10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 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 FIRST FORTIS LIFE INSURANCE COMPANY BALANCE SHEETS (In thousands, except share data) September December 30, 31, 2000 1999 (Unaudited) Assets Investments: Fixed maturities, at fair value (amortized cost 2000-- $130,048; 1999--$126,432) $126,222 $121,212 Policy Loans 2 1 Short-term investments 2,960 5,800 129,184 127,013 Cash and cash equivalents 4,072 4,562 Receivables: Uncollected premiums, less allowance (2000 and 1999-- $100) 4,193 3,097 Reinsurance recoverable on unpaid and paid 36,194 31,634 losses Other 1,148 1,495 41,535 36,226 Accrued investment income 2,167 2,095 Deferred policy acquisition costs 4,018 4,353 Property and equipment at cost, less accumulated 89 124 depreciation (2000-- $ 2,322; 1999-- $2,287) Deferred federal income taxes 4,637 3,535 Goodwill, less accumulated amortization (2000--$ 448; 382 416 1999--$414) Assets held in separate accounts 78,307 69,928 Total assets $264,391 $248,252 FIRST FORTIS LIFE INSURANCE COMPANY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY (In thousands, except per share data) September December 30, 31, 2000 1999 (Unaudited) Policy reserves, liabilities and shareholder's equity Policy reserves and liabilities: Future policy benefit reserves: Life insurance $ 29,132 $ 34,165 Interest sensitive and investment products 4,119 3,487 Accident and health 75,873 70,852 109,124 108,504 Unearned revenues 15,450 9,834 Other policy claims and benefits payable 12,491 12,247 Income taxes payable 1,992 1,213 Other liabilities 8,162 10,590 Liabilities related to separate accounts 78,307 69,928 Total policy reserves and liabilities 225,526 212,316 Shareholder's equity: Common stock, $20 par value: Authorized, issued and outstanding shares 2,000 2,000 -- 100,000 Additional paid-in capital 37,440 37,440 Retained deficit 1,898 (124) Accumulated other comprehensive (loss) (2,473) (3,380) income Total shareholder's equity 38,865 35,936 Total policy reserves, liabilities and $264,391 $248,252 shareholder's equity See accompanying notes. FIRST FORTIS LIFE INSURANCE COMPANY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands) (Unaudited) Nine months ended September 30, 2000 1999 Revenues Insurance operations: $$ Life insurance premiums $18,688 $18,015 Interest sensitive and investment product 268 144 policy charges Accident and health insurance premiums 29,093 25,557 48,049 43,716 Net investment income 6,886 6,370 Realized (losses) gains on investments (1,821) 141 Other income 1,354 978 Total revenues 54,468 51,205 Benefits and Expenses Benefits to policyholders: Life insurance 14,785 13,677 Interest sensitive and investment products 338 257 Accident and health claims 22,000 19,831 37,123 33,765 Amortization of deferred policy 242 103 acquisition costs Insurance commissions 4,428 3,645 General and administrative expenses 9,564 10,500 Total benefits and expenses 51,357 48,013 Income (loss) before federal income taxes 3,111 3,192 Income taxes expense(benefits) Current 2,680 (427) Deferred (1,591) 1,544 1,089 1,117 Net income (loss) 2,022 2,075 Other comprehensive income: Unrealized gain on investments 907 (5,172) Comprehensive income $ 2,929 $(3,097) See accompanying notes. FIRST FORTIS LIFE INSURANCE COMPANY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands) (Unaudited) Three months ended September 30, 2000 1999 Revenues Insurance operations: Life insurance premiums $ 6,605 $ 6,178 Interest sensitive and investment product 58 14 policy charges Accident and health insurance premiums 9,471 8,644 16,134 14,836 Net investment income 2,248 2,153 Realized (losses) gains on investments (743) (123) Other income 525 340 Total revenues 18,164 17,206 Benefits and Expenses Benefits to policyholders: Life insurance 3,669 4,428 Interest sensitive and investment products 113 55 Accident and health claims 5,253 6,655 9,035 11,138 Amortization of deferred policy 96 65 acquisition costs Insurance commissions 2,322 1,399 General and administrative expenses 3,239 3,263 Total benefits and expenses 14,692 15,865 Income (loss) before federal income taxes 3,472 1,341 Income taxes expense(benefits) Current 1,352 (1,236) Deferred (137) 1,705 1,215 469 Net income 2,257 872 Other comprehensive income: Unrealized gain on investments 1,456 (969) Comprehensive income $ 3,713 $ (97) See accompanying notes. FIRST FORTIS LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine months ended September 30, 2000 1999 Operating Activities Net income $ 2,022 $ 2,075 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Increase in future policy benefit reserves and other policy claims and benefits 5,781 5,082 Provision for deferred federal income (1,591) 1,544 taxes Decrease (increase) in federal income 779 (1,332) taxes (Increase) decrease in other liabilities (2,428) 1,029 Depreciation, amortization and accretion 404 (521) Amortization of investment premiums, net 71 66 (Increase) decrease in uncollected premiums, accrued investment income and (821) 314 other Increase in reinsurance recoverable (4,560) (2,528) Net realized loss (gains) on investments 1,821 (141) Cash Provided By Operating Activities 1,478 5,588 Investing Activities Purchases of fixed maturity investments (53,512) (65,833) Sales or maturities of fixed maturity 48,005 65,030 investments Increase in equity securities and short- 2,840 (3,940) term investments Net Cash Used By Investing Activities (2,667) (4,743) Financing Activities Activities related to investment products: Considerations received 3,808 2,290 Surrenders and death benefits (3,343) (5,437) Interest credited to policyholders 234 266 Net Cash Provided (Used) By Financing 699 (2,881) Activities Decrease In Cash (490) (2,036) Cash and cash equivalents at beginning of (4,562) 1,160 period Cash and cash equivalents at end of period $ 4,072 $ (876) See accompanying notes FIRST FORTIS LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS September 30, 2000 (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 September 30, 2000 and the related statement of income for the nine months ended September 30, 2000 and 1999, and cash flow for the nine months ended September 30, 2000 and 1999. Income tax payments for the nine months ended September 30, 2000 and September 30, 1999 were $1,901,000 and $906,000, 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 September 30, 2000, all fixed maturity and equity securities are classified as available-for-sale and carried at fair value. The amortized cost and fair values of investments available- for sale were as follows at September 30, 2000 (in thousands): Gross Gross Amortized Unrealize Unrealize Fair Cost d d Value Gain Loss Fixed Income Securities: Governments $ 16,729 $ 151 $ 161 $ 16,719 Public utilities 97,324 564 3,666 94,222 Industrial and 15,995 8 722 15,281 miscellaneous Total $130,048 $ 723 $4,549 $126,222 FIRST FORTIS LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS September 30, 2000 (unaudited) The amortized cost and fair value of available-for-sale investments in fixed maturities at September 30, 2000, by contractual maturity, are shown below (in thousands). 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 $ 11,343 $ 11,249 Due after one year through five years 28,356 27,868 Due after five years through ten years 38,060 36,253 Due after ten years 52,289 50,852 Total $130,048 $126,222 Proceeds from sales and maturities of investments in fixed maturities in the nine-month period ended September 30, 2000 and 1999 were $48,005,000 and $65,030,000 respectively. Gross gains of $164,000 and $693,000 and gross losses of $1,983,000 and $552,000 were realized on sales during the nine-month period ended September 30, 2000 and 1999, respectively. Net Investment Income and Realized Gains (Losses) on Investments: Major categories of net investment income and realized gains and losses on investments for the first nine months of each year were as follows (in thousands): Realized Investment Income Gain (Loss) 2000 1999 2000 1999 Fixed maturities $6,572 $6,260 $(1,821) $141 Short-term investments 404 213 6,976 6,473 $(1,821) $141 Expenses 90 103 Net investment income $6,886 $6,370 First Fortis Life Insurance Company Management's Discussion and Analysis of Financial Condition and Results of Operations September Year-to-Date 2000 Compared to September Year- to-Date 1999 Revenues First Fortis (the Company) life insurance premiums increased somewhat during the first nine months of 2000, as compared to the same period in 1999 due to strong group life sales. 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 53%, 46%, and 1%, respectively, of total first nine months group accident and health premium in 2000 compared to 47%, 47%, and 6%, respectively, in 1999. 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 2000 and 1999 resulted in recognition of realized gains and losses upon sales of securities. Benefits Third quarter year-to-date 2000 life benefits as compared to premium were level with the same period in 1999. Third quarter year-to-date 2000 accident and health benefits as compared to premium were lower than the same period in 1999 due primarily to proportionally less remaining 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 have decreased to 20% in 2000 from 24% in 1999. The Company is incurring lower costs due to the relocation of their administrative offices, service and supply vendor changes, and permanent staff alignment. The Company continues to strive for improvements in the expense to gross revenue ratio while maintaining quality and timely services to the policyholders. 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. The National Association of Insurance Commissioners has implemented risk-based capital standards to determine the capital requirements of a life insurance company based upon the risks inherent in its operations. These standards require the computation of a risk-based capital amount which is then compared to a company's actual total adjusted capital. Based upon current calculation using these risk-based capital standards, the Company's percentage of total adjusted capital is in excess of ratios which would require regulatory attention. The Company has no long or short term debt. As of September 30, 2000, 99% 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. Year 2000 The Company utilizes computer systems to process Company businesses. Fortis Inc., the Company's parent ("Fortis"), created a Year 2000 Project Office which was dedicated to ensuring that all of the systems for Fortis and its subsidiaries and affiliates were ready for Year 2000. The estimated total cost of the Fortis Year 2000 Project was approximately $85 million. The Company is not incurring any cost for the Year 2000 project since it is being paid for by affiliates of the Company. As of December 20, 1999, 100% of the computer system lines of code that had been identified were renovated and tested and were ready for year 2000. Although there have been several minor matters, as of September 30, 2000, no significant disruptions resulting from the century date change have been detected. The Company will continue to monitor the status of and exposure to any potential Year 2000 issues. 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 None 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: November 14, 2000