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 September 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.)
308 MALTBIE STREET, SUITE 200, SYRACUSE, NY 13204
(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 share data)
September 30,
December 31,
1999 1998
(Unaudited
)
Assets
Investments:
Fixed maturities, at fair value (amortized
cost 1999--$126,665; 1998--$125,787) $122,958
$130,038
Policy Loans 1
-
Short-term investments 4,770
830
127,729
130,868
Cash and cash equivalents (876)
1,160
Receivables:
Uncollected premiums, less allowance (1999 2,936
and 1998 $100) 3,538
Reinsurance recoverable on unpaid and paid 30,986
losses 28,458
Other 490
417
34,412
32,413
Accrued investment income 2,110
1,895
Deferred policy acquisition costs 3,853
3,148
Property and equipment at cost, less
accumulated 174
depreciation (1999--$2,237; 1998--$2,086) 324
Deferred federal income taxes 2,391
1,150
Goodwill, less accumulated amortization 427
(1999--$403; 1998--$368) 462
Assets held in separate accounts 59,420
46,082
Total assets $229,640
$217,502
FIRST FORTIS LIFE INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands, except per share data)
September 30,
December 31,
1999 1998
(Unaudited
)
Policy reserves, liabilities and
shareholder's equity
Policy reserves and liabilities:
Future policy benefit reserves:
Life insurance $ 33,467 $ 30,388
Interest sensitive and investment products 3,263 6,267
Accident and health 68,847 68,206
105,577 104,861
Unearned revenues 9,657 8,535
Other policy claims and benefits payable 11,447 11,084
Income taxes payable 685 2,017
Other liabilities 5,926 4,897
Liabilities related to separate accounts 59,419 46,082
Total policy reserves and liabilities 192,711 177,476
Shareholder's equity:
Common stock, $20 par value:
Authorized, issued and outstanding shares 2,000 2,000
- - 100,000
Additional paid-in capital 37,440 37,440
Retained deficit (115) (2,190)
Accumulated other comprehensive income (2,396) 2,776
Total shareholder's equity 36,929 40,026
Total policy reserves, liabilities and $229,640 $217,502
shareholder's equity
See accompanying notes.
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Nine
months ended
September 30,
1999 1998
Revenues
Insurance operations:
Life insurance premiums $18,015 $17,243
Interest sensitive and investment product 144 66
policy charges
Accident and health insurance premiums 25,557 23,445
Net investment income 6,370 6,093
Net realized gains on investments 141 1,022
Other income 978 873
Total Revenues 51,205 48,742
Benefits and Expenses
Benefits to policyholders:
Life insurance 13,677 12,345
Interest sensitive and investment products 257 578
Accident and health 19,831 20,833
Amortization of deferred policy acquisition103 55
costs
Insurance commissions 3,645 3,730
General and administrative expenses 10,500 9,535
Total Benefits and Expenses 48,013 47,076
Income (Loss) Before Federal Income Taxes 3,192 1,666
Income Tax Expense (Benefits)
Current (427) -
Deferred 1,544 583
1,117 583
Net Income (Loss) 2,075 1,083
Other Comprehensive (Loss) Income
Unrealized (loss) gain on investments (5,172) 1,328
Comprehensive Loss $ (3,097) $ 2,411
See accompanying notes
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three
months ended
September 30,
1999 1998
Revenues
Insurance operations:
Life insurance premiums $6,178 $5,818
Interest sensitive and investment product
policy charges 14 13
Accident and health insurance premiums 8,644 8,071
Net investment income 2,153 2,039
Realized (losses) gains on investments (123) 172
Other income 340 386
Total Revenues 17,206 16,499
Benefits and Expenses
Benefits to policyholders:
Life insurance 4,428 2,632
Interest sensitive and investment products 55 244
Accident and health 6,655 4,100
Amortization of deferred policy acquisition65 153
costs
Insurance commissions 1,399 1,567
General and administrative expenses 3,263 3,431
Total Benefits and Expenses 15,865 12,127
Income Before Federal Income Taxes 1,341 4,372
Income Taxes (Benefits)
Current (1,236) 1,173
Deferred 1,705 357
469 1,530
Net Income (Loss) 872 2,842
Other Comprehensive (Loss) Income:
Unrealized (loss) gain on investments (969) 1,250
Comprehensive Income (Loss) $ ( 97) $4,092
See accompanying notes.
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
September 30,
1998
1999
Operating Activities
Net income $ $
2,075 1,083
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Loss on disposal of property and equipment
- 12
Increase in future policy benefit reserves and
other policy claims and benefits
5,082 11,904
Provision for deferred federal income taxes
1,544 583
Decrease in federal income taxes
(1,332) 424
Decrease in other liabilities
1,029 (107)
Depreciation, amortization and accretion
(521) (852)
Amortization of investment premiums, net
66 (47)
(Increase) decrease in uncollected premiums,
accrued investment income and other
314 (1,362)
Increase in reinsurance recoverable
(2,528) (7,881)
Net realized gains on investments
(141) (1,022)
Cash Provided (Used) By Operating Activities
5,588 2,735
Investing Activities
Purchases of fixed maturity investments
(65,833) (88,964)
Sales or maturities of fixed maturity
investments 65,030 68,492
Decrease (increase) in equity securities and
short-term investments
(3,940) 10,797
Net Cash Provided (Used) By Investing
Activities (4,743) (9,675)
Financing Activities
Activities related to investment products:
Considerations received
2,290 12,265
Surrenders and death benefits
(5,437) (10,388)
Interest credited to policyholders
266 520
Net Cash Provided (Used) By Financing
Activities (2,881) 2,397
Increase (Decrease) In Cash
(2,036) (4,543)
Cash and cash equivalents at beginning of
period 1,160 7,453
Cash and cash equivalents at end of period $ $
(876) 2,910
See accompanying notes
FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
September 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 September 30, 1999 and the
related statement of income for the nine and three months ended
September 30, 1999 and 1998, and cash flows for the nine months
ended September 30, 1999 and 1998.
Income tax payments for the nine months ended September 30, 1999
and September 30, 1998 were $906,000 and $424,000, respectively.
The classification of fixed maturity investments is to be made at
the time of purchase and, prospectively, that classification is
expected to be reevaluated as of each balance sheet date. At
September 30, 1999, all fixed maturity and equity securities are
classified as available-for-sale and carried at fair value.
The amortized cost and fair values of investments available-for
sale were as follows at September 30, 1999 (in thousands):
Gross Gross
Amortized UnrealizedUnrealized Fair
Cost Gain Loss Value
Fixed Income
Securities:
Governments $ 14,524 $ 69 $ 191 $ 14,402
Public utilities 16,769 35 816 15,988
Industrial and 95,372 338 3,142 92,568
miscellaneous
Total $126,665 $442 $4,149 $122,958
.
FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(unaudited)
The amortized cost and fair value of available-for-sale investments
in fixed maturities at September 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.
Amortized Fair
Cost Value
Due in one year or less $ $ 3,747
3,728
Due after one year through five years 31,307 31,129
Due after five years through ten years 44,500 43,012
Due after ten years 47,130 45,070
Total $ 126,665 $ 122,958
Proceeds from sales and maturities of investments in fixed
maturities in the nine-month period ended September 30, 1999 were
$65,030,000 and $0 respectively. Gross gains of $692,000 and
$1,273,000 and gross losses of $552,000 and $251,000 were realized
on sales during the nine-month period ended September 30, 1999 and
1998, respectively.
Net Investment Income and Realized Gains (Losses) on Investments:
Major categories of net investment income and realized gains and
losses on investments for the first nine months of each year were
as follows (in thousands):
Realized
Investment Income
Gain (Loss)
1999 1998 1999 1998
Fixed maturities $6,260 $5,985 $141 $1,022
Short-term investments 213 215 - -
6,473 6,200 $141 $1,022
Expenses (103) (107)
Net investment income $6,370 $6,093
First Fortis Life Insurance Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September Year-to-Date 1999 Compared to September Year-to-
Date 1998
Revenues
First Fortis (the Company) life insurance premiums increased
during the first three quarters of 1999 as compared to the
first three quarters of 1998 due to strong group life sales.
Group disability and dental sales account for the increase in
accident and health premiums. 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 $896,000 in premium inforce at September 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.
Third quarter dental, disability income, and medical premium
represented 47%, 46%, and 7%, respectively, of total group
accident and health premium in 1999 compared to 44%, 40%, and
16%, 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
Third 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 nine 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 24.0% in 1999 from
23.4% in 1998. The Company continues to strive for
improvements in the expense to gross revenue ratio
while maintaining quality and timely services to the
policyholders.
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 contract owners bear
the investment risk related to the variable products.
Therefore, the risks associated with the investments
supporting the variable separate accounts are assumed
by contract owners, 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 September
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 $88.2 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 August 31, 1999, approximately $69.8
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.
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
Note: Fortis, Inc. has recently acquired the American
Bankers Insurance Group (ABIG) and it's subsidiaries.
To review ABIG's Year 2000 Readiness Disclosure, please
go to www.us.fortis.com. Click on "Organization", then
on "American Bankers Insurance Group (ABIG) Year 2000
Readiness Disclosure".
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.None
b.None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a.None
b.No Forms 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this repot to be
signed on its behalf by the undersigned thereunto duly
authorized.
First Fortis Life Insurance Company
(Registrant)
Date: November 12, 1999
/s/ Larry M. Cains
Treasurer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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