10-Q 1 c77096e10vq.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 333-14761 FIRST FORTIS LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter) NEW YORK (State or other jurisdiction of incorporation or organization) 13-2699219 (IRS Identification No.) 308 MALTBIE STREET, SUITE 200, SYRACUSE, NY 13204 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: 315-451-0066 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X FIRST FORTIS LIFE INSURANCE COMPANY BALANCE SHEETS (In thousands, except share data) PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS.

MARCH 31, DECEMBER 31, 2003 2002 ----------- -------------- (UNAUDITED) ASSETS Investments: Fixed maturities, at fair value (amortized cost 2003 - $163,048; $ 173,947 $ 175,616 2002 - $166,221) Preferred stock (cost 2003- $6,022, 2002- $3,054) 6,074 3,100 Policy loans 26 24 Short-term investments 2,726 3,394 Real estate and other investment 348 348 ---------- -------------- 183,121 182,482 Cash and cash equivalents 4,108 2,041 Receivables: Uncollected premiums, less allowance (2002 and 2001 - $100) 2,239 1,627 Reinsurance recoverable on unpaid and paid losses 108,767 109,942 Other 2,112 1,457 ---------- -------------- 113,118 113,026 Accrued investment income 2,407 2,333 Deferred policy acquisition costs 1,454 1,570 Property and equipment at cost, less accumulated depreciation (2003 and 2002 - $1,752) 1 4 Due from affiliates -- 1,511 Deferred federal income taxes 3,555 4,170 Goodwill 1,949 1,971 Assets held in separate accounts 39,444 43,430 ---------- -------------- Total assets $ 349,157 $ 352,538 ========== ==============

The accompanying notes are an integral part of the financial statements. 2 FIRST FORTIS LIFE INSURANCE COMPANY BALANCE SHEETS (In thousands, except share data)

MARCH 31, DECEMBER 31, 2003 2002 ---------- -------------- (UNAUDITED) POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY Policy reserves and liabilities: Future policy benefit reserves: Life insurance $ 52,312 $ 55,084 Interest sensitive and investment products 6,576 6,699 Accident and health 92,198 92,598 ---------- -------------- 151,086 154,381 Unearned revenues 25,012 24,906 Other policy claims and benefits payable 30,497 31,424 Income taxes payable 1,981 2,478 Due to affiliates 798 -- Other liabilities 25,659 24,846 Liabilities related to separate accounts 39,444 43,430 ---------- -------------- Total policy reserves and liabilities 274,477 281,465 ---------- -------------- Shareholder's equity: Common stock, $20 par value: authorized, issued 2,000 2,000 and outstanding shares --100,000 Additional paid-in capital 43,006 43,006 Retained earnings 22,764 20,139 Accumulated other comprehensive income 6,910 5,928 ---------- -------------- Total shareholder's equity 74,680 71,073 ---------- -------------- Total policy reserves, liabilities and shareholder's equity $ 349,157 $ 352,538 ========== ==============

The accompanying notes are an integral part of the financial statements. 3 FIRST FORTIS LIFE INSURANCE COMPANY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, unaudited)

THREE MONTH ENDED MARCH 31, 2003 2002 ---------- -------------- Revenues: Insurance operations: Life insurance premiums $ 5,469 $ 6,965 Accident and health insurance premiums 11,962 12,255 ---------- -------------- 17,431 19,220 Net investment income 2,580 2,776 Net realized (losses) gains on investments (55) 54 Other income 569 639 ---------- -------------- Total revenues 20,525 22,689 BENEFITS AND EXPENSES: Benefits to policyholders: Life insurance 4,077 4,668 Accident and health claims 6,048 8,511 ---------- -------------- 10,125 13,179 Amortization of deferred policy acquisition costs 196 1,165 Insurance commissions 3,082 2,914 General and administrative expenses 3,083 2,984 ---------- -------------- Total benefits and expenses 16,486 20,242 Income before federal income taxes 4,039 2,447 Income taxes expense Current 1,328 810 Deferred 86 42 ---------- -------------- 1,414 852 Net income 2,625 1,595 Other comprehensive income (loss): Unrealized gain (loss) on investments 982 (2,323) ---------- -------------- Comprehensive income (loss) $ 3,607 $ (728) ========== ==============

The accompanying notes are an integral part of the financial statements. 4 FIRST FORTIS LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS (In thousands, unaudited)

THREE MONTHS ENDED MARCH 31, 2003 2002 ---------- -------------- Operating Activities Net income $ 2,625 $ 1,595 Adjustments to reconcile net income to net cash used in operating activities: (Decrease) increase in future policy benefit reserves and other policy claims and benefits (4,117) 1,364 Provision for deferred federal income taxes 86 42 Decrease in federal income taxes (497) (4,974) Increase in other liabilities 2,092 1,027 Depreciation, amortization and accretion 141 1,080 Amortization of investment premiums, net (6) (65) Amortization of gain on reinsurance transaction (480) (568) Decrease in uncollected premiums, accrued investment income and other 170 1,251 Decrease (increase) in reinsurance recoverable 1,175 (3,676) Net realized loss (gain) on investments 55 (54) ---------- -------------- Cash Provided By (Used in) Operating Activities 1,244 (2,978) INVESTING ACTIVITIES Purchases of fixed maturity investments (13,466) (37,219) Sales of fixed maturity investments 13,623 35,784 Purchases of other investments (22,976) (37,650) Sales of other investments 23,641 41,383 ---------- -------------- Net Cash Provided By Investing Activities 822 2,298 Increase (decrease) in cash 2,066 (680) Cash and cash equivalents at beginning of period 2,042 5,598 ---------- -------------- Cash and cash equivalents at end of period $ 4,108 $ 4,918 ========== ==============

The accompanying notes are an integral part of the financial statements. 5 FIRST FORTIS LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS March 31, 2003 1. GENERAL The accompanying unaudited financial statements of First Fortis Life Insurance Company contain all adjustments necessary to present fairly the balance sheet as of March 31, 2003 and the related statement of income for the three months ended March 31, 2003 and 2002, and cash flow for the three months ended March 31, 2003 and 2002. Income tax payments for the three months ended March 31, 2003 and March 31, 2002 were $1,825 and $5,784 respectively. 2. INVESTMENTS The classification of fixed maturity investments is to be made at the time of purchase and, prospectively, that classification is expected to be reevaluated as of each balance sheet date. At March 31, 2003 all fixed maturity and equity securities are classified as available-for-sale and carried at fair value. The amortized cost and fair values of investments available-for-sale were as follows at March 31, 2003 (in thousands):

GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSS VALUE ---------- ---------- ---------- ---------- Fixed Income Securities: Governments $ 12,461 $ 772 $ -- $ 13,233 Public utilities 12,337 1,114 -- 13,451 Industrial and miscellaneous 138,250 9,335 322 147,263 ---------- ---------- ---------- ---------- Total 163,048 11,221 322 173,947 Equity Securities 6,022 85 33 6,074 ---------- ---------- ---------- ---------- Total $ 169,070 $ 11,306 $ 355 $ 180,021 ========== ========== ========== ==========

6 FIRST FORTIS LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS March 31, 2003 The amortized cost and fair value of available-for-sale investments in fixed maturities at March 31, 2003 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

AMORTIZED FAIR COST VALUE ---------- ---------- Due in one year or less $ 4,503 $ 4,616 Due after one year through five years 30,257 32,255 Due after five years through ten years 56,127 59,539 Due after ten years 72,161 77,537 ---------- ---------- Total $ 163,048 $ 173,947 ========== ==========

Proceeds from sales and maturities of investments in fixed maturities in the three-month period ended March 31, 2003 and 2002 were $ 13,623 and $35,783, respectively. Gross gains of $119 and $677 and gross losses of $174 and $623 were realized on sales during the three-month period ended March 31, 2003 and 2002, respectively. Net Investment Income and Net Realized Losses on Investments: Major categories of net investment income and realized gains and losses on investments for the first three months of each year were as follows:

Investment Income Realized (Loss) Gain ------------------------ ------------------------ 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Fixed maturities $ 2,519 $ 2,821 $ (55) $ 54 Short-term investments 87 33 -- -- ---------- ---------- ---------- ---------- 2,606 2,854 $ (55) $ 54 ========== ========== Expenses (26) (78) ---------- ---------- Net investment income $ 2,580 $ 2,776 ========== ==========

7 FIRST FORTIS LIFE INSURANCE COMPANY March 31, 2003 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. MARCH 31, 2003 COMPARED TO MARCH 31, 2002 REVENUES First Fortis (the Company) life insurance premium are principally composed of group life and credit life coverages. Group life and credit life business represented 76% and 24%, respectively of premium for the three months ended March 31, 2003; and 60% and 40%, respectively of premium for the three months ended March 31, 2002. This shift in premium from 2003 to 2002 is due to the credit life line's non renewal of business. Premium decreases associated with the credit accident and health line also decreased as a result of business non renewals. Slightly offsetting this accidental and health credit premium decrease is an increase in dental premium from the three months ended March 31, 2002 to the three months ended March 31, 2003. The Company continues to match investment portfolio composition to liquidity needs and capital requirements. Investment income decreased from $2.8 million during the three months ended March 31, 2002 to $2.6 million during the three months ended March 31, 2003 due to lower yielding investment markets. Changes in interest rates during the first quarter of 2002 and 2003 resulted in recognition of realized gains and losses upon sales of securities. BENEFITS The total Company ratio of benefits to premium decreased to 58% for the three months ended March 31, 2003 from 68% for the three months ended March 31, 2002. Relatively larger case terminations on the accident and health disability line during the first quarter of 2003 compared to the first quarter of 2002 and the Company's continued review of credit life reserve estimates are the primary reasons for the benefit to premium ratio shifts. EXPENSES The Company continues to monitor its commission rate structures, and, as indicated by market conditions, periodically adjusts rates paid. Rates paid vary by product type, group size and duration. The Company's general and administrative expense to premium first quarter ratio increased to 18% at three months ended March 31, 2003 from 16% at three months ended March 31, 2002. Shifts in the mix of business are the primary reason for this increase as different products require varying levels of administrative costs. The Company continues to strive for improvements in the expense to gross revenue ratio while maintaining quality and timely services to the policyholders. 8 FIRST FORTIS LIFE INSURANCE COMPANY March 31, 2003 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. MARKET RISK AND RISK MANAGEMENT Interest rate risk is the Company's primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the profitability of insurance products and market value of investments. The yield realized on new investments generally increases or decreases in direct relationship with interest rate changes. The market value of the Company's fixed maturity investments generally increases when interest rates decrease, and decreases when interest rates increase. Interest rate risk is monitored and controlled through asset/liability management. As part of the risk management process, different economic scenarios are modeled, including cash flow testing required for insurance regulatory purposes, to determine that existing assets are adequate to meet projected liability cash flows. A major component of the Company's asset/liability management program is structuring the investment portfolio with cash flow characteristics consistent with the cash flow characteristics of the Company's insurance liabilities. The Company uses computer models to perform simulations of the cash flow generated from existing insurance policies under various interest rate scenarios. Information from these models is used in the determination of interest crediting strategies and investment strategies. The asset/liability management discipline includes strategies to minimize exposure to loss as market interest rates change. On the basis of these analyses, management believes there is no material solvency risk to the Company with respect to interest rate movements up or down of 100 basis points from year end levels. Equity market risk exposure is not significant. Equity investments in the general account are not material enough to threaten solvency and contract owners bear the investment risk related to the variable products. Therefore, the risks associated with the investments supporting the variable separate accounts are assumed by contract owners, not by the Company. The Company provides certain minimum death benefits that depend on the performance of the variable separate accounts. Currently the majority of these death benefit risks are reinsured which then protects the Company from adverse mortality experience and prolonged capital market decline. LIQUIDITY AND CAPITAL RESOURCES The liquidity requirements of the Company have been met by funds provided from operations, including investment income. Funds are principally used to provide for policy benefits, operating expenses, commissions and investment purchases. The impact of the declining inforce medical business has been considered in evaluating the Company's future liquidity needs. The Company expects its operating activities to continue to generate sufficient funds. The National Association of Insurance Commissioners has implemented risk-based capital standards to determine the capital requirements of a life insurance company based upon the risks 9 FIRST FORTIS LIFE INSURANCE COMPANY March 31, 2003 inherent in its operations. These standards require the computation of a risk-based capital amount which is then compared to a company's actual total adjusted capital. Based upon current calculation using these risk-based capital standards, the Company's percentage of total adjusted capital is in excess of ratios which would require regulatory attention. The Company has no long or short term debt. As of March 31, 2003, 93.5% of the Company's fixed maturity investments consisted of investment grade bonds. The Company does not expect this percentage to change significantly in the future. REGULATION The Company is subject to the laws and regulations established by the New York State Insurance Department governing insurance business conducted in New York State. Periodic audits are conducted by the New York Insurance Department related to the Company's compliance with these laws and regulations. To date, there have been no adverse findings regarding the Company's operations. ITEM 4. CONTROLS AND PROCEDURES. The Company, under the direction of the Chief Executive Officer and the Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Within 45 days of the filing of this report, the Chief Executive Officer and the Chief Financial Officer have reviewed and evaluated the Company's disclosure controls and procedures, Based on, and as of the date of, that review and evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effectively serving the stated purposes. In addition, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. No significant deficiencies or material weaknesses in the internal controls were identified during the evaluation and, as a consequence, no corrective action is required to be taken. 10 FIRST FORTIS LIFE INSURANCE COMPANY March 31, 2003 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a. Written Statement of Chief Executive Officer (Exhibit 99.1) Written Statement of Chief Financial Officer (Exhibit 99.2) b. None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. First Fortis Life Insurance Company (Registrant) /s/ LARRY M. CAINS ----------------------------- Larry M. Cains Treasurer Date: May 13, 2003 11 FIRST FORTIS LIFE INSURANCE COMPANY March 31, 2003 CERTIFICATION OF PERIODIC REPORT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, the undersigned Chief Executive Officer of First Fortis Life Insurance Company (the "Company"), do hereby certify, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. I have reviewed the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2003 (this "Report"); 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and have: a) Designated such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) Evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Report (the "Evaluation Date"); and c) Presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this Report whether there were significant changes in internal controls or in the other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ ROBERT B. POLLOCK -------------------------- Robert B. Pollock Chief Executive Officer 12 FIRST FORTIS LIFE INSURANCE COMPANY March 31, 2003 CERTIFICATION OF PERIODIC REPORT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, the undersigned Chief Financial Officer of First Fortis Life Insurance Company (the "Company"), do hereby certify, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. I have reviewed the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2003 (this "Report"); 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and have: a) Designated such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) Evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Report (the "Evaluation Date"); and c) Presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this Report whether there were significant changes in internal controls or in the other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ LARRY M. CAINS -------------------------- Larry M. Cains Chief Financial Officer 13