Back to GetFilings.com
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, 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.
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------------------------------------
ASSETS (UNAUDITED)
Investments:
Fixed maturities, at fair value (amortized cost 2003 - $152,770; $ 164,832 $ 175,616
2002 - $166,221)
Preferred stock (cost 2003- $9,162, 2002- $3,054) 9,270 3,100
Policy loans 34 24
Short-term investments 7,843 3,394
Real estate and other investment 304 348
----------------------------------------
182,283 182,482
Cash and cash equivalents -- 2,041
Receivables:
Uncollected premiums, less allowance (2003-$0 and 2002-$100) 1,684 1,627
Reinsurance recoverable on unpaid and paid losses 101,976 109,942
Other 138 1,457
----------------------------------------
103,798 113,026
Accrued investment income 2,272 2,333
Deferred policy acquisition costs 1,103 1,570
Property and equipment at cost, less accumulated depreciation
(2003-$1,753 and 2002-$1,751) -- 4
Due from affiliates -- 1,511
Federal income tax recoverable 640 --
Deferred federal income taxes 2,759 4,170
Goodwill 2,086 1,971
Assets held in separate accounts 39,500 43,430
----------------------------------------
Total assets $ 334,441 $ 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)
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------------------------------------
POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY (UNAUDITED)
Policy reserves and liabilities:
Future policy benefit reserves:
Life insurance $ 42,528 $ 55,084
Interest sensitive and investment products 6,796 6,699
Accident and health 96,125 92,598
----------------------------------------
145,449 154,381
Unearned revenues 19,873 24,906
Other policy claims and benefits payable 30,646 31,424
Income taxes payable - 2,478
Deferred gain on reinsurance ceded 8,540 9,963
Other liabilities 12,180 14,883
Liabilities related to separate accounts 39,500 43,430
----------------------------------------
Total policy reserves and liabilities 256,188 281,465
----------------------------------------
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 25,546 20,139
Accumulated other comprehensive income 7,701 5,928
----------------------------------------
Total shareholder's equity 78,253 71,073
----------------------------------------
Total policy reserves, liabilities and shareholder's equity $ 334,441 $ 352,538
========================================
The accompanying notes are an integral part of the financial statements.
3
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AN COMPREHENSIVE INCOME
(In thousands, unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
-----------------------------------------
REVENUES:
Insurance operations:
Life insurance premiums $ 16,351 $ 18,389
Accident and health insurance premiums 34,128 37,188
-----------------------------------------
50,479 55,577
Net investment income 7,742 8,363
Net realized gains (losses) on investments 652 (1,922)
Other income 1,612 1,902
-----------------------------------------
Total revenues 60,485 63,920
BENEFITS AND EXPENSES:
Benefits to policyholders:
Life insurance 9,900 14,608
Accident and health claims 22,869 24,725
-----------------------------------------
32,769 39,333
Amortization of deferred policy acquisition costs (53) 1,986
Insurance commissions 6,847 6,401
General and administrative expenses 12,604 10,130
-----------------------------------------
Total benefits and expenses 52,167 57,850
-----------------------------------------
Income before federal income taxes 8,318 6,070
Income taxes expense (benefit)
Current 2,455 2,942
Deferred 456 (400)
-----------------------------------------
2,911 2,542
Net income $ 5,407 $ 3,528
=========================================
Other comprehensive income:
Unrealized gain on investments 1,773 2,360
-----------------------------------------
Comprehensive income $ 7,180 $ 5,888
=========================================
The accompanying notes are an integral part of the financial statements.
4
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
-------------------------------------
REVENUES:
Insurance operations:
Life insurance premiums $ 4,412 $ 5,564
Accident and health insurance premiums 11,212 12,844
-------------------------------------
15,624 18,408
Net investment income 2,563 2,848
Net realized (losses) on investments (89) (839)
Other income 483 583
-------------------------------------
Total revenues 18,581 21,000
BENEFITS AND EXPENSES:
Benefits to policyholders:
Life insurance 1,979 4,513
Accident and health claims 9,326 8,957
-------------------------------------
11,305 13,470
Amortization of deferred policy acquisition costs (534) (86)
Insurance commissions 1,913 491
General and administrative expenses 5,781 2,952
-------------------------------------
Total benefits and expenses 18,465 16,827
-------------------------------------
Income before federal income taxes 116 4,173
Income taxes expense (benefit)
Current 193 2,082
Deferred (153) (204)
-------------------------------------
40 1,878
Net income $ 76 $ 2,295
=====================================
Other comprehensive (loss) income:
Unrealized (loss) gain on investments (2,015) 3,747
-------------------------------------
Comprehensive (loss) income $ (1,939) $ 6,042
=====================================
The accompanying notes are an integral part of the financial statements.
5
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
----------------------------------------
OPERATING ACTIVITIES
Net income $ 5,407 $ 3,528
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 (14,744) 2,526
Provision for deferred federal income taxes 456 (400)
Decrease in federal income taxes (3,118) (3,919)
(Decrease) increase in other liabilities (2,699) 2,954
Depreciation, amortization and accretion 356 2,090
Amortization of investment premiums, net 23 (175)
Amortization of gain on reinsurance transaction (1,423) (1,686)
Decrease (increase) in uncollected premiums, accrued investment
income and other 2,834 4,862
Decrease in reinsurance recoverable 7,966 160
Net realized (gain) loss on investments (652) 1,922
----------------------------------------
Net cash (used in) provided by operating activities (5,594) 11,862
INVESTING ACTIVITIES
Purchases of fixed maturity investments (39,472) (89,230)
Sales of fixed maturity investments 47,485 77,118
Purchases of other investments (69,365) (1,057)
Sales of other investments 64,905 -
----------------------------------------
Net cash provided by (used in) investing activities 3,553 (13,169)
----------------------------------------
Decrease in cash (2,041) (1,307)
Cash and cash equivalents at beginning of period 2,041 5,598
----------------------------------------
Cash and cash equivalents at end of period $ - $ 4,291
========================================
The accompanying notes are an integral part of the financial statements.
6
FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
September 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 September 30, 2003 and the related statement of income for the nine and three
months ended September 30, 2003 and 2002, and cash flow for the nine months
ended September 30, 2003 and 2002.
Income tax payments for the nine months ended September 30, 2003 and September
30, 2002 were $5,573 and $6,862 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 September 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 September 30, 2003:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
---------------------------------------------------------------------
Fixed Income Securities:
Governments $ 8,106 $ 621 $ 15 $ 8,712
Public utilities 12,379 1,342 28 13,693
Industrial and miscellaneous 132,285 10,268 126 142,427
-------------- ---------------- --------------- --------------
Total 152,770 12,231 169 164,832
Preferred Stock 9,162 152 44 9,270
-------------- ---------------- --------------- --------------
Total $ 161,932 $ 12,383 $ 213 $ 174,102
============== ================ =============== ==============
7
FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
September 30, 2003 (In thousands)
The amortized cost and fair value of available-for-sale investments in fixed
maturities at September 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 $ 3,439 $ 3,539
Due after one year through five years 29,571 31,935
Due after five years through ten years 58,557 62,743
Due after ten years 61,203 66,615
---------------- ----------------
Total $ 152,770 $ 164,832
================ ================
Proceeds from sales of investments in fixed maturities in the nine-month period
ended September 30, 2003 and 2002 were $ 43,916 and $74,195, respectively. Gross
gains of $1,160 and $1,226 and gross losses of $508 and $3,148 were realized on
sales during the nine-month period ended September 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 nine months of each year were as follows:
Investment Income Realized Gain (Loss)
---------------------------------------------------------------
2003 2002 2003 2002
----------------------------- -----------------------------
Fixed maturities $ 7,449 $ 8,352 $ 672 $ (1,913)
Preferred Stock 368 192 24 (9)
Short-term investments 38 50 (44) -
----------------------------- -----------------------------
7,855 8,594 $ 652 $ (1,922)
=============================
Expenses (113) (231)
-----------------------------
Net investment income $ 7,742 $ 8,363
=============================
7
FIRST FORTIS LIFE INSURANCE COMPANY
September 30, 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FOR THE NINE MONTHS SEPTEMBER 30, 2003 COMPARED TO SEPTEMBER 30, 2002
Fortis, Inc., the ultimate parent of First Fortis Life Insurance Company (the
"Company") has initiated the process with the Securities and Exchange Commission
for an initial public offering of its common stock.
REVENUES
The Company's accident and health insurance premiums are principally composed of
group and credit coverages. Group accident and health and credit accident and
health business represented 81% and 19%, respectively of premium for the nine
months ended September 30, 2003; and 76% and 24%, respectively of premium for
the nine months ended September 30, 2002. This shift in premium is due to the
credit accident and health line's non-renewal of business. Premium associated
with both the group life and credit life lines also decreased as a result of
business non-renewals.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Net investment income decreased from $8.4
million during the nine months ended September 30, 2002 to $7.7 million during
the nine months ended September 30, 2003 due to lower yielding investment
markets. Changes in interest rates during the first nine months 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 from 71% to 65% for the
nine months ended September 30, 2002 and September 30, 2003, respectively. This
change is due primarily to a decrease in the group life line's benefit to
premium ratio from 95% at September 30, 2002 to 64% at September 30, 2003.
Driving this decrease was a change in reserve estimates. During the third
quarter, Fortis Employee Benefits completed actuarial reserve adequacy studies
for the group long-term disability, and group life products, which reflected
that, in the aggregate, these reserves were redundant by $0.2 million (pre-tax).
Therefore, reserves were released by $0.2 million in the third quarter to
reflect these best estimates.
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 ratio increased to
25% from 18% for the nine months ended September 30, 2003 and 2002,
respectively. The timing of overhead costs allocated to the credit life and
credit accident and health lines is the primary reason for this increase. Also
driving the increase are shifts in the mix of business 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.
9
FIRST FORTIS LIFE INSURANCE COMPANY
September 30, 2003
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In April of 2003, the FASB's Derivative Implementation Group ("DIG") released
FAS 133 Implementation Issue B36, Embedded Derivatives: Modified Coinsurance
Arrangements and Debt Instruments that Incorporate Credit Risk Exposures that
are Unrelated or Only Partially Related to the Creditworthiness of the Obligor
under those Instruments ("DIG B36"). The effective date of the implementation of
the guidance is October 1, 2003. The Company is assessing whether adoption of
DIG B36 will have a material impact on the Company's financial position or the
results of operations.
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
10
FIRST FORTIS LIFE INSURANCE COMPANY
September 30, 2003
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 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, 2003, 95.1% 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
11
FIRST FORTIS LIFE INSURANCE COMPANY
September 30, 2003
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.
12
FIRST FORTIS LIFE INSURANCE COMPANY
September 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: November 12, 2003
13