SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-71690
FIRST FORTIS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of
incorporation or organization)
13-2699219
(IRS Identification No.)
220 SALINA MEADOWS PARKWAY, SUITE 255, SYRACUSE, NY
13212
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 315-451-
0066
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X
No
FIRST FORTIS LIFE INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<S> <C>
<C>
June 30,
December
31,
1999
1998
(unaudited)
ASSETS:
Investments:
Fixed maturities, at fair value (amortized
cost 1999--$123,348; 1998--$125,787)
$121,132
$130,038
Policy loans 1
-
Short-term investments
3,480
830
124,613
130,868
Cash and cash equivalents
565
1,160
Receivables:
Uncollected premiums, less allowance of $100
3,008 3,538
Reinsurance recoverable on paid and unpaid losses 29,292
28,458
Other 490
313
32,790
32,309
Accrued investment income
1,955
1,895
Deferred policy acquisition costs
3,441
3,148
Property and equipment at cost, less accumulated
depreciation (1999--$2,170; 1998--$2,086)
240
324
Deferred federal income tax
3,574
1,150
Goodwill, less accumulated amortization
(1999--$391; 1998--$368)
439 462
Other assets 85
104
Assets held in separate accounts
59,022
46,082
Total assets $226,724
$217,502
See accompanying notes.
<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands, except per share data)
June 30,
December 31,
1999
1998
(unaudited)
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:
Life insurance $ 32,130
$ 30,388
Interest sensitive and investment products 3,781
6,267
Accident and health 68,704
68,206
104,615
104,861
Unearned revenues 9,229
8,535
Other policy claims and benefits payable
11,697
11,084
Income taxes payable 1,344
2,017
Other liabilities 3,791
4,897
Liabilities related to separate accounts
59,022
46,082
Total policy reserves and liabilities 189,698
177,476
SHAREHOLDER'S EQUITY:
Common stock, $20 par value:
Authorized, issued, and outstanding shares
--100,000 2,000
2,000
Additional paid-in capital 37,440
37,440
Retained deficit (987)
(2,190)
Accumulated other comprehensive income (1,427)
2,776
Total shareholder's equity 37,026
40,026
Total policy reserves, liabilities, and
shareholder's equity $226,724
$217,502
See accompanying notes.
<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Six months
ended
June 30,
1999 1998
REVENUES
Insurance operations:
Life insurance premiums $11,837
$11,425
Interest sensitive and investment products
policy charges 130
53
Accident and health premiums
16,913
15,374
Net investment income 4,217
4,054
Net realized gains on investments 264
850
Other income 638
487
TOTAL REVENUES 33,999
32,243
BENEFITS AND EXPENSES
Benefits to policyholders:
Life insurance 9,249
9,713
Interest sensitive and investment products 202
334
Accident and health 13,176
16,733
Amortization of deferred policy
acquisition costs 38
(98)
Insurance commissions 2,246
2,163
General and administrative expenses
7,237
6,104
TOTAL BENEFITS AND EXPENSES 32,148
34,949
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES 1,851
(2,706)
INCOME TAX EXPENSE (BENEFITS)
Current
809
(1,173)
Deferred
(161) 226
648
(947)
NET INCOME (LOSS)
1,203(1,759)
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized (loss) gain on investments
(4,203) 78
COMPREHENSIVE LOSS $(3,000)
$(1,681)
See accompanying notes.
<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three months
ended
June 30,
1999 1998
REVENUES
Insurance operations:
Life insurance premiums $5,952
$6,227
Interest sensitive and investment products
policy charges 125
42
Accident and health premiums
8,411
7,730
Net investment income 2,082
2,062
Realized (losses) gains on investments (157)
481
Other income 301
248
TOTAL REVENUES 16,714
16,790
BENEFITS AND EXPENSES
Benefits to policyholders:
Life insurance 4,745
5,199
Interest sensitive and investment products 66
178
Accident and health 6,317
9,187
Amortization of deferred policy
acquisition costs (5)
(51)
Insurance commissions 1,304
1,016
General and administrative expenses
3,371
3,102
TOTAL BENEFITS AND EXPENSES 15,798
18,631
INCOME BEFORE FEDERAL INCOME TAXES
916
1,841
INCOME TAX EXPENSE (BENEFITS)
Current 517
(695)
Deferred (196)
51
321
(644)
NET INCOME (LOSS) 595
(1,197)
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized (loss) gain on investments (2,274)
377
COMPREHENSIVE (LOSS) $(1,679)
$ (820)
See accompanying notes.
<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months
ended
June 30,
1999
1998
OPERATING ACTIVITIES
Net Income (loss) $ 1,203
$
(1,759)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Loss on disposal of property and equipment
- -
12
Increase in future policy benefit reserves
and other policy claims and benefits
3,420
10,927
Provision for deferred federal income taxes
(161) 226
Decrease in federal income taxes
(673) (750)
Decrease in other liabilities
(1,106)
(1,322)
Depreciation, amortization and accretion
(186)
(771)
Amortization of investment premiums, net
41
(36)
Increase in uncollected premiums, accrued
investment income and other
312
(739)
Increase in reinsurance recoverable (834)
(5,372)
Net realized gains on investments (264)
(850)
CASH PROVIDED (USED) BY OPERATING ACTIVITIES
1,752
(434)
INVESTING ACTIVITIES
Purchases of fixed maturity investments
(48,941)
(111,080)
Sales or maturities of fixed maturity investments
51,603
95,975
(Decrease)Increase in equity securities and
short-term investments (2,650)
9,947
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 12
(5,158)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 1,900
8,221
Surrenders and death benefits
(4,419)
(5,927)
Interest credited to policyholders
160 337
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
(2,359)
2,631
INCREASE (DECREASE) IN CASH
(595)
(2,961)
Cash and cash equivalents at beginning of period
1,160
7,453
CASH AND CASH EQUIVALENTS AT END OF PERIOD $
565
$ 4,492
See accompanying notes.
</TABLE>
<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
Notes to Financial Statements
June 30, 1999
(unaudited)
General: The accompanying unaudited financial
statements of First Fortis Life Insurance Company
contain all adjustments necessary to present fairly the
balance sheet as of June 30, 1999 and the related
statements of operations for the six and three months
ended June 30, 1999 and 1998, and cash flows for the
six months ended June 30, 1999 and 1998.
Income tax payments for the six months ended June 30,
1999 and June 30, 1998 were $1,482,000 and $0,
respectively.
The classification of fixed maturity investments is to
be made at the time of purchase and, prospectively,
that classification is expected to be reevaluated as of
each balance sheet date. At June 30, 1999, all fixed
maturity investments are classified as available-for-
sale and carried at fair value.
The amortized cost and fair values of investments
available-for-sale were as follows at June 30, 1999 (in
thousands):
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized
Fair Cost Gain Loss
Value
Fixed Income Securities:
Governments $ 8,984 $ 22 $ 141 $
8,865
Public Utilities 16,421 63 555
15,929
Industrial and
miscellaneous 97,943 648 2,253
96,338
Total $ 123,348 $733 $2,949
$121,132
</TABLE>
The amortized cost and fair value of fixed maturities
at June 30, 1999, by contractual maturity, are shown
below (in thousands). Expected maturities will differ
from contractual maturities because borrowers may have
the right to call or prepay obligations with or without
call or prepayment penalties.
<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
Notes to Financial Statements
June 30, 1999
(unaudited)
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<S> <C> <C>
Amortized Fair
Cost Value
Due in one year or less $ 4,549 $ 4,589
Due after one year through
five years 30,641 30,642
Due after five years through
ten years 43,692
42,685
Due after ten years 44,466 43,216
$123,348 $121,132
</TABLE>
Proceeds from sales and maturities of fixed maturity
securities were $51,603,000 and $47,925,000 for the
six month period ended June 30, 1999 and 1998,
respectively. Gross gains of $631,000 and $1,005,000
and gross losses of $367,000 and $155,000 were realized
on the sales during the six month period ended June 30,
1999 and 1998.
Net Investment Income and Realized Gains (Losses) on
Investments: Major categories of net investment income
and realized gains and losses on investments for the
first six months of each year were as follows (in
thousands):
<TABLE>
<S> <C> <C> <C>
<C>
Realized Gain
(Loss)
Investment Income on Investments
1999 1998 1999
1998
Fixed maturities $4,118 $3,926 $
264
$850
Short-term investments 167 176
-
-
4,285 4,102 $ 264
$850
Expenses (68) (48)
Net investment income $4,217 $4,054
</TABLE>
<PAGE>
First Fortis Life Insurance Company
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June Year-to-Date 1999 Compared to June Year-to-Date 1998
Revenues
First Fortis' (the Company) life insurance premiums
increased during the first two quarters of 1999 as compared
to the first two quarters of 1998 due to strong group life
sales. Group disability and dental sales account for the
increase in accident and health premiums. Slightly
offsetting this is a decrease in the group medical premiums.
This group medical premium decrease was substantially
attributable to the Company's decision, effective January 1,
1996, to cease new sales of group medical policies. The
Company continues to service the existing group medical
business. The decision to effectively exit the group medical
business has reduced annualized premiums associated with
this line from $11.4 million inforce at January 1, 1997 to
$2.1 million in premium inforce at June 30, 1999. Accident
and health premiums are principally composed of group
accident and health coverages. The discontinuance of the
group medical sales and strong dental and disability sales
have caused the group accident and health premium mix to
shift. Second quarter dental, disability income, and
medical premium represented 46%, 45%, and 9%, respectively,
of total group accident and health premium in 1999 compared
to 44%, 39%, and 17%, respectively, in 1998.
The Company continues to match investment portfolio
composition to liquidity needs and capital requirements.
Changes in interest rates during 1999 and 1998 resulted in
recognition of realized gains and losses upon sales of
securities.
Benefits
Second quarter year-to-date 1999 life benefits as compared
to premium were lower than 1998 due to more favorable
mortality experience and higher life premium volumes. The
decrease in accident and health benefits in the first six
months of 1999 as compared to the same period in 1998 is
primarily due to improved experience in the group long term
disability claims.
Expenses
The Company continues to monitor its commission rate
structures, and, as indicated by market conditions,
periodically adjusts rates paid. Rates paid vary by product
type, group size and duration.
The Company's general and administrative expenses as a
percent of premium have increased to 25.1% in 1999 from
22.7% in 1998 due to an increase in the effective state
premium tax rates.
Market Risk and Risk Management
Interest rate risk is the Company's primary market risk
exposure. Substantial and sustained increases and decreases
in market interest rates can affect the profitability of
insurance products and market value of investments. The
yield realized on new investments generally increases or
decreases in direct relationship with interest rate changes.
The market value of the Company's fixed maturity and
mortgage loan portfolios generally increases when interest
rates decrease, and decreases when interest rates increase.
Interest rate risk is monitored and controlled through
asset/liability management. As part of the risk management
process, different economic scenarios are modeled, including
cash flow testing required for insurance regulatory
purposes, to determine that existing assets are adequate to
meet projected liability cash flows. A major component of
the Company's asset/liability management program is
structuring the investment portfolio with cash flow
characteristics consistent with the cash flow
characteristics of the Company's insurance liabilities.
The Company uses computer models to perform simulations of
the cash flow generated from existing insurance policies
under various interest rate scenarios. Information from
these models is used in the determination of interest
crediting strategies and investment strategies. The
asset/liability management discipline includes strategies to
minimize exposure to loss as market interest rates change.
On the basis of these analyses, management believes there is
no material solvency risk to the Company with respect to
interest rate movements up or down of 100 basis points from
year end levels.
Equity market risk exposure is not significant. Equity
investments in the general account are not material enough
to threaten solvency and contractowners bear the investment
risk related to the variable products. Therefore, the risks
associated with the investments supporting the variable
separate accounts are assumed by contractowners, not by the
Company. The Company provides certain minimum death
benefits that depend on the performance of the variable
separate accounts. Currently the majority of these death
benefit risks are reinsured which then protects the Company
from adverse mortality experience and prolonged capital
market decline.
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 a 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.
The Company has no long or short term debt. As of June 30,
1999, 99% 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.
Year 2000
Introduction. The information provided in this section and
in other communications is to keep the reader informed about
Fortis, Inc. and its subsidiaries ("Fortis") Year 2000
effort. A list of the Fortis, Inc. subsidiaries is attached
hereto as Exhibit A. This information reflects Fortis'
understanding and expectations as of the date we provide it,
but the situation could change over time. This document is
designated as a Year 2000 Readiness Disclosure and the
information contained herein is provided in accordance with
the Year 2000 Information and Readiness Disclosure Act (112
Stat. 2386).
Fortis relies heavily on information technology ("IT")
systems to conduct its business. These Fortis IT systems
include both internally developed and vendor-supplied
systems. Fortis also relies on the non-IT systems including
the embedded technology and facility related systems. In
addition, Fortis has business relationships with numerous
entities including but not limited to financial
institutions, financial intermediaries, third party
administrators and other critical vendors as well as
regulators and customers. These entities are themselves
reliant on their IT systems to conduct their businesses.
Therefore, there is a supply chain of dependency among and
between all involved entities.
State of Readiness. In 1997, the Fortis parent company
organized a multi-disciplinary Year 2000 Project Team
("Team"). The Team consists of employees at each subsidiary,
audit, legal and outside consultants. The Team and Fortis
have developed and are currently executing a comprehensive
plan ("Plan") designed to make Fortis' IT systems Year 2000
ready. The Plan covers four stages including (i) inventory,
(ii) assessment, (iii) programming, and (iv) testing and
certification. Fortis has completed the inventory stage for
its internal hardware, software and telecommunications
systems (mainframe and client/server applications). The
assessment process is also complete and Fortis is utilizing
both internal and external resources to reprogram or replace
the systems where necessary, and testing the applications
for Year 2000 readiness. Fortis has also inventoried its
various facility locations and the systems that relate
thereto including embedded technologies. Fortis is
proceeding with actions to ensure Year 2000 readiness of
those systems. Programming, testing and certification of all
systems and applications are targeted for completion by the
end of 1999.
Fortis is also in the process of identifying third parties
with which they have a material relationship in both sending
and receiving information from those entities with respect
to current Year 2000 readiness, additional actions which
need to be taken and potential opportunities to share
specific, detailed information and possible test results.
Costs. The cost of the Fortis Year 2000 project is
estimated at $84.8 million (pre-tax) and is being funded
through operating cash flows. Total Year 2000 project costs
are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party
modification plans and other factors. Costs to upgrade and
replace systems in the normal course of business are not
included in this estimate. As of June 30, 1999,
approximately $64.3 million (pre-tax) had already been
expensed to Fortis. Fortis believes that its Year 2000
project generally is on schedule.
Risks. Fortis is attempting to limit the potential impact
of the Year 2000 by monitoring the progress of its own Year
2000 project and those of its critical external
relationships (both I/T and non-I/T) and by developing
contingency/recovery plans. Those contingency plans have
identified the mission critical systems and relationships
and have put action plans in place to address a Year 2000
issue. Fortis cannot guarantee that it will be able to
identify and/or resolve all of its Year 2000 issues. Any
critical unresolved Year 2000 issues at Fortis or its
external relationships, however, could have a material
adverse effect on the Fortis' results of operations,
liquidity or financial condition. If Fortis' Year 2000
issues were unresolved, potential consequences would
include, among other possibilities, the inability to
accurately and timely process benefit claims; update
customer's accounts; process financial transactions; bill
customers; assess exposure to risks; determine liquidity
requirements or report accurate data to management,
shareholders, customers, regulators and others; as well as
business interruptions or shutdowns; financial losses; harm
to its reputation; increased scrutiny by regulators; and
litigation related to Year 2000 issues. However, Fortis is
using methods recognized and adopted in the general business
community to ensure that any Year 2000 issue will be
addressed promptly and any damages will be mitigated.
Contingency Plans. Consistent with prudent due diligence
efforts, Fortis has defined contingency plans aimed at
ensuring the continuity of critical business functions
before and after December 31, 1999, should there be an
unexpected system failure. Fortis has developed plans that
are designed to reduce the negative impact on Fortis, and
provide methods of returning to normal operations, if
failure occurs.
<PAGE>
EXHIBIT A
FORTIS, INC. SUBSIDIARIES
First Fortis Life Insurance Company
Fortis Insurance Company
Fortis Benefits Insurance Company
American Security Insurance Company
Union Security Life Insurance Company
Standard Guaranty Insurance Company
Insureco, Inc.
Fortis Advisers Inc.
Fortis Investors, Inc.
United Family Life Insurance Company
Adultcare, Inc.
Dental Health Alliance, L.L.C.
Remembrance Institute, Inc.
Associated California State Insurance Agencies/Ardiel
Insurance Services, Inc.
John Alden Financial Corporation
John Alden Life Insurance Company
Houston National Life Insurance Company
Pierce National Life Insurance Company
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
a. On April 23, 1999, the Annual First Fortis Life
Insurance Company Shareholder Meeting was held.
b. All 100,000 outstanding shares of the Company's common
stock were cast for the election of each director
(Larry M. Cains, Allen R. Freedman, Barbara R. Hege,
Terry J. Kryshak, Susie Gharib, Dale E. Gardner, Esthere
Nelson, Kenneth W. Nelson, Clarence E. Galston, and Robert
B. Pollock).
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. None
b. No Forms 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
First Fortis Life Insurance Company
(Registrant)
Date: August 13, 1999
/s/ Larry M. Cains
Treasurer
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000914804
<NAME> FIRST FORTIS LIFE INSURANCE COMPANY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 124,613
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 124,613
<CASH> 565
<RECOVER-REINSURE> 29,292
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 226,724
<POLICY-LOSSES> 104,615
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 9,229
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 2,000
0
0
<OTHER-SE> 35,026
<TOTAL-LIABILITY-AND-EQUITY> 226,724
28,880
<INVESTMENT-INCOME> 4,217
<INVESTMENT-GAINS> 264
<OTHER-INCOME> 638
<BENEFITS> 22,627
<UNDERWRITING-AMORTIZATION> 38
<UNDERWRITING-OTHER> 9,483
<INCOME-PRETAX> 1,851
<INCOME-TAX> 648
<INCOME-CONTINUING> 1,203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,203
<EPS-BASIC> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 62,540
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
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</TABLE>
