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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 March 31, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
FIRST FORTIS LIFE INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except share data)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MARCH 31, DECEMBER 31,
2003 2002
----------- --------------
(UNAUDITED)
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost 2003 - $163,048; $ 173,947 $ 175,616
2002 - $166,221)
Preferred stock (cost 2003- $6,022, 2002- $3,054) 6,074 3,100
Policy loans 26 24
Short-term investments 2,726 3,394
Real estate and other investment 348 348
---------- --------------
183,121 182,482
Cash and cash equivalents 4,108 2,041
Receivables:
Uncollected premiums, less allowance (2002 and 2001 - $100) 2,239 1,627
Reinsurance recoverable on unpaid and paid losses 108,767 109,942
Other 2,112 1,457
---------- --------------
113,118 113,026
Accrued investment income 2,407 2,333
Deferred policy acquisition costs 1,454 1,570
Property and equipment at cost, less accumulated depreciation
(2003 and 2002 - $1,752) 1 4
Due from affiliates -- 1,511
Deferred federal income taxes 3,555 4,170
Goodwill 1,949 1,971
Assets held in separate accounts 39,444 43,430
---------- --------------
Total assets $ 349,157 $ 352,538
========== ==============
The accompanying notes are an integral part of the financial statements.
2
FIRST FORTIS LIFE INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except share data)
MARCH 31, DECEMBER 31,
2003 2002
---------- --------------
(UNAUDITED)
POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
Policy reserves and liabilities:
Future policy benefit reserves:
Life insurance $ 52,312 $ 55,084
Interest sensitive and investment products 6,576 6,699
Accident and health 92,198 92,598
---------- --------------
151,086 154,381
Unearned revenues 25,012 24,906
Other policy claims and benefits payable 30,497 31,424
Income taxes payable 1,981 2,478
Due to affiliates 798 --
Other liabilities 25,659 24,846
Liabilities related to separate accounts 39,444 43,430
---------- --------------
Total policy reserves and liabilities 274,477 281,465
---------- --------------
Shareholder's equity:
Common stock, $20 par value: authorized, issued 2,000 2,000
and outstanding shares --100,000
Additional paid-in capital 43,006 43,006
Retained earnings 22,764 20,139
Accumulated other comprehensive income 6,910 5,928
---------- --------------
Total shareholder's equity 74,680 71,073
---------- --------------
Total policy reserves, liabilities and shareholder's equity $ 349,157 $ 352,538
========== ==============
The accompanying notes are an integral part of the financial statements.
3
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, unaudited)
THREE MONTH ENDED
MARCH 31,
2003 2002
---------- --------------
Revenues:
Insurance operations:
Life insurance premiums $ 5,469 $ 6,965
Accident and health insurance premiums 11,962 12,255
---------- --------------
17,431 19,220
Net investment income 2,580 2,776
Net realized (losses) gains on investments (55) 54
Other income 569 639
---------- --------------
Total revenues 20,525 22,689
BENEFITS AND EXPENSES:
Benefits to policyholders:
Life insurance 4,077 4,668
Accident and health claims 6,048 8,511
---------- --------------
10,125 13,179
Amortization of deferred policy acquisition costs 196 1,165
Insurance commissions 3,082 2,914
General and administrative expenses 3,083 2,984
---------- --------------
Total benefits and expenses 16,486 20,242
Income before federal income taxes 4,039 2,447
Income taxes expense
Current 1,328 810
Deferred 86 42
---------- --------------
1,414 852
Net income 2,625 1,595
Other comprehensive income (loss):
Unrealized gain (loss) on investments 982 (2,323)
---------- --------------
Comprehensive income (loss) $ 3,607 $ (728)
========== ==============
The accompanying notes are an integral part of the financial statements.
4
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
THREE MONTHS ENDED
MARCH 31,
2003 2002
---------- --------------
Operating Activities
Net income $ 2,625 $ 1,595
Adjustments to reconcile net income to net cash used in
operating activities:
(Decrease) increase in future policy benefit reserves and
other policy claims and benefits (4,117) 1,364
Provision for deferred federal income taxes 86 42
Decrease in federal income taxes (497) (4,974)
Increase in other liabilities 2,092 1,027
Depreciation, amortization and accretion 141 1,080
Amortization of investment premiums, net (6) (65)
Amortization of gain on reinsurance transaction (480) (568)
Decrease in uncollected premiums, accrued investment
income and other 170 1,251
Decrease (increase) in reinsurance recoverable 1,175 (3,676)
Net realized loss (gain) on investments 55 (54)
---------- --------------
Cash Provided By (Used in) Operating Activities 1,244 (2,978)
INVESTING ACTIVITIES
Purchases of fixed maturity investments (13,466) (37,219)
Sales of fixed maturity investments 13,623 35,784
Purchases of other investments (22,976) (37,650)
Sales of other investments 23,641 41,383
---------- --------------
Net Cash Provided By Investing Activities 822 2,298
Increase (decrease) in cash 2,066 (680)
Cash and cash equivalents at beginning of period 2,042 5,598
---------- --------------
Cash and cash equivalents at end of period $ 4,108 $ 4,918
========== ==============
The accompanying notes are an integral part of the financial statements.
5
FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
1. GENERAL
The accompanying unaudited financial statements of First Fortis Life Insurance
Company contain all adjustments necessary to present fairly the balance sheet as
of March 31, 2003 and the related statement of income for the three months ended
March 31, 2003 and 2002, and cash flow for the three months ended March 31, 2003
and 2002.
Income tax payments for the three months ended March 31, 2003 and March 31, 2002
were $1,825 and $5,784 respectively.
2. INVESTMENTS
The classification of fixed maturity investments is to be made at the time of
purchase and, prospectively, that classification is expected to be reevaluated
as of each balance sheet date. At March 31, 2003 all fixed maturity and equity
securities are classified as available-for-sale and carried at fair value.
The amortized cost and fair values of investments available-for-sale were as
follows at March 31, 2003 (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
---------- ---------- ---------- ----------
Fixed Income Securities:
Governments $ 12,461 $ 772 $ -- $ 13,233
Public utilities 12,337 1,114 -- 13,451
Industrial and miscellaneous 138,250 9,335 322 147,263
---------- ---------- ---------- ----------
Total 163,048 11,221 322 173,947
Equity Securities 6,022 85 33 6,074
---------- ---------- ---------- ----------
Total $ 169,070 $ 11,306 $ 355 $ 180,021
========== ========== ========== ==========
6
FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
The amortized cost and fair value of available-for-sale investments in fixed
maturities at March 31, 2003 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 $ 4,503 $ 4,616
Due after one year through five years 30,257 32,255
Due after five years through ten years 56,127 59,539
Due after ten years 72,161 77,537
---------- ----------
Total $ 163,048 $ 173,947
========== ==========
Proceeds from sales and maturities of investments in fixed maturities in the
three-month period ended March 31, 2003 and 2002 were $ 13,623 and $35,783,
respectively. Gross gains of $119 and $677 and gross losses of $174 and $623
were realized on sales during the three-month period ended March 31, 2003 and
2002, respectively.
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 three months of each year were as follows:
Investment Income Realized (Loss) Gain
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Fixed maturities $ 2,519 $ 2,821 $ (55) $ 54
Short-term investments 87 33 -- --
---------- ---------- ---------- ----------
2,606 2,854 $ (55) $ 54
========== ==========
Expenses (26) (78)
---------- ----------
Net investment income $ 2,580 $ 2,776
========== ==========
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FIRST FORTIS LIFE INSURANCE COMPANY
March 31, 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
MARCH 31, 2003 COMPARED TO MARCH 31, 2002
REVENUES
First Fortis (the Company) life insurance premium are principally composed of
group life and credit life coverages. Group life and credit life business
represented 76% and 24%, respectively of premium for the three months ended
March 31, 2003; and 60% and 40%, respectively of premium for the three months
ended March 31, 2002. This shift in premium from 2003 to 2002 is due to the
credit life line's non renewal of business. Premium decreases associated with
the credit accident and health line also decreased as a result of business non
renewals. Slightly offsetting this accidental and health credit premium decrease
is an increase in dental premium from the three months ended March 31, 2002 to
the three months ended March 31, 2003.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Investment income decreased from $2.8 million
during the three months ended March 31, 2002 to $2.6 million during the three
months ended March 31, 2003 due to lower yielding investment markets. Changes in
interest rates during the first quarter of 2002 and 2003 resulted in recognition
of realized gains and losses upon sales of securities.
BENEFITS
The total Company ratio of benefits to premium decreased to 58% for the three
months ended March 31, 2003 from 68% for the three months ended March 31, 2002.
Relatively larger case terminations on the accident and health disability line
during the first quarter of 2003 compared to the first quarter of 2002 and the
Company's continued review of credit life reserve estimates are the primary
reasons for the benefit to premium ratio shifts.
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
increased to 18% at three months ended March 31, 2003 from 16% at three months
ended March 31, 2002. Shifts in the mix of business are the primary reason for
this increase as different products require varying levels of administrative
costs. The Company continues to strive for improvements in the expense to gross
revenue ratio while maintaining quality and timely services to the
policyholders.
8
FIRST FORTIS LIFE INSURANCE COMPANY
March 31, 2003
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
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 investments 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
9
FIRST FORTIS LIFE INSURANCE COMPANY
March 31, 2003
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 March 31, 2003, 93.5% 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.
ITEM 4. CONTROLS AND PROCEDURES.
The Company, under the direction of the Chief Executive Officer and the Chief
Financial Officer, has established disclosure controls and procedures that are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms. The
disclosure controls and procedures are also intended to ensure that such
information is accumulated and communicated to the Company's management,
including the Chief Executive Officer and the Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosures.
Within 45 days of the filing of this report, the Chief Executive Officer and the
Chief Financial Officer have reviewed and evaluated the Company's disclosure
controls and procedures, Based on, and as of the date of, that review and
evaluation, the Chief Executive Officer and the Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effectively
serving the stated purposes.
In addition, there have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their most recent evaluation. No significant
deficiencies or material weaknesses in the internal controls were identified
during the evaluation and, as a consequence, no corrective action is required to
be taken.
10
FIRST FORTIS LIFE INSURANCE COMPANY
March 31, 2003
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Written Statement of Chief Executive Officer (Exhibit 99.1)
Written Statement of Chief Financial Officer (Exhibit 99.2)
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: May 13, 2003
11
FIRST FORTIS LIFE INSURANCE COMPANY
March 31, 2003
CERTIFICATION OF PERIODIC REPORT
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, the undersigned Chief Executive Officer of First Fortis Life
Insurance Company (the "Company"), do hereby certify, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1. I have reviewed the Quarterly Report on Form 10-Q of the Company for
the period ended March 31, 2003 (this "Report");
2. Based on my knowledge, this Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the periods covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this Report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a) Designated such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this Report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Report (the "Evaluation Date"); and
c) Presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of Company's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
Report whether there were significant changes in internal controls or in the
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ ROBERT B. POLLOCK
--------------------------
Robert B. Pollock
Chief Executive Officer
12
FIRST FORTIS LIFE INSURANCE COMPANY
March 31, 2003
CERTIFICATION OF PERIODIC REPORT
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, the undersigned Chief Financial Officer of First Fortis Life
Insurance Company (the "Company"), do hereby certify, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1. I have reviewed the Quarterly Report on Form 10-Q of the Company for
the period ended March 31, 2003 (this "Report");
2. Based on my knowledge, this Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the periods covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this Report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a) Designated such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this Report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Report (the "Evaluation Date"); and
c) Presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of Company's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
Report whether there were significant changes in internal controls or in the
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ LARRY M. CAINS
--------------------------
Larry M. Cains
Chief Financial Officer
13