<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1999
Registration No. 333-20345
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRST FORTIS LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
New York
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(State or other jurisdiction of incorporation or organization)
63
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(Primary Standard Industrial Classification Code Number)
13-2699219
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(I.R.S. Employer Identification No.)
220 Salina Meadows Parkway
Syracuse, New York 13220
315-451-0066
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(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
David A. Peterson, Esquire
P. O. Box 64284
Saint Paul, Minnesota 55164
651-738-5080
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(Name, address including zip code, and telephone number, including
area code, of agent for service)
<PAGE>
Approximate Date of Commencement of Proposed Sale to Public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box:
/X/
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-----------------------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Title of each Proposed Proposed maximum
class of securities Amount to be maximum offering aggregate Amount of
to be registered registered price per unit offering price registration fee
</TABLE>
- --------------------------------------------------------------------------------
Interests under * * None registered herewith.
flexible premium
deferred fixed
annuity contracts
- ---------------------
* The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee. The amount being registered and the proposed
maximum offering price per unit are not applicable in that these securities are
not issued in predetermined amounts or units.
<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
Cross-Reference Sheet
Pursuant to Regulation S-K
Item 501(b)
Form S-1 Item Number Prospectus Caption
- -------------------- --------------------
1. Forepart of the Cover Page; Table of Contents;
Registration Statement Distribution and Servicing
and Outside Front
Cover Page of Prospectus
2. Inside Front and Back Other Information; Reports
Cover Pages of Prospectus
3. Summary Information, Risk Summary of Contract Features
Factors and Ratio of or, as to ratio of earnings to
Earnings to Fixed Charges fixed charges, Not Applicable
4. Use of Proceeds The Variable Account; The
Portfolios; The Fixed Account
5. Determination of Offering Not Applicable
Price
6. Dilution Not Applicable
7. Selling Security Holders None
8. Plan of Distribution Distribution and Servicing
9. Description of Securities Cover Page; The Variable
to be Registered Account; The Portfolios; The
Fixed Account; Accumulation
Period; Charges and
Deductions; General Provisions
10. Interests of Named Legal Matters
Experts and Counsel
11. Information with Respect First Fortis Life Insurance
to the Registrant Company; Further Information
About First Fortis; Financial
Statements; Distribution and
Servicing
<PAGE>
12. Disclosure of Commission
Position on
Indemnification
for Securities Act
Liabilities
Not Applicable
<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
MAILING ADDRESS: STREET ADDRESS: PHONE: 1-800-591-7333
P.O. BOX 3249 SUITE 255
SYRACUSE 220 SALINA MEADOWS
NEW YORK 13220 PARKWAY
SYRACUSE
NEW YORK 13212
PROSPECTUS DATED MAY 1, 1999
This prospectus describes interests under flexible premium deferred combination
variable and fixed annuity contracts issued by Fortis Life Insurance Company
("First Fortis").
These contracts allow you to accumulate funds on a tax-deferred basis. You may
elect a guaranteed interest accumulation option through a fixed account or a
variable return accumulation option through a variable account or a combination
of these two options. Under the guaranteed interest accumulation option, you can
choose among ten different guarantee periods, each of which has its own interest
rate which is guaranteed for the entire guarantee period.
Under the variable return accumulation option, you can choose among the
following investment portfolios:
Alliance Money Market Portfolio Lexington Natural Resources Trust
Alliance International Portfolio MFS Emerging Growth Series
Alliance Premier Growth Portfolio MFS High Income Series
American Century VP Balanced Fund MFS Global Governments Series
American Century VP Capital Appreciation Montgomery Emerging Markets Fund
Fund Montgomery Growth Fund
Federated High Income Bond Fund II Neuberger & Berman Limited Maturity
Federated Utility Fund II Bond Portfolio
Federated American Leaders Fund II Neuberger & Berman Partners
Federated Fund for U.S. Government Portfolio
Securities II SAFECO Equity Portfolio
Fortis S&P 500 Index Series SAFECO Growth Portfolio
INVESCO Equity Income Fund Strong Discovery Fund II
INVESCO Health Sciences Fund Strong International Stock Fund II
INVESCO Technology Fund Van Eck Worldwide Bond Fund
Van Eck Worldwide Hard Assets Fund
The accompanying prospectuses for these investment portfolios describe the
investment objectives, policies and risks of each of the portfolios.
This prospectus gives you information about the contracts that you should know
before investing. This prospectus must be accompanied by a current prospectus of
the available investment portfolios. These prospectuses should be read carefully
and kept for future reference.
A Statement of Additional Information, dated January 1, 1999, about certain
aspects of the contracts has been filed with the Securities and Exchange
Commission and is available without charge from First Fortis at the address and
phone number printed above. The Table of Contents for the Statement of
Additional Information appears on page 22 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.
[LOGO] FORTIS-Registered Trademark- and Fortis-Registered Trademark- are
registered servicemarks of Fortis (NL) N.V. and Fortis (B).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms Used in this Prospectus................................. 3
Information Concerning Fees and Charges............................... 4
Summary of Contract Features.......................................... 6
First Fortis Life Insurance Company................................... 8
The Variable Account.................................................. 9
The Portfolios........................................................ 9
The Fixed Account..................................................... 9
- Guaranteed Interest Rates/Guarantee Periods..................... 9
- Market Value Adjustment......................................... 10
- Investments by First Fortis..................................... 10
Accumulation Period................................................... 11
- Issuance of a Contract and Purchase Payments.................... 11
- Contract Value.................................................. 11
- Allocation of Purchase Payments and Contract Value.............. 12
- Total and Partial Surrenders.................................... 13
- Telephone Transactions.......................................... 13
- Benefit Payable on Death of Contract Owner or Annuitant......... 13
The Annuity Period.................................................... 14
- Annuity Commencement Date....................................... 14
- Commencement of Annuity Payments................................ 14
- Relationship Between Subaccount Investment Performance and
Amount of Variable Annuity Payments............................ 14
- Annuity Options................................................. 14
- Death of Annuitant or Other Payee............................... 15
Charges and Deductions................................................ 15
- Premium Taxes................................................... 15
- Charges Against the Variable Account............................ 15
- Annual Administrative Charge.................................... 15
- Tax Charge...................................................... 16
- Miscellaneous................................................... 16
General Provisions.................................................... 16
- The Contracts................................................... 16
- Postponement of Payments........................................ 16
- Misstatement of Age or Sex and Other Errors..................... 16
- Assignment...................................................... 16
- Beneficiary..................................................... 16
- Reports......................................................... 16
Rights Reserved By First Fortis....................................... 16
Distribution.......................................................... 17
Federal Tax Matters................................................... 17
Further Information About First Fortis................................ 19
- General......................................................... 19
- Ownership of Securities......................................... 19
- Selected Financial Data......................................... 19
- Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 20
Voting Privileges..................................................... 21
Legal Matters......................................................... 21
Other Information..................................................... 22
Contents of Statement of Additional Information....................... 22
First Fortis Financial Statements..................................... 23
Appendix A--Sample Market Value Adjustment Calculations............... A-1
Appendix B--Explanation Of Expense Calculations....................... B-1
Appendix C--Participating Portfolios.................................. 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. FIRST FORTIS 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
FIRST FORTIS.
<PAGE>
SPECIAL TERMS USED IN THIS PROSPECTUS
Accumulation The time period under a contract between the contract
Period issue date and the annuity commencement date.
Accumulation A unit of measure used to calculate the contract
Unit owners' interest in the Variable Account during the
Accumulation Period.
Annuitant A person during whose life annuity payments are to be
made by First Fortis under the contract.
Annuity Period The time period following the Accumulation Period,
during which annuity payments are made by First Fortis.
Annuity Unit A unit of measurement used to calculate variable
annuity payments.
Fixed Annuity An annuity option under which First Fortis promises to
Option pay the Annuitant or any other payee that you designate
one or more fixed payments.
Market Value Positive or negative adjustment in fixed account value
Adjustment that we make if such value is paid out more than
fifteen days before or after the end of a guarantee
period in which it was being held.
Non-Qualified Contracts that do not qualify for the special federal
Contracts income tax treatment applicable in connection with
certain retirement plans.
Qualified Contracts that are qualified for the special federal
Contracts income tax treatment applicable in connection with
certain retirement plans.
Valuation Date All business days 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
Period on the New York Stock Exchange on a Valuation Date and
ends at the close of regular trading on the exchange on
the next succeeding Valuation Date.
Variable The segregated asset account referred to as Variable
Account Account A of First Fortis Life Insurance Company
established to receive and invest purchase payments
under contracts.
Variable An annuity option under which First Fortis promises to
Annuity Option pay the Annuitant or any other payee chosen by you one
or more payments which vary in amount in accordance
with the net investment experience of the subaccounts
selected by the Annuitant.
3
<PAGE>
INFORMATION CONCERNING FEES AND CHARGES
CONTRACT OWNER TRANSACTION CHARGES
<TABLE>
<S> <C>
Front-End Sales Charge Imposed on Purchases.......... 0%
Maximum Surrender Charge for Sales Expenses.......... 0%
Other Surrender Fees................................. 0%
Exchange Fee......................................... 0%
ANNUAL CONTRACT ADMINISTRATION CHARGE....................... $30
</TABLE>
<TABLE>
<S> <C>
VARIABLE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
Mortality and Expense Risk Charge............... .45%
Variable Account Administrative Charge.......... 0%
-----
Total Variable Account Annual Expenses........ .45%
</TABLE>
MARKET VALUE ADJUSTMENT WITH RESPECT TO FIXED ACCOUNT
Surrenders and other withdrawals from the fixed account more than fifteen days
from the end of a guarantee period are subject to a Market Value Adjustment. The
Market Value Adjustment may increase or reduce the fixed account value. We
compute this adjustment according to a formula that we describe in more detail
under "Market Value Adjustment."
PORTFOLIO ANNUAL EXPENSES (a) (b)
<TABLE>
<CAPTION>
INVESTMENT TOTAL PORTFOLIO OPERATING
ADVISORY AND OTHER EXPENSES (*AFTER EXPENSE
MANAGEMENT FEE EXPENSES REIMBURSEMENT)
-------------- -------- -------------------------
<S> <C> <C> <C>
Alliance Money Market Portfolio............................. 0.50% 0.18% 0.68%
Alliance International Portfolio............................ 0.67% 0.28% 0.95%
Alliance Premier Growth Portfolio........................... 0.97% 0.09% 1.06%
American Century VP Balanced Fund........................... 1.00% 0.00% 1.00%
American Century VP Capital Appreciation Fund............... 1.00% 0.00% 1.00%
Federated High Income Bond Fund II.......................... 0.60% 0.18% 0.78%
Federated Utility Fund II................................... 0.68% 0.25% 0.93%
Federated American Leaders Fund II.......................... 0.74% 0.14% 0.88%
Federated Fund for U.S. Gov't Securities Fund II............ 0.52% 0.33% 0.85%
Fortis S&P 500 Index........................................ 0.40% 0.06% 0.46%
INVESCO Equity Income Fund.................................. 0.75% 0.18% 0.93%
INVESCO Health Sciences Fund................................ 0.75% 0.52% 1.27%
INVESCO Technology Fund..................................... 0.75% 0.65% 1.40%
Lexington Natural Resources Trust........................... 1.00% 0.29% 1.29%
MFS Emerging Growth Series.................................. 0.75% 0.10% 0.85%
MFS High Income Series...................................... 0.75% 0.28% 1.03%
MFS Global Governments Series............................... 0.65% 0.36% 1.01%
Montgomery Emerging Markets Fund............................ 1.25% 0.50% 1.75%
Montgomery Growth Fund...................................... 1.00% 0.25% 1.25%
Neuberger & Berman Limited Maturity Bond Portfolio.......... 0.65% 0.11% 0.76%
Neuberger & Berman Partners Portfolio....................... 0.78% 0.06% 0.84%
SAFECO Equity Portfolio..................................... 0.75% 0.03% 0.78%
SAFECO Growth Portfolio..................................... 0.75% 0.05% 0.80%
Strong Discovery Fund....................................... 1.00% 0.19% 1.19%
Strong International Fund................................... 1.00% 0.62% 1.62%
Van Eck Worldwide Bond Fund................................. 1.00% 0.15% 1.15%
Van Eck Worldwide Hard Assets Fund.......................... 1.00% 0.16% 1.16%
</TABLE>
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(a) As a percentage of portfolio average net assets based on historical data
for the fiscal year ended December 31, 1998. In the absence of expense and
fee waivers or expense reimbursements by the portfolio investment adviser,
the total expenses of the following portfolios would have been as hereafter
indicated rather than as listed above: Alliance International
portfolio--1.37%; Alliance Premier Growth Portfolio--1.09%; Federated
Utility Fund II--1.00%; Federated American Leaders Fund II--0.89%;
Federated Fund for U.S. Government Securities Fund II--0.93%; INVESCO
Equity Income Portfolio--1.17%; INVESCO Health Sciences Portfolio--4.37%;
INVESCO Technology Portfolio--6.60%; and MFS Global Governments
Series--1.11%; Montgomery Growth Fund--1.40%; Van Eck Worldwide Hard Assets
Fund--1.20%. The information set forth in this table was provided to Fortis
Benefits by the portfolio managers and Fortis Benefits has not
independently verified such information.
(b) Certain of the unaffiliated investment advisers of the portfolios reimburse
First Fortis for costs incurred in connection with administering the
portfolios as variable funding options by payment of an amount based on
assets in the portfolios attributable to the contracts. These amounts are
not charged to the portfolios or the holders of the contracts.
4
<PAGE>
EXAMPLES*
If you COMMENCE AN ANNUITY payment option, or whether you DO or DO NOT surrender
your contract or commence an annuity payment option, 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>
Alliance Money Market Portfolio............................. 12 37 64 142
Alliance International Portfolio............................ 15 45 78 172
Alliance Premier Growth Portfolio........................... 16 49 84 184
American Century VP Balanced Fund........................... 15 47 61 177
American Century VP Capital Appreciation Fund............... 15 47 81 177
Federated High Income Bond Fund II.......................... 13 40 69 153
Federated Utility Fund II................................... 14 45 77 169
Federated American Leaders Fund II.......................... 14 43 75 164
Federated Fund for U.S. Gov't Securities Fund II............ 14 42 73 161
Fortis S&P 500 Index........................................ 10 30 53 117
INVESCO Health Sciences Portfolio........................... 18 55 95 206
INVESCO Equity Income Portfolio............................. 14 45 77 169
INVESCO Technology Portfolio................................ 19 59 102 220
Lexington Natural Resources Trust........................... 18 56 96 208
MFS Emerging Growth Series.................................. 14 42 73 161
MFS High Income Series...................................... 15 48 83 180
MFS Global Governments Series............................... 15 47 81 178
Montgomery Emerging Markets Fund............................ 23 70 119 256
Montgomery Growth Fund...................................... 18 55 94 204
Neuberger & Berman Partners Portfolio....................... 14 42 73 159
Neuberger & Berman Limited Maturity Bond Portfolio.......... 13 40 68 151
SAFECO Growth Portfolio..................................... 13 41 71 155
SAFECO Equity Portfolio..................................... 13 40 69 153
Strong Discovery Fund....................................... 17 53 91 198
Strong International Fund................................... 21 66 113 243
Van Eck Worldwide Bond Fund................................. 17 51 89 193
Van Eck Worldwide Hard Assets Fund.......................... 17 52 89 194
</TABLE>
- ------------------------
* For purposes of these examples, the effect of the annual contract
administration charge has been computed based on the average total contract
value during the year ended December 31, 1998 of similar contracts issued
by an affiliated company and the total actual amount of annual contract
administration charges collected during the year on those contracts. For
the purpose of these examples, portfolio annual expenses are assumed to
continue at the rates set forth in the table above.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
------------------------
We have included the foregoing tables and examples to help you understand the
transaction and operating expenses we directly or indirectly impose under the
contracts and under the portfolios. We will also deduct amounts for state
premium taxes or similar assessments where these deductions are applicable.
See Appendix B for an explanation of the calculation of the amounts set forth
above.
5
<PAGE>
SUMMARY OF CONTRACT FEATURES
The following summary should be read in conjunction with the detailed
information in this prospectus.
The contracts are designed to provide individuals with retirement benefits
through the accumulation of purchase payments on a fixed or variable basis, and
by the application of such accumulations to provide fixed or variable annuity
payments.
"We," "our," and "us" mean First Fortis Life Insurance Company. "You" and "your"
mean a reader of this prospectus who is contemplating making purchase payments
or taking any other action in connection with a contract.
Depending on the state that you live in, the contract that is issued to you may
be as a part of a group contract or as an individual contract. Participation in
a group contract will be evidenced by the issuance of a certificate showing your
interest under the group contract. In other states, an individual contract will
be issued to you. Both the certificate and the contract are referred to as a
"contract" in this prospectus.
FREE LOOK
You have the right to examine a contract during a "free look" period after you
receive the contract and return it for a refund of the amount of the then
current contract value. However, in certain states where required by state law
the refund will be in the amount of all purchase payments that have been made,
without interest or appreciation or depreciation. The "free look" period is
generally 10 days unless a longer time is specified on the face page of your
contract.
PURCHASE PAYMENTS
The initial purchase payment under a contract must be at least $5,000 ($2,000
for a contract which is part of a qualified plan). Additional purchase payments
under a contract must be at least $50. See "Issuance of a Contract and Purchase
Payments."
ALLOCATION OF PURCHASE PAYMENTS
On the date that the contract is issued, except as hereafter explained, the
initial purchase payment is allocated, as specified by you in the contract
application, among one or more of the portfolios, or to one or more of the
guarantee periods in the fixed account, or to a combination thereof. Subsequent
purchase payments are allocated in the same way, or pursuant to different
allocation percentages that the you may request in writing.
VARIABLE ACCOUNT INVESTMENT OPTIONS
Each of the subaccounts of the Variable Account invests in shares of a
portfolio. Contract value in each of the subaccounts of the Variable Account
will vary to reflect the investment experience of each of the corresponding
portfolios, as well as deductions for certain charges.
Each portfolio has a separate and distinct investment objective. A full
description of the portfolios and their investment objectives, policies, risks
and expenses can be found in the current prospectus for the portfolios, which
accompanies this prospectus, and the Statement of Additional Information for the
portfolio which is available upon request.
FIXED ACCOUNT INVESTMENT OPTIONS
Any amount allocated by the owner to the fixed account earns a guaranteed
interest rate. The level of the guaranteed interest rate depends on the length
of the guarantee period selected by the owner. We currently make available ten
different guarantee periods, ranging from one to ten years.
If amounts are transferred, surrendered or otherwise paid out more than fifteen
days before or after the end of the applicable guarantee period, a Market Value
Adjustment will be applied to increase or decrease the amount that is paid out.
Accordingly, the Market Value Adjustment can result in gains or losses to you.
For a more complete discussion of the fixed account investment options and the
Market Value Adjustment, see "The Fixed Account."
TRANSFERS
During the Accumulation Period, you can transfer all or part of your contract
value from one subaccount to another or into the fixed account and, subject to
any Market Value Adjustment, from one guarantee period of the fixed account to
another or into a subaccount. There is currently no charge for these transfers.
We reserve the right to restrict the frequency of or otherwise condition,
terminate, or impose charges upon, transfers from a subaccount during the
Accumulation Period. During the Annuity Period the person receiving annuity
payments may make up to four transfers (but not from a Fixed Annuity Option)
during each year of the Annuity Period. For a description of certain limitations
on transfer rights, see "Allocations of Purchase Payments and Contract
Value--Transfers."
TOTAL OR PARTIAL SURRENDERS
Subject to certain conditions, all or part of the contract value may be
surrendered by you before the earlier of (1) the Annuitant's death or (2) the
annuity commencement date. Amounts surrendered from the fixed account may be
subject to a Market Value Adjustment. See "Total and Partial Surrenders" and
"Market Value Adjustment." Particular attention should be paid to the tax
implications of any surrender, including possible penalties for premature
distributions. See "Federal Tax Matters."
CHARGES AND DEDUCTIONS
We deduct daily charges at a rate of .45 % per annum of the value of the average
net assets in the Variable Account for the mortality and expense risks we
assume. There is also an annual administrative charge each year for contract
administration and maintenance. This charge is $30 per year (subject to any
applicable state law limitations) and is deducted on each anniversary of the
contract issue date and upon total surrender of the contract. Also, there may be
state premium tax charges deducted from your contract value. See "Charges and
Deductions."
6
<PAGE>
ANNUITY PAYMENTS
The contract provides several types of annuity benefits to you or other persons
you properly designate to receive such payments, including Fixed and Variable
Annuity Options. The owner has 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 that the contract owner or the Annuitant dies prior to the annuity
commencement date, a death benefit is payable to the beneficiary. See "Benefit
Payable on Death of Contract Owner (or Annuitant)."
LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS
Certain rights you would otherwise have under a contract may be limited by the
terms of any applicable employee benefit plan. These limitations may restrict
such things as total and partial surrenders, the amount or timing of purchase
payments that may be made, when annuity payments must start and the type of
annuity options that may be selected. Accordingly, you should familiarize
yourself with these and all other aspects of any retirement plan in connection
with which a contract is issued.
The record owner of the group variable annuity contract pursuant to which
contracts may be issued will be a bank trustee whose sole function is to hold
record ownership of the contract or an employer (or the employer's designee) in
connection with an employee benefit plan. In the latter cases, certain rights
that an owner otherwise would have under a contract may be reserved instead by
the employer.
TAX IMPLICATIONS
The tax implications for you or any other persons who may receive payments under
a contract, and those of any related employee benefit plan can be quite
important. A brief discussion of some of these is set out under "Federal Tax
Matters" in this prospectus and "Taxation Under Certain Retirement Plans" in the
Statement of Additional Information, but such discussion is not comprehensive.
Therefore, you should consider these matters carefully and consult a qualified
tax adviser before making purchase payments or taking any other action in
connection with a contract or any related employee benefit plan. Failure to do
so could result in serious adverse tax consequences which might otherwise have
been avoided.
QUESTIONS AND OTHER COMMUNICATIONS
Any question about procedures of the contract should be directed to your sales
representative, or First Fortis' home office: P.O. Box 3249, Syracuse, NY 13220;
1-800-591-7333. Purchase payments and written requests should be mailed or
delivered to the same home office address. All communications should include the
contract number, the owner's name and, if different, the Annuitant's name. The
number for telephone transfers is 1-800-591-7333.
Any purchase payment or other communication, except a free-look cancellation
notice, is deemed received at First Fortis' 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.
7
<PAGE>
FINANCIAL AND PERFORMANCE INFORMATION
The information presented below reflects the Accumulation Unit information for
the available subaccounts of the Variable Account through December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------- -----------------------------
ACCUMULATION ACCUMULATION ACCUMULATION ACCUMULATION
UNITS UNIT VALUE UNITS UNIT VALUE
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Alliance Money Market Portfolio............................. 57,856 $ 11.351 19,606 $10.861561
Alliance International Portfolio............................ 6,481 12.177 4,147 10.818424
Alliance Premier Growth Portfolio........................... 32,730 23.172 17,972 15.729195
American Century VP Balanced Fund........................... 1,722 14.571 615 12.639353
American Century VP Capital Appreciation Fund............... 743 8.836 0 9.061024
Federated Fund for U.S. Government Securities II............ 4,038 11.483 1,710 10.704721
Federated High Income Bond Fund II.......................... 32,236 12.723 29,708 12.441253
Federated Utility Fund II................................... 2,610 15.435 0 13.550370
Federated American Leaders Fund II.......................... 3,644 17.579 0 15.012052
Fortis S & P 500 Index Series............................... 2,151 16.447 47 12.896250
INVESCO Health Sciences Fund................................ 7,986 15.663 273 11.006864
INVESCO Equity Income Fund.................................. 1,683 13.935 1,157 12.136873
INVESCO Technology Fund..................................... 2,187 14.323 192 11.445543
Lexington Natural Resources Trust........................... 0 10.284 0 12.853076
MFS Emerging Growth Series.................................. 6,958 18.390 10,745 13.756132
MFS High Income Series...................................... 43,436 12.269 39,079 12.342449
MFS Global Governments Series............................... 0 11.009 0 10.248705
Montgomery Emerging Markets Fund............................ 2,438 6.547 434 10.526513
Montgomery Growth Fund...................................... 6,157 16.639 1,398 16.232262
Neuberger & Berman Limited Maturity Bond Portfolio.......... 5,263 10.918 0 10.497834
Neuberger & Berman Partners Portfolio....................... 4,003 12.948 1,201 12.477670
SAFECO Equity Portfolio..................................... 24,561 15.105 18,571 12.151817
SAFECO Growth Portfolio..................................... 14,286 15.188 1,217 14.992831
Strong Discovery Fund....................................... 1,822 11.916 1,015 11.153400
Strong International Stock Fund............................. 7,516 8.584 3,909 9.049000
Van Eck Worldwide Bond Fund................................. 21 11.905 0 10.492666
Van Eck Worldwide Hard Assets Fund.......................... 0 6.731 0 9.774884
</TABLE>
Audited financial statements of the available subaccounts of the Variable
Account are included in the Statement of Additional Information.
Advertising and other sales materials may include yield and total return figures
for the subaccounts of the Variable Account. These figures are based on
historical results and are not intended to indicate future performance. "Yield"
is the income generated by an investment in the subaccount over a period of time
specified in the advertisement. This rate of return is assumed to be earned over
a full year and is shown as a percentage of the investment. "Total Return" is
the total change in value of an investment in the subaccount over a period of
time specified in the advertisement. The rate of return shown would produce that
change in value over the specified period, if compounded annually. Yield and
total return figures do not reflect premium tax charges. This makes the
performance shown more favorable.
Financial information concerning First Fortis is included in this prospectus
under "Additional Information About First Fortis" and "First Fortis Financial
Statements."
FIRST FORTIS LIFE INSURANCE COMPANY
First Fortis Life Insurance Company is the issuer of the contracts. At the end
of 1998, First Fortis had approximately $7 billion of total life insurance in
force. First Fortis is a New York corporation founded in 1971. It is qualified
to sell life insurance, accident and health, and annuity contracts in New York.
First Fortis is a 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.
First Fortis is a member of the Fortis Financial Group. This group is a joint
effort by First Fortis, Fortis Benefits Insurance Company, Fortis Advisers,
Inc., Fortis Investors, Inc., and Fortis 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 and financial
services, and real estate development in The Netherlands, Belgium, the United
States, Western Europe, and the Pacific Rim. The Fortis group of companies had
approximately $390 billion in assets at the end of 1998.
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All of the guarantees and commitments under the contracts are general
obligations of First Fortis, regardless of whether you have allocated the
contract value to the Variable Account or to the fixed account. None of First
Fortis' affiliated companies has any legal obligation to back First Fortis'
obligations under the contracts.
THE VARIABLE ACCOUNT
The Variable Account is a segregated investment account of First Fortis. First
Fortis established Variable Account A under New York insurance law as of October
1, 1993. The Variable Account is an integral part of First Fortis. However, the
Variable Account is registered with the Securities and Exchange Commission as a
unit investment trust under the Investment Company Act of 1940. Assets in the
Variable Account representing reserves and liabilities under these contracts and
other variable annuity contracts issued by First Fortis will not be chargeable
with liabilities arising out of any other business of First Fortis.
The Variable Account has subaccounts. The assets in each subaccount are invested
exclusively in one of the portfolios listed on page one of this prospectus.
Income and both realized and unrealized gains or losses from the assets of each
subaccount of the Variable Account are credited to or charged against that
subaccount without regard to income, gains or losses, from any other subaccount
of the Variable Account or arising out of any other business we may conduct. We
may add or eliminate new subaccounts as new portfolios are added or eliminated.
THE PORTFOLIOS
You may choose from among a number of 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 First Fortis and by other
life insurance companies. Each portfolio corresponds to one of the subaccounts
of the Variable 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. We offer more detailed
information for each investment portfolio. This information includes the
investment policies, investment restrictions, charges, and risks attendant to
investing in each portfolio. This information also includes other aspects of
each portfolio's operations. You may 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 may obtain a
copy of each prospectus from us, free of charge, by calling 1-800-523-4374, or
by writing P.O. Box 3249, Syracuse, NY 13220.
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 Variable Account and other separate accounts of First
Fortis. Although First Fortis does not anticipate any disadvantages to this,
there is a possibility that a material conflict may arise between the interest
of the Variable Account and one or more of the other separate accounts
participating in the portfolios. 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, First Fortis will take any steps necessary to protect the contract
owners and variable annuity payees.
First Fortis purchases and redeems portfolios' shares for the Variable 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 the
portfolio's net asset value on the date paid. These dividends and distributions
will have the effect of reducing the new asset value of each share of the
corresponding portfolio and increasing, by an equivalent value, the number of
shares outstanding of the portfolio. However, the value of your interest in the
corresponding subaccount will not change as a result of any such dividends and
distributions.
The portfolios available for investment by the Variable Account are listed on
the cover page of this prospectus.
THE FIXED ACCOUNT
GUARANTEED INTEREST RATES/GUARANTEE PERIODS
Any amount you allocate to the fixed account earns a guaranteed interest rate
beginning on the date you make the allocation. The guaranteed interest rate
continues for the number of years you select, up to a maximum of TEN years. At
the end of your guarantee period, your contract value, including accrued
interest, will be allocated to a new guarantee period of equal length. However,
you may reallocate your contract value to a different guarantee period (or
periods) or to one (or more) of the subaccounts of the Variable Account. If you
decide to reallocate your contract value, you must do so by sending us a WRITTEN
REQUEST. We must receive your written request AT LEAST three business days
before the end of your guarantee period. The first day of your new guarantee
period (or other reallocation) will be the day after the end of your previous
guarantee period. We will notify you AT LEAST 45 days and NOT MORE than 60 days
before the end of your guarantee period.
We currently offer ten different guarantee periods. These guarantee periods
range in length from one to ten years. Each guarantee period has its own
guaranteed interest rate, which may differ from those for other guarantee
periods. From time to time we will, at our discretion, change the guaranteed
interest rate for FUTURE guarantee periods. These changes will NOT affect the
guaranteed interest rates we are paying on CURRENT guarantee periods. Please
note, when you allocate or transfer an amount to a guarantee period, a new
guarantee period begins running with respect to that amount. Therefore, the
amount you allocate will earn a guaranteed interest rate that will not change
until the end of that period. In addition, the guaranteed interest rate will
never be less than an effective annual rate of 3%.
We declare the guaranteed interest rates from time to time as market conditions
dictate. We advise you of the guaranteed interest rate for a chosen guarantee
period at the time we receive a purchase payment from you, or at the time we
execute a transfer you have requested , or at the time a guarantee period is
renewed.
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We do not have a specific formula for establishing the guaranteed interest rates
for the guarantee periods. Guaranteed interest rates may be INFLUENCED by the
available interest rates on the investments we acquire with the amounts you
allocate for a particular guarantee period. Guaranteed interest rates do not
necessarily CORRESPOND to the available interest rates on the investments we
acquire with the amounts you allocate for a particular guarantee period. See
"Investments by First Fortis". In addition, when we determine guaranteed
interest rates, we may consider: (1) the duration of a guarantee period, (2)
regulatory and tax requirements, (3) sales and administrative expenses we bear,
(4) risks we assume, (5) our profitability objectives, and (6) general economic
trends.
FIRST FORTIS' MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED
INTEREST RATES TO BE DECLARED. WE CANNOT PREDICT OR ASSURE THE LEVEL OF ANY
FUTURE GUARANTEED INTEREST RATES IN EXCESS OF AN EFFECTIVE ANNUAL RATE OF 3%.
You may obtain information concerning the guaranteed interest rates that apply
to the various guarantee periods. You may obtain this information from our home
office or from your sales representative at any time.
MARKET VALUE ADJUSTMENT
Except as described below, we will apply a Market Value Adjustment to any fixed
account value that is:
- surrendered,
- transferred, or
- otherwise paid out
BEFORE the end of the guarantee period in which it is being held.
For example, we will apply a Market Value Adjustment to fixed account value that
we pay:
- as an amount applied to an annuity option, and
- as an amount paid as a single sum in lieu of an annuity.
The Market Value Adjustment we apply may increase or decrease the fixed account
value that is withdrawn or transferred. We determine whether the fixed account
value is increased or decreased by performing a comparison of two guaranteed
interest rates.
The first rate we compare is the guaranteed interest rate for the fixed account
value that is withdrawn or transferred from the existing guarantee period. The
second rate we compare is the guaranteed interest rate we are then offering for
new guarantee periods with durations equal to the number of years remaining in
the existing guarantee period. After comparing these two rates, we determine
whether the fixed account value is increased or decreased as follows:
- If the first rate exceeds the second rate by more than 1/2%, the Market
Value Adjustment produces an INCREASE in the fixed account value withdrawn
or transferred.
- If the first rate does not exceed the second rate by at least 1/2%, the
Market Value Adjustment produces a DECREASE in the fixed account value
withdrawn or transferred.
We will determine the Market Value Adjustment by multiplying the fixed account
value that is withdrawn or transferred from the existing guarantee period
(before deduction of any applicable surrender charge) by the following factor:
1 + I n / 12
( ----------) - 1
1 + J + .0025
where,
- I is the guaranteed interest rate we credit to the fixed account value
that is withdrawn or transferred from the existing guarantee period.
- J is the guaranteed interest rate we are then offering for new guarantee
periods with durations equal to the number of years remaining in the
existing guarantee period (rounded up to the next higher number of years).
- N is the number of months remaining in the existing guarantee period
(rounded up to the next higher number of months).
You will find sample Market Value Adjustment calculations in Appendix A.
We do not apply a Market Value Adjustment to withdrawals and transfers of fixed
account value under TWO exceptions. We describe these exceptions below.
We will NOT apply a Market Value Adjustment to fixed account value that we pay
out during a 30 DAY period that:
- BEGINS 15 DAYS BEFORE the end date of the guarantee period in which the
fixed account value was being held, and that:
- ENDS 15 DAYS AFTER the end date of the guarantee period in which the fixed
account value was being held.
In addition, we will NOT apply a Market Value Adjustment to fixed account value
that is withdrawn or transferred from a guarantee period on a PERIODIC,
AUTOMATIC BASIS. This exception only applies to such withdrawals or transfers
under a formal First Fortis program for the withdrawal or transfer of fixed
account value.
We may impose CONDITIONS AND LIMITATIONS on any formal First Fortis program for
the withdrawal or transfer of fixed account value. Ask your First Fortis
representative about the availability of such a program in your state. In
addition, if such a program is available in your state, your First Fortis
representative can inform you about the conditions and limitations that may
apply to that program.
INVESTMENTS BY FIRST FORTIS
First Fortis' legal obligations with respect to the fixed account are supported
by our general account assets. These general account assets also support our
obligations under other insurance and annuity contracts. Investments purchased
with amounts allocated to both fixed accounts are the property of First Fortis,
and you have no legal rights in such investments. Subject to applicable law, we
have sole discretion over the investment of assets in our general account and in
the fixed account.
We will invest amounts in our general account, and amounts in the fixed account,
in compliance with applicable state insurance laws and
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regulations concerning the nature and quality of investments for the general
account. Within specified limits and subject to certain standards and
limitations, these laws generally permit investment in:
- federal, state and municipal obligations,
- preferred and common stocks,
- corporate bonds,
- real estate mortgages,
- real estate, and
- certain other investments.
See "First Fortis' Financial Statements" for information on our investments.
Investment management for amounts in our general account and in the fixed
account is provided to us by Fortis Advisors, Inc.
When we establish guaranteed interest rates, we will consider the available
return on the instruments in which we invest amounts allocated to the fixed
account. However, this return is only one of many factors we consider when we
establish the guaranteed interest rates. See "Guaranteed Interest
Rates/Guarantee Periods".
Generally, we expect to invest amounts allocated to the fixed account in debt
instruments. We expect that these debt instruments will approximately match our
liabilities with regard to the guarantee periods. We also expect that these debt
instruments will primarily include:
(1) securities issued by the United States Government or its
agencies or instrumentalities. These securities may or may not be guaranteed by
the United States Government;
(2) debt securities that, at the time of purchase, have an
investment grade within the four highest grades assigned by Moody's Investors
Services, Inc. ("Moody's"), Standard & Poor's Corporation ("Standard &
Poor's"), or any other nationally recognized rating service. Moody's four
highest grades are: Aaa, Aa, A, and Baa. Standard & Poor's four highest
grades are: AAA, AA, A, and BBB;
(3) other debt instruments including, but not limited to, issues of,
or guaranteed by, banks or bank holding companies and corporations.
Although not rated by Moody's or Standard & Poor's, we deem these
obligations to have an investment quality comparable to securities that may
be purchased as stated above;
(4) other evidences of indebtedness secured by mortgages or deeds
of trust representing liens upon real estate.
Except as required by applicable state insurance laws and regulations, we are
not obligated to invest amounts allocated to the fixed account according to any
particular strategy, See "Regulation and Reserves".
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 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 $5,000 ($2,000 for a
contract issued pursuant to a qualified plan).
The date that we apply the initial purchase payment to the purchase of the
contract is also the contract issue date. The contract issue date is the date
used to determine contract years, regardless of when we deliver the contract.
Our crediting of investment experience in the Variable Account, or a fixed rate
of return in the fixed account, generally begins as of the contract issue date.
We will accept additional purchase payments at any time after the contract issue
date and prior to the annuity commencement date, as long as the Annuitant is
living. You must transmit purchase payments (together with any required
information identifying the proper contracts and accounts to be credited with
purchase payments) to our home office. We 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.
Each additional purchase payment under a contract must be at least $50. The
total of all purchase payments for all First Fortis annuities 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 First Fortis Life Insurance
Company.
If the contract value is less than $1,000, we may cancel the contract on any
Valuation Date. We will notify you of our intention to cancel the contract at
least 90 days in advance of the cancellation date. If we do cancel your
contract, we consider such cancellation a full surrender of the contract.
CONTRACT VALUE
Contract value is the total of any Variable Account value in all the subaccounts
of the Variable Account, plus any fixed account value.
The contract does not guarantee a minimum Variable Account value. You bear the
entire investment risk for the contract value that you allocate to the Variable
Account.
DETERMINATION OF VARIABLE ACCOUNT VALUE. A contract's Variable Account value is
based on the number of Accumulation Units and Accumulation Unit values, which
are determined on each Valuation Date. The value of an Accumulation Unit for a
subaccount on any
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Valuation Date is equal to the previous value of that subaccount's Accumulation
Unit multiplied by that subaccount's net investment factor (discussed below) for
the Valuation Period ending on that Valuation Date. At the end of any Valuation
Period, a contract's Variable Account value in a subaccount is equal to the
number of Accumulation Units in the subaccount times the value of one
Accumulation Unit for that subaccount.
The number of Accumulation Units in each subaccount is equal to
- Accumulation Units purchased at the time that any purchase payments or
transferred amounts are allocated to the subaccount; less
- Accumulation Units redeemed to pay for the portion of any transfers from
or partial surrenders allocated to the subaccount; less
- Accumulation Units redeemed to pay charges under the contract.
NET INVESTMENT FACTOR. The net investment factor for a subaccount is determined
by dividing (1) the net asset value per share of the portfolio shares held by
the subaccount, determined at the end of the current Valuation Period, plus the
per share amount of any dividend or capital gains distribution made with respect
to the portfolio shares held by the subaccount during the current Valuation
Period, minus a per share charge for the increase, plus a per share credit for
the decrease, in any income taxes assessed which we determine to have resulted
from the investment operation of the subaccount or any other taxes which are
attributable to this contract, by (2) the net asset value per share of the
portfolio shares held in the subaccount as determined at the end of the previous
Valuation Period, and subtracting from that result a factor representing the
mortality risk, expense risk and administrative expense charge.
If a subaccount's net investment factor is GREATER THAN ONE, the subaccount's
Accumulation Unit value has INCREASED. If a subaccount's net investment factor
is LESS THAN ONE, the subaccount's Accumulation Unit value has DECREASED.
DETERMINATION OF FIXED ACCOUNT VALUE. A contract's fixed account value is
guaranteed by First Fortis. Therefore, we bear the investment risk with respect
to amounts allocated to the fixed account, except to the extent that (1) we may
vary the guaranteed interest rate for future guarantee periods (subject to the
3% effective annual minimum) and (2) the Market Value Adjustment for fixed
accounts imposes investment risks on you.
The contract's fixed account value on any Valuation Date is equal to the
following amounts, in each case increased by accrued interest:
- The amount of purchase payments or transferred amounts allocated to the
fixed account; less
- The amount of any transfers or surrenders out of the fixed account.
ALLOCATION OF PURCHASE PAYMENTS AND CONTRACT VALUE
ALLOCATION OF PURCHASE PAYMENTS. In your application for a contract, you may
allocate purchase payments, or portions of payments, to the:
- available subaccounts of the Variable Account, or
- to the fixed account (and to guarantee periods within the fixed account),
or
- to a combination of the two previous options.
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 First Fortis' 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 available subaccount, or
- from one available subaccount to the fixed account, or
- from the fixed account to an available subaccount, or
- from one guarantee period to another guarantee period.
You must request transfers by (1) a written request to First Fortis' home
office, or by (2) a telephone transfer as described below. Currently, we do not
charge for any transfer. However, transfers from a guarantee period of a fixed
account that are (1) more than 15 days before or 15 days after the expiration of
the existing guarantee period, or are (2) not a part of a formal First Fortis
program for the transfer of fixed account value are subject to a Market Value
Adjustment. See "Market Value Adjustment".
Please note, we reserve the right to impose charges (not to exceed $25 per
transfer) upon transfers. However, we will not impose a transfer charge on the
first six transfers between guarantee periods of the fixed account and the
subaccounts, between the fixed account and the subaccounts, or between the
subaccounts in any calendar year.
The MINIMUM transfer from a subaccount or guarantee period is the LESSER of:
- $1,000, or
- all of the contract value in the subaccount or fixed account.
However, we may permit a continuing request for transfers of lesser specified
amounts automatically on a periodic basis. Where you make all your transfer
requests at the same time, as part of one request, we will count all transfers
between and among the subaccounts of the Variable Account and the fixed account
as one transfer. We will execute the transfers, and determine all values in
connection with the transfers, at of the end of the Valuation Period in which we
receive the transfer request. The amount of any positive or negative Market
Value Adjustment associated with a transfer from a guarantee period will be
added to or deducted from the transferred amount.
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Certain restrictions on very substantial allocations to any one subaccount are
set forth under "Limitations on Allocations" in the Statement of Additional
Information.
TOTAL AND PARTIAL SURRENDERS
TOTAL SURRENDERS. You may surrender all of the cash surrender value at any time
during the life of the Annuitant and prior to the annuity commencement date. If
you choose to make a total surrender, you must do so by written request sent to
our 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,
plus or minus
- any applicable Market Value Adjustment.
See "Market Value Adjustment".
We must receive written consent of all collateral assignees and irrevocable
beneficiaries prior to any total surrender. We will generally pay surrenders
from the Variable Account within seven days of the date of receipt by our home
office of the written request. However, we may postpone payments in certain
circumstances. See "Postponement of Payment".
The amount we pay upon total surrender of the cash surrender value (taking into
account any prior partial surrenders) may be more or less than the total
purchase payments you made. After a surrender of the cash surrender value or at
any time the contract value is zero, all rights of the owner, Annuitant, or any
other person will terminate.
PARTIAL SURRENDERS. At any time during the life of the Annuitant and prior to
the annuity commencement date, you may surrender a portion of the fixed account
and/or the Variable Account. You must request partial surrender by a written
request sent to First Fortis' home office. We will not accept a partial
surrender request from you unless the net proceeds payable to you, as a result
of the request, are at least $1,000. We will surrender the entire cash surrender
value under the contract if the total contract value in both the Variable
Account and fixed account would be less than $1,000 after the partial surrender.
You should specify the subaccounts of the Variable Account or guarantee periods
of the fixed account that you wish to partially surrender. If you do not
specify, we take the partial surrender from the subaccounts and from the
guarantee periods of the fixed account on a pro rata basis.
We will surrender Accumulation Units from the Variable Account and/ or dollar
amounts from the fixed account so that the total amount of the partial surrender
equals the dollar amount of the partial surrender request. If the surrender is
from a guarantee period, we will reduce the partial surrender by the amount of
any applicable negative Market Value Adjustment, or we will increase the amount
payable to you by any positive Market Value Adjustment UNLESS the surrender is
(1) within 15 days before or 15 days after the expiration of a guarantee period,
or (2) is a part of a formal First Fortis program for the transfer of fixed
account value. 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.)
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.
BENEFIT PAYABLE ON DEATH OF CONTRACT OWNER OR ANNUITANT
If the contract owner or Annuitant dies prior to the annuity commencement date,
we will pay a death benefit to the beneficiary. 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 death benefit will equal the greater of:
(1) the sum of all purchase payments made less all prior surrenders and any
applicable prior negative Market Value Adjustments, or
(2) the contract value as of the date used for valuing the death benefit.
The value of the death benefit is determined as of the end of the Valuation
Period in which we receive, at our home office, proof of death and the written
request as to the manner of payment. Upon receipt of these items, the death
benefit generally will be paid within seven days. Under certain circumstances,
payment of the death benefit may be postponed. See "Postponement of Payment." If
we do not receive a written request for a settlement method, we will pay the
death benefit in a single sum, based on values determined at that time.
The beneficiary may (1) receive a single sum payment, which terminates the
contract, or (2) select an annuity option. If the beneficiary selects an annuity
option, he or she will have all the rights and privileges of a payee under the
contract. If the beneficiary desires an annuity option, the election should be
made within 60 days of the date the death benefit becomes payable. Failure to
make a timely election can result in unfavorable tax consequences. For further
information, see "Federal Tax Matters."
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We accept any of the following as proof of death: (1) a copy of a certified
death certificate; (2) a copy of a certified decree of a court of competent
jurisdiction as to the finding of death; or (3) a written statement by a medical
doctor who attended the deceased at the time of death.
The Internal Revenue Code requires that a Non-Qualified Contract contain certain
provisions about an owner's death. We discuss these provisions below under
"Federal Tax Matters--Required Distributions for Non-Qualified Contracts." It is
imperative that written notice of the death of the owner be promptly transmitted
to us at our home office, so that we can make arrangements for distribution of
the entire interest in the contract to the beneficiary in a manner that
satisfies the Internal Revenue Code requirements. Failure to satisfy these
requirements may result in the contract not being treated as an annuity contract
for federal income tax purposes with possible adverse tax consequences.
THE ANNUITY PERIOD
ANNUITY COMMENCEMENT DATE
You may specify an annuity commencement date in your application. The annuity
commencement date marks the beginning of the period during which an Annuitant or
other payee designated by the owner receives annuity payments under the
contract. We reserve the right to prohibit an annuity commencement date that is
on or after the Annuitant's 75th birthday. You should consult your First Fortis
representative in this regard
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 during the Annuitant's lifetime 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 which contains
the annuity commencement date is less than $1,000. We would make the payment in
a single sum to the Annuitant or other payee chosen by the owner and cancel the
contract. We would not impose any 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 Variable Account value in any subaccount to provide a
Variable Annuity Option using the same subaccount, unless you have notified us
by written request to apply the fixed account value and Variable Account value
in different proportions. We must receive 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 benefits plans, see "Calculations of
Annuity Payments" in the Statement of Additional Information. The Statement of
Additional Information also contains detailed information about how the amount
of each annuity payment is computed.
The dollar amount of any fixed annuity payments is specified during the entire
period of annuity payments according to the provisions of the annuity option
selected. The dollar amount of variable annuity payments varies during the
Annuity Period based on changes in Annuity Unit values for the subaccounts that
you choose to use in connection with your payments.
RELATIONSHIP BETWEEN SUBACCOUNT INVESTMENT PERFORMANCE AND AMOUNT OF VARIABLE
ANNUITY PAYMENTS
The amount of an annuity payment depends on the average effective net 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 and
administrative expense charges, which are assessed at an annual rate of .45%.
We guarantee that the amount of each variable annuity payment after the first
payment will not be affected by variations in our mortality experience or our
expenses.
TRANSFERS. A person receiving annuity payments may make up to four transfers a
year among subaccounts. The current procedures for and conditions on these
transfers are the same as we describe above under "Allocation of Purchase
Payments and Contract Value--Transfers". We do not permit transfers from a Fixed
Annuity Option during the Annuity Period.
ANNUITY OPTIONS
You may select an annuity option or change a previous selection by written
request. We must receive your request at least 30 days before the annuity
commencement date. You may select one annuity form, 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 payments under
certain retirement plans pursuant to Option D (described below) unless another
election is made. 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.
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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 do not make payments after the annuitant dies. It is
possible for the annuitant to receive only one payment under this option, if the
annuitant dies before the second payment is due.
OPTION B, LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS TO 20 YEARS. We
continue payments as long as the annuitant lives. If the annuitant dies before
we have made all of the guaranteed payments, we continue installments of the
guaranteed payments to the beneficiary.
OPTION C, JOINT AND FULL SURVIVOR ANNUITY. We continue payments as long as
either the annuitant or the joint annuitant is alive. We stop payments when both
the annuitant and the joint annuitant have died. It is possible for the payee or
payees to receive only one payment under this option if both annuitants die
before the second payment is due.
OPTION D, JOINT AND ONE-HALF CONTINGENT SURVIVOR ANNUITY. We continue payments
as long as either the annuitant or the joint annuitant is alive. If the
annuitant dies first, we continue payments to the joint annuitant at one-half
the original amount. If the joint annuitant dies first, we continue payments to
the annuitant at the original full amount. We stop payments when both the
annuitant and the joint annuitant have died. It is possible for the payee or
payees to receive only one payment under this option if both annuitants die
before the second payment is due.
We also have other annuity options available. You can get information about them
from your sales representative or by calling or writing to our home office.
DEATH OF ANNUITANT OR OTHER PAYEE
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 such 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
- when imposed at the time annuity payments begin, we deduct the amount from
your contract value.
We may deduct premium taxes from contract value when no deduction was made from
purchase payments, but is subsequently determined to be due. Conversely, we will
credit to the contract value the amount of any deductions for premium taxes or
similar assessments that are subsequently determined not to be owed.
Applicable premium tax rates depend upon your place of residence. Rates can
change by legislation, administrative interpretations, or judicial acts.
CHARGES AGAINST THE VARIABLE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. We assess each subaccount of the Variable
Account with a daily charge for mortality and expense risk. This charge is a
nominal annual rate of .45% of the average daily net assets of the Variable
Account. It consists of approximately .30% for mortality risk and approximately
.15% for expense risk. We guarantee not to increase this charge for the duration
of the contract. This charge is assessed during both the Accumulation Period and
the Annuity Period.
The mortality risk borne by us 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. In addition, we bear
a mortality risk in that we guarantee to pay a death benefit upon the death of
an Annuitant or owner prior to the annuity commencement date.
The expense risk we assume is that actual expenses incurred in connection with
issuing and administering the contract will exceed the limits on administrative
charges set in the contract.
We bear the loss if the administrative charges and the mortality and expense
risk charge are insufficient to cover the expenses and costs assumed.
Conversely, we profit if the amount deducted proves more than sufficient.
ANNUAL ADMINISTRATIVE CHARGE
A $30 annual administrative charge is deducted from the contract value on each
anniversary of the contract issue date. Some states require a lower
administration charge. Therefore, your annual administration charge may be
lower. This charge helps to cover administrative costs incurred in:
- 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.
We will initially waive this charge during the Annuity Period, although we
reserve the right to reinstitute it at any time.
We will deduct the annual administrative charge by redeeming Accumulation Units
from each subaccount of the Variable Account and by redeeming Accumulation Units
from the fixed account. Contract value is the total value of the Variable
Account and the fixed account. We will redeem Accumulation Units in proportion
to the allocation of contract value among both:
- the subaccounts of the Variable Account, and
- the fixed account
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If you totally surrender the contract, we will deduct the full annual
administration charge at the time of surrender.
The annual administrative charge and charges against the Variable Account
described above are for the purposes described, and First Fortis may receive a
profit as a result of these charges.
TAX CHARGE
We currently impose no charge for taxes payable by us in connection with the
contract, other than for applicable premium taxes. We reserve the right to
impose a charge for any other taxes that may become payable by us in the future
for the contracts or the Variable Account.
MISCELLANEOUS
The Variable Account invests in shares of the portfolios. Therefore, the net
assets of the Variable Account will reflect the investment advisory fees and
certain other expenses incurred by the portfolios and described in their
prospectuses.
GENERAL PROVISIONS
THE CONTRACTS
The entire contract includes any application, amendment, rider, endorsement, and
revised contract pages. Only an officer of First Fortis can agree to change or
waive any provision of a contract. Any change or waiver must be in writing and
signed by an officer of First Fortis.
The contracts are non-participating and do not share in dividends or earnings of
First Fortis.
POSTPONEMENT OF PAYMENT
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. For
a description of other circumstances in which amounts payable out of Variable
Account assets could be deferred, see "Postponement of Payments" in the
Statement of Additional Information. 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 credit or charge the amount of any
adjustment with interest at the rate of 3% annually.
ASSIGNMENT
Owners and payees may assign their rights and interests under a Qualified
Contract only in certain narrow circumstances referred to in the contract.
Owners and other payees may assign their rights and interests under
Non-Qualified Contracts, including their ownership rights.
We take no responsibility for the validity of any assignment. Owners and payees
must make a change in ownership rights in writing and send 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 and while the Annuitant is living. You must send a
written request of the change to First Fortis. Certain retirement programs may
require spousal consent to name or change a beneficiary. In addition, 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.
In the event of the death of a contract owner or Annuitant, prior to the annuity
commencement date, the beneficiary will be determined as follows:
- If upon the death of a contract owner there is one or more surviving
contract owners, the surviving contract owner(s) will be the beneficiary
(these override any other beneficiary designations).
- If upon the death of a contract owner there are no surviving contract
owners, and upon the death of the Annuitant, the beneficiary will be the
beneficiary designated by the contract owner.
- If there is no surviving beneficiary who has been designated by the
contract owner, then the contract owner, or the contract owner's estate,
will be the beneficiary.
REPORTS
We will mail to the contract owner (or to the person receiving payments during
the annuity period), at the last known address of record, any report and
communication required by applicable law or regulation. You should therefore
give us prompt written notice of any address change. This will include annual
audited financial statements of the portfolios, but not necessarily of the
Variable Account or First Fortis.
RIGHTS RESERVED BY FIRST FORTIS
We reserve the right to make certain changes if, in our judgment, they would
best serve the interests of owners and Annuitants or would be appropriate in
carrying out the purposes of the contracts. We will make any change only as
permitted by applicable laws. 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 Variable Account in any form permitted under the Investment
Company Act of 1940 or in any other form permitted by law.
- To transfer any assets in any subaccount to another subaccount, or to one
or more separate accounts, or to the fixed account; or to add, combine, or
remove subaccounts in the Variable Account.
- To substitute, for the portfolio shares held in any subaccount, the shares
of another portfolio or the shares of another investment company or any
other investment permitted by law.
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- To make any changes required by the Internal Revenue Code or by any other
applicable law in order to continue treatment of the contract as an
annuity.
- To change the time or time of day at which a Valuation Date is deemed to
have ended.
- To make any other necessary technical changes in the contract in order to
conform with any action the above provisions permit us to take, including
to change the way we assess charges, but without increasing as to any then
outstanding contract the aggregate amount of the types of charges that we
have guaranteed.
DISTRIBUTION
The contracts are sold by individuals who are (1) licensed by state insurance
authorities to sell the contracts of First Fortis, and (2) representatives of
Waterhouse National Bank. The representatives of Waterhouse National Bank are
authorized to sell the contracts by means of a dealer agreement with Fortis
Investors, Inc., the principal underwriter of the contracts. Fortis Investors is
registered as a broker-dealer with the Securities and Exchange Commission under
the Securities Exchange Act of 1934. Fortis Investors is also a member of the
National Association of Securities Dealers, Inc.
We compensate Fortis Investors who, in turn, compensate Waterhouse National Bank
for distributing the contracts by paying Waterhouse National Bank a fee. We do
not expect this fee to exceed .40% per annum of the average daily contract value
of the contracts sold by representatives of Waterhouse National Bank.
We did not pay any amount associated with distribution of the contracts to
Fortis Investors in 1997 or 1998. In our distribution agreement with Fortis
Investors, we have agreed to indemnify Fortis Investors (and its agents,
employees, and controlling persons) for certain damages and expenses, including
those arising under federal securities laws.
See Note 9 to the Notes to First Fortis' Financial Statements as to amounts we
have paid to Fortis, Inc., Fortis Advisors, Inc. and Fortis Benefits Insurance
Company, affiliates of First Fortis, for various services.
Fortis Investors is an indirect subsidiary of Fortis (NL)N.V. and Fortis (B).
Fortis Investors is under common control with First Fortis. Fortis Investors'
principal business address is 500 Bielenberg Drive, Woodbury Minnesota 55125 and
its mailing address is P.O. Box 64284, St. Paul MN 55164. Fortis Investors is
not obligated to sell any specific amount of interests under the contracts.
$20,000,000 of interests in the fixed account and an indefinite amount of
interests in the Variable Account have been registered with the Securities and
Exchange Commission.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes. These rules are based on laws, regulations and
interpretations that are subject to change at any time. This summary is not
comprehensive. We do not intend it as tax advice. Federal estate and gift tax
considerations, as well as state and local taxes, may also be material. You
should consult a qualified tax adviser as to the tax implications of taking any
action under a contract or related retirement plan.
NON-QUALIFIED CONTRACTS
Section 72 of the Internal Revenue Code ("Code") governs the taxation of
annuities in general. Neither you nor any other person may exclude or deduct
purchase payments under Non-Qualified Contracts from gross income. However, you
are not currently taxed, until receipt, on any increase in the accumulated value
of a Non-Qualified Contract that results from (1) the investment performance of
the Variable Account, or (2) interest credited to the fixed account. Owners who
are not natural persons ARE taxed annually on any increase in the contract value
subject to exceptions. You may wish to discuss this with your tax adviser.
The following discussion applies generally to contracts owned by natural
persons.
In general, surrenders or partial withdrawals under contracts are taxed as
ordinary income to the extent of the accumulated income or gain under the
contract. If you assign or pledge any part of the value of a contract, you pay
on the value so pledged or assigned to the same extent as a partial withdrawal.
With respect to annuity payment options, the tax consequences may vary depending
on the option elected under the contract. Until the "investment in the contract"
is recovered, generally only the portion of the annuity payment that represents
the amount by which the contract value exceeds the "investment in the contract"
will be taxed. In general, "investment in the contract" is the aggregate amount
of purchase payments made. After recovery of an Annuitant's or other payee's
"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.
For fixed annuity payments, in general, prior to recovery of the "investment in
the contract," there is no tax on the amount of each payment that bears the same
ratio to that payment as the "investment in the contract" bears to the total
expected value of the annuity payments for the term of the payments. However,
the remainder of each annuity payment is taxable. The taxable portion of a
distribution (in the form of an annuity or a single sum payment) is taxed as
ordinary income.
For purposes of determining the amount of taxable income resulting from
distributions, all contracts and other annuity contracts we or our affiliates
issue to you within the same calendar year will be treated as if they were a
single contract.
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 is
- part of a series of substantially equal annuity payments for the life or
life expectancy of you AND your beneficiary.
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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 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 owner's designated beneficiary is the surviving spouse, the
surviving spouse may continue the contract as the new contract owner. Where the
owner or other person receiving payments is not a natural person, the required
distributions under Section 72(A) apply on the death of the primary Annuitant.
The Internal Revenue Service has not issued regulations interpreting the
requirements of Section 72(s) (although it has issued proposed regulations
interpreting similar requirements for qualified plans). We intend to review and
modify the contract if necessary to ensure that it complies with the
requirements of Section 72(s) when clarified by regulation or otherwise.
Generally, the above requirements will be satisfied with a single sum payment
where the death occurs prior to the annuity commencement date. A single sum
payment will be subject to proof of the owner's death. The beneficiary, however,
may elect by written request to receive an annuity option instead of a lump sum
payment. However, if the election is not made within 60 days of the date the
single sum death benefit otherwise becomes payable, the IRS may disregard the
election for tax purposes and tax the beneficiary as if a single sum payment had
been made.
QUALIFIED CONTRACTS
The contracts may be used with several types of tax-qualified plans. The tax
rules applicable to owners, Annuitants, and other payees vary according to the
type of plan and the terms and conditions of the plan itself. In general,
purchase payments made under a tax qualified plan on your behalf are excludable
from your gross income during the Accumulation Period. The portion, if any, of
any purchase payment that is not excluded from your gross income during the
Accumulation Period constitutes your "investment in the contract".
When annuity payments begin, you will receive back your "investment in the
contract" if any, as a tax-free return of capital. The Code provides which
portion of each payment is taxable and which portion is tax free. These rules
may vary depending on the type of tax qualified plan.
The contracts are available in connection with the following types of retirement
plans:
- Section 403(b) annuity plans for employees of certain tax-exempt
organizations and public 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);
- Section 457 unfunded deferred compensation plans of tax-exempt
organizations and private employer unfunded deferred compensation plans.
The tax implications of these plans are further discussed in the Statement of
Additional Information under the heading "Taxation Under Certain Retirement
Plans".
WITHHOLDING
Annuity payments and other amounts received under contracts are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld will vary among recipients depending on the tax status of
the individual and the type of payments from which taxes are withheld.
Despite the recipient's election, the Code may require withholding from certain
payments outside the United States. The Code may also require withholding from
certain distributions from certain types of qualified retirement plans, unless
the proceeds are transferred directly from the qualified plan to another
qualified retirement plan. Moreover, special "backup withholding" rules may
require us to disregard the recipient's election if the recipient fails to
supply us with a "TIN" or taxpayer identification number (social security number
for individuals), or if the Internal Revenue Service notifies us that the TIN
provided by the recipient is incorrect.
PORTFOLIO DIVERSIFICATION
The United States Treasury Department has adopted regulations under Section
817(h) of the Code that set forth diversification requirements for investments
underlying 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 receiving annuity payments to be treated as the
owners of Variable Account assets for tax purposes. We reserve the right to
amend the contracts in any way necessary to avoid any such result. The Treasury
Department may establish standards in this regard through regulations or
rulings. Such standards may apply only
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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 under 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 product you exchanged out of.
Because of the complexity of these and other tax aspects in connection with an
exchange, you should consult a tax adviser before making any exchange.
TAX LAW RESTRICTIONS AFFECTING SECTION 403(b) PLANS
Section 403(b)(11) of the Internal Revenue Code restricts the distribution under
Section 403(b) annuity contracts of:
(1) elective contributions made for years beginning after December 31, 1988;
(2) earnings on those contributions; and
(3) earnings on amounts held as of December 31, 1988.
Distribution of these amounts may only occur upon death of the employee,
attainment of age 59 1/2, separation from service, disability, or financial
hardship. In addition, we may not distribute income attributable to elective
contributions made after December 31, 1988.
FURTHER INFORMATION ABOUT FIRST FORTIS
GENERAL
We offer and sell insurance products, including fixed life insurance policies,
fixed and variable annuity contracts, and group life, accident and health
insurance policies. We market our products to small business and individuals
through a national network of independent agents, brokers, and financial
institutions.
OWNERSHIP OF SECURITIES
All of First Fortis' outstanding shares are owned by Fortis, Inc., One Chase
Manhattan Plaza, New York, N.Y. 10005. Fortis, Inc., in turn is wholly owned by
Fortis International, Inc., which is wholly owned by AMEV/VSB 1990 N.V., both of
which share the same address with N.V. AMEV., Archimedeslaan 10, 3584 BA,
Utrecht, The Netherlands. AMEV/VSB 1990 N.V. is 50% owned by Fortis (NL)N.V. and
50% owned, through certain subsidiaries, by Fortis (B), Boulevard Emile Jacqmain
53, 1000 Brussels, Belgium.
SELECTED FINANCIAL DATA
The following is a summary of certain financial data of First Fortis. This
summary has been derived in part from the financial statements of First Fortis
included elsewhere in this prospectus. You should read the following along with
these financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
(IN THOUSANDS) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums........................................................ $ 54,451 $ 51,846 $ 67,516 $ 81,201 $ 92,056
Net investment income........................................... 8,187 7,907 7,891 7,466 6,261
Realized investment gains (losses).............................. 1,436 361 (3) 2,683 (1,057)
Other income.................................................... 1,202 682 336 298 287
-------- -------- -------- -------- --------
TOTAL REVENUES.................................................... $ 65,276 $ 60,796 $ 75,740 $ 91,648 $ 97,547
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Benefits and expenses........................................... $ 61,477 $ 60,983 $ 75,596 $ 96,371 $104,582
Income tax expense (benefit).................................... 1,347 (63) (39) (1,563) (999)
Net income (loss)............................................... 2,452 (124) 183 (3,160) (6,036)
BALANCE SHEET DATA
Total assets.................................................... $217,502 $170,898 $142,742 $139,913 $123,954
Total liabilities............................................... 177,476 133,817 107,050 101,523 97,913
Total shareholder's equity...................................... 40,026 37,081 35,692 38,390 26,041
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
REVENUES
First Fortis (the "Company") life insurance premiums increased during 1998 as
compared to 1997 due to strong group life sales. Accident and health premiums
decreased during 1998 as compared to 1997. This accident and health 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 a
$4.2 million in premium inforce at December 31, 1998. Accident and health
premiums are principally composed of group accident and health coverages. The
discontinuance of group medical sales and strong dental sales have caused the
group accident and health premium mix to shift. The dental, disability income,
and medical premium represented 44%, 41%, and 15%, respectively, of total group
accident and health premium in 1998 compared to 39%, 39%, and 22%, respectively,
in 1997.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Changes in interest rates during 1998 and 1997
resulted in recognition of realized gains and losses upon sales of securities.
BENEFITS
1998 life benefits as compared to premium were lower than 1997 due to more
favorable mortality experience, despite the fact that the aggregate amount of
claims increased. The decrease in accident and health benefits in 1998 as
compared to 1997 is primarily due to improved experience in the group medical
products. Slightly offsetting this is a larger volume of new 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.
The Company's general and administrative expenses as a percent of premium has
decreased in 1998 from 1997 as a reflection of the Company's expense monitoring
efforts.
YEAR 2000
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 Company is not incurring any cost for the Year 2000 project since it
is being paid for by affiliates of the Company. Costs to upgrade and replace
systems in the normal course of business are not included in this estimate. 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.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company have been met by funds provided from
operations, including investment income. Funds are principally used to provide
for policy benefits, operating expenses, commissions and investment purchases.
The impact of the declining inforce medical business has been considered in
evaluating the Company's future liquidity needs. The Company expects its
operating activities to continue to generate sufficient funds.
The National Association of Insurance Commissioners has implemented risk-based
capital standards to determine the capital requirements of a life insurance
company based upon the risks inherent in its operations. These standards require
the computation of risk-based capital amount which is then compared to a
company's actual total adjusted capital. Based upon current calculation using
these risk-based capital standards, the Company's percentage of total adjusted
capital is in excess of ratios which would require regulatory attention.
20
<PAGE>
The Company has no long or short term debt. As of December 31, 1998, 96% of the
Company's fixed maturity investments consisted of investment grade bonds. The
Company does not expect this percentage to change significantly in the future.
REGULATION
The Company is subject to the laws and regulations established by the New York
State Insurance Department governing insurance business conducted in New York
State. Periodic audits are conducted by the New York Insurance Department
related to the Company's compliance with these laws and regulations. To date,
there have been no adverse findings regarding the Company's operations.
MARKET RISK
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.
VOTING PRIVILEGES
In accordance with our view of current applicable law, we will vote shares of
each of the portfolios attributable to a contract at regular and special
meetings of the shareholders of the portfolios. We will vote those shares in
proportion to instructions we receive from the persons having the voting
interest in the contract as of the record date for the corresponding portfolio
shareholders meeting. Owners have the voting interest during the Accumulation
Period, persons receiving annuity payments have the voting interest during the
Annuity Period, and beneficiaries have the voting interest after the death of
the Annuitant or 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:
- 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.
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 holders holding voting interests in that
portfolio. Shares held by separate accounts other than the Variable Account will
in general be voted in accordance with instructions of owners in such other
separate accounts. This diminishes the relative voting influence of the
contracts.
Each person having a voting interest in a subaccount of the Variable Account
will receive proxy material, reports and other materials relating to the
appropriate portfolio. Under the procedures described above, these persons may
give instructions regarding:
- the election of the Board of Directors of the portfolios,
- ratification of the selection of a portfolio's independent auditors,
- the approval of the investment managers of a portfolio,
- changes in fundamental investment policies of a portfolio, and
- all other matters that are put to a vote by portfolio shareholders
LEGAL MATTERS
David A. Peterson, Esquire, Vice President and Assistant General Counsel with
our legal department has passed on the legality of the
21
<PAGE>
contracts described in this prospectus. Messrs. Freedman, Levy, Kroll & Simonds,
Washington, D.C., have advised First Fortis on certain federal securities law
matters.
YEAR 2000 ISSUES
At First Fortis, 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. First Fortis 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 First Fortis
Financial Statements.
OTHER INFORMATION
We have filed Registration Statements with the Securities and Exchange
Commission under the Securities Act of 1933 as amended, with respect to the
contracts discussed in this prospectus. We have not included in the prospectus
all of the information set forth in the Registration Statement, amendments, and
exhibits thereto. We intend statements contained in this prospectus about the
content of the contracts and other legal instruments to be summaries. For a
complete statement of the terms of these documents, you should refer to the
instruments filed with the Securities and Exchange Commission.
A Statement of Additional Information is available upon request. Its contents
are as follows:
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
First Fortis and the Variable Account..........
Calculation of Annuity Payments................
Postponement of Payments.......................
Services.......................................
- Safekeeping of Variable Account Assets.....
- Experts....................................
- Principal Underwriter......................
Taxation Under Certain Retirement Plans........
Withholding....................................
Other Information..............................
Miscellaneous..................................
Variable Account Financial Statements..........
APPENDIX A--Performance Information............
</TABLE>
22
<PAGE>
FIRST FORTIS FINANCIAL STATEMENTS
The financial statements of First Fortis that are included in this prospectus
should be considered primarily as bearing on the ability of First Fortis to meet
its obligations under the contracts. The contracts are not entitled to
participate in earnings, dividends or surplus of First Fortis.
23
<PAGE>
(This page left intentionally blank.)
24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
First Fortis Life Insurance Company
We have audited the accompanying balance sheets of First Fortis Life 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 First Fortis Life 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
FIRST FORTIS LIFE 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--$125,787; 1997--$102,284).......................... $ 130,038 $ 105,776
Short-term investments.................................... 830 11,697
----------- -----------
130,868 117,473
Cash and cash equivalents................................... 1,160 7,453
Receivables:
Uncollected premiums, less allowance (1998 and
1997--$100).............................................. 3,538 2,358
Reinsurance recoverable on unpaid and paid losses......... 28,458 19,764
Other..................................................... 417 1,402
----------- -----------
32,413 23,524
Accrued investment income................................... 1,895 1,700
Deferred policy acquisition costs........................... 3,148 1,413
Property and equipment at cost, less accumulated
depreciation (1998--$2,086; 1997--$1,853).................. 324 676
Deferred federal income taxes............................... 1,150 2,079
Goodwill, less accumulated amortization (1998--$368;
1997--$322)................................................ 462 508
Assets held in separate accounts............................ 46,082 16,072
----------- -----------
TOTAL ASSETS................................................ $ 217,502 $ 170,898
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-2
<PAGE>
BALANCE SHEETS (CONTINUED)
FIRST FORTIS LIFE 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:
Life insurance.......................................... $ 30,388 $ 27,671
Interest sensitive and investment products.............. 6,267 6,878
Accident and health..................................... 68,206 61,175
----------- -----------
104,861 95,724
Unearned revenues......................................... 8,535 5,223
Other policy claims and benefits payable.................. 11,084 10,304
Income taxes payable...................................... 2,017 911
Other liabilities......................................... 4,897 5,583
Liabilities related to separate accounts.................. 46,082 16,072
----------- -----------
TOTAL POLICY RESERVES AND LIABILITIES....................... 177,476 133,817
COMMITMENTS AND CONTINGENCIES
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.......................................... (2,190) (4,642)
Accumulated other comprehensive income.................... 2,776 2,283
----------- -----------
TOTAL SHAREHOLDER'S EQUITY.................................. 40,026 37,081
----------- -----------
TOTAL POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S
EQUITY..................................................... $ 217,502 $ 170,898
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Insurance operations:
Life insurance premiums........................................................... $ 23,057 $ 19,158 $ 22,791
Interest sensitive and investment product policy charges.......................... 71 4 59
Accident and health insurance premiums............................................ 31,323 32,684 44,666
Net investment income............................................................... 8,187 7,907 7,891
Net realized gains on investments................................................... 1,436 361 (3)
Other income........................................................................ 1,202 682 336
--------- --------- ---------
TOTAL REVENUES.................................................................... 65,276 60,796 75,740
BENEFITS AND EXPENSES
Benefits to policyholders:
Life insurance.................................................................... 16,167 14,597 19,720
Interest sensitive and investment products........................................ 815 196 72
Accident and health............................................................... 26,616 29,090 37,988
--------- --------- ---------
43,598 43,883 57,780
Amortization of deferred policy acquisition costs..................................... (106) (56) (92)
Insurance commissions................................................................. 5,056 4,457 5,214
General and administrative expenses................................................... 12,929 12,699 12,694
--------- --------- ---------
TOTAL BENEFITS AND EXPENSES....................................................... 61,477 60,983 75,596
--------- --------- ---------
Income (loss) before federal income taxes............................................. 3,799 (187) 144
Federal income taxes.................................................................. 1,347 (63) (39)
--------- --------- ---------
NET INCOME (LOSS)..................................................................... $ 2,452 $ (124) $ 183
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-4
<PAGE>
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FIRST FORTIS LIFE INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL STOCK CAPITAL DEFICIT (LOSS) INCOME
------------ ------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996........................ $ 38,390 $ 2,000 $ 37,440 $ (4,701) $ 3,651
Comprehensive loss:
Net income.................................. 183 -- -- 183 --
Change in unrealized losses on investments,
net........................................ (2,882) -- -- -- (2,882)
------------
Comprehensive loss............................ (2,699)
------------ ------ ------------ ------ ------
Balance, December 31, 1996...................... 35,691 2,000 37,440 (4,518) 769
Comprehensive income:
Net loss.................................... (124) -- -- (124) --
Change in unrealized gains on investments,
net........................................ 1,514 -- -- -- 1,514
------------
Comprehensive income.......................... 1,390
------------ ------ ------------ ------ ------
Balance, December 31, 1997...................... 37,081 2,000 37,440 (4,642) 2,283
Comprehensive income:
Net income.................................. 2,452 -- -- 2,452 --
Change in unrealized gains on investments,
net........................................ 493 -- -- -- 493
------------
Comprehensive income.......................... 2,945
------------ ------ ------------ ------ ------
Balance, December 31, 1998...................... $ 40,026 $ 2,000 $ 37,440 $ (2,190) $ 2,776
------------ ------ ------------ ------ ------
------------ ------ ------------ ------ ------
</TABLE>
See accompanying notes.
F-5
<PAGE>
STATEMENTS OF CASH FLOWS
FIRST FORTIS LIFE INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................................. $ 2,452 $ (124) $ 183
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Change in deferred tax....................................................... 665 (1,338) --
Depreciation, amortization and accretion..................................... 299 707 804
Loss on disposal of property and equipment................................... 12 -- --
Net realized (gains) losses on investments................................... (1,436) (361) 4
(Increase) decrease in uncollected premiums, accrued investment income and
other....................................................................... (390) 2,309 (1,076)
Increase in reinsurance recoverable.......................................... (8,694) (5,033) (5,395)
Increase in income taxes payable............................................. 1,106 883 1,772
Amortization of policy acquisition costs..................................... (106) (56) (92)
Policy acquisition costs deferred............................................ (1,629) (1,110) (155)
Increase in future policy benefit reserves, unearned revenues and other
policy claims and benefits.................................................. 13,922 1,769 5,265
(Decrease) increase in other liabilities..................................... (686) 1,533 (1,939)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES...................... 5,515 (821) (629)
INVESTING ACTIVITIES
Purchases of fixed maturity investments........................................ (187,953) (127,426) (140,954)
Sales and repayments of fixed maturity investments............................. 165,971 137,273 135,352
Decrease (increase) in short-term investments.................................. 10,867 (11,697) 6,942
Purchases of property and equipment............................................ -- (107) (310)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES...................... (11,115) (1,957) 1,030
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received...................................................... 13,661 10,679 --
Surrenders and death benefits................................................ (15,075) (2,152) --
Interest credited to policyholders........................................... 721 159 --
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES...................... (693) 8,686 --
--------- --------- ---------
(Decrease) increase in cash and cash equivalents................................. (6,293) 5,908 401
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................... 7,453 1,545 1,144
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................. $ 1,160 $ 7,453 $ 1,545
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying note
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FIRST FORTIS LIFE INSURANCE COMPANY
DECEMBER 31, 1998
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
First Fortis Life Insurance Company (the Company) is an affiliate of the
worldwide Fortis group of companies owned by Fortis (B) and Fortis (NL) N.V.
Prior to April 30, 1997, First Fortis was wholly-owned by Fortis (B), while the
other U.S. subsidiaries of Fortis (B) and Fortis (NL) N.V. operated under the
holding company of Fortis, Inc. Upon regulatory approval by the New York State
Insurance Department in April 1997, the Company became a wholly-owned subsidiary
of Fortis, Inc. The Company was organized to enable the Fortis group of
companies to distribute their products to the New York State marketplace. To
date, the Company's revenues have been derived primarily from group employee
benefits products. During 1998, the Company had no direct premium written by
third party administrators ("TPAs"). Effective January 1, 1996, the Company
stopped offering its group medical products; however, the Company will continue
to renew and service existing medical business, which represented $4,648,000,
$7,297,000 and $17,871,000 of 1998, 1997 and 1996 accident and health premiums,
respectively.
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 accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which practices differ in certain
respects from statutory accounting practices prescribed or permitted by the
Department of Insurance of the State of New York. The more significant of these
principles are:
REVENUE RECOGNITION AND FUTURE POLICY BENEFIT RESERVES
Premiums for traditional life insurance are recognized as revenue 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
credit rates for universal life and investment products ranged from 3.5% to
10.25% in 1998 and 3.5% to 10.0% in 1997 and 1996.
Premiums for accident and health insurance products, including medical, long and
short-term disability and dental insurance products, are recognized as revenues
ratably over the contract period in proportion to the risk insured. Reserves for
future disability benefits are based on the 1964 Commissioners Disability Table
at 6% interest. Calculated reserves are modified based on the Company's actual
experience.
Premiums for credit insurance included in life insurance premiums and accident
and health insurance premiums are recognized as revenues when due over the
estimated coverage period.
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 credit life, disability and accident and health insurance
products, such costs are amortized over the premium paying period. For interest
sensitive and investment products, such costs are amortized in relation to
expected future gross profits. 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 are classified as available-for-sale and carried
at fair value.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FIRST FORTIS LIFE INSURANCE COMPANY
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 are reported as accumulated other
comprehensive income and, accordingly, have no effect on net income.
Short term investments are at cost which approximates fair value.
Realized gains and losses on sales of investments, and declines in value judged
to be other-than-temporary, are recognized on the specific identification basis.
Investment income is recorded as earned.
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.
GOODWILL
Goodwill represents the excess of the purchase price paid over net assets
acquired in connection with the purchase of the shell of Metropolitan Life.
Goodwill is amortized on a straight line basis over 18 years.
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 separate accounts relate to deposit and
annuity considerations for which the contractholder, 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
contract owners. The Company receives mortality and expense risk fees from the
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 expectance 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.
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.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FIRST FORTIS LIFE INSURANCE COMPANY
2. 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
Governments.................................... $ 18,770 $ 437 $ 14 $ 19,193
Public utilities............................... 14,446 768 119 15,095
Industrial and miscellaneous................... 92,571 3,471 292 95,750
----------- --------- --- -----------
Total........................................ $ 125,787 $ 4,676 $ 425 $ 130,038
----------- --------- --- -----------
----------- --------- --- -----------
December 31, 1997
Governments.................................... $ 3,599 $ 125 $ 2 $ 3,722
Public utilities............................... 8,212 247 -- 8,459
Industrial and miscellaneous................... 90,473 3,197 75 93,595
----------- --------- --- -----------
Total........................................ $ 102,284 $ 3,569 $ 77 $ 105,776
----------- --------- --- -----------
----------- --------- --- -----------
</TABLE>
The amortized cost and fair value of fixed maturity securities 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................................................ $ 1,226 $ 1,228
Due after one year through five years.................................. 41,505 42,350
Due after five years through ten years................................. 42,709 44,286
Due after ten years.................................................... 40,347 42,174
----------- -----------
Total.................................................................. $ 125,787 $ 130,038
----------- -----------
----------- -----------
</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.
INVESTMENTS ON DEPOSIT
The Company had fixed maturities carried at $525,000, at December 31, 1998 and
1997, on deposit with various governmental authorities as required by law.
NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Major categories of net investment income for each year were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Fixed maturities...................................................... $ 8,108 $ 7,744 $ 7,941
Short-term investments................................................ 222 302 231
--------- --------- ---------
8,330 8,046 8,172
Expenses.............................................................. (143) (139) (281)
--------- --------- ---------
Net investment income................................................. $ 8,187 $ 7,907 $ 7,891
--------- --------- ---------
--------- --------- ---------
</TABLE>
All net realized gains (losses) on investments resulted from sales of fixed
maturities.
Proceeds from sales of investments were $165,471,000, $134,234,000, and
$135,352,000 in 1998, 1997, and 1996, respectively. Gross gains of $1,757,000,
$1,136,000, and $1,551,000 and gross losses of $321,000, $775,000, and
$1,554,000 were realized on the sales in 1998, 1997, and 1996, respectively.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FIRST FORTIS LIFE INSURANCE COMPANY
2. 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, were as
follows (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............................................. $ 2,194 $ (768) $ 1,426
Reclassification adjustment for gains realized in net
income.................................................. (1,436) 503 (933)
----------- ----------- -----------
Other comprehensive income................................. $ 758 $ (265) $ 493
----------- ----------- -----------
----------- ----------- -----------
December 31, 1997
Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments............................................. $ 2,766 $ (1,017) $ 1,748
Reclassification adjustment for gains (losses) realized
in net income........................................... (361) 126 (234)
----------- ----------- -----------
Other comprehensive income................................. $ 2,405 $ (891) $ 1,514
----------- ----------- -----------
----------- ----------- -----------
December 31, 1996
Unrealized (losses) gains on investments:
Unrealized gains (losses) on available-for-sale
investments............................................. $ (4,370) $ 1,486 $ (2,884)
Reclassification adjustment for losses realized in net
income.................................................. 3 (1) 2
----------- ----------- -----------
Other comprehensive (loss)................................. $ (4,367) $ 1,485 $ (2,882)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
3. LEASES
The Company leases office space under operating lease arrangements that have
various renewal options and are subject to escalation clauses for real estate
taxes and operating expenses. Rent expense was $789,000, $661,000, and $692,000
in 1998, 1997, and 1996, respectively. Future minimum payments required under
operating lease arrangements that have initial or noncancelable terms in excess
of one year or more are: 1999-- $602,000, 2000--$51,000, 2001--$43,000 and
2002--$28,000.
4. 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........... $ 60,498 $ 61,482 $ 65,764
Add: Incurred losses related to:
Current year..................................................... 16,816 25,424 38,798
Prior years...................................................... 9,800 3,666 (810)
--------- --------- ---------
Total incurred losses.......................................... 26,616 29,090 37,988
Deduct: Paid losses related to:
Current year..................................................... 11,639 15,393 23,727
Prior year....................................................... 12,935 14,681 18,543
--------- --------- ---------
Total paid losses.............................................. 24,574 30,074 42,270
--------- --------- ---------
Balance as of December 31, net of reinsurance recoverables......... $ 62,540 $ 60,498 $ 61,482
--------- --------- ---------
--------- --------- ---------
</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.
As discussed in Note 1, the Company stopped offering group medical products in
1996 but continues to service and renew existing business, resulting in lower
incurred and paid loss activity for the years ended December 31, 1998, 1997 and
1996.
The liability for unpaid accident and health claims includes $59,339,000,
$55,956,000 and $55,152,000 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-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FIRST FORTIS LIFE INSURANCE COMPANY
4. ACCIDENT AND HEALTH RESERVES (CONTINUED)
The 1998 and 1997 claims incurred related to prior years is principally
additional payments and increases to the discounted accident and health reserves
based on actual experience of claims liabilities through the current year. For
1996, the claims incurred related to prior years resulted from favorable
experience mitigated by increases to the discounted accident and health reserves
based on actual experience of claims liabilities through the current year.
5. FEDERAL INCOME TAXES
As of May 1, 1997, 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>
DECEMBER 31
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserves................................................................... $ 473 $ 2,437
Separate account assets/liabilities........................................ 1,545 229
Deferred policy acquisition costs.......................................... -- 228
Alternative minimum tax credit carryforward................................ 308 392
Net operating loss carryforward............................................ 557 598
Other...................................................................... 19 493
--------- ---------
Total deferred tax assets................................................ 2,902 4,377
Deferred tax liabilities:
Deferred policy acquisition costs.......................................... 213 --
Unrealized gains........................................................... 1,487 1,287
Other...................................................................... 52 1,011
--------- ---------
Total gross deferred tax liabilities..................................... 1,752 2,298
--------- ---------
Net deferred tax asset................................................... $ 1,150 $ 2,079
--------- ---------
--------- ---------
</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 benefit for the year ended December 31 is shown as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current................................................................ $ 889 $ (35) $ (131)
Deferred............................................................... 458 (28) 92
--------- --------- ---------
$ 1,347 $ (63) $ (39)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Federal income tax payments and refunds resulted in net payments of $382,000 and
$32,000 in 1997 and 1996 respectively, and net refunds of $424,000 in 1998.
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% 34.0%
Other, including provision for prior year adjustments.................... .4 (1.3) (61.3)
--- --- ---
35.4% 33.7% (27.3)%
--- --- ---
--- --- ---
</TABLE>
As of May 1, 1997, the Company is included as a member of a federal consolidated
group that has a statutory federal rate of 35%.
At December 31, 1998, the Company has net operating loss and capital loss
carryforwards relating to periods ending before May 1, 1997, for federal income
tax purposes of $1,591,000 which are available to offset future federal taxable
income of the Company, if any, through 2009. The Company also has alternative
minimum tax credit carryforwards of $308,000 relating to periods before May 1,
1997, which are available to reduce future federal regular income taxes of the
Company, if any, over an indefinite period of time.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FIRST FORTIS LIFE INSURANCE COMPANY
6. REINSURANCE
The maximum amounts that the Company retains on any one life are $500,000
for group life; $250,000 for group accidental death; $2,000 net monthly benefit
for long-term disability; from 10% to 100% of possible benefits payable under
credit life and credit disability insurance; and none of a closed block of
individual life business. Amounts in excess of these limits are reinsured with
various insurance companies on a yearly renewable term, coinsurance or other
basis.
In the second quarter of 1996, the Company received approval from the New York
State Insurance Department for a reinsurance agreement with the Fortis Benefits
Insurance Company ("Fortis Benefits"), an affiliate. The agreement, which became
effective as of January 1, 1996, decreased the Company's 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 ceded
$5,601,000, $5,742,000 and $6,144,000 of premium to Fortis Benefits in 1998,
1997 and 1996, respectively. Fortis Benefits has assumed $9,315,000, $5,452,000
and $3,599,000 of reserves in 1998, 1997 and 1996, respectively, from the
Company. In the future, the agreement is expected to reduce the variability of
financial results for this product line.
Future policy benefits and other policy claims and benefits payable are reported
gross of reinsurance. The reinsured portion of future policy benefits and other
policy claims and benefits payable are $28,458,000 and $19,764,000 in 1998 and
1997, respectively.
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...................................................... $ 5,343 $ 3,249 $ 1,366
Accident and health insurance....................................... 11,343 8,768 7,085
--------- --------- ---------
$ 16,686 $ 12,017 $ 8,451
--------- --------- ---------
--------- --------- ---------
</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...................................................... $ 1,740 $ 1,628 $ 1,021
Accident and health insurance....................................... 3,504 2,310 348
--------- --------- ---------
$ 5,244 $ 3,938 $ 1,369
--------- --------- ---------
--------- --------- ---------
</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.
7. DIVIDEND RESTRICTIONS
The Company is subject to insurance regulatory restrictions that limit cash
dividends which can be paid from the Company to its Parent. All dividends
require prior approval by the New York State Insurance Department.
8. REGULATORY ACCOUNTING REQUIREMENTS
The Company prepares its statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the Department of Insurance
of the State of New York. 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 that
are not prescribed; such practices 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-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FIRST FORTIS LIFE INSURANCE COMPANY
8. REGULATORY ACCOUNTING REQUIREMENTS (CONTINUED)
Reconciliations of net income (loss) 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>
SHAREHOLDER'S EQUITY
NET INCOME (LOSS)
------------------------------- --------------------
1998 1997 1996 1998 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Based on statutory accounting practices............. $ 1,177 $ (296) $ (428) $ 28,782 $ 27,358
Deferred policy acquisition costs................... 1,764 1,180 247 3,148 1,413
Deferred and uncollected premiums................... (14,055) 246 76 97 425
Policy reserves..................................... 13,463 (660) 476 (361) (92)
Investment valuation difference..................... -- (47) -- 4,250 3,492
Realized gains (losses) on investments.............. 896 235 (3) -- --
Amortization of goodwill............................ (46) (46) (46) 462 508
Income taxes........................................ (458) 28 115 55 778
Pension............................................. (19) (275) -- (321) (301)
Amortization of IMR................................. (347) (348) (426) -- --
Interest Maintenance Reserve........................ -- -- -- 2,438 1,888
Asset Valuation Reserve............................. -- -- -- 814 717
Property and equipment.............................. -- -- -- 164 318
Agents balances..................................... -- -- -- 300 456
Other............................................... 77 (141) 172 198 121
--------- --------- --------- --------- ---------
As reported herein.................................. $ 2,452 $ (124) $ 183 $ 40,026 $ 37,081
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
9. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company received various services from Fortis and its affiliates. These
services include assistance in benefit plan administration, corporate insurance,
accounting, tax, auditing, investment information systems, actuarial and other
administrative functions. The fees paid for these services for years ended
December 31, 1998, 1997 and 1996, were $1,712,000, $2,568,000 and $1,648,000,
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.
10. FAIR VALUE DISCLOSURES
VALUATION METHODS AND ASSUMPTIONS
The fair values for fixed maturity 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.
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.
Separate account assets and liabilities are reported at their estimated fair
value in the Balance Sheet.
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........................................... $ 130,038 $ 130,038 $ 105,776 $ 105,776
Short-term investments......................................... 830 830 11,697 11,697
Cash........................................................... 1,160 1,160 7,453 7,453
Assets held in separate accounts............................... 46,082 46,082 16,072 16,072
Liabilities:
Individual and group annuities (subject to discretionary
withdrawal)................................................... $ 8,435 $ 8,097 $ 6,877 $ 6,554
Liabilities related to Separate Accounts....................... 46,082 46,082 16,072 16,072
</TABLE>
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FIRST FORTIS LIFE INSURANCE COMPANY
11. RETIREMENT AND OTHER EMPLOYEE BENEFITS
Fortis (the Company's parent) 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. As a matter of policy, pension costs are funded as they accrue and
vested benefits are fully funded. 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 $52,000,
$61,000 and $72,000 for 1998, 1997 and 1996, respectively.
The Company has a contributory profit sharing plan, sponsored by Fortis,
covering employees and certain agents who meet eligibility requirements as to
age and length of service. The Company matches 200% up to 3% of the employee's
contribution. Benefits are payable to participants on retirement or disability
and to the beneficiaries of participants in the event of death. The amount
expensed was approximately $124,000, $122,000 and $182,000 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.
12. 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.
13. 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. At December 31, 1998, 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 Company is not incurring any cost for the Year 2000 project since it
is being paid for by affiliates of the Company. Costs to upgrade and replace
systems in the normal course of business are not included in this estimate. 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-14
<PAGE>
APPENDIX A--SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS
The formula which will be used to determine the Market Value Adjustment is:
1 + I n/12
( ----------) - 1
1 + J + .0025
Sample Calculation 1: Positive Adjustment
Amount withdrawn or transferred $10,000
Existing guarantee period 7 years
Time of withdrawal or transfer beginning of 3rd year of existing
guarantee period
Guaranteed interest rate (I) 8%*
Guaranteed interest rate for
new 5-year guarantee (J) 7%*
Remaining guarantee period (N) 60 months
Market Value Adjustment
1 + .08 60/12
$10,000 X [( ----------) - 1] = $354.57
1 + .07 + .0025
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $10,354.57
Sample Calculation 2: Negative Adjustment
Amount withdrawn or transferred $10,000
Existing guarantee period 7 years
Time of withdrawal or transfer beginning of 3rd year of existing
guarantee period
Guaranteed interest rate (I) 8%*
Guaranteed interest rate for
new 5-year guarantee (J) 9%*
Remaining guarantee period (N) 60 months
Market Value Adjustment:
1 + .08 60/12
$10,000 X [( ----------) - 1] = - $559.14
1 + .09 + .0025
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $9,440.86
Sample Calculation 3: Negative Adjustment
Amount withdrawn or transferred $10,000
Guarantee period 7 years
Time of withdrawal or transfer beginning of 3rd year of existing
guarantee period
Guaranteed interest rate (I) 8%*
Guaranteed interest rate for
new 5-year guarantee (J) 7.75%*
Remaining guarantee period (N) 60 months
Market Value Adjustment:
1 + .08 60/12
$10,000 X [( ------------)] - 1] = $0
1 + .0775 + .0025
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $10,000
- ------------------------
*Assumed for illustrative purposes only.
A-1
<PAGE>
APPENDIX B--EXPLANATION OF EXPENSE CALCULATIONS
The expense for a given year is calculated by multiplying the projected
beginning of the year policy value by the total expense rate. The total expense
rate is the sum of the variable account expense rate plus the total portfolio
expense rate plus the annual administrative charge rate.
The policy values are projected by assuming a single payment of $1,000 grows at
an annual rate equal to 5% reduced by the total expense rate described above.
For example, the 3 year expense for the Alliance Money Market Portfolio is
calculated as follows:
<TABLE>
<S> <C> <C>
Total Variable Account Annual Expenses 0.45%
+ Total Portfolio Operating Expenses 0.68%
+ Annual Administrative Charges (see below) 0.06%
= Total Expense Rate 1.19%
</TABLE>
The Annual Administrative Charge rate is calculated by dividing the total Annual
Contract Charges collected in 1998 on similar contracts by an affiliated company
by the average policy value in force in 1998 on such contracts.
Year 1 Beginning Policy Value = $1000.00
Year 1 Expense = 1000.00 X 0.0119 = $11.90
Year 2 Beginning Policy Value = $1038.10
Year 2 Expense = 1038.10 X 0.0119 = $12.35
Year 3 Beginning Policy Value = $1077.66
Year 3 Expense = 1077.66 X 0.0119 = $12.82
So the cumulative expenses for years 1-3 for the Alliance Money Market Portfolio
are equal to:
$11.90 + $12.30 + $12.82 = $37.07
B-1
<PAGE>
APPENDIX C--PARTICIPATING FUNDS
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
The Alliance Variable Products Series Fund, Inc. is an open-ended series
investment company. It was incorporated under Maryland law on November 17, 1987.
Alliance Capital Management L.P. serves as the Fund's manager.
ALLIANCE MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE: Seeks safety of principal, maintenance of liquidity and
maximum current income by investing in a broadly diversified portfolio of money
market securities.
ALLIANCE INTERNATIONAL PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad
portfolio of marketable securities of established non-United States companies
(or United States companies having their principal activities and interests
outside the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
ALLIANCE PREMIER GROWTH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks growth of capital rather than current income. In
pursuing its investment objective, the Premier Growth Portfolio will employ
aggressive investment policies. Since investments will be made based upon their
potential for capital appreciation, current income will be incidental to the
objective of capital growth.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
American Century Variable Portfolios, Inc. is a open-end management investment
company. It was organized as a Maryland corporation on June 4, 1987. American
Century Investment Management, Inc., serves as the investment manager of
American Century Portfolios.
AMERICAN CENTURY VP BALANCED FUND
INVESTMENT OBJECTIVE: Capital growth and current income. Seeks to achieve its
investment objective by maintaining approximately 60% of the assets in common
stocks that are considered to have better-then-average prospects for
appreciation and the remaining assets in bonds and other fixed income
securities.
FEDERATED INSURANCE SERIES
Federated Insurance Series is an open-end management investment company. It was
established as a Massachusetts business trust under a Declaration of Trust dated
September 15, 1993. Federated Advisers is the investment adviser.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
INVESTMENT OBJECTIVE: Seeks to provide current income. Under normal
circumstances, the portfolio pursues its investment objective by investing at
least 65% of the value of its total assets in securities issued or guaranteed as
to payment of principal and interest by the U.S. Government, its agencies or
instrumentalities.
AMERICAN LEADERS FUND II
INVESTMENT OBJECTIVE: To achieve long-term growth of capital and to provide
income.
UTILITY FUND II
INVESTMENT OBJECTIVE: To achieve high current income and moderate capital
appreciation.
HIGH INCOME BOND FUND II
INVESTMENT OBJECTIVE: To seek high current income.
FORTIS SERIES FUND, INC.
The Fortis Series Fund, Inc. is an open-end series investment fund. It was
incorporated under Minnesota law in 1986. Fortis Advisers, Inc. serves as the
fund's manager.
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FORTIS S & P 500 INDEX SERIES
INVESTMENT OBJECTIVE: Seeks to replicate the total return of the Standard &
Poor's 500 Composite Stock Price Index primarily through investment in equity
securities.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
The INVESCO Variable Investment Funds, Inc. is an open-end series management
investment company. It was incorporated under Maryland law on August 19, 1993.
INVESCO Funds Group, Inc. serves as the Fund's manager.
INVESCO EQUITY INCOME FUND
INVESTMENT OBJECTIVE: Seeks the best possible current income while following
sound investment practices. Capital growth potential is an additional
consideration in the selection of the portfolio securities. The portfolio
normally invests at least 65% of its total assets in dividend-paying common
stocks.
INVESCO HEALTH SCIENCES FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation. The portfolio normally invests
at least 80% of its total assets in equity securities of companies that develop,
produce, or distribute products or services related to health care.
INVESCO TECHNOLOGY FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation. The portfolio normally invests
at least 80% of its total assets in equity securities of companies in
technology-related industries such as computers, communications, video,
electronics, oceanography, office and factory automation, and robotics.
LEXINGTON NATURAL RESOURCES TRUST
The Lexington Natural Resources Trust is an open-end management investment
company. It was organized as a Massachusetts business trust on October 7, 1988.
Lexington Management Corporation is the Investment Adviser of the fund.
INVESTMENT OBJECTIVE: To seek long-term growth of capital through investment
primarily in common stocks of companies that own or develop natural resources
and other basic commodities, or supply goods and services to such companies.
LEXINGTON EMERGING MARKETS FUND, INC.
The Lexington Emerging Markets Fund, Inc. is an open-end management investment
company. It was organized as a corporation under Maryland law on December 27,
1993. Lexington Management Corporation is the fund's investment adviser.
INVESTMENT OBJECTIVE: To seek long-term growth of capital primarily through
investment in equity securities of companies domiciled in, or doing business in,
emerging countries and emerging markets.
MFS7 VARIABLE INSURANCE TRUST
MFS Variable Insurance Trust is an open-end management investment company. It
was organized as a business trust under the laws of the Commonwealth of
Massachusetts by a Declaration of Trust dated February 1, 1994. Massachusetts
Financial Services Company manages each series.
MFS EMERGING GROWTH SERIES
INVESTMENT OBJECTIVE: Seeks to provide long-term growth of capital. The series'
policy is to invest primarily in common stocks of small and medium-sized
companies that are early in their life cycle but which have the potential to
become major enterprises.
MFS HIGH INCOME SERIES
INVESTMENT OBJECTIVE: Seeks high current income by investing primarily in a
professionally managed portfolio of fixed income securities, some of which may
involve equity features.
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MFS GLOBAL GOVERNMENTS SERIES
INVESTMENT OBJECTIVE: Seeks to provide income and capital appreciation. The
series invests, under normal market conditions, at least 65% of its total assets
in debt obligations that are issued or guaranteed as to principal and interest
by either (i) the U.S. Government, its agencies, authorities or
instrumentalities or (ii) the governments of foreign countries (including
emerging markets). The series may also invest in corporate bonds (including
lower rated bonds commonly known as junk bonds) and mortgage-backed and
assets-backed securities.
THE MONTGOMERY FUNDS III
The Montgomery Funds III is an open-end investment company. This Delaware
business trust was organized on August 24, 1994. The trust is managed by
Montgomery Asset Management, L.P.
MONTGOMERY VARIABLE SERIES: GROWTH FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities, usually common stock, of domestic companies of all sizes.
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities of companies in countries having economies and markets
generally considered by the World Bank or the United Nations to be emerging or
developing.
NEUBERGER & BERMAN ADVISERS MANAGERS TRUST
Neuberger & Berman Advisers Managers Trust is an open-end diversified series
management investment company. It was established as a Delaware business trust
on May 23, 1994. Neuberger & Berman Management Incorporated serves as manager of
the Fund.
NEUBERGER & BERMAN LIMITED MATURITY BOND PORTFOLIO
INVESTMENT OBJECTIVE: Seeks highest current income consistent with low risk to
principal and liquidity; and secondarily, total return. Principal investments
are short-to-intermediate term debt securities, primarily investment grade.
NEUBERGER & BERMAN PARTNERS PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital growth. Principal investments are common
stocks and other equity securities of established companies.
SAFECO RESOURCE SERIES TRUST
The SAFECO Resource Series Trust is an open-end series management investment
company. It is a Delaware business trust established by a trust instrument dated
May 13, 1993. SAFECO Asset Management Company is the fund's manager.
SAFECO EQUITY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term growth of capital and reasonable current
income. The Equity Portfolio ordinarily invests principally in common stocks or
securities convertible into common stocks.
SAFECO GROWTH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks growth of capital and the increased income that
ordinarily follows from such growth. The Growth Portfolio ordinarily invests a
preponderance of its assets in common stock selected for potential appreciation.
STRONG VARIABLE INSURANCE FUNDS, INC.
The Strong Variable Insurance Funds, Inc. is an open-end management investment
company. It was incorporated in Wisconsin. Strong Capital Management, Inc. is
the investment adviser.
THE STRONG DISCOVERY FUND II
INVESTMENT OBJECTIVE: Seeks to identify emerging investment trends and
attractive growth opportunities.
THE STRONG INTERNATIONAL STOCK FUND II
INVESTMENT OBJECTIVE: Seeks capital growth. The fund invests primarily in the
equity securities of issuers located outside of the United States.
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VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment company.
It was organized as a business trust under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as
investment adviser and manager to the two funds listed below.
WORLDWIDE HARD ASSETS FUND
INVESTMENT OBJECTIVE: Seeks long-term capital appreciation by investing
globally, primarily in (i) precious metals, (ii) ferrous and non-ferrous metals,
(iii) oil and gas, (iv) forest products, (v) real estate, and (vi) other basic
non-agricultural commodities.
WORLDWIDE BOND FUND
INVESTMENT OBJECTIVE: Seeks high total return through a flexible policy of
investing globally, primarily in debt securities.
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CONTRACTS UNDER
FLEXIBLE PREMIUM DEFERRED
COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
THE WATERHOUSE VARIABLE ANNUITY
Issued by
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
MAY 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 certificates under flexible premium deferred combination variable
and fixed annuity contracts ("Contracts"), dated May 1, 1999. A copy of the
Prospectus may be obtained without charge from Fortis Investors, Inc.
1-800-827-5877, mailing address: P.O. Box 64272, St. Paul, MN 55164. You have
the option of receiving benefits under a Contract through First Fortis' Variable
Account A or through First Fortis' Fixed Account.
TABLE OF CONTENTS
<TABLE>
<S> <C>
First Fortis and the Variable Account..........................................1
Calculation of Annuity Payments................................................2
Postponement of Payments.......................................................3
Services.......................................................................3
- Safekeeping of Variable Account Assets.....................................3
- Experts....................................................................3
- Principal Underwriter .....................................................4
Taxation Under Certain Retirement Plans........................................4
Withholding....................................................................7
Miscellaneous..................................................................7
Variable Account Financial Statements..........................................8
Appendix A -- Performance Information........................................A-1
</TABLE>
In order to supplement the description in the Prospectus, the following provides
additional information about the Contracts and other matters which may be of
interest to you. Terms used in this Statement of Additional Information have the
same meanings as are defined in the Prospectus under the heading "Special Terms
Used in This Prospectus."
FIRST FORTIS AND THE VARIABLE ACCOUNT
First Fortis Life Insurance Company, the issuer of the Contracts, is a New York
corporation qualified to sell life insurance and annuity contracts in the state
of New York. First Fortis 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 (NL) N.V. has been in business since 1847 and is a publicly-traded,
multi-national insurance, real estate, and financial services group
headquartered in The Netherlands. It is one of the largest holding companies in
Europe, with subsidiary companies in twelve countries on four continents. Fortis
(NL) N.V. is the third largest insurance company in the Netherlands.
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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.
The assets allocated to the Variable Account are the exclusive property of First
Fortis. Registration of the Variable Account under the Investment Company Act of
1940 does not involve supervision of the management or investment practices or
policies of the Variable Account or of First Fortis by the Securities and
Exchange Commission. First Fortis may accumulate in the Variable Account
proceeds from charges under the Contracts and other amounts in excess of the
Variable Account assets representing reserves and liabilities under Contracts
and other variable annuity contracts issued by First Fortis. First Fortis may
from time to time transfer to its General Account any of such excess amounts.
Under certain remote circumstances the assets of one Subaccount may not be
insulated from liability associated with another Subaccount.
Best's Insurance Reports has assigned First Fortis a rating of A (Excellent) for
financial position and operating performance. First Fortis 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 First Fortis' 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 First Fortis. Monthly fixed annuity payments will start as of the
end of the Valuation Period that contains the Annuity Commencement Date. At that
time, the Contract Value , after any Market Value Adjustment, is computed and
that portion of the Contract Value which will be applied to the Fixed Annuity
Option selected is determined. The amount of the first monthly payment under the
Fixed Annuity Option selected will be at least as large as would result from
using the annuity tables contained in the Contract to apply such amount of
Contract Value to the annuity form selected. The dollar amounts of any fixed
annuity payments after the first are specified during the entire period of
annuity payments according to the provisions of the annuity form selected.
VARIABLE ANNUITY OPTION
ANNUITY UNITS. To the extent a Variable Annuity Option has been selected, we
convert the Accumulation Units for each Subaccount of the Variable Account into
Annuity Units for each Subaccount at their values determined as of the end of
the Valuation Period which contains the Annuity Commencement Date. As of such
time, any Fixed Account Value to be applied to a Variable Annuity Option is also
converted, after any Market Value Adjustment, to Annuity Units in the
Subaccounts selected based on the then-current Annuity Unit value. The initial
number of Annuity Units in each Subaccount is determined by dividing the amount
of the initial monthly variable annuity payment (see "Variable Annuity Option --
Variable Annuity Payments," below) allocable to that Subaccount by the value of
one Annuity Unit in that Subaccount as of the time of the conversion. The number
of Annuity Units for each Subaccount will remain constant, as long as an annuity
remains in force and the allocation among the Subaccounts has not changed.
The value of each Subaccount's Annuity Units will vary to reflect the investment
experience of the Subaccount as well as charges deducted from the Subaccount.
The value of each Subaccount's Annuity Units is equal to the prior value of the
Subaccount's Annuity Units multiplied by the net investment factor for that
Subaccount (discussed in the Prospectus under "Contract Value") for the
Valuation Period ending on that Valuation Date, with an offset for the 4%
assumed interest rate used in the annuity tables of the Contract.
VARIABLE ANNUITY PAYMENTS. Variable annuity payments start at the end of the
Valuation Period that contains the Annuity Commencement Date, and will vary in
amount as the related Annuity Unit values vary. The amount of the first monthly
payment is shown on the annuity tables contained in the Contract for each $1,000
of Contract Value applied to the Variable Annuity Option selected as of the end
of such Valuation Period. The first variable annuity payment is, in effect,
allocated
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among the Subaccounts in the same proportion as the Contract Value is allocated
among the Subaccounts upon commencement of annuity payments.
Payments after the first will vary in amount and are determined on the first
Valuation Date of each subsequent monthly period. If the monthly payment under
the annuity form selected is based on the value of Annuity Units of a single
Subaccount, the monthly payment is found by multiplying the number of the
Contract's Annuity Units for the Subaccount by the Annuity Unit value of such
Subaccount as of the first Valuation Date in each monthly period following the
Annuity Commencement Date. If the monthly payment under the Variable Annuity
Option selected is based upon the value of Annuity Units in more than one
Subaccount, this is repeated for each applicable Subaccount. The sum of these
payments is the variable annuity payment.
GENDER OF ANNUITANT
The amount of each annuity payment ordinarily will be higher for a male
Annuitant than for a female Annuitant with an otherwise identical Contract. This
is because, statistically, females tend to have longer life expectancies than
males. However, there will be no differences between male and female Annuitants
in any jurisdiction, including Montana, where such differences are not
permitted. We will also make available Contracts with no such differences in
connection with certain employer-sponsored benefit plans. Employers should be
aware that, under most such plans, Contracts that make distinctions based on
gender are prohibited by law.
POSTPONEMENT OF PAYMENTS
With respect to amounts in the Subaccounts of the Variable Account, payment of
any amount due upon a total or partial surrender, death or under an annuity
option will ordinarily be made within seven days after all documents required
for such payment are received by First Fortis at its Home Office. However, First
Fortis may defer the determination, application or payment of any death benefit,
transfer, partial or total surrender or annuity payment, to the extent dependent
on Accumulation or Annuity Unit Values, 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, for any period during which any emergency
exists as a result of which it is not reasonably practicable for First Fortis to
determine the investment experience for the Contract, or for such other periods
as the Securities and Exchange Commission may by order permit for the protection
of investors.
SERVICES
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS
Title to the assets of the Variable Account is held by First Fortis. The assets
of the Variable Account are kept segregated and held separate and apart from
First Fortis' other assets.
EXPERTS
The financial statements of First Fortis Life Insurance Company at
December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, and the statements of net assets of First Fortis
Life Insurance Company Variable Account A at December 31, 1998 and the
related statements of changes in net assets for each of the two years in the
period ended December 31, 1998, appearing in the Prospectus, this Statement
of Additional Information and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elswhere herein and are included in reliance upon such
authority as experts in accounting and auditing.
PRINCIPAL UNDERWRITER
Fortis Investors, Inc. ("Fortis Investors"), the principal underwriter of the
Contracts, is a Minnesota corporation and a member of the Securities Investors
Protection Corporation. The address of Fortis Investors is 500 Bielenberg Drive,
Woodbury, Minnesota 55125. The offering of the Contracts is continuous, and
Fortis Investors does not anticipate
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<PAGE>
discontinuing the offering of the Contracts, although it reserves the right to
do so. Contracts generally will be issued for Annuitants from ages zero to
ninety in all states.
TAXATION UNDER CERTAIN RETIREMENT PLANS
Federal income tax information concerning the purchase of Contracts for specific
types of retirement plans is set forth below. You should also refer to "Federal
Tax Matters" in the Prospectus. The tax information provided is not
comprehensive, and you should consult a qualified tax adviser before taking any
action in connection with a retirement plan.
SECTION 403(b) ANNUITIES FOR EMPLOYEES OF CERTAIN TAX-EXEMPT ORGANIZATIONS
OR PUBLIC EDUCATIONAL INSTITUTIONS
PURCHASE PAYMENTS. Under Section 403(b) of the Internal Revenue Code ("Code"),
payments made by certain employers (i.e., tax-exempt organizations meeting the
requirements of Section 501(c)(3) of the Code, or public educational
institutions) to purchase Contracts for their employees are excludible from the
gross income of employees to the extent that such aggregate purchase payments do
not exceed certain limitations prescribed by the Code. This is the case whether
the purchase payments are a result of voluntary salary reduction amounts or
employer contributions. Salary reduction payments are, however, subject to FICA
(social security) taxes.
TAXATION OF DISTRIBUTIONS. Distributions from a Section 403(b) tax-deferred
annuity are taxed as ordinary income to the recipient as described under
"Federal Tax Matters" in the Prospectus. Taxable distributions received before
the employee attains age 59 1/2 generally are subject to a 10% penalty tax in
addition to regular income tax. Certain distributions are excepted from this
penalty tax, including distributions following the employee's death, disability,
separation from service after age 55, separation from service at any age if the
distribution is in the form of an annuity for the life (or life expectancy) of
the employee (or the employee and Beneficiary) and distributions not in excess
of deductible medical expenses. In addition, no distributions of voluntary
salary reduction amounts will be permitted prior to one of the following events:
attainment of age 59 1/2 by the employee or the employee's separation from
service, death , disability or hardship. (Hardship distributions will be limited
to the lesser of the amount of the hardship or the amount of salary reduction
contributions, exclusive of earnings thereon.)
REQUIRED DISTRIBUTIONS. Generally, distributions from Section 403(b) annuities
must commence not later than April 1 of the calendar year following the calendar
year in which the employee attains age 70 1/2, and such distributions must be
made over a period that does not exceed the life expectancy of the employee (or
the employee and Beneficiary). A penalty tax of 50% would be imposed on any
amount by which the minimum required distribution in any year exceeded the
amount actually distributed in that year. In addition, in the event that the
employee dies before his or her entire interest in the Contract has been
distributed, the employee's entire interest must be distributed in accordance
with rules similar to those applicable upon the death of the Contract Owner or
Payee in the case of a Non-Qualified Contract, as described in the Prospectus.
Certain of these and other provisions are incorporated in a special endorsement
attached to Contracts that are intended to qualify under Section 403(b), and
reference should be made to that endorsement for its complete terms.
TAX-FREE EXCHANGES AND ROLLOVERS. The Code provides for the tax-free transfer of
one Section 403(b) annuity for another Section 403(b) annuity, and the IRS has
ruled (Revenue Ruling 90-24) that amounts transferred may qualify as tax-free
transfers under certain circumstances. In addition, Section 403(b)(8) of the
code permits tax-free rollovers from Section 403(b) programs to individual
retirement annuities or other Section 403(b) programs under certain
circumstances.
SECTION 401 QUALIFIED PENSION, PROFIT-SHARING OR ANNUITY PLANS
PURCHASE PAYMENTS. Subject to certain limitations prescribed by the Code,
purchase payments made by an employer (or a self-employed individual) under a
pension, profit-sharing or annuity plan qualified under Section 401 or Section
403(a) of the Code are generally deductible by the employer and excluded from
the taxable income of the employee for federal income tax purposes, whether made
under a salary reduction agreement or directly by employer contributions. Salary
reduction payments are, however, subject to FICA (social security) taxes.
Purchase payments made directly by an employee generally are made on an
after-tax basis.
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TAXATION OF DISTRIBUTIONS. Distributions from Contracts purchased under these
qualified plans are taxable as ordinary income, except to the extent allocable
to an employee's after-tax contributions, as described under "Federal Tax
Matters -- Qualified Plans," in the Prospectus. However, if an employee or other
payee receives a "lump sum" distribution, as defined in the Code, from an exempt
employees' trust, the taxable portion of the distribution may be subject to
special tax treatment. For most individuals receiving lump sum distributions
after attaining age 59 1/2, the rate of tax may be determined under a special
5-year income averaging provision. Those who attained age 50 by January 1, 1986
may instead elect to use a 10-year income averaging provision based on the
income tax rates in effect for 1986. Taxable distributions received prior to
attainment of age 59 1/2 under a Contract purchased under a qualified plan are
subject to the same 10% penalty tax (and the same exceptions) as described above
with respect to Section 403(b) annuities.
REQUIRED DISTRIBUTIONS. The minimum distribution requirements for these
qualified plans are generally the same as described above with respect to
Section 403(b) annuities.
TAX-FREE ROLLOVERS. If, within 60 days of receipt, an employee who receives a
single sum distribution transfers all of the taxable amount received to another
plan qualified under Section 401 or 403(a), or to an individual retirement
account or annuity as provided for under the Code, the transferred amount will
not be taxed in the year of distribution. Certain "partial" distributions may
also qualify for tax-free rollover treatment, but only if transferred to an
individual retirement account or annuity. However, income tax may be withheld
from the distribution unless the distribution is transferred directly from the
qualified plan to the individual retirement account or individual retirement
annuity.
SECTION 408(p) SIMPLE IRA PLANS
PURCHASE PAYMENTS: Under Section 408(p) of the Code, small employers may
establish a type of IRA plan referred to as a Savings Incentive Match Plan for
Employees (SIMPLE Plan). An employee may contribute annually through his or her
employer a pre-tax salary reduction contribution not to exceed the lesser of
$6,000 or 100% of compensation. The employer must annually either (1) match the
employee contribution dollar for dollar up to 3% of pay, or (2) make a 2% of pay
contribution for each eligible employee regardless of whether the employee makes
any salary reduction contribution. In two out of every five years, the employer
has the option to reduce the matching contribution as low as 1% of pay but
advance notice must be provided to employees.
TAXATION OF DISTRIBUTIONS: Generally, distributions from SIMPLE IRA Plans are
subject to the same distribution rules described above for IRAs. However, if an
individual withdraws any amount from his SIMPLE IRA Plan within the first two
years of his or her commencement of participation in the employer's SIMPLE IRA
Plan, the 10% penalty tax for premature distribution, if such tax applies, will
be increased to 25%.
REQUIRED DISTRIBUTIONS: SIMPLE distributions are subject to the same minimum
distribution rules described above for IRAs.
TAX-FREE ROLLOVERS: Generally, rollovers and direct transfers may be made to and
from SIMPLE IRAs in the same manner as described above for IRAs, subject to the
same conditions and limitations. Rollovers or transfers to other IRAs, other
than SIMPLE IRAs, are also possible but only after the second anniversary of
commencement of participation in the employer's SIMPLE IRA Plan.
SECTION 457 UNFUNDED DEFERRED COMPENSATION PLANS OF PUBLIC EMPLOYERS
AND TAX-EXEMPT ORGANIZATIONS
PURCHASE PAYMENTS. Under Section 457 of the Code, all individuals who perform
services for a state or local government or governmental agency may participate
in a deferred compensation program. Other tax-exempt employers may establish
unfunded deferred compensation plans under Section 457 for employees and/or
independent contractors.
Though not actually a qualified plan as that term is normally used, this type of
program allows individuals to defer the receipt of compensation that otherwise
would be currently payable and therefore to defer the payment of federal income
taxes on such amounts. Assuming that the program meets the requirements to be
considered an eligible deferred compensation plan (an "EDCP"), an individual may
contribute (and thereby defer from current income for tax purposes) the lesser
of $7,500 or 33-1/3% of the individual's includible compensation. (Includible
compensation means compensation from the employer
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which would be currently includible in gross income for federal tax purposes.)
In addition, during the last three years before an individual attains normal
retirement age, additional "catch-up" deferrals are permitted.
The amounts which are deferred may be used by the employer to purchase the
Contracts offered by this Prospectus. The Contract is owned by the employer and
is subject to the claims of the employer's creditors. The employee has no rights
or interest in the Contract and is entitled only to payment in accordance with
the EDCP provisions.
TAXATION OF DISTRIBUTIONS. Amounts received by an individual from an EDCP are
includible in gross income for the taxable year in which such amounts are paid
or otherwise made available.
DISTRIBUTIONS BEFORE SEPARATION FROM SERVICE. Distributions generally are not
permitted under an EDCP prior to separation from service or reaching age 70 1/2,
except in cases of severe financial hardship. Hardship distributions are
includible in the gross income of the individual in the year in which paid.
REQUIRED DISTRIBUTIONS. The distribution requirements for these qualified plans
are generally the same as described above with respect to Section 403(b)
annuities. However, if distributions do not commence before the employee's
death, 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. 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 August 16, 1986, and not
subsequently modified, are also subject to the rules for private taxable
employer deferred compensation plans discussed below. (Unfunded deferred
compensation plans of other tax-exempt employers are generally subject to the
requirements of Section 457.)
These types of programs allow individuals to defer receipt of up to 100% of
compensation which would otherwise be includible in income and therefore to
defer the payment of federal income taxes on such amounts. Purchase payments
made by the employer, however are not immediately deductible by the employer,
and the employer is currently taxed on any increase in Contract Value.
Deferred compensation plans represent a contractual promise on the part of the
employer to pay current compensation at some future time. The Contract is owned
by the employer and is subject to the claims of the employer's creditors. The
individual has no right or interest in the Contract and is entitled only to
payment from the employer's general assets in accordance with plan provisions.
TAXATION OF DISTRIBUTIONS. Amounts received by an individual from a private
employer deferred compensation plan are includible in gross income for the
taxable year in which such amounts are paid or otherwise made available.
WITHHOLDING
Annuity payments and other amounts received under Contracts are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld will vary among recipients depending on the tax status of
the individual and the type of payments from which taxes are withheld.
6
<PAGE>
Notwithstanding the recipient's election, withholding may be required with
respect to certain payments to be delivered outside the United States and, with
respect to certain distributions from certain types of qualified retirement
plans, unless the proceeds are transferred directly to another qualified
retirement plan. Moreover, special "backup withholding" rules may require First
Fortis to disregard the recipient's election if the recipient fails to supply
First Fortis with a "TIN" or taxpayer identification number (social security
number for individuals), or if the Internal Revenue Service notifies First
Fortis that the TIN provided by the recipient is incorrect.
VARIABLE ACCOUNT FINANCIAL STATEMENTS
7
<PAGE>
FINANCIAL STATEMENTS
FIRST FORTIS LIFE INSURANCE COMPANY
VARIABLE ACCOUNT A
YEAR ENDED DECEMBER 31, 1998
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Financial Statements
Year ended December 31, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................................1
Financial Statements
Statements of Net Assets......................................................3
Statements of Changes in Net Assets...........................................5
Notes to Financial Statements................................................14
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
First Fortis Life Insurance Company
We have audited the accompanying individual and combined statements of net
assets of the segregated asset subaccounts of First Fortis Life Insurance
Company Variable Account A (comprised of the Fortis Series Fund, Inc.'s Growth
Stock, U.S. Government Securities, Money Market, Asset Allocation, Diversified
Income, Global Growth, Aggressive Growth, Growth & Income, High Yield, Global
Asset Allocation, Global Bond, International Stock, Value, S & P 500, Blue Chip
Stock, Mid Cap Stock, Large Cap Growth, and Small Cap Value Subaccounts; the
Alliance Variable Product's Money Market, International and Premier Growth
Subaccounts; the SAFECO Resource Series' Growth and Equity Subaccounts; the
Federated Insurance Series' U.S. Government Securities Fund II, High Income Fund
II, Utility Series, and American Leaders Series Subaccounts; the Lexington Funds
Inc.'s Emerging Market Subaccount; the MFS Variable Insurance Trust's Emerging
Growth and High Income Subaccounts; the Montgomery Variable Funds' Emerging
Markets and Growth Subaccounts; the Strong Variable Annuity Funds' Discovery II
and International II Subaccounts; the American Century Investments' VP Balanced
and VP Capital Appreciation Subaccounts; the Van Eck Worldwide Insurance Trust's
Worldwide Bond Fund Subaccount; the Neuberger & Berman, Inc.'s AMT Limited
Maturity Bond and AMT Partners Subaccounts; and INVESCO, Inc.'s Health &
Sciences, Industrial Income and Technology Subaccounts) as of December 31, 1998,
and the related statements of changes in net assets for each of the two years in
the periods then ended, except for the Alliance Variable Product's Money Market,
International and Premier Growth Subaccounts; the SAFECO Resource Series' Growth
and Equity Subaccounts; the Federated Insurance Series' U.S. Government
Securities Fund II and High Income Fund II Subaccounts; the MFS Variable
Insurance Trust's Emerging Growth and High Income Subaccounts; the Montgomery
Variable Funds' Emerging Markets and Growth Subaccounts; the Strong Variable
Annuity Fund Discovery II and International II Subaccounts; the American Century
Investments' VP Balanced Subaccount; the Neuberger & Berman, Inc.'s AMT Partners
Subaccount; and INVESCO, Inc.'s Health & Sciences, Industrial Income and
Technology Subaccounts which are for the period from September 1, 1997 to
December 31, 1997 and the Fortis Mid Cap Stock, Large Cap Growth and Small Cap
Value Subaccounts which are for the period May 1, 1998 (commencement of
operations) to December 31, 1998. These financial statements are the
responsibility of the management of First Fortis Life Insurance Company. Our
responsibility is to express an opinion on these financial statements based on
our audits.
1
<PAGE>
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. Our procedures included
confirmation of securities owned as of December 31, 1998 by correspondence with
the custodian. 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 individual and combined financial position of the
segregated asset subaccounts of First Fortis Life Insurance Company Variable
Account A at December 31, 1998, and the individual and combined changes in its
net assets for the periods described above, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 19, 1999
2
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Statements of Net Assets
December 31, 1998
<TABLE>
<CAPTION>
NET ASSET VALUE
FOR VARIABLE
ANNUITY
NET ASSETS ACCUMULATION CONTRACTS PER
AT MARKET UNITS ACCUMULATION
SHARES COST VALUE OUTSTANDING UNIT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments in Fortis Series Fund, Inc.:
Growth Stock 44,751 $1,650,355 $1,838,724 44,751 $41.09
U.S. Government Securities 120,019 1,299,443 1,311,582 120,019 10.93
Money Market 44,130 487,192 488,232 44,130 11.06
Asset Allocation 136,741 2,602,095 2,884,296 136,741 21.09
Diversified Income 103,326 1,245,049 1,231,033 103,326 11.91
Global Growth 71,546 1,458,645 1,614,639 71,546 22.57
Aggressive Growth 100,260 1,368,017 1,674,406 100,260 16.70
Growth & Income 334,522 6,322,840 7,100,933 334,522 21.23
High Yield 171,697 1,802,235 1,700,801 171,697 9.91
Global Asset Allocation 105,139 1,471,235 1,505,721 105,139 14.32
Global Bond 17,136 194,334 198,104 17,136 11.56
International Stock 140,061 2,033,364 2,028,486 140,062 14.48
Value 165,278 2,240,047 2,375,906 165,278 14.38
S & P 500 382,247 6,216,885 7,199,393 380,368 18.93
Blue Chip Stock 265,335 4,156,445 4,928,671 265,319 18.58
Mid Cap Stock 13,216 112,950 127,357 13,216 9.64
Large Cap Growth 88,288 902,119 1,063,375 88,288 12.04
Small Cap Value 24,048 212,238 223,154 24,048 9.28
Investments in Alliance Variable Product:
Money Market 656,744 656,744 656,744 57,856 11.35
International 4,880 76,226 78,916 6,481 12.18
Premier Growth 24,441 622,086 758,418 32,730 23.17
Investments in SAFECO Resource Series:
Growth 10,215 257,990 216,975 14,286 15.19
Equity 12,379 336,143 370,994 24,561 15.11
Investments in Federated Insurance Series:
U.S. Government Securities Fund II 4,159 45,009 46,370 4,038 11.48
High Income Fund II 42,220 435,780 461,040 36,236 12.72
Utility Series 2,638 37,847 40,285 2,610 15.43
American Leaders Series 2,955 57,368 64,059 3,644 17.58
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Statements of Net Assets (continued)
December 31, 1998
<TABLE>
<CAPTION>
NET ASSET VALUE
FOR VARIABLE
ANNUITY
NET ASSETS ACCUMULATION CONTRACTS PER
AT MARKET UNITS ACCUMULATION
SHARES COST VALUE OUTSTANDING UNIT
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments in Lexington Funds, Inc.:
Emerging Markets 1,037 $ 5,328 $ 5,862 986 $ 5.95
Investments in MFS Variable Insurance Trust:
Emerging Growth 5,960 99,265 127,960 6,958 18.39
High Income 46,219 514,532 532,907 43,436 12.27
Investments in Montgomery Variable Funds:
Emerging Markets 2,422 19,282 15,961 2,438 6.55
Growth 6,657 104,989 102,446 6,157 16.64
Investments in Strong Variable Annuity Funds:
Discovery II 1,707 19,954 21,711 1,822 11.92
International II 7,348 63,130 64,517 7,516 8.58
Investments in American Century Investments:
VP Balanced 3,009 24,133 25,092 1,722 14.57
VP Capital Appreciation 728 5,328 6,565 743 8.84
Investments in Van Eck Worldwide Ins. Trust:
Worldwide Bond Fund 20 250 250 21 11.90
Investments in Neuberger & Berman, Inc.:
AMT Limited Maturity Bond 4,157 57,274 57,461 5,263 10.92
AMT Partners 2,738 50,906 51,830 4,003 12.95
Investments in INVESCO, Inc.:
Health & Sciences 8,181 106,494 125,083 7,986 15.66
Industrial Income 1,260 22,720 23,452 1,683 13.93
Technology 2,184 27,664 31,324 2,187 14.32
-------------------------------------------
Total Net Assets $39,421,930 $43,381,035 2,601,209
-------------------------------------------
-------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Statements of Changes in Net Assets
Year ended December 31, 1998
<TABLE>
<CAPTION>
FORTIS FORTIS
GROWTH U.S. GOVERNMENT MONEY FORTIS
STOCK SECURITIES MARKET ASSET ALLOCATION
-------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C>
Dividend income $ 74,961 $ 25,927 $ 14,196 $ 4,471
Mortality and expense and administrative charges
(16,709) (6,277) (4,306) (28,363)
Net realized gain (loss) on investments 13,232 (456) (26,025) 2,361
Net change in unrealized appreciation
(depreciation) of investments 161,133 9,921 3,329 403,071
-------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 232,617 29,115 (12,806) 381,540
CAPITAL TRANSACTIONS
Purchase of Variable Account units 938,415 1,083,157 677,788 1,322,894
Redemption of Variable Account units (142,834) (29,413) (433,177) (372,855)
Mortality and expense and administrative charges redeemed
16,709 6,277 4,306 28,363
-------------------------------------------------------------
Net increase from capital transactions 812,290 1,060,021 248,917 978,402
Net assets at beginning of year 793,817 222,446 252,121 1,524,354
-------------------------------------------------------------
Net assets at end of year $ 1,838,724 $ 1,311,582 $ 488,232 $ 2,884,296
-------------------------------------------------------------
-------------------------------------------------------------
<CAPTION>
FORTIS FORTIS FORTIS
FORTIS GLOBAL FORTIS GROWTH & HIGH
DIVERSIFIED INC GROWTH AGGRESSIVE GROWTH INCOME YIELD
-----------------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C> <C>
Dividend income $ 56,023 $ 1,604 $ 2,104 $ 1,657 $ 119,774
Mortality and expense and administrative charges
(8,973) (17,478) (13,391) (64,764) (16,220)
Net realized gain (loss) on investments (396) 11,413 9,641 20,441 (2,079)
Net change in unrealized appreciation
(depreciation) of investments (17,143) 111,270 280,168 579,716 (120,724)
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 29,511 106,809 278,522 537,050 (19,249)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 920,521 745,727 865,048 4,039,563 1,190,129
Redemption of Variable Account units (19,789) (179,438) (112,602) (222,124) (97,106)
Mortality and expense and administrative charges redeemed
8,973 17,478 13,391 64,764 16,220
-----------------------------------------------------------------------
Net increase from capital transactions 909,705 583,767 765,837 3,882,203 1,109,243
Net assets at beginning of year 291,817 924,063 630,047 2,681,680 610,807
-----------------------------------------------------------------------
Net assets at end of year $ 1,231,033 $ 1,614,639 $ 1,674,406 $ 7,100,933 $ 1,700,801
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
FORTIS FORTIS FORTIS
GLOBAL GLOBAL INTERNATIONAL FORTIS
ASSET ALLOCATION BOND STOCK VALUE
---------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C>
Dividend income $ 99,868 $ 7,959 $ 135,567 $ 52,409
Mortality and expense and administrative charges
(11,070) (1,325) (15,623) (19,724)
Net realized gain (loss) on investments 815 577 6,618 2,650
Net change in unrealized appreciation
(depreciation) of investments 26,698 5,497 (2,847) 96,647
---------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 116,311 12,708 123,715 131,982
CAPITAL TRANSACTIONS
Purchase of Variable Account units 1,034,925 125,991 1,457,342 1,508,103
Redemption of Variable Account units (22,016) (11,560) (77,257) (45,032)
Mortality and expense and administrative charges redeemed
11,070 1,325 15,623 19,724
---------------------------------------------------------
Net increase from capital transactions 1,023,979 115,756 1,395,708 1,482,795
Net assets at beginning of year 365,431 69,640 509,063 761,129
---------------------------------------------------------
Net assets at end of year $ 1,505,721 $ 198,104 $ 2,028,486 $ 2,375,906
---------------------------------------------------------
---------------------------------------------------------
<CAPTION>
FORTIS FORTIS FORTIS FORTIS
FORTIS BLUE CHIP ORTIS LARGE CAP SMALL CAP
S&P 500 STOCK MID CAP STOCK* GROWTH* VALUE*
-----------------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C> <C>
Dividend income $ 106,189 $ 82,088 $ 216 $ 272 $ 2,947
Mortality and expense and administrative charges
(50,027) (36,122) (345) (3,525) (549)
Net realized gain (loss) on investments 6,880 7,951 4 3,875 (133)
Net change in unrealized appreciation
(depreciation) of investments 882,217 676,563 14,407 161,256 10,916
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 945,259 730,480 14,282 161,878 13,181
CAPITAL TRANSACTIONS
Purchase of Variable Account units 5,180,564 3,150,945 112,935 959,801 210,341
Redemption of Variable Account units (407,707) (59,745) (205) (61,829) (917)
Mortality and expense and administrative charges redeemed
50,027 36,122 345 3,525 549
-----------------------------------------------------------------------
Net increase from capital transactions 4,822,884 3,127,322 113,075 901,497 209,973
Net assets at beginning of year 1,431,250 1,070,869 -- -- --
-----------------------------------------------------------------------
Net assets at end of year $ 7,199,393 $ 4,928,671 $ 127,357 $ 1,063,375 $ 223,154
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
* For the period from May 1, 1998 to December 31, 1998.
SEE ACCOMPANYING NOTES.
6
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
ALLIANCE ALLIANCE
MONEY ALLIANCE PREMIER SAFECO
MARKET INTERNATIONAL GROWTH GROWTH
---------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C>
Dividend income $ 7,585 $ -- $ -- $ 22,511
Mortality and expense and administrative charges
(2,057) (257) (1,861) (725)
Net realized gain (loss) on investments -- 1,883 2,704 (24,450)
Net change in unrealized appreciation
(depreciation) of investments -- 2,924 133,535 (38,248)
---------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 5,528 4,550 134,378 (40,912)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 3,684,672 760,164 672,665 513,929
Redemption of Variable Account units (3,248,486) (730,934) (333,215) (275,000)
Mortality and expense and administrative charges redeemed
2,057 257 1,861 725
---------------------------------------------------------
Net increase from capital transactions 438,243 29,487 341,311 239,654
Net assets at beginning of year 212,973 44,879 282,729 18,233
---------------------------------------------------------
Net assets at end of year $ 656,744 $ 78,916 $ 758,418 $ 216,975
---------------------------------------------------------
---------------------------------------------------------
<CAPTION>
FEDERATED U.S.
GOVERNMENT FEDERATED HIGH FEDERATED
SAFECO SECURITIES INCOME FEDERATED AMERICAN
EQUITY FUND II FUND II UTILITY II LEADERS II
-----------------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C> <C>
Dividend income $ 17,476 $ 324 $ 11,392 $ 2,328 $ 66
Mortality and expense and administrative charges
(1,281) (100) (1,028) (132) (304)
Net realized gain (loss) on investments 781 2 4,085 -- 7,830
Net change in unrealized appreciation
(depreciation) of investments 47,661 1,208 19,920 2,438 6,691
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 64,637 1,434 34,369 4,634 14,283
CAPITAL TRANSACTIONS
Purchase of Variable Account units 124,579 26,626 557,093 35,519 992,788
Redemption of Variable Account units (45,200) (103) (501,159) -- (943,316)
Mortality and expense and administrative charges redeemed
1,281 100 1,028 132 304
-----------------------------------------------------------------------
Net increase from capital transactions 80,660 26,623 56,962 35,651 49,776
Net assets at beginning of year 225,697 18,313 369,709 -- --
-----------------------------------------------------------------------
Net assets at end of year $ 370,994 $ 46,370 $ 461,040 $ 40,285 $ 64,059
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
* For the period from May 1, 1998 to December 31, 1998.
SEE ACCOMPANYING NOTES.
7
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
LEXINGTON MFS MONTGOMERY
EMERGING EMERGING MFS HIGH EMERGING
MARKETS GROWTH INCOME MARKETS
-------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C>
Dividend income $ -- $ 1,453 $ 32,386 $ 31
Mortality and expense and administrative charges
(5) (625) (1,681) (41)
Net realized gain (loss) on investments -- (795) (4,057) (11)
Net change in unrealized appreciation
(depreciation) of investments 534 28,368 12,115 (3,380)
-------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 529 28,401 38,763 (3,401)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 5,328 38,432 389,855 14,796
Redemption of Variable Account units -- (87,326) (379,868) (44)
Mortality and expense and administrative charges redeemed 5 625 1,681 41
-------------------------------------------------
Net increase from capital transactions 5,333 (48,269) 11,668 14,793
Net assets at beginning of year -- 147,828 482,476 4,569
-------------------------------------------------
Net assets at end of year $ 5,862 $ 127,960 $ 532,907 $ 15,961
-------------------------------------------------
-------------------------------------------------
<CAPTION>
AMERICAN
STRONG STRONG AMERICAN CENTURY
MONTGOMERY DISCOVERY INTERNATIONAL CENTURY VP CAPITAL
GROWTH II II VP BALANCED APPRECIATION
-----------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C> <C>
Dividend income $ 459 $ 178 $ 418 $ 1,039 $ --
Mortality and expense and administrative charges
(312) (54) (169) (67) (15)
Net realized gain (loss) on investments (26) (3) 305 1,499 343
Net change in unrealized appreciation
(depreciation) of investments (1,414) 2,305 1,966 884 1,237
-----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (1,293) 2,426 2,520 3,355 1,565
CAPITAL TRANSACTIONS
Purchase of Variable Account units 80,457 7,984 40,679 50,995 156,020
Redemption of Variable Account units (161) (76) (14,233) (37,104) (151,035)
Mortality and expense and administrative charges redeemed 312 54 169 67 15
-----------------------------------------------------------------
Net increase from capital transactions 80,608 7,962 26,615 13,958 5,000
Net assets at beginning of year 23,131 11,323 35,382 7,779 --
-----------------------------------------------------------------
Net assets at end of year $ 102,446 $ 21,711 $ 64,517 $ 25,092 $ 6,565
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
NEUBERGER &
VAN ECK BERMAN AMT NEUBERGER &
WORLDWIDE LIMITED BERMAN
BOND FUND MATURITY BOND AMT PARTNERS
---------------------------------------------
OPERATIONS
<S> <C> <C> <C>
Dividend income $ -- $ -- $ 2,082
Mortality and expense and administrative charges
(1) (51) (115)
Net realized gain (loss) on investments -- -- (18)
Net change in unrealized appreciation
(depreciation) of investments -- 187 738
---------------------------------------------
Net (decrease) increase in net assets
resulting from operations (1) 136 2,687
CAPITAL TRANSACTIONS
Purchase of Variable Account units 250 57,274 34,219
Redemption of Variable Account units -- -- (185)
Mortality and expense and administrative charges redeemed 1 51 115
---------------------------------------------
Net increase from capital transactions 251 57,325 34,149
Net assets at beginning of year -- -- 14,994
---------------------------------------------
Net assets at end of year $ 250 $ 57,461 $ 51,830
---------------------------------------------
---------------------------------------------
<CAPTION>
INVESCO INVESCO COMBINED
HEALTH & INDUSTRIAL INVESCO VARIABLE
SCIENCES INCOME TECHNOLOGY ACCOUNT
-------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C>
Dividend income $ 3,233 $ 1,192 $ 158 $ 892,543
Mortality and expense and administrative charges
(293) (54) (73) (326,091)
Net realized gain (loss) on investments 1,291 331 (1,897) 47,166
Net change in unrealized appreciation
(depreciation) of investments 18,576 1,477 3,572 3,525,389
-------------------------------------------------------------
Net (decrease) increase in net assets
resulting from operations 22,807 2,946 1,760 4,139,007
CAPITAL TRANSACTIONS
Purchase of Variable Account units 129,353 14,731 78,657 33,991,254
Redemption of Variable Account units (30,374) (8,329) (51,365) (9,133,119)
Mortality and expense and administrative charges redeemed 293 54 73 326,091
-------------------------------------------------------------
Net increase from capital transactions 99,272 6,456 27,365 25,184,226
Net assets at beginning of year 3,004 14,050 2,199 14,057,802
-------------------------------------------------------------
Net assets at end of year $ 125,083 $ 23,452 $ 31,324 $ 43,381,035
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Statements of Changes in Net Assets
Year ended December 31, 1997
<TABLE>
<CAPTION>
FORTIS
FORTIS U.S. FORTIS FORTIS
GROWTH GOVERNMENT MONEY ASSET
STOCK SECURITIES MARKET ALLOCATION
---------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C>
Dividend income $ 57 $ 8,101 $ 11,383 $ 192,549
Mortality and expense and administrative charges (6,272) (1,066) (3,107) (7,853)
Net realized gain (loss) on investments 22,406 (1,976) 3,214 8,609
Net change in unrealized appreciation
(depreciation) of investments 26,263 2,353 (2,658) (117,203)
---------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 42,454 7,412 8,832 76,102
CAPITAL TRANSACTIONS
Purchase of Variable Account units 809,304 315,010 2,580,624 1,460,620
Redemption of Variable Account units (274,309) (107,853) (2,385,564) (169,600)
Mortality and expense and administrative charges
redeemed 6,272 1,066 3,107 7,853
---------------------------------------------------------
Net increase from capital transactions 541,267 208,223 198,167 1,298,873
Net assets at beginning of year 210,096 6,811 45,122 149,379
---------------------------------------------------------
Net assets at end of year $ 793,817 $ 222,446 $ 252,121 $ 1,524,354
---------------------------------------------------------
---------------------------------------------------------
<CAPTION>
FORTIS FORTIS FORTIS FORTIS
DIVERSIFIED GLOBAL AGGRESSIVE GROWTH & FORTIS
INCOME GROWTH GROWTH INCOME HIGH YIELD
-----------------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C> <C>
Dividend income $ 16,326 $ -- $ 7 $ 76,880 $ 646
Mortality and expense and administrative charges (1,961) (7,355) (5,186) (16,770) (4,468)
Net realized gain (loss) on investments (2) (12,952) 755 23,492 1,165
Net change in unrealized appreciation
(depreciation) of investments 2,118 43,191 33,963 191,974 24,198
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 16,481 22,884 29,539 275,576 21,541
CAPITAL TRANSACTIONS
Purchase of Variable Account units 236,355 1,198,499 481,066 2,676,915 535,464
Redemption of Variable Account units (235) (432,388) (76,978) (510,526) (68,118)
Mortality and expense and administrative charges
redeemed 1,961 7,355 5,186 16,770 4,468
-----------------------------------------------------------------------
Net increase from capital transactions 238,081 773,466 409,274 2,183,159 471,814
Net assets at beginning of year 37,255 127,713 191,234 222,945 117,452
-----------------------------------------------------------------------
Net assets at end of year $ 291,817 $ 924,063 $ 630,047 $ 2,681,680 $ 610,807
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
10
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Statements of Changes in Net Assets (continued)
Year ended December 31, 1997
<TABLE>
<CAPTION>
FORTIS
GLOBAL FORTIS FORTIS
ASSET GLOBAL INTERNATIONAL FORTIS
ALLOCATION BOND STOCK VALUE
---------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C>
Dividend income $ 17,421 $ 2,110 $ 19,136 $ 43,484
Mortality and expense and administrative charges (2,913) (518) (3,619) (5,646)
Net realized gain (loss) on investments 3,379 (110) 9,811 12,634
Net change in unrealized appreciation
(depreciation) of investments 8,407 (1,467) (4,635) 31,692
---------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 26,294 15 20,693 82,164
CAPITAL TRANSACTIONS
Purchase of Variable Account units 294,716 98,951 462,256 626,949
Redemption of Variable Account units (56,351) (45,993) (117,125) (127,016)
Mortality and expense and administrative charges
redeemed 2,913 518 3,619 5,646
---------------------------------------------------------
Net increase from capital transactions 241,278 53,476 348,750 505,579
Net assets at beginning of year 97,859 16,149 139,620 173,386
---------------------------------------------------------
Net assets at end of year $ 365,431 $ 69,640 $ 509,063 $ 761,129
---------------------------------------------------------
---------------------------------------------------------
<CAPTION>
FORTIS ALLIANCE ALLIANCE
FORTIS BLUE CHIP MONEY ALLIANCE PREMIER
S&P 500 STOCK MARKET* INTERNATIONAL* GROWTH*
-----------------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C> <C>
Dividend income $ 21,704 $ 4,348 $ 735 $ -- $ --
Mortality and expense and administrative charges (7,708) (6,433) (46) (13) (80)
Net realized gain (loss) on investments 8,202 5,163 -- -- --
Net change in unrealized appreciation
(depreciation) of investments 98,868 93,112 -- (234) 2,797
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 121,066 96,190 689 (247) 2,717
CAPITAL TRANSACTIONS
Purchase of Variable Account units 1,365,385 925,855 303,796 45,113 279,932
Redemption of Variable Account units (121,189) (66,571) (91,558) -- --
Mortality and expense and administrative charges
redeemed 7,708 6,433 46 13 80
-----------------------------------------------------------------------
Net increase from capital transactions 1,251,904 865,717 212,284 45,126 280,012
Net assets at beginning of year 58,280 108,962 -- -- --
-----------------------------------------------------------------------
Net assets at end of year $ 1,431,250 $ 1,070,869 $ 212,973 $ 44,879 $ 282,729
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
* For the period from September 1, 1997 to December 31, 1997.
SEE ACCOMPANYING NOTES.
11
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Statements of Changes in Net Assets (continued)
Year ended December 31, 1997
<TABLE>
<CAPTION>
FEDERATED
U.S. FEDERATED
GOVERNMENT HIGH
SAFECO SAFECO SECURITIES INCOME
GROWTH* EQUITY* FUND II* FUND II*
-----------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C>
Dividend income $ 2,922 $ 16,403 $ -- $ --
Mortality and expense and administrative charges (6) (62) (6) (112)
Net realized gain (loss) on investments -- -- -- --
Net change in unrealized appreciation
(depreciation) of investments (2,767) (12,809) 153 5,339
-----------------------------------------------
Net increase (decrease) in net assets
resulting from operations 149 3,532 147 5,227
CAPITAL TRANSACTIONS
Purchase of Variable Account units 18,078 222,103 18,160 364,370
Redemption of Variable Account units -- -- -- --
Mortality and expense and administrative charges
redeemed 6 62 6 112
-----------------------------------------------
Net increase from capital transactions 18,084 222,165 18,166 364,482
Net assets at beginning of year -- -- -- --
-----------------------------------------------
Net assets at end of year $ 18,233 $ 225,697 $ 18,313 $ 369,709
-----------------------------------------------
-----------------------------------------------
<CAPTION>
MFS MFS MONTGOMERY
EMERGING HIGH EMERGING MONTGOMERY STRONG
GROWTH* INCOME* MARKETS* GROWTH* DISCOVERY II*
--------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C> <C>
Dividend income $ -- $ -- $ 8 $ 1,003 $ --
Mortality and expense and administrative charges (38) (147) (1) (9) (2)
Net realized gain (loss) on investments 16 -- -- -- --
Net change in unrealized appreciation
(depreciation) of investments 327 6,260 59 (1,129) (548)
--------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 305 6,113 66 (135) (550)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 148,667 476,216 4,502 23,257 11,871
Redemption of Variable Account units (1,182) -- -- -- --
Mortality and expense and administrative charges
redeemed 38 147 1 9 2
--------------------------------------------------------------
Net increase from capital transactions 147,523 476,363 4,503 23,266 11,873
Net assets at beginning of year -- -- -- -- --
--------------------------------------------------------------
Net assets at end of year $ 147,828 $ 482,476 $ 4,569 $ 23,131 $ 11,323
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
* For the period from September 1, 1997 to December 31, 1997.
SEE ACCOMPANYING NOTES.
12
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Statements of Changes in Net Assets (continued)
Year ended December 31, 1997
<TABLE>
<CAPTION>
AMERICAN NEUBERGER &
STRONG CENTURY BERMAN
INTERNATIONAL VP BALANCED* AMT PARTNERS*
II*
---------------------------------------------
OPERATIONS
<S> <C> <C> <C>
Dividend income $ -- $ -- $ --
Mortality and expense charges (10) (3) (5)
Net realized gain (loss) on investments -- -- --
Net change in unrealized appreciation
(depreciation) of investments (579) 75 186
---------------------------------------------
Net increase (decrease) in net assets
resulting from operations (589) 72 181
CAPITAL TRANSACTIONS
Purchase of Variable Account units 35,961 7,704 14,808
Redemption of Variable Account units -- -- --
Mortality and expense charges redeemed 10 3 5
---------------------------------------------
Increase from capital transactions 35,971 7,707 14,813
Net assets at beginning of year -- -- --
---------------------------------------------
Net assets at end of year $ 35,382 $ 7,779 $ 14,994
---------------------------------------------
---------------------------------------------
<CAPTION>
INVESCO INVESCO COMBINED
HEALTH & INDUSTRIAL INVESCO VARIABLE
SCIENCES* INCOME* TECHNOLOGY* ACCOUNT
--------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C>
Dividend income $ -- $ 994 $ -- $ 436,217
Mortality and expense charges (1) (7) (1) (81,424)
Net realized gain (loss) on investments -- -- -- 83,806
Net change in unrealized appreciation
(depreciation) of investments 14 (745) 88 426,663
--------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 13 242 87 865,262
CAPITAL TRANSACTIONS
Purchase of Variable Account units 2,990 13,801 2,111 16,061,409
Redemption of Variable Account units -- -- -- (4,652,556)
Mortality and expense charges redeemed 1 7 1 81,424
--------------------------------------------------------------
Increase from capital transactions 2,991 13,808 2,112 11,490,277
Net assets at beginning of year -- -- -- 1,702,263
--------------------------------------------------------------
Net assets at end of year $ 3,004 $ 14,050 $ 2,199 $ 14,057,802
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
* For the period from September 1, 1997 to December 31, 1997.
SEE ACCOMPANYING NOTES.
13
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Notes to Financial Statements
December 31, 1998
1. GENERAL
FIRST FORTIS LIFE INSURANCE COMPANY
Variable Account A (the "Account") was established as a segregated asset account
of First Fortis Life Insurance Company (First Fortis) on October 1, 1993 under
New York law and became operational July 1, 1996. The Account is registered
under the Investment Company Act of 1940 as a unit investment trust. The
variable annuity contracts are sold under the names Opportunity Variable
Annuity, Masters Variable Annuity and Value Advantage Plus Variable Annuity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The assets of the Account are segregated from First Fortis' other assets. The
operations of the Account are part of First Fortis. The following is a summary
of significant accounting policies consistently followed by the Account in the
preparation of its financial statements.
INVESTMENT TRANSACTIONS
Capital gain distributions from subaccounts are recorded on the ex-dividend date
and reinvested upon receipt.
INVESTMENT INCOME
Dividend income distributions from subaccounts are recorded on the ex-dividend
date and reinvested upon receipt.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of net assets at the date of the financial
statements and the reported amounts of net increase and decrease in net assets
from operations during the reporting period. Actual results could differ from
these estimates.
14
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Notes to Financial Statements (continued)
3. INVESTMENTS
There are forty-two active subaccounts and three inactive subaccounts as of
December 31, 1998 within the Account. The inactive subaccounts are available
funds in which contract holders have not yet invested. Investment in shares of
the Fortis Series Fund, Inc. subaccounts are stated at market value, which is
based on the percentage owned by the Account of the net asset value of the
respective portfolios of these Series. The Series' net asset value is based on
market quotations of the securities held in the portfolio. Investments in the
other subaccounts are valued at the net asset (market) value per share at the
close of business on December 31, as reported by the respective mutual fund.
The cost of investments sold and redeemed is determined on the average cost
method. Unrealized appreciation or depreciation of investments represents the
Account's share of the subaccount's undistributed net investment income,
undistributed realized gains or losses and unrealized appreciation or
depreciation.
Purchases and sales of shares of the Funds are recorded on the trade date. The
number of shares and aggregate cost of purchases, including reinvested dividends
and realized capital gains, and aggregate cost of investments sold or redeemed
for active subaccounts were as follows:
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES COST OF
------------------------- COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fortis Series Fund, Inc.:
Growth Stock 26,601 3,515 $1,013,376 $129,602
U.S. Government Securities 101,885 2,693 1,109,084 29,869
Money Market 60,418 39,145 691,984 459,202
Asset Allocation 69,787 19,556 1,327,365 370,494
Diversified Income 80,644 1,668 976,544 20,185
Global Growth 34,446 8,441 747,331 168,025
Aggressive Growth 62,177 7,552 867,152 102,961
Growth & Income 202,417 10,874 4,041,220 201,683
High Yield 124,255 9,263 1,309,903 99,185
Global Asset Allocation 79,205 1,568 1,134,793 21,201
Global Bond 11,597 1,002 133,950 10,983
International Stock 106,998 5,039 1,592,909 70,639
Value 111,781 3,219 1,560,512 42,382
S & P 500 310,604 24,185 5,286,753 400,827
Blue Chip Stock 196,205 3,472 3,233,033 51,794
Mid Cap Stock 13,242 24 113,151 201
Large Cap Growth 94,015 5,727 960,073 57,954
Small Cap Value 24,166 117 213,288 1,050
</TABLE>
15
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
SHARES COST OF
------------------------- COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alliance Variable Product:
Money Market 3,659,902 3,248,486 $3,692,257 $3,248,486
International 45,456 43,390 760,164 729,051
Premier Growth 25,024 12,452 672,665 330,511
SAFECO Resource Series:
Growth 19,458 11,106 536,440 299,450
Equity 4,486 1,650 142,055 44,419
Federated Insurance Series:
U.S. Government Securities Fund II 2,400 9 26,950 101
High Income Fund II 53,223 45,804 568,485 497,074
Utility II 2,474 -- 37,847 --
American Leaders II 50,401 47,449 992,854 935,486
Lexington Funds, Inc.:
Emerging Markets 1,037 -- 5,328 --
MFS Variable Insurance Trust:
Emerging Growth 2,051 5,328 39,885 88,121
High Income 36,002 31,526 422,241 383,925
Montgomery Variable Funds:
Emerging Markets 1,991 6 14,827 55
Growth 5,103 12 80,916 187
Strong Variable Annuity Funds:
Discovery II 759 39 8,162 79
International II 4,968 1,458 41,097 13,928
American Century Investments:
VP Balanced 6,306 4,378 52,034 35,605
VP Capital Appreciation 16,768 16,040 156,020 150,692
Van Eck Worldwide Insurance Trust:
Worldwide Bond Fund 20 -- 250 --
Neuberger & Berman, Inc.:
AMT Limited Maturity Bond 4,157 -- 57,274 --
AMT Partners 1,913 11 36,301 203
INVESCO, Inc.:
Health & Sciences 9,985 2,322 132,586 29,083
Industrial Income 811 448 15,923 7,998
Technology 5,982 4,003 78,815 53,262
</TABLE>
16
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHARES COST OF
------------------------- COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fortis Series Fund, Inc.:
Growth Stock 22,661 7,441 $ 809,361 $ 274,309
U.S. Government Securities 30,484 10,301 323,111 107,853
Money Market 233,715 214,478 2,592,007 2,385,564
Asset Allocation 96,893 8,514 1,653,169 169,600
Diversified Income 19,661 20 252,681 235
Global Growth 62,726 23,908 1,198,499 432,388
Aggressive Growth 37,352 5,782 481,073 76,978
Growth & Income 159,029 30,750 2,753,795 510,526
High Yield 51,337 6,574 536,110 68,118
Global Asset Allocation 23,716 4,141 312,137 56,351
Global Bond 9,303 4,219 101,061 45,993
International Stock 35,322 8,441 481,392 117,125
Value 51,090 9,611 670,433 127,016
S & P 500 99,878 9,123 1,387,089 121,189
Blue Chip Stock 68,209 4,934 930,203 66,571
Alliance Variable Product:
Money Market 304,530 91,557 304,531 91,558
International 2,988 -- 45,113 --
Premier Growth 13,470 -- 279,932 --
SAFECO Resource Series:
Growth 781 -- 21,000 --
Equity 8,963 -- 238,506 --
Federated Insurance Series:
U.S. Government Securities Fund II 1,738 -- 18,160 --
High Income Fund II 33,763 -- 364,370 --
MFS Variable Insurance Trust:
Emerging Growth 9,230 71 148,667 1,182
High Income 39,067 -- 476,216 --
Montgomery Variable Funds:
Emerging Markets -- 4,510 --
Growth 432 -- 24,260 --
Strong Variable Annuity Funds: 1,533
Discovery II -- 11,871 --
International II 941 -- 35,961 --
American Century Investments: 3,797
VP Balanced -- 7,704 --
</TABLE>
17
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
<TABLE>
<CAPTION>
SHARES COST OF
-------------------------- COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Neuberger & Berman, Inc.:
AMT Partners 728 - $14,808 $ --
INVESCO, Inc.:
Health & Sciences 272 - 2,990 --
Industrial Income 825 - 14,795 --
Technology 192 - 2,111 --
</TABLE>
4. ORGANIZATIONAL EXPENSES AND OTHER CHARGES
ORGANIZATION EXPENSES
First Fortis assumes all organizational expenses of the Account.
ADMINISTRATION CHARGE
A $30 annual contract administrative charge is deducted each contract year from
the value of each Opportunity Variable Annuity on the anniversary of the
contract date and upon surrender of the contract. This charge will be waived
during the accumulation period if the contract value at the end of the contract
year (or upon total surrender) is $25,000 or more.
In addition, First Fortis assesses each subaccount of the Opportunity Variable
Annuity and Masters Variable Annuity a daily charge for administrative expense
at annual rate of 0.10% of the net assets.
MORTALITY AND EXPENSE RISK CHARGE
First Fortis assesses each subaccount of the Opportunity Variable Annuity and
Masters Variable Annuity a daily charge for mortality and expense risk at an
annual rate of 1.25% of the net assets. For the Value Advantage Plus Variable
Annuity the mortality and expense risk charge is assessed at an annual rate of
0.45%.
18
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Notes to Financial Statements (continued)
5. SURRENDER AND PREMIUM TAX CHARGES
FREE SURRENDERS
The following amounts can be withdrawn from the contract without a surrender
charge:
- Any purchase payments received more than five years prior to the
surrender date for Opportunity Variable Annuity and seven years for
Master Variable Annuity and have not been previously surrendered.
- In any contract year, up to 10% of the purchase payments received less
than five years prior to the surrender date for Opportunity Variable
Annuity and seven years prior to the surrender date for Master
Variable Annuity.
- For Master Variable Annuity any earnings that have not been previously
surrendered.
- For Value Advantage Plus Variable Annuity there is no surrender
charge.
AMOUNT OF SURRENDER CHARGE
Surrender charges apply only if the amount being withdrawn exceeds the sum of
the amounts listed above under Free Surrenders. The surrender charge is based on
a percentage of the amount of purchase payments surrendered. The percentage of
payments is set at 5% during the first five years on the Opportunity Variable
Annuity contracts with a sliding scale down to zero by the end of the fifth
year, and is set at 7% during the first seven years of the Master Variable
Annuity contracts, with a sliding scale down to zero by the end of the seventh
year.
PREMIUM TAXES
Where premium taxes or similar assessments are imposed by states or other
jurisdiction upon receipt of purchase payments, First Fortis pays such taxes on
behalf of the contract owner and then will deduct a charge for these amounts
from the contract value upon surrender, death of the annuitant or contract
owner, or annuitization of the contract. In jurisdictions where premium taxes or
similar assessments are imposed at the time annuity payments begin, First Fortis
will deduct a charge on a pro rata basis from the contract value at that time.
19
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Notes to Financial Statements (continued)
5. SURRENDER AND PREMIUM TAX CHARGES (CONTINUED)
Surrender and premium tax charges are included in redemptions and are paid
directly to First Fortis. Surrender and premium tax charges collected by First
Fortis were $40,683 and $1,607 in 1998 and 1997, respectively.
6. FEDERAL INCOME TAXES
The operations of the Account form part of, and are taxed with, the operations
of First Fortis, which is taxed as a life insurance company under the Internal
Revenue Code. As a result, the net asset value of the subaccounts are not
affected by income taxes on income distributions received by the subaccounts.
7. RELATED PARTY TRANSACTIONS
Fortis Advisers, Inc. (Fortis Advisers), an affiliate of First Fortis, provides
investment management services to Fortis Series Fund, Inc. in exchange for
investment advisory and management fees. Investment advisory and management fees
are based on each portfolio's daily net assets and decrease in reduced
percentages as average daily net assets increase. The fees represent an
investment expense to Fortis Series Fund, Inc. which reduces the portfolios' net
assets. These fees charged by Fortis Advisers are not available on an individual
variable account basis. Fees for all variable accounts to which Fortis Advisers
provided investment management services amounted to $17,790,513 and $14,415,172
in 1998 and 1997, respectively.
8. YEAR 2000 ISSUE (UNAUDITED)
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of the Account. The Account
has no computer systems of its own but is dependent upon the systems of Fortis
Benefits Insurance Company, Fortis Advisers and certain other third parties.
20
<PAGE>
First Fortis Life Insurance Company
Variable Account A
Notes to Financial Statements (continued)
8. YEAR 2000 ISSUE (UNAUDITED) (CONTINUED)
A comprehensive review of Fortis Benefits' and Fortis Advisers' computer systems
and business processes has been conducted to identify the major systems that
could be affected by the Year 2000 issue. Steps are being taken to resolve any
potential problems including modification to existing software and the purchase
of new software. These measures are scheduled to be completed and tested on a
timely basis. Fortis Benefits' and Fortis Advisers' goal is to complete internal
remediation and testing of each system by mid 1999.
The costs related to the Year 2000 issue are not expected to have a material
impact on Fortis Benefits' and Fortis Advisers' results of operations or
financial condition. This expectation is subject to uncertainties that could
cause actual results to differ materially. Factors that could influence the
total costs to be incurred by Fortis Benefits and Fortis Advisers in connection
with the Year 2000 issue include the ability of Fortis Benefits and Fortis
Advisers to successfully identify systems containing two-digit year codes, the
nature and amount of programming required to fix the affected programs, the
related labor and consulting costs for such remediation, and the ability of
third parties that interface with Fortis Benefits and Fortis Advisers to
successfully address their Year 2000 issues.
Fortis Benefits and Fortis Advisers are evaluating the Year 2000 readiness of
advisors and other third parties whose system failures could have an impact on
Fortis Benefits' and Fortis Advisers' operations. The potential materiality of
any such impact is not entirely known at this time. Fortis Benefits and Fortis
Advisers are closely monitoring these entities to avoid any unforeseen
circumstances.
Fortis Benefits' and Fortis Advisers' Year 2000 project includes establishing
Year 2000 contingency plans for all key business units. These plans are being
developed and are expected to be substantially complete by the end of the first
quarter of 1999. These plans will continue to be refined throughout 1999 as
additional information related to potential Year 2000 exposure is gathered.
21
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
In advertising and other sales material for the Certificates, yield and total
return information for the Subaccounts of the Variable Account may be
included. The information below provides investment results for the indicated
Subaccounts of the Variable 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.
YIELD CALCULATIONS
Yield information for the Alliance Money Market Subaccount will be based on
the seven days ended on a specified date. It will be computed by determining
the net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account (after the deduction of all asset based charges) having
a balance of one Accumulation Unit at the beginning of the period and
dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return , and multiplying the base
period return by (365/7), with the resulting yield figure carried to the
nearest hundredth of one percent. The seven day yield for the Alliance Money
Market Subaccount as of December 31, 1998 was 4.03%.
An effective yield may also be quoted for the Alliance Money Market Subaccount.
Effective yield is calculated by compounding the current yield as follows:
365/7
Effective Yield = [(Base Period Return + 1) ] - 1
The seven day effective yield for the Alliance Money Market Subaccount as of
December 31, 1998 was 4.11%.
Yield information for the other Subaccounts will be based on the thirty days
ended on a specified date and carried to the nearest hundredth of a percent,
according to the following formula:
A-B 6
2 [( ----- +1) -1]
CD
Where: A = net investment income earned during the period by the Portfolio
whose shares are owned by the Subaccount,
B = expenses accrued for the period,
C = the average daily number of Accumulation Units outstanding during the
period, and
D = the offering price per Accumulation Unit at the end of the last day of the
period.
The following table sets figures for the thirty days ended December 31, 1998.
<TABLE>
<CAPTION>
Subaccount Yield
---------- -----
<S> <C>
Federated High Yield Bond . . . . . . . . . . . . . . . . . 2.49%
Federated U.S. Government Securities. . . . . . . . . . . . 2.74%
MFS High Income . . . . . . . . . . . . . . . . . . . . . . 9.16%
MFS World Governments . . . . . . . . . . . . . . . . . . . 1.54%
Van Eck Worldwide Bond . . . . . . . . . . . . . . . . . . 1.60%
</TABLE>
A-1
<PAGE>
TOTAL RETURN CALCULATIONS
Total return information will be given for the one-year and five-year periods
ended on a specified date, provided that, if the registration statement has
been effective for a Subaccount only during a shorter period, then such
shorter period will be used.
AVERAGE ANNUAL TOTAL RETURN
Total average annual compounded rates of return for each period will be computed
to the nearest one hundredth of a percent, according to the following formula:
n
P(1 + T) = CSV
WHERE: P = a hypothetical initial purchase payment of $1,000,
T = average annual total return,
n = number of years, and
CSV = end of period Cash Surrender Value of hypothetical $1,000
purchase payment made at the beginning of the period, assuming
deduction of a proportionate amount of the annual administrative
charge (based on average Contract size).
The following table show total average annual rates of return for the periods
indicated:
<TABLE>
<CAPTION>
One Year Period Commencement to
Subaccount Ended Dec. 31, 1998 Dec. 31, 1998
- ----------------------------------------------- ------------------- ---------------
<S> <C> <C>
Alliance International Portfolio 9.54% 5.14%
Alliance Premier Growth Portfolio 44.31% 32.15%
American Century VP Balanced Fund 12.25% 12.12%
American Century VP Capital Appreciation Fund -5.60% -6.47%
Federated High Income Bond Fund II -0.76% 6.81%
Federated Utility II 10.47% 14.30%
Federated American Leaders II 14.09% 19.87%
Federated U.S. Government Securities II 4.17% 6.88%
INVESCO Equity Income Fund 11.76% 20.40%
INVESCO Health Sciences Fund 39.22% 29.33%
INVESCO Technology Fund 22.13% 22.48%
Lexington Natural Resources Trust -22.96% -1.08%
Lexington Emerging Markets Fund -31.43% -19.33%
MFS Emerging Growth Series 30.57% 21.77%
MFS High Income Series -3.62% 5.42%
MFS Global Government Series 4.41% 1.38%
Montgomery Emerging Markets Fund -40.82% -16.31%
A-2
<PAGE>
Montgomery Growth Fund -0.54% 17.54%
Neuberger & Berman Limited Maturity 0.75% 15.09%
Bond Portfolio
Neuberger & Berman Partners Portfolio 93.00% 3.62%
SAFECO Equity Portfolio 21.30% 19.58%
SAFECO Growth Portfolio 22.39% 17.04%
Strong Discovery Fund II 3.77% 4.30%
Strong International Stock Fund II -8.20% -7.44%
Van Eck Worldwide Bond Fund 9.25% 3.89%
Van Eck WorldwideHard Assets Fund -34.14% -15.43%
</TABLE>
CUMULATIVE TOTAL RETURN
Total cumulative rates of return for each period will be computed to the nearest
one hundredth of a percent, according to the following formula:
CTR = (CSV - P) 100
-------
P
Where: P = a hypothetical initial purchase payment of $1,000,
CTR = cumulative total return, and
CSV = end of period Cash Surrender Value of hypothetical $1,000
purchase payment made at the beginning of the period, assuming
deduction of a proportional amount of the annual administrative charge
(based on average Contract size).
The following table shows cumulative total rates of return for the periods
indicated:
<TABLE>
<CAPTION>
One Year Period Commencement to
Subaccount Ended Dec. 31, 1998 Dec. 31, 1998
- ----------------------------------------------- ------------------- ---------------
<S> <C> <C>
Alliance International Portfolio 9.54% 15.75%
Alliance Premier Growth Portfolio 44.31% 125.71%
American Century VP Balanced Fund 12.25% 39.67%
American Century VP Capital -5.60% -17.75%
Appreciation Fund
Federated High Income Bond Fund II -0.76% 21.20%
Federated Utility II 10.47% 47.75%
Federated American Leaders II 14.09% 69.77%
Federated U.S. Government Securities II 4.17% 11.73%
INVESCO Equity Income Fund 11.76% 36.28%
INVESCO Health Sciences Fund 39.22% 53.54%
INVESCO Technology Fund 22.13% 40.22%
Lexington Natural Resources Trust -22.96% -3.12%
Lexington Emerging Markets Fund -31.43% -46.60%
MFS Emerging Growth Series 30.57% 77.74%
A-3
<PAGE>
MFS High Income Series -3.62% 16.66%
MFS Global Government Series 4.41% 4.08%
Montgomery Emerging Markets Fund -40.82% -40.54%
Montgomery Growth Fund -0.54% -6.32%
Neuberger & Berman Limited Maturity Bond Portfolio 0.75% 26.46%
Neuberger & Berman Partners Portfolio 93.00% 6.11%
SAFECO Equity Portfolio 21.30% 45.05%
SAFECO Growth Portfolio 22.39% 46.37%
Strong Discovery Fund II 3.77% 13.08%
Strong International Stock Fund II -8.20% -20.22%
Van Eck Worldwide Bond Fund 9.25% 11.78%
Van Eck Worldwide Hard Assets Fund -34.14% -38.69%
</TABLE>
Yield figures do not reflect any surrender charge, and yield and total return
figures do not reflect any premium tax charge. Yield and total return figures do
reflect the reimbursement of certain Fortis Series expenses. Current Fixed
Account effective annual rates of interest may also be quoted in advertising and
other sales materials, and these rates do not reflect any deductions or charges.
First Fortis 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>
Rating Service Category
-------------- --------
<S> <C>
Alliance Money Market Subaccount
Morningstar Publications, Inc.
Lipper Analytical Services, Inc.
Alliance International Subaccount
Morningstar Publications, Inc. International
Lipper Analytical Services, Inc. International
Alliance Premier Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc. Growth
Federated High Yield Bond Subaccount
Morningstar Publications, Inc. High Yield Bond
Lipper Analytical Services, Inc.
Federated Utility Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc.
A-4
<PAGE>
Federated American Leaders Subaccount
Morningstar Publications, Inc. Growth & Income
Lipper Analytical Services, Inc.
Lexington Natural Resources Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc.
Lexington Emerging Markets Subaccount
Morningstar Publications, Inc. International Stock
Lipper Analytical Services, Inc.
MFS Emerging Growth Subaccount
Morningstar Publications, Inc. Aggressive Growth
Lipper Analytical Services, Inc. Mid Cap Funds
MFS High Income Subaccount
Morningstar Publications, Inc. High Yield Bonds
Lipper Analytical Services, Inc. Mid Cap Funds
MFS Global Governments Subaccount
Morningstar Publications, Inc. International Bonds
Lipper Analytical Services, Inc.
Montgomery Emerging Markets Subaccount
Morningstar Publications, Inc. Diversified Emerging
Markets
Lipper Analytical Services, Inc. Emerging Markets Funds
Montgomery Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc. Growth
Strong Discovery Subaccount
Morningstar Publications, Inc. Aggressive Growth
Lipper Analytical Services, Inc. Capital Appreciation Fund
Strong Government Securities Subaccount
Morningstar Publications, Inc. Government Bond - General
Lipper Analytical Services, Inc.
Strong Advantage Subaccount
Morningstar Publications, Inc. Corporate Bond - General
Lipper Analytical Services, Inc.
A-5
<PAGE>
Strong International Stock Subaccount
Morningstar Publications, Inc. Foreign Stock
Lipper Analytical Services, Inc. International Fund
TCI Balanced Subaccount
Morningstar Publications, Inc. Balanced
Lipper Analytical Services, Inc.
TCI Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc.
Van Eck Worldwide Bond Subaccount
Morningstar Publications, Inc. International Bond
Lipper Analytical Services, Inc.
Van Eck Gold and Natural Resources Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc. Gold Oriented Fund
</TABLE>
A-6
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The estimated expenses of the issuance and distribution of the Contracts,
other than commissions on sales of the Contracts are as follows:
Amount
------
Securities and Exchange Commission
registration fee $ -0-
Printing and engraving $1,500.00
Accounting fees and expenses $1,500.00
Legal fees and expenses $3,000.00
Item 15. Indemnification of Directors and Officers
First Fortis' By-Laws provide for indemnity and payment of expenses of
First Fortis' officers and directors 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 New York
law generally permits payment of such indemnification and expenses if the person
seeking indemnification has acted in good faith and for a purpose that he
reasonably believed to be in, or not opposed to, the best interests of the
Company, and, in a criminal proceeding, if the person seeking indemnification
also has no reasonable cause to believe his conduct was unlawful. No
indemnification is further permitted to an individual if there has been an
adjudication, and a judgement rendered adverse to the individual seeking
indemnification, finding that the acts were committed in bad faith, as the
result of active and deliberate dishonesty, or that there was personal gain,
financial profit, or other advantage which he or she was not otherwise legally
entitled.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the indemnification provision described in response to
Item 14, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant 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, 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.
<PAGE>
Item 16. Exhibits and Financial Statement Schedule
a. Exhibits
1. Form of Principal Underwriter and Servicing Agreement -- filed as an
exhibit to Registration Statement No. 33-71686 on Form N-4 filed April
11, 1994 and incorporated by reference.
2. None.
3. (a) Charter of First Fortis Life Insurance Company (Incorporated by
reference from Form 10-K405, File No. 33-71690, of registrant filed
March 29, 1996).
(b) By-laws of First Fortis Life Insurance Company (Incorporated by
reference from Form N-4 Registration Statement, File No. 33-71686, of
registrant and its Separate Account A filed on November 15, 1993);
4. (a) Form of Combination Fixed and Variable Annuity Contract
(Incorporated by Reference from Form N-4 Registration Statement, File
No. 333-20343, of Registrant and its Separate Account A, filed May 9,
1997);
(b) Form of Application to be used in connection with Contract
(Incorporated by Reference from Form N-4 Registration Statement, File
No. 333-20343, of Registrant and its Separate Account A, filed May 9,
1997);
(c) Form of IRA Endorsement (Incorporated by reference from Form N-4
Registration Statement, File No. 33-71686, of registrant and its
Separate Account A filed April 27, 1995);
(d) Form of Section 403(b) Annuity Endorsement (Incorporated by
reference from Form N-4 Registration Statement, File No. 33-71686, of
registrant and its Separate Account A filed April 27, 1995);
(e) Form of Automatic Portfolio Rebalancing Endorsement (Incorporated
by reference from Form N-4 Registration Statement, File No. 33-71686,
of registrant and its Separate Account A filed April 27, 1995);
(f) Form of Systematic Withdrawal Option Endorsement (Incorporated by
reference from Form N-4 Registration Statement, File No. 33-71686, of
registrant and its Separate Account A filed April 27, 1995);
(g) Form of Systematic Transfer Endorsement (Incorporated by reference
from Form N-4 Registration Statement, File No. 33-71686, of registrant
and its Separate Account A filed April 27, 1995);
<PAGE>
5. Opinion and consent of David A. Peterson, Esq., Corporate Counsel of
Fortis Benefits Insurance Company, as to the legality of the
securities being registered (filed as a part of this Form S-1
registration statement filed on January 24, 1997).
10. Administrative Service Agreement (Incorporated by reference from Form
N-4 Registration Statement, File No. 33-71686, of registrant and its
Separate Account A filed on November 15, 1993).
24. Consent of Ernst & Young LLP -- filed herewith.
25. (a) Power of Attorney for Messr. Freedman and Madame Gharib.
(Incorporated by reference from Form N-4 Registration Statement, File
No. 33-71686, of registrant and its Separate Account A filed on
November 15, 1993).
(b) Power of Attorney for Messrs. Gardner, Nelson and Galston.
(Incorporated by reference from Form N-4 Registration Statement, File
No. 33-71686, of registrant and its Separate Account A filed on April
12, 1994.)
(c) Power of Attorney for Messr. Kopperud (Incorporated by reference
from Form N-4 Registration Statement, File No. 33-71686, of registrant
and its Separate Account A filed April 27, 1995.)
28. (b) Financial statement schedules.
None.
Item 17. Undertakings
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(I) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement, including (but not limited to) any addition or deletion of
a managing underwriter.
<PAGE>
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, the Registrant has caused this
Registration Statement to be signed on its behalf in the Town of Salina, County
of Onondaga, State of New York on this 19th day of April 1999.
FIRST FORTIS LIFE INSURANCE COMPANY
By: /s/ Zafar Rashid
-------------------------------------
Zafar Rashid
President & Chief Executive Officer
(Principal Executive Officer)
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons, in the capacities indicated, on April 19, 1999.
SIGNATURE TITLE WITH FIRST FORTIS
- --------- -----------------------
/s/ Zafar Rashid President, Chief Executive
- ------------------------ Officer and Director
Zafar Rashid (Principal Executive Officer)
/s/ Terry J. Kryshak Sr. Vice President and Chief
- ------------------------ Administrative Officer and
Terry J. Kryshak Director
/s/ Larry M. Cains Treasurer and Director
- ------------------------ (Principal Financial Officer)
Larry M. Cains
/s/ Barbara R. Hege Assistant Treasurer and
- ------------------------ Director of Accounting
Barbara R. Hege (Principal Accounting Officer)
* Chairman and Director
- ------------------------
Allen Royal Freedman
* Director
- ------------------------
Susie Gharib
* Director
- ------------------------
Dale Edward Gardner
<PAGE>
* Director
- ------------------------
Kenneth Warwick Nelson
Director
- ------------------------
Robert B. Pollock
/s/ Dean C. Kopperud Director
- ------------------------
Dean C. Kopperud
* Director
- ------------------------
Clarence Elkus Galston
*By /s/ Terry J. Kryshak
--------------------
Terry J. Kryshak
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Item
Number Description
- ------ -----------
24. Consent of Accountants
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 19, 1999 on the financial statements
of First Fortis Life Insurance Company and our report dated March 19, 1999 on
the financial statements of First Fortis Life Insurance Company Variable
Account A in the Amendment No. 3 to the Registration Statement (Form S-2 No.
333-20345) and related Prospectus and Statement of Additional Information of
First Fortis Life Insurance Company for the registration of flexible premium
deferred combination variable and fixed annuity contracts.
/s/
Ernst & Young LLP
Minneapolis, Minnesota
April 26, 1999
