10-Q 1 g69404e10-q.txt FIRST FORTIS LIFE INSURANCE COMPANY 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 March 31, 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 (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 [ ] 2 FIRST FORTIS LIFE INSURANCE COMPANY BALANCE SHEETS (In thousands)

MARCH 31, DECEMBER 31, 2001 2000 ------------------------------ (UNAUDITED) ASSETS Investments: Fixed maturities, at fair value (amortized cost 2001 -- $129,780; 2000 -- $130,242) $ 132,123 $ 129,784 Policy Loans 6 4 Short-term investments 7,600 9,450 ------------------------------ 139,729 139,238 Cash and cash equivalents 550 1,659 Receivables: Uncollected premiums, less allowance (2001 and 2000 -- $100) 2,864 3,417 Reinsurance recoverable on unpaid and paid losses 38,494 36,761 Other 11 1,267 ------------------------------ 41,369 41,445 Accrued investment income 2,349 2,215 Deferred policy acquisition costs 4,138 4,127 Property and equipment at cost, less accumulated depreciation (2001 -- $1,742; 2000 -- $1,732) 68 78 Deferred federal income taxes 2,193 3,283 Goodwill, less accumulated amortization (2001 -- $471; 2000 -- $460) 359 370 Assets held in separate accounts 65,968 73,582 ------------------------------ Total assets $ 256,723 $ 265,997 ==============================

3 FIRST FORTIS LIFE INSURANCE COMPANY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY (In thousands)

MARCH 31, DECEMBER 31, 2001 2000 ----------------------------- (UNAUDITED) POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY Policy reserves and liabilities: Future policy benefit reserves: Life insurance $ 32,159 $ 32,443 Interest sensitive and investment products 5,184 4,916 Accident and health 78,267 76,830 ----------------------------- 115,610 114,189 Unearned revenues 9,623 10,058 Other policy claims and benefits payable 13,248 14,205 Income taxes payable 1,323 1,035 Other liabilities 2,991 7,464 Deferred gain on LTC sale 1,979 2,086 Liabilities related to separate accounts 65,968 73,582 ----------------------------- Total policy reserves and liabilities 210,742 222,619 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 5,005 4,223 Accumulated other comprehensive income (loss) 1,536 (285) ----------------------------- Total shareholder's equity 45,981 43,378 ----------------------------- Total policy reserves, liabilities and shareholder's equity $ 256,723 $ 265,997 ============================

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

THREE MONTHS ENDED MARCH 31, 2001 2000 ------------------------------- (UNAUDITED) REVENUES Insurance operations: Life insurance premiums $ 5,496 $ 6,426 Interest sensitive and investment product policy charges 378 45 Accident and health insurance premiums 9,898 9,174 ------------------------------- 15,772 $ 15,645 Net investment income 2,418 2,292 Realized losses on investments (302) (727) Other income 240 321 ------------------------------- Total revenues 18,128 17,531 BENEFITS AND EXPENSES Benefits to policyholders: Life insurance 4,452 6,142 Interest sensitive and investment products 478 58 Accident and health claims 7,261 7,798 ------------------------------- 12,191 13,998 Amortization of deferred policy acquisition costs 159 85 Insurance commissions 1,317 1,233 General and administrative expenses 3,258 3,256 ------------------------------- Total benefits and expenses 16,925 18,572 ------------------------------- Income (loss) before federal income taxes 1,203 (1,041) Income taxes expense (benefits) Current 311 619 Deferred 110 (983) ------------------------------- 421 (364) ------------------------------- Net income (loss) 782 (677) Other comprehensive income: Unrealized gain on investments 1,821 6,344 ------------------------------- Comprehensive income $ 2,603 $ 5,667 ===============================

See accompanying notes 5 FIRST FORTIS LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS (In thousands, Unaudited)

THREE MONTHS ENDED MARCH 31, 2001 2000 ----------------------------- OPERATING ACTIVITIES Net income $ 782 $ (677) Adjustments to reconcile net income to net cash used in operating activities: (Decrease) increase in future policy benefit reserves and other policy claims and benefits (14) 2,329 Provision for deferred federal income taxes 110 (982) Increase in federal income taxes 288 525 Increase in other liabilities (4,473) (4,167) Depreciation, amortization and accretion 10 460 Amortization of investment premiums, net (32) 9 Amortization of gain on reinsurance transaction (107) -- Decrease in uncollected premiums, accrued investment income and other 1,673 825 Increase in reinsurance recoverable (1,733) (841) Net realized loss on investments 302 727 ----------------------------- Cash Used in Operating Activities (3,194) (1,792) INVESTING ACTIVITIES Purchases of fixed maturity investments (15,070) (20,042) Sales or maturities of fixed maturity investments 15,262 19,198 Decrease (increase) in equity securities and short-term investments 1,850 (1,100) ----------------------------- Net Cash Provided By (Used in) Investing Activities 2,042 (1,944) FINANCING ACTIVITIES Activities related to investment products: Considerations received 1,863 1,384 Surrenders and death benefits (1,904) (783) Interest credited to policyholders 84 67 ----------------------------- Net Cash Provided By Financing Activities 43 668 Decrease in cash (1,109) (3,068) Cash and cash equivalents at beginning of period 1,659 4,562 ----------------------------- Cash and cash equivalents at end of period $ 550 $ 1,494 =============================

See accompanying notes 6 FIRST FORTIS LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS March 31, 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 March 31, 2001 and the related statement of income for the three months ended March 31, 2001 and 2000, and cash flow for the three months ended March 31, 2001 and 2000. Income tax payments for the three months ended March 31, 2001 and March 31, 2000 were $23 and $94 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 March 31, 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 March 31, 2001 (in thousands):

Gross Gross Amortized Unrealized Unrealized Fair Cost Gain Loss Value ----------------------------------------------------------- Fixed Income Securities: Governments $ 18,610 $ 622 $ 21 $ 19,211 Public utilities 15,500 343 309 15,534 Industrial and miscellaneous 95,670 2,797 1,089 97,378 ----------------------------------------------------------- Total $ 129,780 $3,762 $1,419 $132,123 ===========================================================

7 FIRST FORTIS LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS March 31, 2001 (In thousands, Unaudited) The amortized cost and fair value of available-for-sale investments in fixed maturities at March 31, 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 $ 8,290 $ 8,323 Due after one year through five years 27,195 28,043 Due after five years through ten years 44,333 45,188 Due after ten years 49,962 50,569 ------------------------------ Total $ 129,780 $ 132,123 ==============================

Proceeds from sales and maturities of investments in fixed maturities in the three-month period ended March 31, 2001 and 2000 were $15,262 and $19,198 respectively. Gross gains of $517 and $18 and gross losses of $819 and $745 were realized on sales during the three-month period ended March 31, 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 three months of each year were as follows:

Investment Income Realized Loss -------------------------------------------------------- 2001 2000 2001 2000 -------------------------------------------------------- Fixed maturities $ 2,302 $ 2,222 $ (302) $ (727) Short-term investments 146 100 -------------------------------------------------------- 2,448 2,322 $ (302) $ (727) ===================== Expenses (30) (30) ------------------------- Net investment income $ 2,418 $ 2,292 =========================

8 FIRST FORTIS LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH YEAR-TO-DATE 2001 COMPARED TO MARCH YEAR-TO-DATE 2000 REVENUES First Fortis (the Company) life insurance premiums decreased during the first three 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 quarter 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. BENEFITS First 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. First 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 21% 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. 9 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. 10 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 March 31, 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. EVENTS SUBSEQUENT On April 1, 2001, Fortis, Inc. completed the sale (the "Sale") of its Fortis Financial Group division (the "Division") to The Hartford Financial Services Group ("The Hartford"). The Division includes, among other blocks of business, certain individual life insurance policies (including variable universal life insurance policies) and all annuity 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 (the "Fund"). To effect the sale as it relates to the Company, Hartford Life Insurance Company, an indirect wholly owned subsidiary of The Hartford, reinsured the Insurance Contracts on a 100% coinsurance basis and agreed to administer the Insurance Contracts going forward. Also as part of the Sale, Hartford Life and Accident Insurance Company purchased 100% of the outstanding stock of Fortis Advisers, Inc. ("Fortis Advisers"), which is the investment adviser for the Fund. The Sale also included 100% of the outstanding stock of Fortis Investors, Inc., which is a wholly owned subsidiary of Fortis Advisers and acts as principal distributor for the Fund. Fortis and the Company received in connection with the Sale aggregate cash consideration of approximately $1.15 billion from The Hartford and its affiliates. 11 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 (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K on February 8, 2001 to announce the agreement by Fortis, Inc. to sell the Fortis Financial Group to The Hartford as discussed above in "Events Subsequent." 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 14, 2001