UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549-------FORM 10-K
(MARK ONE) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
þ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBERFor the fiscal year ended December 31,
20032004
OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBERFor the transition period from to
Commission file number 033-37576FORTIS BENEFITS INSURANCE COMPANY
(Exact(Exact name of registrant as specified in its charter)
MINNESOTA 81-0170040 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 576 BIELENBERG DRIVE WOODBURY, MINNESOTA 55125 (Address of Principal Executive Offices) (Zip Code) Registrant's
IOWA
(State or Other Jurisdiction
of Incorporation or Organization)81-0170040
(I.R.S. Employer
Identification No.)
729 INSURANCE EXCHANGE BUILDING
DES MOINES, IOWA
(Address of Principal Executive Offices)50309
(Zip Code)Registrant’s telephone number, including area code:(651) 361-4000
Securities registered pursuant to Section 12(b) of the Act:
NONENone
Securities registered pursuant to Section 12(g) of the Act:NONENoneIndicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Sectionsection 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
Xþ No--- ---oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X]þIndicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yeso No
X --- ---þThe aggregate market value of the voting and non-voting common equity held by non-affiliates is not applicable as no public market exists for the voting stock of the registrant.
As of March
1, 2004,4, 2005, there were 1,000,000 shares of common stock of the registrant outstanding, all of which are ownedindirectlyby Assurant, Inc.THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(A) AND (B) OF FORM 10-K AND IS FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
FORTIS BENEFITS INSURANCE COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31,20032004TABLE OF CONTENTS
ITEM PAGE NUMBER NUMBER - ------ PART I ------1. BUSINESS.............................................................................. 2 2. PROPERTIES............................................................................ 4 3. LEGAL PROCEEDINGS..................................................................... 4 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................... 5 PART II 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES................................................. 5 6. SELECTED FINANCIAL DATA............................................................... 5 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................................ 5 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................ 7 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................... 10 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................................................ 10 9A. CONTROLS AND PROCEDURES............................................................... 10 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................... 10 11. EXECUTIVE COMPENSATION................................................................ 10 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS................................................................... 10 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 10 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES................................................ 10 PART IV 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...................... 11 SIGNATURES..................................................................................... 14FORWARD-LOOKING STATEMENTS
Some of the statements under
"Business" and "Management's“Business,” “Management’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations,” and elsewhere in this report may contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as"outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates"“outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of thisforward-lookingforward looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in this report. We believe that these factors include but are not limited tothe risksthose described under"Risk Factors."the subsection entitled “Risk Factors” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements you read in this report reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity.
1
PART I
ITEMItem 1.
BUSINESS.BusinessFortis Benefits is a stock life insurance company formed in 1910 and organized under the laws of the State of
Minnesota.Iowa. It is an indirect wholly owned subsidiary of Assurant, Inc. (Assurant), which owns and operates a number of companies that provide insurance products and related services in North America and selected other markets. Assurant, a Delaware corporation, completed an initial public offering of its common stock in February 2004, and its common stock now trades on The New York Stock Exchange. Prior to the initial public offering, Fortis, Inc., a Nevada corporation, had formed Assurant and merged into it on February 4, 2004. The merger was done in order to redomesticate Fortis, Inc. from Nevada to Delaware and to change its name. As a result of the merger, Assurant is the successor to the business operations and obligations of Fortis, Inc. Fortis Benefits has been a wholly owned subsidiary of Fortis, Inc. since 1984.In this report, references to the
"Company," "Fortis“Company,” “Fortis Benefits," "we," "us"” “we,” “us” or"our"“our” refer to Fortis Benefits Insurance Company. Also, in this report, references to"Assurant"“Assurant” refer to Fortis, Inc. and its subsidiaries prior to the merger described above, and Assurant, Inc. and its subsidiaries after the consummation of the merger described above.2
Assurant
currently hasorganizes and manages their specialized businesses through fourdecentralizedoperating businesssegments including the following: o Assurant Employee Benefits, whichsegments:
Operating Business Segment Principal Products and Services Principal Distribution Channels
Property• Creditor-placed homeowners
insurance (including tracking
services)• Mortgage lenders and services • Manufactured housing homeowners
insurance• Manufactured housing lenders, dealers and vertically integrated builders
Protection• Debt protection administration
• Credit insurance• Financial institutions (including credit card issuers) and retailers • Warranties and extended service contracts • Consumer electronics and appliance retailers
• Vehicle dealerships-Appliances -Automobiles and recreational vehicles -Consumer electronics -Wireless devices
Individual Health• Preferred Provider Organizations
(PPO)
• Short-term medical insurance
• Student medical insurance• Independent agents
• National accounts
• Internet• PPO • Independent agents • Group dental insurance
- - Employer-paid
- - Employee-paid
• Group disability insurance
• Group term life insurance• Employee benefit advisors
• Brokers
• DRMS(1)• Pre-funded funeral insurance • Service Corporation International (SCI)
• Independent funeral homes(1) DRMS refers to Disability Reinsurance Management Services, Inc., one of our wholly owned subsidiaries that provides
employer- and employee-paid group dental insurance, as well asa turnkey facility to other insurers to write principally group disabilityinsurance and group lifeinsurance.In its core benefits business, Assurant Employee Benefits focuses on employer-sponsored programs for employers with typically between 20 and 1,000 employees. At December 31, 2003, substantially all of Assurant Employee Benefits' coverages in force were for employers with less than 1,000 employees. This business segment has a particularly strong emphasis on employers with under 250 employees. The average in force case size at Assurant Employee Benefits was 56 enrolled employees as of December 31, 2003. Assurant Employee Benefits distributes its products primarily through approximately 160 group sales representatives located in 40 offices at or near major U.S. metropolitan areas. These representatives work through independent employee benefits advisors, including brokers and other intermediaries, to reach the customers. An Assurant wholly owned subsidiary, Disability Risk Management Services (DRMS), provides services for fees to other insurance carriers that write group disability insurance, including product development, state insurance regulatory filings, underwriting, claims management and other functions typically performed by an insurer's back office. Risks written by DRMS' various clients are reinsured into a pool, and Assurant's licensed subsidiaries reinsure the largest portion of that risk. o Assurant PreNeed, which provides pre-funded funeral insurance. This insurance provides whole life insurance death benefits or annuity benefits used to fund costs incurred in connection with pre-arranged funerals. Assurant PreNeed distributes its products primarily through funeral homes, and the products are sold mainly to customers over the age of 65, with an average issue age of 72. Assurant PreNeed has two separate distribution channels: an independent channel, comprised of approximately 23,000 funeral firms in the U.S. and Canada; and the American Memorial Life Insurance Company (AMLIC) channel, which provides products and support services for Service Corporation International, the largest funeral provider in North America. o Assurant Health, which provides individual health insurance, including short-term and student medical insurance, and small employer group health insurance. Assurant Health provides it small group products to employer groups primarily of two to fifty employees in size. As of December 31, 2003, the average group size was approximately five 2employees, and substantially all of the small group health insurance policies that Assurant Health sold in 2002 and 2003 were preferred provider organization (PPO) products. Assurant Health distributes its products through a network of independent agents, and approximately 150,000 agents had access to Assurant Health products during 2003. Assurant also distributes its products to individuals through a variety of exclusive and non-exclusive national account relationships and direct distribution channels, as well as through NorthStar Marketing, a wholly owned affiliate that seeks business directly from independent agents. o Assurant Solutions, which provides specialty solutions and consumer protection solutions. Specialty property solutions primarily include creditor-placed homeowners insurance (including tracking services) and manufactured housing homeowners insurance. Consumer protection solutions primarily include debt protection administration, credit insurance and warranties and extended service contracts. Assurant Solutions develops, underwrites and markets its insurance products and services through collaborative relationships with its clients (financial institutions, retailers, manufactured housing and automobile dealers, utilities and other entities) to their customers. Assurant Solutions services its clients throughout North America, the Caribbean and selected countries in South America and Europe.Fortis Benefits, which is licensed to sell life, health and annuity insurance in the District of Columbia and in all states except New York, writes insurance products that are marketed by each of
Assurant'sAssurant’s business segments. We perform substantially all of the operations of Assurant Employee Benefits. We market, sell and administer directly the group disability, group life and certain of the group dental insurance products, and we manage other Assurant subsidiaries that provide the prepaid dental products. We also issue many of the preneed life insurance policies that are marketed, sold and administered by Assurant PreNeed, including in Canada where we are licensed as a life insurer. With respect to Assurant Health, we issue only small group health insurance policies that are sold through an independent agency, Rogers Benefit Group. With respect to Assurant Solutions, we issue accidental death and dismemberment policies for which the segment performs the selling, marketing, and administration functions. Of our total gross revenues generated during2003,2004, approximately 62% were from the Assurant Employee Benefits segment,3
approximately 18% from the Assurant PreNeed segment, approximately
13%14% from the Assurant Health segment, and approximately5%4% from the Assurant Solutions segment.As an indirect wholly owned subsidiary of Assurant, Fortis Benefits does not have any publicly issued equity or debt securities. We are, however, subject to certain filing requirements of the Securities Exchange Act of 1934, as amended, because we have issued certain variable and market value adjusted insurance contracts, which are required to be registered with the SEC as securities. Effective April 1, 2001, Assurant exited this line of business and sold the business segment, then referred to as Fortis Financial Group, to The Hartford Financial Services Group, Inc. and certain of its subsidiaries (The Hartford). This sale was accomplished by means of reinsurance and modified coinsurance. As a result, The Hartford is contractually responsible for servicing the insurance contracts, including the payment of benefits, oversight of investment management, overall contract administration and funding of reserves. If The Hartford fails to fulfill its obligations, however, we will be obligated to perform the services and make the required payments and funding.
Fortis Benefits was redomesticated to Iowa from Minnesota in 2004.
RISK FACTORS
Fortis Benefits is subject to risks associated with our business. These risks include, among others:
o Reliance on Relationships with Significant Clients, Distributors and Other Parties. If our significant clients, distributors and other parties with which we do business decline to renew or seek to terminate our relationships or contractual arrangements, our results of operations and financial condition could be materially adversely affected. We are also subject to the risk that these parties may face financial difficulties, reputational issues or 3problems with respect to their own products and services, which may lead to decreased sales of products and services. o Failure to Attract and Retain Sales Representatives or Develop and Maintain Distribution Sources. Our sales representatives interface with clients and third party distributors. Our inability to attract and retain our sales representatives or an interruption in, or changes to, our relationships with various third-party distributors could impair our ability to compete and market our insurance products and services and materially adversely affect our results of operations and financial condition. In addition, our ability to market our products and services depends on our ability to tailor our channels of distribution to comply with changes in the regulatory environment. o Effect of General Economic, Financial Market and Political Conditions. Our results of operations and financial condition may be materially adversely affected by general economic, financial market and political conditions, including: o insurance industry cycles; o levels of employment; o levels of inflation and movements of the financial markets; o fluctuations in interest rates; o monetary policy; o demographics; and o legislative and competitive factors. o Failure to Predict Accurately Benefits and Other Costs and Claims. We may be unable to predict accurately benefits, claims and other costs or to manage such costs through our loss limitation methods, which could have a material adverse effect on our results of operations and financial condition if claims substantially exceed our expectations. o
• Reliance on Relationships with Significant Clients, Distributors and Other Parties. If our significant clients, distributors and other parties with which we do business decline to renew or seek to terminate our relationships or contractual arrangements, our results of operations and financial condition could be materially adversely affected. We are also subject to the risk that these parties may face financial difficulties, reputational issues or problems with respect to their own products and services, which may lead to decreased sales of products and services. • Failure to Attract and Retain Sales Representatives or Develop and Maintain Distribution Sources. Our sales representatives interface with clients and third party distributors. Our inability to attract and retain our sales representatives or an interruption in, or changes to, our relationships with various third-party distributors could impair our ability to compete and market our insurance products and services and materially adversely affect our results of operations and financial condition. In addition, our ability to market our products and services depends on our ability to tailor our channels of distribution to comply with changes in the regulatory environment. • Effect of General Economic, Financial Market and Political Conditions. Our results of operations and financial condition may be materially adversely affected by general economic, financial market and political conditions, including:
• insurance industry cycles; • levels of employment; • levels of inflation and movements of the financial markets; • fluctuations in interest rates; • monetary policy; • demographics; and • legislative and competitive factors.
• Failure to Predict Accurately Benefits and Other Costs and Claims. We may be unable to predict accurately benefits, claims and other costs or to manage such costs through our loss limitation methods, which could have a material adverse effect on our results of operations and financial condition if claims substantially exceed our expectations. 4
• Changes in Regulation. Legislation or other regulatory reform that increases the regulatory requirements imposed on us or that changes the way we are able to do business may significantly harm our business or results of operations in the future. As of December 31,
2003,2004, we had approximately 1,500 employees.ITEMItem 2.
PROPERTIES.Properties.Our principal office is in Kansas City, Missouri, where we lease approximately 297,000 square feet of space in a building owned by our parent, Assurant. We also lease from an unrelated party approximately 70,000 square feet of space in Birmingham, Alabama, which is used to house certain employees of our dental benefits division. In addition, we have several regional claims and sales offices throughout the United States.
ITEMItem 3.
LEGAL PROCEEDINGS.Legal Proceedings.We are regularly involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. We may from time to time be subject to a variety of legal and regulatory actions relating to our current and past business operations. While we cannot predict the outcome of any pending or future litigation, examination or investigation and although no assurances can be given, we do not believe that any pending matter will have a material adverse effect on our financial condition or results of operations.
4ITEMItem 4.
SUBMISSION OF MATTERS TOSubmission Of Matters To AVOTE OF SECURITY HOLDERS.Vote Of Security Holders.Not required under reduced disclosure format.
PARTPart II
ITEMItem 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.Market For Registrant’s Common Equity and Related Stockholder MattersThere is no public trading market for our common stock. As of March
1, 2004,4, 2005, we had 1,000,000 shares of common stock outstanding, all of which are owned directly by Interfinancial Inc., a Georgia corporation that is a direct wholly owned subsidiary of Assurant, Inc.Fortis BenefitsWe paidno dividends to its stockholder in 2003$75 million, zero, and $60 million incashdividends toitsour stockholder in2002. ITEM2004, 2003 and 2002, respectively.Item 6.
SELECTED FINANCIAL DATA.Selected Financial Data.Not required under reduced disclosure format.
ITEM5
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.Management’s Discussion And Analysis Of Financial Condition And Results Of Operations.The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this report. It contains forward-looking statements that involve risks and uncertainties. Please see
"Forward-Looking Statements"“Forward-Looking Statements” for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report.CONSOLIDATED OVERVIEWThe table below presents information regarding our consolidated results of operations:
For the Year Ended December 31, 2004 2003 (in thousands) Net earned premiums and other considerations $ 1,756,320 $ 1,705,681 Net investment income 275,693 259,804 Net realized gains (losses) on investments 8,371 3,909 Amortization of deferred gains on disposal of businesses 43,299 51,846 Fees and other income 13,033 15,099 Total revenues 2,096,716 2,036,339 Policyholder benefits 1,352,002 1,284,723 Selling, underwriting and general expenses(1) 565,311 554,874 Total benefits, losses and expenses 1,917,313 1,839,597 179,403 196,742 Income taxes 59,810 66,613 $ 119,593 $ 130,129
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 ---- ---- (IN MILLIONS)REVENUES: Net earned premiums(1) Includes amortization of DAC and other considerations $1,706 $1,686 Net investment income 260 259 Net realized gains (losses) on investments 4 (46) FeesVOBA andother income 67 73 -- -- Total revenues 2,037 1,972 ----- ----- BENEFITS, LOSSES AND EXPENSES: Policyholder benefits 1,285 1,305 Selling,underwriting, general andgeneral expenses 555 522 Total benefits, losses and expenses 1,840 1,827 ----- ----- INCOME BEFORE INCOME TAXES: 197 145 Income taxes 67 44 -- -- NET INCOME $130 $101 ==== ====administrative expenses.5YEAR ENDED DECEMBERYear Ended December 31, 2004 Compared to December 31, 2003
COMPARED TO DECEMBER 31, 2002Total Revenues
Total revenues increased by
$65 million,$60,377, or 3%,to $2,037 millionfrom $2,036,339 for the year ended December 31, 2003,from $1,972 millionto $2,096,716 for the year ended December 31,2002. This increase was due primarily to an increase in net2004.Net earned premiums and
an improvement in our net realized gains (loses) on investments. In 2003, our disability net earned premiumsother considerations increased by$58 million, primarily due to $83 million of additional disability reinsurance premiums that we assumed through an affiliated reinsurance intermediary, DRMS. Partially offsetting this increase was a $19 million decrease in group life net earned premiums, due to the non-renewal of certain unprofitable business and less new business due to continued pricing discipline. In addition, dental net earned premiums decreased by $6 million, driven by lower sales and the non-renewal of a large account. Consumer protection premiums in the accident and health line increased by $3 million, as a result of increases in new business sales. Small employer group and individual health premiums decreased slightly by $18 million, primarily due to a lower rate of renewals of individual medical policies. Also in 2003, we realized $4 million of net gains on investments, compared to $46 million of net losses in 2002, and net investment income increased slightly from $259 million during 2002 to $260 million during 2003. We continue to match investment portfolio composition to liquidity needs and capital requirements. Policyholder Benefits Policyholder benefits decreased by $20 million,$50,639, or2%3%, from$1,305 million$1,705,681 for the year ended December 31,2002,2003, to$1,285 million$1,756,320 for the year end December 31, 2004. The increase was primarily due to increases of $39,424, $16,533, and $6,647 in our group disability, small employer group health and preneed businesses, respectively, offset by a decrease of $7,416 in our group dental business. The increase in group disability business was primarily driven by business written through alternate distribution sources, as well as the transition of a block of business from administrative fee only business to fully insured business. The increase in our small employer group health business was primarily due to increases in premium rates. The increase in our preneed business was primarily due to the change in mix of business from limited-pay to single-pay sales. The decrease in our group dental business was primarily due to maintaining pricing discipline in an increasingly competitive market, which has resulted in lower sales and renewals.6
Net investment income increased by $15,889, or 6%, from $259,804 for the year ended December 31,
2003.2003, to $275,693 for the year ended December 31, 2004. This increase was primarily due to increases in invested assets, offset by a decrease in investment yields driven by the lower interest rate environment.Net realized gains on investments increased by $4,462, or 114%, from $3,909 for the year ended December 31, 2003, to $8,371 for the year ended December 31, 2004. Net realized gains on investments are comprised of both other-than-temporary impairments and realized gains/(losses) on the sales of securities. For the years ended December 31, 2003 and 2004, we had other-than-temporary impairments on available for sale securities of $8,048 and $131, respectively.
Amortization of deferred gain on disposal of business decreased by $8,547, or 16%, from $51,846 for the year ended December 31, 2003, to $43,299 for the year ended December 31, 2004. The decrease was consistent with the anticipated run-off of the business ceded to The Hartford in 2001 and John Hancock in 2000.
Fees and other income decreased by $2,066, or 14%, from $15,099 for the year ended December 31, 2003, to $13,033 for the year ended December 31, 2004. The decrease is driven by
favorable development in disability claimslower administrative services only sales.Total Benefits, Losses and
lower claims volumeExpensesTotal benefits, losses and expenses increased by $77,716, or 4%, from $1,839,597 for the year ended December 31, 2003, to $1,917,313 for the year ended December 31, 2004.
Policyholder benefits increased by $67,279, or 5%, from $1,284,723 for the year ended December 31, 2003, to $1,352,002 for the year ended December 31, 2004. The increase was primarily due to
thea net increase in our group disability, group life and group dental businesses of $29,263 and increases in our small employer group health and preneed businesses of $17,262 and $8,902, respectively. The increase in group disability, group life and group dental was primarily driven by a reduction indental and group net life earned premiums. In addition, duringreserves in 2003. During the third quarter of 2003, we completed actuarial reserve adequacy studies for these products, which reflected that, in thegroup disability, group life and group dental products. We concluded that group life and group dentalaggregate, these reserves were redundant by $17,678. Therefore, we reduced reserves by $17,678 in the third quarter of 2003 to reflect these estimates. Also contributing to the increase in 2004 was poor experience on a single large disability case andthatdeterioration in group dental experience, partially offset by lower group disability incidence and improved group life mortality. The increase in small employer group health was attributable to increases in membership as well as unfavorable loss experience compared to prior year. The increase in preneed was primarily due to the crediting of policy growth to a larger (by face amount) in force block of business as well as an increase in policyholder reservesrequired strengthening. Adjustmentsdue to higher customer utilization of an early pay off feature that allows conversion from limited pay to single-pay policies. These increases weremade to reserves to reflect current mortality and morbidity experience. In addition, the reserve discount rate on all claims was changed to reflect the continuing low interest rate environment. The net impact of these adjustments waspartially offset by a reduction inreserves of approximately $18 million. The total policyholder benefit to premium ratio decreasedgrowth rates on the discretionary growth business.Selling, underwriting and general expenses increased by $10,437, or 2%, from
77.4%$554,874 for the year ended December 31,20022003, to75.3%$565,311 for the year ended December 31,2003.2004. Thefollowing table shows the policyholder benefitincrease was primarily due topremium ratio by product line for the years ended December 31, 2003increases of $10,420, $5,157 and2002:
Product Line 2003 2004 ------------ ---- ----Group dental 69% 72% Group disability 93% 87% Group life 51% 74% Small employer group health 68% 66% and individual heath Pre-funded funeral 106% 102% Consumer protection 23% 39%Group dental,$9,599 in our group disability, small employer group health and preneed businesses, offset by decreases of $7,895 and $4,503 in our consumer protection and grouplife loss ratios were all impacted by the reserve adjustment described above.dental businesses. The increase intheour group disability expenses was due to growth in disability business sold through an alternative distribution source. The increase in our small employer group health business was attributable to increased commission expense on first year business. The increase in our preneed business was primarily due to higher amortized commissions andindividual health loss ratio resulted from increased lossexpensesrelatedincurred as a result of the change in mix of business toconversion deficiency reserves.more single-pay sales. Thefavorable loss ratio change for thedecrease in our consumer protection business isoffset by a corresponding increase in the contingent commission. The increase in the pre-funded funeral loss ratio isprimarily due to ashiftdecrease in theproduct mixexperience based commission on a single client. The decrease in our group dental business is primarily due to non-recurring expenses incurred during 2003 as well as focused expense management in 2004.7
Net Income
Net income decreased by $10,536, or 8%, from
6limited pay to single pay policies. Single pay policies typically have higher first year reserves driving an increase in the loss ratio. Expenses Our total selling, underwriting and general expenses increased by $33 million, from $522 million in 2002 to $555 million in 2003. Commissions increased by $16 million, from $166 million$130,129 for the year ended December 31,20022003, to$182 million$119,593 for the year ended December 312003.2004.Income taxes decreased by $6,803, or 10%, from $66,613 for the year ended December 31, 2003, to $59,810 for the year ended December 31, 2004. This decrease is
primarily due to changes in the mix of business by product lines along with increases in production of disability and consumer protection premiums. Increases in contingent commissions on consumer protection products offset favorable loss ratios as mentioned above. Our general and administrative expense to premium ratio rose slightly to 19% in 2003 from 18% in 2002. Expenses in the group disability insurance product line increased correspondinglyconsistent with theincreasedecrease inits premium volume. Expenses related to the small employer group health product line decreased as a result of less renewal business in 2003. With respect to the pre-funded funeral business, expenses in 2003 decreased from 2002 levels, however, the amortization of deferred acquisition expense for that product line increased over 2002 levels. Also in 2003, we had a $6.2 million writedown of previously capitalized software related to our new administration system. ITEMpre-tax income.Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative And Qualitative Disclosures About Market RiskAs a provider of insurance products, effective risk management is fundamental to our ability to protect both our
customers'customers’ and ourstockholder'sstockholder’s interests. We are exposed to potential loss from various market risks, in particular interest rate risk and creditrisk. Additionally we are exposed torisk, as well as inflationrisk and to a small extent to foreign currencyrisk.Interest rate risk is the possibility the fair value of liabilities will change more or less than the market value of investments in response to changes in interest rates, including changes in the slope or shape of the yield curve and changes in spreads due to credit risks and other factors.
Credit risk is the possibility that counterparties may not be able to meet payment obligations when they become due. We assume counterparty credit risk in many forms. A counterparty is any person or entity from which cash or other forms of consideration are expected to extinguish a liability or obligation to us. Primarily, our credit risk exposure is concentrated in our fixed income investment portfolio and, to a lesser extent, in our reinsurance recoverables.
Inflation risk is the possibility that a change in domestic price levels produces an adverse effect on earnings. This typically happens when only one of invested assets or liabilities is indexed to inflation.
Foreign exchange risk is the possibility that changes in exchange rates produce an adverse effect on earnings and equity when measured in domestic currency. This risk is largest when assets backing liabilities payable in one currency are invested in financial instruments of another currency. Our general principle is to invest in assets that match the currency in which we expect the liabilities to be paid.
INTEREST RATE RISKInterest Rate Risk
Interest rate risk arises as we invest substantial funds in interest-sensitive fixed income assets, such as fixed maturity investments, mortgage-backed and asset-backed securities and commercial mortgage loans, primarily in the United States and Canada. There are two forms of interest rate
risk--pricerisk—price risk and reinvestment risk. Price risk occurs when fluctuations in interest rates have a direct impact on the market valuation of these investments. As interest rates rise, the market value of these investments falls, and conversely, as interest rates fall, the market value of these investments rises. Reinvestment risk occurs when fluctuations in interest rates have a direct impact on expected cash flows from mortgage-backed and asset-backed securities. As interest rates fall, an increase in prepayments on these assets results in earlier7than expected receipt of cash flows forcing us to reinvest the proceeds in an unfavorable lower interest rate environment, and conversely as interest rates rise, a decrease in prepayments on these assets results in later than expected receipt of cash flows forcing us to forgo reinvesting in a favorable higher interest rate environment. As of December 31, 2003,2004, we held$3,452 million$3,604,365 of fixed maturity securities at fair market value and$635 million$695,921 of commercial mortgages at amortized cost for a combined total of92%86% of total invested assets. As of December 31,2002,2003, we held$3,045 million$3,452,299 of fixed maturity securities at fair market value and$579 million$634,615 of commercial mortgages at amortized cost for a combined total of90%85% of total invested assets.We expect to manage interest rate risk by selecting investments with characteristics such as duration, yield, currency and liquidity tailored to the anticipated cash outflow characteristics of our insurance and reinsurance liabilities.
8
Our group long-term disability and group term life waiver of premium reserves are also sensitive to interest rates.
Group long-term disabilityThese reserves are discounted to the valuation date at the valuation interest rate. The valuation interest rate is determined by taking into consideration actual and expected earned rates on our asset portfolio, with adjustments for investment expenses and provisions for adverse deviation.The interest rate sensitivity of our fixed maturity security assets is assessed using hypothetical test scenarios that assume several positive and negative parallel shifts of the underlying yield curves. We have assumed that both the United States and Canadian yield curves have a 100% correlation and, therefore, move together. The individual securities are repriced under each scenario using a valuation model. For investments such as mortgage-backed and asset-backed securities, a prepayment model was used in conjunction with a valuation model. Our actual experience may differ from the results noted below particularly due to assumptions utilized or if events occur that were not included in the methodology.
CREDIT RISKCredit Risk
We have exposure to credit risk primarily as a holder of fixed income securities and by entering into reinsurance cessions.
Our risk management strategy and investment policy is to invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to any one issuer. We attempt to limit our credit exposure by imposing fixed maturity portfolio limits on individual issuers based upon credit quality. Currently our portfolio limits are 1.5% for issuers rated AA-and above, 1% for issuers rated A- to A+, 0.75% for issuers rated BBB- to BBB+ and 0.38% for issuers rated BB- to BB+. These portfolio limits are further reduced for certain issuers with whom we have credit exposure on reinsurance agreements.
We use the lower of
Moody'sMoody’s or Standard &Poor'sPoor’s ratings to determine anissuer'sissuer’s rating.We are also exposed to the credit risk of our reinsurers. When we reinsure, we are still liable to our insureds regardless of whether we get reimbursed by our reinsurer. As part of our overall risk and capacity management strategy, we purchase reinsurance for certain risks that we underwrite.
For at least 50% of our
$1,210 million$1,238,111 of reinsurance recoverables at December 31,2003,2004, we are protected from the credit risk by using some type of risk mitigation mechanism such as a trust, letter of credit or by withholding the assets in a modified coinsurance or co-funds-withheld arrangement. For example, reserves of$891 million$870,764 and$240 million$290,993 as of December 31,20032004 relating to two large coinsurance arrangements with The Hartford and John Hancock Life Insurance Company (John Hancock), respectively, related to sales ofbusinesses.businesses are secured by such mechanisms. If the value of the assets in these trusts decreases, The Hartford and John Hancock, as the case may be, will be required to put more assets in the trusts. We may be dependent on the financial condition of The Hartford and John Hancock, whose A.M. Best ratings are currently A+ and A++, respectively. For recoverables that are not protected by these mechanisms, we are dependent solely on the credit of the reinsurer. Occasionally, the credit worthiness of the reinsurer becomes questionable.We believe that a majority of our reinsurers are rated "A-" or better by A.M. Best. 8INFLATION RISKInflation Risk
Inflation risk arises as we invest substantial funds in nominal assets, which are not indexed to the level of inflation, whereas the underlying liabilities are indexed to the level of inflation. Approximately 19% of Assurant
PreNeed'sPreNeed’s insurance policies with reserves of approximately$343$348 million as of December 31,20032004 have death benefits that are guaranteed to grow with the Consumer Price Index. In times of rapidly rising inflation the credited death benefit growth on these liabilities increases relative to the investment income earned on the nominal assets resulting in an adverse impact on earnings. We have partially mitigated this risk by purchasing a contract with payments tied to the Consumer Price Index. See"--“— Derivatives."”In addition, we have inflation risk in our individual and small employer group health insurance businesses to the extent that medical costs increase with inflation and we have not been able to increase premiums to keep pace with inflation.
FOREIGN EXCHANGE RISK9
Foreign Exchange Risk
We are exposed to some foreign exchange risk arising from our international operations mainly in Canada. Total invested assets denominated in currencies other than the U.S. dollar were less than
5%8% of our total invested assets at December 31,2003.2004.Foreign exchange risk is mitigated by matching our liabilities under insurance policies that are payable in foreign currencies with investments that are denominated in such currency. We have not established any hedge to our foreign currency exchange rate exposure.
We assess our foreign exchange risk by examining the foreign exchange rate exposure of the excess of invested assets over the statutory reserve liabilities denominated in foreign currency. Two stress scenarios are examined. The first scenario assumes a hypothetical 10% immediate change in the foreign exchange rate. The second scenario assumes a more severe 2.33 standard deviation event (comparable to a one in 100 probability under a normal distribution). The modelling techniques we use to calculate our exposure does not take into account correlation among foreign currency exchange rates or correlation among various markets. Our actual experience may differ due to correlation assumptions utilized or if events occur that were not included in the methodology, such as significant illiquidity or other market events. DERIVATIVESDerivatives
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the prices of securities or commodities. Derivative financial instruments may be exchange-traded or contracted in the over-the-counter market and include swaps, futures, options and forward contracts.
Under insurance statutes, our insurance companies may use derivative financial instruments to hedge actual or anticipated changes in their assets or liabilities, to replicate cash market instruments or for certain income-generating activities. These statutes generally prohibit the use of derivatives for speculative purposes. We generally do not use derivative financial instruments.
On August 1, 2003, we purchased a contract to partially hedge the inflation risk exposure inherent in some of our pre-funded funeral insurance policies.
9ITEMItem 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.Financial Statements And Supplementary Data.The consolidated financial statements and financial statement schedules in Part IV, Item 15(a) 1 and 2 of this report are incorporated by reference into this Item 8.
ITEMItem 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.There have been no changes in or disagreements with accountants on accounting and financial disclosure.
ITEMItem 9A.
CONTROLS AND PROCEDURES.Controls And Procedures.Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of December 31,
2003.2004. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer10
have concluded that our disclosure controls and procedures were effective as of that date in providing a reasonable level of assurance that information we are required to disclose in reports we file or furnish under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods in SEC rules and forms. Further, our disclosure controls and procedures were effective in providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Item 9B.Other Information.
None.
PART III
ITEMItem 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.Directors And Executive Officers Of The Registrant.Not required under reduced disclosure format.
ITEMItem 11.
EXECUTIVE COMPENSATION.Executive Compensation.Not required under reduced disclosure format.
ITEMItem 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters.Not required under reduced disclosure format.
ITEMItem 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.Certain Relationships And Related Transactions.Not required under reduced disclosure format.
ITEMItem 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICESPrincipal Accountant Fees And ServicesPricewaterhouseCoopers LLP has audited our financial statements for fiscal
2003.2004. The following table shows the aggregate fees billed to us by PricewaterhouseCoopers LLP for services rendered and the percentage of those services that were approved bythe boardour Board ofdirectorsDirectors during the fiscal years ended December 31,20022004 and 2003.10
FISCAL YEAR ENDED FISCAL YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2003 ----------------- ----------------- DESCRIPTION OF FEES (IN THOUSANDS) AMOUNT PERCENTAGE OF AMOUNT PERCENTAGE OF SERVICES SERVICES APPROVED APPROVEDAudit Fees $290 100% $162 100% Audit Related Fees $0 N/A $0 N/A Tax Fees $0 N/A $0 N/A All Other Fees $0 N/A $0 N/A
Fiscal Year Ended Fiscal Year Ended December 31, 2004 December 31, 2003 Description of Fees (in thousands) Amount Percentage Amount Percentage Audit Fees $ 414 100 % $ 162 100 % Audit Related Fees — — — — Tax Fees — — — — All Other Fees — — — — In March 2004, the Board of Directors of the Company adopted written procedures for pre-approval of services by the independent auditors, including procedures relating to the
Board'sBoard’s power to:o Retain and terminate independent auditors and approve all audit engagement fees and terms; o Inform each registered public accounting firm performing work for the Company that such firm shall report directly to the Board of Directors; o Directly oversee the work of any registered public accounting firm employed by the Company, including the resolution of any disagreement between management and the auditor regarding financial reporting, for the purpose of preparing or issuing an audit report or related work; and o Approve in advance any significant audit or non-audit engagement or relationship between the Company and the independent auditors, other than "prohibited
• Retain and terminate independent auditors and approve all audit engagement fees and terms; • Inform each registered public accounting firm performing work for the Company that such shall report directly to the Board of Directors; • Directly oversee the work of any registered public accounting firm employed by the Company, including the resolution of any disagreement between management and the auditor regarding financial reporting, for the purpose of preparing or issuing an audit report or related work; and 11
• Approve in advance any significant audit or non-audit engagement or relationship between the Company and the independent auditors, other than “prohibited non-auditing services.” “Prohibited nonauditing
services." "Prohibited nonauditing services"services” are services that Congress, the SEC or the Public Company Accounting Oversight Board prohibits through regulation. Notwithstanding the foregoing, pre-approval is not necessary for minor audit services if: (i) the aggregate amount of all such non-audit services provided to the Company constitutes not more than 5% of the total amount of revenues paid by the Company to its auditor during the fiscal year in which the non-audit services are provided; (ii) such services were not recognized by the Company at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Board of Directors and approved prior to the completion of the audit by the Board of Directors or by one or more members of the Board of Directors who are members of the Board to whom authority to grant such approvals has been delegated by the Board of Directors. The Board of Directors may delegate to one or more of its members the authority to approve in advance all significant audit or non-audit services to be provided by the independent auditors so long as it is presented to the full Board of Directors at a later time.PART IV
ITEMItem 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.Exhibits and Financial Statement Schedules(a)1.
CONSOLIDATED FINANCIAL STATEMENTSFinancial StatementsThe following
consolidatedfinancial statements of Fortis Benefits Insurance Company, incorporated by reference into Item 8, are attached hereto:
Page Consolidated Financial Statements of Fortis Benefits Insurance CompanyCompany.F-1 F-2 11
F-4 F-5 F-6 F-8 (a)2.
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES None.Financial Statement SchedulesThe following financial statement schedules of Fortis Benefits Insurance Company are attached hereto:
All schedules are omitted because they are not applicable, not required, or the information is included in the financial statements or the notes thereto.
12
(a)3.
EXHIBITSExhibitsThe following exhibits either (a) are filed with this report or (b) have previously been filed with the SEC and are incorporated herein by reference to those prior filings. Exhibits are available upon request at the investor relations section of our website, located at
www.assurant.com EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 3.1 Articles of Incorporation of Fortis Benefits Insurance Company (incorporated by reference from the Registrant's Registration Statement on Form S-6 and Variable Account C filed on March 17, 1986, File No. 33-03919). 3.2 By-laws of Fortis Benefits Insurance Company (incorporated by reference from the Registrant's Registration Statement on Form S-6 and Variable Account C filed on March 17, 1986, File No. 33-03919). 3.3 Amendments to Articles of Incorporation and By-laws of Fortis Benefits Insurance Company dated November 21, 1991 (incorporated by reference from the Registrant's Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577). 3.4 Amendment to By-laws of Fortis Benefits Insurance Company dated May 1, 1999 (incorporated by reference from Exhibit 3(d) to the Registrant's Form 10-K filed on March 30, 2001, File No. 33-63799). 4.1 Form of Combination Fixed and Variable Group Annuity Contract (incorporated by reference from Registrant's Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577). 4.2 Form of Certificate to be used in connection with Form of Combination Fixed and Variable Group Annuity Contract filed as Exhibit 4.1 to this report (incorporated by reference from Registrant's Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577). 4.3 Form of Application to be used in connection with Form of Certificate filed as Exhibit 4.2 to this report (incorporated by reference from Registrant's Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577). 4.4 Form of IRA Endorsement (incorporated by reference from Registrant's Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577). 4.5 Form of Section 403(b) Annuity Endorsement (incorporated by reference from Registrant's Post-Effective Amendment No. 3 to the Registration Statement on Form N-4 and Variable Account D filed on March 1, 1990, File No. 33-19421). 4.6 Annuity Contract Exchange Form (incorporated by reference from Registrant's Pre-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on April 19, 1988, File No. 33-19421). 1210.1 Stock Option Plan (incorporated by reference from Exhibit 10.2 to Assurant, Inc.'s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 10.2 Assurant 2004 Long-Term Incentive Plan (incorporated by reference from Exhibit 10.3 to Assurant, Inc.'s Registration Statement on Form S-1/A (File No. 333-109984) and amendments thereto, originally filed on Januarywww.assurant.com.
3.1 Articles of Incorporation of Fortis Benefits Insurance Company (incorporated by reference from the Registrant’s Registration Statement on Form S-6 and Variable Account C filed on March 17, 1986, File No. 33-03919). 3.2 By-laws of Fortis Benefits Insurance Company (incorporated by reference from the Registrant’s Registration Statement on Form S-6 and Variable Account C filed on March 17, 1986, File No. 33-03919). 3.3 Amendments to Articles of Incorporation and By-laws of Fortis Benefits Insurance Company dated November 21, 1991 (incorporated by reference from the Registrant’s Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577). 3.4 Amendment to By-laws of Fortis Benefits Insurance Company dated May 1, 1999 (incorporated by reference from Exhibit 3(d) to the Registrant’s Form 10-K filed on March 30, 2001, File No. 33-63799). 3.5 Restated Articles of Incorporation of Fortis Benefits Insurance Company dated September 29, 2004 (incorporated by reference from Exhibit 3.1 to Registrant’s Form 10-Q filed November 12, 2004, File No. 33-37576). 3.6 Restated By-laws of Fortis Benefits Insurance Company dated September 30, 2004. 4.1 Form of Combination Fixed and Variable Group Annuity Contract (incorporated by reference from Registrant’s Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577). 4.2 Form of Certificate to be used in connection with Form of Combination Fixed and Variable Group Annuity Contract filed as Exhibit 4.1 to this report (incorporated by reference from Registrant’s Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577). 4.3 Form of Application to be used in connection with Form of Certificate filed as Exhibit 4.2 to this report (incorporated by reference from Registrant’s Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577). 4.4 Form of IRA Endorsement (incorporated by reference from Registrant’s Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577). 4.5 Form of Section 403(b) Annuity Endorsement (incorporated by reference from Registrant’s Post-Effective Amendment No. 3 to the Registration Statement on Form N-4 and Variable Account D filed on March 1, 1990, File No. 33-19421). 4.6 Annuity Contract Exchange Form (incorporated by reference from Registrant’s Pre-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on April 19, 1988, File No. 33-19421). 10.1 Stock Option Plan (incorporated by reference from Exhibit 10.2 to Assurant, Inc.’s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 13
2004). 10.3 Supplemental Executive Retirement Plan, as amended (incorporated by reference from Exhibit 10.4 to Assurant, Inc.'s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 10.4 Executive Pension and 401(k) Plan (incorporated by reference from Exhibit 10.5 to Assurant, Inc.'s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 10.5 Assurant Directors Compensation Plan (incorporated by reference from Exhibit 10.12 to Assurant, Inc.'s Registration Statement on Form S-1/A (File No. 333-109984) and amendments thereto, originally filed on January 13, 2004). 10.6 Assurant 2004 Employee Stock Purchase Plan (incorporated by reference from Exhibit 10.13 to Assurant, Inc.'s Registration Statement on Form S-1/A (File No. 333-109984) and amendments thereto, originally filed on January 13, 2004). 10.7 Assurant Executive Management Incentive Plan (incorporated by reference from Exhibit 10.16 to Assurant, Inc.'s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 10.8 Assurant Appreciation Incentive Rights Plan (incorporated by reference from Exhibit 10.17 to Assurant, Inc.'s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 10.9 Investment Plan (incorporated by reference from Exhibit 10.18 to Assurant, Inc.'s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 24.1 Power of Attorney. 31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. 31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. 32.1 Certification of Chief Executive Officer of Fortis Benefits Insurance Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer of Fortis Benefits Insurance Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed for the year ended December 31, 2003. 13
10.2 Assurant 2004 Long-Term Incentive Plan (incorporated by reference from Exhibit 10.3 to Assurant, Inc.’s Registration Statement on Form S-1/A (File No. 333-109984) and amendments thereto, originally filed on January 13, 2004). 10.3 Supplemental Executive Retirement Plan, as amended (incorporated by reference from Exhibit 10.4 to Assurant, Inc.’s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 10.4 Executive Pension and 401(k) Plan (incorporated by reference from Exhibit 10.5 to Assurant, Inc.’s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 10.5 Assurant Directors Compensation Plan (incorporated by reference from Exhibit 10.12 to Assurant, Inc.’s Registration Statement on Form S-1/A (File No. 333-109984) and amendments thereto, originally filed on January 13, 2004). 10.6 Assurant 2004 Employee Stock Purchase Plan (incorporated by reference from Exhibit 10.13 to Assurant, Inc.’s Registration Statement on Form S-1/A (File No. 333-109984) and amendments thereto, originally filed on January 13, 2004). 10.7 Assurant Executive Management Incentive Plan (incorporated by reference from Exhibit 10.16 to Assurant, Inc.’s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 10.8 Assurant Appreciation Incentive Rights Plan (incorporated by reference from Exhibit 10.17 to Assurant, Inc.’s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 10.9 Investment Plan (incorporated by reference from Exhibit 10.18 to Assurant, Inc.’s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally filed on October 24, 2003). 10.10 Assurant Deferred Compensation Plan (incorporated by reference from Exhibit 10.17 to Assurant, Inc.’s Form 10-K filed March 31, 2005) 10.11 Amendment No. 1 To the Amended and Restated 2004 Employee Stock Purchase Agreement (incorporated by reference from Exhibit 10.27 to Assurant, Inc.’s Form 10-K filed March 31, 2005) 10.12 Amendment No 1. To the Executive Pension and 401K Plan (incorporated by reference from Exhibit 10.28 to Assurant, Inc.’s Form 10-K filed March 31, 2005) 10.13 Amendment No. 2 To the Supplemental Executive Retirement Plan (incorporated by reference from Exhibit 10.29 to Assurant, Inc.’s Form 10-K filed March 31, 2005) 24.1 Power of Attorney. 31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. 31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. 32.1 Certification of Chief Executive Officer of Fortis Benefits Insurance Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer of Fortis Benefits Insurance Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 29,
2004. FORTIS BENEFITS INSURANCE COMPANY By: /s/ Robert B. Pollock --------------------------------- Name: Robert B. Pollock Title: President and Chief Executive Officer By: /s/ Larry M. Cains --------------------------------- Name: Larry M. Cains Title:2005.
FORTIS BENEFITS INSURANCE COMPANY By: /s/ Robert B. Pollock Name: Robert B. Pollock Title: President and Chief Executive Officer By: /s/ Ranell Jacobson Name: Ranell Jacobson Title: Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 29,
2004.2005.
SIGNATURE TITLE --------- -----Signature Title *
J. Kerry ClaytonChairman of the Board - -------------------------------- J. Kerry Clayton /s//s/ Robert B. Pollock
Robert B. PollockPresident and Chief Executive Officer - --------------------------------(Principal Executive Officer)Robert B. Pollock /s/ Larry M. Cains/s/ Ranell Jacobson
Ranell JacobsonTreasurer - --------------------------------(Principal Financial Officer)Larry M. Cains(Principal Accounting Officer)* Director - --------------------------------
Alan W. FeaginDirector * Director - --------------------------------
Michael J. PeningerDirector * Director - --------------------------------
Lesley G. Silvester*By: /s/Director
*By: /s/ Douglas R. Lowe -------------------------Douglas R. Lowe Attorney-in-Fact 14REPORT OF INDEPENDENT AUDITORS15
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of
Fortis Benefits Insurance Company:In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in
stockholder'sstockholder’s equity and cash flows present fairly, in all material respects, the financial position of Fortis Benefits Insurance Company and its subsidiaries (the Company), an indirect wholly owned subsidiary ofFortis (SA/NV) and Fortis N.V.Assurant, Inc. at December 31,20032004 and2002,2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31,20032004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of theCompany'sCompany’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance withauditingstandardsgenerally accepted inof theUnited States of America,Public Company Accounting Oversight Board (United States), which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion./s/ PRICEWATERHOUSECOOPERS/s/ PricewaterhouseCoopers LLP
March 31, 2005
Minneapolis, MinnesotaFebruary 20,F-1
Fortis Benefits Insurance Company
Consolidated Balance Sheets
At December 31, 2004F-1FORTIS BENEFITS INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,and 2003AND 2002
DECEMBER 31, -------------------------------- 2003 2002 ------------- ------------ (IN THOUSANDS EXCEPT SHARE DATA)ASSETS Investments: Fixed maturities available for sale, at fair value (amortized cost - $3,227,043 in 2003 and $2,882,516 in 2002) $3,452,299 $3,044,689 Equity securities available for sale, at fair value (cost - $199,287 in 2003 and $108,002 in 2002) 208,149 102,214 Commercial mortgage loans on real estate, at amortized cost 634,615 578,517 Policy loans, at amortized cost 10,678 10,301 Short-term investments, at amortized cost 71,057 245,224 Other investments 51,831 62,248 ---------- ---------- Total investments 4,428,629 4,043,193 Cash and cash equivalents 29,176 49,575 Premiums and accounts receivable, less allowances for doubtful accounts (2003 - $11,072; 2002 - $11,482) 77,094 78,203 Reinsurance recoverables 1,210,299 1,151,186 Accrued investment income 49,756 45,584 Income tax receivable - 8,258 Deferred acquisition costs 92,117 71,171 Property and equipment, at cost less accumulated depreciation 2,566 3,795 Deferred income taxes, net 54,249 125,317 Goodwill 156,985 156,006 Value of businesses acquired 45,710 52,643 Other assets 41,710 35,605 Assets held in separate accounts 3,516,070 3,126,978 ---------- ---------- Total assets $9,704,361 $8,947,514 ========== ==========
December 31, 2004 2003 (in thousands except share data) Investments: Fixed maturities available for sale, at fair value (amortized cost — $3,356,668 in 2004 and $3,227,043 in 2003) $ 3,604,365 $ 3,452,299 Equity securities available for sale, at fair value (cost — $241,101 in 2004 and $199,287 in 2003) 248,722 208,149 Commercial mortgage loans on real estate at amortized cost 695,921 634,615 Policy loans 9,956 10,678 Short-term investments 47,989 71,057 Collateral held under securities lending 332,276 379,898 Other investments 45,171 51,831 Total investments 4,984,400 4,808,527 Cash and cash equivalents 43,362 29,176 Premiums and accounts receivable, less allowances for doubtful accounts (2004 - $8,717; 2003 - $11,072) 78,669 65,605 Reinsurance recoverables 1,238,111 1,210,299 Due from affiliates 5,967 — Accrued investment income 51,933 49,756 Deferred acquisition costs 116,060 103,606 Property and equipment, at cost less accumulated depreciation 1,507 2,566 Deferred income taxes, net 20,515 54,249 Goodwill 156,104 156,985 Value of business acquired 39,413 45,710 Other assets 38,708 41,710 Assets held in separate accounts 3,435,089 3,516,070 Total assets $ 10,209,838 $ 10,084,259 See the accompanying notes to the consolidated financial statements
F-2
FORTIS BENEFITS INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS AT DECEMBERFortis Benefits Insurance Company
Consolidated Balance Sheets
At December 31, 2004 and 2003AND 2002
DECEMBER 31, -------------------------------- 2003 2002 ------------- ------------ (IN THOUSANDS EXCEPT SHARE DATA)LIABILITIES Future policy benefits and expenses $2,869,324 $2,657,445 Unearned premiums 50,002 50,145 Claims and benefits payable 1,810,847 1,768,866 Commissions payable 15,918 27,345 Reinsurance balances payable 5,138 628 Funds held under reinsurance 100 84 Deferred gain on disposal of businesses 249,481 301,327 Due to affiliates 3,478 3,842 Accounts payable and other liabilities 141,309 176,628 Income tax payable 22,112 - Liabilities related to separate accounts 3,516,070 3,126,978 ---------- ---------- Total liabilities 8,683,779 8,113,288 STOCKHOLDER'S EQUITY Common stock, $5 par value: authorized, issued and outstanding shares - 1,000,000 5,000 5,000 Additional paid-in capital 516,570 516,570 Retained earnings 342,610 211,459 Accumulated other comprehensive income 156,402 101,197 ---------- ---------- Total stockholder's equity 1,020,582 834,226 ---------- ---------- Total liabilities and stockholder's equity $9,704,361 $8,947,514 ========== ==========
December 31, 2004 2003 (in thousands except share data) Future policy benefits and expenses $ 3,028,030 $ 2,869,324 Unearned premiums 46,228 50,002 Claims and benefits payable 1,884,608 1,810,847 Commissions payable 19,721 15,918 Reinsurance balances payable 6,727 5,138 Funds held under reinsurance 93 100 Deferred gain on disposal of businesses 206,182 249,481 Obligation under securities lending 332,276 379,898 Due to affiliates — 3,478 Accounts payable and other liabilities 159,798 141,309 Tax payable 7,987 22,112 Liabilities related to separate accounts 3,435,089 3,516,070 Total liabilities 9,126,739 9,063,677 Common stock, par value $5 per share, 1,000,000 shares authorized, issued, and outstanding $ 5,000 $ 5,000 Additional paid-in capital 516,570 516,570 Retained earnings 388,854 342,610 Accumulated other comprehensive income 172,675 156,402 Total stockholder’s equity 1,083,099 1,020,582 Total liabilities and stockholder’s equity $ 10,209,838 $ 10,084,259 See the accompanying notes to the consolidated financial statements
F-3
FORTIS BENEFITS INSURANCE COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBERFortis Benefits Insurance Company
Consolidated Statements of Operations
Years Ended December 31, 2004, 2003 and 2002AND 2001
YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2003 2002 2001 ----------- ----------- ----------- (IN THOUSANDS)REVENUES Net earned premiums and other considerations $ 1,705,681 $ 1,686,364 $ 1,533,521 Net investment income 259,804 258,590 306,377 Net realized gain (loss) on investments 3,909 (45,801) (34,327) Amortization of deferred gain on disposal of businesses 51,846 60,186 50,538 Fees and other income 15,099 13,099 27,485 ----------- ----------- ----------- Total revenues 2,036,339 1,972,438 1,883,594 BENEFITS, LOSSES AND EXPENSES Policyholder benefits 1,284,723 1,304,765 1,237,189 Amortization of deferred acquisition costs and value of business acquired 52,001 47,793 55,936 Underwriting, general and administrative expenses 502,873 475,007 427,636 ----------- ----------- ----------- Total benefits, losses and expenses 1,839,597 1,827,565 1,720,761 ----------- ----------- ----------- Income before income taxes 196,742 144,873 162,833 Income taxes 66,613 44,225 55,474 ----------- ----------- ----------- Net income $ 130,129 $ 100,648 $ 107,359 =========== =========== ===========
Years Ended December 31, 2004 2003 2002 (in thousands) Net earned premiums and other considerations $ 1,756,320 $ 1,705,681 $ 1,686,364 Net investment income 275,693 259,804 258,590 Net realized gain (loss) on investments 8,371 3,909 (45,801 ) Amortization of deferred gain on disposal of businesses 43,299 51,846 60,186 Fees and other income 13,033 15,099 13,099 Total revenues 2,096,716 2,036,339 1,972,438 Policyholder benefits 1,352,002 1,284,723 1,304,765 Amortization of deferred acquisition costs and value of business acquired 75,011 60,096 58,293 Underwriting, general and administrative expenses 490,300 494,778 464,507 Total benefits, losses and expenses 1,917,313 1,839,597 1,827,565 Income before income taxes 179,403 196,742 144,873 Income taxes 59,810 66,613 44,225 Net income $ 119,593 $ 130,129 $ 100,648 See the accompanying notes to the consolidated financial statements
F-4
FORTIS BENEFITS INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY YEARS ENDED DECEMBERFortis Benefits Insurance Company
Consolidated Statements of Changes in Stockholder’s Equity
Years Ended December 31, 2004, 2003 and 2002AND 2001
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS)Balance, January 1, 2001 $ 5,000 $ 645,757 $ 363,452 $ (23,163) $ 991,046 ----------- Dividends on common stock - - (300,000) - (300,000) Net deemed dividend to parent (129,187) - (129,187) Comprehensive income Net income - - 107,359 - 107,359 Net change in unrealized gains on securities - - - 50,920 50,920 Foreign currency translation - - - 657 657 ----------- Total comprehensive income 158,936 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 2001 5,000 516,570 170,811 28,414 720,795 ----------- Dividends on common stock - - (60,000) - (60,000) Comprehensive income Net income - - 100,648 - 100,648 Net change in unrealized gains on securities - - - 74,696 74,696 Foreign currency translation - - - (1,913) (1,913) ----------- Total comprehensive income 173,431 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 2002 5,000 516,570 211,459 101,197 834,226 ----------- Other - - 1,022 - 1,022 Comprehensive income Net income - - 130,129 - 130,129 Net change in unrealized gains on securities - - - 49,724 49,724 Foreign currency translation - - - 5,481 5,481 ----------- Total comprehensive income 185,334 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 2003 $ 5,000 $ 516,570 $ 342,610 $ 156,402 $ 1,020,582 =========== =========== =========== =========== ===========
Accumulated Additional Other Common Paid-in Retained Comprehensive Stock Capital Earnings Income (Loss) Total (in thousands) Balance, January 1, 2002 $ 5,000 $ 516,570 $ 170,811 $ 28,414 $ 720,795 Dividends on common stock — — (60,000 ) — (60,000 ) Comprehensive income (loss): Net income — — 100,648 — 100,648 Net change in unrealized gains on securities — — — 74,696 74,696 Foreign currency translation — — — (1,913 ) (1,913 ) Total comprehensive income 173,431 Balance, December 31, 2002 5,000 516,570 211,459 101,197 834,226 Other — — 1,022 — 1,022 Comprehensive income: Net income — — 130,129 — 130,129 Net change in unrealized gains on securities — — — 50,016 50,016 Foreign currency translation — — — 5,189 5,189 Total comprehensive income 185,334 Balance, December 31, 2003 5,000 516,570 342,610 156,402 1,020,582 Dividends on common stock — — (75,000 ) — (75,000 ) Other — — 1,674 — 1,674 Comprehensive income: Net income — — 119,593 — 119,593 Net change in unrealized gains on securities — — — 13,489 13,489 Foreign currency translation — — (23 ) 2,784 2,761 Total comprehensive income 137,517 Balance, December 31, 2004 $ 5,000 $ 516,570 $ 388,854 $ 172,675 $ 1,083,099 See the accompanying notes to the consolidated financial statements
F-5
FORTIS BENEFITS INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS DECEMBERFortis Benefits Insurance Company
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002AND 2001
YEARS ENDED DECEMBER 31, --------------------------------------------- 2003 2002 2001 ----------- ----------- ----------- (IN THOUSANDS)OPERATING ACTIVITIES Net income $ 130,129 $ 100,648 $ 107,359 Adjustments to reconcile net income to net cash provided by operating activities: Change in reinsurance recoverable (59,107) (24,284) 49,617 Change in premiums and accounts receivables 865 39,124 2,890 Depreciation and amortization 1,125 1,253 2,769 Change in deferred acquisition costs and value of businesses acquired (9,031) (15,322) (19,057) Change in accrued investment income (3,828) 5,429 12,331 Change in insurance policy reserves and liabilities 222,012 165,188 111,983 Change in accounts payable and other liabilities (36,088) (4,919) (25,580) Change in commissions payable (11,427) 5,854 8,638 Change in reinsurance balances payable 4,510 (4,875) 5,503 Change in funds held under reinsurance 16 (12) (96) Amortization of deferred gain on disposal of businesses via reinsurance (51,846) (60,186) (50,538) Change in income taxes 72,719 (56,016) 16,202 Net realized (gain)/loss on investments (3,909) 45,801 34,327 Other 393 1,106 (951) ----------- ----------- ----------- Net cash provided by operating activities 256,533 198,789 255,397 INVESTING ACTIVITIES Sales of: Fixed maturities available for sale 564,972 1,510,883 1,589,547 Equity securities available for sale 54,519 1,733,693 3,138,347 Other invested assets 24,322 3,688 32,206 Maturities, prepayments and scheduled redemption of: Fixed maturities available for sale 307,594 280,859 136,383 Purchase of: Fixed maturities available for sale (1,189,996) (1,997,147) (1,396,593) Equity securities available for sale (145,931) (1,723,664) (3,168,453) Other invested assets (13,885) (1,188) (30,467) (Increase) decrease in commercial mortgage loans on real estate (52,475) 76,810 119,519 Decrease (increase) in short term investments 174,167 (11,573) (114,545) (Increase) in policy loans (219) (365) (1,897) Net cash paid related to acquisition/sale of business - - (189,179) ----------- ----------- ----------- Net cash (used in) provided by investing activities $ (276,932) $ (128,004) $ 114,868
Years Ended December 31, 2004 2003 2002 (in thousands) Net income $ 119,593 $ 130,129 $ 100,648 Adjustments to reconcile net income to net cash provided by operating activities: Change in reinsurance recoverable (27,812 ) (59,107 ) (24,284 ) Change in premiums and accounts receivables (19,078 ) 865 39,124 Depreciation and amortization 1,033 1,125 1,253 Change in deferred acquisition costs and value of businesses acquired (3,095 ) (9,031 ) (15,322 ) Change in accrued investment income (2,017 ) (3,828 ) 5,429 Change in insurance policy reserves and expenses 211,093 222,012 165,188 Change in accounts payable and other liabilities 14,761 (36,088 ) (4,919 ) Change in commissions payable 3,636 (11,427 ) 5,854 Change in reinsurance balances payable 1,589 4,510 (4,875 ) Change in funds held under reinsurance (7 ) 16 (12 ) Amortization of deferred gain on disposal of businesses (43,299 ) (51,846 ) (60,186 ) Change in income taxes 11,413 72,719 (56,016 ) Net realized (gains)/losses on investments (8,371 ) (3,909 ) 45,801 Other 4,372 393 1,106 Net cash provided by operating activities 263,811 256,533 198,789 Sales of: Fixed maturities available for sale 584,290 564,972 1,510,883 Equity securities available for sale 38,126 54,519 1,733,693 Other invested assets 24,981 24,322 3,688 Maturities, prepayments, and scheduled redemption of: Fixed maturities available for sale 176,520 307,594 280,859 Purchase of: Fixed maturities available for sale (865,381 ) (1,189,996 ) (1,997,147 ) Equity securities available for sale (79,441 ) (145,931 ) (1,723,664 ) Other invested assets (18,318 ) (13,885 ) (1,188 ) Change in commercial mortgage loans on real estate (59,273 ) (52,475 ) 76,810 Change in short term investments 23,068 174,167 (11,573 ) Change in collateral held under securities lending 47,622 (72,350 ) (120,806 ) Change in policy loans 803 (219 ) (365 ) Net cash (used in) investing activities $ (127,003 ) $ (349,282 ) $ (248,810 ) See the accompanying notes to the consolidated financial statements
F-6
FORTIS BENEFITS INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS DECEMBERFortis Benefits Insurance Company
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002AND 2001
YEARS ENDED DECEMBER 31, --------------------------------------- 2003 2002 2001 --------- --------- --------- (IN THOUSANDS)FINANCING ACTIVITIES Activities related to investment products: Considerations received $ - $ - $ 43,713 Surrenders and death benefits - - (79,329) Interest credited to policyholders - - 7,174 Dividends paid - (60,000) (375,000) Other - - 4,308 --------- --------- --------- Net cash used in financing activities - (60,000) (399,134) Change in cash and cash equivalents (20,399) 10,785 (28,869) Cash and cash equivalents at beginning of period 49,575 38,790 67,659 --------- --------- --------- Cash and cash equivalents at end of period $ 29,176 $ 49,575 $ 38,790 ========= ========= ========= Supplemental information: Income taxes paid $ 7,702 $ 112,791 $ 317
2004 2003 2002 (in thousands) Dividends paid $ (75,000 ) $ — $ (60,000 ) Change in obligation under securities lending (47,622 ) 72,350 120,806 Net cash provided by (used in) financing activities (122,622 ) 72,350 60,806 Change in cash and cash equivalents 14,186 (20,399 ) 10,785 Cash and cash equivalents at beginning of period 29,176 49,575 38,790 Cash and cash equivalents at end of period $ 43,362 $ 29,176 $ 49,575 Supplemental information: Income taxes paid $ 48,447 $ 7,702 $ 112,791
Years Ended December 31, 2004 2003 2002 Supplemental schedule of non-cash investing activities: Non cash activities: Foreign currency translation $ 2,784 $ 5,189 $ (1,913 ) Assumptions of Protective DBD in 2002: Non-cash assets assumed: Goodwill and intangibles $ — $ — $ (3,796 ) Other assets — — 1,435 Federal income tax recoverable — — (2,044 ) Total assets assumed $ — $ — $ (4,405 ) Non-cash liabilities assumed: Claim liabilities and dividends payable $ — $ — $ 208 Accrued expenses and other liabilities — — (2,500 ) Total liabilities assumed $ — $ — $ (2,292 ) See the accompanying notes to the consolidated financial statements
F-7
FORTIS BENEFITS INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS DECEMBERFortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002AND 2001
--------------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (IN THOUSANDS)Supplemental schedule of non-cash investing activities: Non cash activities: Foreign currency translation 5,481 (1,913) 657 Assets and liabilities transferred in reinsurance transactions (Notes 3 and 4): Cessations of FFG in 2001: Non-cash assets (ceded) received: Compensation for ceded liabilities - - (500,000) Fixed maturities - - (161,579) Other investments - - (196,987) Capital gains on assets transferred - - 582 Other assets - - (20,367) Deferred acquisition costs - - (441,555) ---------- ---------- ---------- Total value of assets (ceded) received - - (1,319,906) ========== ========== ========== Non-cash liabilities ceded (assumed): Ceding commission - - 500,000 Future policy benefit reserves - - 1,049,137 Claim liabilities and dividends payable - - 14,928 Unearned premium reserves - - 241 Separate accounts seed money liability - - (21,387) Other liabilities - - 1,515 Proceeds reallocation - - 198,750 ---------- ---------- ---------- Total liabilities ceded (assumed) - - 1,743,184 ========== ========== ========== Deemed dividend to parent - - (198,750) Deferred tax asset - - 69,563 ---------- ---------- ---------- Net deemed dividend to parent - - (129,187) ========== ========== ========== Assumptions of Protective DBD in 2002 and 2001: Non-cash assets assumed: Goodwill and intangibles - (3,796) 143,204 Other assets - 1,435 20,890 Federal income tax recoverable - (2,044) 77,110 ---------- ---------- ---------- Total assets assumed - (4,405) 241,204 ========== ========== ========== Non-cash liabilities assumed Future policy benefit reserves - - (21,913) Unearned premium reserves - - (13,975) Claim liabilities and dividends payable - 208 (15,068) Accrued expenses and other liabilities - (2,500) (28,245) ----------- ---------- ---------- Total liabilities assumed - (2,292) (79,201) =========== ========== ==========See the accompanying notes to the consolidated financial statements F-8FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)
(In thousands except share data)1.
NATURE OF OPERATIONSNature of OperationsFortis Benefits Insurance Company (the
"Company"“Company”) is a provider of life and health insurance products.At December 31, 2003,On January 1, 2004, the Company was an indirect wholly owned subsidiary of Fortis, Inc.("Fortis"), which itself was an indirect, wholly owned subsidiary of Fortis(SA/NV) of Belgium and Fortis N.VN.V. of the Netherlands and Fortis SA/NV of Belgium (collectively,the "Parent"“Fortis”).through their affiliates, including their wholly owned subsidiary, Fortis Insurance N.V.On February 5, 2004,
the ParentFortis sold approximately 65% of its ownership interest inFortis.Assurant, Inc. via anInitial Public Offering ("IPO"initial public offering (the “IPO”) and retained approximately 35% of its ownership (50,199,130 shares). In connection with the IPO,Fortis.Fortis, Inc. was merged into Assurant, Inc., a Delaware corporation, which was formed solely for the purpose of the redomestication ofFortis.Fortis, Inc. After the merger, Assurant, Inc. became the successor to the business, operations and obligations ofFortis.Fortis, Inc. Assurant,IncInc. is traded on the New York Stock Exchange under the symbol AIZ.On January 21, 2005, Fortis owned approximately 36% (50,199,130 shares) of the Assurant, Inc. based on the number of shares outstanding that day and sold 27,200,000 of those shares in a secondary offering to the public. Assurant, Inc. did not receive any of the proceeds from the sale of shares of common stock by Fortis. Fortis received all net proceeds from the sale. Fortis concurrently sold exchangeable bonds, due January 26, 2008, that are mandatorily exchangeable for their remaining 22,999,130 shares of Assurant, Inc. Fortis may elect, prior to the maturity date of the bonds, a cash settlement alternative and pay the bondholders an amount of cash equal to the applicable market value of Assurant, Inc.’s common stock. The exchangeable bonds and the shares of the Assurant, Inc.’s common stock into which they are exchangeable have not been and will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
The Company
is incorporatedwas redomesticated to Iowa from Minnesota inMinnesota and2004. The Company distributes its products in all states except New York. TheCompany'sCompany’s revenues are derived principally from group employee benefits products and from individual, group health and pre-need products. The Company offers insurance products, including life insurance policies, annuity contracts, and group life, accident and health insurance policies.2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATIONSummary of Significant Accounting PoliciesBasis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
("GAAP"(“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates when recording transactions resulting from business operations based on information currently available. The most significant items on theCompany'sCompany’s balance sheet that involve accounting estimates and actuarial determinations are the value of business acquired (“VOBA”), goodwill, reinsurance recoverables, valuation of investments, deferred acquisition costs("DAC"(“DAC”), liabilities for future policy benefits and expenses, taxes, and claims and benefits payable. The accounting estimates and actuarial determinations are sensitive to market conditions, investment yields, mortality, morbidity, commissions and other acquisition expenses, and terminations by policyholders. As additional information becomes available orF-8
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)actual amounts are determinable, the recorded estimates will be revised and reflected in operating results. Although some variability is inherent in these estimates, the Company believes the amounts provided are
reasonable.reasonable and adequate.Dollar amounts are presented in U.S. dollars and all amounts are in thousands except for number of shares and securities.
PRINCIPLES OF CONSOLIDATIONPrinciples of Consolidation
The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant inter-company transactions and balances are eliminated in consolidation.
See notes 3 and 4 for acquisitions and dispositions of businesses. F-9FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA) COMPREHENSIVE INCOMEComprehensive Income
Comprehensive income is comprised of net income and other comprehensive income, which includes foreign currency translation, unrealized gains and losses on securities classified as available for sale, less deferred income taxes.
RECLASSIFICATIONSReclassifications
Certain prior period amounts
in the 2002 and 2001 consolidated financial statementshave been reclassified to conform to the20032004 presentation.CASH AND CASH EQUIVALENTSCash and Cash Equivalents
The Company considers cash on hand, all operating cash and working capital cash to be cash equivalents. These amounts are carried principally at cost, which approximates fair value. Cash balances are reviewed at the end of each reporting period to determine if negative cash balances exist. If negative cash balances do exist, the cash accounts are netted with other positive cash accounts of the same bank
providedproviding the right of offset exists between the accounts. If the right of offset does not exist, the negative cash balances are reclassified to accounts payable.INVESTMENTSInvestments
The
Company'sCompany’s investment strategy is developed based on many factors including appropriate insurance asset and liability management, rate of return, maturity, credit risk, tax considerations and regulatory requirements.Fixed maturities and equity securities are classified as available-for-sale and reported at fair value.
Changes inIf the fairvalues of availablevalue is higher than the amortized cost forsaledebt securitiesafter related deferred income taxesor the purchase cost for equity securities, the excess is an unrealized gain; andafter adjustment forif lower than cost, thechanges in the pattern of amortization of deferred policy acquisition costsdifference is an unrealized loss. The net unrealized gains and participating policyholder dividends, losses, less deferred income taxes are reported as included in accumulated other comprehensive income and, accordingly, have no effect on net income.The unrealized appreciation or depreciation in the fair value of available for sale securities is reported net of taxes that would have been required as a charge or credit to income had such unrealized amounts been realized.Commercial mortgage loans on real estate are reported at unpaid balances, adjusted for amortization of premium or discount, less allowance for losses.
Allowances, if necessary, are established for mortgage loans based on the difference between the unpaid loan balance and the estimated fair value of the underlying real estate when such loans are determined to be in default as to scheduled payments.The change in the allowance for losses is recorded as realized gains and losses on investments.Such allowances are based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable market price, or the fair market value of the collateral if the loan is collateral dependent.F-9
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)Policy loans are reported at unpaid principal balances, which do not exceed the cash surrender value of the underlying policies.
F-10FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)Short-term investments include all investment cash and
highly liquidshort maturity investments. These amounts are carried principally at cost, which approximates fair value.Other investments consist of investments in joint ventures and partnerships. The joint ventures and partnerships are valued according to the equity method of accounting. Any changes in the fair value are recorded as net realized gains and losses in the statement of operations.
The Company regularly monitors its investment portfolio to
ensuredetermine that investments that may be other than temporarily impaired are identified in a timely fashion and properly valued, and that any impairments are charged against earnings in the proper period. TheCompany'sCompany’s methodology to identify potential impairments requires professional judgment.Changes in individual security values are monitored on a
semi-monthlyregular basis in order to identify potentialproblem credits.credit problems. In addition, securities whose market price is equal to 85% or less of their original purchase price are added to the impairment watch list, which is discussed at monthly meetings attended by members of theCompany'sCompany’s investment, accounting and finance departments. Any security whose price decrease is deemed other-than-temporary is written down to its then current marketlevel.level with the amount of the writedown reflected as a realized loss in the Statement of Operations for that period. Assessment factors include, but are not limited to, the financial condition and rating of the issuer, any collateral held and the length of time the market value of the security has been below cost.Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events which affect one or more companies, industry sectors or countries could result in additional write downs in future periods for impairments that are deemed to be other-than-temporary.
Realized gains and losses on sales of investments and declines in value judged to be other-than-temporary are recognized on the specific identification basis.
Investment income is recorded as earned net of investment expenses.
The Company anticipates prepayments of principal in the calculation of the effective yield for mortgage-backed securities and structured securities. The majority of the
Company'sCompany’s mortgage-backed securities and structured securities are of high credit quality. Therefore, the retrospective method is used to adjust the effective yield.DERIVATIVE INSTRUMENTDerivative Instrument
In August 2003, the Company began to utilize derivative instruments in managing the PreNeed
segment'ssegment’s exposure to inflation risk. The derivative instrument, a Consumer Price Index Cap (the"CPI CAP"“CPI CAP”), limits the inflation risk on certain policies to a maximum of 5% and has a notional amount of $454,000 amortizing to zero over 20 years. The CPI CAP does not qualify under GAAP as an effective hedge; therefore, it is marked-to-market on a quarterly basis and the accumulated gain or loss is recognized in theF-10
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)results of operations in fees and other income. As of December 31,
2003,2004, the CPI CAP included in other assets amounted to$8,800$9,850 and the income recorded in the results of operations totaled$100. REINSURANCE$1,050.Reinsurance
Reinsurance recoverables include amounts related to paid benefits and estimated amounts related to unpaid policy and contract claims, future policyholder benefits and policyholder contract deposits. The cost of reinsurance is accounted for over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the policies. Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported in the consolidated balance sheets. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies. The ceding of
F-11FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)insurance does not discharge theCompany'sCompany’s primary liability to insureds. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency,management'smanagement’s experience, and current economic conditions.DEFERRED ACQUISITION COSTS (DAC)Deferred Acquisition Costs
The costs of acquiring new business
whichthat vary with and aredirectlyprimarily related to the production of new business are deferred to the extentrecoverable and amortized. For traditional and pre-need life insurance and long-term care products (included as accident and health products),that such costs areamortized over the premium paying period. For interest sensitive and investment products, such costs are amortized in relation to expecteddeemed recoverable from future premiums or gross profits. Acquisition costs primarily consist of commissions, policy issuance expenses, premium taxes and certain direct marketing expenses.A premium deficiency is recognized by a charge to the statement of operations as a reduction of DAC to the extent that future policy premiums, including anticipation of interest income, are not adequate to recover all DAC and related claims, benefits and expenses. If the premium deficiency is greater than unamortized DAC, a liability will be accrued for the excess deficiency.
PROPERTY AND EQUIPMENTShort Duration Contracts
Acquisition costs relating to group term life, group disability and group dental consist primarily of new business underwriting, field sales support, commissions to agents and brokers, and compensation to sales representatives. These acquisition costs are front-end loaded; thus they are deferred and amortized over the estimated terms of the underlying contracts.
Acquisition costs on individual medical contracts issued in most jurisdictions after 2002 and small group medical consist primarily of commissions to agents and brokers and compensation to representatives. These contracts are considered short duration because the terms of the contract are not fixed at issue and they are not guaranteed renewable. As a result, these costs are not deferred but rather they are recorded in the consolidated Statement of Operations in the period in which they are incurred.
Long Duration Contracts
Acquisition costs for pre-funded funeral life insurance policies and life insurance policies no longer offered are deferred and amortized in proportion to anticipated premiums over the premium-paying period. These acquisition costs relate primarily to commissions and marketing allowances.
F-11
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)For pre-funded funeral investment type annuities and universal life and investment-type annuities no longer offered, DAC is amortized in proportion to the present value of estimated gross margins or profits from investment, mortality, expense margins and surrender charges over the estimated life of the policy or contract. The assumptions used for the estimates are consistent with those used in computing the policy or contract liabilities.
Acquisition costs relating to individual medical contracts issued prior to 2003 and currently in a limited number of jurisdictions are deferred and amortized over the estimated average terms of the underlying contracts. These acquisition costs relate to commissions and policy issuance expenses. Commissions represent the majority of deferred costs and result from commission schedules that pay significantly higher rates in the first year. The majority of deferred policy issuance expenses are the costs of separately underwriting each individual medical contract.
Acquisition costs on the Fortis Financial Group (“FFG”) and Long-Term Care (“LTC”) disposed businesses were written off when the businesses were sold.
Property and Equipment
Property and equipment are reported at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over estimated useful lives with a maximum of 39.5 years for buildings, 7 years for furniture and 5 years for equipment. Expenditures for maintenance and repairs are charged to income as incurred. Expenditures for improvements are capitalized and depreciated over the remaining useful life of the asset. Depreciation expense was $1,033, $1,125,
$1,253and$1,243$1,253 for the years ended December 31, 2004, 2003 and 2002,and 2001,respectively.GOODWILLGoodwill
Goodwill represents the excess of acquisition costs over the net fair values of identifiable assets acquired and liabilities assumed in a business combination. The Company adopted Statement of Financial Accounting Standards No. 142
("(“FAS142"142”), Goodwill and Other Intangible Assets, as of January 1, 2002. Pursuant to FAS 142, goodwill is deemed to have an indefinite life and should not be amortized, but rather tested at least annually for impairment. The goodwill impairment test has two steps. The first identifies potential impairments by comparing the fair value of a reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step is not required. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write down is recorded. Prior to the adoption of FAS 142, goodwill was amortized over 20 years. Upon the adoption of FAS 142, the Company ceased amortizing goodwill. The measurement of fair value was determined based on a valuation report prepared by an independent valuation firm. The valuation was based on an evaluation of ranges of future discounted earnings, public company trading multiples and acquisitions of similar companies. Certain key assumptions considered include forecasted trends in revenues, operating expenses and effective tax rates.F-12FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBERThe Company performs a goodwill impairment test annually and has not recognized an impairment charge since adoption. The Company performed a January 1, 2005 impairment test during the three months ended March 31, 2005 and concluded that goodwill was not further impaired.F-12
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002AND 2001 (IN THOUSANDS EXCEPT SHARE DATA) SEPARATE ACCOUNTS
(In thousands except share data)Value of Businesses Acquired
VOBA is the identifiable intangible asset representing the value of the insurance businesses acquired. The amount is determined using best estimates for mortality, lapse, maintenance expenses and investment returns at date of purchase. The amount determined represents the purchase price paid to the seller for producing the business. Similar to the amortization of DAC, the amortization of VOBA is over the premium payment period for traditional life insurance policies and a small block of limited payment policies. For the remaining limited payment policies, pre-funded funeral life insurance policies, all universal life policies and annuities, the amortization of VOBA is over the expected life time of the policies.
VOBA is tested for recoverability annually. If it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses or loss expenses, then VOBA is charged to current earnings.
Separate Accounts
Assets and liabilities associated with separate accounts relate to premium and annuity considerations for variable life and annuity products for which the contract-holder, rather than the Company, bears the investment risk. Separate account assets are reported at fair value. Revenues and expenses related to the separate account assets and liabilities, to the extent of benefits paid or provided to the separate account policyholders, are excluded from the amounts reported in the accompanying consolidated statements of operations.
ThroughPrior to April
1,2, 2001, FFG had issued variable insurance products registered as securities under theCompany received administrative fees for managing the funds and other fees for assuming mortality and certain expense risks. Such fees were included in net earnedSecurities Act of 1933. These products featured fixed premiums,and other considerations in the consolidated statements of operations. Since April 1, 2001, all fees have been ceded to the Hartford Life Insurance and Annuity Company ("the Hartford") (see note 4). The Company received mortality and expense risk fees from the separate accounts, deducted monthly cost of insurance charges, and receiveda minimum death benefit,guarantee fees alongand policyholder returns linked to an underlying portfolio of securities. The variable insurance products issued by FFG have been 100% reinsured withissue and administrative fees fromThe Hartford Financial Services Group Inc. (“The Hartford”). The balance of reserve ceded for the variablelifeinsuranceseparate accounts prior to the sale. The Company made contractual mortality assurances to the variable annuity contract owners that the net assetsproducts issued by FFG was $870,764 and $890,592 as ofthe separate accounts will not be affected by future variations in the actual life expectancy experience of the annuitantsDecember 31, 2004 andbeneficiaries from the mortality assumptions implicit in the annuity contracts. The Company made periodic fund transfers to, or withdrawals from, the separate account assets for such actuarial adjustments for variable annuities in the benefit payment period. The Company also guarantees that the rates at which administrative fees are deducted from contract funds will not exceed contractual maximums. For variable life insurance, the Company guarantees that the rates at which insurance charges and administrative fees are deducted from contract funds will not exceed contractual maximums. The Company also guarantees that the death benefit will continue to be payable at the initial level regardless of investment performance so long as minimum premium payments are made. The risk associated with minimum business guarantees has been ceded to the Hartford as noted above. INCOME TAXES2003, respectively.Income Taxes
The Company reports its taxable income in a consolidated federal income tax return along with other affiliated subsidiaries of
Fortis.Assurant, Inc. Income tax expense or credits are allocated among the affiliated subsidiaries by applying corporate income tax rates to taxable income or loss determined on a separate return basis according to a Tax Allocation Agreement.Current federal income taxes are charged to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income taxes
reflect the net tax effects ofare recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which we expect the temporary differences to reverse. The Company is required to establish a valuation allowance forfinancial statement purposesany portion of the deferred tax assets that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the deferred tax assets and,for income tax purposes. OTHER ASSETStherefore, no such valuation allowance has been established.Other Assets
Other assets include prepaid items and intangible assets. Identifiable intangible assets with finite lives, including costs capitalized relating to developing software for internal use, are amortized on a straight-line basis over their estimated useful lives. The Company tests the intangible assets for impairment whenever circumstances warrant, but at least annually. If impairment exists, then
F-13FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)excess of the unamortized balance over the fair value of the intangible assets will be charged toincomeearnings at that time.FOREIGN CURRENCY TRANSLATION AssetsF-13
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 andliabilities2002
(In thousands except share data)Foreign Currency Translation
For those foreign affiliates where the foreign currency is the functional currency, unrealized foreign exchange gains (losses) net of
foreign operations reported in other than U.S. dollars are translated at the exchange rate in effect at the end of the period. Revenues, benefits and other expenses are translated at the average rate prevailing during the period. Cumulative translation adjustmentsincome taxes have been reflected inStockholder'sStockholders’ Equity under the caption"Accumulated“Accumulated other comprehensive income." REVENUES AND FUTURE POLICY BENEFIT RESERVES”Premiums
forShort Duration Contracts
The Company’s short duration contracts are those on which the Company recognizes revenue on a pro-rata basis over the contract term. The Company’s short duration contracts primarily include group term life, group disability, medical and dental, and individual medical contracts after 2002 in most jurisdictions.
Long Duration Contracts
Currently, the Company’s long duration contracts being sold are pre-funded funeral life insurance and investment type annuities. For pre-funded funeral life insurance policies, revenues are recognized when due from policyholders. For pre-funded funeral investment-type annuity contracts, revenues consist of charges assessed against policy balances.
For individual medical contracts sold prior to 2003, individual medical contracts currently sold in a limited number of jurisdictions and traditional life insurance contracts previously sold but no longer offered, revenue is recognized when due from policyholders.
Premiums for LTC insurance and
pre-needtraditional lifeproductsinsurance contracts within FFG are recognized asrevenuesrevenue when dueoverfrom thepremium-paying period.policyholder. For universal life insurance and investment-type annuity contracts within FFG, revenues consist of charges assessed against policy balances. For the FFG and LTC businesses previously sold, all revenue is ceded to Hartford Life and Annuity Insurance Company (“the Hartford”) and John Hancock Life Insurance Company (“John Hancock”), respectively.Reinsurance Assumed
Reinsurance premiums assumed are calculated based upon payments received from ceding companies together with accrual estimates, which are based on both payments received and in force policy information received from ceding companies. Any subsequent differences arising on such estimates are recorded in the period in which they are determined.
Fee Income
The Company primarily derives income from fees received from providing administrative services. Fee income is earned when services are performed.
Reserves
Reserves
for future policy benefitsarecomputedestablished according to GAAP, usingthe net level methodgenerally accepted actuarial methods and are based on a number of factors. These factors includeinvestment yield, mortality, withdrawal,experience derived from historical claim payments and actuarial assumptions to arrive at loss development factors. Such assumptions and otherassumptionsfactors include trends, the incidence of incurred claims, the extent to which all claims have been reported, and internalF-14
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)claims processing charges. The process used in computing reserves cannot be exact, particularly for liability coverages, since actual claim costs are dependent upon such complex factors as inflation, changes in doctrines of legal liabilities and damage awards. The methods of making such estimates and establishing the related liabilities are periodically reviewed and updated.
Short Duration Contracts
For short duration contracts, claims and benefits payable reserves are recorded when insured events occur. The liability is based on the
Company's experience, modifiedexpected ultimate cost of settling the claims. The claims and benefits payable reserves include (1) case basis reserves for known but unpaid claims asnecessaryof the balance sheet date; (2) incurred but not reported (“IBNR”) reserves for claims where the insured event has occurred but has not been reported to the Company as of the balance sheet date; and (3) loss adjustment expense reserves for the expected handling costs of settling the claims.For group disability, the case reserves and the IBNR are recorded at an amount equal to the net present value of the expected claims future payments. Group long-term disability and group term life waiver of premiums reserves are discounted to the valuation date at the valuation interest rate. The valuation interest rate is reviewed quarterly by taking into consideration actual and expected earned rates on our asset portfolio, with adjustments for investment expenses and provisions for adverse deviation. Group long-term disability and group term life reserve adequacy studies are performed annually, and morbidity and mortality assumptions are adjusted where appropriate.
Unearned premium reserves are maintained for the portion of the premiums on short duration contracts that is related to the unexpired period of the policies.
Long Duration Contracts
Future policy benefits and expense reserves on LTC, life insurance policies that are no longer offered, individual medical polices issued prior to 2003 or issued in a limited number of jurisdictions and the traditional life insurance contracts within FFG are recorded at the present value of future benefits to be paid to policyholders and related expenses less the present value of the future net premiums. These amounts are estimated and include assumptions as to the expected investment yield, inflation, mortality, morbidity and withdrawal rates as well as other assumptions that are based on the Company’s experience. These assumptions reflect anticipated trends and
toinclude provisions for possible unfavorable deviations.Revenues for interest sensitive and investment products consist of charges assessed against policy account balances during the period for the cost of insurance, policy administration, and surrender charges.Future policy
benefitbenefits and expense reservesare computed underfor pre-funded funeral investment-type annuities, universal life insurance policies and investment-type annuity contracts no longer offered, and theretrospective deposit methodvariable life insurance and investment-type annuity contracts in FFG consist of policy account balances before applicable surrendercharges.charges and certain deferred policy initiation fees that are being recognized in income over the terms of the policies. Policy benefits charged to expense during the period include amounts paid in excess of policy account balances and interest credited to policy account balances. Interest crediting rates foruniversal life and investment productspre-funded funeral investment-type annuities ranged from3%2.5% to7%5.5% in 2004, 20033%and 2002.Future policy benefits and expense reserves for pre-funded funeral life insurance contracts are recorded as the present value of future benefits to
10% inpolicyholders and related expenses less the present value of future net premiums. Reserve assumptions are selected using best estimates for expected investment yield,F-15
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)inflation, mortality and
3% to 14% in 2001. A portion of the Company's pre-need life products provide an increasing future benefit tied typically to the U.S. Consumer Price Index or a targeted growth rate established at management's discretion. All pre-need life products that have death benefit increases made at management's discretion are accounted for as interest-sensitive life products. Premiums for accident and health insurance products, including medical, long-term and short-term disability and dental insurance products, are recognized as revenues ratably over the contract period in proportion to the risk insured. Reserves for future disability benefitswithdrawal rates. These assumptions reflect current trends, are based on Company experience and include provision for possible unfavorable deviation. An unearned revenue reserve is also recorded for these contracts which represents the1987 Commissioners Group Disability Table. The valuation interest ratebalance of the excess of gross premiums over net premiums that isthe Single Premium Immediate Annuity valuation rate less 100 basis points. Claimsstill to be recognized in future years’ income in a constant relationship to insurance in force.Changes in the
first five years are modified based on the Company's actual experience. CLAIMS AND BENEFITS PAYABLE Other policy claims and benefits payable for reported and incurred but not reported claims and related claims adjustment expenses are determined using case-basis estimates and past experience. The methods of making such estimates and establishing the relatedestimated liabilities arecontinually reviewed and updated. Any adjustments resulting there fromcharged or credited to operations as the estimates arereflected in income currently. F-14FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA) GUARANTY FUND ASSESSMENTSrevised.Guaranty Fund Assessments
There are a number of insurance companies that are currently under regulatory supervision. This may result in future assessments to the Company by state guaranty fund associations to cover losses to policyholders of insolvent or rehabilitated companies. These assessments can be partially recovered through a reduction in future premium taxes in some states. The Company believes it has adequately provided for the impact of future assessments relating to current insolvencies.
RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the FinancialRecent Accounting
Standards Board ("FASB") issued FAS 146, Accounting for Costs Associated with Exit or Disposal Activities ("FAS 146"). This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit on Activity (Including Certain Costs Incurred in Restructuring ("EITF 94-3")). EITF 94-3 required accrual of liabilities related to exit and disposal activities at a plan (commitment) date. FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted this Statement on January 1, 2003. The adoption of this standard did not have a material impact on the Company's financial position or the results of operations. In November 2002, the FASB issued Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees ("FIN 45"). FIN 45 requires that a liability be recognized at the inception of certain guarantees for the fair value of the obligation, including the ongoing obligation to stand ready to perform over the term of the guarantee. Guarantees, as defined in FIN 45, include contracts that contingently require the Company to make payments to a guaranteed party based on changes in an underlying obligation that is related to an asset, liability or equity security of the guaranteed party, performance guarantees, indemnification agreements and indirect guarantees of indebtedness of others. This new accounting standard is effective for certain guarantees issued or modified after December 31, 2002. In addition, FIN 45 requires certain additional disclosures. The Company adopted this standard on January 1, 2003, and the adoption did not have a material impact on the Company's financial position or the results of operations. In April 2003, the FASB's Derivative Implementation Group ("DIG") released FAS 133 Implementation Issue B36, Embedded Derivatives: Modified Coinsurance Arrangement and Debt Instrument that Incorporates Credit Risk Exposures that are Unrelated or Only Partially Related to the Creditworthiness of the obligor under those Instruments ("DIG B36"). DIG B36 addresses whether FAS 133 requires bifurcation of a debt instrument into a debt host contract and an embedded derivative if the debt instrument incorporates both interest rate risk and credit risk exposures that are unrelated or only partially related to the creditworthiness of the issuer of that instrument. Under DIG B36, modified coinsurance and coinsurance with funds withheld reinsurance agreements as well as other types of receivables and payables where interest is determined by reference to a pool of fixed maturity assets or a total return debt index are examples of arrangements containing embedded derivatives requiring bifurcation. The Company adopted DIG B36 on October 1, 2003. The adoption of this standard did not have a material impact on the Company's financial position or the results of operations. F-15FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)PronouncementsIn April 2003, the FASB issued FAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities
("(“FAS149"149”). This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FAS 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective prospectively for contracts entered into or modified after June 30, 2003 and prospectively for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material impact on theCompany'sCompany’s financial position ortheresults of operations.On July 7, 2003, the Accounting Standards Executive Committee
("AcSEC"(“AcSEC”) of the American Institute of Certified Public Accountants("AICPA"(“AICPA”) issued Statement of Position 03-1,Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long Duration Contracts and for Separate Accounts("(“SOP03-1"03-1”). SOP 03-1 provides guidance on a number of topics unique to insurance enterprises, including separate account presentation, interest in separate accounts, gains and losses on the transfer of assets from the general account to a separate account, liability valuation, returns based on a contractually referenced pool of assets or index, accounting for contracts that contain death or other insurance benefit features, accounting for reinsurance and other similar contracts, accounting for annuitization benefits and sales inducements to contract holders. SOP 03-1will bewas effective for theCompany's consolidatedCompany’s financial statements on January 1, 2004.The Company assessed this statement and determined that the adoption of this statement will not have a material impact on the Company's financial position or the results of operations. In January 2003, the FASB issued Interpretation 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which clarifies the consolidation accounting guidance in ARB 51, Consolidated Financial Statements, as it applies to certain entities in which equity investors who do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties. Such entities are known as variable interest entities ("VIEs"). FIN 46 requires that the primary beneficiary of a VIE consolidate the VIE. FIN 46 also requires new disclosures for significant relationships with VIEs, whether or not consolidation accounting is either used or anticipated. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise holds a variable interest that was acquired after February 1, 2003. On October 8, 2003, the FASB deferred the adoption of FIN 46 until reporting periods ending after December 15, 2003.The adoption of this statement did not have a material impact on theCompany'sCompany’s financial position or the results of operations.3. MERGERS AND ACQUISITIONS PIERCE NATIONAL LIFE INSURANCE COMPANY ("PNL") On July 1, 2001,In December 2003, the
Company completed a statutory mergerFASB issued FAS 132 (Revised 2003),Employers’ Disclosure about Pensions and Other Postretirement Benefits(“FAS 132” – Revised 2003). This statement revises employers’ disclosure about pension plans and other postretirement benefit plans. This statement does not change the measurement or recognition of those plans required by FAS No. 87, Employers’ Accounting for Pensions, No. 88, Employers’ Accounting for Settlement and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. This statement retains the disclosure requirements contained in FAS 132, Employers’ Disclosure about Pensions and Other Postretirement Benefits, whichPierce National Lifeit replaces. It requires additional disclosure to that found in FAS 132 about the assets, obligations, cash flows, and net periodic benefit costF-16
Fortis Benefits Insurance Company
("PNL"), a California insurance company, merged with and into the Company (the "Merger"). Immediately prior
Notes tothe Merger, both the Company and PNL were indirect wholly owned subsidiaries of Fortis. The Merger was completed as part of an internal reorganization being effected by Fortis with respect to certain of its life and health insurance companies. This transaction was accounted for at F-16FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA) historical cost, similar to pooling of interests. The results of operations for PNL have been included as of January 1, 2001. DENTAL BENEFITS DIVISION ("DBD") OF PROTECTIVE LIFE CORPORATION ("PROTECTIVE") OnConsolidated Financial Statements
December 31,2001,2004, 2003 and 2002
(In thousands except share data)of defined benefit pension plans and other defined benefit postretirement plans and was effective for fiscal year ending after December 15, 2003. The Company’s Parent fully adopted this statement.
In March 2004, the
Company purchased ("the Purchase"Emerging Issues Task Force (“EITF”)the Dental Benefits Divisionreached a final consensus on Issue 03-1,The Meaning ofProtective Life Corporation ("Protective"Other Than Temporary Impairment and Its Application to Certain Investments(“EITF 03-1”).The Purchase included group dental, group lifeEITF 03-1 provides guidance on the disclosure requirements for other than temporary impairments of debt andgroup disability insurance products. The Company entered into a reinsurance agreement with Protective for these insurance products on a 100% co-insurance basis and performs administration services for such insurance products. The transaction wasmarketable equity investments that are accounted for under Financial Accounting Standard 115 (“FAS 115”). EITF 03-1 also provides guidance for evaluating whether an investment is other than temporarily impaired. The adoption of EITF 03-1 required thepurchase method. Consequently,Company to include certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under FAS 115 that are impaired at thepurchase price was allocated to assets acquired and liabilities assumed based on the relative fair values.balance sheet date but for which an other than temporary impairment has not been recognized. The disclosures were effective for financial statements for fiscal years ending after December 15, 2003. The Companyassumed approximately $75,000adopted the disclosure requirements ofreserves, $244,000EITF 03-1 at December 31, 2003. The guidance for evaluating whether an investment is other than temporarily impaired is effective for reporting periods beginning after June 15, 2004; however, the Financial Accounting Standards Board (“FASB”) has issued two new proposed Staff Positions. EITF 03-1a, which would defer the June 15, 2004 effective date of the requirement to record impairment losses caused by the effect of increases in interest rates or sector spreads on debt securities subject to paragraph 16 of EITF 03-1 until further guidance is provided and EITF 03-1b, which would exclude minor impairments from the requirement. Both Staff Positions are still in the comment period phase. The Company is continuing to evaluate the impact of adoption of this issue given the fact that portions of the issue are still in the comment period. The Company currently follows the guidance on other than temporary impairments provided by Staff Accounting Bulletin (“SAB”) 59,Accounting for Noncurrent Marketable Equity Securities.In May 2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-2,Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“FAS 106-2”), which provides guidance on accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”). The Act introduces (1) a prescription drug benefit under Medicare and (2) a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least “actuarially equivalent” to Medicare Part D. The FASB concluded that the subsidy should be treated as an actuarial gain pursuant to FAS 106,Employers’ Accounting for Postretirement Benefits Other Than Pensions. FAS 106-2 is effective for the first interim period or annual period beginning after June 15, 2004. Since the effects of the Act were not considered a significant event, the effects of the Act were incorporated in the next measurement of plan assets
including $147,000 of goodwillandintangibles and paid cash of approximately $169,000. During 2002,obligations, December 31, 2004. The Company believes that it will be entitled to the subsidy. Therefore, the Companyfinalizedadopted FAS 106-2 as of December 31, 2004. The adoption of FAS 106-2 did not have a material effect on either the Company’s accumulated postretirement benefit obligation or itspurchase price allocation and allocated $28,800 to intangible assets, net of deferred income taxes of $10,060. Thefinancial position or results ofoperationsoperations.F-17
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)
3. Investments The amortized cost and fair value of
the business acquired have been included in the consolidated financial statements since the date of acquisition. 4. DISPOSITIONS FORTIS FINANCIAL GROUP ("FFG") On April 2, 2001, the Company entered into a reinsurance agreement with the Hartford for the sale of its Fortis Financial Group ("FFG") division. FFG includes, among other blocks of business, certain individual life insurance policiesfixed maturities andannuity contracts (collectively, the "Insurance Contracts") written by the Company. Certain of the Insurance Contracts permit investment in, among other investment options, various series of the Fortis Series Fund. To execute the saleequity securities at December 31, 2004 were asit relates to the Company, the Hartford reinsured the Insurance Contracts on a 100% coinsurance basis (or 100% modified coinsurance basis for the Separate Accounts block) and agreed to administer the Insurance Contracts going forward. The Company received in connection with the sale an aggregate consideration of approximately $500,000 from the Hartford. The reinsurance contracts did not legally replace the Company as the insurer to policyholders or extinguish the Company's liabilities to its policyholders. The reserves for this block of business are included in the Company's reserves, see Note 9. The deferred gain is being amortized over the remaining estimated life of the underlying business. The amortization of the deferred gain is more rapid in the first few years after sale and will be slower as the liabilities in the reinsured block decrease. During 2003, 2002 and 2001, the Company recognized pre-tax income of approximately $51,501, $58,227, and $47,928, respectively, reflecting the amortization of a portion of the deferred gain in the results of operations. F-17FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA) 5. INVESTMENTSfollows:
Cost or Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value United States Government and government agencies and authorities $ 397,679 $ 12,531 $ (1,200 ) $ 409,010 States, municipalities and political subdivisions 21,442 1,432 (1 ) 22,873 Foreign governments 181,537 11,967 (8 ) 193,496 Public utilities 453,889 38,756 (291 ) 492,354 All other corporate bonds 2,302,121 187,522 (3,011 ) 2,486,632 Total fixed maturities $ 3,356,668 $ 252,208 $ (4,511 ) $ 3,604,365 Non-sinking fund preferred stocks $ 241,101 $ 8,081 $ (460 ) $ 248,722 Total equity securities $ 241,101 $ 8,081 $ (460 ) $ 248,722 The amortized cost and fair value of fixed maturities and equity securities at December 31, 2003 were as follows:
COST GROSS GROSS OR AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ------------ ---------- ---------- ----------FIXED MATURITIES BONDS: United States Government and government agencies and authorities $ 564,124 $ 15,429 $ (1,374) $ 578,179 States, municipalities and political subdivisions 30,089 999 - 31,088 Foreign governments 90,068 7,796 (90) 97,774 Public utilities 396,447 33,930 (195) 430,182 All other corporate bonds 2,146,315 172,407 (3,646) 2,315,076 ---------- ---------- ---------- ---------- Total fixed maturities $3,227,043 $ 230,561 $ (5,305) $3,452,299 ========== ========== ========== ========== EQUITY SECURITIES COMMON STOCKS: Banks, trusts and insurance companies - 32 - 32 NON-REDEEMABLE PREFERRED STOCKS: Non-sinking fund preferred stocks 199,287 8,934 (104) 208,117 ---------- ---------- ---------- ---------- Total equity securities $ 199,287 $ 8,966 $ (104) $ 208,149 ========== ========== ========== ==========The amortized cost and fair value of fixed maturities and equity securities at
Cost or Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value United States Government and government agencies and authorities $ 564,124 $ 15,429 $ (1,374 ) $ 578,179 States, municipalities and political subdivisions 30,089 999 — 31,088 Foreign governments 90,068 7,796 (90 ) 97,774 Public utilities 396,447 33,930 (195 ) 430,182 All other corporate bonds 2,146,315 172,407 (3,646 ) 2,315,076 Total fixed maturities $ 3,227,043 $ 230,561 $ (5,305 ) $ 3,452,299 Banks, trusts and insurance companies $ — $ 32 $ — $ 32 Non-sinking fund preferred stocks 199,287 8,934 (104 ) 208,117 Total equity securities $ 199,287 $ 8,966 $ (104 ) $ 208,149 F-18
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31,2002 were as follows:
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- ----------FIXED MATURITIES BONDS: United States Government and government agencies and authorities $ 554,369 $ 24,912 $ (11) 579,270 States, municipalities and political subdivisions 28,170 716 (2) 28,884 Foreign governments 65,274 8,178 (23) 73,429 Public utilities 348,456 22,595 (5,028) 366,023 All other corporate bonds 1,886,247 128,918 (18,082) 1,997,083 ---------- ---------- ---------- ---------- Total fixed maturities $2,882,516 $ 185,319 $ (23,146) $3,044,689 ========== ========== ========== ========== EQUITY SECURITIES NON-REDEEMABLE PREFERRED STOCKS: Non-sinking fund preferred stocks $ 108,002 $ 2,617 $ (8,405) $ 102,214 ---------- ---------- ---------- ---------- Total equity securities $ 108,002 $ 2,617 $ (8,405) $ 102,214 ========== ========== ========== ==========F-18FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31,2004, 2003 and 2002AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)
(In thousands except share data)The amortized cost and fair value of fixed maturities at December 31,
20032004 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED COST FAIR VALUE ---------- ----------Due in one year or less $ 24,471 $ 25,096 Due after one year through five years 390,353 420,516 Due after five years through ten years 971,603 1,039,626 Due after ten years 1,171,731 1,287,675 Total 2,558,158 2,772,913 Mortgage and asset backed securities 668,885 679,386 ---------- ---------- Total $3,227,043 $3,452,299 ========== ==========
Amortized Cost Fair Value Due in one year or less $ 93,764 $ 95,589 Due after one year through five years 378,611 404,872 Due after five years through ten years 1,042,275 1,104,188 Due after ten years 1,373,511 1,524,040 Total 2,888,161 3,128,689 Mortgage and asset backed securities 468,507 475,676 Total $ 3,356,668 $ 3,604,365 Gross gains of $16,151, $20,718
$69,152,and$48,963$69,152 and gross losses of $6,871, $7,783$76,629and$74,264$76,629 were realized onthesesales of fixed maturities and equity securities in 2004, 2003 and 2002,and 2001,respectively.Major categories of net investment income were as follows:
YEARS ENDED DECEMBER 31, --------------------------------------- 2003 2002 2001 --------- --------- ---------Fixed maturities $ 195,500 $ 200,458 $ 217,535 Equity securities 12,097 10,364 16,967 Commercial mortgage loans on real estate 49,940 52,392 65,524 Policy loans 588 575 2,156 Short-term investments 1,363 728 922 Other investments 8,592 1,932 9,428 Cash and cash equivalents 198 21 17 Investment expenses (8,474) (7,880) (6,172) --------- --------- --------- Net investment income $ 259,804 $ 258,590 $ 306,377 ========= ========= =========
Years Ended December 31, 2004 2003 2002 Fixed maturities $ 207,711 $ 195,500 $ 200,458 Equity securities 16,117 12,097 10,364 Commercial mortgage loans on real estate 55,329 49,940 52,392 Policy loans 574 588 575 Short-term investments 714 1,363 728 Other investments 4,805 8,592 1,932 Cash and cash equivalents 264 198 21 Investment expenses (9,821 ) (8,474 ) (7,880 ) Net investment income $ 275,693 $ 259,804 $ 258,590 The net realized gains (losses) recorded in income for 2004, 2003
2002and20012002 are summarized as follows:
YEARS ENDED DECEMBER 31, ---------------------------------------------- 2003 2002 2001 -------- -------- --------Fixed maturities $ 5,014 $(50,698) $(35,594) Equity securities (127) 3,981 (6,467) -------- -------- -------- Total marketable securities 4,887 (46,717) (42,061) Real estate - 917 7,810 Other (978) (1) (76) -------- -------- -------- Total $ 3,909 $(45,801) $(34,327) ======== ======== ========
Years Ended December 31, 2004 2003 2002 Fixed maturities $ 8,651 $ 5,014 $ (50,698 ) Equity securities 498 (127 ) 3,981 Total marketable securities 9,149 4,887 (46,717 ) Real estate (130 ) — 917 Other (648 ) (978 ) (1 ) Total $ 8,371 $ 3,909 $ (45,801 ) F-19
FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBERFortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)
(In thousands except share data)The Company recorded $131, $8,048
$39,240and$16,760$39,240 of pre-tax realized losses in 2004, 20032002and2001,2002, respectively, associated with other-than-temporary declines in value of available for sale securities.The investment category and duration of the Company’s gross unrealized losses on fixed maturities and equity securities at December 31, 2004 were as follows:
Less than 12 months 12 Months or More Total Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses United States Government and government agencies and authorities $ 25,493 $ (553 ) $ 19,646 $ (647 ) $ 45,139 $ (1,200 ) States, municipalities and political subdivisions 1,095 (1 ) — — 1,095 (1 ) Foreign governments 2,111 (8 ) — — 2,111 (8 ) Public utilities 35,647 (291 ) — — 35,647 (291 ) All other corporate bonds 185,309 (2,426 ) 17,422 (585 ) 202,731 (3,011 ) Total fixed maturities $ 249,655 $ (3,279 ) $ 37,068 $ (1,232 ) $ 286,723 $ (4,511 ) Non-sinking fund preferred stocks 29,961 (457 ) 140 (3 ) 30,101 (460 ) Total equity securities $ 29,961 $ (457 ) $ 140 $ (3 ) $ 30,101 $ (460 ) The total unrealized loss represents less than 2% of the aggregate fair value of the related securities. Approximately 75% of these securities in an unrealized loss position have been in a continuous loss position for less than twelve months. The total unrealized losses on securities that were in a continuous unrealized loss position for longer than six months but less than 12 months were approximately $2,254, with no security with a book value greater than $1,000 having a market value below 94% of book value.
As part of the Company’s ongoing monitoring process, the Company regularly reviews its investment portfolio to ensure that investments that may be other than temporarily impaired are identified on a timely basis and that any impairment is charged against earnings in the proper period. The Company has reviewed these securities and concluded that there were no additional other than temporary impairments as of December 31, 2004. Due to issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms and their continued expectations to do so, as well as the Company’s evaluation of the fundamentals of the issuers’ financial condition, the Company believes that the securities in an unrealized loss status are not impaired and intends to hold them until recovery.
The Company has made commercial mortgage loans, collateralized by the underlying real estate, on properties located throughout the United States. At December 31,
2003,2004, approximately49%52.5% of the outstanding principal balance of commercial mortgage loanswerewas concentrated in the states of California, New York,Connecticut,Pennsylvania and Florida. Although the Company has a diversified loan portfolio, an economic downturn could have an adverse impact on the ability of its debtors to repay their loans. The outstanding balance of commercial mortgage loans range in size from$55$43 to$9,350$12,962 at December 31,2003.2004. The mortgage loan balance is net of an allowance for losses of$13,287$12,820 and$13,228$13,287 at December 31, 2004 and 2003,and 2002,respectively.The Company had fixed maturities carried at
$188,785$293,587 and$57,353$188,785 at December 31,20032004 and2002,2003, respectively, on deposit with various governmental authorities as required by law.SECURITY LENDINGF-20
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)Security Lending
The Company engages in
transactions in which fixed maturities, especiallya securities lending program where bonds issued by the United States Government,andGovernment agencies, andauthorities,U.S. Corporations, are loaned to selected broker/dealers.Collateral, greater than or equal to 102%The company receives cash collateral in an amount that is in excess of thefairmarket value ofthesecuritieslent plus interest, is received in the form of cash or marketable securities and is held by a custodian for the benefit of the Company.loaned. The Company monitors the fair value of securities loaned and the collateral received,on a daily basis,with additional collateral obtained as necessary.The Company is subject to the risk of loss to the extent that the loaned securities are not returned and the value of the collateral is less than the market value of the securities loaned. Management believes such an event is unlikely.At December 31,20032004 and2002,2003, securities with a fair value of$376,234$319,227 and$301,065$376,234 respectively, were on loan to selectbrokers. 6. INCOME TAXESbrokers and are included in the Company’s available for sale investments.At December 31, 2004 and 2003, collateral with a fair value of $332,276 and $379,898, respectively, is included in the Company’s assets with an offsetting liability. The Company had a revision on the classification in the 2003 balance sheet to reflect the collateral held under securities lending.
4. Income Taxes
The Company and its subsidiary are subject to U.S. tax and is part of a U.S. consolidated federal income tax return with its parent,
Fortis,Assurant, Inc. Information about current and deferred tax expense follows:
YEARS ENDED DECEMBER 31, --------------------------------------------- 2003 2002 2001 -------- -------- --------Current expense: Federal $ 20,400 $ 20,320 $ 81,366 Foreign 2,821 485 3,330 -------- -------- -------- Total current expense 23,221 20,805 84,696 Deferred expense (benefit) Federal 43,914 23,420 (29,222) Foreign (522) - - -------- -------- -------- Total deferred expense (benefit) 43,392 23,420 (29,222) -------- -------- -------- Total income tax expense $ 66,613 $ 44,225 55,474 ======== ======== ========F-20FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA) The provision for foreign taxes includes amounts attributable to income from U.S. possessions that are considered foreign under U.S. tax laws.
Years Ended December 31, 2004 2003 2002 Current expense: Federal $ 35,219 $ 20,400 $ 20,320 Foreign 494 2,821 485 Total current expense 35,713 23,221 20,805 Deferred expense (benefit): Federal 24,712 43,914 23,420 Foreign (615 ) (522 ) — Total deferred expense (benefit) 24,097 43,392 23,420 Total income tax expense $ 59,810 $ 66,613 $ 44,225 International operations of the Company are subject to income taxes imposed by the jurisdiction in which they operate.
F-21
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)A reconciliation of the federal income tax rate to the
Company'sCompany’s effective income tax rate follows:
DECEMBER 31, --------------------------------- 2003 2002 2001 ------ ------ ------Federal income tax rate: 35.0% 35.0% 35.0% Reconciling items: Dividends received deduction (1.5) (0.5) (1.8) Permanent nondeductible expenses 0.4 (0.2) 0.4 Adjustment for deferred liabilities (0.9) - - Goodwill 0.5 - 0.3 Other 0.4 (3.8) 0.2 ------ ------ ------ Effective income tax rate: 33.9% 30.5% 34.1% ====== ====== ======
December 31, 2004 2003 2002 35.0 % 35.0 % 35.0 % Dividends received deduction (2.7 ) (1.5 ) (0.5 ) Permanent nondeductible expenses 0.2 0.4 (0.2 ) Adjustment for deferred liabilities (0.5 ) (0.9 ) — Change in reserve for prior year taxes 1.7 — — Goodwill — 0.5 — Other (0.4 ) 0.4 (3.8 ) 33.3 % 33.9 % 30.5 % The tax effects of temporary differences that result in significant deferred tax assets and deferred tax liabilities are as follows:
DECEMBER 31, ----------------------- 2003 2002 -------- --------Deferred tax assets: Policyholder and separate account reserves $ 18,974 $ 27,478 Accrued liabilities 13,067 16,207 Investment adjustments 14,527 15,857 Deferred acquisition costs 12,606 20,316 Other assets 77,011 100,254 -------- -------- Gross deferred tax assets 136,185 180,112 -------- -------- Deferred tax liabilities: Unrealized gains on fixed maturities and equities 81,936 54,795 -------- -------- Gross deferred tax liabilities 81,936 54,795 -------- -------- Net deferred income tax asset $ 54,249 $125,317 ======== ========
December 31, 2004 2003 Policyholder and separate account reserves $ 24,044 $ 18,974 Accrued liabilities 12,631 13,067 Investment adjustments 2,130 1,614 Deferred acquisition costs 17,014 12,606 Deferred gains on reinsurance 73,685 89,252 Other — 12,913 Gross deferred tax assets 129,504 148,426 Unrealized gains on fixed maturities and equities 90,245 81,936 Other Liabilities 18,744 12,241 Gross deferred tax liabilities 108,989 94,177 $ 20,515 $ 54,249 Under pre-1984 life insurance company income tax laws, a portion of a life insurance
company's "gaincompany’s “gain fromoperations"operations” was not subject to current income taxation but was accumulated, for tax purposes, in a memorandum account designated as"policyholders'“policyholders’ surplus account."” Amounts in this account only become taxable upon the occurrence of certain events. The approximate amount in this account was $12,145 at December 31,20032004 and2002, respectively. Deferred taxes have not been provided2003. The Company anticipates designating dividends in the amount of $12,145 over the next two years to be taken from the policyholders’ surplus account. In accordance with the JOBs Act, there will be no federal income tax onamounts in this account since the Company neither contemplates any action nor foresees any events occurring that would create such tax. F-21FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)these amounts.At December 31,
2003,2004, the Company and its subsidiaries had capital loss carryforwards for U.S. federal income tax purposes. Capital loss carryforwards total$36,893$14,634 and will all expire in 2007 if unused.7. STOCKHOLDER'S EQUITYF-22
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)
5. Stockholder’s Equity The Board of Directors of the Company has authorized 1,000,000 shares of common stock with a par value of $5 per share. All the shares are issued and outstanding as of December 31, 2004, 2003,
2002,and2001.2002. All the outstanding shares at December 31,20032004 are owned byFortisAssurant, Inc. (see Note 1). The Company paid dividends of $75,000, $0$60,000and$300,000$60,000 at December 31, 2004, 2003 and 2002,and 2001,respectively.The maximum amount of dividends which can be paid by the State of
MinnesotaIowa insurance companies to shareholders without prior approval of the Insurance Commissioner is subject to restrictions relating to statutory surplus (see Note8)6).8. STATUTORY INFORMATION
6. Statutory Information Statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the
MinnesotaIowa Department of Commerce.The principal differences between statutory accounting principles (SAP) and GAAP are: 1) policy acquisition costs are expensed as incurred under SAP, but are deferred and amortized under GAAP; 2) the value of business acquired is not capitalized under SAP but is under GAAP; 3) amounts collected from holders of universal life-type and annuity products are recognized as premiums when collected under SAP, but are initially recorded as contract deposits under GAAP, with cost of insurance recognized as revenue when assessed and other contract charges recognized over the periods for which services are provided; 4) the classification and carrying amounts of investments in certain securities are different under SAP than under GAAP; 5) the criteria for providing asset valuation allowances, and the methodologies used to determine the amounts thereof, are different under SAP than under GAAP; 6) the timing of establishing certain reserves, and the methodologies used to determine the amounts thereof, are different under SAP than under GAAP; and 7) certain assets are not admitted for purposes of determining surplus under SAP.
The
Company'sCompany’s statutory net income and capital and surplus are as follows:
YEARS ENDED AND AT DECEMBER 31, -------------------------------- 2003 2002 2001 --------- --------- ----------Statutory Net Income $ 121,896 $ 111,378 $ (48,150) ========= ========= ========== Statutory Capital and Surplus $ 560,896 $ 503,324 $ 485,031 ========= ========= ==========
Years Ended and at December 31, 2004 2003 2002 (Unaudited) Statutory Net Income $ 123,810 $ 121,896 $ 111,378 Statutory Capital and Surplus $ 584,177 $ 560,896 $ 503,324 Insurance enterprises are required by State Insurance Departments to adhere to minimum risk-based capital (RBC) requirements developed by the NAIC. The Company exceeds the minimum RBC requirements.
F-22FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)Dividend distributions to the parent are restricted as to the amount by state regulatory requirements. A dividend is extraordinary when combined with all other dividends and distributions made with in the preceding 12 months exceeds the greater of 10% of the insurers surplus as regards to policyholders on December 31 of the next preceding year, or the net gain from operations. In 2004, the Company declared
F-23
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)and paid dividends of $75,000, all of which were ordinary. In 2003, the Company declared no dividends. In 2002, the Company declared and paid dividends of $60,000, all of which were ordinary. The Company
paid $375,000 during 2001, $75,000 of which was declared in 2000. The Companyhas the ability, under state regulatory requirements, to dividend up to$131,000$120,280 to its parent in2004. In 1998, the NAIC adopted codified statutory accounting practices (Codification) effective January 1, 2001. Codification changed, to some extent, prescribed statutory accounting practices and resulted in changes to the accounting practices that the Company uses to prepare its statutory-basis financial statements. Codification required adoption by the various states before it became the prescribed statutory basis of accounting for insurance companies domesticated within those states. Minnesota adopted Codification effective January 1, 2001. The cumulative effect of all changes resulting2005 without permission fromthe Codification guidance was recorded as a direct adjustment to statutory surplus on January 1, 2001. The effect of the adoption was an increase to statutory surplus of $33,501 due primarily to deferred taxes. 9. REINSURANCEIowa regulators.
7. Reinsurance In the ordinary course of business, the Company is involved in both the assumption and cession of reinsurance with non-affiliated companies. The following table provides details of the reinsurance recoverables balance for the years ended December 31:
----------- ----------- 2003 2002 ----------- -----------Ceded future policy holder benefits and expense $ 1,132,484 $ 1,065,000 Ceded unearned premium 19,898 19,991 Ceded claims and benefits payable 40,459 57,259 Ceded paid losses recoverable 17,458 8,936 ----------- ----------- Total $ 1,210,299 $ 1,151,186 =========== ===========F-23FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)
2004 2003 Ceded future policy holder benefits and expense $ 1,155,253 $ 1,132,484 Ceded unearned premium 19,336 19,898 Ceded claims and benefits payable 43,566 40,459 Ceded paid losses 19,956 17,458 Total $ 1,238,111 $ 1,210,299 The effect of reinsurance on premiums earned and benefits incurred was as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------------ 2003 2002 2001 -------------------------------- --------------------------------- ------------------------------------ LONG SHORT LONG SHORT LONG SHORT DURATION DURATION TOTAL DURATION DURATION TOTAL DURATION DURATION TOTAL -------- -------- --------- -------- -------- ---------- ---------- ---------- ----------Gross earned premiums and other considerations $523,173 $1,293,519 $1,816,692 $630,036 $1,185,372 $1,815,408 $ 762,825 $1,227,156 $1,989,981 premiums assumed 23,335 194,222 217,557 30,431 249,311 279,742 42,778 13,721 56,499 premiums ceded (304,638) (23,930) (328,568) (384,547) (24,239) (408,786) (501,700) (11,259) (512,959) -------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- Net earned premiums and other considerations $241,870 $1,463,811 $1,705,681 $275,920 $1,410,444 $1,686,364 $ 303,903 $1,229,618 $1,533,521 ======== ========== ========== ======== ========== ========== ========== ========== ========== Gross policyholder benefits $843,127 $ 854,965 $1,712,520 $960,342 $ 860,953 $1,821,295 $1,730,617 $ 932,312 $2,662,929 benefits assumed 48,478 173,261 221,739 49,893 187,781 237,674 61,551 13,697 75,248 benefits ceded (635,745) (13,791) (649,536) (741,424) (12,780) (754,204) (1,497,510) (3,478) (1,500,988) -------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- Net policyholder benefits $255,860 $1,028,863 $1,284,723 $268,811 $1,035,954 $1,304,765 $ 294,658 $ 942,531 $1,237,189 ======== ========== ========== ======== ========== ========== ========== ========== ==========
Years Ended December 31, 2004 2003 2002 Long Short Long Short Long Short Duration Duration Total Duration Duration Total Duration Duration Total Gross earned Premiums and other considerations $ 512,103 $ 1,367,271 $ 1,879,374 $ 523,173 $ 1,293,519 $ 1,816,692 $ 630,036 $ 1,185,372 $ 1,815,408 Premiums assumed 18,383 160,827 179,210 23,335 194,222 217,557 30,431 249,311 279,742 Premiums ceded (278,496 ) (23,768 ) (302,264 ) (304,638 ) (23,930 ) (328,568 ) (384,547 ) (24,239 ) (408,786 ) Net earned premiums and other considerations $ 251,990 $ 1,504,330 $ 1,756,320 $ 241,870 $ 1,463,811 $ 1,705,681 $ 275,920 $ 1,410,444 $ 1,686,364 Gross policyholder Benefits $ 771,003 $ 935,634 $ 1,706,637 $ 843,127 $ 869,393 $ 1,712,520 $ 960,342 $ 860,953 $ 1,821,295 Benefits assumed 43,067 151,705 194,772 48,478 173,261 221,739 49,893 187,781 237,674 Benefits ceded (545,646 ) (3,761 ) (549,407 ) (635,745 ) (13,791 ) (649,536 ) (741,424 ) (12,780 ) (754,204 ) Net policyholder benefits $ 268,424 $ 1,083,578 $ 1,352,002 $ 255,860 $ 1,028,863 $ 1,284,723 $ 268,811 $ 1,035,954 $ 1,304,765 The Company had $108,097 and $112,027 of assets held in trusts as of December 31, 2004 and 2003, respectively, for the benefit of others related to certain reinsurance arrangements.
The Company utilizes ceded reinsurance for loss protection and capital management, business divestitures, client risk and profit sharing.
LOSS PROTECTION AND CAPITAL MANAGEMENTF-24
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)Loss Protection and Capital Management
As part of the
Company'sCompany’s overall risk and capacity management strategy, the Company purchases reinsurance for certain risks underwritten by the Company, including significant individual or catastrophic claims, and to free up capital to enable the Company to write additional business.Under indemnity reinsurance transactions in which the Company is the ceding insurer, the Company remains liable for policy claims if the assuming company fails to meet its obligations. To limit this risk, the Company has control procedures in place to evaluate the financial condition of reinsurers and to monitor the concentration of credit risk to minimize this exposure. The selection of reinsurance companies is based on criteria related to solvency and reliability and, to a lesser degree, diversification as well as on developing strong relationships with the
Company'sCompany’s reinsurance partners for the sharing of risks.BUSINESS DIVESTITURESBusiness Divestitures
The Company has used reinsurance to exit certain
businesses, such as the disposal of FFG (see note 4).businesses. Assets backing ceded liabilities related to this business are held in trust for the benefit of the Company and the separate accounts relating to FFG are still reflected as separate accounts in theCompany'sCompany’s balance sheet.F-24FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 ANDIn 2001,
(IN THOUSANDS EXCEPT SHARE DATA)the Company entered into a reinsurance agreement with the Hartford for the sale of its FFG division. The reinsurance recoverable from the Hartford was$890,592$870,764 and$903,655$890,592 as of December 31,20032004 and2002,2003, respectively. The Company would be responsible to administer this business in the event of a default by the reinsurer. In addition, under the reinsurance agreement, the Hartford is obligated to contribute funds to increase the value of the separateaccountsaccount assets relating tothemodified guaranteed annuity business sold if such valuedeclines.declines below the value of the associated liabilities. If the Hartford fails to fulfill these obligations, the Company will be obligated to make these payments.In 2000, the Company divested its
long term care insuranceLTC operations to JohnHancock Life Insurance Company (John Hancock).Hancock. Reinsurance recoverable from John Hancock was$239,621$290,993 and$152,833$239,621 as of December 31, 2004 and 2003, respectively.F-25
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002respectively. 10. RESERVES
(In thousands except share data)
8. Reserves The following table provides reserve information by major lines of business as of:
DECEMBER 31, 2003 DECEMBER 31, 2002 --------------------------------------------- ---------------------------------------------- FUTURE POLICY CLAIMS AND FUTURE POLICY CLAIMS AND BENEFITS AND UNEARNED BENEFITS BENEFITS AND UNEARNED BENEFITS EXPENSES PREMIUMS PAYABLE EXPENSES PREMIUMS PAYABLE ------------- ----------- ------------- ------------- ------------ -------------LONG DURATION CONTRACTS: Pre-funded funeral life insurance policies and annuity contracts $ 1,471,865 $ 2,042 $ 5,792 $ 1,318,202 $ 1,890 $ 5,833 Life insurance no longer offered 304,773 715 1,788 311,238 757 2,269 FFG and other disposed businesses 1,088,799 19,257 22,159 1,023,004 19,326 14,158 All other 3,887 521 3,819 5,001 1,307 6,102 SHORT DURATION CONTRACTS: Group term life - 12,375 368,873 - 10,638 426,730 Group disability - 3,830 1,313,014 - 3,844 1,216,786 Medical - 11,219 38,108 - 8,372 32,549 Dental - - 34,881 - 3,985 39,964 Other - 43 22,413 - 26 24,475 ------------- ----------- ------------- ------------- ------------ ------------- TOTAL $ 2,869,324 $ 50,002 $ 1,810,847 $ 2,657,445 $ 50,145 $ 1,768,866 ============= =========== ============= ============= ============ =============LONG DURATION CONTRACTS
December 31, 2004 December 31, 2003 Future Policy Claims and Future Policy Claims and Benefits and Unearned Benefits Benefits and Unearned Benefits Expenses Premiums Payable Expenses Premiums Payable Pre-funded funeral life insurance policies and investment-type annuity contracts $ 1,614,342 $ 1,984 $ 6,628 $ 1,471,865 $ 2,042 $ 5,792 Life insurance no longer offered 297,082 731 933 304,773 715 1,788 FFG and LTC disposed businesses 1,112,101 19,087 30,568 1,088,799 19,257 22,159 All other 4,505 122 2,430 3,887 521 3,819 Group term life — 8,995 369,435 — 12,375 368,873 Group disability — 3,714 1,378,853 — 3,830 1,313,014 Medical — 8,437 43,967 — 11,219 38,108 Dental — 3,088 31,794 — — 34,881 Other — 70 20,000 — 43 22,413 $ 3,028,030 $ 46,228 $ 1,884,608 $ 2,869,324 $ 50,002 $ 1,810,847 The
Company's long duration contracts are comprised of pre-funded funeral life insurance policies and annuity contracts, certain medical policies, life insurance policies no longer offered and annuities no longer offered and FFG and other disposed business. A description of the disposal of FFG can be found in the dispositions footnote (see note 4). The reserves for these blocks of business are included in the Company's reserves in accordance with FAS 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. The Company maintains an offsetting reinsurance recoverable related to these reserves (see note 9). F-25FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA) SHORT DURATION CONTRACTS The Company'sCompany’s short durationcontracts are comprised ofgroupterm life, group disability, certain medical and dental and all other. Thedisability category includes short and long term disability products. Claims and benefits payable for long-term disability have been discounted at 5.25%. The December 31,20032004 and20022003 liabilities include$1,301,790$1,367,434 and$1,205,187,$1,301,790, respectively of such reserves. The amount of discounts deducted from outstanding reserves as of December 31, 2004 and 2003 are $432,483 and2002 are$419,983,and $438,752,respectively.11. FAIR VALUE DISCLOSURES
9. Fair Value Disclosures Statement of Financial Accounting Standards No. 107,Disclosures About Fair Value of Financial Instruments
("(“FAS107"107”) requires disclosure of fair value information about financial instruments, as defined therein, for which it is practicable to estimate such fair value. These financial instruments may or may not be recognized in the consolidated balance sheets. In the measurement of the fair value of certain financial instruments, if quoted market prices were not available other valuation techniques were utilized. These derived fair value estimates are significantly affected by the assumptions used. Additionally, FAS 107 excludes certain financial instruments including those related to insurance contracts.In estimating the fair value of the financial instruments presented, the Company used the following methods and assumptions:
Cash, cash equivalents and short-term
investments:investments: the carrying amount reported approximates fair value because of the short maturity of the instruments.F-26
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)Fixed maturity
securities:securities: the fair value for fixed maturity securities is based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments.Equity
securities:securities: fair value of equity securities and non-sinking fund preferred stocks is based upon quoted market prices.Commercial mortgage loans and policy
loans:loans: the fair values of mortgage loans are estimated using discounted cash flow analyses, based on interest rates currently being offered for similar loans to borrowers with similar credit ratings. Mortgage loans with similar characteristics are aggregated for purposes of the calculations. The carrying amounts of policy loans are reported in the balance sheets at amortized cost, which approximates fair value.Other
investments:investments: the fair values of joint ventures are calculated based on fair market value appraisals. The carrying amounts of the remaining other investments approximate fair value.Policy reserves under investment
products:products: the fair values for theCompany'sCompany’s policy reserves under the investment products are determined using cash surrender value.Collateral and obligations under securities lending: the fair values of securities lending assets and liabilities are based on quoted market prices.
Separate account assets and
liabilities:liabilities: separate account assets and liabilities are reported at their estimated fair values in the balance sheet.F-26FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)Other assets:a derivative instrument, the CPI CAP, is recorded in other assets. The fair value of this derivative is based upon quoted market prices.
DECEMBER 31, 2003 DECEMBER 31, 2002 -------------------------------- -------------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE --------------- -------------- -------------- ---------------FINANCIAL ASSETS Cash and cash equivalents $ 29,176 $ 29,176 $ 46,819 $ 46,819 Fixed maturities 3,452,299 3,452,299 3,044,689 3,044,689 Equity securities 208,149 208,149 102,214 102,214 Commercial mortgage loans on real estate 634,615 694,890 578,517 656,268 Policy loans 10,678 10,678 10,301 10,301 Short-term investments 71,057 71,057 245,224 245,224 Other investments 51,831 51,831 62,248 62,248 Other assets 8,800 8,800 - - Assets held in separate accounts 3,516,070 3,516,070 3,126,978 3,126,978 FINANCIAL LIABILITIES Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal) $ 564,540 $ 556,524 $ 436,123 $ 430,199 Liabilities related to separate accounts 3,516,070 3,516,070 3,126,978 3,126,978
December 31, 2004 December 31, 2003 Carrying Value Fair Value Carrying Value Fair Value Cash and cash equivalents $ 43,362 $ 43,362 $ 29,176 $ 29,176 Fixed maturities 3,604,365 3,604,365 3,452,299 3,452,299 Equity securities 248,722 248,722 208,149 208,149 Commercial mortgage loans on real estate 695,921 779,111 634,615 694,890 Policy loans 9,956 9,956 10,678 10,678 Short-term investments 47,989 47,989 71,057 71,057 Collateral held under securities lending 332,276 332,276 379,898 379,898 Other investments 45,171 45,171 51,831 51,831 Other assets 9,850 9,850 8,800 8,800 Assets held in separate accounts 3,435,089 3,435,089 3,516,070 3,516,070 Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal) $ 595,799 $ 588,190 $ 564,540 $ 556,524 Obligations under securities lending 332,276 332,276 379,898 379,898 Liabilities related to separate accounts 3,435,089 3,435,089 3,516,070 3,516,070 The fair value of the
Company'sCompany’s liabilities for insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in theCompany'sCompany’s overall management of interest rate risk, such that theCompany'sF-27
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.
12. RETIREMENT AND OTHER EMPLOYEE BENEFITS
10. Retirement and Other Employee Benefits The Company is an indirect wholly-owned subsidiary of
Fortis,Assurant, Inc., which sponsors a defined benefit pension plan and certain other post retirement benefits covering employees and certain agents who meet eligibility requirements as to age and length of service. Plan assets of the defined benefit plans are not specifically identified by each participating subsidiary. Therefore, a breakdown of plan assets is not reflected in these financial statements. The Company has no legal obligation for benefits under these plans. The benefits are based on years of service and career compensation.Fortis'sAssurant’s pension plan funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes, and to charge each subsidiary an allocable amount based on its employee census. Pension cost allocated to the Company amounted to approximately $9,523, $6,329 and $3,640 for 2004, 2003 and$4,114 for 2003,2002,and 2001,respectively.The Company participates in a contributory profit sharing plan, sponsored by
Fortis,Assurant, covering employees and certain agents who meet eligibility requirements as to age and length of service. Benefits are payableF-27FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA)to participants on retirement or disability and to the beneficiaries of participants in the event of death. For employees hired on or before December 31, 2000, the first 3% of anemployee'semployee’s contribution is matched 200% by the Company. The second 2% is matched 50% by the Company. For employees hired after December 31, 2000, the first 3% of anemployee'semployee’s contribution is matched 100% by the Company. The second 2% is matched 50% by the Company. The amount expensed was approximately $4,902, $5,214 and $5,344 for 2004, 2003 and$5,216 for 2003,2002,and 2001,respectively.With respect to retirement benefits, the Company participates in other health care and life insurance benefit plans (postretirement benefits) for retired employees, sponsored by
Fortis.Assurant. Health care benefits, either through aFortisAssurant sponsored retiree plan for retirees under age 65 or through a cost offset for individually purchased Medigap policies for retirees over age 65, are available to employees who retire on or after January 1, 1993, at age 55 or older, with 10 years or more service. Life insurance, on a retiree pay all basis, is available to those who retire on or after January 1, 1993.There were no net postretirement benefit costs allocated to the Company for the years ended December 31, 2004, 2003
2002and2001.2002. The Company made contributions to the postretirement benefit plans of approximately $4,024, $1,961 and $2,275 in 2004, 2003 and$1,049 in 2003,2002,and 2001,respectively, as claims were incurred. During 2004, 20032002and20012002 the Company incurred expenses related to retirement benefits of $4,356, $2,247 and $1,223, respectively.F-28
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and$1,369, respectively. 13. DEFERRED POLICY ACQUISITION COSTS2002
(In thousands except share data)
12. Deferred Policy Acquisition Costs Information about deferred policy acquisition costs follows:
December 31, 2004 2003 2002 Beginning Balance $ 103,606 $ 77,737 $ 47,093 Costs deferred 78,106 74,048 73,616 Amortization (68,508 ) (52,630 ) (43,033 ) Foreign currency translation 2,856 4,451 61 �� Ending Balance $ 116,060 $ 103,606 $ 77,737
DECEMBER 31, ---------------------------------- 2003 2002 2001 ---------- --------- ----------Beginning Balance $ 71,171 $ 47,093 $ 453,361 Costs deferred 61,030 63,116 74,164 Amortization (44,535) (39,099) (45,315) Recovery13. Goodwill and Value of acquisition costs on FFG and other reinsurance - - (433,542) Foreign currency translation 4,451 61 - Other - - (1,575) ---------- --------- ---------- Ending Balance $ 92,117 $ 71,171 $ 47,093 ========== ========= ==========Business AcquiredF-28FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA) 14. GOODWILL AND VALUE OF BUSINESS ACQUIREDInformation about goodwill and value of business acquired (VOBA) follows:
GOODWILL FOR THE YEAR ENDED VOBA FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31, ---------------------------------- ----------------------------------- 2003 2002 2001 2003 2002 2001 --------- --------- --------- --------- --------- ---------Beginning Balance $ 156,006 $ 147,972 $ - $ 52,643 $ 61,312 $ 79,946 Amounts acquired - - 149,592 - - - Amortization, net of interest accrued - - (1,620) (7,466) (8,694) (10,621) Adjustment related to FFG sale - - - - - (8,013) Adjustment related to foreign currency translation 1,246 52 - 533 - - Final PGAAP Adj. on Protective Purchase & Other (267) 7,982 - - 25 - --------- --------- --------- --------- --------- --------- Ending Balance $ 156,985 $ 156,006 $ 147,972 $ 45,710 $ 52,643 $ 61,312 ========= ========= ========= ========= ========= =========
Goodwill for the Year Ended VOBA for the Year Ended December 31, December 31, 2004 2003 2002 2004 2003 2002 Beginning Balance $ 156,985 $ 156,006 $ 147,972 $ 45,710 $ 52,643 $ 61,312 Amortization, net of interest accrued — — — (6,503 ) (7,466 ) (8,694 ) Foreign Currency Translation and Other (881 ) 979 8,034 206 533 25 Ending Balance $ 156,104 $ 156,985 $ 156,006 $ 39,413 $ 45,710 $ 52,643 As of December 31,
2003,2004, the majority of the outstanding balance of VOBA is in theCompany'sCompany’s PreNeed segment. VOBA in this segment assumes an interest rate ranging from 6.5% to 7.5%.At December 31,
20032004 the estimated amortization of VOBA for the next five years is as follows:
Year Amount 2005 5,240 2006 4,479 2007 3,787 2008 2,993 2009 2,219 F-29
Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)
YEAR AMOUNT - -------------- ------------2004 6,209 2005 5,240 2006 4,479 2007 3,787 2008 2,99314. Other Comprehensive Income 15. OTHER COMPREHENSIVE INCOMEThe
Company'sCompany’s components of other comprehensive income (loss) net of tax at December 31 are as follows:
Foreign Currency Translation Unrealized Gains on Accumulated Other Adjustment Securities Comprehensive Income Balance at December 31, 2001 $ 657 $ 27,757 $ 28,414 Activity in 2002 (1,913 ) 74,696 72,783 Balance at December 31, 2002 (1,256 ) 102,453 101,197 Activity in 2003 5,189 50,016 55,205 Balance at December 31, 2003 3,933 152,469 156,402 Activity in 2004 2,784 13,489 16,273 Balance at December 31, 2004 $ 6,717 $ 165,958 $ 172,675
FOREIGN CURRENCY UNREALIZED GAINS ACCUMULATED OTHER TRANSLATION (LOSSES) ON SECURITIES, COMPREHENSIVE INCOME ADJUSTMENT NET OF TAX (LOSS) ---------------- ----------------------- ---------------------Balance at December 31, 2000 $ - $ (23,163) $ (23,163) Activity in 2001 657 50,920 51,577 --------- --------- --------- Balance at December 31, 2001 657 27,757 28,414 Activity in 2002 (1,913) 74,696 72,783 --------- --------- --------- Balance at December 31, 2002 (1,256) 102,453 101,197 Activity in 2003 5,481 49,724 55,205 --------- --------- --------- Balance at December 31, 2003 $ 4,225 $ 152,177 $ 156,402 ========= ========= =========15. Related Party Transactions F-29FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA) 16. RELATED PARTY TRANSACTIONSThe Company receives various services from
FortisAssurant and its affiliates. These services include assistance in benefit plan administration, corporate insurance, accounting, tax, auditing, investment, information technology and other administrative functions. The fees paid toFortis,Assurant, Inc. for these services for years ended December 31, 2004, 2003 and 2002, were $18,735, $15,518 and2001, were $15,518,$15,406,and $9,332,respectively. Information technology expenses were $11,725, $11,048$8,711and$10,436$8,711 for years ended December 31, 2004, 2003 and 2002,and 2001,respectively.In conjunction with the marketing of its fixed and variable annuity and variable life products, the Company paid $0, $0 and $19,313 in commissions to its affiliate, Fortis Investors, Inc., for the years ended December 31, 2003, 2002 and 2001, respectively.Administrative expenses allocated for the Company may be greater or less than the expenses that would be incurred if the Company were operating on a separate company basis.
The Company assumes pre-funded funeral business from its affiliate, United Family Life Insurance Company (UFL). The Company has assumed premium from UFL of $15,136, $19,332 and $25,048 in 2004, 2003 and
$35,919 in 2003,2002,and 2001,respectively. The Company assumed$632,716$600,447 and$665,081$632,716 of reserves in20032004 and2002,2003, respectively, from UFL.The Company assumes group disability business from its affiliate, First Fortis Life Insurance Company (First Fortis). The Company has assumed $6,526, $5,847
$6,705and$6,622$6,705 of premium from First Fortis in 2004, 20032002and2001,2002, respectively. The Company has assumed$22,096$23,533 and$21,905$22,096 of reserves in20032004 and2002,2003, respectively, from First Fortis.17. SUBSEQUENT EVENTS In connection with the IPO (see Note 1) the board of directors of Assurant, Inc. approved certain employee benefit programs. The Company's intercompany allocations will be impacted by the following changes: 2004 LONG-TERM INCENTIVE PLAN The 2004 Long-Term Incentive Plan was effective on February 5, 2003. The 2004 Long-Term Incentive Plan authorizes the granting of awardsF-30
Fortis Benefits Insurance Company
Notes toemployees, officers, and directors in the following forms: (1) options to purchase shares of Assurant's common stock, which may be non-statutory stock options or incentive stock options under the U.S. tax code; (2) stock appreciation rights, which give the holder the right to receive the difference between the fair market value per share on the date of exercise over the grant price; (3) performance awards, which are payable in cash or stock upon the attainment of specified performance goals; (4) restricted stock, which is subject to restrictions on transferability and subject to forfeiture on terms set by the Compensation Committee; (5) dividend equivalents, which entitle the participant to payments equal to any dividends paid on the shares of stock underlying an award; and (6) other stock-based awards in the discretion of the Compensation Committee, including unrestricted stock grants. F-30FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA) There are 10,000,000 shares reserved and available for issuance under the plan. Under the plan, 68,976 shares of common stock of Assurant, Inc. were granted to certain officers of Assurant, Inc. on February 5, 2004. Any awards will be made at the discretion of the Compensation Committee. Therefore, it is not presently possible to determine the benefits or amounts that will be received by any individuals or groups pursuant to the 2004 Long-Term Incentive Plan in the future. 2004 EMPLOYEE STOCK PURCHASE PLAN The 2004 Employee Stock Purchase Plan will go into effect on or about July 1, 2004. The purpose of the stock purchase plan is to enhance the proprietary interest among the employees of Assurant, Inc. The stock purchase plan is designed to allow eligible employees to purchase discounted shares of the Assurant's common stock, at defined intervals, with their accumulated payroll deductions. Employees are eligible to participate if they are designated by the Compensation Committee and if they are customarily employed for at least 20 hours per week and five months per calendar year, and provided they have served as an employee for at least six months. A total of 5,000,000 shares of Assurant's common stock have been reserved for issuance under the stock purchase plan. EXECUTIVE MANAGEMENT INCENTIVE PLAN The Executive Management Incentive Plan went into effect January 1, 2004. Participation in the Executive Management Incentive Plan is limited to senior officers of Assurant, Inc. and its subsidiaries who are selected to participate in the plan for a given year by the Compensation Committee. The plan provides for the payment of annual monetary awards to each participant equal to a percentage of such participant's base salary based upon the achievement of certain designated performance goals. The amount of awards under the plan will be determined at the discretion of the Compensation Committee. Therefore, it is not presently possible to determine the benefits or amounts that will be received by any individuals or groups pursuant to this plan. AMENDMENT TO ASSURANT APPRECIATION INCENTIVE RIGHTS PLAN ("AAIR PLAN") The AAIR Plan was amended to provide for the cash-out and replacement of Assurant, Inc. incentive rights with stock appreciation rights on the Assurant, Inc. common stock. The business segment rights outstanding under the plan were not changed or effected. The conversion of outstanding Assurant, Inc. incentive rights occurred as described in this paragraph. The Assurant, Inc. incentive rights were valued as ofConsolidated Financial Statements
December 31, 2004, 2003using a special valuation method, as follows. The measurement value of each Assurant, Inc. incentive right as of December 31,and 2002was adjusted to reflect dividends paid by Assurant, Inc., consistent with past practices; such adjusted value was then multiplied by the arithmetic average of the change during calendar year 2003 in the Dow Jones Life Insurance Index, the Dow Jones Property Casualty Index, and the Dow Jones Healthcare Providers Index; and the result became the measurement value of a Assurant, Inc. incentive rights as of December 31, 2003. On January 18, 2004, each Assurant, Inc. incentive right then outstanding under the plan was cashed out for a cash payment equal to the difference, if any, between the measurement value of the Assurant, Inc. incentive rights as of December 31st immediately preceding the date of grant, and the measurement value of that right determined as of December 31, 2003, pursuant to the special valuation. Each outstanding Assurant, Inc. incentive right, whether or not vested, was cancelled effective as of the date it was cashed out. Following the cash-out and cancellation of Assurant, Inc. incentive rights, Assurant, Inc. granted to each participant whose rights were cashed out a number of stock appreciation rights on F-31FORTIS BENEFITS INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS EXCEPT SHARE DATA) Assurant's common stock (referred to as "replacement rights"). The number of replacement rights granted to a participant was equal (1) the measurement value of the participant's cashed-out Assurant, Inc. incentive rights, divided by (2) the IPO price of $22 a share. Each replacement right that replaces a vested cashed-out right was vested immediately, and each replacement right that replaces a non-vested cashed-out right will become vested on the vesting date for the corresponding cashed-out right, but no replacement right, whether or not vested, may be exercised sooner than one year from the closing date of the IPO. After that waiting period, each replacement right will be exercisable for the remaining term of the corresponding cancelled right. 18. COMMITMENTS AND CONTINGENCIES
(In thousands except share data)
16. Commitments and Contingencies The Company and its subsidiaries lease office space and equipment under operating lease arrangements. Certain facility leases contain escalation clauses based on increases in the
lessors'lessors’ operating expenses. At December 31,2003,2004, the aggregate future minimum lease payment under operating lease agreements that have initial or non-cancelable terms in excess of one year are:
2004 10,003 2005 8,704 2006 7,343 2007 6,395 2008 5,651 Thereafter 11,640 -------- Total minimum future lease payment $ 49,736 ========
2005 9,741 2006 8,154 2007 6,621 2008 5,619 2009 4,235 Thereafter 7,715 Total minimum future lease payments $ 42,085 Rent expense was
$1,048, $978$11,147, $10,373 and$761$10,262 for 2004, 2003 and 2002and 2001respectively.The Company is regularly involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. The Company may from time to time be subject to a variety of legal and regulatory actions relating to the
Company'sCompany’s current and past business operations. While the Company cannot predict the outcome of any pending or future litigation, examination or investigation, the Company does not believe that any pending matter will have a material adverse effect on theCompany'sCompany’s business, financial condition or results of operations.F-32F-31