10-Q 1 c64382e10-q.txt QUARTERLY REPORT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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 13-2699219 (State or other jurisdiction of (IRS Identification No.) incorporation or organization) 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 2 FIRST FORTIS LIFE INSURANCE COMPANY BALANCE SHEETS (In thousands, except share data)

JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) ASSETS Investments: Fixed maturities, at fair value (amortized cost 2001 -- $119,452; 2000 - $130,242) $120,067 $129,784 Policy loans 6 4 Short-term investments 29,344 9,450 -------- -------- 149,417 139,238 Cash and cash equivalents 3,257 1,659 Receivables: Uncollected premiums, less allowance (2001 and 2000 -- $100) 2,394 3,417 Reinsurance recoverable on unpaid and paid losses 46,387 36,761 Other 875 1,267 -------- -------- 49,656 41,445 Accrued investment income 1,953 2,215 Deferred policy acquisition costs 179 4,127 Property and equipment at cost, less accumulated depreciation (2001 -- $1,752; 2000 -- $1,732) 58 78 Deferred federal income taxes 6,763 3,283 Goodwill, less accumulated amortization (2001 -- $ 483; 2000 - $460) 347 370 Assets held in separate accounts 69,582 73,582 -------- -------- Total assets $281,212 $265,997 ======== ========

3 FIRST FORTIS LIFE INSURANCE COMPANY BALANCE SHEETS (In thousands, except per share data)

JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY Policy reserves and liabilities: Future policy benefit reserves: Life insurance $ 30,818 $ 32,443 Interest sensitive and investment products 5,221 4,916 Accident and health 80,827 76,830 -------- -------- 116,866 114,189 Unearned revenues 9,784 10,058 Other policy claims and benefits payable 11,447 14,205 Income taxes payable 4,844 1,035 Deferred gain on reinsurance transactions 13,507 2,086 Liabilities related to separate accounts 69,582 73,582 -------- -------- Total policy reserves and liabilities 234,673 222,619 Shareholder's equity: Common stock, $20 par value: authorized, issued and outstanding shares -- 100,000 2,000 2,000 Additional paid-in capital 37,440 37,440 Retained earnings 6,687 4,223 Accumulated other comprehensive income (loss) 412 (285) -------- -------- Total shareholder's equity 46,539 43,378 Total policy reserves, liabilities and shareholder's equity $281,212 $265,997 ======== ========

See accompanying notes. 4 FIRST FORTIS LIFE INSURANCE COMPANY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands)

SIX MONTHS ENDED JUNE 30, --------------------------- 2001 2000 ------------ ------------ (UNAUDITED) REVENUES Insurance operations: Life insurance premiums $ 10,406 $ 12,083 Interest sensitive and investment product policy charges 378 210 Accident and health insurance premiums 20,144 19,622 -------- -------- 30,928 31,915 Net investment income 4,822 4,638 Realized losses on investments (412) (1,078) Other income 1,059 829 -------- -------- Total revenues 36,397 36,304 BENEFITS AND EXPENSES Benefits to policyholders: Life insurance 6,773 11,116 Interest sensitive and investment products 478 225 Accident and health claims 15,864 16,747 -------- -------- 23,115 28,088 Amortization of deferred policy acquisition costs 165 146 Insurance commissions 2,974 2,106 General and administrative expenses 6,352 6,325 -------- -------- Total benefits and expenses 32,606 36,665 -------- -------- Income (loss) before federal income taxes 3,791 (361) Income taxes expense (benefits) Current 5,182 1,328 Deferred (3,855) (1,454) -------- -------- 1,327 (126) -------- -------- Net income (loss) 2,464 (235) Other comprehensive income (loss): Unrealized gain (loss) on investments 697 (549) -------- -------- Comprehensive income (loss) $ 3,161 $ (784) ======== ========

See accompanying notes 5 FIRST FORTIS LIFE INSURANCE COMPANY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands)

THREE MONTHS ENDED JUNE 30, --------------------------- 2001 2000 ------------ ------------ (UNAUDITED) REVENUES Insurance operations: Life insurance premiums $ 4,910 $ 5,657 Interest sensitive and investment product policy charges -- 165 Accident and health insurance premiums 10,246 10,448 -------- -------- 15,156 16,270 Net investment income 2,404 2,346 Realized losses on investments (110) (351) Other income 819 508 -------- -------- Total revenues 18,269 18,773 BENEFITS AND EXPENSES Benefits to policyholders: Life insurance 2,321 4,974 Interest sensitive and investment products -- 167 Accident and health claims 8,603 8,949 -------- -------- 10,924 14,090 Amortization of deferred policy acquisition costs 6 61 Insurance commissions 1,657 873 General and administrative expenses 3,094 3,069 -------- -------- Total benefits and expenses 15,681 18,093 -------- -------- Income (loss) before federal income taxes 2,588 680 Income taxes expense (benefits) Current 4,871 709 Deferred (3,965) (471) -------- -------- 906 238 -------- -------- Net income (loss) 1,682 442 Other comprehensive income: Unrealized loss on investments (1,124) (739) -------- -------- Comprehensive income (loss) $ 558 $ (297) ======== ========

See accompanying notes 6 FIRST FORTIS LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS (In thousands, Unaudited)

SIX MONTHS ENDED JUNE 30, --------------------------- 2001 2000 ------------ ------------ OPERATING ACTIVITIES Net income (loss) $ 2,464 $ (235) Adjustments to reconcile net income to net cash provided by (used in) operating activities: (Decrease) increase in future policy benefit reserves and other policy claims and benefits (398) 7,074 Provision for deferred federal income taxes (3,856) (1,454) Increase (decrease) in federal income taxes 3,809 (508) Increase (decrease) in other liabilities 1,179 (3,949) Depreciation, amortization and accretion 3,991 441 Amortization of investment premiums, net (87) 17 Amortization of gain on reinsurance transactions 11,421 -- Decrease in uncollected premiums, accrued investment income and other 1,677 612 Increase in reinsurance recoverable (9,626) (3,470) Net realized loss on investments 412 1,078 -------- -------- Cash provided by (used in) Operating Activities 10,986 (393) INVESTING ACTIVITIES Purchases of fixed maturity investments (26,840) (29,821) Sales or maturities of fixed maturity investments 37,303 29,555 Decrease (increase) in equity securities and short-term investments (19,894) (2,610) -------- -------- Net cash used in investing activities (9,431) (2,876) FINANCING ACTIVITIES Activities related to investment products: Considerations received 1,863 2,609 Surrenders and death benefits (1,904) (2,151) Interest credited to policyholders 84 149 -------- -------- Net cash provided by financing activities 43 607 Increase (decrease) in cash 1,598 (2,662) Cash and cash equivalents at beginning of period 1,659 4,562 -------- -------- Cash and cash equivalents at end of period $ 3,257 $ 1,900 ======== ========

See accompanying notes 7 FIRST FORTIS LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS (In thousands, Unaudited)

SIX MONTHS ENDED JUNE 30, --------------------------- 2001 2000 ------------ ------------ SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES Assets and liabilities transferred in reinsurance transactions: Non-cash Assets ceded: Compensation for ceded liabilities $(15,000) $ -- Other assets (1,623) -- Deferred acquisition costs (3,957) -- -------- -------- Total value of assets ceded $(20,580) ======== ======== Non-cash liabilities ceded: Ceding commission $ 15,000 $ -- Future policy benefit reserves 7,125 -- Other liabilities (182) -- -------- -------- Total liabilities ceded $ 21,943 ======== ========

See accompanying notes 8 FIRST FORTIS LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS June 30, 2001 (In thousands, Unaudited) General: The accompanying unaudited financial statements of First Fortis Life Insurance Company contain all adjustments necessary to present fairly the balance sheet as of June 30, 2001 and the related statement of income for the six months ended June 30, 2001 and 2000, and cash flow for the six months ended June 30, 2001 and 2000. Income tax payments for the six months ended June 30, 2001 and June 30, 2000 were $1,373 and $1,836 respectively. 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 June 30, 2001 all fixed maturity and equity securities are classified as available-for-sale and carried at fair value. The amortized cost and fair values of investments available-for sale were as follows at June 30, 2001 (in thousands):

Gross Gross Amortized Unrealized Unrealized Fair Cost Gain Loss Value ---------- ---------- ---------- ---------- Fixed Income Securities: Governments $ 19,278 $ 251 $ 202 $ 19,327 Public utilities 13,495 199 361 13,333 Industrial and miscellaneous 86,679 2,007 1,279 87,407 -------- -------- -------- -------- Total $119,452 $ 2,457 $ 1,842 $120,067 ======== ======== ======== ========

9 FIRST FORTIS LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS June 30, 2001 (In thousands, Unaudited) The amortized cost and fair value of available-for-sale investments in fixed maturities at June 30, 2001 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 $ 6,278 $ 6,334 Due after one year through five years 23,265 23,965 Due after five years through ten years 45,573 45,457 Due after ten years 44,336 44,311 -------- -------- Total $119,452 $120,067 ======== ========

Proceeds from sales and maturities of investments in fixed maturities in the six-month period ended June 30, 2001 and 2000 were $37,303 and $29,555 respectively. Gross gains of $914 and $38 and gross losses of $1,326 and $1,116 were realized on sales during the six-month period ended June 30, 2001 and 2000, respectively. Net Investment Income and Realized Losses on Investments: Major categories of net investment income and realized gains and losses on investments for the first six months of each year were as follows:

Investment Income Realized Loss ------------------- ------------------- 2001 2000 2001 2000 ------- ------- ------- ------- Fixed maturities $ 4,526 $ 4,444 $ (412) $(1,078) Short-term investments 373 254 -- -- ------- ------- ------- ------- 4,899 4,698 $ (412) $(1,078) Expenses (77) (60) ======= ======= ------- ------- Net investment income $ 4,822 $ 4,638 ======= =======

10 FIRST FORTIS LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE YEAR-TO-DATE 2001 COMPARED TO JUNE YEAR-TO-DATE 2000 REVENUES First Fortis (the Company) life insurance premiums decreased during the first six months of 2001, as compared to the same period in 2000 due to an increase in the level of group life accidental death premium ceded in 2001. Group disability and dental sales account for the increase in accident and health premiums. Accident and health premiums are principally composed of group accident and health coverages. Dental, disability income, and medical premium represented 54%, 46%, and 0%, respectively, of total first half group accident and health premium in 2001 compared to 51%, 47%, and 2%, respectively, in 2000. The decrease in the group medical premium as a percent of the total group accident and health premium is due to the run-out of a block of business that discontinued sales in 1996. The Company continues to match investment portfolio composition to liquidity needs and capital requirements. Changes in interest rates during 2001 and 2000 resulted in recognition of realized gains and losses upon sales of securities. The Company had net capital losses of $0.4 million for the first six months of 2001 as compared to net capital losses of $1.1 million for the same period of 2000. BENEFITS Second quarter year-to-date 2001 life benefits as compared to premium were lower than 2000 and is attributed to higher 2000 paid claim activity and reserve increases. Second quarter year-to-date 2001 accident and health benefits as compared to premium were lower than the same period in 2000 due primarily to 2000 losses paid and additional reserves established for the discontinued group medical business. 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 expenses as a percent of premium remained flat at 20% from 2001 to 2000. The Company continues to strive for improvements in the expense to gross revenue ratio while maintaining quality and timely services to the policyholders. 11 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 and mortgage loan portfolios 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. 12 The National Association of Insurance Commissioners has implemented risk-based capital standards to determine the capital requirements of a life insurance company based upon the risks inherent in its operations. These standards require the computation of a risk-based capital amount which is then compared to a company's actual total adjusted capital. Based upon current calculation using these risk-based capital standards, the Company's percentage of total adjusted capital is in excess of ratios which would require regulatory attention. The Company has no long or short term debt. As of June 30, 2001, 98% 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. 13 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. None b. A Form 8-K was filed April 16, 2001, wherein the sale of certain individual life insurance policies and annuity contracts were reported. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this repot to be signed on its behalf by the undersigned thereunto duly authorized. First Fortis Life Insurance Company (Registrant) /s/ Larry M. Cains --------------------------------------- Larry M. Cains Treasurer Date: August 14, 2001