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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, 2002
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 333-14761
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
STATEMENTS OF INCOME
(In thousands, except share data)
JUNE 30, DECEMBER 31,
2002 2001
--------------- ---------------
ASSETS (UNAUDITED)
Investments:
Fixed maturities, at fair value (amortized cost 2002 - $161,296; $ 158,997 $ 161,583
2001 - $158,417)
Preferred stock 2,879 2,640
Policy loans 15 6
Short-term investments 2,194 6,601
Real estate and other investment 426 474
--------------- ---------------
164,511 171,304
Cash and cash equivalents 3,535 5,598
Receivables:
Uncollected premiums, less allowance (2002 and 2001 - $100) 1,355 3,830
Reinsurance recoverable on unpaid and paid losses 117,532 107,443
Other 5,125 3,274
Intercompany receivables 4,250 1,974
--------------- ---------------
128,262 116,521
Accrued investment income 2,333 2,488
Deferred policy acquisition costs 1,853 3,760
Property and equipment at cost, less accumulated depreciation ( 2002 -
$1,743; 2001 - $1,729) 32 60
Deferred federal income taxes 6,896 5,953
Goodwill, less accumulated amortization (2002 and 2001 - $506) 1,949 1,949
Assets held in separate accounts 50,723 66,341
--------------- ---------------
Total assets $ 360,094 $ 373,974
=============== ===============
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FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands, except share data)
JUNE 30, DECEMBER 31,
2002 2001
--------------- ---------------
POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY (UNAUDITED)
Policy reserves and liabilities:
Future policy benefit reserves:
Life insurance $ 66,808 $ 65,123
Interest sensitive and investment products 8,040 5,010
Accident and health 84,700 81,578
--------------- ---------------
159,548 151,711
Unearned revenues 26,512 27,048
Other policy claims and benefits payable 31,430 31,877
Income taxes payable (2,015) 6,537
Other liabilities 34,750 31,160
Liabilities related to separate accounts 50,723 66,341
--------------- ---------------
Total policy reserves and liabilities 300,948 314,674
--------------- ---------------
Shareholder's equity:
Common stock, $20 par value: authorized, issued and outstanding 2,000 2,000
shares --100,000
Additional paid-in capital 43,006 43,006
Retained earnings 13,280 12,047
Accumulated other comprehensive income (loss) 860 2,247
--------------- ---------------
Total shareholder's equity 59,146 59,300
--------------- ---------------
Total policy reserves, liabilities and shareholder's equity $ 360,094 $ 373,974
=============== ===============
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FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands, except share data)
SIX MONTHS ENDED
JUNE 30,
2002 2001
------------ ------------
REVENUES:
Insurance operations:
Life insurance premiums $ 12,825 $ 10,406
Interest sensitive and investment product policy charges -- 378
Accident and health insurance premiums 24,344 20,144
------------ ------------
37,169 30,928
Net investment income 5,515 4,822
Net realized losses on investments (1,083) (412)
Other income 1,319 1,059
------------ ------------
Total revenues 42,920 36,397
BENEFITS AND EXPENSES:
Benefits to policyholders:
Life insurance 10,091 6,773
Interest sensitive investment products 4 478
Accident and health claims 15,768 15,864
------------ ------------
25,863 23,115
Amortization of deferred policy acquisition costs 2,072 165
Insurance commissions 5,910 2,974
General and administrative expenses 7,178 6,352
------------ ------------
Total benefits and expenses 41,023 32,606
Income before federal income taxes 1,897 3,791
Income taxes expense
Current 860 5,182
Deferred (196) (3,855)
------------ ------------
664 1,327
------------ ------------
Net income 1,233 2,464
Other comprehensive income:
Unrealized (loss) gain on investments (1,387) 697
------------ ------------
Comprehensive (loss) income $ (154) $ 3,161
============ ============
See accompanying notes.
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FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands, except share data)
THREE MONTHS ENDED
JUNE 30,
2002 2001
----------- -----------
REVENUES:
Insurance operations:
Life insurance premiums $ 5,860 $ 4,910
Accident and health insurance premiums 12,089 10,246
----------- -----------
17,949 15,156
Net investment income 2,739 2,404
Net realized losses on investments (1,137) (110)
Other income 680 819
----------- -----------
Total revenues 20,231 18,269
BENEFITS AND EXPENSES:
Benefits to policyholders:
Life insurance 5,425 2,321
Interest sensitive investment products 2 --
Accident and health claims 7,257 8,603
----------- -----------
12,684 10,924
Amortization of deferred policy acquisition costs 907 6
Insurance commissions 2,996 1,657
General and administrative expenses 4,194 3,094
----------- -----------
Total benefits and expenses 20,781 15,681
Income before federal income taxes (550) 2,588
Income taxes expense
Current 50 4,871
Deferred (238) (3,965)
----------- -----------
(188) 906
Net income (362) 1,682
Other comprehensive income:
Unrealized gain (loss) on investments 936 (1,124)
----------- -----------
Comprehensive (loss) income $ 574 $ 558
=========== ===========
See accompanying notes.
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FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands, except share data)
SIX MONTHS ENDED
JUNE 30,
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income $ 1,233 $ 2,464
Adjustments to reconcile net income to net cash used in
operating activities:
Increase (decrease) in future policy benefit reserves and
other policy claims and benefits 6,854 (398)
Provision for deferred federal income taxes (196) (3,856)
(Decrease) increase in federal income taxes (8,551) 3,809
Decrease (increase) in other liabilities 4,717 1,179
Depreciation, amortization and accretion 1,935 3,991
Amortization of investment premiums, net (172) (87)
Amortization of gain on reinsurance transactions (1,127) 11,421
(Increase) decrease in uncollected premiums, accrued investment
income and other (1,497) 1,677
Increase in reinsurance recoverable (10,089) (9,626)
Net realized loss (gain) on investments 1,083 412
----------- -----------
Cash Used in Operating Activities (5,810) 10,986
INVESTING ACTIVITIES
Purchases of fixed maturity investments (64,731) (26,840)
Sales or maturities of fixed maturity investmnets 63,008 37,303
Decrease (increase) in equity securities and short-term investments 5,470 (19,894)
----------- -----------
Net Cash Provided By Investing Activities 3,747 (9,431)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received -- 1,863
Surrenders and death benefits -- (1,904)
Interest credited to policyholders -- 84
----------- -----------
Net Cash Provided By Financing Activities -- 43
Decrease in cash (2,063) 1,598
Cash and cash equivalents at beginning of period 5,598 1,659
----------- -----------
Cash and cash equivalents at end of period $ 3,535 $ 3,257
=========== ===========
See accompanying notes.
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FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands, except share data)
SIX MONTHS ENDED
JUNE 30,
2002 2001
------------ ------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Assets and liabilities trasferred in reinsurance transactions:
Non-cash Assets ceded:
Compensation for ceded liabilities $ -- $ (15,000)
Other assets -- (1,623)
Deferred acquisition costs -- (3,957)
------------ ------------
Total value of assets ceded $ -- $ (20,580)
============ ============
Non-cash liabilities ceded:
Ceding commission $ -- $ 15,000
Future policy benefit reserves -- 7,125
Other liabilities -- (182)
------------ ------------
Total liabilities ceded $ -- $ 21,943
============ ============
See accompanying notes.
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FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(In thousands, unaudited)
General: The accompanying unaudited financial statements of First Fortis
Life Insurance Company (the Company) contain all adjustments necessary to
present fairly the balance sheet as of June 30, 2002 and the related
statement of income for the six months ended June 30, 2002 and 2001, and
cash flow for the six months ended June 30, 2002 and 2001.
Income tax payments for the six months ended June 30, 2002 and June 30,
2001 were $9,412 and $1,373 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, 2002 all fixed
maturity and equity securities are classified as available-for-sale and
carried at fair value.
The amortized cost and fair values of investments available-for-sale were
as follows at June 30, 2002 (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
------------- ------------- ------------- -------------
Fixed Income Securities:
Governments $ 7,804 $ 370 $ 110 $ 8,064
Public utilities 13,181 436 377 13,240
Industrial and miscellaneous 136,704 4,374 3,385 137,693
------------- ------------- ------------- -------------
Total $ 157,689 $ 5,180 $ 3,872 $ 158,997
============= ============= ============= =============
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FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(In thousands, unaudited)
The amortized cost and fair value of available-for-sale investments in
fixed maturities at June 30, 2002 by contractual maturity are shown
below. 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 $ 6,605 $ 6,730
Due after one year through five years 28,712 29,328
Due after five years through ten years 47,516 47,902
Due after ten years 74,856 75,037
--------- ---------
Total $ 157,689 $ 158,997
========= =========
Proceeds from sales and maturities of investments in fixed maturities in
the six-month period ended June 30, 2002 and 2001 were $63,027 and
$37,303, respectively. Gross gains of $1,094 and $914 and gross losses of
$2,177 and $1,326 were realized on sales during the six-month period
ended June 30, 2002 and 2001, respectively.
Effective as of November 30, 2001, the Company completed a statutory
merger in which Bankers American Life Assurance Company, a New York
insurance company (BALAC), merged with and into the Company (the Merger).
The Merger was completed as part of an internal reorganization effected
by Fortis, Inc. with respect to certain of its life and health insurance
companies.
Disposal of Fortis Financial Group (the Division): On April 1, 2001,
Fortis, Inc. completed the sale (the Sale) of its Division to The
Hartford Life Insurance Company (Hartford). The Division includes among
other blocks of business, certain individual life insurance policies and
annuity contracts written by the Company.
To effect the Sale as it relates to the Company, Hartford reinsured the
Insurance contracts on a 100% co-insurance basis (or 100% modified
co-insurance basis for some of the blocks) and agreed to administer the
Insurance Contracts going forward. The Company received, in connection
with the Sale, aggregate cash consideration of approximately $15,000 from
the Hartford. The reinsurance transaction resulted in a gain of $9,465,
which was deferred and will be amortized into income at the rate that
earnings from the business sold would have been expected to emerge. The
amount of gain amortized during the six months ended June 30, 2002 was
$992.
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FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(In thousands, unaudited)
In the fourth quarter of 2001, the Company entered into a reinsurance
agreement with Protective Life Corporation (Protective). The agreement,
which became effective December 31, 2001, provided for the assumption of
Protective's Dental Benefits Division on a 100% co-insurance basis. The
Company paid $2,500 for the business and recorded goodwill of $1,625 in
the transactions.
Net Investment Income and Net Realized 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:
Investment Income Realized Gain (Loss)
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Fixed maturities $ 5,650 $ 4,526 $ (1,083) $ (412)
Short-term investments 22 373
--------- --------- --------- ---------
5,672 4,899 $ (1,083) $ (412)
========= =========
Expenses (157) (77)
--------- ---------
Net investment income $ 5,515 $ 4,822
========= =========
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FIRST FORTIS LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS JUNE 30, 2002 COMPARED TO JUNE 30, 2001
On November 30, 2001, First Fortis Life Insurance Company ("FFLIC") acquired
100% of the issued and outstanding common stock of Bankers American Life
Assurance Company ("BALAC") from American Bankers Insurance Group, Inc. ("ABIG")
for a total purchase price of $32 million. FFLIC paid the purchase price in cash
using internally generated working capital.
Also on November 30, 2001, and immediately following the stock purchase
described above, BALAC merged with and into FFLIC, with FFLIC as the surviving
corporation (the "Merger").
Both ABIG and FFLIC are wholly owned subsidiaries of Fortis, Inc., a Nevada
corporation that serves as a holding company for insurance and related business
in the U.S. FFLIC is, and BALAC was immediately prior to the Merger, a New York
life insurance company engaged in life and other lines of insurance business in
the State of New York. Fortis, Inc. determined that it was advisable to combine
the assets and operations of FFLIC and BALAC, so that it would have only one New
York-domiciled life insurance company. BALAC's assets, liabilities and
obligations, which have been transferred to FFLIC by operation of law as a
result of the Merger, consist primarily of outstanding insurance policies
written in the State of New York, and the related reserve assets, liabilities
and obligations.
REVENUES
The Company's life insurance premium increased from June 30, 2001 to June 30,
2002 principally due to additional premium levels associated with the merger.
Life premiums are composed of group life and credit life business representing
66% and 34%, respectively of premium for the six months ended June 30, 2002; and
91% and 9% respectively of premium for the six months ended June 30, 2001.
Accident and health premiums increased during the first half of 2002 as compared
to the same period in 2001 primarily due to the merger as well as an 8% increase
in dental premium. Offsetting this is a decrease in disability premium due to
slower sales and decreases in persistency.
On December 31, 2001, the Company purchased (the "Purchase") the Dental Benefits
Division of Protective Life Corporation ("Protective"). The Purchase includes
group dental, group life and group disability insurance products (Insurance
Products). The Company will reinsure these Insurance Products on a 100%
co-insurance basis and perform administration of such Insurance Products. The
Company paid $2.5 million for the business and recorded goodwill of $1.6 million
in the transaction.
On April 1, 2001 the Company entered into a coinsurance agreement with Hartford
Financial Services Group ("Hartford") whereby the Company ceded the Investment
Product block of
11
business to the Hartford. This business is reflected as interest sensitive and
investment product policy charges of $0 and $0.4 million at June 30, 2002 and
June 30, 2001, respectively.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Changes in interest rates during 2002 and 2001
resulted in recognition of realized gains and losses upon sales of securities.
BENEFITS
The total Company ratio of benefits to premium decreased in 2002 to 69.6% from
74.7% in 2001 primarily due to lower benefit to premium ratios on the merged
credit business. Group life benefit to premium ratios increased to 98% at June
30, 2002 from 92% at June 30, 2001 as this line of business experienced
unusually high mortality during the first six months of 2002. Higher group
disability claim incidence and lower sales, persistency and terminations during
the six months ended June 30, 2002 as compared to the same period in 2001 have
resulted in an increase in a group disability benefit to premium ratio to 90% in
2002 from 82% in 2001.
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 expense to premium first quarter ratio
decreased to 19.3% in 2002 from 20.5% in 2001. Shifts in the mix of business are
the primary reason for this decrease as the merged credit business has a
relatively low expense to premium ratio. In addition, the business reinsured and
administered by the Hartford has a relatively high expense to premium ratio. 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.
12
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 June 30, 2002, 98.9% 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.
13
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
An annual shareholder meeting was held May 3, 2002 wherein the current
members of the Board of Directors were re-elected until their
successors are duly elected.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Written Statement of Chief Executive Officer (Exhibit 99l.1)
Written Statement of Chief Financial Officer (Exhibit 99l.2)
b. None
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)
/s/ LARRY M. CAINS
- --------------------------
Larry M. Cains
Treasurer
Date: August 14, 2002
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