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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, 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
1
FIRST FORTIS LIFE INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except share data)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
JUNE 30, DECEMBER 31,
2003 2002
------------------------
ASSETS (UNAUDITED)
Investments:
Fixed maturities, at fair value (amortized cost 2003 - $155,036; $169,988 $175,616
2002 - $166,221)
Preferred stock (cost 2003- $9,192, 2002- $3,054) 9,509 3,100
Policy loans 30 24
Short-term investments 5,989 3,394
Real estate and other investment 348 348
------------------------
185,864 182,482
Cash and cash equivalents 7,428 2,041
Receivables:
Uncollected premiums, less allowance (2003 and 2002 - $100) 1,815 1,627
Reinsurance recoverable on unpaid and paid losses 104,646 109,942
Other 3,413 1,457
------------------------
109,874 113,026
Accrued investment income 2,170 2,333
Deferred policy acquisition costs 1,265 1,570
Property and equipment at cost, less accumulated depreciation
(2003 and 2002 - $1,756) - 4
Due from affiliates - 1,511
Deferred federal income taxes 1,521 4,170
Goodwill 2,086 1,971
Assets held in separate accounts 40,782 43,430
------------------------
Total assets $350,990 $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)
JUNE 30, DECEMBER 31,
2003 2002
--------------------------
POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY (UNAUDITED)
Policy reserves and liabilities:
Future policy benefit reserves:
Life insurance $ 48,347 $ 55,084
Interest sensitive and investment products 7,183 6,699
Accident and health 93,198 92,598
--------------------------
148,728 154,381
Unearned revenues 21,729 24,906
Other policy claims and benefits payable 30,100 31,424
Income taxes payable 260 2,478
Other liabilities 29,199 24,846
Liabilities related to separate accounts 40,782 43,430
--------------------------
Total policy reserves and liabilities 270,798 281,465
--------------------------
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 25,470 20,139
Accumulated other comprehensive income 9,716 5,928
--------------------------
Total shareholder's equity 80,192 71,073
--------------------------
Total policy reserves, liabilities and shareholder's equity $350,990 $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)
SIX MONTHS ENDED
JUNE 30,
2003 2002
------------------------
REVENUES:
Insurance operations:
Life insurance premiums $ 11,939 $ 12,825
Accident and health insurance premiums 22,916 24,344
------------------------
34,855 37,169
Net investment income 5,179 5,515
Net realized gains (losses) on investments 741 (1,083)
Other income 1,129 1,319
------------------------
Total revenues 41,904 42,920
BENEFITS AND EXPENSES:
Benefits to policyholders:
Life insurance 7,921 10,095
Accident and health claims 13,543 15,768
------------------------
21,464 25,863
Amortization of deferred policy acquisition costs 481 2,072
Insurance commissions 4,934 5,910
General and administrative expenses 6,823 7,178
------------------------
Total benefits and expenses 33,702 41,023
------------------------
Income before federal income taxes 8,202 1,897
Income taxes expense (benefit)
Current 2,262 860
Deferred 609 (196)
------------------------
2,871 664
Net income 5,331 1,233
Other comprehensive income (loss):
Unrealized gain (loss) on investments 3,788 (1,387)
------------------------
Comprehensive income (loss) $ 9,119 $ (154)
========================
The accompanying notes are an integral part of the financial statements.
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FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, unaudited)
THREE MONTHS ENDED
JUNE 30,
2003 2002
-------------------------
REVENUES:
Insurance operations:
Life insurance premiums $ 6,470 $ 5,860
Accident and health insurance premiums 10,954 12,089
-------------------------
17,424 17,949
Net investment income 2,599 2,739
Net realized gains (losses) on investments 796 (1,137)
Other income 560 680
-------------------------
Total revenues 21,379 20,231
BENEFITS AND EXPENSES:
Benefits to policyholders:
Life insurance 3,844 5,427
Accident and health claims 7,495 7,257
-------------------------
11,339 12,684
Amortization of deferred policy acquisition costs 285 907
Insurance commissions 1,852 2,996
General and administrative expenses 3,740 4,194
-------------------------
Total benefits and expenses 17,216 20,781
-------------------------
Income before federal income taxes 4,163 (550)
Income taxes expense (benefit)
Current 934 50
Deferred 523 (238)
-------------------------
1,457 (188)
Net income 2,706 (362)
Other comprehensive income (loss):
Unrealized gain on investments 2,806 936
-------------------------
Comprehensive income $ 5,512 $ 574
=========================
The accompanying notes are an integral part of the financial statements.
5
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
JUNE 30,
2003 2002
-------------------------
OPERATING ACTIVITIES
Net income $ 5,331 $ 1,233
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 (10,154) 6,854
Provision for deferred federal income taxes 609 (196)
Decrease in federal income taxes (2,218) (8,551)
Increase in other liabilities 5,305 4,717
Depreciation, amortization and accretion 195 1,935
Amortization of investment premiums, net (13) (172)
Amortization of gain on reinsurance transaction (952) (1,127)
Increase in uncollected premiums, accrued investment
income and other (468) (1,497)
Decrease (increase) in reinsurance recoverable 5,296 (10,089)
Net realized (gain) loss on investments (741) 1,083
-------------------------
Cash Provided By (Used in) Operating Activities 2,190 (5,810)
INVESTING ACTIVITIES
Purchases of fixed maturity investments (28,217) (63,707)
Sales of fixed maturity investments 34,016 63,008
Purchases of other investments (48,974) (61,165)
Sales of other investments 46,372 65,611
-------------------------
Net Cash Provided By Investing Activities 3,197 3,747
-------------------------
Increase (decrease) in cash 5,387 (2,063)
Cash and cash equivalents at beginning of period 2,041 5,598
-------------------------
Cash and cash equivalents at end of period $ 7,428 $ 3,535
=========================
The accompanying notes are an integral part of the financial statements.
6
FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 2003 (In thousands)
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 June 30, 2003 and the related statement of income for the six and three
months ended June 30, 2003 and 2002, and cash flow for the six months ended June
30, 2003 and 2002.
Income tax payments for the six months ended June 30, 2003 and June 30, 2002
were $4,479 and $9,412 respectively.
2. INVESTMENTS
The classification of fixed maturity investments is made at the time of
purchase and, prospectively, that classification is reevaluated as of each
balance sheet date. At June 30, 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 June 30, 2003:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
--------------------------------------------------------
Fixed Income Securities:
Governments $ 9,670 $ 897 $ 13 $ 10,554
Public utilities 12,900 1,616 10 14,506
Industrial and miscellaneous 132,466 12,550 88 144,928
-------- -------- -------- --------
Total 155,036 15,063 111 169,988
Preferred Stock 9,192 330 13 9,509
-------- -------- -------- --------
Total $164,228 $ 15,393 $ 124 $179,497
======== ======== ======== ========
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FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 2003 (In thousands)
The amortized cost and fair value of available-for-sale investments in fixed
maturities at June 30, 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 $ 3,198 $ 3,296
Due after one year through five years 27,723 30,321
Due after five years through ten years 55,905 60,903
Due after ten years 68,210 75,468
-------- --------
Total $155,036 $169,988
======== ========
Proceeds from sales of investments in fixed maturities in the six-month period
ended June 30, 2003 and 2002 were $ 34,017 and $63,027, respectively. Gross
gains of $956 and $1,094 and gross losses of $215 and $2,177 were realized on
sales during the six-month period ended June 30, 2003 and 2002, respectively.
3. 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)
------------------------ ------------------------
2003 2002 2003 2002
------------------------ ------------------------
Fixed maturities $ 5,240 $ 5,650 $ 741 $(1,083)
Short-term investments 26 22 - -
------------------------ ------------------------
5,266 5,672 $ 741 $(1,083)
========================
Expenses (87) (157)
------------------------
Net investment income $ 5,179 $ 5,515
========================
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FIRST FORTIS LIFE INSURANCE COMPANY
June 30, 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
JUNE 30, 2003 COMPARED TO JUNE 30, 2002
REVENUES
First Fortis Life Insurance Company (the Company) life insurance premiums are
principally composed of group life and credit life coverages. Group life and
credit life business represented 78% and 22%, respectively of premium for the
six months ended June 30, 2003; and 67% and 33%, respectively of premium for the
six months ended June 30, 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 accident and health credit premium
decrease is an increase in dental premium from the six months ended June 30,
2002 to the six months ended June 30, 2003.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Net investment income decreased from $5.5
million during the six months ended June 30, 2002 to $5.2 million during the six
months ended June 30, 2003 due to lower yielding investment markets. Changes in
interest rates during the first half 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 62% for the six
months ended June 30, 2003 from 70% for the six months ended June 30, 2002.
Relatively larger case terminations on the accident and health disability line
during the first half of 2003 compared to the first half 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 21% at six months ended June 30, 2003 from 19% at six months ended
June 30, 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.
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FIRST FORTIS LIFE INSURANCE COMPANY
June 30, 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 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
10
FIRST FORTIS LIFE INSURANCE COMPANY
June 30, 2003
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, 2003, 93.2% 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.
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
11
FIRST FORTIS LIFE INSURANCE COMPANY
June 30, 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. 302 Certification of Chief Executive Officer (Exhibit 31.1)
302 Certification of Chief Financial Officer (Exhibit 31.2)
906 Certification of Chief Executive Officer (Exhibit 32.1)
906 Certification of Chief Financial Officer (Exhibit 32.2)
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 12, 2003
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