POS AM 1 c60923poposam.txt AMENDMENT NO. 8 TO FORM S-2 1 As filed with the Securities and Exchange Commission on April 17, 2001 Registration No. 33-63799 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 8 to FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FORTIS BENEFITS INSURANCE COMPANY ------------------------------------------------------ (Exact name of registrant as specified in its charter) Minnesota ---------------------------------------- (State or other jurisdiction of incorporation or organization) 63 --------------------------------- (Primary Standard Industrial Classification Code Number) 81-0170040 ------------------------------ (I.R.S. Employer Identification No.) 500 Bielenberg Drive Woodbury, Minnesota 55125 651-738-4000 ------------------------------------ (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Rhonda J. Schwartz, Esquire P. O. Box 64284 Saint Paul, Minnesota 55164 651-738-4000 --------------------------------------- (Name, address including zip code, and telephone number, including area code, of agent for service) Approximate Date of Commencement of Proposed Sale to Public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: /X/ --- ------------------------------------------ CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------------------- Title of each Proposed Proposed maximum class of securities Amount to be maximum offering aggregate Amount of to be registered registered price per unit offering price registration fee --------------------------------------------------------------------------------------------------------------------------- Interests under flexible * * [None registered herewith.] premium deferred fixed annuity contracts
------------------ * The maximum aggregate offering price is estimated solely for the purpose of determining the registration fee. The amount being registered and the proposed maximum offering price per unit are not applicable in that these securities are not issued in predetermined amounts or units. 2 FORTIS BENEFITS INSURANCE COMPANY Cross-Reference Sheet Pursuant to Regulation S-K Item 501(b)
Form S-1 Item Number Prospectus Caption -------------------- ------------------ 1. Forepart of the Registration Cover Page; Table of Contents; Statement and Outside Front Distribution and Servicing Cover Page of Prospectus 2. Inside Front and Back Other Information; Reports Cover Pages of Prospectus 3. Summary Information, Risk Summary of Contract Features or, as to Factors and Ratio of ratio of earnings to fixed charges, Not Earnings to Fixed Charges Applicable 4. Use of Proceeds The Variable Account; Series Fund; The Fixed Account 5. Determination of Offering Not Applicable Price 6. Dilution Not Applicable 7. Selling Security Holders None 8. Plan of Distribution Distribution and Servicing 9. Description of Securities Cover Page; The Variable Account; Series to be Registered Fund; The Fixed Account; Accumulation Period; Charges and Deductions; General Provisions 10. Interests of Named Legal Matters Experts and Counsel 11. Information with Respect Fortis Benefits/Fortis Financial Group to the Registrant Member; Further Information About Fortis Benefits; Financial Statements; Distribution and Servicing 12. Disclosure of Commission Not Applicable Position on Indemnification for Securities Act Liabilities
3 FORTIS MASTERS VARIABLE ANNUITY Contracts Under Flexible Premium Deferred Combination Variable and Fixed Annuity Contracts PROSPECTUS DATED May 1, 2001 [FORTIS SOLID PARTNERS, FLEXIBLE SOLUTIONS(SM) LOGO] 95961 (5/01) FORTIS BENEFITS INSURANCE COMPANY MAILING STREET ADDRESS: PHONE: 1-800-800-2000 ADDRESS: 500 BIELENBERG DRIVE EXTENSION 3057 P.O. BOX 64272 WOODBURY ST. PAUL MINNESOTA 55125 MINNESOTA 55164
This prospectus describes interests under flexible premium, deferred combination variable and fixed annuity contracts issued by Fortis Benefits Insurance Company ("Fortis Benefits"). These contracts allow you to accumulate funds on a tax-deferred basis. You may elect a guaranteed interest accumulation option through a fixed account, or a variable return accumulation option through a variable account, or a combination of these two options. You can choose among 10 different guarantee periods under the guaranteed interest accumulation option, each of which has its own interest rate which is guaranteed for the entire guarantee period. Under the variable return accumulation option, you can choose among the following investment portfolios (those portfolios which have a non-Fortis subadvisor include the name of the subadvisor at the beginning of the portfolio name): Money Market Series Value Series U.S. Government Securities Series MFS -- Capital Opportunities Series Diversified Income Series Growth & Income Series AIM -- Multisector Bond Series Dreyfus -- S&P 500 Index Series High Yield Series T. Rowe Price -- Blue Chip Stock T. Rowe Price -- International Stock Series Series II Alliance -- Large Cap Growth Series Lazard Freres -- International Stock MFS -- Investors Growth Series Series AIM -- Blue Chip Stock Series II Global Growth Series Dreyfus -- Mid Cap Stock Series MFS -- Global Equity Series Growth Stock Series Asset Allocation Series Berger -- Small Cap Value Series Federated -- American Leaders Series Aggressive Growth Series
The accompanying prospectus for these investment portfolios describes the investment objectives, policies, and risks of each of the portfolios. This prospectus gives you information about the contracts that you should know before investing. This prospectus must be accompanied by a current prospectus of the available investment portfolios. These prospectuses should be read carefully and kept for future reference. A Statement of Additional Information, dated May 1, 2001, about certain aspects of the contracts has been filed with the Securities and Exchange Commission and is available, without charge, from Fortis Benefits at the address and phone number printed above. The Table of Contents for the Statement of Additional Information appears on page 24 of this prospectus. THESE CONTRACTS ARE NOT OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, CREDIT UNION, BROKER-DEALER, OR OTHER FINANCIAL INSTITUTION. THEY ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. THEY INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 4 TABLE OF CONTENTS
PAGE Special Terms Used in this Prospectus....................... 3 Information Concerning Fees and Charges..................... 4 Summary of Contract Features................................ 6 - Fortis Benefits...................................... 9 The Variable Account........................................ 9 Series Fund................................................. 9 The Fixed Account........................................... 10 - Guaranteed Interest Rates/Guarantee Periods.......... 10 - Market Value Adjustment.............................. 10 - Investments by Fortis Benefits....................... 11 Accumulation Period......................................... 11 - Issuance of a Contract and Purchase Payments......... 11 - Contract Value....................................... 12 - Allocation of Purchase Payments and Contract Value... 12 - Total and Partial Surrenders......................... 13 - Telephone Transactions............................... 14 - Benefit Payable on Death of Annuitant or Owner....... 14 The Annuity Period.......................................... 15 - Annuity Commencement Date............................ 15 - Commencement of Annuity Payments..................... 15 - Relationship Between Subaccount Investment Performance and Amount of Variable Annuity Payments... 15 - Annuity Options...................................... 15 - Death of Annuitant or Other Payee.................... 16 Charges and Deductions...................................... 16 - Premium Taxes........................................ 16 - Charges Against the Variable Account................. 16 - Tax Charge........................................... 16 - Surrender Charge..................................... 16 - Miscellaneous........................................ 17 - Reduction of Charges................................. 17 General Provisions.......................................... 17 - The Contracts........................................ 17 - Postponement of Payment.............................. 18 - Misstatement of Age or Sex and Other Errors.......... 18 - Assignment........................................... 18 - Beneficiary.......................................... 18 - Reports.............................................. 18 Rights Reserved By Fortis Benefits.......................... 18 Distribution................................................ 18 Federal Tax Matters......................................... 19 Further Information about Fortis Benefits................... 21 - General.............................................. 21 - Ownership of Securities.............................. 21 - Selected Financial Data.............................. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 22 Voting Privileges........................................... 23 Other Information........................................... 24 Contents of Statement of Additional Information............. 24 Fortis Benefits Financial Statements........................ 24 Appendix A--Sample Market Value Adjustment Calculations..... A-1 Appendix B--Sample Death Benefit Calculations............... B-1 Appendix C--Explanation of Expense Calculations............. C-1
THE CONTRACTS ARE NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. FORTIS BENEFITS DOES NOT AUTHORIZE ANY INFORMATION OR REPRESENTATION REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS WHICH IS NOT INCLUDED IN THIS PROSPECTUS, THE RELATED STATEMENT OF ADDITIONAL INFORMATION, OR ANY SUPPLEMENTS THERETO OR IN ANY SUPPLEMENTAL SALES MATERIAL AUTHORIZED BY FORTIS BENEFITS. 5 SPECIAL TERMS USED IN THIS PROSPECTUS Accumulation PeriodThe time period under a contract between the contract issue date and the annuity commencement date. Accumulation Unit A unit of measure used to calculate the owners' interest in the Variable Account during the Accumulation Period. Annuitant A person during whose life annuity payments are to be made by Fortis Benefits under the contract. Annuity Period The time period following the Accumulation Period, during which annuity payments are made by Fortis Benefits. Annuity Unit A unit of measurement used to calculate variable annuity payments. Fixed Annuity An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee Option that you designate one or more fixed payments. Market Value Adjustment Positive or negative adjustment in fixed account value that we make if such value is paid out more than fifteen days before or after the end of a guarantee period in which it was being held. Non-Qualified Contracts Contracts that do not qualify for the special federal income tax treatment applicable in connection with certain retirement plans. Qualified ContractsContracts that do qualify for the special federal income tax treatment applicable in connection with certain retirement plans. Series Fund Fortis Series Fund, Inc., a diversified, open-end management investment company in which the Variable Account invests. Seven Year The seventh anniversary of a contract issue date, and each Anniversary subsequent seventh anniversary of that date. Valuation Date All business days except, with respect to any subaccount, days on which the related portfolio does not value its shares. Generally, the portfolios value their shares on each day the New York Stock Exchange is open. Valuation Period The period that starts at the close of regular trading on the New York Stock Exchange on a Valuation Date and ends at the close of regular trading on the exchange on the next succeeding Valuation Date. Variable The segregated asset account referred to as Variable Account D Account of Fortis Benefits Insurance Company established to receive and invest purchase payments under contracts. Variable Annuity Option An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee chosen by you one or more payments which vary in amount in accordance with the net investment experience of the subaccounts selected by the Annuitant. 3 6 INFORMATION CONCERNING FEES AND CHARGES OWNER TRANSACTION CHARGES Front-End Sales Charge Imposed on Purchases................. 0% Maximum Surrender Charge for Sales Expenses................. 7%(1)
NUMBER OF YEARS SURRENDER CHARGE AS A SINCE PURCHASE PERCENTAGE OF PAYMENT WAS CREDITED PURCHASE PAYMENT -------------------- --------------------- Less than 1 7% At least 1 but less than 2 6% At least 2 but less than 3 5% At least 3 but less than 4 4% At least 4 but less than 5 3% At least 5 but less than 6 2% At least 6 but less than 7 1% 7 or more 0%
Other Surrender Fees........................................ 0% Exchange Fee................................................ 0% ANNUAL CONTRACT ADMINISTRATION CHARGE............................ $ 0 VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE) Mortality and Expense Risk Charge........................... 1.25% Variable Account Administrative Charge...................... .10% Total Variable Account Annual Expenses...................... 1.35%
------------------------------ (1) This charge does not apply in certain cases such as partial surrenders each year of up to 10% of "new purchase payments" as defined under the heading "Surrender Charge," or payment of a death benefit. MARKET VALUE ADJUSTMENT WITH RESPECT TO FIXED ACCOUNT Surrenders and other withdrawals from the fixed account more than fifteen days from the end of a guarantee period are subject to a Market Value Adjustment. The Market Value Adjustment may increase or reduce the fixed account value. We compute this adjustment according to a formula that we describe in more detail under "Market Value Adjustment". PORTFOLIO ANNUAL EXPENSES (a)
U.S. MONEY GOVERNMENT DIVERSIFIED INTERNATIONAL ASSET AMERICAN MARKET SECURITIES INCOME MULTI SECTOR HIGH YIELD STOCK ALLOCATION LEADERS SERIES SERIES SERIES BOND SERIES SERIES SERIES II SERIES SERIES ------ ---------- ----------- ------------ ---------- ------------- ---------- -------- Investment and Management Fee...................... 0.30% 0.47% 0.48% 0.75% 0.50% 0.90% 0.47% 0.90% Other Expenses............. 0.06% 0.05% 0.05% 0.19% 0.06% 0.16% 0.04% 0.35% Total Fortis Series Operating Expenses....... 0.36% 0.52% 0.53% 0.94% 0.56% 1.06% 0.51% 1.25% CAPITAL GROWTH & S&P 500 VALUE OPPORTUNITIES INCOME INDEX SERIES SERIES SERIES SERIES ------ ------------- -------- ------- Investment and Management Fee...................... 0.70% 0.90% 0.63% 0.40% Other Expenses............. 0.06% 0.41% 0.04% 0.05% Total Fortis Series Operating Expenses....... 0.76% 1.31% 0.67% 0.45%
BLUE CHIP GLOBAL GLOBAL BLUE CHIP STOCK INTERNATIONAL MID CAP SMALL CAP GROWTH EQUITY STOCK SERIES SERIES II STOCK SERIES STOCK SERIES VALUE SERIES SERIES SERIES ------------ --------- ------------- ------------ ------------ ------ ------ Investment and Management Fee........... 0.87% 0.95% 0.83% 0.90% 0.90% 0.70% 1.00% Other Expenses.......................... 0.05% 0.43% 0.10% 0.15% 0.13% 0.05% 0.43% Total Fortis Series Operating Expenses.............................. 0.92% 1.38% 0.93% 1.05% 1.03% 0.75% 1.43% LARGE CAP INVESTORS GROWTH AGGRESSIVE GROWTH GROWTH STOCK GROWTH SERIES SERIES SERIES SERIES ------ --------- ------ ---------- Investment and Management Fee........... 0.90% 0.90% 0.61% 0.62% Other Expenses.......................... 0.06% 0.49% 0.03% 0.04% Total Fortis Series Operating Expenses.............................. 0.96% 1.39% 0.64% 0.66%
------------------------------ (a) As a percentage of Series average net assets based on 2000 historical data. The figures set forth above were annualized numbers for the following portfolios and the total operating expense ratio for them would have been as follows had there not been a waiver and reimbursement of expense arrangement in effect: American Leaders Series--1.50%; Blue Chip Series II--1.50%; Capital Opportunities Series--1.38%; Global Equity Series--1.86%; Investors Growth Series--1.53%. 4 7 EXAMPLES* If you Surrender your contract in full at the end of any of the time periods shown below, you would pay the following cumulative expenses on a $1,000 investment, assuming a 5% annual return on assets:
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------------------------------------------- ------ ------- ------- -------- Money Market................................................ $80 $ 98 $118 $199 U.S. Government Securities.................................. 82 103 127 216 Diversified Income.......................................... 82 103 127 217 Multisector Bond............................................ 86 116 148 259 High Yield.................................................. 82 104 129 220 International Stock II...................................... 87 119 154 271 Asset Allocation............................................ 82 103 126 215 American Leaders............................................ 89 125 163 290 Value....................................................... 84 110 139 241 Capital Opportunities....................................... 90 127 166 296 Growth & Income............................................. 83 107 134 231 S&P 500 Index............................................... 81 101 123 208 Blue Chip Stock............................................. 86 115 147 257 Blue Chip Stock II.......................................... 90 129 170 303 International Stock......................................... 86 115 147 258 MidCap Stock Series......................................... 87 119 153 270 Small Cap Value Series...................................... 87 118 152 268 Global Growth............................................... 84 110 138 240 Global Equity............................................... 91 130 172 307 Large Cap Growth Series..................................... 86 116 149 261 Investors Growth Series..................................... 90 129 170 304 Growth Stock................................................ 83 107 133 228 Aggressive Growth........................................... 83 107 134 230
If you commence an annuity payment option, or do not surrender your contract, you would pay the following cumulative expenses on a $1,000 investment, assuming a 5% annual return on assets:
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------------------------------------------- ------ ------- ------- -------- Money Market................................................ $17 $53 $ 91 $199 U.S. Government Securities.................................. 19 58 100 216 Diversified Income.......................................... 19 58 100 217 Multisector Bond............................................ 23 71 121 259 High Yield.................................................. 19 59 102 220 International Stock II...................................... 24 74 127 271 Asset Allocation............................................ 19 58 99 215 American Leaders............................................ 26 80 136 290 Value....................................................... 21 65 112 241 Capital Opportunities....................................... 27 82 139 296 Growth & Income............................................. 20 62 107 231 S&P 500 Index............................................... 18 56 96 208 Blue Chip Stock............................................. 23 70 120 257 Blue Chip Stock II.......................................... 27 84 143 303 International Stock......................................... 23 70 120 258 MidCap Stock Series......................................... 24 74 126 270 Small Cap Value Series...................................... 24 73 125 268 Global Growth............................................... 21 65 111 240 Global Equity............................................... 28 85 145 307 Large Cap Growth Series..................................... 23 71 122 261 Investors Growth Series..................................... 27 84 143 304 Growth Stock................................................ 20 62 106 228 Aggressive Growth........................................... 20 62 107 230
------------------------------ * Does not include the effect of any Market Value Adjustment. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. ------------------------------ We have included the foregoing tables and examples to help you understand the transaction and operating expenses we directly or indirectly impose under the contracts and under the Series Fund. Please note, we will also deduct amounts for state premium taxes or similar assessments where these deductions are applicable. See Appendix C for an explanation of the calculation of the amounts set forth above. 5 8 SUMMARY OF CONTRACT FEATURES The following summary should be read in conjunction with the detailed information in this prospectus. Variations from the information appearing in this prospectus due to requirements particular to your state are described in supplements which are attached to this prospectus, or in endorsements to the contract as appropriate. The contracts are designed to provide individuals with retirement benefits through the accumulation of purchase payments on a fixed or variable basis, and by the application of such accumulations to provide fixed or variable annuity payments. Depending on the state that you live in, the contract that is issued to you may be as a part of a group contract or as an individual contract. Participation in a group contract will be evidenced by the issuance of a certificate showing your interest under the group contract. In other states, an individual contract will be issued to you. Both the certificate and the contract are referred to as a "contract" in this prospectus. FREE LOOK You have the right to examine a contract during a "free look" period after you receive the contract and return it for a refund of the amount of the then current contract value. However, in certain states where required by state law the refund will be in the amount of all purchase payments that have been made, without interest or appreciation or depreciation. The "free look" period is generally 10 days unless a longer time is specified on the face page of your contract. PURCHASE PAYMENTS The initial purchase payment under a contract must be at least $5,000 ($2,000 for a contract which is a part of a qualified plan). Additional purchase payments under a contract must be at least $50. See "Issuance of a Contract and Purchase Payments". ALLOCATION OF PURCHASE PAYMENTS On the date that the contract is issued, the initial purchase payment is allocated, as specified by you in the contract application, among one or more of the portfolios, or to one or more of the guarantee periods in the fixed account, or to a combination thereof. Subsequent purchase payments are allocated in the same way, or pursuant to different allocation percentages that you may request in writing. VARIABLE ACCOUNT INVESTMENT OPTIONS Each of the subaccounts of the Variable Account invests in shares of a corresponding portfolio of Series Fund. Contract value in each of the subaccounts of the Variable Account will vary to reflect the investment experience of each of the corresponding portfolios, as well as deductions for certain charges. Each portfolio has a separate and distinct investment objective and is managed by Fortis Advisers, Inc. or a subadviser of Fortis Advisers, Inc. A full description of the portfolios and their investment objectives, policies, risks and expenses can be found in the current prospectus for Series Fund, which accompanies this prospectus, and Series Fund Statement of Additional Information which is available upon request from Fortis Benefits at the address and phone number on the cover of this prospectus. FIXED ACCOUNT INVESTMENT OPTIONS Any amount allocated by the owner to the fixed account earns a guaranteed interest rate. The level of the guaranteed interest rate depends on the length of the guarantee period selected by the owner. We currently make available ten different guarantee periods, ranging from one to ten years. If amounts are transferred, surrendered or otherwise paid out more than fifteen days before or after the end of the applicable guarantee period, a Market Value Adjustment will be applied to increase or decrease the amount of fixed account value that is paid out. Accordingly, the Market Value Adjustment can result in gains or losses to you. THE FIXED ACCOUNT INVESTMENT OPTION IS NOT AVAILABLE FOR CONTRACTS ISSUED IN THE STATES OF PENNSYLVANIA AND NEVADA. For a more complete discussion of the fixed account investment options and the Market Value Adjustment, see "The Fixed Account". TRANSFERS During the Accumulation Period, you can transfer all or part of your contract value from one subaccount to another or into the fixed account and, subject to any Market Value Adjustment, from one guarantee period to another or into a subaccount. There is currently no charge for these transfers. We reserve the right to restrict the frequency of or otherwise condition, terminate, or impose charges upon, transfers from a subaccount during the Accumulation Period. During the Annuity Period the person receiving annuity payments may make up to four transfers (but not from a Fixed Annuity Option) during each year of the Annuity Period. For a description of certain limitations on transfer rights, see "Allocations of Purchase Payments and Contract Value--Transfers". TOTAL OR PARTIAL SURRENDERS Subject to certain conditions, all or part of the contract value may be surrendered by you before the earlier of the Annuitant's death or the annuity commencement date. Amounts surrendered may be subject to a surrender charge and, in addition, amounts surrendered from the fixed account may be subject to a Market Value Adjustment. See "Total and Partial Surrenders," "Surrender Charge" and "Market Value Adjustment". Particular attention should be paid to the tax implications of any surrender, including possible penalties for premature distributions. See "Federal Tax Matters". ANNUITY PAYMENTS The contract provides several types of annuity benefits to you or to other persons you properly designate to receive such payments, including Fixed and Variable Annuity Options. The owner has considerable flexibility in choosing the annuity commencement date. However, the tax implications of an annuity commencement date must be carefully considered, including the possibility of penalties for commencing benefits either too soon or too late. See "Annuity Commencement Date," "Annuity Options" and "Federal Tax Matters" in this prospectus and "Taxation Under Certain Retirement Plans" in the Statement of Additional Information. 6 9 DEATH BENEFIT In the event that the Annuitant or owner dies prior to the annuity commencement date, a death benefit is payable to the beneficiary. See "Benefit Payable on Death of Annuitant or Owner". LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS Certain rights you would otherwise have under a contract may be limited by the terms of any applicable employee benefit plan. These limitations may restrict such things as total and partial surrenders, the amount or timing of purchase payments that may be made, when annuity payments must start and the type of annuity options that may be selected. Accordingly, you should familiarize yourself with these and all other aspects of any retirement plan in connection with which a contract is issued. The record owner of the group variable annuity contract pursuant to which group certificates will be issued will be a bank trustee whose sole function is to hold record ownership of the contract or an employer (or the employer's designee) in connection with an employee benefit plan. In the latter cases, certain rights that an owner otherwise would have under a contract may be reserved instead by the employer. TAX IMPLICATIONS The tax implications for you or any other persons who may receive payments under a contract, and those of any related employee benefit plan can be quite important. A brief discussion of some of these is set out under "Federal Tax Matters" in this prospectus and "Taxation Under Certain Retirement Plans" in the Statement of Additional Information, but such discussion is not comprehensive. Therefore, you should consider these matters carefully and consult a qualified tax adviser before making purchase payments or taking any other action in connection with a contract or any related employee benefit plan. Failure to do so could result in serious adverse tax consequences which might otherwise have been avoided. QUESTIONS AND OTHER COMMUNICATIONS Any question about procedures of the contract should be directed to your sales representative, or Fortis Benefits' home office: P.O. Box 64272, St. Paul, Minnesota, 55164: 1-800-800-2000, extension 3057. Purchase payments and written requests should be mailed or delivered to the same home office address. All communications should include the contract number, the owner's name and, if different, the Annuitant's name. The number for telephone transfers is 1-800-800-2000 (extension 3057). Any purchase payment or other communication, except a 10-day cancellation notice, is deemed received at Fortis Benefit's home office on the actual date of receipt there in proper form unless received (1) after the close of regular trading on The New York Stock Exchange, or (2) on a date that is not a Valuation Date. In either of these two cases, the date of receipt will be deemed to be the next Valuation Date. 7 10 FINANCIAL AND PERFORMANCE INFORMATION The information presented below reflects the Accumulation Unit information for subaccounts of the Variable Account through December 31, 2000.
MONEY U.S. GOV'T DIVERSIFIED MULTISECTOR HIGH INTERNATIONAL ASSET MARKET SECURITIES INCOME BOND YIELD STOCK II ALLOCATION ------ ---------- ----------- ----------- ----- ------------- ---------- December 31, 2000 Accum Units in Force... 39,594,550 5,977,686 37,519,171 1,388,496 3,777,913 2,403,196 144,888,821 Accum Unit Values...... $1.662 $19.655 $2.118 $12,436 $11.814 $14.633 $3.877 December 31, 1999 Accum Units in Force... 59,567,286 6,961,590 46,271,405 1,402,949 4,713,245 3,230,112 152,820,325 Accum Unit Values...... $1.587 $17.823 $1.998 $12.092 $12.799 $16.150 $3.923 December 31, 1998 Accumulation Units in Force................. 39,532,433 7,577,700 51,323,231 1,236,211 4,984,906 3,315,158 160,803,266 Accumulation Unit Values................ $1.532 $18.421 $2.059 $13.254 $12.823 $16.513 $3.326 December 31, 1997 Accumulation Units in Force................. 31,491,629 7,743,923 49,942,498 1,123,401 4,194,544 2,918,483 156,035,843 Accumulation Unit Values................ $1.474617 $17.149938 $1.963344 $11.837281 $12.917282 $14.433538 $2.809839 December 31, 1996 Accumulation Units in Force................. 36,220,947 9,635,092 55,653,680 1,088,043 3,337,604 2,330,884 154,525,474 Accumulation Unit Values................ $1.418 $15.935 $1.801 $11.961 $11.928 $12.884 $2.368 January 1, 1996* Accumulation Unit Values................ -- -- -- -- -- -- -- December 31, 1995 Accumulation Units in Force................. 26,915,975 10,989,914 59,213,865 574,142 2,321,419 1,117,596 148,700,081 Accumulation Unit Value................. $1.367 $15.805 $1.753 $11.743 $10.941 $11.590 $2.134 January 2, 1995* Accumulation Unit Value................. -- -- -- 10.000 -- 10.000 -- December 31, 1994 Accumulation Units in Force................. 30,697,754 12,271,738 62,744,615 -- 1,216,957 -- 137,642,102 Accumulation Unit Value................. $1.311 $13.483 $1.515 -- $9.834 -- $1.773 May 1, 1994* Accumulation Unit Value................. -- -- -- -- 10.0000 -- -- December 31, 1993 Accumulation Units in Force................. 21,315,022 15,601,818 56,005,709 -- -- -- 106,834,367 Accumulation Unit Value................. $1.278 $14.609 $1.621 -- -- -- $1.797 December 31, 1992 Accumulation Units in Force................. 20,674,556 9,505,984 19,353,521 -- -- -- 49,688,937 Accumulation Unit Value................. $1.261 $13.529 $1.457 -- -- -- $1.664 May 1, 1992* Accumulation Unit Value................. -- -- -- -- -- -- -- December 31, 1991 Accumulation Units in Force................. 7,235,168.03 3,595,759.23 6,056,976.03 -- -- -- 17,772,322.83 Accumulation Unit Value................. $1.237 $12.921 $1.379 -- -- -- $1.577 December 31, 1990 Accumulation Units in Force................. 5,632,146.27 747,992.12 2,352,517.74 -- -- -- 8,249,373.75 Accumulation Unit Value................. $1.183 $11.450 $1.219 -- -- -- $1.252 AMERICAN CAPITAL GROWTH & S&P BLUE BLUE LEADERS VALUE OPPORTUNITIES INCOME 500 CHIP CHIP II -------- ----- ------------- -------- --- ---- ------- December 31, 2000 Accum Units in Force... 180,486 4,407,086 763,073 9,221,342 14,152,174 10,307,005 834,628 Accum Unit Values...... $10.392 $18.559 $8.754 $24.661 $19.808 $20,758 $8.728 December 31, 1999 Accum Units in Force... -- 4,744,081 -- 10,994,926 14,134,177 9,671,577 -- Accum Unit Values...... -- $15.875 -- $23.775 $22.189 $21.571 -- December 31, 1998 Accumulation Units in Force................. -- 4,869,102 -- 12,171,938 10,440,486 7,548,794 -- Accumulation Unit Values................ -- $14.768 -- $21.767 $18.689 $18.238 -- December 31, 1997 Accumulation Units in Force................. -- 3,402,217 -- 11,003,248 5,491,818 4,149,587 -- Accumulation Unit Values................ -- $13.651572 -- $19.487584 $14.786540 $14.429421 -- December 31, 1996 Accumulation Units in Force................. -- 1,071,648 -- 7,892,683 1,259,758 915,358 -- Accumulation Unit Values................ -- $11.048 -- $15.468 $11.326 $11.520 -- January 1, 1996* Accumulation Unit Values................ -- -- 10.000 10.000 10.000 -- December 31, 1995 Accumulation Units in Force................. -- -- 4,204,164 -- Accumulation Unit Value................. -- -- $12.904 $11.271 -- January 2, 1995* Accumulation Unit Value................. -- -- -- December 31, 1994 Accumulation Units in Force................. -- -- 1,489,517 Accumulation Unit Value................. -- -- $10.083 May 1, 1994* Accumulation Unit Value................. -- -- 10.0000 December 31, 1993 Accumulation Units in Force................. -- -- -- Accumulation Unit Value................. -- -- -- December 31, 1992 Accumulation Units in Force................. -- -- -- Accumulation Unit Value................. -- -- -- May 1, 1992* Accumulation Unit Value................. -- -- -- December 31, 1991 Accumulation Units in Force................. -- -- -- Accumulation Unit Value................. -- -- -- December 31, 1990 Accumulation Units in Force................. -- -- -- Accumulation Unit Value................. -- -- -- -- $1.298 INTERNATIONAL GLOBAL GLOBAL GROWTH AGGRESSIVE MID CAP LARGE CAP INVESTORS STOCK GROWTH EQUITY STOCK GROWTH GROWTH GROWTH GROWTH ------------- ------ ------ ------ ---------- ------- --------- --------- December 31, 2000 Accum Units in Force... 5,688,753 9,791,503 280,353 111,543,696 8,239,797 2,297,535 5,763,035 508,808 Accum Unit Values...... $17.572 $27.039 $9.264 $6.079 $27.382 $11.303 $11.946 $8.905 December 31, 1999 Accum Units in Force... 5,344,248 9,640,858 -- 114,976,011 6,379,981 1,441,402 3,962,830 -- Accum Unit Values...... $19.711 $33.343 -- $5.925 $32.680 $10.538 $14.754 -- December 31, 1998 Accumulation Units in Force................. 4,751,940 11,754,865 -- 136,042,148 6,165,803 765,338 842,995 -- Accumulation Unit Values................ $16.113 $21.433 -- $3.870 $15.829 $9.625 $11.755 -- December 31, 1997 Accumulation Units in Force................. 4,239,821 13,725,612 -- 156,975,866 6,551,677 -- -- -- Accumulation Unit Values................ $14.021796 $19.507894 -- $3.296005 $13.241215 -- -- -- December 31, 1996 Accumulation Units in Force................. 3,137,348 13,713,860 -- 169,095,500 5,706,895 -- -- -- Accumulation Unit Values................ $12.690 $18.510 -- $2.971 $13.232 -- -- -- January 1, 1996* Accumulation Unit Values................ -- -- -- -- December 31, 1995 Accumulation Units in Force................. 1,157,064 10,769,830 -- 160,247,280 3,033,587 -- -- -- Accumulation Unit Value................. $15.754 $2.587 -- $12.461 January 2, 1995* Accumulation Unit Value................. 10.000 -- -- -- -- -- -- -- December 31, 1994 Accumulation Units in Force................. -- 10,055,959 -- 148,657,108 1,115,647 -- -- -- Accumulation Unit Value................. -- $12.236 -- $2.054 $9.723 -- -- -- May 1, 1994* Accumulation Unit Value................. -- -- -- -- $10.0000 -- -- -- December 31, 1993 Accumulation Units in Force................. -- 5,108,957 -- 118,720,649 -- -- -- -- Accumulation Unit Value................. -- $12.784 -- $2.142 -- -- -- -- December 31, 1992 Accumulation Units in Force................. -- 698,720 -- 79,582,321 -- -- -- -- Accumulation Unit Value................. -- $10.988 -- $1.996 -- -- -- -- May 1, 1992* Accumulation Unit Value................. -- 10.0000 -- -- -- -- -- December 31, 1991 Accumulation Units in Force................. -- -- 42,946,178.33 -- -- -- -- Accumulation Unit Value................. -- -- $1.965 -- -- -- -- December 31, 1990 Accumulation Units in Force................. -- -- 14,690,313.64 -- -- -- -- Accumulation Unit Value................. -- SMALL CAP VALUE --------- December 31, 2000 Accum Units in Force... 3,045,179 Accum Unit Values...... $13.357 December 31, 1999 Accum Units in Force... 2,496,974 Accum Unit Values...... $10.659 December 31, 1998 Accumulation Units in Force................. 1,098,102 Accumulation Unit Values................ $9.367 December 31, 1997 Accumulation Units in Force................. -- Accumulation Unit Values................ -- December 31, 1996 Accumulation Units in Force................. -- Accumulation Unit Values................ January 1, 1996* Accumulation Unit Values................ December 31, 1995 Accumulation Units in Force................. -- Accumulation Unit Value................. January 2, 1995* Accumulation Unit Value................. -- December 31, 1994 Accumulation Units in Force................. -- Accumulation Unit Value................. -- May 1, 1994* Accumulation Unit Value................. -- December 31, 1993 Accumulation Units in Force................. -- Accumulation Unit Value................. -- December 31, 1992 Accumulation Units in Force................. -- Accumulation Unit Value................. -- May 1, 1992* Accumulation Unit Value................. -- December 31, 1991 Accumulation Units in Force................. -- Accumulation Unit Value................. -- December 31, 1990 Accumulation Units in Force................. -- Accumulation Unit Value.................
------------------------------ * Accumulation Unit value at date of initial registration statement effectiveness 8 11 Audited financial statements of the Variable Account are included in the Statement of Additional Information. Advertising and other sales materials may include yield and total return figures for the subaccounts of the Variable Account. These figures are based on historical results and are not intended to indicate future performance. "Yield" is the income generated by an investment in the subaccount over a period of time specified in the advertisement. This rate of return is assumed to be earned over a full year and is shown as a percentage of the investment. "Total Return" is the total change in value of an investment in the subaccount over a period of time specified in the advertisement. The rate of return shown would produce that change in value over the specified period, if compounded annually. Yield figures do not reflect the surrender charge and yield and total return figures do not reflect premium tax charges. This makes the performance shown more favorable. Financial information concerning Fortis Benefits is included in this prospectus under "Additional Information About Fortis Benefits" and "Fortis Benefits Financial Statements". FORTIS BENEFITS Fortis Benefits Insurance Company is the issuer of the contracts. Fortis Benefits is a Minnesota corporation founded in 1910. It is qualified to sell life insurance and annuity contracts in the District of Columbia and in all states except New York. Fortis Benefits is an indirectly wholly-owned subsidiary of Fortis, Inc., which is itself indirectly owned 50% by Fortis (NL)N.V. and 50% by Fortis (B). Fortis, Inc. manages the United States operations for these two companies. Fortis (NL)N.V. is a diversified financial services company headquartered in Utrecht, The Netherlands, where its insurance operations began in 1847. Fortis (B) is a diversified financial services company headquartered in Brussels, Belgium, where its insurance operations began in 1824. Fortis (NL)N.V. and Fortis (B) have merged their operating companies under the trade name of Fortis. The Fortis group of companies is active in insurance, banking and financial services, and real estate development in The Netherlands, Belgium, the United States, Western Europe, and the Pacific Rim. All of the guarantees and commitments under the contracts are general obligations of Fortis Benefits regardless of whether you have allocated the contract value to the Variable Account or to the fixed account. None of Fortis Benefits' affiliated companies has any legal obligation to back Fortis Benefits' obligations under the contracts. Effective April 1, 2001, Fortis Benefits contracted the administrative servicing obligations for the contracts to Hartford Life and Annuity Insurance Company ("Hartford L&A"), a subsidiary of The Hartford Financial Services Group. Although Fortis Benefits remains responsible for all contract terms and conditions, Hartford L&A is responsible for servicing the contracts, including the payment of benefits, oversight of investment management (i.e., the available investment portfolios) and overall contract administration. This was part of a larger transaction whereby Hartford L&A reinsured all of the individual life insurance and annuity business of Fortis Benefits. THE VARIABLE ACCOUNT The Variable Account is a segregated investment account of Fortis Benefits. Fortis Benefits established Variable Account D under Minnesota insurance law as of October 14, 1987. The Variable Account is an integral part of Fortis Benefits. However, the Variable Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940. Assets in the Variable Account representing reserves and liabilities under these contracts and other variable annuity contracts issued by Fortis Benefits will not be chargeable with liabilities arising out of any other business of Fortis Benefits. The Variable Account has subaccounts. The assets in each subaccount are invested exclusively in a distinct class (or series) of stock issued by Series Fund, each of which represents a separate investment portfolio within Series Fund. Income and both realized and unrealized gains or losses from the assets of each subaccount of the Variable Account are credited to or charged against that subaccount without regard to income, gains or losses from any other subaccount of the Variable Account or arising out of any other business we may conduct. We may add or eliminate new subaccounts as new portfolios are added or are eliminated. SERIES FUND Series Fund is a "series" type of mutual fund. Series Fund is registered with the Securities and Exchange Commission under the Investment Company Act of 1940. Series Fund has served as the investment medium for the Variable Account since the Variable Account began operations. Series Fund is also the investment medium for the variable account of Fortis Benefits through which variable life insurance policies are issued by Fortis Benefits. We do not foresee any conflict between your interests and the interests of life insurance policy owners. However, Series Fund's Board of Directors will monitor to identify any material, irreconcilable conflicts which may develop. Series Fund's Board of Directors will determine what action, if any, should be taken in response. If it becomes necessary for any separate account to replace shares of any portfolio with another investment, the portfolio may have to liquidate securities on a disadvantageous basis. Fortis Benefits purchases and redeems Series Fund shares for the Variable Account at their net asset value without any sales or redemption charges. These shares are interests in the portfolios of Series Fund available for investment by the Variable Account. Each portfolio corresponds to one of the subaccounts of the Variable Account. The assets of each portfolio are separate from the assets of other portfolios. In addition, each portfolio operates as a separate investment portfolio whose investment performance has no effect on the investment performance of any other portfolio. We automatically reinvest dividends or capital gain distributions attributable to contracts in shares of the portfolio from which they are received at the portfolio's net asset value on the date paid. These dividends and distributions will have the effect of reducing the net asset value of each share of the corresponding portfolio and increasing, by an equivalent value, the number of shares outstanding of the portfolio. However, the value of your interest in the corresponding subaccount will not change as a result of any of these dividends and distributions. The portfolios of Series Fund available for investment by the Variable Account are listed on the cover page of this prospectus. A full description of the portfolios, their investment policies and restrictions, the charges, the risks associated with investing in 9 12 them, and other aspects of their operations is contained in the prospectus for Series Fund accompanying this prospectus and in the Statement of Additional Information for Series Fund. Additional copies of these documents may be obtained from your sales representative or from our home office. The complete risk disclosure in the prospectus for the Diversified Income Series, High Yield Series, Asset Allocation Series, and Global Asset Allocation Series should be read before selection of them for investment. THE FIXED ACCOUNT GUARANTEED INTEREST RATES/GUARANTEE PERIODS Any amount you allocate to the fixed account earns a guaranteed interest rate beginning on the date you make the allocation. The guaranteed interest rate continues for the number of years you select, up to a maximum of ten years. At the end of your guarantee period, your contract value, including accrued interest, will be allocated to a new guarantee period of equal length. However, you may reallocate your contract value to a different guarantee period (or periods) or to one (or more) of the subaccounts of the Variable Account. If you decide to reallocate your contract value, you must do so by sending us a written request. We must receive your written request at least three business days before the end of your guarantee period. The first day of your new guarantee period (or other reallocation) will be the day after the end of your previous guarantee period. We will notify you at least 45 days and not more than 75 days before the end of your guarantee period. We currently offer ten different guarantee periods. These guarantee periods range in length from one to ten years. Each guarantee period has its own guaranteed interest rate, which may differ from those for other guarantee periods. From time to time we will, at our discretion, change the guaranteed interest rate for future guarantee periods. These changes will not affect the guaranteed interest rates we are paying on current guarantee periods. Please note, when you allocate or transfer an amount to a guarantee period, a new guarantee period begins running with respect to that amount. Therefore, the amount you allocate will earn a guaranteed interest rate that will not change until the end of that period. In addition, the guaranteed interest rate will never be less than an effective annual rate of 4%. We declare the guaranteed interest rates from time to time as market conditions dictate. We advise you of the guaranteed interest rate for a chosen guarantee period at the time we receive a purchase payment from you, or at the time we execute a transfer you have requested, or at the time a guarantee period is renewed. We do not have a specific formula for establishing the guaranteed interest rates for the guarantee periods. Guaranteed interest rates may be influenced by the available interest rates on the investments we acquire with the amounts you allocate for a particular guarantee period. Guaranteed interest rates do not necessarily correspond to the available interest rates on the investments we acquire with the amounts you allocate for a particular guarantee period. See "Investments by Fortis Benefits". In addition, when we determine guaranteed interest rates, we may consider: (1) the duration of a guarantee period, (2) regulatory and tax requirements, (3) sales and administrative expenses we bear, (4) risks we assume, (5) our profitability objectives, and (6) general economic trends. FORTIS BENEFITS' MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES WE DECLARE. WE CANNOT PREDICT OR ASSURE THE LEVEL OF ANY FUTURE GUARANTEED INTEREST RATES IN EXCESS OF AN EFFECTIVE ANNUAL RATE OF 4%. THE FIXED ACCOUNT INVESTMENT OPTION IS NOT AVAILABLE FOR CONTRACTS ISSUED IN THE STATES OF PENNSYLVANIA AND NEVADA. You may obtain information concerning the guaranteed interest rates that apply to the various guarantee periods. You may obtain this information from our home office or from your sales representative at any time. MARKET VALUE ADJUSTMENT Except as described below, we will apply a Market Value Adjustment to any fixed account value that is: - surrendered, - transferred, or - otherwise paid out before the end of the guarantee period in which it is being held. For example, we will apply a Market Value Adjustment to fixed account value that we pay: - as a death benefit pursuant to a contract, - as an amount applied to an annuity option, and - as an amount paid as a single sum in lieu of an annuity. The Market Value Adjustment we apply may increase or decrease the fixed account value that is withdrawn or transferred. We determine whether the fixed account value is increased or decreased by performing a comparison of two guaranteed interest rates. The first rate we compare is the guaranteed interest rate for the fixed account value that is withdrawn or transferred from the existing guarantee period. The second rate we compare is the guaranteed interest rate we are then offering for new guarantee periods with durations equal to the number of years remaining in the existing guarantee period. After comparing these two rates, we determine whether the fixed account value is increased or decreased as follows: - If the first rate exceeds the second rate by more than 1/2%, the Market Value Adjustment produces an increase in the fixed account value withdrawn or transferred. - If the first rate does not exceed the second rate by at least 1/2%, the Market Value Adjustment produces a decrease in the fixed account value withdrawn or transferred. We will determine the Market Value Adjustment by multiplying the fixed account value that is withdrawn or transferred from the existing guarantee period (before deduction of any applicable surrender charge) by the following factor: 1 + I n/12 ------------ - 1 ( 1 + J + .005 )
where, - I is the guaranteed interest rate we credit to the fixed account value that is withdrawn or transferred from the existing guarantee period. 10 13 - J is the guaranteed interest rate we are then offering for new guarantee periods with durations equal to the number of years remaining in the existing guarantee period (rounded up to the next higher number of years). - N is the number of months remaining in the existing guarantee period (rounded up to the next higher number of months). You will find sample Market Value Adjustment calculations in Appendix A. We do not apply a Market Value Adjustment to withdrawals and transfers of fixed account value under two exceptions. We describe these exceptions below. We will not apply a Market Value Adjustment to fixed account value that we pay out during a 30 day period that: - begins 15 days before the end date of the guarantee period in which the fixed account value was being held, and that: - ends 15 days after the end date of the guarantee period in which the fixed account value was being held. In addition, we will not apply a Market Value Adjustment to fixed account value that is withdrawn or transferred from a guarantee period on a periodic, automatic basis. This exception only applies to such withdrawals or transfers under a formal Fortis Benefits program for the withdrawal or transfer of fixed account value. We may impose conditions and limitations on any formal Fortis Benefits program for the withdrawal or transfer of fixed account value. Ask your Fortis Benefits representative about the availability of such a program in your state. In addition, if such a program is available in your state, your Fortis Benefits representative can inform you about the conditions and limitations that may apply to that program. INVESTMENTS BY FORTIS BENEFITS Fortis Benefits' legal obligations with respect to the fixed account are supported by our general account assets. These general account assets also support our obligations under other insurance and annuity contracts. Investments purchased with amounts allocated to the fixed account are the property of Fortis Benefits, and you have no legal rights in such investments. Subject to applicable law, we have sole discretion over the investment of assets in our general account and in the fixed account. Neither our general account nor the fixed account is subject to registration under the Investment Company Act of 1940. We will invest amounts in our general account, and amounts in the fixed account, in compliance with applicable state insurance laws and regulations concerning the nature and quality of investments for the general account. Within specified limits and subject to certain standards and limitations, these laws generally permit investment in: - federal, state and municipal obligations, - preferred and common stocks, - corporate bonds, - real estate mortgages and mortgage backed securities, - real estate, and - certain other investments, including various derivative investments. See "Fortis Benefits' Financial Statements" for information on our investments. When we establish guaranteed interest rates, we will consider the available return on the instruments in which we invest amounts allocated to the fixed account. However, this return is only one of many factors we consider when we establish the guaranteed interest rates. See "Guaranteed Interest Rates/Guarantee Periods". Generally, we expect to invest amounts allocated to the fixed account in debt instruments. We expect that these debt instruments will approximately match our liabilities with regard to the guarantee periods. We also expect that these debt instruments will primarily include: (1) securities issued by the United States Government or its agencies or instrumentalities. These securities may or may not be guaranteed by the United States Government; (2) debt securities that, at the time of purchase, have an investment grade within the four highest grades assigned by Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's Corporation ("Standard & Poor's"), or any other nationally recognized rating service. Moody's four highest grades are: Aaa, Aa, A, and Baa. Standard & Poor's four highest grades are: AAA, AA, A, and BBB; (3) other debt instruments including, but not limited to, issues of, or guaranteed by, banks or bank holding companies and corporations. Although not rated by Moody's or Standard & Poor's, we deem these obligations to have an investment quality comparable to securities that may be purchased as stated above; (4) other evidences of indebtedness secured by mortgages or deeds of trust representing liens upon real estate. Except as required by applicable state insurance laws and regulations, we are not obligated to invest amounts allocated to the fixed account according to any particular strategy, See "Regulation and Reserves". As stated above under the caption "Fortis Benefits" in the "Summary of Contract Features" section of this prospectus, the contracts are reinsured by Hartford Life and Annuity Insurance Company. As part of this reinsurance arrangement, the assets supporting the reserve liabilities of Fortis Benefits associated with the fixed accounts under the contracts are held by Fortis Benefits; however, these assets are managed by Hartford Investment Management Company, an affiliate of Hartford Life and Annuity Insurance Company. Hartford Investment Management Company generally invests those assets as described above for the contract fixed account related investments of Fortis Benefits. ACCUMULATION PERIOD ISSUANCE OF A CONTRACT AND PURCHASE PAYMENTS We reserve the right to reject any application for a contract or any purchase payment for any reason. If we accept your issuing instructions in the form received, we will credit the initial purchase payment within two Valuation Dates after the later of (1) receipt of the issuing instructions or (2) receipt of the initial purchase payment at our home office. If we cannot apply the 11 14 initial purchase payment within five Valuation Dates after receipt because the issuing instructions are incomplete, we will return the initial purchase payment unless you consent to our retaining the initial purchase payment and applying it as of the end of the Valuation Period in which the necessary requirements are fulfilled. The initial purchase payment must be at least $5,000 ($2,000 for a contract issued pursuant to a qualified plan). The date that we apply the initial purchase payment to the purchase of the contract is also the contract issue date. The contract issue date is the date used to determine contract years, regardless of when we deliver the contract. Our crediting of investment experience in the Variable Account, or a fixed rate of return in the fixed account, generally begins as of the contract issue date. We will accept additional purchase payments at any time after the contract issue date and prior to the annuity commencement date, as long as the Annuitant is living. You must transmit purchase payments (together with any required information identifying the proper contracts and account to be credited with purchase payments) to our home office. We apply additional purchase payments to the contract, and add to the contract value as of the end of the Valuation Period in which we receive the payments. Each additional purchase payment under a contract must be at least $50. The total of all purchase payments for all Fortis Benefits annuities having the same owner or Annuitant, may not exceed $1 million (not more than $500,000 allocated to the fixed account) without our prior approval. We reserve the right to modify this limitation at any time. You may make purchase payments in excess of the initial minimum by monthly draft against a bank account if you have completed and returned to us a special authorization form. You may get the form from your sales representative or from our home office. We can also arrange for you to make purchase payments by wire transfer, payroll deduction, military allotment, direct deposit and billing. Purchase payments by check should be made payable to Fortis Benefits Insurance Company. If the contract value is less than $1,000, we may cancel the contract on any Valuation Date. We will notify you of our intention to cancel the contract at least 90 days in advance of the cancellation date. If we do cancel your contract, we consider such cancellation a full surrender of the contract. CONTRACT VALUE Contract value is the total of any Variable Account value in all the subaccounts of the Variable Account, plus any fixed account value in all the guarantee periods. The contract does not guarantee a minimum Variable Account value. You bear the entire investment risk for the contract value that you allocate to the Variable Account. Determination of Variable Account Value. A contract's Variable Account value is based on the number of Accumulation Units and on Accumulation Unit values, which are determined on each Valuation Date. The value of an Accumulation Unit for a subaccount on any Valuation Date is equal to the previous value of that subaccount's Accumulation Unit multiplied by that subaccount's net investment factor (discussed directly below) for the Valuation Period ending on that Valuation Date. At the end of any Valuation Period, a contract's Variable Account value in a subaccount is equal to the number of Accumulation Units in the subaccount times the value of one Accumulation Unit for that subaccount. The number of Accumulation Units in each subaccount is equal to - Accumulation Units purchased at the time that any purchase payments or transferred amounts are allocated to the subaccount; less - Accumulation Units redeemed to pay for the portion of any transfers from or partial surrenders allocated to the subaccount; less - Accumulation Units redeemed to pay charges under the contract. Net Investment Factor. The net investment factor for a subaccount is determined by dividing (1) the net asset value per share of the portfolio shares held by the subaccount, determined at the end of the current Valuation Period, plus the per share amount of any dividend or capital gains distribution made with respect to the portfolio shares held by the subaccount during the current Valuation Period, minus a per share charge for the increase, plus a per share credit for the decrease, in any income taxes assessed which we determine to have resulted from the investment operation of the subaccount or any other taxes which are attributable to this contract, by (2) the net asset value per share of the portfolio shares held in the subaccount as determined at the end of the previous Valuation Period, and subtracting from that result a factor representing the mortality risk, expense risk and administrative expense charge. If a subaccount's net investment factor is greater than one, the subaccount's Accumulation Unit value has increased. If a subaccount's net investment factor is less than one, the subaccount's Accumulation Unit value has decreased. Determination of Fixed Account Value. A contract's fixed account value is guaranteed by Fortis Benefits. Therefore, we bear the investment risk with respect to amounts allocated to the fixed account, except to the extent that (1) we may vary the guaranteed interest rate for future guarantee periods (subject to the 4% effective annual minimum) and (2) the Market Value Adjustment imposes investment risks on you. The contract's fixed account value on any Valuation Date is the sum of its fixed account values in each guarantee period on that date. The fixed account value in a guarantee period is equal to the following amounts, in each case increased by accrued interest at the applicable guaranteed interest rate: - The amount of purchase payments or transferred amounts allocated to the guarantee period; less - The amount of any transfers or surrenders out of the guarantee period. ALLOCATION OF PURCHASE PAYMENTS AND CONTRACT VALUE Allocation of Purchase Payments. In your application for a contract, you may allocate purchase payments, or portions of payments, to the: - available subaccounts of the Variable Account, or - to the guarantee periods in the fixed account, or 12 15 - to a combination of the two previous options. Percentages must be in whole numbers and the total allocation must equal 100%. The percentage allocations for future purchase payments may be changed, without charge, at any time by sending a written request to Fortis Benefits' home office. Changes in the allocation of future purchase payments will be effective on the date we receive your written request. Transfers. You may transfer contract value: - from one available subaccount to another available subaccount, or - from one available subaccount to the fixed account, or - from one guarantee period to another guarantee period, or - from one guarantee period to an available subaccount You must request transfers by (1) a written request to Fortis Benefits' home office, or by (2) a telephone transfer as described below. Currently, we do not charge for any transfer. However, transfers from a guarantee period that are (1) more than 15 days before or 15 days after the expiration of the existing guarantee period, or are (2) not a part of a formal Fortis Benefits program for the transfer of fixed account value are subject to a Market Value Adjustment. See "Market Value Adjustment". The minimum transfer from a subaccount or guarantee period is the lesser of: - $1,000, or - all of the contract value in the subaccount or guarantee period. However, we may permit a continuing request for transfers of lesser specified amounts automatically on a periodic basis. You may not make a transfer into the one year guarantee period fixed account within six months of a transfer out of the one year guarantee period fixed account. We reserve the right to additionally restrict the frequency of transfers or to otherwise condition, terminate, or impose charges (not to exceed $25 per transfer) upon transfers. Where you make all your transfer requests at the same time, as part of one request, we will count all transfers between and among the subaccounts of the Variable Account and the fixed account as one transfer. We will execute the transfers, and determine all values in connection with the transfers, at of the end of the Valuation Period in which we receive the transfer request. The amount of any positive or negative Market Value Adjustment will be added to or deducted from the transferred amount. Certain restrictions on very substantial allocations to any one subaccount are set forth under "Limitations on Allocations" in the Statement of Additional Information. TOTAL AND PARTIAL SURRENDERS Total Surrenders. You may surrender all of the cash surrender value at any time during the life of the Annuitant and prior to the annuity commencement date. If you choose to make a total surrender, you must do so by written request sent to our home office. We reserve the right to require that the contract be returned to us prior to making payment, although this will not affect our determination of the amount of the cash surrender value. Cash surrender value is: - the contract value at the end of the Valuation Period during which we receive the written request for the total surrender at our home office, less - any applicable surrender charge, and - after we have applied any Market Value Adjustment. See "Surrender Charge" and "Market Value Adjustment". We must receive written consent of all collateral assignees and irrevocable beneficiaries prior to any total surrender. We will generally pay surrenders from the Variable Account within seven days of the date of receipt by our home office of the written request. However, we may postpone payments in certain circumstances. See "Postponement of Payment". The amount we pay upon total surrender of the cash surrender value (taking into account any prior partial surrenders) may be more or less than the total purchase payments you made. After a surrender of the cash surrender value or at any time the contract value is zero, all rights of the owner, Annuitant, or any other person will terminate. Partial Surrenders. At any time during the life of the Annuitant and prior to the annuity commencement date, you may surrender a portion of the fixed account and/or the Variable Account. You must request partial surrender by a written request sent to Fortis Benefits' home office. We will not accept a partial surrender request from you unless the net proceeds payable to you, as a result of the request, are at least $1,000. We will surrender the entire cash surrender value under the contract if the total contract value in both the Variable Account and fixed account would be less than $1,000 after the partial surrender. You should specify the subaccounts of the Variable Account or guarantee periods of the fixed account that you wish to partially surrender. If you do not specify, we take the partial surrender from the subaccounts and from the guarantee periods of the fixed account on a pro rata basis. We will surrender Accumulation Units from the Variable Account and/ or dollar amounts from the fixed account so that the total amount of the partial surrender equals the dollar amount of the partial surrender request. We will reduce the partial surrender by the amount of any applicable surrender charge. In addition, if the surrender is from a guarantee period, we will reduce the amount payable to you by any negative Market Value Adjustment, or we will increase the amount payable to you by any positive Market Value Adjustment unless the surrender is (1) within 15 days before or 15 days after the expiration of a guarantee period, or (2) is a part of a formal Fortis Benefits program for the transfer or withdrawal of fixed account value. The partial surrender will be effective at the end of the Valuation Period in which we receive the written request for partial surrender at our home office. Payments will generally be made within seven days of the effective date of such request, although certain delays are permitted. See "Postponement of Payment". The Internal Revenue Code provides that a penalty tax will be imposed on certain premature surrenders. For a discussion of this and other tax implications of total and partial surrenders, including withholding requirements, see "Federal Tax Matters". Also, under tax deferred annuity contracts pursuant to Sec- 13 16 tion 403(b) of the Internal Revenue Code, no distributions of voluntary salary reduction amounts will be permitted prior to one of the following events: attainment of age 59 1/2 by the employee or the employee's separation from service, death, disability or hardship. (Hardship distributions will be limited to the lesser of the amount of the hardship or the amount of salary reduction contributions, exclusive of earnings thereon.) TELEPHONE TRANSACTIONS You or your representative may make certain requests under the contract by telephone if we have a written telephone authorization on file. These include requests for (1) transfers, (2) withdrawals, and (3) changes in purchase payment allocation instructions, dollar-cost averaging, portfolio rebalancing programs, and systematic withdrawals. Our home office will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures may include, among others, (1) requiring some form of personal identification such as your address and social security number prior to acting upon instructions received by telephone, (2) providing written confirmation of such transactions, and/or (3) tape recording of telephone instructions. Your request for telephone transactions authorizes us to record telephone calls. We may be liable for any losses due to unauthorized or fraudulent instructions if we do not employ reasonable procedures. If we do employ reasonable procedures, we will not be liable for any losses due to unauthorized or fraudulent instructions. We reserve the right to place limits, including dollar limits, on telephone transactions. BENEFIT PAYABLE ON DEATH OF ANNUITANT OR OWNER If the owner or Annuitant dies prior to the annuity commencement date, we will pay a death benefit to the beneficiary. If more than one Annuitant has been named, we will pay the death benefit payable upon the death of an Annuitant only upon the death of the last survivor of the persons so named. If the contract is issued on or after May 1, 1997 and in a state that has approved the Enhanced Death Benefit Rider (check with your representative as to its availability in your state), the death benefit will be equal to the greater of (1), (2), or (3) as follows: (1)(a) If an owner or the Annuitant dies before the date any owner or Annuitant first reaches age 75, the accumulation of purchase payments made less all prior surrenders and less any applicable prior negative Market Value Adjustments less previously imposed surrender charges at an effective annual rate of 3.0%. This amount may not exceed a maximum of two times the following: purchase payments made less all prior surrenders and less any applicable prior negative Market Value Adjustments less previously imposed surrender charges. This amount is referred to as the "roll-up amount". or (1)(b) If the Annuitant or owner dies on or after the date any owner or Annuitant first reaches age 75, the roll-up amount as of the date that an owner or Annuitant first reaches age 75, plus subsequent purchase payments made, less subsequent surrenders and any subsequent negative Market Value Adjustments less subsequently imposed surrender charges. (2) The contract value adjusted by any applicable Market Value Adjustment as of the date used for valuing the death benefit. (3) The contract value adjusted by any Market Value Adjustment (less the amount of any subsequent surrenders and surrender charges and negative Market Value Adjustments in connection therewith), as of the contract's Seven Year Anniversary immediately preceding the earlier of: (a) the date of death of either the owner or Annuitant, or (b) the date either first reaches his or her 75th birthday. See Appendix B for Sample Death Benefit Calculations. If the contract is issued prior to May 1, 1997, or on or after that date in a state that has not approved the Enhanced Death Benefit rider, the death benefit will be equal to the greater of (1), (2), or (3) as follows: (1) The sum of all purchase payments made (less all prior surrenders and previously-imposed surrender charges and prior negative Market Value Adjustments); (2) The contract value adjusted by any Market Value Adjustment, as of the date used for valuing the death benefit; or (3) The contract value adjusted by any Market Value Adjustment (less the amount of any subsequent surrenders and surrender charges and negative Market Value Adjustments in connection therewith), as of the contract's Seven Year Anniversary immediately preceding the earlier of: (a) the date of death of either the owner or Annuitant, or (b) the date either first reaches his or her 75th birthday. The value of the death benefit is determined as of the end of the Valuation Period in which we receive, at our home office, proof of death and the written request as to the manner of payment. Upon receipt of these items, the death benefit generally will be paid within seven days. Under certain circumstances, payment of the death benefit may be postponed. See "Postponement of Payment". If we do not receive a written request for a settlement method, we will pay the death benefit in a single sum, based on values determined at that time. The beneficiary may (1) receive a single sum payment, which terminates the contract, or (2) select an annuity option. If the beneficiary selects an annuity option, he or she will have all the rights and privileges of a payee under the contract. If the beneficiary desires an annuity option, the election should be made within 60 days of the date the death benefit becomes payable. Failure to make a timely election can result in unfavorable tax consequences. For further information, see "Federal Tax Matters". We accept any of the following as proof of death: (1) a copy of a certified death certificate; (2) a copy of a certified decree of a court of competent jurisdiction as to the finding of death; or (3) a written statement by a medical doctor who attended the deceased at the time of death. The Internal Revenue Code requires that a Non-Qualified Contract contain certain provisions about an owner's death. We discuss these provisions below under "Federal Tax Matters--Required Distributions for Non-Qualified Contracts". It is 14 17 imperative that written notice of the death of the owner be promptly transmitted to us at our home office, so that we can make arrangements for distribution of the entire interest in the contract to the beneficiary in a manner that satisfies the Internal Revenue Code requirements. Failure to satisfy these requirements may result in the contract not being treated as an annuity contract for federal income tax purposes with possible adverse tax consequences. THE ANNUITY PERIOD ANNUITY COMMENCEMENT DATE You may specify an annuity commencement date in your application. The annuity commencement date marks the beginning of the period during which an Annuitant or other payee designated by the owner receives annuity payments under the contract. The annuity commencement date must be at least two years after the contract issue date. You should consult your sales representative in this regard. The Internal Revenue Code may impose penalty taxes on amounts distributed either too soon or too late depending on the type of retirement arrangement involved. See "Federal Tax Matters". You should consider this carefully in selecting or changing an annuity commencement date. You must submit a written request in order to advance or defer the annuity commencement date. Moreover, you must submit a written request during the Annuitant's lifetime. We must receive the request at our home office at least 30 days before the then-scheduled annuity commencement date. The new annuity commencement date must also be at least 30 days after we receive the written request. You have no right to make any total or partial surrender during the Annuity Period. COMMENCEMENT OF ANNUITY PAYMENTS We may pay the entire contract value, rather than apply the amount to an annuity option if the contract value at the end of the Valuation Period which contains the annuity commencement date is less than $1,000. We would make the payment in a single sum to the Annuitant or other payee chosen by the owner and cancel the contract. We would not impose any charge other than the premium tax charge. Otherwise, we will apply (1) the fixed account value to provide a Fixed Annuity Option and (2) the Variable Account value in any subaccount to provide a Variable Annuity Option using the same subaccount, unless you have notified us by written request to apply the fixed account value and Variable Account value in different proportions. We must receive written request at our home office at least 30 days before the annuity commencement date. We will make annuity payments under a Fixed or Variable Annuity Option on a monthly basis to the Annuitant or other properly-designated payee, unless we agree to a different payment schedule. If you name more than one person as an Annuitant, you may elect to name one of such persons to be the sole Annuitant as of the annuity commencement date. We reserve the right to change the frequency of any annuity payment so that each payment will be at least $50 ($20 in Texas). The amount of each annuity payment will depend on (1) the amount of contract value applied to an annuity option, (2) the form of annuity selected, and (3) the age of the Annuitant. For information concerning the relationship between the Annuitant's sex and the amount of annuity payments, including special requirements in connection with employee benefits plans, see "Calculations of Annuity Payments' in the Statement of Additional Information. The Statement of Additional Information also contains detailed information about how the amount of each annuity payment is computed. The dollar amount of any fixed annuity payments is specified during the entire period of annuity payments according to the provisions of the annuity option selected. The dollar amount of variable annuity payments varies during the Annuity Period based on changes in Annuity Unit values for the subaccounts that you choose to use in connection with your payments. RELATIONSHIP BETWEEN SUBACCOUNT INVESTMENT PERFORMANCE AND AMOUNT OF VARIABLE ANNUITY PAYMENTS The amount of an annuity payment depends on the average effective net investment return of a subaccount during the period since the preceding payment as follows: - if the return is higher than 4% annually, the Annuity Unit value will increase, and the second payment will be higher than the first; and - if the return is lower than 4% annually, the Annuity Unit value will decrease, and the second payment will be lower than the first. "Net investment return," for this purpose, refers to the subaccount's overall investment performance after deduction of the mortality and expense risk and administrative expense charges, which are assessed at an annual rate of 1.35%. We guarantee that the amount of each variable annuity payment after the first payment will not be affected by variations in our mortality experience or our expenses. Transfers. A person receiving annuity payments may make up to four transfers a year among subaccounts. The current procedures for and conditions on these transfers are the same as we describe above under "Allocation of Purchase Payments and Contract Value--Transfers". We do not permit transfers from a Fixed Annuity Option during the Annuity Period. ANNUITY OPTIONS You may select an annuity option or change a previous selection by written request. We must receive your request at least 30 days before the annuity commencement date. You may select one annuity form, although payments under that form may be on a combination fixed and variable basis. If no annuity form selection is in effect on the annuity commencement date, we usually automatically apply Option B (described below), with payments guaranteed for ten years. However, federal pension law may require that we make default payments under certain retirement plans pursuant to plan provisions and/or federal law. Tax laws and regulations may impose further restrictions to assure that the primary purpose of the plan is distribution of the accumulated funds to the employee. Your contract offers the following options for fixed and variable annuity payments. Under each of the options, we make payments as of the first Valuation Date of each monthly period, starting with the annuity commencement date. 15 18 Option A, Life Annuity. We do not make payments after the annuitant dies. It is possible for the annuitant to receive only one payment under this option, if the annuitant dies before the second payment is due. Option B, Life Annuity with Payments Guaranteed for 10 Years to 20 Years. We continue payments as long as the annuitant lives. If the annuitant dies before we have made all of the guaranteed payments, we continue installments of the guaranteed payments to the beneficiary. Option C, Joint and Full Survivor Annuity. We continue payments as long as either the annuitant or the joint annuitant is alive. We stop payments when both the annuitant and the joint annuitant have died. It is possible for the payee or payees to receive only one payment under this option if both annuitants die before the second payment is due. Option D, Joint and One-Half Contingent Survivor Annuity. We continue payments as long as either the annuitant or the joint annuitant is alive. If the annuitant dies first, we continue payments to the joint annuitant at one-half the original amount. If the joint annuitant dies first, we continue payments to the annuitant at the original full amount. We stop payments when both the annuitant and the joint annuitant have died. It is possible for the payee or payees to receive only one payment under this option if both annuitants die before the second payment is due. We also have other annuity options available. You can get information about them from your sales representative or by calling or writing to our home office. DEATH OF ANNUITANT OR OTHER PAYEE Under most annuity forms offered by us, the amounts, if any, payable on the death of the Annuitant during the Annuity Period are the continuation of annuity payments for any remaining guarantee period or for the life of any joint Annuitant. In all such cases, the person entitled to receive payments also receives any rights and privileges under the annuity form in effect. Additional rules applicable to such distributions under Non-Qualified Contracts are described under "Federal Tax Matters--Required Distributions for Non-Qualified Contracts". Though the rules there described do not apply to contracts issued in connection with qualified plans, similar rules apply to the plans themselves. CHARGES AND DEDUCTIONS PREMIUM TAXES We deduct state premium taxes as follows: - when imposed on purchase payments, we pay the amount on your behalf and deduct the amount from your contract value upon (1) our payment of surrender proceeds or death benefit or (2) annuitization of a contract, or - when imposed at the time annuity payments begin, we deduct the amount from your contract value. Applicable premium tax rates depend upon your place of residence. Rates can change by legislation, administrative interpretations, or judicial acts. CHARGES AGAINST THE VARIABLE ACCOUNT Mortality and Expense Risk Charge. We assess each subaccount of the Variable Account with a daily charge for mortality and expense risk. This charge is a nominal annual rate of 1.25% of the average daily net assets of the Variable Account. It consists of approximately .8% for mortality risk and approximately .45% for expense risk. We guarantee not to increase this charge for the duration of the contract. This charge is assessed during both the Accumulation Period and the Annuity Period. The mortality risk borne by us arises from our obligation to make annuity payments (determined in accordance with the annuity tables and other provisions contained in the contract) for the full life of all Annuitants regardless of how long all Annuitants or any individual Annuitant might live. In addition, we bear a mortality risk in that we guarantee to pay a death benefit upon the death of an Annuitant or owner prior to the annuity commencement date. We do not impose a surrender charge upon payment of a death benefit. This places a further mortality risk on us. The expense risk we assume is that actual expenses incurred in connection with issuing and administering the contract will exceed the limits on administrative charges set in the contract. We or the reinsurer of the contracts bear the loss if the administrative charges and the mortality and expense risk charge are insufficient to cover the expenses and costs assumed. Conversely, we or the reinsurer of the contracts profit if the amount deducted proves more than sufficient. Administrative Expense Charge. We assess each subaccount of the Variable Account with a daily charge at an annual rate of .10% of the average daily net assets of the subaccount. We assess this charge during both the Accumulation Period and the Annuity Period. This charge helps cover administrative costs such as those incurred in issuing contracts, establishing and maintaining the records relating to contracts, making regulatory filings and furnishing confirmation notices, voting materials and other communications, providing computer, actuarial and accounting services, and processing contract transactions. There is no necessary relationship between the amount of administrative charges assessed on a given contract and the amount of expenses actually incurred for that contract. TAX CHARGE We currently impose no charge for taxes payable by us in connection with the contract, other than for applicable premium taxes. We reserve the right to impose a charge for any other taxes that may become payable by us in the future for the contracts or the Variable Account. The annual administrative charge and charges against the Variable Account described above are for the purposes described. We may receive a profit as a result of these charges. SURRENDER CHARGE We do not deduct a sales charge from purchase payments. We deduct surrender charges on certain total or partial surrenders. We use the revenues from surrender charges to partially pay our expenses in the sale of the contracts, including (1) commissions, (2) promotional, distribution and marketing expenses, and (3) costs of printing and distribution of prospectuses and sales material. 16 19 Free Surrenders. You can withdraw the following amounts from the contract without a surrender charge: - Any purchase payments that we received more than seven years before the surrender date and that you have not previously surrendered; - Any earnings that you have not previously surrendered; - In any contract year, up to 10% of the purchase payments that we received less than seven years before the surrender date (whether or not you have previously surrendered the purchase payments). Earnings are deemed to be withdrawn first. After all earnings have been withdrawn, all purchase payments not subject to a surrender charge are deemed to be withdrawn. After all purchase payments not subject to a surrender charge have been withdrawn, all purchase payments subject to a surrender charge are deemed to be withdrawn. We do not impose a surrender charge on (1) annuitization or (2) payment of a single sum because less than the minimum required contract value is available to provide an annuity at the annuity commencement date or (3) payment of any death benefit. In addition, we have an administrative policy to waive surrender charges for full surrenders of contracts that have been in force for at least ten years if the amount then subject to the surrender charge is less than 25% of the contract value. We have offered these contracts since 1991. Therefore, we have made no waivers. We reserve the right to change or terminate this practice at any time, both for new and for previously issued contracts. Amount of Surrender Charge. We only apply surrender charges if the amount being withdrawn exceeds the sum of the amounts listed above under "Free Surrenders" (that is, if the amount being withdrawn includes purchase payments made less than seven years prior to the surrender date). The surrender charges are:
NUMBER OF YEARS SURRENDER CHARGE SINCE PURCHASE AS A PERCENTAGE OF PAYMENT WAS CREDITED PURCHASE PAYMENT -------------------- ------------------ Less than 1 7% At least 1 but less than 2 6% At least 2 but less than 3 5% At least 3 but less than 4 4% At least 4 but less than 5 3% At least 5 but less than 6 2% At least 6 but less than 7 1% 7 or more 0%
We anticipate the surrender charge will not be sufficient to cover our distribution expenses. To the extent that the surrender charge is insufficient, we will pay such costs from our general account assets. These assets will include any profit that we derive from the mortality and expense risk charge. Nursing Care/Hospitalization Waiver of Surrender Charges. We do not deduct surrender charges for a total or partial withdrawal: - after a covered person has been confined in a hospital or skilled health care facility for at least 60 consecutive days and the covered person continues to be confined in the hospital or skilled care facility when the request is made, or - within 60 days following a covered person's discharge from a hospital or skilled health care facility after confinement of at least 60 consecutive days. Confinement must begin after the effective date of this provision. Covered persons are the contract owner or owners and the spouse of any contract owner if the spouse is the Annuitant. We will not waive surrender charges when a confinement is due to (1) substance abuse, or (2) mental or personality disorders without a demonstrable organic disease. We consider a degenerative brain disease such as Alzheimer's Disease an organic disease. We provide this nursing care/hospitalization waiver of surrender charges by means of a rider to the contract. This rider has not been approved in all states. When you apply for a contract, you should check with your Fortis Benefits representative to determine if this rider is available in your state. MISCELLANEOUS The Variable Account invests in shares of the portfolios. Therefore, the net assets of the Variable Account will reflect the investment advisory fees and certain other expenses incurred by the portfolios and described in their prospectus. REDUCTION OF CHARGES We will not impose a surrender charge under any contract owned by: (A) Fortis, Inc. or its subsidiaries, and the following persons associated with such companies, if at the contract issue date they are: (1) officers and directors; (2) employees; or (3) spouses of any such persons or any of such persons' children, grandchildren, parents, grandparents, or siblings--or spouses of any of these persons; (B) Series Fund directors, officers, or their spouses (or such persons' children, grandchildren, parents or grandparents--or spouses of any such persons); and (C) representatives or employees (or their spouses) of Fortis Investors (including agencies) or of other broker-dealers having a sales agreement with Fortis Investors (or such persons' children, grandchildren, parents, or grandparents--or spouses of any such persons). GENERAL PROVISIONS THE CONTRACTS The entire contract includes any application, amendment, rider, endorsement, and revised contract pages. Only an officer of Fortis Benefits can agree to change or waive any provision of a contract. Any change or waiver must be in writing and signed by an officer of Fortis Benefits. The contracts are non-participating and do not share in dividends or earnings of Fortis Benefits. 17 20 POSTPONEMENT OF PAYMENT We may defer for up to 15 days the payment of any amount attributable to a purchase payment made by check to allow the check reasonable time to clear. For a description of other circumstances in which amounts payable out of Variable Account assets could be deferred, see "Postponement of Payments" in the Statement of Additional Information. We may also defer payment of surrender proceeds payable out of the fixed account for a period of up to 6 months. MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS If the Annuitant's age or sex was misstated, we pay the amount that the purchase payments paid would have purchased at the correct age and sex. If we make any overpayment because of incorrect information about age or sex, or any other miscalculation, we deduct the overpayment from the next payment due. We add underpayments to the next payment. We credit or charge the amount of any adjustment with interest at the rate of 4% annually. ASSIGNMENT Owners and payees may assign their rights and interests under a Qualified Contract only in certain narrow circumstances referred to in the contract. Owners and other payees may assign their rights and interests under Non-Qualified Contracts, including their ownership rights. We take no responsibility for the validity of any assignment. Owners and payees must make a change in ownership rights in writing and send it to our home office. The change will be effective on the date made, although we are not bound by a change until the date we record it. The rights under a contract are subject to any assignment of record at our home office. An assignment or pledge of a contract may have adverse tax consequences. See below under "Federal Tax Matters". BENEFICIARY You may name or change a beneficiary or a contingent beneficiary before the annuity commencement date. You must send a written request of the change to Fortis Benefits. Certain retirement programs may require spousal consent to name or change a beneficiary. Applicable tax laws and regulations may limit the right to name a beneficiary other than the spouse. We are not responsible for the validity of any change. A change will take effect as of the date it is signed but will not affect any payment we make or action we take before receiving the written request. We also need the consent of any irrevocably named person before making a requested change. Upon the death of an owner or Annuitant prior to the annuity commencement date the beneficiary will be deemed to be as follows: - If there is any surviving owner, the surviving owner will be the beneficiary (this overrides any other beneficiary designation). - If there is no surviving owner, the beneficiary will be the beneficiary designated by the owner. - If there is no surviving owner and no surviving beneficiary who has been designated by the owner, then the estate of the last surviving owner will be the beneficiary. REPORTS We will mail to the owner (or to the person receiving payments during the Annuity Period), at the last known address of record, any report and communication required by applicable law or regulation. You should therefore give us prompt written notice of any address change. This will include annual audited financial statements of the Series Fund, but not necessarily of the Variable Account or Fortis Benefits. RIGHTS RESERVED BY FORTIS BENEFITS We reserve the right to make certain changes if, in our judgment, they would best serve the interests of owners and Annuitants or would be appropriate in carrying out the purposes of the contracts. We will make any change only as permitted by applicable laws. We will obtain your approval of the changes and approval from any appropriate regulatory authority if required by law. Examples of the changes we may make include: - To operate the Variable Account in any form permitted under the Investment Company Act of 1940 or in any other form permitted by law. - To transfer any assets in any subaccount to another subaccount, or to one or more separate accounts, or to the fixed account; or to add, combine, or remove subaccounts in the Variable Account. - To substitute, for the portfolio shares held in any subaccount, the shares of another portfolio of Series Fund or the shares of another investment company or any other investment permitted by law. - To make any changes required by the Internal Revenue Code or by any other applicable law in order to continue treatment of the contract as an annuity. - To change the time or time of day at which a Valuation Date is deemed to have ended. - To make any other necessary technical changes in the contract in order to conform with any action the above provisions permit us to take, including to change the way we assess charges, but without increasing as to any then outstanding contract the aggregate amount of the types of charges that we have guaranteed. DISTRIBUTION Woodbury Financial Services, Inc. ("Woodbury Financial") is the principal underwriter of the contracts. The contracts will be sold by individuals who are licensed by state insurance authorities to sell the contracts of Fortis Benefits, and (1) are registered representatives of Woodbury Financial, or (2) are registered representatives of other broker-dealer firms or (3) are representatives of other firms that are exempt from broker dealer regulation. Woodbury Financial and any other broker-dealer firms are (1) registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 as broker-dealers, and (2) members of the National Association of Securities Dealers, Inc. 18 21 Woodbury Financial will pay an allowance to its registered representatives and selling brokers in varying amounts. Woodbury Financial does not expect the allowances under normal circumstances to exceed 6.25% of purchase payments plus a servicing fee of .25% of contract value per year, starting in the first contract year. Fortis Benefits and Woodbury Financial may, under certain flexible compensation arrangements, pay lesser or greater selling allowances and larger or smaller service fees to its registered representatives and other broker dealer firms than as set forth above. However, in such case, such flexible compensation arrangements will have actuarial present values that are approximately equivalent to the amounts of the selling allowances and service fees set forth above. Additionally, registered representatives, broker-dealer firms and exempt firms may qualify for additional compensation based upon meeting certain production standards. Woodbury Financial may charge back commissions paid to others if the contract upon which the commission was paid is surrendered or cancelled within certain specified time periods. Fortis Benefits paid a total of $32,874,801, $48,774,402 and $55,661,956 to Woodbury Financial for annuity contract distribution services during 1998, 1999 and 2000, respectively, $5,389,151 in 1998, $7,643,966 in 1999 and $9,648,917 in 2000 was not reallowed to other broker-dealers or exempt firms. In the distribution agreement, Fortis Benefits has agreed to indemnify Woodbury Financial (and its agents, employees, and controlling persons) for certain damages and expenses, including those arising under federal securities laws. Fortis Benefits or Woodbury Financial may also provide additional compensation to broker-dealers in connection with sales of contracts. Compensation may include financial assistance to broker-dealers in connection with (1) conferences, (2) sales or training programs for their employees, (3) seminars for the public, (4) advertising, (5) sales campaigns regarding contracts, and (6) other broker-dealer sponsored programs or events. Compensation may also include trips taken by invited sales representatives and their family members to locations within or without the United States for business meetings or seminars. Fortis Benefits or Woodbury Financial may pay travel expenses that arise from these trips. See Notes to Fortis Benefits' Financial Statements as to amounts it has paid to Fortis, Inc. for various services. Woodbury Financial is an indirect subsidiary of The Hartford Financial Services, Group, Inc. Woodbury Financial principal business address is the same as that of our home office. Woodbury Financial is not obligated to sell any specific amount of interests under the contracts. $110,000,000 of interests in the fixed account and an indefinite amount of interests in the Variable Account have been registered with the Securities and Exchange Commission. FEDERAL TAX MATTERS The following description is a general summary of the tax rules, primarily related to federal income taxes. These rules are based on laws, regulations and interpretations that are subject to change at any time. This summary is not comprehensive. We do not intend it as tax advice. Federal estate and gift tax considerations, as well as state and local taxes, may also be material. You should consult a qualified tax adviser as to the tax implications of taking any action under a contract or related retirement plan. NON-QUALIFIED CONTRACTS Section 72 of the Internal Revenue Code ("Code") governs the taxation of annuities in general. Neither you nor any other person may exclude or deduct purchase payments under Non-Qualified Contracts from gross income. However, you are not currently taxed, until receipt, on any increase in the accumulated value of a Non-Qualified Contract that results from (1) the investment performance of the Variable Account, or (2) interest credited to the fixed account. Owners who are not natural persons are taxed annually on any increase in the contract value subject to exceptions. You may wish to discuss this with your tax adviser. The following discussion applies generally to contracts owned by natural persons. In general, surrenders or partial withdrawals under contracts are taxed as ordinary income to the extent of the accumulated income or gain under the contract. If you assign or pledge any part of the value of a contract, you pay on the value so pledged or assigned to the same extent as a partial withdrawal. With respect to annuity payment options, the tax consequences may vary depending on the option elected under the contract. Until the "investment in the contract" is recovered, generally only the portion of the annuity payment that represents the amount by which the contract value exceeds the "investment in the contract" will be taxed. In general, "investment in the contract" is the aggregate amount of purchase payments made. After recovery of an Annuitant's or other payee's "investment in the contract," the full amount of any additional annuity payments is taxable. For variable annuity payments, in general, the taxable portion of each annuity payment (prior to recovery of the "investment in the contract") is the amount of the payment less the nontaxable portion. The nontaxable portion of each payment is the "investment in the contract" divided by the total number of expected annuity payments. For fixed annuity payments, in general, prior to recovery of the "investment in the contract," there is no tax on the amount of each payment that bears the same ratio to that payment as the "investment in the contract" bears to the total expected value of the annuity payments for the term of the payments. However, the remainder of each annuity payment is taxable. The taxable portion of a distribution (in the form of an annuity or a single sum payment) is taxed as ordinary income. For purposes of determining the amount of taxable income resulting from distributions, all contracts and other annuity contracts we or our affiliates issue to you within the same calendar year will be treated as if they were a single contract. You, or any other payee, will pay a 10% penalty on the taxable portion of a "premature distribution." Generally, an amount is a "premature distribution" unless the distribution is: - made on or after you or another payee reach age 59 1/2, or is - made to a beneficiary on or after your death, or is - made upon your disability or that of another payee, or is - part of a series of substantially equal annuity payments for your life or life expectancy, or is 19 22 - part of a series of substantially equal annuity payments for the life or life expectancy of you and your beneficiary. Premature distributions may result, for example, from: - an early annuity commencement date - an early surrender or partial surrender of a contract - an assignment of a contract - the early death of an Annuitant other than you or another person receiving annuity payments under the contract If you transfer ownership of a contract, or designate an Annuitant or payee other than yourself, you may have certain income or gift tax consequences that are beyond the scope of this discussion. If you are contemplating any transfer or assignment of a contract, you should contact a competent tax adviser. REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CONTRACTS In order that a Non-Qualified Contract be treated as an annuity contract for federal income tax purposes, Section 72(s) of the Code requires: - if any person receiving annuity payments dies on or after the annuity commencement date but prior to the time the entire interest in the contract has been distributed, the remaining portion of such interest will be distributed at least as rapidly as under the method of distribution being used as of the date of the person's death; and - if you die prior to the annuity commencement date, the entire interest in the contract will be distributed: - within five years after your death, or - as annuity payments that will begin within one year of your death and will be made over your designated beneficiary's life or over a period not extending beyond the life expectancy of that beneficiary. However, if the owner's designated beneficiary is the surviving spouse, the surviving spouse may continue the contract as the new contract owner. Where the owner or other person receiving payments is not a natural person, the required distributions under Section 72(A) apply on the death of the primary Annuitant. The Internal Revenue Service has not issued regulations interpreting the requirements of Section 72(s) (although it has issued proposed regulations interpreting similar requirements for qualified plans). We intend to review and modify the contract if necessary to ensure that it complies with the requirements of Section 72(s) when clarified by regulation or otherwise. Generally, the above requirements will be satisfied with a single sum payment where the death occurs prior to the annuity commencement date. A single sum payment will be subject to proof of the owner's death. The beneficiary, however, may elect by written request to receive an annuity option instead of a lump sum payment. However, if the election is not made within 60 days of the date the single sum death benefit otherwise becomes payable, the IRS may disregard the election for tax purposes and tax the beneficiary as if a single sum payment had been made. QUALIFIED CONTRACTS The contracts may be used with several types of tax-qualified plans. The tax rules applicable to owners, Annuitants, and other payees vary according to the type of plan and the terms and conditions of the plan itself. In general, purchase payments made under a tax qualified plan on your behalf are excludable from your gross income during the Accumulation Period. The portion, if any, of any purchase payment that is not excluded from your gross income during the Accumulation Period constitutes your "investment in the contract". When annuity payments begin, you will receive back your "investment in the contract" if any, as a tax-free return of capital. The Code provides which portion of each payment is taxable and which portion is tax free. These rules may vary depending on the type of tax qualified plan. The contracts are available in connection with the following types of retirement plans: - Section 403(b) annuity plans for employees of certain tax-exempt organizations and public education institutions; - Section 401 or 403(a) qualified pension, profit-sharing, or annuity plans; - Individual retirement annuities ("IRAs") under Section 408(b); - Simplified employee pension plans ("SEPs") under Section 408(k); - SIMPLE IRA Plans under Section 408(p); and - Section 457 unfunded deferred compensation plans of tax-exempt organizations and private employer unfunded deferred compensation plans. The tax implications of these plans are further discussed in the Statement of Additional Information under the heading "Taxation Under Certain Retirement Plans". WITHHOLDING Annuity payments and other amounts received under contracts are subject to income tax withholding unless the recipient elects not to have taxes withheld. The amounts withheld will vary among recipients depending on the tax status of the individual and the type of payments from which taxes are withheld. Despite the recipient's election, the Code may require withholding from certain payments outside the United States. The Code may also require withholding from certain distributions from certain types of qualified retirement plans, unless the proceeds are transferred directly from the qualified plan to another qualified retirement plan. Moreover, special "backup withholding" rules may require us to disregard the recipient's election if the recipient fails to supply us with a "TIN" or taxpayer identification number (social security number for individuals), or if the Internal Revenue Service notifies us that the TIN provided by the recipient is incorrect. PORTFOLIO DIVERSIFICATION The United States Treasury Department has adopted regulations under Section 817(h) of the Code that set forth diversification requirements for investments underlying Non-Qualified Con- 20 23 tracts. We believe that the investments will satisfy these requirements. Failure to do so would result in immediate taxation to you or another person of all income credited to Non-Qualified Contracts. Also, current regulations do not provide guidance as to any circumstances in which control over allocation of values among different investment alternatives may cause you or another person receiving annuity payments to be treated as the owners of Variable Account assets for tax purposes. We reserve the right to amend the contracts in any way necessary to avoid any such result. The Treasury Department may establish standards in this regard through regulations or rulings. Such standards may apply only prospectively, although retroactive application is possible if the Treasury Department considered such standards not to embody a new position. CERTAIN EXCHANGES Section 1035 of the Code provides generally that no gain or loss will be recognized under the exchange of a life insurance or annuity contract for an annuity contract. Thus, a properly completed exchange pursuant to the special annuity contract exchange form we provide for this purpose is not generally a taxable event under the Code. Moreover, your investment in the contract will be the same as your investment in the product you exchanged out of. Because of the complexity of these and other tax aspects in connection with an exchange, you should consult a tax adviser before making any exchange. TAX LAW RESTRICTIONS AFFECTING SECTION 403(b) PLANS Section 403(b)(11) of the Internal Revenue Code restricts the distribution under Section 403(b) annuity contracts of: (1) elective contributions made for years beginning after December 31, 1988; (2) earnings on those contributions; and (3) earnings on amounts held as of December 31, 1988. Distribution of these amounts may only occur upon death of the employee, attainment of age 59 1/2, separation from service, disability, or financial hardship. In addition, we may not distribute income attributable to elective contributions made after December 31, 1988. FURTHER INFORMATION ABOUT FORTIS BENEFITS GENERAL We offer and sell insurance products, including fixed and variable life insurance policies, fixed and variable annuity contracts, and group life, accident and health insurance policies. We market our products to small business and individuals through a national network of independent agents, brokers, and financial institutions. OWNERSHIP OF SECURITIES All of Fortis Benefits' outstanding shares are owned by Interfinancial, Inc., which is itself wholly owned by Fortis, Inc., both having an address of One Chase Manhattan Plaza, New York, N.Y. 10005. Fortis, Inc., in turn, is wholly owned by Fortis International, Inc., which is wholly owned by AMEV/VSB 1990 N.V., both of which share the same address with Fortis (NL) N.V., Archimedeslaan 10, 3584 BA, Utrecht, The Netherlands. AMEV/VSB 1990 N.V. is 50% owned by Fortis (NL)N.V. and 50% owned, through certain subsidiaries, by Fortis (B), Boulevard Emile Jacqmain 53, 1000 Brussels, Belgium. SELECTED FINANCIAL DATA The following is a summary of certain financial data of Fortis Benefits. This summary has been derived in part from the financial statements of Fortis Benefits included elsewhere in this prospectus. You should read the following along with these financial statements.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ (IN THOUSANDS) 2000 1999 1998 1997 1996 -------------- ---- ---- ---- ---- ---- INCOME STATEMENT DATA Premiums and policy charges......................... $1,540,384 $1,445,529 $1,333,258 $1,238,006 $1,295,878 Net investment income............................... 279,572 238,698 234,043 228,724 206,023 Net realized gains (losses) on investment........... (17,039) 25,962 52,404 41,101 25,731 Other income........................................ 12,687 11,610 11,183 36,458 31,725 ---------- ---------- ---------- ---------- ---------- TOTAL REVENUES...................................... $1,816,604 $1,721,799 $1,630,888 $1,544,289 $1,559,357 ========== ========== ========== ========== ========== Total benefits and expenses......................... $1,685,930 $1,598,266 $1,538,604 $1,442,059 $1,470,066 Federal Income taxes................................ 41,555 40,327 30,402 35,120 31,099 Net income.......................................... 88,119 83,206 61,882 67,110 58,192 BALANCE SHEET DATA Total assets........................................ $9,691,784 $9,610,139 $7,578,055 $6,819,484 $5,951,876 Total liabilities................................... 8,861,060 8,760,587 6,692,587 5,939,378 5,171,203 Total shareholder's equity.......................... 830,724 849,552 885,468 880,106 780,673
21 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2000 COMPARED TO 1999 REVENUES The Company's major products are group disability and dental, group medical, group life, and annuity and individual life insurance coverages sold through a network of independent agents and brokers. In the fourth quarter of 1999, the Company assumed a block of business from an affiliated Company, United Family Life Insurance Company. This assumed business is primarily pre-need life insurance designed to pre-fund funeral expenses and is sold as individual and group life and annuity products. Pre-need business represents $148 million and $36 million of gross premiums in 2000 and 1999 respectively. Group disability and dental, group medical, group life, annuity and individual life and pre-need represented 39%, 25%, 18%, 8% and 10%, respectively of premium in 2000 and 39%, 32%, 18%, 8% and 3% respectively in 1999. Rate increases in the group medical line resulted in non-renewal of existing business and lower new sales, which account for the decrease in premium from 1999 to 2000. Group medical sales began to recover during 2000. The Company continues to match investment portfolio composition to liquidity needs and capital requirements. Investment income increased from $239 million in 1999 to $280 million in 2000 due to the Company's larger invested asset base from the assumed pre-need business. Changes in interest rates during 2000 and 1999 resulted in recognition of realized gains and losses upon sales of securities. The Company had more capital losses from fixed income investments in 2000 as compared to 1999. During 1999, the Company decreased its common stock holdings as a result of investment portfolio realignment, which resulted in equity gains. BENEFITS The total year-to-date policyholder benefit to premium ratio decreased to 79% in 2000 from 80% in 1999. The group disability and dental, group medical, group life and pre-need benefit to premium ratios for the year ended December 31, were 82%, 74%, 67% and 98% respectively in 2000 and 83%, 80%, 70% and 87% respectively in 1999. The group medical business experienced a lower benefit to premium ratio due to rate increases implemented in 1998 causing an increase in a higher quality base of business in 2000. Group life had improved mortality in 2000. The annuity line experienced lower interest credited due to the continued decline in the size of the fixed account block. The pre-need benefit to premium ratio at the end of 1999 represents one-quarter of business as it was assumed from an affiliated Company during the last quarter of 1999. EXPENSES Commission rates have decreased from the levels in 1999. This is primarily due to changes in the mix of business by product lines as well as the change in first year versus renewal premiums. The Company's general and administrative expense to premium ratio increased slightly to 23% in 2000 up from 22% in 1999. Project and system costs as well as new sales efforts are the primary reason for this increase. The Company continues to monitor expenses, striving to improve the expense to premium ratio, while maintaining quality and timely services to policyholders. EVENTS SUBSEQUENT On January 25, 2001, Fortis, Inc. agreed to sell (the "Sale") 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 and annuity contracts (collectively, the "Insurance Contracts") written by Fortis Benefits Insurance Company, First Fortis Life Insurance Company, Fortis Insurance Company, John Alden Life Insurance Company and Houston National Life Insurance Company (the "Companies"). 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 Companies, Hartford Life and Annuity Insurance Company and Hartford Life Insurance Company, indirect wholly owned subsidiaries of The Hartford, will reinsure the Insurance Contracts on a 100% coinsurance basis (or a 100% modified coinsurance basis for some of the block) and perform administration of such Insurance Contracts. In addition, Hartford Life and Accident Insurance Company, another indirect wholly owned subsidiary of The Hartford, will purchase all of the outstanding stock of Fortis Advisers, Inc., which is the investment adviser for the Fund. Thus, upon completion of the Sale, Hartford Life and Accident Insurance Company will own and control Fortis Advisers, Inc. and its subsidiaries, including Fortis Investors, Inc., which is the principal distributor of the Fund. The Sale was completed on April 1, 2001. Following the Sale, the Fund entered into new investment advisory, subadvisory and distribution agreements with affiliates of the Hartford. These new agreements will require approval of the Fund's shareholders and by Insurance Contract holders to the extent required by law. 1999 COMPARED TO 1998 REVENUES The Company's major products are group disability and dental, group medical, group life, and annuity and individual life insurance coverages sold through a network of independent agents and brokers. In the fourth quarter of 1999, the Company assumed a block of business from an affiliated Company, United Family Life Insurance Company. This assumed business is primarily pre-need life insurance designed to pre-fund funeral expenses and is sold as individual and group life and annuity products. Pre-need business represents $36 million in gross premium in 1999. Group disability and dental, group medical, group life, annuity and individual life and pre-need represented 39%,32%, 18%, 8% and 3%, respectively of premium in 1999 and 38%, 36%, 19%, 7% and 0% respectively in 1998. The Company had less capital gains from fixed income investments in 1999 as compared to 1998. During 1999, the Company decreased its common stock holdings as a result of investment portfolio realignment which resulted in equity gains. 22 25 The Company continues to match investment portfolio composition to liquidity needs and capital requirements. Changes in interest rates during 1999 and 1998 resulted in recognition of realized gains and losses upon sales of securities. BENEFITS The total year-to-date policyholder benefit to premium ratio decreased to 80% in 1999 from 83% in 1998. The group disability and dental, group medical, group life, annuity and individual life, and pre-need benefit to premium ratios for the year ended December 31, were 83%, 80%, 70%, 94%, and 87% respectively in 1999 and 83%, 85%, 73%, 108% and 0% respectively in 1998. The group medical business experienced a lower premium to benefit ratio due to rate increases and better management of claims. Group life had improved mortality in 1999. The annuity and individual life business also experienced strong market performance, in addition to lower interest crediting on the Company's interest sensitive and investment products. EXPENSES Commission rates have decreased from the levels in 1998. This is primarily due to changes in the mix of business by product lines as well as the change in first year versus renewal premiums. The Company's general and administrative expense to premium ratio decreased slightly to 22% in 1999 down from 23% in 1998. A principal reason for this expense reduction is the combining of three group medical cost centers into one. The Company continued to monitor expenses, striving to improve the expense to premium ratio, while maintaining quality and timely services to 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 contractowners bear the investment risk related to the variable products. Therefore, the risks associated with the investments supporting the variable separate accounts are assumed by contractowners, 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 market value of cash, short-term investments and publicly traded bonds and stocks is at least equal to all policyholder reserves and liabilities. The Company's portfolio is readily marketable and convertible to cash to a degree sufficient to provide for short-term needs. The Company consistently monitors its liability durations and invests assets accordingly. The Company has no material commitments or off-balance sheet financing arrangements, which would reduce sources of funds in the upcoming year. 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 calculations 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's fixed maturity investments consisted of % investment grade bonds as of December 31, 2000 and the Company does not expect this percentage to change significantly in the future. VOTING PRIVILEGES In accordance with our view of current applicable law, we will vote shares of each of the portfolios attributable to a contract at regular and special meetings of the shareholders of the portfolios. We will vote those shares in proportion to instructions we receive from the persons having the voting interest in the contract as of the record date for the corresponding portfolio shareholders meeting. Owners have the voting interest during the Accumulation Period, persons receiving annuity payments have the voting interest during the Annuity Period, and beneficiaries have the voting interest after the death of the Annuitant or owner. However, if the Investment Company Act of 1940 or any rules thereunder should be amended or if the present interpretation thereof should change, and as a result we determine that we are permitted to vote shares of the portfolios in our own right, we may elect to do so. We determine the number of shares of a portfolio attributable to a contract as follows: - During the Accumulation Period, we divide the amount of contract value in a subaccount by the net asset value of one share of the portfolio corresponding to that subaccount. We make this calculation as of the record date for the applicable portfolio. 23 26 - During the Annuity Period, or after the death of the Annuitant or owner, we make a similar calculation. However, for subaccount value we use the liability for future variable annuity payments allocable to that subaccount as of the record date for the applicable portfolio. We calculate the liability for future variable annuity payments on the basis of the following on the record date: - mortality assumptions, - the assumed interest rate used in determining the number of Annuity Units under the contract, and - the applicable Annuity Unit value During the Annuity Period, the number of votes attributable to a contract will generally decrease since funds set aside to make the annuity payments will decrease. We will vote shares for which we have not received timely instructions, and any shares attributable to excess amounts we have accumulated in the related subaccount, in proportion to the voting instructions which we receive for all contracts and other variable annuity contracts participating in a portfolio. To the extent that we or any affiliated company holds any shares of a portfolio, those shares will be voted in the same proportion as instructions for that portfolio from all our policy holders holding voting interests in that portfolio. Shares held by separate accounts other than the Variable Account will in general be voted in accordance with instructions of owners in such other separate accounts. This diminishes the relative voting influence of the contracts. Each person having a voting interest in a subaccount of the Variable Account will receive proxy material, reports and other materials relating to the appropriate portfolio. Under the procedures described above, these persons may give instructions regarding: - the election of the Board of Directors of the portfolios, - ratification of the selection of a portfolio's independent auditors, - the approval of the investment managers of a portfolio, - changes in fundamental investment policies of a portfolio, and - all other matters that are put to a vote of portfolio shareholders OTHER INFORMATION We have filed Registration Statements with the Securities and Exchange Commission under the Securities Act of 1933 as amended, with respect to the contracts discussed in this prospectus. We have not included in the prospectus all of the information set forth in the Registration Statement, amendments, and exhibits thereto. We intend statements contained in this prospectus about the content of the contracts and other legal instruments to be summaries. For a complete statement of the terms of these documents, you should refer to the instruments filed with the Securities and Exchange Commission. A Statement of Additional Information is available upon request. Its contents are as follows: CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION Fortis Benefits and the Variable Account....... Calculation of Annuity Payments................ Postponement of Payments....................... Services....................................... - Safekeeping of Variable Account Assets..... - Experts.................................... - Principal Underwriter...................... Taxation Under Certain Retirement Plans........ Withholding.................................... Other Information.............................. Variable Account Financial Statements.......... APPENDIX A--Performance Information............
FORTIS BENEFITS FINANCIAL STATEMENTS The financial statements of Fortis Benefits that are included in this prospectus should be considered primarily as bearing on our ability to meet our obligations under the contracts. The contracts are not entitled to participate in our earnings, dividends, or surplus. 24 27 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of Fortis Benefits Insurance Company In our opinion, the accompanying balance sheet and the related statements of income, of changes in shareholder's equity and of cash flows present fairly, in all material respects, the financial position of Fortis Benefits Insurance Company, an indirect, wholly-owned subsidiary of Fortis (B) and Fortis (NL) N.V. (the Company) at December 31, 2000, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, 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 audit provides a reasonable basis for our opinion. The financial statements of the Company as of December 31, 1999 and for the two years in the period then ended were audited by other independent accountants whose report dated February 17, 2000 expressed an unqualified opinion on those statements. [/s/ PRICEWATERHOUSECOOPERS LLP] February 15, 2001 F-1 28 REPORT OF INDEPENDENT AUDITORS Board of Directors Fortis Benefits Insurance Company We have audited the accompanying balance sheet of Fortis Benefits Insurance Company, an indirect, wholly-owned subsidiary of Fortis (B) and Fortis (NL) N.V., as of December 31, 1999, and the related statements of income, changes in shareholder's equity and cash flows for each of the two years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fortis Benefits Insurance Company at December 31, 1999, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. [/s/ ERNST & YOUNG] Minneapolis, Minnesota February 17, 2000 F-2 29 BALANCE SHEETS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 ------------------------ 2000 1999 ---------- ---------- ASSETS Investments: Fixed maturities, at fair value (amortized cost 2000 -- $2,543,040; 1999 -- $2,802,697)................ $2,530,480 $2,706,372 Equity securities, at fair value (cost 2000 -- $91,164; 1999 -- $81,554)....................................... 87,912 85,021 Mortgage loans on real estate, less allowance for possible losses (2000 and 1999 -- $11,085)...................... 810,616 754,514 Policy loans.............................................. 102,308 83,439 Short-term investments.................................... 152,736 115,527 Real estate and other investments......................... 41,712 47,502 ---------- ---------- 3,725,764 3,792,375 Cash and cash equivalents................................... 13,209 18,670 Receivables: Uncollected premiums...................................... 66,505 62,938 Reinsurance recoverable on unpaid and paid losses......... 64,182 23,471 Other..................................................... 48,083 19,406 ---------- ---------- 178,770 105,815 Accrued investment income................................... 52,556 55,464 Deferred policy acquisition costs........................... 473,761 430,192 Property and equipment at cost, less accumulated depreciation.............................................. 20,891 25,118 Federal income tax recoverable.............................. 7,248 -- Deferred federal income taxes............................... 33,825 52,467 Other assets................................................ 1,677 1,582 Due from affiliates......................................... -- 8,304 Assets held in separate accounts............................ 5,184,083 5,120,152 ---------- ---------- Total assets................................................ $9,691,784 $9,610,139 ========== ==========
The accompanying notes are an integral part of the financial statements. F-3 30 BALANCE SHEETS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 ------------------------ 2000 1999 ---------- ---------- POLICY RESERVES AND LIABILITIES AND SHAREHOLDER'S EQUITY Policy reserves and liabilities: Future policy benefit reserves: Traditional and pre-need life insurance................ $1,170,612 $1,106,269 Interest sensitive and investment products............. 970,591 1,147,657 Accident and health.................................... 1,007,328 940,865 ---------- ---------- 3,148,531 3,194,791 Unearned revenues......................................... 33,614 28,673 Other policy claims and benefits payable.................. 240,677 265,486 Policyholder dividends payable............................ 7,438 7,939 ---------- ---------- 3,430,260 3,496,889 Accrued expenses.......................................... 69,476 59,409 Current income taxes payable.............................. -- 1,838 Other liabilities......................................... 181,633 120,110 Due to affiliates......................................... 4,497 -- Deferred gain on LTC sale................................. 15,919 -- Liabilities related to separate accounts.................. 5,159,275 5,082,341 ---------- ---------- Total policy reserves and liabilities....................... 8,861,060 8,760,587 ---------- ---------- Shareholder's equity: Common stock, $5 par value: authorized, issued and outstanding shares -- 1,000,000........................ 5,000 5,000 Additional paid-in capital................................ 468,000 468,000 Retained earnings......................................... 366,644 427,811 Accumulated other comprehensive loss...................... (8,920) (51,259) ---------- ---------- Total shareholder's equity.................................. 830,724 849,552 ---------- ---------- Total policy reserves and liabilities and shareholder's equity.................................................... $9,691,784 $9,610,139 ========== ==========
The accompanying notes are an integral part of the financial statements. F-4 31 STATEMENTS OF INCOME FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
YEARS ENDED DECEMBER 31 -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- REVENUES: Insurance operations: Traditional life insurance premiums....................... $ 428,641 $ 301,377 $ 260,567 Interest sensitive and investment product policy charges................................................ 159,728 141,285 119,039 Accident and health insurance premiums.................... 952,015 1,002,867 953,652 ---------- ---------- ---------- 1,540,384 1,445,529 1,333,258 Net investment income....................................... 279,572 238,698 234,043 Net realized (losses) gains on investments.................. (17,039) 25,962 52,404 Other income................................................ 12,687 11,610 11,183 ---------- ---------- ---------- Total revenues.............................................. 1,815,604 1,721,799 1,630,888 BENEFITS AND EXPENSES: Benefits to policyholders: Traditional life insurance................................ 335,022 218,993 189,337 Interest sensitive investment products.................... 89,062 93,668 96,178 Accident and health claims................................ 749,945 812,149 798,036 ---------- ---------- ---------- 1,174,029 1,124,810 1,083,551 Policyholder dividends...................................... 2,685 3,114 3,486 Amortization of deferred policy acquisition costs........... 47,215 43,078 33,365 Insurance commissions....................................... 128,267 124,601 118,710 General and administrative expenses......................... 333,734 302,663 299,492 ---------- ---------- ---------- Total benefits and expenses................................. 1,685,930 1,598,266 1,538,604 ---------- ---------- ---------- Income before federal income taxes.......................... 129,674 123,533 92,284 Federal income taxes........................................ 41,555 40,327 30,402 ---------- ---------- ---------- Net income.................................................. $ 88,119 $ 83,206 $ 61,882 ========== ========== ==========
The accompanying notes are an integral part of the financial statements. F-5 32 STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE TOTAL STOCK CAPITAL EARNINGS (LOSS) INCOME --------- ------ ---------- --------- ------------- Balance, December 31, 1997.......... $ 880,106 $5,000 $468,000 $ 332,723 $ 74,383 Comprehensive income: Net income..................... 61,882 -- -- 61,882 -- Change in unrealized gain (losses) on investments, net.......................... (6,520) -- -- -- (6,520) --------- Total comprehensive income........ 55,362 Dividend.......................... (50,000) -- -- (50,000) -- --------- ------ -------- --------- --------- Balance, December 31, 1998.......... 885,468 5,000 468,000 344,605 67,863 Comprehensive income: Net income..................... 83,206 -- -- 83,206 -- Change in unrealized gain (losses) on investments, net.......................... (119,122) -- -- -- (119,122) --------- Total comprehensive loss.......... (35,916) --------- ------ -------- --------- --------- Balance, December 31, 1999.......... 849,552 5,000 468,000 427,811 (51,259) Comprehensive income: Net income..................... 88,119 -- -- 88,119 -- Change in unrealized gain (losses) on investments, net.......................... 42,339 -- -- -- 42,339 --------- Total comprehensive income........ 130,458 Dividend.......................... (149,286) -- -- (149,286) -- --------- ------ -------- --------- --------- Balance, December 31, 2000.......... $ 830,724 $5,000 $468,000 $ 366,644 $ (8,920) ========= ====== ======== ========= =========
The accompanying notes are an integral part of the financial statements. F-6 33 STATEMENTS OF CASH FLOWS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
YEARS ENDED DECEMBER 31 ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................... $ 88,119 $ 83,206 $ 61,882 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation.......................... 4,830 12,807 12,409 Amortization of gain on reinsured business.......... (3,100) -- -- Amortization of investment (discounts) premiums, net............................................... 1,574 1,930 (3,200) Net realized losses (gains) on sold investments..... 13,910 (25,962) (52,404) Write-off of investment............................. 3,129 -- -- Policy acquisition costs deferred................... (113,927) (96,308) (73,147) Amortization of deferred policy acquisition costs... 47,215 43,078 33,365 Provision for deferred federal income taxes......... (4,151) 29,454 417 Decrease in income taxes recoverable................ (9,086) (2,330) (6,381) Change in receivables, accrued investment income, unearned premiums, accrued expenses, other assets, due to and from affiliates and other liabilities....................................... (48,646) 27,227 (4,455) Increase (decrease) in future policy benefit reserves for traditional, interest sensitive and accident and health policies...................... 158,150 97,931 106,135 (Decrease) increase in other policy claims and benefits and policyholder dividends payable....... (25,303) 5,012 (2,514) Other............................................... -- -- 169 ----------- ----------- ----------- Net cash provided by operating activities................ 112,714 176,045 72,276 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed maturity investments.................. (1,546,720) (1,654,104) (2,380,511) Sales and repayments of fixed maturity investments....... 1,777,428 1,675,488 2,428,207 (Increase) decrease in short-term investments............ (37,208) (83,659) 38,669 Purchases of other investments........................... (363,978) (305,889) (408,998) Sales of other investments............................... 298,925 353,267 352,873 Purchases of property and equipment...................... (603) (7,213) (356) Cash received pursuant to reinsurance agreement.......... 17,591 3,374 -- ----------- ----------- ----------- Net cash provided by (used in) investing activities...... 145,435 (18,736) 29,884 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Activities related to investment products: Considerations received................................ 226,139 237,375 215,693 Surrenders and death benefits.......................... (448,349) (416,537) (326,457) Interest credited to policyholders..................... 32,886 39,855 49,371 Dividend................................................. (74,286) -- (50,000) ----------- ----------- ----------- Net cash used in financing activities.................... (263,610) (139,307) (111,393) ----------- ----------- ----------- (Decrease) increase in cash and cash equivalents......... (5,461) 18,002 (9,233) Cash and cash equivalents at beginning of year........... 18,670 668 9,901 ----------- ----------- ----------- Cash and cash equivalents at end of year................. $ 13,209 $ 18,670 $ 668 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-7 34 STATEMENTS OF CASH FLOWS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
YEARS ENDED DECEMBER 31 --------------------------------- 2000 1999 1998 -------- --------- -------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: Assets and liabilities transferred in reinsurance transactions (Note 9): Non-cash assets (ceded) received: Fixed maturities.......................................... $ -- $ 517,091 $ -- Other investments......................................... -- 121,696 -- Other assets.............................................. (157) 12,763 -- Deferred acquisition costs................................ (20,829) 35,882 -- -------- --------- -------- Total value of assets (ceded) received...................... $(20,986) $ 687,432 $ -- -------- --------- -------- Non-cash liabilities ceded (assumed): Future policy benefit reserves............................ $ 15,086 $(685,932) $ -- Claim reserves............................................ 7 (4,874) -- Unearned premium reserves................................. 7,641 -- -- Other liabilities......................................... (320) -- -- -------- --------- -------- Total liabilities ceded (assumed)........................... $ 22,414 $(690,806) $ -- ======== ========= ========
The accompanying notes are an integral part of the financial statements. F-8 35 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS) 1. NATURE OF OPERATIONS Fortis Benefits Insurance Company (the Company) is an indirect wholly-owned subsidiary of Fortis, Inc. (Fortis), which itself is an indirect, wholly-owned subsidiary of Fortis (B) and Fortis (NL) N.V. The Company is incorporated in Minnesota and distributes its products in all states except New York. The Company's revenues are derived principally from group employee benefits products and from individual life and annuity products. Effective October 1, 1999, the Company assumed pre-need life insurance business from an affiliate on a 100% co-insurance basis. These life insurance and annuity products are marketed in connection with the advance funding of funeral expenses. (See Note 9 "Reinsurance" for more information on this reinsurance transaction.) Effective March 1, 2000, the Company ceded long-term care insurance business to John Hancock Life Insurance Company on a 100% co-insurance basis. (See Note 9 "Reinsurance" for more information on this reinsurance transaction.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FAS 133," which deferred to January 1, 2001 the effective date of the accounting and reporting requirements of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The adoption of SFAS 133 is not expected to have a material effect on the Company's results of operations or financial position. Effective January 1, 2000, the Company adopted Statement of Position ("SOP") 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts that do not Transfer Insurance Risk. SOP 98-7 provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk. The adoption of SOP 98-7 did not have a material effect on the Company's results of operations or financial position. INVESTMENTS The Company's investment strategy is developed based on many factors including insurance liability matching, rate of return, maturity, credit risk, tax considerations and regulatory requirements. All fixed maturity investments and all marketable equity securities are classified as available-for-sale and carried at fair value. Changes in fair values of available for sale securities, after related deferred income taxes and after adjustment for the changes in the pattern of amortization of deferred policy acquisition costs and participating policyholder dividends, are reported directly in shareholder's equity as accumulated other comprehensive income and, accordingly, have no effect on net income. The unrealized appreciation or depreciation is net of deferred policy acquisition cost amortization and taxes that would have been required as a charge or credit to income had such unrealized amounts been realized. Mortgage loans constitute first liens on commercial real estate and other income producing properties. The insurance statutes in Minnesota generally require that the initial principal loaned not exceed 80% of the appraised value of the property securing the loan. The Company's policy fully complies with this statute. Mortgage loans on real estate are reported at amortized cost, less allowance for possible losses. The change in the allowance for possible losses is recorded with realized gains and losses on investments. F-9 36 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Policy loans are reported at their unpaid balance. Short-term investments are carried at cost which approximates fair value. Real estate and other investments consist principally of property acquired in satisfaction of debt and limited partnerships, respectively. Real estate is recorded at cost or carrying value of loans foreclosed less allowances for depreciation. The Company provides for depreciation on a straight-line basis over the estimated useful lives. Other investments are accounted for using the equity method of accounting. 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. DEFERRED POLICY ACQUISITION COSTS The costs of acquiring new business, which vary with and are directly related to the production of new business, are deferred to the extent recoverable and amortized. For traditional and pre-need life insurance and long-term care products (included as accident and health products), such costs are amortized over the premium paying period. For interest sensitive and investment products, such costs are amortized in relation to expected future gross profits. Estimation of future gross profits requires significant management judgment and is reviewed periodically. As excess amounts of deferred costs over future premiums or gross profits are identified, such excess amounts are expensed. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost less accumulated depreciation. The Company provides for depreciation principally on the straight-line method over the estimated useful lives of the related property. Depreciation expense was $4,830, $12,807 and $12,409 for the year ended December 31, 2000, 1999 and 1998, respectively. INCOME TAXES Income taxes have been provided using the liability method. Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and the tax bases and are measured using the enacted tax rates. GUARANTY FUND ASSESSMENTS There are a number of insurance companies that are currently under regulatory supervision. This may result in future assessments 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. SEPARATE ACCOUNTS Revenues and expenses related to the separate account assets and liabilities are excluded from the amounts reported in the accompanying statements of income. Assets and liabilities associated with the separate accounts relate to deposits and annuity considerations for variable life and variable annuity products for which the contract owner, rather than the Company, bears the investment risk. Separate account assets are reported at fair value and represent funds held for the exclusive benefit of the variable annuity and variable life insurance contract owners. The Company receives mortality and expense risk fees from the separate accounts. The Company also deducts monthly cost of insurance charges, and receives minimum death benefit guarantee fees and issue and administrative fees from the variable life insurance separate accounts. The Company makes contractual mortality assurances to the variable annuity contract owners that the net assets of the separate accounts will not be affected by future variations in the actual life expectancy experience of the annuitants and beneficiaries from the mortality assumptions implicit in the annuity contracts. The Company makes periodic fund transfers to, or withdrawals from, the separate account assets for such actuarial adjustments for F-10 37 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) variable annuities that are 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. REVENUE RECOGNITION AND FUTURE POLICY BENEFIT RESERVES Premiums for traditional life insurance and pre-need life products are recognized as revenues when due over the premium-paying period. Reserves for future policy benefits are computed using the net level method and include investment yield, mortality, withdrawal, and other assumptions based on the Company's experience, modified as necessary to reflect anticipated trends and to include 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 benefit reserves are computed under the retrospective deposit method and consist of policy account balances before applicable surrender charges. 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 for universal life and investment products ranged from 4% to 15% in 2000, 3.5% to 12% in 1999 and 2.5% to 8.75% in 1998. 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- 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 benefits are based on the 1987 Commissioners Group Disability Table. The valuation interest rate is the Single Premium Immediate Annuity valuation rate less 100 basis points. Claims in the first five years are modified based on the Company's actual experience. 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 related liabilities are continually reviewed and updated. Any adjustments resulting therefrom are reflected in income currently. COMPREHENSIVE INCOME Comprehensive income is comprised of net income and other comprehensive income which includes unrealized gains and losses adjusted for the impact of gains and losses realized during the current year on securities classified as available-for-sale, net of the effect on deferred policy acquisition costs and taxes. STATEMENTS OF CASH FLOWS The Company considers investments with a maturity at the date of their acquisition of three months or less to be cash equivalents. These securities are carried principally at amortized cost which approximates fair value. RECLASSIFICATIONS Certain amounts in the 1999 and 1998 financial statements have been reclassified to conform to the 2000 presentation. F-11 38 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 3. INVESTMENTS AVAILABLE-FOR-SALE SECURITIES The following is a summary of the available-for-sale securities:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- AT DECEMBER 31, 2000: Fixed maturities: Governments.................................. $ 348,795 $15,261 $ 317 $ 363,739 Public utilities............................. 212,371 3,849 3,661 212,559 Industrial and miscellaneous................. 1,794,011 27,815 58,902 1,762,924 Other........................................ 187,863 4,294 899 191,258 ---------- ------- -------- ---------- Total fixed maturities......................... 2,543,040 51,219 63,779 2,530,480 Equity securities.............................. 91,164 5,160 8,412 87,912 ---------- ------- -------- ---------- Total.......................................... $2,634,204 $56,379 $ 72,191 $2,618,392 ========== ======= ======== ========== AT DECEMBER 31, 1999: Fixed maturities: Governments.................................. $ 309,402 $ 46 $ 8,934 $ 300,514 Public utilities............................. 237,579 341 10,375 227,545 Industrial and miscellaneous................. 2,208,281 7,020 81,412 2,133,889 Other........................................ 47,435 184 3,195 44,424 ---------- ------- -------- ---------- Total fixed maturities......................... 2,802,697 7,591 103,916 2,706,372 Equity securities.............................. 81,554 5,825 2,358 85,021 ---------- ------- -------- ---------- Total.......................................... $2,884,251 $13,416 $106,274 $2,791,393 ========== ======= ======== ==========
The amortized cost and fair value of available-for-sale investments in fixed maturities at December 31, 2000, by contractual maturity, are shown below.
AMORTIZED FAIR COST VALUE ---------- ---------- Due in one year or less..................................... $ 83,263 $ 83,164 Due after one year through five years....................... 610,579 609,360 Due after five years through ten years...................... 786,695 778,801 Due after ten years......................................... 1,062,503 1,059,155 ---------- ---------- Total....................................................... $2,543,040 $2,530,480 ========== ==========
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. MORTGAGE LOANS The Company has issued commercial mortgage loans on properties located throughout the United States. Approximately 37% and 38% of outstanding principal is concentrated in the states of New York, California and Florida, at December 31, 2000 and 1999, respectively. Loan commitments outstanding totaled $8,000 at December 31, 2000. F-12 39 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 3. INVESTMENTS (CONTINUED) INVESTMENTS ON DEPOSIT The Company had fixed maturities carried at $11,630 and $17,061 at December 31, 2000 and 1999, respectively, on deposit with various governmental authorities as required by law. NET UNREALIZED GAINS (LOSSES) The adjusted net unrealized gains (losses) on investments recorded in accumulated other comprehensive income for the year ended December 31, are set forth below:
TAX BEFORE-TAX BENEFIT NET-OF-TAX AMOUNT (EXPENSE) AMOUNT ---------- --------- ---------- DECEMBER 31, 2000: Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments........................................... $ 93,933 $(32,873) $ 61,060 Increase in amortization of deferred policy acquisition costs................................................. (2,314) 810 (1,504) Reclassification adjustment for gains (losses) realized in net income......................................... (26,488) 9,271 (17,217) --------- -------- --------- Other comprehensive gain................................... $ 65,131 $(22,792) $ 42,339 ========= ======== ========= DECEMBER 31, 1999: Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments........................................... $(216,270) $ 75,694 $(140,576) Decrease in amortization of deferred policy acquisition costs................................................. 9,142 (3,200) 5,942 Reclassification adjustment for gains (losses) realized in net income......................................... 23,864 (8,352) 15,512 --------- -------- --------- Other comprehensive loss................................... $(183,264) $ 64,142 $(119,122) ========= ======== ========= DECEMBER 31, 1998: Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments.............................................. $ (53,050) $ 18,420 $ (34,630) Decrease in amortization of deferred policy acquisition costs.................................................... 414 (145) 269 Reclassification adjustment for gains (losses) realized in net income............................................... 42,832 (14,991) 27,841 --------- -------- --------- Other comprehensive loss................................... $ (9,804) $ 3,284 $ (6,520) ========= ======== =========
F-13 40 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 3. INVESTMENTS (CONTINUED) NET INVESTMENT INCOME AND NET REALIZED (LOSSES) GAINS ON INVESTMENTS Major categories of net investment income and realized (losses) gains on investments for each year were as follows:
2000 1999 1998 -------- -------- -------- NET INVESTMENT INCOME: Fixed maturities............................................ $193,005 $167,027 $160,163 Equity securities........................................... 14,392 7,320 8,656 Mortgage loans on real estate............................... 68,794 57,684 57,031 Policy loans................................................ 6,617 5,272 4,653 Short-term investments...................................... 522 844 1,701 Real estate and other investments........................... 2,816 6,375 8,194 -------- -------- -------- 286,146 244,522 240,398 Expenses.................................................... (6,574) (5,824) (6,355) -------- -------- -------- $279,572 $238,698 $234,043 ======== ======== ======== NET REALIZED (LOSSES) GAINS ON INVESTMENTS: Fixed maturities............................................ $(31,179) $ (9,750) $ 34,320 Equity securities........................................... 4,691 33,613 8,512 Mortgage loans on real estate............................... -- -- (198) Short-term investments...................................... -- -- 5 Real estate and other investments........................... 9,449 2,099 9,765 -------- -------- -------- $(17,039) $ 25,962 $ 52,404 ======== ======== ========
Proceeds from sales of investments in fixed maturities were $1,756,637, $1,627,450 and $2,460,316 in 2000, 1999 and 1998, respectively. Gross gains of $14,851, $11,996 and $44,360 and gross losses of $46,030, $21,746 and $10,040 were realized on the sales in 2000, 1999 and 1998, respectively. F-14 41 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 4. DEFERRED POLICY ACQUISITION COSTS The changes in deferred policy acquisition costs by product were as follows:
INTEREST TRADITIONAL SENSITIVE AND AND PRE-NEED INVESTMENT ACCIDENT LIFE PRODUCTS AND HEALTH TOTAL ------------ ------------- ---------- -------- Balance, December 31, 1998.................... $ 14,560 $314,462 $ 2,916 $331,938 Acquisition costs deferred.................. 33,783 81,016 17,391 132,190 Acquisition costs amortized................. (2,438) (38,831) (1,809) (43,078) Decreased amortization of deferred acquisition costs from unrealized losses on available-for-sale securities......... -- 9,142 -- 9,142 -------- -------- -------- -------- Balance, December 31, 1999.................... 45,905 365,789 18,498 430,192 Acquisition costs deferred.................. 15,882 95,062 2,983 113,927 Acquisition costs amortized................. (14,216) (32,347) (21,481) (68,044) Increased amortization of deferred acquisition costs from unrealized gains on available-for-sale securities......... -- (2,314) -- (2,314) -------- -------- -------- -------- Balance, December 31, 2000.................... $ 47,571 $426,190 $ -- $473,761 ======== ======== ======== ========
Included in total policy acquisition costs amortized in 2000 is $20,829 of acquisition costs resulting from the long-term care reinsurance cession agreement with John Hancock Life Insurance Company, which became effective March 1, 2000. See Note 9, "Reinsurance" for more information on the reinsurance transaction. Included in total policy acquisition costs deferred in 1999 is $35,882 of present value of future profits (PVP) and $1,416 of subsequent acquisition costs resulting from the reinsurance assumption agreement with United Family Life Insurance Company, an affiliate, which became effective October 1, 1999. PVP is being amortized against the expected premium revenue of the pre-need life insurance business assumed. See Note 9 "Reinsurance" for more information on this reinsurance transaction. During 2000, 1999 and 1998, the Company sold portions of its investment portfolio and in accordance with FASB Statement 97, the recognition of the realized net capital gains resulted in increased (decreased) amortization of deferred acquisition costs of $901, $(224) and $3,357, respectively. 5. PROPERTY AND EQUIPMENT A summary of property and equipment at December 31 for each year follows:
2000 1999 -------- -------- Land........................................................ $ 1,900 $ 1,900 Building and improvements................................... 27,019 26,383 Furniture and equipment..................................... 78,630 81,447 -------- -------- 107,549 109,730 Less accumulated depreciation............................... (86,658) (84,612) -------- -------- Net property and equipment.................................. $ 20,891 $ 25,118 ======== ========
F-15 42 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 6. ACCIDENT AND HEALTH RESERVES Activity for the liability for unpaid accident and health claims is summarized as follows:
YEARS ENDED DECEMBER 31 -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Balance as of January 1, net of reinsurance recoverables.... $1,139,603 $1,061,883 $ 988,036 Add: Incurred losses related to: Current year.............................................. 753,070 824,949 826,009 Prior years............................................... (25,859) (12,800) (27,973) ---------- ---------- ---------- Total incurred losses....................................... 727,211 812,149 798,036 Deduct: Paid losses related to: Current year.............................................. 428,725 468,404 469,881 Prior years............................................... 283,782 266,025 254,308 ---------- ---------- ---------- Total paid losses........................................... 712,507 734,429 724,189 ---------- ---------- ---------- Balance as of December 31, net of reinsurance recoverables.............................................. $1,154,307 $1,139,603 $1,061,883 ========== ========== ==========
The table above differs from the amounts reported on the balance sheet in the following respects: (1) the table above is presented net of ceded reinsurance and the accident and health reserves reported on the balance sheet are gross of ceded reinsurance; and (2) the table above includes accident and health benefits payable which are included with other policy claims and benefits payable reported on the balance sheet. Excluded from incurred losses presented above related to current year is $22,734 of reserves ceded resulting from the long-term care reinsurance agreement with John Hancock Life Insurance Company, which became effective March 1, 2000. See Note 9 "Reinsurance" for more information on this reinsurance transaction. In each of the years presented above, the accident and health insurance line of business experienced overall favorable development on claims reserves established as of the previous year end. The favorable development was a result of lower medical costs and a reduction of loss reserves due to lower than anticipated inflation in medical costs. The liability for unpaid accident and health claims includes $1,042,180 and $994,651 of total disability income reserves as of December 31, 2000 and 1999, respectively, which were discounted for anticipated interest earnings using a rate which varies by incurral year. 7. FEDERAL INCOME TAXES The Company reports its taxable income in a consolidated federal income tax return along with other affiliated subsidiaries of Fortis. 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. Deferred income taxes reflect the net tax effects of temporary differences between the basis of assets and liabilities for financial statement purposes and for income tax purposes. F-16 43 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 7. FEDERAL INCOME TAXES (CONTINUED) The significant components of the Company's deferred tax liabilities and assets as of December 31, 2000 and 1999 are as follows:
2000 1999 -------- -------- Deferred tax assets: Separate account assets/liabilities....................... $ 72,599 $ 60,716 Reserves.................................................. 28,244 35,843 Claims and benefits payable............................... 7,445 7,964 Accrued liabilities....................................... 10,811 6,973 Unrealized losses......................................... 5,543 32,500 Investments............................................... 14,373 4,549 Other..................................................... 8,301 6,755 -------- -------- Total deferred tax assets................................... 147,316 155,300 Deferred tax liabilities: Deferred policy acquisition costs......................... 107,948 98,539 Unrealized gains.......................................... 747 -- Fixed assets.............................................. 3,143 2,963 Investments............................................... 237 1,171 Other..................................................... 1,416 160 -------- -------- Total deferred tax liabilities.............................. 113,491 102,833 -------- -------- Net deferred tax asset...................................... $ 33,825 $ 52,467 ======== ========
The Company is required to establish a valuation allowance for any portion of the deferred tax asset 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, therefore, no such valuation allowance has been established. The Company's tax expense (benefit) for the year ended December 31 is shown as follows:
2000 1999 1998 ------- ------- ------- Current..................................................... $45,706 $10,873 $30,232 Deferred.................................................... (4,151) 29,454 170 ------- ------- ------- $41,555 $40,327 $30,402 ======= ======= =======
Federal income tax payments and refunds resulted in net payments of $54,792, $13,203 and $36,367 in 2000, 1999 and 1998, respectively. The Company's effective income tax rate varied from the statutory federal income tax rate as follows:
2000 1999 1998 ---- ---- ---- Statutory income tax rate................................... 35.0% 35.0% 35.0% Other, net.................................................. (3.0) (2.4) (2.1) ---- ---- ---- 32.0% 32.6% 32.9% ==== ==== ====
F-17 44 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 8. ASSETS HELD IN SEPARATE ACCOUNTS Separate account assets at December 31 were as follows:
2000 1999 ---------- ---------- Premium and annuity considerations for the variable annuity products and variable universal life products for which the contract holder, rather than the Company, bears the investment risk........................................... $5,159,275 $5,082,341 Assets of the separate accounts owned by the Company, at fair value................................................ 24,808 37,811 ---------- ---------- $5,184,083 $5,120,152 ========== ==========
9. REINSURANCE In the second quarter of 1996, First Fortis Life Insurance Company (First Fortis), an affiliate, received approval from the New York State Insurance Department for a reinsurance agreement with the Company. The agreement, which became effective as of January 1, 1996, decreased First Fortis' long-term disability reinsurance retention from a $10 net monthly benefit to a $2 net monthly benefit for claims incurred on and after January 1, 1996. The Company has assumed $6,884, $6,580 and $5,601 of premium from First Fortis in 2000, 1999 and 1998, respectively. The Company has assumed $14,366 and $11,047 of reserves in 2000 and 1999, respectively, from First Fortis. In the fourth quarter of 1999, United Family Life Insurance Company (UFL), an affiliate, received approval from the state of Georgia for a reinsurance agreement with the Company. The agreement, which became effective October 1, 1999, provided for the cession of substantially all of UFL's pre-need life insurance business on a 100% co-insurance basis. The Company assumed approximately $690,806 of reserves and received approximately $654,924 of cash, investments (primarily fixed maturities and mortgages) and other assets as of October 1, 1999. The $35,882 ceding commission was capitalized as an acquisition cost (as described in Note 4). The Company has assumed premium from UFL of $63,069 in 2000 and $31,523 during the period October 1, 1999 to December 31, 1999. The Company has assumed $679,969 and $690,806 of reserves in 2000 and 1999, respectively, from UFL. In the first quarter of 2000, the Company entered into a reinsurance agreement with John Hancock Life Insurance Company (John Hancock) for the sale of the Long-Term Care (LTC) line of business. The sale of the LTC line of business was effective March 1, 2000. The Company recorded a gain on this transaction of $19,019. The gain has been deferred and is being amortized as the level of direct inforce LTC policies decreases over future years, not to exceed 30 years. The amount of gain amortized in 2000 was $3,100. The Company ceded $41,309 of premiums and $32,222 of reserves to John Hancock in 2000. The maximum amount that the Company retains on any one life is $1,000 of life insurance including accidental death. Amounts in excess of $1,000 are reinsured with other life insurance companies on a yearly renewable term basis. Ceded reinsurance premiums for the year ended December 31 were as follows:
2000 1999 1998 ------- ------- ------- Life insurance.............................................. $ 7,413 $ 6,246 $ 6,983 Accident and health insurance............................... 48,403 17,803 13,862 ------- ------- ------- $55,816 $24,049 $20,845 ======= ======= =======
Recoveries under reinsurance contracts for the year ended December 31 were as follows:
2000 1999 1998 ------- ------- ------- Life insurance.............................................. $ 2,877 $ 478 $ 4,549 Accident and health insurance............................... 8,525 13,669 9,465 ------- ------- ------- $11,402 $14,147 $14,014 ======= ======= =======
F-18 45 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 9. REINSURANCE (CONTINUED) Reinsurance ceded would become a liability of the Company in the event the reinsurers are unable to meet the obligations assumed under the reinsurance agreement. To minimize its exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers. 10. DIVIDEND RESTRICTIONS Dividend distributions to the parent are restricted as to the amount by state regulatory requirements. The Company will have $42,895 free from such restrictions during 2001. Distributions in excess of this amount would require regulatory approval. In 2000, the Company declared dividends of $149,286, of which $100,000 was extraordinary. Approval was sought and received from the Minnesota Department of Commerce for the distribution of the extraordinary dividend. The Company paid $74,286 during 2000; $75,000 will be paid in 2001 and is included in other liabilities. 11. REGULATORY ACCOUNTING REQUIREMENTS Statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the Minnesota Department of Commerce. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The Company does not employ any significant permitted practices. In 1998, the NAIC adopted codified statutory accounting practices (Codification) effective January 1, 2001. Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that the Company uses to prepare its statutory-basis financial statements. Codification requires adoption by the various states before it becomes the prescribed statutory basis of accounting for insurance companies domesticated within those states. Minnesota has adopted Codification effective January 1, 2001. The cumulative effect of all changes resulting form the Codification guidance will be recorded as a direct adjustment to statutory surplus on January 1, 2001. The effect of the adoption is expected to increase statutory surplus by a material amount. 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-19 46 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 11.REGULATORY ACCOUNTING REQUIREMENTS (CONTINUED) Reconciliations of net income and shareholder's equity on the basis of statutory accounting to the related amounts presented in the accompanying statements were as follows:
NET INCOME SHAREHOLDER'S EQUITY -------------------- --------------------- 2000 1999 1998 2000 1999 -------- -------- ------- --------- -------- Based on statutory accounting practices...... $ 88,911 $ 9,387 $14,841 $ 433,955 $497,858 Deferred policy acquisition costs............ 66,712 54,049 39,782 473,761 430,192 Investment valuation differences............. 368 953 745 (19,310) (103,361) Deferred and uncollected premiums............ (732) (4,637) 511 (14,399) (13,188) Policy reserves.............................. (12,092) (20,070) (7,041) (150,668) (127,766) Commissions.................................. (45,485) 79,067 -- -- -- Current income taxes payable................. 22 (8,882) 925 (8,977) (9,000) Deferred income taxes........................ 4,151 (18,650) (417) 33,825 52,467 Realized gains on investments................ 439 9 356 -- -- Realized gains (losses) transferred to the Interest Maintenance Reserve (IMR), net of tax........................................ (17,873) (6,163) 22,748 -- -- Amortization of IMR, net of tax.............. (5,396) (8,565) (7,128) -- -- Write-off of investment...................... (3,129) -- -- -- -- Pension expense.............................. (2,145) (1,475) 81 (9,985) (8,235) Property and equipment....................... -- -- -- 3,261 591 Interest maintenance reserve................. -- -- -- 31,482 55,117 Asset valuation reserve...................... -- -- -- 70,955 72,940 Other, net................................... 14,368 8,183 (3,521) (13,176) 1,937 -------- -------- ------- --------- -------- Based on generally accepted accounting principles................................. $ 88,119 $ 83,206 $61,882 $ 830,724 $849,552 ======== ======== ======= ========= ========
12.TRANSACTIONS WITH AFFILIATED COMPANIES The Company receives various services from Fortis and its affiliates. These services include assistance in benefit plan administration, corporate insurance, accounting, tax, auditing, investment and other administrative functions. The fees paid to Fortis, Inc. for these services for years ended December 31, 2000, 1999 and 1998, were $10,094, $11,661 and $13,077, respectively. During 1997, Fortis, Inc. began providing information technology services to the Company. Information technology expenses were $47,123, $59,390 and $55,910 for years ended December 31, 2000, 1999 and 1998, respectively. In conjunction with the marketing of its fixed and variable annuity and variable life products, the Company paid $93,107, $79,413 and $72,638 in commissions to its affiliate, Fortis Investors, Inc., for the years ended December 31, 2000, 1999 and 1998, 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. 13.FAIR VALUE DISCLOSURES VALUATION METHODS AND ASSUMPTIONS The fair values for fixed maturity securities and equity securities are 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. Mortgage loans are reported at unpaid principal balance less allowances for possible losses. The fair values of mortgage loans are estimated using discounted cash flow analyses, using interest rates currently being offered for F-20 47 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 13.FAIR VALUE DISCLOSURES (CONTINUED) similar loans to borrowers with similar credit ratings. Mortgage loans with similar characteristics are aggregated for purposes of the calculations. The carrying amount of policy loans reported in the Balance Sheet approximates fair value. For short-term investments, the carrying amount is a reasonable estimate of fair value. The fair values for the Company's policy reserves under the investment products are determined using cash surrender value. Separate account assets and liabilities are reported at their estimated fair values in the Balance Sheet. The fair values under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.
DECEMBER 31, 2000 DECEMBER 31, 1999 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- Assets: Investments: Securities available-for-sale: Fixed maturities......................... $2,530,480 $2,530,480 $2,706,372 $2,706,372 Equity securities........................ 87,912 87,912 85,021 85,021 Mortgage loans on real estate................. 810,616 844,319 754,514 741,397 Policy loans.................................. 102,308 102,308 83,439 83,439 Short -- term investments..................... 152,736 152,736 115,527 115,527 Assets held in separate accounts.............. 5,184,083 5,184,083 5,120,152 5,120,152 Liabilities: Individual and group annuities (subject to discretionary withdrawal).................. 585,905 571,834 789,002 763,861 Liabilities related to separate accounts...... 5,159,275 5,159,275 5,082,341 5,082,341
14.COMMITMENTS AND CONTINGENCIES The Company is named as a defendant in a number of legal actions arising primarily from claims made under insurance policies. These actions have been considered in establishing policy benefit and loss reserves. Management and its legal counsel are of the opinion that the settlement of these actions will not have a material adverse effect on the Company's financial position or results of operations. 15. RETIREMENT AND OTHER EMPLOYEE BENEFITS The Company is an indirect wholly-owned subsidiary of Fortis, which sponsors a defined benefit pension plan covering employees and certain agents who meet eligibility requirements as to age and length of service. The benefits are based on years of service and career compensation. Fortis Inc.'s 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 $2,097, $2,225 and $1,627 for 2000, 1999 and 1998, respectively. The Company participates in a contributory profit sharing plan, sponsored by Fortis, covering employees and certain agents who meet eligibility requirements as to age and length of service. Benefits are payable to participants on retirement or disability and to the beneficiaries of participants in the event of death. The first three percent of an employee's contribution is matched 200% by the Company. The amount expensed was approximately $4,573, $3,711 and $3,610 for 2000, 1999 and 1998, respectively. In addition to retirement benefits, the Company participates in other health care and life insurance benefit plans (postretirement benefits) for retired employees, sponsored by Fortis. Health care benefits, either through a Fortis sponsored retiree plan for retirees under age 65 or through a cost offset for individually purchased Medigap policies F-21 48 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 15. RETIREMENT AND OTHER EMPLOYEE BENEFITS (CONTINUED) for retirees over age 65, are available to employees who retire on or after January 1, 1993, at age 55 or older, with 15 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, 2000, 1999 and 1998. The Company made contributions to the postretirement benefit plans of approximately $0, $19 and $(5) in 2000, 1999 and 1998, respectively, as claims were incurred. 16. EVENTS SUBSEQUENT On January 25, 2001, Fortis agreed to sell (the "Sale") 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 and 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 and Annuity Insurance Company, an indirect wholly owned subsidiary of The Hartford, will reinsure the Insurance Contracts on a 100% coinsurance basis and perform administration of such Insurance Contracts. In addition, Hartford Life and Accident Insurance Company, another indirect wholly owned subsidiary of The Hartford, will purchase all of the outstanding stock of Fortis Advisers, Inc., which is the investment adviser for the Fund. Thus, upon completion of the Sale, Hartford Life and Accident Insurance Company will own and control Fortis Advisers, Inc. and its subsidiaries, including Fortis Investors, Inc., which is the principal distributor of the Fund. Closing of the Sale is subject to various regulatory and other approvals. Following the Sale, the Fund expects to enter into new investment advisory, subadvisory and distribution agreements with affiliates of The Hartford. Such new agreements will require approvals subsequent to the closing of the Sale by the Fund's board of directors and shareholders and by Insurance Contract holders to the extent required by law. F-22 49 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information of Fortis Benefits Insurance Company is being presented in connection with the Company's Sale of its Fortis Financial Group Division (FFG) to The Hartford on April 1, 2001. The accompanying unaudited pro forma financial statements of the Company for the period ended December 31, 2000 present the financial position and results for the Company as if the Sale and certain transactions and adjustments related to the Sale had occurred as of January 1, 2000. The unaudited pro forma financial information does not purport to represent what the Company's financial position or results of operations actually would have been had the Sale in fact occurred as of the date indicated, or to project the Company's financial position or results of operations for any future date or period. The pro forma adjustments are based on available information and certain assumptions that the Company currently believes are reasonable under the circumstances. The unaudited pro forma financial information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The unaudited pro forma financial information is provided for informational purposes only. The Company's financial statements will reflect the actual effects of the Sale in the 10-Q filing for the period ending June 30, 2001. Although the actual Sale results will differ, the unaudited pro forma financial information reflects management's best estimate based on currently available information. F-23 50 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DEC. 31, 2000 ANNUAL REPORT FFG PRO FORMA ------------- --------- ----------- ASSETS Investments: Fixed maturities, at fair value (amortized cost 2000 -- $2,543,040; 1999 -- $2,802,697)........... $2,530,480 $(158,752) $ 2,371,728 Equity securities, at fair value (cost 2000 -- $91,164; -- 1999 -- $81,554).............. 87,912 -- 87,912 Mortgage loans on real estate, less allowance for possible losses (2000 and 1999 -- $11,085)........ 810,616 (93,115) 717,501 Policy loans......................................... 102,308 (102,192) 116 Short-term investments............................... 152,736 -- 152,736 Real estate and other investments.................... 41,712 -- 41,712 ---------- --------- ----------- 3,725,764 (354,059) 3,371,705 Cash and cash equivalents.............................. 13,209 19,299 32,508 -- -- Receivables: Uncollected premiums................................. 66,505 (260) 66,245 Reinsurance recoverable on unpaid and paid losses.... 64,182 1,077,253 1,141,435 Other................................................ 48,083 (5,934) 42,149 ---------- --------- ----------- 178,770 1,071,059 1,249,829 Accrued investment income.............................. 52,556 (4,839) 47,717 Deferred policy acquisition costs...................... 473,761 (433,192) 40,569 Property and equipment at cost, less accumulated depreciation......................................... 20,891 (18,138) 2,753 Federal income tax recoverable......................... 7,248 (528) 6,720 Deferred federal income taxes.......................... 33,825 154,050 187,875 Other assets........................................... 1,677 -- 1,677 Assets held in separate accounts....................... 5,184,083 -- 5,184,083 ---------- --------- ----------- Total assets...................................... $9,691,784 $ 433,652 $10,125,436 ========== ========= ===========
F-24 51 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DEC. 31, 2000 ANNUAL REPORT FFG PRO FORMA ------------- -------- ----------- POLICY RESERVES AND LIABILITIES AND SHAREHOLDER'S EQUITY Policy reserves and liabilities: Future policy benefit reserves: Traditional and pre-need life insurance............ $1,170,612 $ -- $ 1,170,612 Interest sensitive and investment products......... 970,591 -- 970,591 Accident and health................................ 1,007,328 -- 1,007,328 ---------- -------- ----------- 3,148,531 -- 3,148,531 Unearned revenues..................................... 33,614 (243) 33,371 Other policy claims and benefits payable.............. 240,677 (7,941) 232,736 Policyholder dividends payable........................ 7,438 (7,438) -- ---------- -------- ----------- 3,430,260 (15,622) 3,414,638 Accrued expenses...................................... 69,476 (1,061) 68,415 Current income taxes payable.......................... -- 161,290 161,290 Other liabilities..................................... 181,633 (787) 180,846 Due to affiliates..................................... 4,497 -- 4,497 Deferred gain on LTC & FFG sale....................... 15,919 256,308 272,227 Liabilities related to separate accounts.............. 5,159,275 24,808 5,184,083 ---------- -------- ----------- Total policy reserves and liabilities.............. 8,861,060 424,936 9,285,996 ---------- -------- ----------- Shareholder's equity: Common stock, $5 par value: authorized, issued and outstanding shares -- 1,000,000.................... 5,000 -- 5,000 Additional paid-in capital............................ 468,000 -- 468,000 Retained earnings..................................... 366,644 8,716 375,360 Accumulated other comprehensive loss.................. (8,920) -- (8,920) ---------- -------- ----------- Total shareholder's equity......................... 830,724 8,716 839,440 ---------- -------- ----------- Total policy reserves and liabilities and shareholder's equity............................. $9,691,784 $433,652 $10,125,436 ========== ======== ===========
F-25 52 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA STATEMENT OF INCOME (IN THOUSANDS)
DEC. 31, 2000 ANNUAL REPORT FFG PRO FORMA ------------- --------- ---------- Insurance operations: Traditional life insurance premiums..................... $ 428,641 (10,267) $ 418,374 Interest sensitive and investment product policy charges............................................... 159,728 (157,408) 2,320 Accident and health insurance premiums.................. 952,015 -- 952,015 ---------- --------- ---------- 1,540,384 (167,675) 1,372,709 Net investment income................................... 279,572 (54,622) 224,950 Net realized (losses) gains on investments.............. (17,039) 3,662 (13,377) Other income............................................ 12,687 17,733 30,420 ---------- --------- ---------- Total revenues........................................ 1,815,604 (200,902) 1,614,702 Benefits to policy holders: Traditional life insurance............................ 335,022 (10,621) 324,401 Interest sensitive investment products................ 89,062 (83,105) 5,957 Accident and health claims............................ 749,945 0 749,945 ---------- --------- ---------- 1,174,029 (93,726) 1,080,303 Policy holder dividends................................. 2,685 (2,685) 0 Amortization of deferred policy acquisition costs....... 47,215 (36,055) 11,160 Insurance commissions................................... 128,267 (6,566) 121,701 General and administrative expenses..................... 333,734 (68,697) 265,037 ---------- --------- ---------- Total benefits and expenses........................... 1,685,930 (207,729) 1,478,201 ---------- --------- ---------- Income before federal income taxes...................... 129,674 6,827 136,501 Federal income taxes.................................... 41,555 (1,889) 39,666 ---------- --------- ---------- Net income.............................................. $ 88,119 $ 8,716 $ 96,835 ========== ========= ==========
F-26 53 FORTIS BENEFITS INSURANCE COMPANY NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (IN THOUSANDS) Adjustments to the balance sheet, including invested assets, receivables, accrued investment income, deferred acquisition costs, reserves, unearned revenues, policy claims and dividends payable and accrued expenses, along with adjustments to the income statement, are related to the Division sold to The Hartford. Adjustments to cash and cash equivalents and property and equipment represent the sale of certain personal and real property to The Hartford. Adjustments to deferred federal income taxes and current income taxes payable represent the accrual of federal income tax associated with the Sale. Deferred gain on the Sale will be amortized to income as the business runs off. For 2000, the pro forma income statement includes pre-tax amortization of $18,000. An effective tax rate of 35% has been applied and is reflected in the provision for federal income tax. Pro forma investment income includes estimated earnings from approximately $500 million of cash proceeds from the Sale (after applicable tax payment). Separate accounts business is reinsured under a modified coinsurance agreement with The Hartford. F-27 54 APPENDIX A--SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS The formula which will be used to determine the Market Value Adjustment is: 1 + I n/12 ------------ - 1 ( 1 + J + .005 )
Sample Calculation 1: Positive Adjustment Amount withdrawn or transferred $10,000 Existing Guarantee Period 7 years Time of withdrawal or transfer beginning of 3rd year of Existing Guarantee Period Guaranteed Interest Rate (I) 8%* Guaranteed Interest Rate for new 5-year guarantee (J) 7%* Remaining Guarantee Period (N) 60 months Market Value Adjustment
1 + .08 60/12 $10,000 X -------------- - 1 = $234.73 [( 1 + .07 + .005 ) ]
Amount transferred or withdrawn (adjusted for Market Value Adjustment): $10,234.73 Sample Calculation 2: Negative Adjustment Amount withdrawn or transferred $10,000 Existing Guarantee Period 7 years Time of withdrawal or transfer beginning of 3rd year of Existing Guarantee Period Guaranteed Interest Rate (I) 8%* Guaranteed Interest Rate for new 5-year guarantee (J) 9%* Remaining Guarantee Period (N) 60 months Market Value Adjustment:
1 + .08 60/12 $10,000 X -------------- - 1 = $666.42 [( 1 + .09 + .005 ) ]
Amount transferred or withdrawn (adjusted for Market Value Adjustment): $9,333.58 Sample Calculation 3: Negative Adjustment Amount withdrawn or transferred $10,000 Guarantee Period 7 years Time of withdrawal or transfer beginning of 3rd year of Existing Guarantee Period Guaranteed Interest Rate (I) 8%* Guaranteed Interest Rate for new 5-year guarantee (J) 7.75%* Remaining Guarantee Period (N) 60 months Market Value Adjustment:
1 + .08 60/12 $10,000 X ---------------- - 1 = $114.94 [( 1 + .0775 + .005 ) ]
Amount transferred or withdrawn (adjusted for Market Value Adjustment): $9,885.06 ------------------------------ * Assumed for illustrative purposes only. A-1 55 APPENDIX B--SAMPLE DEATH BENEFIT CALCULATIONS (FOR CONTRACTS ISSUED ON AND AFTER MAY 1, 1997 WITH ENHANCED DEATH BENEFIT RIDER)
EXAMPLE 1 EXAMPLE 2 DATE OF DEATH IS THE 3RD CONTRACT ANNIVERSARY --------- --------- a. Purchase Payments Made Prior to Date of Death, with 3% accumulation $20,000 $20,000 b. Contract Value on Date of Death $17,000 $25,000 Death Benefit is larger of a, and b $20,000 $25,000
EXAMPLE 3 EXAMPLE 4 EXAMPLE 5 DATE OF DEATH IS THE 8TH CONTRACT ANNIVERSARY --------- --------- --------- a. Purchase Payments Made Prior to Date of Death, with 3% accumulation $20,000 $20,000 $20,000 b. Contract Value on 7th Contract Anniversary $15,000 $30,000 $30,000 c. Contract Value on Date of Death $17,000 $25,000 $35,000 Death Benefit is larger of a, b, and c $20,000 $30,000 $35,000
EXAMPLE 6 EXAMPLE 7 EXAMPLE 8 DATE OF DEATH IS THE 15TH CONTRACT ANNIVERSARY --------- --------- --------- a. Purchase Payments Made Prior to Date of Death, with 3% accumulation $20,000 $20,000 $20,000 b. Contract Value on 14th Contract Anniversary $15,000 $40,000 $40,000 c. Contract Value on Date of Death $17,000 $30,000 $50,000 Death Benefit is larger of a, b, and c $20,000 $40,000 $50,000
The numbers do not include any Market Value Adjustments which might be applicable to the death benefit amount. B-1 56 APPENDIX C--EXPLANATION OF EXPENSE CALCULATIONS The expense for a given year is calculated by multiplying the projected beginning of the year policy value by the total expense rate. The total expense rate is the sum of the Variable Account expense rate plus the total Series Fund expense rate plus the annual administrative charge rate. The policy values are projected by assuming a single payment of $1,000 grows at an annual rate equal to 5% reduced by the total expense rate described above. For example, the 3 year expense for the Growth Stock Series is calculated as follows: -------------------------------------------------------------------------------- Total Variable Account Annual Expenses 1.35% -------------------------------------------------------------------------------- + Total Series Fund Operating Expenses 0.64% -------------------------------------------------------------------------------- = Total Expense Rate 1.99% --------------------------------------------------------------------------------
Year 1 Beginning Policy Value = $1000.00 Year 1 Expense = 1000.00 X 0.0199 = $19.90 Year 2 Beginning Policy Value = $1030.10 Year 2 Expense = $1030.10 X 0.0199 = $20.50 Year 3 Beginning Policy Value = $1061.11 Year 3 Expense = $1061.11 X 0.0199 = $21.12 So the cumulative expenses for years 1-3 for the Growth Stock Series are equal to: $19.90 + 20.50 + 21.12 = $61.52 If the contract is surrendered, the surrender charge is the surrender charge percentage times the purchase payment minus the 10% free withdrawal amount: Surrender Charge Percentage X (Initial Premium - 10% Free Withdrawal) = Surrender Charge 0.05 X ($1000.00 - $100.00) = $45.00 So the total expense if surrendered is $61.52 + $45.00 = $106.52 C-1 57 FORTIS MASTERS+ VARIABLE ANNUITY Contracts Under Flexible Premium Deferred Combination Variable and Fixed Annuity Contracts PROSPECTUS DATED May 1, 2001 [FORTIS SOLID PARTNERS, FLEXIBLE SOLUTIONS(SM) LOGO] 99183 (5/01) FORTIS BENEFITS INSURANCE COMPANY MAILING ADDRESS: STREET ADDRESS: PHONE: P.O. BOX 64272 500 BIELENBERG DRIVE 1-800-800-2000 ST. PAUL, MINNESOTA 55164 WOODBURY, MINNESOTA 55125 EXTENSION 3057
This prospectus describes interests under flexible premium deferred combination variable and fixed annuity contracts issued by Fortis Benefits Insurance Company ("Fortis Benefits"). These contracts allow you to accumulate funds on a tax-deferred basis. You may elect a guaranteed interest accumulation option through a fixed account or a variable return accumulation option through a variable account, or a combination of these two options. Under the guaranteed interest accumulation option, you can choose among ten different guarantee periods, each of which has its own interest rate. Under the variable return accumulation option, you can choose among one or more of the following investment portfolios (those portfolios which have a non-Fortis subadvisor includes the name of the subadvisor at the beginning of the portfolio name): Money Market Series MFS -- Capital Opportunities Series U.S. Government Securities Series Growth & Income Series Diversified Income Series Dreyfus -- S&P 500 Index Series AIM -- Multisector Bond Series T. Rowe Price -- Blue Chip Stock Series High Yield Series AIM -- Blue Chip Stock Series II T. Rowe Price -- International Stock Series Alliance -- Large Cap Growth Series II MFS -- Investors Growth Series Lazard Freres -- International Stock Series Dreyfus -- Mid Cap Stock Series Global Growth Series Growth Stock Series MFS -- Global Equity Series Berger -- Small Cap Value Series Asset Allocation Series Aggressive Growth Series Federated -- American Leaders Series Value Series
The accompanying prospectuses for these investment portfolios describe the investment objectives, policies and risks of each of the portfolios. This prospectus gives you information about the contracts that you should know before investing. This prospectus must be accompanied by a current prospectus of the available investment portfolios. These prospectuses should be read carefully and kept for future reference. A Statement of Additional Information, dated May 1, 2001, about certain aspects of the contracts has been filed with the Securities and Exchange Commission and is available without charge from Fortis Benefits at the address and phone number printed above. The Table of Contents for the Statement of Additional Information appears on page 25 of this prospectus. THESE CONTRACTS ARE NOT OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, CREDIT UNION, BROKER-DEALER OR OTHER FINANCIAL INSTITUTION. THEY ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. THEY INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 58 TABLE OF CONTENTS
PAGE Special Terms Used in this Prospectus....................... 3 Information Concerning Fees and Charges..................... 4 Summary of Contract Features................................ 6 - Fortis Benefits...................................... 10 The Variable Account........................................ 10 The Portfolios.............................................. 10 The Fixed Account........................................... 11 - Guaranteed Interest Rates/Guarantee Periods.......... 11 - Market Value Adjustment.............................. 11 - Investments by Fortis Benefits....................... 12 Accumulation Period......................................... 13 - Issuance of a Contract and Purchase Payments......... 13 - Contract Value....................................... 13 - Allocation of Purchase Payments and Contract Value... 14 - Total and Partial Surrenders......................... 14 - Telephone Transactions............................... 15 - Benefit Payable on Death of Contract Owner (or Annuitant)............................................ 15 The Annuity Period.......................................... 16 - Annuity Commencement Date............................ 16 - Commencement of Annuity Payments..................... 16 - Relationship Between Subaccount Investment Performance and Amount of Variable Annuity Payments... 16 - Annuity Options...................................... 17 - Death of Annuitant or Other Payee.................... 17 Charges and Deductions...................................... 17 - Premium Taxes........................................ 17 - Charges Against the Variable Account................. 17 - Tax Charge........................................... 18 - Surrender Charge..................................... 18 - Nursing Care/Hospitalization Waiver of Surrender Charge................................................ 18 - Disability Waiver of Surrender Charges............... 18 - Miscellaneous........................................ 19 - Reduction of Charges................................. 19 General Provisions.......................................... 19 - The Contracts........................................ 19 - Postponement of Payment.............................. 19 - Misstatement of Age or Sex and Other Errors.......... 19 - Assignment........................................... 19 - Beneficiary.......................................... 19 - Reports.............................................. 20 Rights Reserved by Fortis Benefits.......................... 20 Distribution................................................ 20 Federal Tax Matters......................................... 20 Further Information About Fortis Benefits................... 22 - General.............................................. 22 - Ownership of Securities.............................. 22 - Selected Financial Data.............................. 23 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 23 Voting Privileges........................................... 24 Other Information........................................... 25 Contents of Statement of Additional Information............. 25 Fortis Benefits Financial Statements........................ 25 Appendix A--Sample Market Value Adjustment Calculations..... A-1 Appendix B--Sample Death Benefit Calculations............... B-1 Appendix C--Explanation Of Expense Calculations............. C-1 Appendix D--Pro Rata Adjustments............................ D-1
THE CONTRACTS ARE NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. FORTIS BENEFITS DOES NOT AUTHORIZE ANY INFORMATION OR REPRESENTATION REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS WHICH IS NOT INCLUDED IN THIS PROSPECTUS, THE RELATED STATEMENT OF ADDITIONAL INFORMATION, OR ANY SUPPLEMENTS THERETO OR IN ANY SUPPLEMENTAL SALES MATERIAL AUTHORIZED BY FORTIS BENEFITS. 59 SPECIAL TERMS USED IN THIS PROSPECTUS Accumulation PeriodThe time period under a contract between the contract issue date and the annuity commencement date. Accumulation Unit A unit of measure used to calculate the owners' interest in the Variable Account during the Accumulation Period. Annuitant A person during whose life annuity payments are to be made by Fortis Benefits under the contract. The Annuitant is the person named in the application for the contract. If such person dies before the annuity commencement date and there is an additional annuitant named in the application, the additional annuitant shall become the Annuitant. If there is no named additional annuitant, or the additional annuitant has predeceased the Annuitant who is named in the application, the owner, if he or she is a natural person, shall become the Annuitant. Annuity Period The time period following the Accumulation Period, during which annuity payments are made by Fortis Benefits. Annuity Unit A unit of measurement used to calculate variable annuity payments. Fixed Annuity Option An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee that you designate one or more fixed payments. Market Value Adjustment Positive or negative adjustment in fixed account value that we make if such value is paid out more than fifteen days before or after the end of a guarantee period in which it was being held. Non-Qualified Contracts Contracts that do not qualify for the special federal income tax treatment applicable in connection with certain retirement plans. Qualified ContractsContracts that are qualified for the special federal income tax treatment applicable in connection with certain retirement plans. Valuation Date All business days except, with respect to any subaccount, days on which the related portfolio does not value its shares. Generally, the portfolios value their shares on each day the New York Stock Exchange is open. Valuation Period The period that starts at the close of regular trading on the New York Stock Exchange on a Valuation Date and ends at the close of regular trading on the exchange on the next succeeding Valuation Date. Variable Account The segregated asset account referred to as Variable Account D of Fortis Benefits Insurance Company established to receive and invest purchase payments under contracts. Variable Annuity Option An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee chosen by you one or more payments which vary in amount in accordance with the net investment experience of the subaccounts selected by the Annuitant. 3 60 INFORMATION CONCERNING FEES AND CHARGES CONTRACT OWNER TRANSACTION CHARGES Front-End Sales Charge Imposed on Purchases................. 0% Maximum Surrender Charge for Sales Expenses................. 7% (1)
NUMBER OF YEARS SINCE SURRENDER CHARGE AS A PURCHASE PAYMENT WAS CREDITED PERCENTAGE OF PURCHASE PAYMENT ----------------------------- ------------------------------ Less than 2 7% At least 2 but less than 4 6% At least 4 but less than 5 5% At least 5 but less than 6 3% At least 6 but less than 7 1% 7 or more 0%
Other Surrender Fees........................................ 0% Exchange Fee................................................ 0% ANNUAL CONTRACT ADMINISTRATION CHARGE............................ $0 VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE) Mortality and Expense Risk Charge........................... 1.25% Variable Account Administrative Charge...................... .10% Total Variable Account Annual Expenses...................... 1.35%
------------------------------ (1) This charge does not apply in certain cases such as partial surrenders each year of up to 10% of "new purchase payments" as defined under the heading "Surrender Charge," or payment of a death benefit. MARKET VALUE ADJUSTMENT WITH RESPECT TO FIXED ACCOUNT Surrenders and other withdrawals from the fixed account more than fifteen days from the end of a guarantee period other than the one year guarantee period are subject to a Market Value Adjustment. The Market Value Adjustment may increase or reduce the fixed account value. We compute this adjustment according to a formula that we describe in more detail under "Market Value Adjustment." PORTFOLIO ANNUAL EXPENSES(a)
U.S. MULTI MONEY GOVERNMENT DIVERSIFIED SECTOR HIGH INTERNATIONAL ASSET AMERICAN MARKET SECURITIES INCOME BOND YIELD STOCK ALLOCATION LEADERS VALUE SERIES SERIES SERIES SERIES SERIES SERIES II SERIES SERIES SERIES ------ ---------- ----------- ---------- ------ ------------- ---------- ---------- ------ Investment and Management Fee....... 0.30% 0.47% 0.48% 0.75% 0.50% 0.90% 0.47% 0.90% 0.70% Other Expenses......... 0.06% 0.05% 0.05% 0.19% 0.06% 0.16% 0.04% 0.35% 0.06% Total Fortis Series Operating Expenses... 0.36% 0.52% 0.53% 0.94% 0.56% 1.06% 0.51% 1.25% 0.76% GROWTH CAPITAL & S&P 500 OPPORTUNITIES INCOME INDEX SERIES SERIES SERIES ------------- -------- ------- Investment and Management Fee....... 0.90% 0.63% 0.40% Other Expenses......... 0.41% 0.04% 0.05% Total Fortis Series Operating Expenses... 1.31% 0.67% 0.45%
BLUE MID SMALL LARGE CHIP BLUE CHIP CAP CAP GLOBAL GLOBAL CAP STOCK STOCK INTERNATIONAL STOCK VALUE GROWTH EQUITY GROWTH SERIES SERIES II STOCK SERIES SERIES SERIES SERIES SERIES SERIES ------ ------------- ------------- ------ ------ ------ ---------- ------ Investment and Management Fee.......... 0.87% 0.95% 0.83% 0.90% 0.90% 0.70% 1.00% 0.90% Other Expenses......................... 0.05% 0.43% 0.10% 0.15% 0.13% 0.05% 0.43% 0.06% Total Fortis Series Operating Expenses............................. 0.92% 1.38% 0.93% 1.05% 1.03% 0.75% 1.43% 0.96% INVESTORS GROWTH AGGRESSIVE GROWTH STOCK GROWTH SERIES SERIES SERIES ---------- ------ ---------- Investment and Management Fee.......... 0.90% 0.61% 0.62% Other Expenses......................... 0.49% 0.03% 0.04% Total Fortis Series Operating Expenses............................. 1.39% 0.64% 0.66%
------------------------------ (a) As a percentage of portfolio average net assets based on 1999 historical data. The figures set forth above were annualized numbers for the following portfolios and the total operating expense ratio for them would have been as follows had there not been a waiver and reimbursement of expense arrangement in effect: American Leaders Series--1.50%; Blue Chip Series II--1.50%; Capital Opportunities Series--1.38%; Global Equity Series--1.86%; Investors Growth Series--1.53%. 4 61 EXAMPLES* If you surrender your contract in full at the end of any of the time periods shown below, you would pay the following cumulative expenses on a $1,000 investment, assuming a 5% annual return on assets:
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------------------------------------------- ------ ------- ------- -------- Money Market................................................ $80 $107 $136 $199 US Government Securities.................................... 82 112 145 216 Diversified Income.......................................... 82 112 145 217 Multisector Bond............................................ 86 125 166 259 High Yield.................................................. 82 113 147 220 International Stock Series II............................... 87 128 172 271 Asset Allocation............................................ 82 112 144 215 American Leaders............................................ 89 134 181 290 Value....................................................... 84 119 157 241 Capital Opportunities....................................... 90 136 184 296 Growth & Income............................................. 83 116 152 231 S&P 500 Index............................................... 81 110 141 208 Blue Chip Stock............................................. 86 124 165 257 Blue Chip Stock II.......................................... 90 138 188 303 International Stock......................................... 86 124 165 258 MidCap Stock Series......................................... 87 128 171 270 Small Cap Value Series...................................... 87 127 170 268 Global Growth............................................... 84 119 156 240 Global Equity............................................... 91 139 190 307 Large Cap Growth Series..................................... 86 125 167 261 Investors Growth Series..................................... 90 138 188 304 Growth Stock................................................ 83 116 151 228 Aggressive Growth........................................... 83 116 152 230
If you commence an annuity payment option, or do not surrender your contract, you would pay the following cumulative expenses on a $1,000 investment, assuming a 5% annual return on assets:
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------------------------------------------- ------ ------- ------- -------- Money Market................................................ $17 $53 $ 91 $199 US Government Securities.................................... 19 58 100 216 Diversified Income.......................................... 19 58 100 217 Multisector Bond............................................ 23 71 121 259 High Yield.................................................. 19 59 102 220 International Stock Series II............................... 24 74 127 271 Asset Allocation............................................ 19 58 99 215 American Leaders............................................ 26 80 136 290 Value....................................................... 21 65 112 241 Capital Opportunities....................................... 27 82 139 296 Growth & Income............................................. 20 62 107 231 S&P 500 Index............................................... 18 56 96 208 Blue Chip Stock............................................. 23 70 120 257 Blue Chip Stock II.......................................... 27 84 143 303 International Stock......................................... 23 70 120 258 MidCap Stock Series......................................... 24 74 126 270 Small Cap Value Series...................................... 24 73 125 268 Global Growth............................................... 21 65 111 240 Global Equity............................................... 28 85 145 307 Large Cap Growth Series..................................... 23 71 122 261 Investors Growth Series..................................... 27 84 143 304 Growth Stock................................................ 20 62 106 228 Aggressive Growth........................................... 20 62 107 230
------------------------------ * Does not include the effect of any Market Value Adjustment. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. ------------------------------ We have included the foregoing tables and examples to help you understand the transaction and operating expenses we directly or indirectly impose under the contracts and under the portfolios. We will also deduct amounts for state premium taxes or similar assessments where these deductions are applicable. See Appendix C for an explanation of the calculation of the amounts set forth above. 5 62 SUMMARY OF CONTRACT FEATURES The following summary should be read in conjunction with the detailed information in this prospectus. Variations from the information appearing in this prospectus due to requirements particular to your state are described in supplements which are attached to this prospectus, or in endorsements to the contract as appropriate. The contracts are designed to provide individuals with retirement benefits through the accumulation of purchase payments on a fixed or variable basis, and by the application of such accumulations to provide fixed or variable annuity payments. "We," "our," and "us" mean Fortis Benefits Insurance Company. "You" and "your" mean a reader of this prospectus who is contemplating making purchase payments or taking any other action in connection with a contract. Depending on the state that you live in, the contract that is issued to you may be as a part of a group contract or as an individual contract. Participation in a group contract will be evidenced by the issuance of a certificate showing your interest under the group contract. In other states, an individual contract will be issued to you. Both the certificate and the contract are referred to as a "contract" in this prospectus. FREE LOOK You have the right to examine a contract during a "free look" period after you receive the contract and return it for a refund of the amount of the then current contract value. However, in certain states where required by state law the refund will be in the amount of all purchase payments that have been made, without interest or appreciation or depreciation. The "free look" period is generally 10 days unless a longer time is specified on the face page of your contract. PURCHASE PAYMENTS The initial purchase payment under a contract must be at least $5,000 ($2,000 for a contract which is part of a qualified plan). Additional purchase payments under a contract must be at least $50. See "Issuance of a Contract and Purchase Payments." ALLOCATION OF PURCHASE PAYMENTS On the date that the contract is issued, the initial purchase payment is allocated, as specified by you in the contract application, among one or more of the portfolios, or to one or more of the guarantee periods in the fixed account, or to a combination thereof. Subsequent purchase payments are allocated in the same way, or pursuant to different allocation percentages that you may request in writing. VARIABLE ACCOUNT INVESTMENT OPTIONS Each of the subaccounts of the Variable Account invests in shares of a corresponding portfolio. Contract value in each of the subaccounts of the Variable Account will vary to reflect the investment experience of each of the corresponding portfolios, as well as deductions for certain charges. Each portfolio has a separate and distinct investment objective and is managed by Fortis Advisers, Inc. or a subadviser of Fortis Advisers, Inc. A full description of the portfolios and their investment objectives, policies, risks and expenses can be found in the current prospectus for the portfolios, which accompanies this prospectus, and the portfolios' Statement of Additional Information which is available upon request from Fortis Benefits at the address and phone number on the cover of this prospectus. FIXED ACCOUNT INVESTMENT OPTIONS Any amount allocated by the owner to the fixed account earns a guaranteed interest rate. The level of the guaranteed interest rate depends on the length of the guarantee period selected by the owner. We currently make available ten different guarantee periods, ranging from one to ten years. If amounts are transferred, surrendered or otherwise paid out more than fifteen days before or after the end of the applicable guarantee period other than the one-year guarantee period, a Market Value Adjustment will be applied to increase or decrease the amount of fixed account value that is paid out. Accordingly, the Market Value Adjustment can result in gains or losses to you. There is no Market Value Adjustment for transfers or surrenders from the one-year guarantee period of the fixed account. THE FIXED ACCOUNT INVESTMENT OPTION IS NOT AVAILABLE FOR CONTRACTS ISSUED IN THE STATE OF PENNSYLVANIA. For a more complete discussion of the fixed account investment options and the Market Value Adjustment, see "The Fixed Account." TRANSFERS During the Accumulation Period, you can transfer all or part of your contract value from one subaccount to another or into the fixed account and, subject to any Market Value Adjustment, from one guarantee period to another or into a subaccount. There is currently no charge for these transfers. We reserve the right to restrict the frequency of or otherwise condition, terminate, or impose charges upon, transfers from a subaccount during the Accumulation Period. During the Annuity Period the person receiving annuity payments may make up to four transfers (but not from a Fixed Annuity Option) during each year of the Annuity Period. For a description of certain limitations on transfer rights, see "Allocations of Purchase Payments and Contract Value--Transfers." TOTAL OR PARTIAL SURRENDERS Subject to certain conditions, all or part of the contract value may be surrendered by you before the earlier of (1) the annuity commencement date, or (2) if the owner is a non-natural person the Annuitant's death. Amounts surrendered may be subject to a surrender charge and, in addition, amounts surrendered from the fixed account may be subject to a Market Value Adjustment. See "Total and Partial Surrenders," "Surrender Charge" and "Market Value Adjustment." Particular attention should be paid to the tax implications of any surrender, including possible penalties for premature distributions. See "Federal Tax Matters." ANNUITY PAYMENTS The contract provides several types of annuity benefits to you or to other persons you properly designate to receive such payments, including Fixed and Variable Annuity Options. The owner has considerable flexibility in choosing the annuity commencement date. However, the tax implications of an annuity 6 63 commencement date must be carefully considered, including the possibility of penalties for commencing benefits either too soon or too late. See "Annuity Commencement Date," "Annuity Options" and "Federal Tax Matters" in this prospectus and "Taxation Under Certain Retirement Plans" in the Statement of Additional Information. DEATH BENEFIT In the event of the death of the owner, or the Annuitant if the owner is a non-natural person, prior to the annuity commencement date, a death benefit is payable to the beneficiary. See "Benefit Payable on Death of Contract Owner (or Annuitant)." LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS Certain rights you would otherwise have under a contract may be limited by the terms of any applicable employee benefit plan. These limitations may restrict such things as total and partial surrenders, the amount or timing of purchase payments that may be made, when annuity payments must start and the type of annuity options that may be selected. Accordingly, you should familiarize yourself with these and all other aspects of any retirement plan in connection with which a contract is issued. The record owner of the group variable annuity contract pursuant to which group certificates will be issued will be a bank trustee whose sole function is to hold record ownership of the contract or an employer (or the employer's designee) in connection with an employee benefit plan. In the latter cases, certain rights that an owner otherwise would have under a contract may be reserved instead by the employer. TAX IMPLICATIONS The tax implications for you or any other persons who may receive payments under a contract, and those of any related employee benefit plan can be quite important. A brief discussion of some of these is set out under "Federal Tax Matters" in this prospectus and "Taxation Under Certain Retirement Plans" in the Statement of Additional Information, but such discussion is not comprehensive. Therefore, you should consider these matters carefully and consult a qualified tax adviser before making purchase payments or taking any other action in connection with a contract or any related employee benefit plan. Failure to do so could result in serious adverse tax consequences which might otherwise have been avoided. QUESTIONS AND OTHER COMMUNICATIONS Any question about procedures of the contract should be directed to your sales representative, or Fortis Benefits' home office: P.O. Box 64272, St. Paul, Minnesota, 55164: 1-800-800-2000, extension 3057. Purchase payments and written requests should be mailed or delivered to the same home office address. All communications should include the contract number, the owner's name and, if different, the Annuitant's name. The number for telephone transfers is 1-800-800-2000 (extension 3057). Any purchase payment or other communication, except a 10-day cancellation notice, is deemed received at Fortis Benefit's home office on the actual date of receipt there in proper form unless received (1) after the close of regular trading on The New York Stock Exchange, or (2) on a date that is not a Valuation Date. In either of these two cases, the date of receipt will be deemed to be the next Valuation Date. 7 64 FINANCIAL AND PERFORMANCE INFORMATION The information presented below reflects the Accumulation Unit information for subaccounts of the Variable Account through December 31, 2000.
MONEY U.S. GOV'T DIVERSIFIED GLOBAL HIGH INTERNATIONAL ASSET MARKET SECURITIES INCOME BOND YIELD STOCK II ALLOCATION ------ ---------- ----------- ------ ----- ------------- ---------- December 31, 2000 Accumulation Units in Force...................... 39,594,550 5,977,686 37,519,171 1,388,496 3,777,913 2,403,196 144,888,821 Accumulation Unit Value...... $1.662 $19.655 $2.118 $12,436 $11.814 $14.633 $3.877 December 31, 1999 Accumulation Units in Force...................... 59,567,286 6,961,590 46,271,405 1,402,949 4,713,245 152,820,325 3,230,112 Accumulation Unit Values..... $1,587 $17,823 $1,998 $12,092 $12,799 $3,923 $16,150 December 31, 1998 Accumulation Units in Force...................... 39,532,433 7,577,700 51,323,231 1,236,211 4,984,906 3,315,158 160,803,266 Accumulation Unit Values..... $1.532 $18.421 $2.059 $13.254 $12.823 $16.313 $3.326 December 31, 1997 Accumulation Units in Force...................... 31,491,629 7,743,923 49,942,498 1,123,401 4,194,544 2,918,483 156,035,843 Accumulation Unit Values..... $1.474617 $17.149938 $1.963344 $11.837281 $12.917282 $14.433538 $2.809839 December 31, 1996 Accumulation Units in Force...................... 36,220,947 9,635,092 55,653,680 1,088,043 3,337,604 2,330,884 154,525,474 Accumulation Unit Values..... $1.418 $15.935 $1.801 $11.961 $11.928 $12.884 $2.368 January 1, 1996* Accumulation Unit Values..... -- -- -- -- -- -- -- December 31, 1995 Accumulation Units in Force...................... 26,915,975 10,989,914 59,213,865 574,142 2,321,419 1,117,596 148,700,081 Accumulation Unit Value...... $1.367 $15.805 $1.753 $11.743 $10.941 $11.590 $2.134 January 2, 1995* Accumulation Unit Value...... -- -- -- $10.000 -- $10.000 -- December 31, 1994 Accumulation Units in Force...................... 30,697,754 12,271,738 62,744,615 -- 1,216,957 -- 137,642,102 Accumulation Unit Value...... $1.311 $13.483 $1.515 -- -- $9.834 $1.773 May 1, 1994* Accumulation Unit Value...... -- -- -- -- -- $10.0000 -- December 31, 1993 Accumulation Units in Force...................... 21,315,022 15,601,818 56,005,709 -- -- -- 106,834,367 Accumulation Unit Value...... $1.278 $14.609 $1.621 -- -- -- $1.797 December 31, 1992 Accumulation Units in Force...................... 20,674,556 9,505,984 19,353,521 -- -- -- 49,688,937 Accumulation Unit Value...... $1.261 $13.529 $1.457 -- -- -- $1.664 May 1, 1992* Accumulation Unit Value...... -- -- -- -- -- -- -- December 31, 1991 Accumulation Units in Force...................... 7,235,168.03 3,595,759.23 6,056,976.03 -- -- -- 17,772,322.83 Accumulation Unit Value...... $1.237 $12.921 $1.379 -- -- -- $1.577 December 31, 1990 Accumulation Units in Force...................... 5,632,146.27 747,992.12 2,352,517.74 -- -- -- 8,249,373.75 Accumulation Unit Value...... $1.183 $11.450 $1.219 -- -- -- $1.252 AMERICAN CAPITAL GROWTH & LEADERS VALUE OPPORTUNITIES INCOME -------- ----- ------------- -------- December 31, 2000 Accumulation Units in Force...................... 180,486 4,407,086 763,073 9,221,342 Accumulation Unit Value...... $10.392 $18.559 $8.754 $24.661 December 31, 1999 Accumulation Units in Force...................... -- 4,744,081 -- 10,994,926 Accumulation Unit Values..... -- $15,875 -- $23,775 December 31, 1998 Accumulation Units in Force...................... -- 4,869,102 -- 12,171,938 Accumulation Unit Values..... -- $14.768 -- $21.767 December 31, 1997 Accumulation Units in Force...................... -- 3,402,217 -- 11,003,248 Accumulation Unit Values..... -- $13.651572 -- $19.487584 December 31, 1996 Accumulation Units in Force...................... -- 1,071,648 -- 7,892,683 Accumulation Unit Values..... -- $11.048 -- $15.468 January 1, 1996* Accumulation Unit Values..... -- $10.000 -- December 31, 1995 Accumulation Units in Force...................... -- -- 4,204,164 Accumulation Unit Value...... -- -- $12.904 January 2, 1995* Accumulation Unit Value...... -- -- -- December 31, 1994 Accumulation Units in Force...................... -- -- 1,489,517 Accumulation Unit Value...... -- -- $10.083 May 1, 1994* Accumulation Unit Value...... -- -- $10.0000 December 31, 1993 Accumulation Units in Force...................... -- -- -- Accumulation Unit Value...... -- -- -- December 31, 1992 Accumulation Units in Force...................... -- -- -- Accumulation Unit Value...... -- -- -- May 1, 1992* Accumulation Unit Value...... -- -- -- December 31, 1991 Accumulation Units in Force...................... -- -- -- Accumulation Unit Value...... -- -- -- December 31, 1990 Accumulation Units in Force...................... -- -- -- Accumulation Unit Value...... -- -- --
------------------------------- * Accumulation Unit value at date of initial registration statement effectiveness 8 65
BLUE INTERNATIONAL GLOBAL GLOBAL GROWTH AGGRESSIVE S&P 500 BLUE CHIP CHIP II STOCK GROWTH EQUITY STOCK GROWTH ------- --------- ------- ------------- ------ ------ ------ ---------- December 31, 2000 Accumulation Units in Force.... 14,152,174 10,307,005 834,628 5,688,753 9,791,503 280,353 111,543,696 8,239,797 Accumulation Unit Value........ $19.808 $20,758 $8.728 $17.572 $27.039 $9.264 $6.079 $27.382 December 31, 1999 Accumulation Units in Force.... 14,134,177 9,671,527 -- 9,640,858 114,976,011 -- 5,344,248 6,379,981 Accumulation Unit Values....... $22,189 $21,571 -- $33,343 $5,925 -- $19,711 $32,680 December 31, 1998 Accumulation Units in Force.... 10,440,486 7,548,794 -- 4,751,940 11,744,865 -- 136,042,148 6,165,803 Accumulation Unit Values....... $18.689 $18.238 -- $16.113 $21.433 -- $3.870 $15.829 December 31, 1997 Accumulation Units in Force.... 5,491,818 4,149,587 -- 4,239,821 13,725,612 -- 156,975,866 6,551,677 Accumulation Unit Values....... $14.786540 $14.429421 -- $14.021796 $19.507894 -- $3.296005 $13.241215 December 31, 1996 Accumulation Units in Force.... 1,259,758 915,358 -- 3,137,348 13,713,860 -- 169,095,500 5,706,895 Accumulation Unit Values....... $11.326 $11.520 -- $12.690 $18.510 -- $2.971 $13.232 January 1, 1996* Accumulation Unit Values....... $10.000 $10.000 -- -- -- -- -- -- December 31, 1995 Accumulation Units in Force.... -- 1,157,064 10,769,830 -- 160,247,280 3,033,587 Accumulation Unit Value........ -- $11.271 $15.754 -- $2.587 $12.461 January 2, 1995* Accumulation Unit Value........ -- $10.000 -- -- -- -- December 31, 1994 Accumulation Units in Force.... -- -- 10,055,959 -- 148,657,108 1,115,647 Accumulation Unit Value........ -- -- $12.236 -- $2.054 $9.723 May 1, 1994* Accumulation Unit Value........ -- -- -- -- -- $10.0000 December 31, 1993 Accumulation Units in Force.... -- -- 5,108,957 -- 118,720,649 -- Accumulation Unit Value........ -- -- $12.784 -- $2.142 -- December 31, 1992 Accumulation Units in Force.... -- -- 698,720 -- 79,582,321 -- Accumulation Unit Value........ -- -- $10.988 -- $1.996 -- May 1, 1992* Accumulation Unit Value........ -- -- 10.0000 -- -- -- December 31, 1991 Accumulation Units in Force.... -- -- -- -- 42,946,178.33 -- Accumulation Unit Value........ -- -- -- -- $1.965 -- December 31, 1990 Accumulation Units in Force.... -- -- -- -- 14,690,313.64 -- Accumulation Unit Value........ -- -- -- -- $1.298 -- MID CAP LARGE CAP INVESTORS SMALL CAP GROWTH GROWTH GROWTH VALUE ------- --------- --------- --------- December 31, 2000 Accumulation Units in Force.... 2,297,535 5,763,035 508,808 3,045,179 Accumulation Unit Value........ $11.303 $11.946 $8.905 $13.357 December 31, 1999 Accumulation Units in Force.... 1,441,402 3,962,830 -- 2,496,974 Accumulation Unit Values....... $10,538 $14,754 -- $10,659 December 31, 1998 Accumulation Units in Force.... 765,338 842,995 -- 1,098,102 Accumulation Unit Values....... $9.625 $11.755 -- $9.367 December 31, 1997 Accumulation Units in Force.... -- -- -- -- Accumulation Unit Values....... -- -- -- -- December 31, 1996 Accumulation Units in Force.... -- -- -- -- Accumulation Unit Values....... -- -- -- -- January 1, 1996* Accumulation Unit Values....... -- -- -- -- December 31, 1995 Accumulation Units in Force.... -- -- -- -- Accumulation Unit Value........ -- -- -- -- January 2, 1995* Accumulation Unit Value........ -- -- -- -- December 31, 1994 Accumulation Units in Force.... -- -- -- -- Accumulation Unit Value........ -- -- -- -- May 1, 1994* Accumulation Unit Value........ -- -- -- -- December 31, 1993 Accumulation Units in Force.... -- -- -- -- Accumulation Unit Value........ -- -- -- -- December 31, 1992 Accumulation Units in Force.... -- -- -- -- Accumulation Unit Value........ -- -- -- -- May 1, 1992* Accumulation Unit Value........ -- -- -- -- December 31, 1991 Accumulation Units in Force.... -- -- -- -- Accumulation Unit Value........ -- -- -- -- December 31, 1990 Accumulation Units in Force.... -- -- -- -- Accumulation Unit Value........ -- -- -- --
------------------------------- * Accumulation Unit value at date of initial registration statement effectiveness 9 66 Audited financial statements of the Variable Account are included in the Statement of Additional Information. Advertising and other sales materials may include yield and total return figures for the subaccounts of the Variable Account. These figures are based on historical results and are not intended to indicate future performance. "Yield" is the income generated by an investment in the subaccount over a period of time specified in the advertisement. This rate of return is assumed to be earned over a full year and is shown as a percentage of the investment. "Total Return" is the total change in value of an investment in the subaccount over a period of time specified in the advertisement. The rate of return shown would produce that change in value over the specified period, if compounded annually. Yield figures do not reflect the surrender charge and yield and total return figures do not reflect premium tax charges. This makes the performance shown more favorable. Financial information concerning Fortis Benefits is included in this prospectus under "Additional Information About Fortis Benefits" and "Fortis Benefits Financial Statements." FORTIS BENEFITS Fortis Benefits Insurance Company is the issuer of the contracts. Fortis Benefits is a Minnesota corporation founded in 1910. It is qualified to sell life insurance and annuity contracts in the District of Columbia and in all states except New York. Fortis Benefits is an indirectly wholly-owned subsidiary of Fortis, Inc., which is itself indirectly owned 50% by Fortis (NL)N.V. and 50% by Fortis (B). Fortis, Inc. manages the United States operations for these two companies. Fortis (NL)N.V. is a diversified financial services company headquartered in Utrecht, The Netherlands, where its insurance operations began in 1847. Fortis (B) is a diversified financial services company headquartered in Brussels, Belgium, where its insurance operations began in 1824. Fortis (NL)N.V. and Fortis (B) have merged their operating companies under the trade name of Fortis. The Fortis group of companies is active in insurance, banking and financial services, and real estate development in The Netherlands, Belgium, the United States, Western Europe, and the Pacific Rim. All of the guarantees and commitments under the contracts are general obligations of Fortis Benefits regardless of whether you have allocated the contract value to the Variable Account or to the fixed account. None of Fortis Benefits' affiliated companies has any legal obligation to back Fortis Benefits' obligations under the contracts. Effective April 1, 2001, Fortis Benefits contracted the administrative servicing obligations for the contracts to Hartford Life and Annuity Insurance Company ("Hartford L&A"), a subsidiary of The Hartford Financial Services Group. Although Fortis Benefits remains responsible for all contract terms and conditions, Hartford L&A is responsible for servicing the contracts, including the payment of benefits, oversight of investment management (i.e., the available investment portfolios) and overall contract administration. This was part of a larger transaction whereby Hartford L&A reinsured all of the individual life insurance and annuity business of Fortis Benefits. THE VARIABLE ACCOUNT The Variable Account is a segregated investment account of Fortis Benefits. Fortis Benefits established Variable Account D under Minnesota insurance law as of October 14, 1987. The Variable Account is an integral part of Fortis Benefits. However, the Variable Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940. Assets in the Variable Account representing reserves and liabilities under these contracts and other variable annuity contracts issued by Fortis Benefits will not be chargeable with liabilities arising out of any other business of Fortis Benefits. The Variable Account has subaccounts. The assets in each subaccount are invested exclusively in one of the portfolios listed on the first page of the prospectus, each of which represents a separate investment portfolio. Income and both realized and unrealized gains or losses from the assets of each subaccount of the Variable Account are credited to or charged against that subaccount without regard to income, gains or losses, from any other subaccount of the Variable Account or arising out of any other business we may conduct. We may add or eliminate new subaccounts as new portfolios are added or eliminated. THE PORTFOLIOS You may choose from among a number of different portfolios. Each portfolio is a mutual fund available for purchase only as a funding vehicle for benefits under variable life insurance and variable annuity products. These variable life insurance and variable annuity products are issued by Fortis Benefits and by other life insurance companies. Each portfolio corresponds to one of the subaccounts of the Variable Account. The assets of each portfolio are separate from the assets of other portfolios. In addition, each portfolio operates as a separate investment portfolio whose investment performance has no effect on the investment performance of any other portfolio. We offer more detailed information for each investment portfolio. This information includes the investment policies, investment restrictions, charges, and risks attendant to investing in each portfolio. This information also includes other aspects of each portfolio's operations. You may find this information in the current prospectus for each portfolio. These portfolio prospectuses must accompany this prospectus, and you should read them in conjunction with it. You may obtain a copy of each prospectus from us, free of charge, by calling 1-800-800-2000, ext. 3057, or by writing P.O. Box 64272, St. Paul, Minnesota 55164. As noted, the investment portfolios may be available to registered separate accounts of other participating insurance companies. These portfolios may also be available to the Variable Account and other separate accounts of Fortis Benefits. Although Fortis Benefits does not anticipate any disadvantages to this, there is a possibility that a material conflict may arise between the interest of the Variable Account and one or more of the other separate accounts participating in the portfolios. For example, a conflict may occur due to (1) a change in law affecting the operations of variable life and variable annuity separate accounts, (2) differences in the voting instructions of the contract owners and those of other companies, or (3) some other reason. In the event of conflict, Fortis Benefits will take any steps necessary to protect the contract owners and variable annuity payees. 10 67 Fortis Benefits purchases and redeems portfolios' shares for the Variable Account at their net asset value without any sales or redemption charges. We automatically reinvest dividends or capital gain distributions attributable to contracts in shares of the portfolio from which they are received at the portfolio's net asset value on the date paid. These dividends and distributions will have the effect of reducing the new asset value of each share of the corresponding portfolio and increasing, by an equivalent value, the number of shares outstanding of the portfolio. However, the value of your interest in the corresponding subaccount will not change as a result of any such dividends and distributions. The portfolios available for investment by the Variable Account are listed on the cover page of this prospectus. THE FIXED ACCOUNT GUARANTEED INTEREST RATES/GUARANTEE PERIODS Any amount you allocate to the fixed account earns a guaranteed interest rate beginning on the date you make the allocation. The guaranteed interest rate continues for the number of years you select, up to a maximum of ten years. At the end of your guarantee period, your contract value, including accrued interest, will be allocated to a new guarantee period of equal length. However, you may reallocate your contract value to a different guarantee period (or periods) or to one (or more) of the subaccounts of the Variable Account. If you decide to reallocate your contract value, you must do so by sending us a written request. We must receive your written request at least three business days before the end of your guarantee period. The first day of your new guarantee period (or other reallocation) will be the day after the end of your previous guarantee period. We will notify you at least 45 days and not more than 75 days before the end of your guarantee period. We currently offer ten different guarantee periods. These guarantee periods range in length from one to ten years. Each guarantee period has its own guaranteed interest rate, which may differ from those for other guarantee periods. From time to time we will, at our discretion, change the guaranteed interest rate for future guarantee periods. These changes will not affect the guaranteed interest rates we are paying on current guarantee periods. Please note, when you allocate or transfer an amount to a guarantee period, a new guarantee period begins running with respect to that amount. Therefore, the amount you allocate will earn a guaranteed interest rate that will not change until the end of that period. In addition, the guaranteed interest rate will never be less than an effective annual rate of 3%. We declare the guaranteed interest rates from time to time as market conditions dictate. We advise you of the guaranteed interest rate for a chosen guarantee period at the time we receive a purchase payment from you, or at the time we execute a transfer you have requested, or at the time a guarantee period is renewed. We do not have a specific formula for establishing the guaranteed interest rates for the guarantee periods. Guaranteed interest rates may be influenced by the available interest rates on the investments we acquire with the amounts you allocate for a particular guarantee period. Guaranteed interest rates do not necessarily correspond to the available interest rates on the investments we acquire with the amounts you allocate for a particular guarantee period. See "Investments by Fortis Benefits". In addition, when we determine guaranteed interest rates, we may consider: (1) the duration of a guarantee period, (2) regulatory and tax requirements, (3) sales and administrative expenses we bear, (4) risks we assume, (5) our profitability objectives, and (6) general economic trends. FORTIS BENEFITS' MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES WE DECLARE. WE CANNOT PREDICT OR ASSURE THE LEVEL OF ANY FUTURE GUARANTEED INTEREST RATES IN EXCESS OF AN EFFECTIVE ANNUAL RATE OF 3%. THE FIXED ACCOUNT INVESTMENT OPTION IS NOT AVAILABLE FOR CONTRACTS ISSUED IN THE STATE OF PENNSYLVANIA. You may obtain information concerning the guaranteed interest rates that apply to the various guarantee periods. You may obtain this information from our home office or from your sales representative at any time. MARKET VALUE ADJUSTMENT Except as described below, we will apply a Market Value Adjustment to any fixed account value that is: - surrendered, - transferred, or - otherwise paid out before the end of the guarantee period in which it is being held. For example, we will apply a Market Value Adjustment to fixed account value that we pay: - as an amount applied to an annuity option, and - as an amount paid as a single sum in lieu of an annuity. The Market Value Adjustment we apply may increase or decrease the fixed account value that is withdrawn or transferred. We determine whether the fixed account value is increased or decreased by performing a comparison of two guaranteed interest rates. The first rate we compare is the guaranteed interest rate for the fixed account value that is withdrawn or transferred from the existing guarantee period. The second rate we compare is the guaranteed interest rate we are then offering for new guarantee periods with durations equal to the number of years remaining in the existing guarantee period. After comparing these two rates, we determine whether the fixed account value is increased or decreased as follows: - If the first rate exceeds the second rate by more than 1/2% (1/4% for contracts issued in the state of Florida), the Market Value Adjustment produces an increase in the fixed account value withdrawn or transferred. - If the first rate does not exceed the second rate by at least 1/2% (1/4% for contracts issued in the state of Florida), the Market Value Adjustment produces a decrease in the fixed account value withdrawn or transferred. We will determine the Market Value Adjustment by multiplying the fixed account value that is withdrawn or transferred from the 11 68 existing guarantee period (before deduction of any applicable surrender charge) by the following factor: 1 + I n/12 ------------ - 1 ( 1 + J + .005 )
where, - I is the guaranteed interest rate we credit to the fixed account value that is withdrawn or transferred from the existing guarantee period. - J is the guaranteed interest rate we are then offering for new guarantee periods with durations equal to the number of years remaining in the existing guarantee period (rounded up to the next higher number of years). - N is the number of months remaining in the existing guarantee period (rounded up to the next higher number of months). You will find sample Market Value Adjustment calculations in Appendix A. We do not apply a Market Value Adjustment to withdrawals and transfers of fixed account value under four exceptions. We describe these exceptions below. (1) We will not apply a Market Value Adjustment to fixed account value that we pay out as a death benefit pursuant to a contract. (2) We will not apply a Market Value Adjustment to fixed account value that is withdrawn or transferred from the one-year guarantee period. (3) We will not apply a Market Value Adjustment to fixed account value that we pay out during a 30 day period that: - begins 15 days before the end date of the guarantee period in which the fixed account value was being held, and that: - ends 15 days after the end date of the guarantee period in which the fixed account value was being held. (4) We will not apply a Market Value Adjustment to fixed account value that is withdrawn or transferred from a guarantee period on a periodic, automatic basis. This exception only applies to such withdrawals or transfers under a formal Fortis Benefits program for the withdrawal or transfer of fixed account value. We may impose conditions and limitations on any formal Fortis Benefits program for the withdrawal or transfer of fixed account value. Ask your Fortis Benefits representative about the availability of such a program in your state. In addition, if such a program is available in your state, your Fortis Benefits representative can inform you about the conditions and limitations that may apply to that program. INVESTMENTS BY FORTIS BENEFITS Fortis Benefits' legal obligations with respect to the fixed account are supported by our general account assets. These general account assets also support our obligations under other insurance and annuity contracts. Investments purchased with amounts allocated to the fixed account are the property of Fortis Benefits, and you have no legal rights in such investments. Subject to applicable law, we have sole discretion over the investment of assets in our general account and in the fixed account. Neither our general account nor the fixed account is subject to registration under the Investment Company Act of 1940. We will invest amounts in our general account, and amounts in the fixed account, in compliance with applicable state insurance laws and regulations concerning the nature and quality of investments for the general account. Within specified limits and subject to certain standards and limitations, these laws generally permit investment in: - federal, state and municipal obligations, - preferred and common stocks, - corporate bonds, - real estate mortgages, and mortgage backed securities, - real estate, and - certain other investments, including various derivative investments. See "Fortis Benefits' Financial Statements" for information on our investments. When we establish guaranteed interest rates, we will consider the available return on the instruments in which we invest amounts allocated to the fixed account. However, this return is only one of many factors we consider when we establish the guaranteed interest rates. See "Guaranteed Interest Rates/Guarantee Periods". Generally, we expect to invest amounts allocated to the fixed account in debt instruments. We expect that these debt instruments will approximately match our liabilities with regard to the guarantee periods. We also expect that these debt instruments will primarily include: (1) securities issued by the United States Government or its agencies or instrumentalities. These securities may or may not be guaranteed by the United States Government; (2) debt securities that, at the time of purchase, have an investment grade within the four highest grades assigned by Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's Corporation ("Standard & Poor's"), or any other nationally recognized rating service. Moody's four highest grades are: Aaa, Aa, A, and Baa. Standard & Poor's four highest grades are: AAA, AA, A, and BBB; (3) other debt instruments including, but not limited to, issues of, or guaranteed by, banks or bank holding companies and corporations. Although not rated by Moody's or Standard & Poor's, we deem these obligations to have an investment quality comparable to securities that may be purchased as stated above; (4) other evidences of indebtedness secured by mortgages or deeds of trust representing liens upon real estate. Except as required by applicable state insurance laws and regulations, we are not obligated to invest amounts allocated to the fixed account according to any particular strategy, See "Regulation and Reserves". 12 69 As stated above under the caption "Fortis Benefits" in the "Summary of Contract Features" section of this prospectus, the contracts are reinsured by Hartford Life and Annuity Insurance Company. As part of this reinsurance arrangement, the assets supporting the reserve liabilities of Fortis Benefits associated with the fixed accounts under the contracts are held by Fortis Benefits; however, these assets are managed by Hartford Investment Management Company, an affiliate of Hartford Life and Annuity Insurance Company. Hartford Investment Management Company generally invests those assets as described above for the contract fixed account related investments of Fortis Benefits. ACCUMULATION PERIOD ISSUANCE OF A CONTRACT AND PURCHASE PAYMENTS We reserve the right to reject any application for a contract or any purchase payment for any reason. If we accept your issuing instructions in the form received, we will credit the initial purchase payment within two Valuation Dates after the later of (1) receipt of the issuing instructions or (2) receipt of the initial purchase payment at our home office. If we cannot apply the initial purchase payment within five Valuation Dates after receipt because the issuing instructions are incomplete, we will return the initial purchase payment unless you consent to our retaining the initial purchase payment and applying it as of the end of the Valuation Period in which the necessary requirements are fulfilled. The initial purchase payment must be at least $5,000 ($2,000 for a contract issued pursuant to a qualified plan). The date that we apply the initial purchase payment to the purchase of the contract is also the contract issue date. The contract issue date is the date used to determine contract years, regardless of when we deliver the contract. Our crediting of investment experience in the Variable Account, or a fixed rate of return in the fixed account, generally begins as of the contract issue date. We will accept additional purchase payments at any time after the contract issue date and prior to the annuity commencement date, as long as the Annuitant is living. You must transmit purchase payments (together with any required information identifying the proper contracts and accounts to be credited with purchase payments) to our home office. We apply additional purchase payments to the contract, and add to the contract value as of the end of the Valuation Period in which we receive the payments. Each additional purchase payment under a contract must be at least $50. The total of all purchase payments for all Fortis Benefits annuities having the same owner or Annuitant, may not exceed $1 million (not more than $500,000 allocated to the fixed account) without our prior approval. We reserve the right to modify this limitation at any time. You may make purchase payments in excess of the initial minimum by monthly draft against a bank account if you have completed and returned to us a special authorization form. You may get the form from your sales representative or from our home office. We can also arrange for you to make purchase payments by wire transfer, payroll deduction, military allotment, direct deposit and billing. Purchase payments by check should be made payable to Fortis Benefits Insurance Company. If the contract value is less than $1,000, we may cancel the contract on any Valuation Date. We will notify you of our intention to cancel the contract at least 90 days in advance of the cancellation date. If we do cancel your contract, we consider such cancellation a full surrender of the contract. CONTRACT VALUE Contract value is the total of any Variable Account value in all the subaccounts of the Variable Account, plus any fixed account value in all the guarantee periods. The contract does not guarantee a minimum Variable Account value. You bear the entire investment risk for the contract value that you allocate to the Variable Account. Determination of Variable Account Value. A contract's Variable Account value is based on the number of Accumulation Units and on Accumulation Unit values, which are determined on each Valuation Date. The value of an Accumulation Unit for a subaccount on any Valuation Date is equal to the previous value of that subaccount's Accumulation Unit multiplied by that subaccount's net investment factor (discussed directly below) for the Valuation Period ending on that Valuation Date. At the end of any Valuation Period, a contract's Variable Account value in a subaccount is equal to the number of Accumulation Units in the subaccount times the value of one Accumulation Unit for that subaccount. The number of Accumulation Units in each subaccount is equal to: - Accumulation Units purchased at the time that any purchase payments or transferred amounts are allocated to the subaccount; less - Accumulation Units redeemed to pay for the portion of any transfers from or partial surrenders allocated to the subaccount; less - Accumulation Units redeemed to pay charges under the contract. Net Investment Factor. The net investment factor for a subaccount is determined by dividing (1) the net asset value per share of the portfolio shares held by the subaccount, determined at the end of the current Valuation Period, plus the per share amount of any dividend or capital gains distribution made with respect to the portfolio shares held by the subaccount during the current Valuation Period, minus a per share charge for the increase, plus a per share credit for the decrease, in any income taxes assessed which we determine to have resulted from the investment operation of the subaccount or any other taxes which are attributable to this contract, by (2) the net asset value per share of the portfolio shares held in the subaccount as determined at the end of the previous Valuation Period, and subtracting from that result a factor representing the mortality risk, expense risk and administrative expense charge. If a subaccount's net investment factor is greater than one, the subaccount's Accumulation Unit value has increased. If a subaccount's net investment factor is less than one, the subaccount's Accumulation Unit value has decreased. Determination of Fixed Account Value. A contract's fixed account value is guaranteed by Fortis Benefits. Therefore, we bear the investment risk with respect to amounts allocated to the 13 70 fixed account, except to the extent that (1) we may vary the guaranteed interest rate for future guarantee periods (subject to the 3% effective annual minimum) and (2) the Market Value Adjustment imposes investment risks on you. The contract's fixed account value on any Valuation Date is the sum of its fixed account values in each guarantee period on that date. The fixed account value in a guarantee period is equal to the following amounts, in each case increased by accrued interest at the applicable guaranteed interest rate: - The amount of purchase payments or transferred amounts allocated to the guarantee period; less - The amount of any transfers or surrenders out of the guarantee period. ALLOCATION OF PURCHASE PAYMENTS AND CONTRACT VALUE Allocation of Purchase Payments. In your application for a contract, you may allocate purchase payments, or portions of payments, to the: - available subaccounts of the Variable Account, or - to the guarantee periods in the fixed account, or - to a combination of the two previous options. Percentages must be in whole numbers and the total allocation must equal 100%. The percentage allocations for future purchase payments may be changed, without charge, at any time by sending a written request to Fortis Benefits' home office. Changes in the allocation of future purchase payments will be effective on the date we receive your written request. Transfers. You may transfer contract value: - from one available subaccount to another available subaccount, or - from one available subaccount to the fixed account, or - from one guarantee period to another guarantee period, or - from one guarantee period to an available subaccount You must request transfers by (1) a written request to Fortis Benefits' home office, or by (2) a telephone transfer as described below. Currently, we do not charge for any transfer. However, transfers from a guarantee period, other than the one-year guarantee period, that are (1) more than 15 days before or 15 days after the expiration of the existing guarantee period, or are (2) not a part of a formal Fortis Benefits program for the transfer of fixed account value may be subject to a Market Value Adjustment. See "Market Value Adjustment". The minimum transfer from a subaccount or guarantee period is the lesser of: - $1,000, or - all of the contract value in the subaccount or guarantee period. However, we may permit a continuing request for transfers of lesser specified amounts automatically on a periodic basis. You may not make a transfer into the one year guarantee period fixed account within six months of a transfer out of the one year guarantee period fixed account. We reserve the right to additionally restrict the frequency of transfers or to otherwise condition, terminate, or impose charges (not to exceed $25 per transfer) upon transfers. Where you make all your transfer requests at the same time, as part of one request, we will count all transfers between and among the subaccounts of the Variable Account and the fixed account as one transfer. We will execute the transfers, and determine all values in connection with the transfers, at of the end of the Valuation Period in which we receive the transfer request. The amount of any positive or negative Market Value Adjustment will be added to or deducted from the transferred amount. Certain restrictions on very substantial allocations to any one subaccount are set forth under "Limitations on Allocations" in the Statement of Additional Information. TOTAL AND PARTIAL SURRENDERS Total Surrenders. You may surrender all of the cash surrender value at any time during the life of the contract owner (or Annuitant if the contract owner is not a natural person) to the annuity commencement date. If you choose to make a total surrender, you must do so by written request sent to our home office. We reserve the right to require that the contract be returned to us prior to making payment, although this will not affect our determination of the amount of the cash surrender value. Cash surrender value is: - the contract value at the end of the Valuation Period during which we receive the written request for the total surrender at our home office, less - any applicable surrender charge, and - after we have applied any Market Value Adjustment. See "Surrender Charge" and "Market Value Adjustment". We must receive written consent of all collateral assignees and irrevocable beneficiaries prior to any total surrender. We will generally pay surrenders from the Variable Account within seven days of the date of receipt by our home office of the written request. However, we may postpone payments in certain circumstances. See "Postponement of Payment". The amount we pay upon total surrender of the cash surrender value (taking into account any prior partial surrenders) may be more or less than the total purchase payments you made. After a surrender of the cash surrender value or at any time the contract value is zero, all rights of the owner, Annuitant, or any other person will terminate. Partial Surrenders. At any time during the life of the contract owner (or Annuitant if the contract owner is not a natural person) and prior to the annuity commencement date, you may surrender a portion of the fixed account and/or the Variable Account. You must request partial surrender by a written request sent to Fortis Benefits' home office. We will not accept a partial surrender request from you unless the net proceeds payable to you, as a result of the request, are at least $1,000. We will surrender the entire cash surrender value under the contract if the total contract value in both the Variable Account and fixed account would be less than $1,000 after the partial surrender. You should specify the subaccounts of the Variable Account or guarantee periods of the fixed account that you wish to partially surrender. If you do not specify, we take the partial surrender 14 71 from the subaccounts and from the guarantee periods of the fixed account on a pro rata basis. We will surrender Accumulation Units from the Variable Account and/or dollar amounts from the fixed account so that the total amount of the partial surrender equals the dollar amount of the partial surrender request. We will reduce the partial surrender by the amount of any applicable surrender charge. In addition, if the surrender is from a guarantee period other than the one-year guarantee period, we will reduce the amount payable to you by any negative Market Value Adjustment, or we will increase the amount payable to you by any positive Market Value Adjustment unless the surrender is (1) within 15 days before or 15 days after the expiration of a guarantee period, or (2) is a part of a formal Fortis Benefits program for the transfer or withdrawal of fixed account value. The partial surrender will be effective at the end of the Valuation Period in which we receive the written request for partial surrender at our home office. Payments will generally be made within seven days of the effective date of such request, although certain delays are permitted. See "Postponement of Payment". The Internal Revenue Code provides that a penalty tax will be imposed on certain premature surrenders. For a discussion of this and other tax implications of total and partial surrenders, including withholding requirements, see "Federal Tax Matters". Also, under tax deferred annuity contracts pursuant to Section 403(b) of the Internal Revenue Code, no distributions of voluntary salary reduction amounts will be permitted prior to one of the following events: attainment of age 59 1/2 by the employee or the employee's separation from service, death, disability or hardship. (Hardship distributions will be limited to the lesser of the amount of the hardship or the amount of salary reduction contributions, exclusive of earnings thereon.) TELEPHONE TRANSACTIONS You or your representative may make certain requests under the contract by telephone if we have a written telephone authorization on file. These include requests for (1) transfers, (2) withdrawals, and (3) changes in purchase payment allocation instructions, dollar-cost averaging, portfolio rebalancing programs and systematic withdrawals. Our home office will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures may include, among others, (1) requiring some form of personal identification such as your address and social security number prior to acting upon instructions received by telephone, (2) providing written confirmation of such transactions, and/or (3) tape recording of telephone instructions. Your request for telephone transactions authorizes us to record telephone calls. We may be liable for any losses due to unauthorized or fraudulent instructions if we do not employ reasonable procedures. If we do employ reasonable procedures, we will not be liable for any losses due to unauthorized or fraudulent instructions. We reserve the right to place limits, including dollar limits, on telephone transactions. BENEFIT PAYABLE ON DEATH OF CONTRACT OWNER (OR ANNUITANT) If the owner dies prior to the annuity commencement date, we will pay a death benefit to the beneficiary. If the contract owner is a non-natural person, we will pay a death benefit upon the death of the Annuitant prior to the annuity commencement date. In such case, if more than one Annuitant has been named, we will pay the death benefit payable upon the death of an Annuitant only upon the death of the last survivor of the persons so named. The term "decedent" in the death benefit description below refers to the death of the contract owner unless the contract owner is a non-natural person, in which case it refers to the death of the Annuitant. Also, the death benefit description refers to the age of the contract owner. If the contract owner is a non-natural person, the relevant age will instead be that of the Annuitant. Additionally, the death benefit description makes reference to "Pro Rata Adjustments." A pro rata adjustment is calculated separately for each withdrawal, creating a decrease in the death benefit proportional to the decrease the withdrawal makes in the contract value. Pro rata adjustments are made for amounts withdrawn for partial surrenders and any associated surrender charge (which shall be deemed to be an amount withdrawn), but not for any contract fee-related surrenders. The death benefit will equal the greatest of (1), (2), or (3): (1) The contract value as of the date used for valuing the death benefit. (2) The highest Anniversary Value of each of the contract's anniversaries prior to the earlier of: (1) the decedent's death, or (2) the owner's attainment of age 75. An Anniversary Value is equal to: (a) the contract value on the anniversary, plus (b) any purchase payments made since the anniversary, reduced by (c) pro rata adjustments for any withdrawals made since the anniversary. (3) If the decedent dies prior to the date the owner reaches age 75, the amount of the death benefit is the lesser of (a) and (b), as follows: (a) the sum of: (i) the accumulation (without interest) of purchase payments, reduced by pro rata adjustments for any withdrawals; plus (ii) an amount equal to interest on such net accumulation value, as it is adjusted for each applicable purchase payment and pro rata adjustment, at an effective annual rate of 5.0%; or (b) 200% of (a)(i). The resulting amount (the lesser of (a) and (b)) will be referred to as the "Roll-Up Amount." If the decedent dies on or after the date the owner reaches age 75, the amount of the death benefit is equal to: (a) the "Roll-Up Amount" as of the date the owner reached age 75; plus (b) the accumulation (without interest) of purchase payments made on or after the date the owner reached age 75; reduced by 15 72 (c) pro rata adjustments for any withdrawals made on or after the date the owner reached age 75. We describe the pro rata adjustments referred to above more fully in Appendix D at the end of this prospectus. See also Appendix A for sample death benefit calculations. The value of the death benefit is determined as of the end of the Valuation Period in which we receive, at our home office, proof of death and the written request as to the manner of payment. Upon receipt of these items, the death benefit generally will be paid within seven days. Under certain circumstances, payment of the death benefit may be postponed. See "Postponement of Payment." If we do not receive a written request for a settlement method, we will pay the death benefit in a single sum, based on values determined at that time. The beneficiary may (1) receive a single sum payment, which terminates the contract, or (2) select an annuity option. If the beneficiary selects an annuity option, he or she will have all the rights and privileges of a payee under the contract. If the beneficiary desires an annuity option, the election should be made within 60 days of the date the death benefit becomes payable. Failure to make a timely election can result in unfavorable tax consequences. For further information, see "Federal Tax Matters." We accept any of the following as proof of death: (1) a copy of a certified death certificate; (2) a copy of a certified decree of a court of competent jurisdiction as to the finding of death; or (3) a written statement by a medical doctor who attended the deceased at the time of death. The Internal Revenue Code requires that a Non-Qualified Contract contain certain provisions about an owner's death. We discuss these provisions below under "Federal Tax Matters--Required Distributions for Non-Qualified Contracts." It is imperative that written notice of the death of the owner be promptly transmitted to us at our home office, so that we can make arrangements for distribution of the entire interest in the contract to the beneficiary in a manner that satisfies the Internal Revenue Code requirements. Failure to satisfy these requirements may result in the contract not being treated as an annuity contract for federal income tax purposes with possible adverse tax consequences. THE ANNUITY PERIOD ANNUITY COMMENCEMENT DATE You may specify an annuity commencement date in your application. The annuity commencement date marks the beginning of the period during which an Annuitant or other payee designated by the owner receives annuity payments under the contract. The annuity commencement date must be at least two years after the contract issue date. You should consult your sales representative in this regard. The Internal Revenue Code may impose penalty taxes on amounts distributed either too soon or too late depending on the type of retirement arrangement involved. See "Federal Tax Matters". You should consider this carefully in selecting or changing an annuity commencement date. You must submit a written request in order to advance or defer the annuity commencement date. We must receive the request at our home office at least 30 days before the then-scheduled annuity commencement date. The new annuity commencement date must also be at least 30 days after we receive the written request. You have no right to make any total or partial surrender during the Annuity Period. COMMENCEMENT OF ANNUITY PAYMENTS We may pay the entire contract value, rather than apply the amount to an annuity option if the contract value at the end of the Valuation Period which contains the annuity commencement date is less than $1,000. We would make the payment in a single sum to the Annuitant or other payee chosen by the owner and cancel the contract. We would not impose any charge other than the premium tax charge. Otherwise, we will apply (1) the fixed account value to provide a Fixed Annuity Option and (2) the Variable Account value in any subaccount to provide a Variable Annuity Option using the same subaccount, unless you have notified us by written request to apply the fixed account value and Variable Account value in different proportions. We must receive written request at our home office at least 30 days before the annuity commencement date. We will make annuity payments under a Fixed or Variable Annuity Option on a monthly basis to the Annuitant or other properly-designated payee, unless we agree to a different payment schedule. If you name more than one person as an Annuitant, you may elect to name one of such persons to be the sole Annuitant as of the annuity commencement date. We reserve the right to change the frequency of any annuity payment so that each payment will be at least $50 ($20 in Texas). The amount of each annuity payment will depend on (1) the amount of contract value applied to an annuity option, (2) the form of annuity selected, and (3) the age of the Annuitant. For information concerning the relationship between the Annuitant's sex and the amount of annuity payments, including special requirements in connection with employee benefits plans, see "Calculations of Annuity Payments" in the Statement of Additional Information. The Statement of Additional Information also contains detailed information about how the amount of each annuity payment is computed. The dollar amount of any fixed annuity payments is specified during the entire period of annuity payments according to the provisions of the annuity option selected. The dollar amount of variable annuity payments varies during the Annuity Period based on changes in Annuity Unit values for the subaccounts that you choose to use in connection with your payments. RELATIONSHIP BETWEEN SUBACCOUNT INVESTMENT PERFORMANCE AND AMOUNT OF VARIABLE ANNUITY PAYMENTS The amount of an annuity payment depends on the average effective net investment return of a subaccount during the period since the preceding payment as follows: - if the return is higher than 3% annually, the Annuity Unit value will increase, and the second payment will be higher than the first; and - if the return is lower than 3% annually, the Annuity Unit value will decrease, and the second payment will be lower than the first. 16 73 "Net investment return," for this purpose, refers to the subaccount's overall investment performance after deduction of the mortality and expense risk and administrative expense charges, which are assessed at an annual rate of 1.35%. We guarantee that the amount of each variable annuity payment after the first payment will not be affected by variations in our mortality experience or our expenses. Transfers. A person receiving annuity payments may make up to four transfers a year among subaccounts. The current procedures for and conditions on these transfers are the same as we describe above under "Allocation of Purchase Payments and Contract Value--Transfers". We do not permit transfers from a Fixed Annuity Option during the Annuity Period. ANNUITY OPTIONS You may select an annuity option or change a previous selection by written request. We must receive your request at least 30 days before the annuity commencement date. You may select one annuity form, although payments under that form may be on a combination fixed and variable basis. If no annuity form selection is in effect on the annuity commencement date, we usually automatically apply Option B (described below), with payments guaranteed for ten years. However, federal pension law may require that we make default payments under certain retirement plans pursuant to plan provisions and/or federal law. Tax laws and regulations may impose further restrictions to assure that the primary purpose of the plan is distribution of the accumulated funds to the employee. Your contract offers the following options for fixed and variable annuity payments. Under each of the options, we make payments as of the first Valuation Date of each monthly period, starting with the annuity commencement date. Option A, Life Annuity. We do not make payments after the annuitant dies. It is possible for the annuitant to receive only one payment under this option, if the annuitant dies before the second payment is due. Option B, Life Annuity with Payments Guaranteed for 10 Years to 20 Years. We continue payments as long as the annuitant lives. If the annuitant dies before we have made all of the guaranteed payments, we continue installments of the guaranteed payments to the beneficiary. Option C, Joint and Full Survivor Annuity. We continue payments as long as either the annuitant or the joint annuitant is alive. We stop payments when both the annuitant and the joint annuitant have died. It is possible for the payee or payees to receive only one payment under this option if both annuitants die before the second payment is due. Option D, Joint and One-Half Contingent Survivor Annuity. We continue payments as long as either the annuitant or the joint annuitant is alive. If the annuitant dies first, we continue payments to the joint annuitant at one-half the original amount. If the joint annuitant dies first, we continue payments to the annuitant at the original full amount. We stop payments when both the annuitant and the joint annuitant have died. It is possible for the payee or payees to receive only one payment under this option if both annuitants die before the second payment is due. We also have other annuity options available. You can get information about them from your sales representative or by calling or writing to our home office. DEATH OF ANNUITANT OR OTHER PAYEE Under most annuity forms offered by us, the amounts, if any, payable on the death of the Annuitant during the Annuity Period are the continuation of annuity payments for any remaining guarantee period or for the life of any joint Annuitant. In all such cases, the person entitled to receive payments also receives any rights and privileges under the annuity form in effect. Additional rules applicable to such distributions under Non-Qualified Contracts are described under "Federal Tax Matters--Required Distributions for Non-Qualified Contracts". Though the rules there described do not apply to contracts issued in connection with qualified plans, similar rules apply to the plans themselves. CHARGES AND DEDUCTIONS PREMIUM TAXES We deduct state premium taxes as follows: - when imposed on purchase payments, we pay the amount on your behalf and deduct the amount from your contract value upon (1) our payment of surrender proceeds or death benefit or (2) annuitization of a contract, or - when imposed at the time annuity payments begin, we deduct the amount from your contract value. Applicable premium tax rates depend upon your place of residence. Rates can change by legislation, administrative interpretations, or judicial acts. CHARGES AGAINST THE VARIABLE ACCOUNT Mortality and Expense Risk Charge. We assess each subaccount of the Variable Account with a daily charge for mortality and expense risk. This charge is a nominal annual rate of 1.25% of the average daily net assets of the Variable Account. It consists of approximately .8% for mortality risk and approximately .45% for expense risk. We guarantee not to increase this charge for the duration of the contract. This charge is assessed during both the Accumulation Period and the Annuity Period. The mortality risk borne by us arises from our obligation to make annuity payments (determined in accordance with the annuity tables and other provisions contained in the contract) for the full life of all Annuitants regardless of how long all Annuitants or any individual Annuitant might live. In addition, we bear a mortality risk in that we guarantee to pay a death benefit upon the death of a contract owner (or Annuitant if the owner is not a natural person) prior to the annuity commencement date. We do not impose a surrender charge upon payment of a death benefit. This places a further mortality risk on us. The expense risk we assume is that actual expenses incurred in connection with issuing and administering the contract will exceed the limits on administrative charges set in the contract. We or the reinsurer of the contracts bear the loss if the administrative charges and the mortality and expense risk charge are insufficient to cover the expenses and costs assumed. Conversely, 17 74 we or the reinsurer of the contracts profit if the amount deducted proves more than sufficient. Administrative Expense Charge. We assess each subaccount of the Variable Account with a daily charge at an annual rate of .10% of the average daily net assets of the subaccount. We assess this charge during both the Accumulation Period and the Annuity Period. This charge helps cover administrative costs such as those incurred in issuing contracts, establishing and maintaining the records relating to contracts, making regulatory filings and furnishing confirmation notices, voting materials and other communications, providing computer, actuarial and accounting services, and processing contract transactions. There is no necessary relationship between the amount of administrative charges assessed on a given contract and the amount of expenses actually incurred for that contract. TAX CHARGE We currently impose no charge for taxes payable by us in connection with the contract, other than for applicable premium taxes. We reserve the right to impose a charge for any other taxes that may become payable by us in the future for the contracts or the Variable Account. The annual administrative charge and charges against the Variable Account described above are for the purposes described. We may receive a profit as a result of these charges. SURRENDER CHARGE We do not deduct a sales charge from purchase payments. We deduct surrender charges on certain total or partial surrenders. We use the revenues from surrender charges to partially pay our expenses in the sale of the contracts, including (1) commissions, (2) promotional, distribution and marketing expenses, and (3) costs of printing and distribution of prospectuses and sales material. Free Surrenders. You can withdraw the following amounts from the contract without a surrender charge: - Any purchase payments that we received more than seven years before the surrender date and that you have not previously surrendered; - Any earnings that you have not previously surrendered; - In any contract year, up to 10% of the purchase payments that we received less than seven years before the surrender date (whether or not you have previously surrendered the purchase payments). Earnings are deemed to be withdrawn first. After all earnings have been withdrawn, all purchase payments not subject to a surrender charge are deemed to be withdrawn. After all purchase payments not subject to a surrender charge have been withdrawn, all purchase payments subject to a surrender charge are deemed to be withdrawn. We do not impose a surrender charge on (1) annuitization or (2) payment of a single sum because less than the minimum required contract value is available to provide an annuity at the annuity commencement date or (3) payment of any death benefit. In addition, we have an administrative policy to waive surrender charges for full surrenders of contracts that have been in force for at least ten years if the amount then subject to the surrender charge is less than 25% of the contract value. We have offered these contracts since 1991. Therefore, we have made no waivers. We reserve the right to change or terminate this practice at any time, both for new and for previously issued contracts. Amount of Surrender Charge. We only apply surrender charges if the amount being withdrawn exceeds the sum of the amounts listed above under "Free Surrenders" (that is, if the amount being withdrawn includes purchase payments made less than seven years prior to the surrender date). The surrender charges are:
NUMBER OF YEARS SURRENDER CHARGE SINCE PURCHASE AS A PERCENTAGE OF PAYMENT WAS APPLIED PURCHASE PAYMENT ------------------- ------------------ Less than 2 7% At least 2 but less than 4 6% At least 4 but less than 5 5% At least 5 but less than 6 3% At least 6 but less than 7 1% 7 or more 0%
We anticipate the surrender charge will not be sufficient to cover our distribution expenses. To the extent that the surrender charge is insufficient, we will pay such costs from our general account assets. These assets will include any profit that we derive from the mortality and expense risk charge. Nursing Care/Hospitalization Waiver of Surrender Charges. We do not deduct surrender charges for a total or partial withdrawal: - after a covered person has been confined in a hospital or skilled health care facility for at least 60 consecutive days and the covered person continues to be confined in the hospital or skilled care facility when the request is made, or - within 60 days following a covered person's discharge from a hospital or skilled health care facility after confinement of at least 60 consecutive days. Confinement must begin after the effective date of this provision. Covered persons are the contract owner or owners and the spouse of any contract owner if the spouse is the Annuitant. We will not waive surrender charges when a confinement is due to (1) substance abuse, or (2) mental or personality disorders without a demonstrable organic disease. We consider a degenerative brain disease such as Alzheimer's Disease an organic disease. We provide this nursing care/hospitalization waiver of surrender charges by means of a rider to the contract. This rider has not been approved in all states. When you apply for a contract, you should check with your Fortis Benefits representative to determine if this rider is available in your state. DISABILITY WAIVER OF SURRENDER CHARGES We will waive surrender charges on total or partial surrenders under the following circumstances: (1) if you become totally disabled after the contract is issued, or (2) if the owner is a non-natural person, and the Annuitant becomes totally disabled after the contract is issued. However, waivers of surrender charges are subject to the following conditions: (1) We will only waive surrender charges on total or partial surrenders of purchase payments that were made prior to the owner's or the Annuitant's total disability, and 18 75 (2) the owner's or the Annuitant's total disability must have begun before the owner or the Annuitant has reached age 64, and (3) the owner's or the Annuitant's total disability must have been continuous for a period of twelve months or more. This benefit terminates on the 65th birthday of the owner, or the 65th birthday of the Annuitant if the owner is a non-natural person. "Total Disability" means: - the inability to engage in an occupation for compensation or profit. "Occupation" has one of two definitions. The applicable definition depends on the length of the disability. "Occupation" is defined as: (1) the inability to perform the substantial and material duties of the owner's or the Annuitant's regular occupation during the first twelve months of disability, and (2) any job suited to the owner's or the Annuitant's education, training, or experience after the first twelve months of disability. We provide this "Disability Waiver of Surrender Charges" by attaching a rider to the contract. This rider has not been approved in all states. You should check with your sales representative to determine if this rider is available in your state. MISCELLANEOUS The Variable Account invests in shares of the portfolios. Therefore, the net assets of the Variable Account will reflect the investment advisory fees and certain other expenses incurred by the portfolios and described in their prospectus. REDUCTION OF CHARGES We will not impose a surrender charge under any contract owned by: (A) Fortis, Inc. or its subsidiaries, and the following persons associated with such companies, if at the contract issue date they are: (1) officers and directors; (2) employees; or (3) spouses of any such persons or any of such persons' children, grandchildren, parents, grandparents, or siblings--or spouses of any of these persons; (B) Series Fund directors, officers, or their spouses (or such persons' children, grandchildren, parents or grandparents, or spouses of any such persons); and (C) representatives or employees (or their spouses) of Fortis Investors (including agencies) or of other broker-dealers having a sales agreement with Fortis Investors (or such persons' children, grandchildren, parents, or grandparents, or spouses of any such persons). GENERAL PROVISIONS THE CONTRACTS The entire contract includes any application, amendment, rider, endorsement, and revised contract pages. Only an officer of Fortis Benefits can agree to change or waive any provision of a contract. Any change or waiver must be in writing and signed by an officer of Fortis Benefits. The contracts are non-participating and do not share in dividends or earnings of Fortis Benefits. POSTPONEMENT OF PAYMENT We may defer for up to 15 days the payment of any amount attributable to a purchase payment made by check to allow the check reasonable time to clear. For a description of other circumstances in which amounts payable out of Variable Account assets could be deferred, see "Postponement of Payments" in the Statement of Additional Information. We may also defer payment of surrender proceeds payable out of the fixed account for a period of up to 6 months. MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS If the Annuitant's age or sex was misstated, we pay the amount that the purchase payments paid would have purchased at the correct age and sex. If we make any overpayment because of incorrect information about age or sex, or any other miscalculation, we deduct the overpayment from the next payment due. We add underpayments to the next payment. We credit or charge the amount of any adjustment with interest at the rate of 3% annually. ASSIGNMENT Owners and payees may assign their rights and interests under a Qualified Contract only in certain narrow circumstances referred to in the contract. Owners and other payees may assign their rights and interests under Non-Qualified Contracts, including their ownership rights. We take no responsibility for the validity of any assignment. Owners and payees must make a change in ownership rights in writing and send it to our home office. The change will be effective on the date made, although we are not bound by a change until the date we record it. The rights under a contract are subject to any assignment of record at our home office. An assignment or pledge of a contract may have adverse tax consequences. See below under "Federal Tax Matters". BENEFICIARY You may name or change a beneficiary or a contingent beneficiary before the annuity commencement date. You must send a written request of the change to Fortis Benefits. Certain retirement programs may require spousal consent to name or change a beneficiary. Applicable tax laws and regulations may limit the right to name a beneficiary other than the spouse. We are not responsible for the validity of any change. A change will take effect as of the date it is signed but will not affect any payments we make or action we take before receiving the written request. We also need the consent of any irrevocably named person before making a requested change. Upon the death of an owner, or Annuitant, if the owner is a non-natural person, prior to the annuity commencement date, the beneficiary will be deemed as follows: - If there is any surviving owner, the surviving owner will be the beneficiary (this overrides any other beneficiary designation). 19 76 - If there is no surviving owner, the beneficiary will be the beneficiary designated by the owner. - If there is no surviving owner and no surviving beneficiary who has been designated by the owner, then the estate of the last surviving owner will be the beneficiary. REPORTS We will mail to the owner (or to the person receiving payments during the Annuity Period), at the last known address of record, any report and communication required by any applicable law or regulation. You should therefore give us prompt written notice of any address change. This will include annual audited financial statements of the portfolios, but not necessarily of the Variable Account or Fortis Benefits. RIGHTS RESERVED BY FORTIS BENEFITS We reserve the right to make certain changes if, in our judgment, they would best serve the interests of owners and Annuitants or would be appropriate in carrying out the purposes of the contracts. We will make any change only as permitted by applicable laws. We will obtain your approval of the changes and approval from any appropriate regulatory authority if required by law. Examples of the changes we may make include: - To operate the Variable Account in any form permitted under the Investment Company Act of 1940 or in any other form permitted by law. - To transfer any assets in any subaccount to another subaccount, or to one or more separate accounts, or to the fixed account; or to add, combine, or remove subaccounts in the Variable Account. - To substitute, for the portfolio shares held in any subaccount, the shares of another portfolio or the shares of another investment company or any other investment permitted by law. - To make any changes required by the Internal Revenue Code or by any other applicable law in order to continue treatment of the contract as an annuity. - To change the time or time of day at which a Valuation Date is deemed to have ended. - To make any other necessary technical changes in the contract in order to conform with any action the above provisions permit us to take, including to change the way we assess charges, but without increasing as to any then outstanding contract the aggregate amount of the types of charges that we have guaranteed. DISTRIBUTION Woodbury Financial Services, Inc. ("Woodbury Financial") is the principal underwriter of the contracts. The contracts will be sold by individuals who are licensed by state insurance authorities to sell the contracts of Fortis Benefits, and (1) are registered representatives of Woodbury Financial, or (2) are registered representatives of other broker-dealer firms or (3) are representatives of other firms that are exempt from broker dealer regulation. Fortis Investors and any other broker-dealer firms are (1) registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 as broker-dealers, and (2) members of the National Association of Securities Dealers, Inc. Woodbury Financial will pay an allowance to its registered representatives and selling brokers in varying amounts. Woodbury Financial does not expect the allowances under normal circumstances to exceed 6.25% of purchase payments plus a servicing fee of .25% of contract value per year, starting in the first contract year. Woodbury Financial may, under certain flexible compensation arrangements, pay lesser or greater selling allowances and larger or smaller service fees to its registered representatives and other broker dealer firms than as set forth above. However, in such case, such flexible compensation arrangements will have actuarial present values that are approximately equivalent to the amounts of the selling allowances and service fees set forth above. Additionally, registered representatives, broker-dealer firms and exempt firms may qualify for additional compensation based upon meeting certain production standards. Woodbury Financial may charge back commissions paid to others if the contract upon which the commission was paid is surrendered or cancelled within certain specified time periods. Fortis Benefits paid a total of $32,874,801, $48,774,402 and $55,661,956 to Woodbury Financial for annuity contract distribution services during 1998, 1999 and 2000 respectively, $5,389,151 in 1998, $7,643,966 in 1999 and $9,648,917 was not reallowed to other broker-dealers or exempt firms. In the distribution agreement, Fortis Benefits has agreed to indemnify Woodbury Financial (and its agents, employees, and controlling persons) for certain damages and expenses, including those arising under federal securities laws. Fortis Benefits or Woodbury Financial may also provide additional compensation to broker-dealers in connection with sales of contracts. Compensation may include financial assistance to broker-dealers in connection with (1) conferences, (2) sales or training programs for their employees, (3) seminars for the public, (4) advertising, (5) sales campaigns regarding contracts, and (6) other broker-dealer sponsored programs or events. Compensation may also include trips taken by invited sales representatives and their family members to locations within or without the United States for business meetings or seminars. Fortis Benefits or Woodbury Financial may pay travel expenses that arise from these trips. See Notes to Fortis Benefits' Financial Statements as to amounts it has paid to Fortis, Inc. for various services. Woodbury Financial is an indirect subsidiary of The Hartford Financial Services Group, Inc. Woodbury Financial principal business address is the same as that of our home office. Fortis Investors is not obligated to sell any specific amount of interests under the contracts. $110,000,000 of interests in the fixed account and an indefinite amount of interests in the Variable Account have been registered with the Securities and Exchange Commission. FEDERAL TAX MATTERS The following description is a general summary of the tax rules, primarily related to federal income taxes. These rules are based on laws, regulations and interpretations that are subject to change at any time. This summary is not comprehensive. We do not intend it as tax advice. Federal estate and gift tax considerations, as well as 20 77 state and local taxes, may also be material. You should consult a qualified tax adviser as to the tax implications of taking any action under a contract or related retirement plan. NON-QUALIFIED CONTRACTS Section 72 of the Internal Revenue Code ("Code") governs the taxation of annuities in general. Neither you nor any other person may exclude or deduct purchase payments under Non-Qualified Contracts from gross income. However, you are not currently taxed, until receipt, on any increase in the accumulated value of a Non-Qualified Contract that results from (1) the investment performance of the Variable Account, or (2) interest credited to the fixed account. Owners who are not natural persons ARE taxed annually on any increase in the contract value subject to exceptions. You may wish to discuss this with your tax adviser. The following discussion applies generally to contracts owned by natural persons. In general, surrenders or partial withdrawals under contracts are taxed as ordinary income to the extent of the accumulated income or gain under the contract. If you assign or pledge any part of the value of a contract, you pay on the value so pledged or assigned to the same extent as a partial withdrawal. With respect to annuity payment options, the tax consequences may vary depending on the option elected under the contract. Until the "investment in the contract" is recovered, generally only the portion of the annuity payment that represents the amount by which the contract value exceeds the "investment in the contract" will be taxed. In general, "investment in the contract" is the aggregate amount of purchase payments made. After recovery of an Annuitant's or other payee's "investment in the contract," the full amount of any additional annuity payments is taxable. For variable annuity payments, in general, the taxable portion of each annuity payment (prior to recovery of the "investment in the contract") is the amount of the payment less the nontaxable portion. The nontaxable portion of each payment is the "investment in the contract" divided by the total number of expected annuity payments. For fixed annuity payments, in general, prior to recovery of the "investment in the contract," there is no tax on the amount of each payment that bears the same ratio to that payment as the "investment in the contract" bears to the total expected value of the annuity payments for the term of the payments. However, the remainder of each annuity payment is taxable. The taxable portion of a distribution (in the form of an annuity or a single sum payment) is taxed as ordinary income. For purposes of determining the amount of taxable income resulting from distributions, all contracts and other annuity contracts we or our affiliates issue to you within the same calendar year will be treated as if they were a single contract. You, or any other payee, will pay a 10% penalty on the taxable portion of a "premature distribution." Generally, an amount is a "premature distribution" unless the distribution is: - made on or after you or another payee reach age 59 1/2, or is - made to a beneficiary on or after your death, or is - made upon your disability or that of another payee, or is - part of a series of substantially equal annuity payments for your life or life expectancy, or is - part of a series of substantially equal annuity payments for the life or life expectancy of you AND your beneficiary. Premature distributions may result, for example, from: - an early annuity commencement date - an early surrender or partial surrender of a contract - an assignment of a contract - the early death of an Annuitant other than you or another person receiving annuity payments under the contract If you transfer ownership of a contract, or designate an Annuitant or payee other than yourself, you may have certain income or gift tax consequences that are beyond the scope of this discussion. If you are contemplating any transfer or assignment of a contract, you should contact a competent tax adviser. REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CONTRACTS In order that a Non-Qualified Contract be treated as an annuity contract for federal income tax purposes, Section 72(s) of the Code requires: - if any person receiving annuity payments dies on or after the annuity commencement date but prior to the time the entire interest in the contract has been distributed, the remaining portion of such interest will be distributed at least as rapidly as under the method of distribution being used as of the date of the person's death; and - if you die prior to the annuity commencement date, the entire interest in the contract will be distributed: - within five years after your death, or - as annuity payments that will begin within one year of your death and will be made over your designated beneficiary's life or over a period not extending beyond the life expectancy of that beneficiary. However, if the owner's designated beneficiary is the surviving spouse, the surviving spouse may continue the contract as the new contract owner. Where the owner or other person receiving payments is not a natural person, the required distributions under Section 72(A) apply on the death of the primary Annuitant. The Internal Revenue Service has not issued regulations interpreting the requirements of Section 72(s) (although it has issued proposed regulations interpreting similar requirements for qualified plans). We intend to review and modify the contract if necessary to ensure that it complies with the requirements of Section 72(s) when clarified by regulation or otherwise. Generally, the above requirements will be satisfied with a single sum payment where the death occurs prior to the annuity commencement date. A single sum payment will be subject to proof of the owner's death. The beneficiary, however, may elect by written request to receive an annuity option instead of a lump sum payment. However, if the election is not made within 60 days of the date the single sum death benefit otherwise becomes payable, the IRS may disregard the election for tax 21 78 purposes and tax the beneficiary as if a single sum payment had been made. QUALIFIED CONTRACTS The contracts may be used with several types of tax-qualified plans. The tax rules applicable to owners, Annuitants, and other payees vary according to the type of plan and the terms and conditions of the plan itself. In general, purchase payments made under a tax qualified plan on your behalf are excludable from your gross income during the Accumulation Period. The portion, if any, of any purchase payment that is not excluded from your gross income during the Accumulation Period constitutes your "investment in the contract". When annuity payments begin, you will receive back your "investment in the contract" if any, as a tax-free return of capital. The Code provides which portion of each payment is taxable and which portion is tax free. These rules may vary depending on the type of tax qualified plan. The contracts are available in connection with the following types of retirement plans: - Section 403(b) annuity plans for employees of certain tax-exempt organizations and public education institutions; - Section 401 or 403(a) qualified pension, profit-sharing, or annuity plans; - Individual retirement annuities ("IRAs") under Section 408(b); - Simplified employee pension plans ("SEPs") under Section 408(k); - SIMPLE IRA Plans under Section 408(p); and - Section 457 unfunded deferred compensation plans of tax-exempt organizations and private employer unfunded deferred compensation plans. The tax implications of these plans are further discussed in the Statement of Additional Information under the heading "Taxation Under Certain Retirement Plans". WITHHOLDING Annuity payments and other amounts received under contracts are subject to income tax withholding unless the recipient elects not to have taxes withheld. The amounts withheld will vary among recipients depending on the tax status of the individual and the type of payments from which taxes are withheld. Despite the recipient's election, the Code may require withholding from certain payments outside the United States. The Code may also require withholding from certain distributions from certain types of qualified retirement plans, unless the proceeds are transferred directly from the qualified plan to another qualified retirement plan. Moreover, special "backup withholding" rules may require us to disregard the recipient's election if the recipient fails to supply us with a "TIN" or taxpayer identification number (social security number for individuals), or if the Internal Revenue Service notifies us that the TIN provided by the recipient is incorrect. PORTFOLIO DIVERSIFICATION The United States Treasury Department has adopted regulations under Section 817(h) of the Code that set forth diversification requirements for investments underlying Non-Qualified Contracts. We believe that the investments will satisfy these requirements. Failure to do so would result in immediate taxation to you or another person of all income credited to Non-Qualified Contracts. Also, current regulations do not provide guidance as to any circumstances in which control over allocation of values among different investment alternatives may cause you or another person receiving annuity payments to be treated as the owners of Variable Account assets for tax purposes. We reserve the right to amend the contracts in any way necessary to avoid any such result. The Treasury Department may establish standards in this regard through regulations or rulings. Such standards may apply only prospectively, although retroactive application is possible if the Treasury Department considered such standards not to embody a new position. CERTAIN EXCHANGES Section 1035 of the Code provides generally that no gain or loss will be recognized under the exchange of a life insurance or annuity contract for an annuity contract. Thus, a properly completed exchange pursuant to the special annuity contract exchange form we provide for this purpose is not generally a taxable event under the Code. Moreover, your investment in the contract will be the same as your investment in the product you exchanged out of. Because of the complexity of these and other tax aspects in connection with an exchange, you should consult a tax adviser before making any exchange. TAX LAW RESTRICTIONS AFFECTING SECTION 403 PLANS Section 403(b)(11) of the Internal Revenue Code restricts the distribution under Section 403(b) annuity contracts of: (1) elective contributions made for years beginning after December 31, 1988; (2) earnings on those contributions; and (3) earnings on amounts held as of December 31, 1988. Distribution of these amounts may only occur upon death of the employee, attainment of age 59 1/2, separation from service, disability, or financial hardship. In addition, we may not distribute income attributable to elective contributions made after December 31, 1988. FURTHER INFORMATION ABOUT FORTIS BENEFITS GENERAL We offer and sell insurance products, including fixed and variable life insurance policies, fixed and variable annuity contracts, and group life, accident and health insurance policies. We market our products to small businesses and individuals through a national network of independent agents, brokers, and financial institutions. OWNERSHIP OF SECURITIES All of Fortis Benefits' outstanding shares are owned by Interfinancial, Inc., which is itself wholly owned by Fortis, Inc., both having an address of One Chase Manhattan Plaza, New York, N.Y. 10005. Fortis, Inc., in turn is wholly owned by Fortis International, Inc., which is wholly owned by AMEV/VSB 1990 N.V., both of which share the same address with N.V. AMEV., Archimedeslaan 10, 3584 BA, Utrecht, The Netherlands. AMEV/ VSB 1990 N.V. is 50% owned by Fortis (NL)N.V. and 50% owned, through certain subsidiaries, by Fortis (B), Boulevard Emile Jacqmain 53, 1000 Brussels, Belgium. 22 79 SELECTED FINANCIAL DATA The following is a summary of certain financial data of Fortis Benefits. This summary has been derived in part from the financial statements of Fortis Benefits included elsewhere in this prospectus. You should read the following along with these financial statements.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ (IN THOUSANDS) 2000 1999 1998 1997 1996 -------------- ---- ---- ---- ---- ---- INCOME STATEMENT DATA Premiums and policy charges $1,540,384 $1,445,529 $1,333,258 $1,238,006 $1,295,878 Net investment income............................... 279,572 238,698 234,043 228,724 206,023 Net realized gains (losses) on investment........... (17,039) 25,962 52,404 41,101 25,731 Other income........................................ 12,687 11,610 11,183 36,458 31,725 ---------- ---------- ---------- ---------- ---------- TOTAL REVENUES...................................... $1,815,604 $1,721,799 $1,630,888 $1,544,289 $1,559,357 ========== ========== ========== ========== ========== Total benefits and expenses......................... $1,686,930 $1,598,266 $1,538,604 $1,442,059 $1,470,066 Federal Income taxes................................ 41,555 40,327 30,402 35,120 31,099 Net income.......................................... 88,119 83,206 61,882 67,110 58,192 BALANCE SHEET DATA Total assets........................................ $9,691,784 $9,610,139 $7,578,055 $6,819,484 $5,951,876 Total liabilities................................... 8,861,060 8,760,587 6,692,587 5,939,378 5,171,203 Total shareholder's equity.......................... 830,724 849,552 885,468 880,106 780,673
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2000 COMPARED TO 1999 REVENUES The Company's major products are group disability and dental, group medical, group life, and annuity and individual life insurance coverages sold through a network of independent agents and brokers. In the fourth quarter of 1999, the Company assumed a block of business from an affiliated Company, United Family Life Insurance Company. This assumed business is primarily pre-need life insurance designed to pre-fund funeral expenses and is sold as individual and group life and annuity products. Pre-need business represents $148 million and $36 million of gross premiums in 2000 and 1999 respectively. Group disability and dental, group medical, group life, annuity and individual life and pre-need represented 39%, 25%, 18%, 8% and 10%, respectively of premium in 2000 and 39%, 32%, 18%, 8% and 3% respectively in 1999. Rate increases in the group medical line resulted in non-renewal of existing business and lower new sales, which account for the decrease in premium from 1999 to 2000. Group medical sales began to recover during 2000. The Company continues to match investment portfolio composition to liquidity needs and capital requirements. Investment income increased from $239 million in 1999 to $280 million in 2000 due to the Company's larger invested asset base from the assumed pre-need business. Changes in interest rates during 2000 and 1999 resulted in recognition of realized gains and losses upon sales of securities. The Company had more capital losses from fixed income investments in 2000 as compared to 1999. During 1999, the Company decreased its common stock holdings as a result of investment portfolio realignment, which resulted in equity gains. BENEFITS The total year-to-date policyholder benefit to premium ratio decreased to 79% in 2000 from 80% in 1999. The group disability and dental, group medical, group life and pre-need benefit to premium ratios for the year ended December 31, were 82%, 74%, 67% and 98% respectively in 2000 and 83%, 80%, 70% and 87% respectively in 1999. The group medical business experienced a lower benefit to premium ratio due to rate increases implemented in 1998 causing an increase in a higher quality base of business in 2000. Group life had improved mortality in 2000. The annuity line experienced lower interest credited due to the continued decline in the size of the fixed account block. The pre-need benefit to premium ratio at the end of 1999 represents one-quarter of business as it was assumed from an affiliated Company during the last quarter of 1999. EXPENSES Commission rates have decreased from the levels in 1999. This is primarily due to changes in the mix of business by product lines as well as the change in first year versus renewal premiums. The Company's general and administrative expense to premium ratio increased slightly to 23% in 2000 up from 22% in 1999. Project and system costs as well as new sales efforts are the primary reason for this increase. The Company continues to monitor expenses, striving to improve the expense to premium ratio, while maintaining quality and timely services to policyholders. EVENTS SUBSEQUENT On January 25, 2001, Fortis, Inc. agreed to sell (the "Sale") 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 and annuity contracts (collectively, the "Insurance Contracts") written by Fortis Benefits Insurance Company, First Fortis Life Insurance Company, Fortis Insurance Company, John Alden Life Insurance Company and Houston National Life Insurance Company (the "Companies"). 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 Companies, Hartford Life and Annuity Insurance Company and Hartford Life Insurance Company, indirect wholly owned subsidiaries of The Hartford, will reinsure the Insurance Contracts on a 100% coinsurance 23 80 basis (or a 100% modified coinsurance basis for some of the block) and perform administration of such Insurance Contracts. In addition, Hartford Life and Accident Insurance Company, another indirect wholly owned subsidiary of The Hartford, will purchase all of the outstanding stock of Fortis Advisers, Inc., which is the investment adviser for the Fund. Thus, upon completion of the Sale, Hartford Life and Accident Insurance Company will own and control Fortis Advisers, Inc. and its subsidiaries, including Fortis Investors, Inc., which is the principal distributor of the Fund. The Sale was completed on April 1, 2001. Following the Sale, the Fund entered into new investment advisory, subadvisory and distribution agreements with affiliates of the Hartford. These new agreements will require approval of the Fund's shareholders and by Insurance Contract holders to the extent required by law. 1999 COMPARED TO 1998 REVENUES The Company's major products are group disability and dental, group medical, group life, and annuity and individual life insurance coverages sold through a network of independent agents and brokers. In the fourth quarter of 1999, the Company assumed a block of business from an affiliated Company, United Family Life Insurance Company. This assumed business is primarily pre-need life insurance designed to pre-fund funeral expenses and is sold as individual and group life and annuity products. Pre-need business represents $36 million in gross premium in 1999. Group disability and dental, group medical, group life, annuity and individual life and pre-need represented 39%,32%, 18%, 8% and 3%, respectively of premium in 1999 and 38%, 36%, 19%, 7% and 0% respectively in 1998. The Company had less capital gains from fixed income investments in 1999 as compared to 1998. During 1999, the Company decreased its common stock holdings as a result of investment portfolio realignment which resulted in equity gains. The Company continues to match investment portfolio composition to liquidity needs and capital requirements. Changes in interest rates during 1999 and 1998 resulted in recognition of realized gains and losses upon sales of securities. BENEFITS The total year-to-date policyholder benefit to premium ratio decreased to 80% in 1999 from 83% in 1998. The group disability and dental, group medical, group life, annuity and individual life, and pre-need benefit to premium ratios for the year ended December 31, were 83%, 80%, 70%, 94%, and 87% respectively in 1999 and 83%, 85%, 73%, 108% and 0% respectively in 1998. The group medical business experienced a lower premium to benefit ratio due to rate increases and better management of claims. Group life had improved mortality in 1999. The annuity and individual life business also experienced strong market performance, in addition to lower interest crediting on the Company's interest sensitive and investment products. EXPENSES Commission rates have decreased from the levels in 1998. This is primarily due to changes in the mix of business by product lines as well as the change in first year versus renewal premiums. The Company's general and administrative expense to premium ratio decreased slightly to 22% in 1999 down from 23% in 1998. A principal reason for this expense reduction is the combining of three group medical cost centers into one. The Company continued to monitor expenses, striving to improve the expense to premium ratio, while maintaining quality and timely services to 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 contractowners bear the investment risk related to the variable products. Therefore, the risks associated with the investments supporting the variable separate accounts are assumed by contractowners, 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 market value of cash, short-term investments and publicly traded bonds and stocks is at least equal to all policyholder reserves and liabilities. The Company's portfolio is readily marketable and convertible to cash to a degree sufficient to provide for short-term needs. The Company consistently monitors its liability durations and invests assets accordingly. The Company has no material commitments or off-balance sheet financing arrangements, which would reduce sources of funds in the upcoming year. 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 24 81 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 calculations 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's fixed maturity investments consisted of XX% investment grade bonds as of December 31, 2000 and the Company does not expect this percentage to change significantly in the future. VOTING PRIVILEGES In accordance with our view of current applicable law, we will vote shares of each of the portfolios attributable to a contract at regular and special meetings of the shareholders of the portfolios. We will vote those shares in proportion to instructions we receive from the persons having the voting interest in the contract as of the record date for the corresponding portfolio shareholders meeting. Owners have the voting interest during the Accumulation Period, persons receiving annuity payments have the voting interest during the Annuity Period, and beneficiaries have the voting interest after the death of the Annuitant or owner. However, if the Investment Company Act of 1940 or any rules thereunder should be amended or if the present interpretation thereof should change, and as a result we determine that we are permitted to vote shares of the portfolios in our own right, we may elect to do so. We determine the number of shares of a portfolio attributable to a contract as follows: - During the Accumulation Period, we divide the amount of contract value in a subaccount by the net asset value of one share of the portfolio corresponding to that subaccount. We make this calculation as of the record date for the applicable portfolio. - During the Annuity Period, or after the death of the Annuitant or owner, we make a similar calculation. However, for subaccount value we use the liability for future variable annuity payments allocable to that subaccount as of the record date for the applicable portfolio. We calculate the liability for future variable annuity payments on the basis of the following on the record date: - mortality assumptions, - the assumed interest rate used in determining the number of Annuity Units under the contract, and - the applicable Annuity Unit value During the Annuity Period, the number of votes attributable to a contract will generally decrease since funds set aside to make the annuity payments will decrease. We will vote shares for which we have not received timely instructions, and any shares attributable to excess amounts we have accumulated in the related subaccount, in proportion to the voting instructions which we receive for all contracts and other variable annuity contracts participating in a portfolio. To the extent that we or any affiliated company holds any shares of a portfolio, those shares will be voted in the same proportion as instructions for that portfolio from all our policy holders holding voting interests in that portfolio. Shares held by separate accounts other than the Variable Account will in general be voted in accordance with instructions of owners in such other separate accounts. This diminishes the relative voting influence of the contracts. Each person having a voting interest in a subaccount of the Variable Account will receive proxy material, reports and other materials relating to the appropriate portfolio. Under the procedures described above, these persons may give instructions regarding: - the election of the Board of Directors of the portfolios, - ratification of the selection of a portfolio's independent auditors, - the approval of the investment managers of a portfolio, - changes in fundamental investment policies of a portfolio, and - all other matters that are put to a vote of portfolio shareholders OTHER INFORMATION We have filed Registration Statements with the Securities and Exchange Commission under the Securities Act of 1933 as amended, with respect to the contracts discussed in this prospectus. We have not included in the prospectus all of the information set forth in the Registration Statement, amendments, and exhibits thereto. We intend statements contained in this prospectus about the content of the contracts and other legal instruments to be summaries. For a complete statement of the terms of these documents, you should refer to the instruments filed with the Securities and Exchange Commission. A Statement of Additional Information is available upon request. Its contents are as follows: CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION Fortis Benefits and the Variable Account....... Calculation of Annuity Payments................ Postponement of Payments....................... Services....................................... - Safekeeping of Variable Account Assets..... - Experts.................................... - Principal Underwriter...................... Taxation Under Certain Retirement Plans........ Withholding.................................... Other Information.............................. Variable Account Financial Statements.......... APPENDIX A--Performance Information............
FORTIS BENEFITS FINANCIAL STATEMENTS The financial statements of Fortis Benefits that are included in this prospectus should be considered primarily as bearing on our ability to meet our obligations under the contracts. The contracts are not entitled to participate in our earnings, dividends or surplus. 25 82 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of Fortis Benefits Insurance Company In our opinion, the accompanying balance sheet and the related statements of income, of changes in shareholder's equity and of cash flows present fairly, in all material respects, the financial position of Fortis Benefits Insurance Company, an indirect, wholly-owned subsidiary of Fortis (B) and Fortis (NL) N.V. (the Company) at December 31, 2000, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, 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 audit provides a reasonable basis for our opinion. The financial statements of the Company as of December 31, 1999 and for the two years in the period then ended were audited by other independent accountants whose report dated February 17, 2000 expressed an unqualified opinion on those statements. [/s/ PRICEWATERHOUSECOOPERS LLP] February 15, 2001 F-1 83 REPORT OF INDEPENDENT AUDITORS Board of Directors Fortis Benefits Insurance Company We have audited the accompanying balance sheet of Fortis Benefits Insurance Company, an indirect, wholly-owned subsidiary of Fortis (B) and Fortis (NL) N.V., as of December 31, 1999, and the related statements of income, changes in shareholder's equity and cash flows for each of the two years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fortis Benefits Insurance Company at December 31, 1999, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. [/s/ ERNST & YOUNG] Minneapolis, Minnesota February 17, 2000 F-2 84 BALANCE SHEETS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 ------------------------ 2000 1999 ---------- ---------- ASSETS Investments: Fixed maturities, at fair value (amortized cost 2000 -- $2,543,040; 1999 -- $2,802,697)................ $2,530,480 $2,706,372 Equity securities, at fair value (cost 2000 -- $91,164; 1999 -- $81,554)....................................... 87,912 85,021 Mortgage loans on real estate, less allowance for possible losses (2000 and 1999 -- $11,085)...................... 810,616 754,514 Policy loans.............................................. 102,308 83,439 Short-term investments.................................... 152,736 115,527 Real estate and other investments......................... 41,712 47,502 ---------- ---------- 3,725,764 3,792,375 Cash and cash equivalents................................... 13,209 18,670 Receivables: Uncollected premiums...................................... 66,505 62,938 Reinsurance recoverable on unpaid and paid losses......... 64,182 23,471 Other..................................................... 48,083 19,406 ---------- ---------- 178,770 105,815 Accrued investment income................................... 52,556 55,464 Deferred policy acquisition costs........................... 473,761 430,192 Property and equipment at cost, less accumulated depreciation.............................................. 20,891 25,118 Federal income tax recoverable.............................. 7,248 -- Deferred federal income taxes............................... 33,825 52,467 Other assets................................................ 1,677 1,582 Due from affiliates......................................... -- 8,304 Assets held in separate accounts............................ 5,184,083 5,120,152 ---------- ---------- Total assets................................................ $9,691,784 $9,610,139 ========== ==========
The accompanying notes are an integral part of the financial statements. F-3 85 BALANCE SHEETS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 ------------------------ 2000 1999 ---------- ---------- POLICY RESERVES AND LIABILITIES AND SHAREHOLDER'S EQUITY Policy reserves and liabilities: Future policy benefit reserves: Traditional and pre-need life insurance................ $1,170,612 $1,106,269 Interest sensitive and investment products............. 970,591 1,147,657 Accident and health.................................... 1,007,328 940,865 ---------- ---------- 3,148,531 3,194,791 Unearned revenues......................................... 33,614 28,673 Other policy claims and benefits payable.................. 240,677 265,486 Policyholder dividends payable............................ 7,438 7,939 ---------- ---------- 3,430,260 3,496,889 Accrued expenses.......................................... 69,476 59,409 Current income taxes payable.............................. -- 1,838 Other liabilities......................................... 181,633 120,110 Due to affiliates......................................... 4,497 -- Deferred gain on LTC sale................................. 15,919 -- Liabilities related to separate accounts.................. 5,159,275 5,082,341 ---------- ---------- Total policy reserves and liabilities....................... 8,861,060 8,760,587 ---------- ---------- Shareholder's equity: Common stock, $5 par value: authorized, issued and outstanding shares -- 1,000,000........................ 5,000 5,000 Additional paid-in capital................................ 468,000 468,000 Retained earnings......................................... 366,644 427,811 Accumulated other comprehensive loss...................... (8,920) (51,259) ---------- ---------- Total shareholder's equity.................................. 830,724 849,552 ---------- ---------- Total policy reserves and liabilities and shareholder's equity.................................................... $9,691,784 $9,610,139 ========== ==========
The accompanying notes are an integral part of the financial statements. F-4 86 STATEMENTS OF INCOME FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
YEARS ENDED DECEMBER 31 -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- REVENUES: Insurance operations: Traditional life insurance premiums....................... $ 428,641 $ 301,377 $ 260,567 Interest sensitive and investment product policy charges................................................ 159,728 141,285 119,039 Accident and health insurance premiums.................... 952,015 1,002,867 953,652 ---------- ---------- ---------- 1,540,384 1,445,529 1,333,258 Net investment income....................................... 279,572 238,698 234,043 Net realized (losses) gains on investments.................. (17,039) 25,962 52,404 Other income................................................ 12,687 11,610 11,183 ---------- ---------- ---------- Total revenues.............................................. 1,815,604 1,721,799 1,630,888 BENEFITS AND EXPENSES: Benefits to policyholders: Traditional life insurance................................ 335,022 218,993 189,337 Interest sensitive investment products.................... 89,062 93,668 96,178 Accident and health claims................................ 749,945 812,149 798,036 ---------- ---------- ---------- 1,174,029 1,124,810 1,083,551 Policyholder dividends...................................... 2,685 3,114 3,486 Amortization of deferred policy acquisition costs........... 47,215 43,078 33,365 Insurance commissions....................................... 128,267 124,601 118,710 General and administrative expenses......................... 333,734 302,663 299,492 ---------- ---------- ---------- Total benefits and expenses................................. 1,685,930 1,598,266 1,538,604 ---------- ---------- ---------- Income before federal income taxes.......................... 129,674 123,533 92,284 Federal income taxes........................................ 41,555 40,327 30,402 ---------- ---------- ---------- Net income.................................................. $ 88,119 $ 83,206 $ 61,882 ========== ========== ==========
The accompanying notes are an integral part of the financial statements. F-5 87 STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE TOTAL STOCK CAPITAL EARNINGS (LOSS) INCOME --------- ------ ---------- --------- ------------- Balance, December 31, 1997.......... $ 880,106 $5,000 $468,000 $ 332,723 $ 74,383 Comprehensive income: Net income..................... 61,882 -- -- 61,882 -- Change in unrealized gain (losses) on investments, net.......................... (6,520) -- -- -- (6,520) --------- Total comprehensive income........ 55,362 Dividend.......................... (50,000) -- -- (50,000) -- --------- ------ -------- --------- --------- Balance, December 31, 1998.......... 885,468 5,000 468,000 344,605 67,863 Comprehensive income: Net income..................... 83,206 -- -- 83,206 -- Change in unrealized gain (losses) on investments, net.......................... (119,122) -- -- -- (119,122) --------- Total comprehensive loss.......... (35,916) --------- ------ -------- --------- --------- Balance, December 31, 1999.......... 849,552 5,000 468,000 427,811 (51,259) Comprehensive income: Net income..................... 88,119 -- -- 88,119 -- Change in unrealized gain (losses) on investments, net.......................... 42,339 -- -- -- 42,339 --------- Total comprehensive income........ 130,458 Dividend.......................... (149,286) -- -- (149,286) -- --------- ------ -------- --------- --------- Balance, December 31, 2000.......... $ 830,724 $5,000 $468,000 $ 366,644 $ (8,920) ========= ====== ======== ========= =========
The accompanying notes are an integral part of the financial statements. F-6 88 STATEMENTS OF CASH FLOWS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
YEARS ENDED DECEMBER 31 ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................... $ 88,119 $ 83,206 $ 61,882 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation.......................... 4,830 12,807 12,409 Amortization of gain on reinsured business.......... (3,100) -- -- Amortization of investment (discounts) premiums, net............................................... 1,574 1,930 (3,200) Net realized losses (gains) on sold investments..... 13,910 (25,962) (52,404) Write-off of investment............................. 3,129 -- -- Policy acquisition costs deferred................... (113,927) (96,308) (73,147) Amortization of deferred policy acquisition costs... 47,215 43,078 33,365 Provision for deferred federal income taxes......... (4,151) 29,454 417 Decrease in income taxes recoverable................ (9,086) (2,330) (6,381) Change in receivables, accrued investment income, unearned premiums, accrued expenses, other assets, due to and from affiliates and other liabilities....................................... (48,646) 27,227 (4,455) Increase (decrease) in future policy benefit reserves for traditional, interest sensitive and accident and health policies...................... 158,150 97,931 106,135 (Decrease) increase in other policy claims and benefits and policyholder dividends payable....... (25,303) 5,012 (2,514) Other............................................... -- -- 169 ----------- ----------- ----------- Net cash provided by operating activities................ 112,714 176,045 72,276 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed maturity investments.................. (1,546,720) (1,654,104) (2,380,511) Sales and repayments of fixed maturity investments....... 1,777,428 1,675,488 2,428,207 (Increase) decrease in short-term investments............ (37,208) (83,659) 38,669 Purchases of other investments........................... (363,978) (305,889) (408,998) Sales of other investments............................... 298,925 353,267 352,873 Purchases of property and equipment...................... (603) (7,213) (356) Cash received pursuant to reinsurance agreement.......... 17,591 3,374 -- ----------- ----------- ----------- Net cash provided by (used in) investing activities...... 145,435 (18,736) 29,884 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Activities related to investment products: Considerations received................................ 226,139 237,375 215,693 Surrenders and death benefits.......................... (448,349) (416,537) (326,457) Interest credited to policyholders..................... 32,886 39,855 49,371 Dividend................................................. (74,286) -- (50,000) ----------- ----------- ----------- Net cash used in financing activities.................... (263,610) (139,307) (111,393) ----------- ----------- ----------- (Decrease) increase in cash and cash equivalents......... (5,461) 18,002 (9,233) Cash and cash equivalents at beginning of year........... 18,670 668 9,901 ----------- ----------- ----------- Cash and cash equivalents at end of year................. $ 13,209 $ 18,670 $ 668 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-7 89 STATEMENTS OF CASH FLOWS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
YEARS ENDED DECEMBER 31 --------------------------------- 2000 1999 1998 -------- --------- -------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: Assets and liabilities transferred in reinsurance transactions (Note 9): Non-cash assets (ceded) received: Fixed maturities.......................................... $ -- $ 517,091 $ -- Other investments......................................... -- 121,696 -- Other assets.............................................. (157) 12,763 -- Deferred acquisition costs................................ (20,829) 35,882 -- -------- --------- -------- Total value of assets (ceded) received...................... $(20,986) $ 687,432 $ -- -------- --------- -------- Non-cash liabilities ceded (assumed): Future policy benefit reserves............................ $ 15,086 $(685,932) $ -- Claim reserves............................................ 7 (4,874) -- Unearned premium reserves................................. 7,641 -- -- Other liabilities......................................... (320) -- -- -------- --------- -------- Total liabilities ceded (assumed)........................... $ 22,414 $(690,806) $ -- ======== ========= ========
The accompanying notes are an integral part of the financial statements. F-8 90 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS) 1. NATURE OF OPERATIONS Fortis Benefits Insurance Company (the Company) is an indirect wholly-owned subsidiary of Fortis, Inc. (Fortis), which itself is an indirect, wholly-owned subsidiary of Fortis (B) and Fortis (NL) N.V. The Company is incorporated in Minnesota and distributes its products in all states except New York. The Company's revenues are derived principally from group employee benefits products and from individual life and annuity products. Effective October 1, 1999, the Company assumed pre-need life insurance business from an affiliate on a 100% co-insurance basis. These life insurance and annuity products are marketed in connection with the advance funding of funeral expenses. (See Note 9 "Reinsurance" for more information on this reinsurance transaction.) Effective March 1, 2000, the Company ceded long-term care insurance business to John Hancock Life Insurance Company on a 100% co-insurance basis. (See Note 9 "Reinsurance" for more information on this reinsurance transaction.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FAS 133," which deferred to January 1, 2001 the effective date of the accounting and reporting requirements of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The adoption of SFAS 133 is not expected to have a material effect on the Company's results of operations or financial position. Effective January 1, 2000, the Company adopted Statement of Position ("SOP") 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts that do not Transfer Insurance Risk. SOP 98-7 provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk. The adoption of SOP 98-7 did not have a material effect on the Company's results of operations or financial position. INVESTMENTS The Company's investment strategy is developed based on many factors including insurance liability matching, rate of return, maturity, credit risk, tax considerations and regulatory requirements. All fixed maturity investments and all marketable equity securities are classified as available-for-sale and carried at fair value. Changes in fair values of available for sale securities, after related deferred income taxes and after adjustment for the changes in the pattern of amortization of deferred policy acquisition costs and participating policyholder dividends, are reported directly in shareholder's equity as accumulated other comprehensive income and, accordingly, have no effect on net income. The unrealized appreciation or depreciation is net of deferred policy acquisition cost amortization and taxes that would have been required as a charge or credit to income had such unrealized amounts been realized. Mortgage loans constitute first liens on commercial real estate and other income producing properties. The insurance statutes in Minnesota generally require that the initial principal loaned not exceed 80% of the appraised value of the property securing the loan. The Company's policy fully complies with this statute. Mortgage loans on real estate are reported at amortized cost, less allowance for possible losses. The change in the allowance for possible losses is recorded with realized gains and losses on investments. F-9 91 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Policy loans are reported at their unpaid balance. Short-term investments are carried at cost which approximates fair value. Real estate and other investments consist principally of property acquired in satisfaction of debt and limited partnerships, respectively. Real estate is recorded at cost or carrying value of loans foreclosed less allowances for depreciation. The Company provides for depreciation on a straight-line basis over the estimated useful lives. Other investments are accounted for using the equity method of accounting. 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. DEFERRED POLICY ACQUISITION COSTS The costs of acquiring new business, which vary with and are directly related to the production of new business, are deferred to the extent recoverable and amortized. For traditional and pre-need life insurance and long-term care products (included as accident and health products), such costs are amortized over the premium paying period. For interest sensitive and investment products, such costs are amortized in relation to expected future gross profits. Estimation of future gross profits requires significant management judgment and is reviewed periodically. As excess amounts of deferred costs over future premiums or gross profits are identified, such excess amounts are expensed. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost less accumulated depreciation. The Company provides for depreciation principally on the straight-line method over the estimated useful lives of the related property. Depreciation expense was $4,830, $12,807 and $12,409 for the year ended December 31, 2000, 1999 and 1998, respectively. INCOME TAXES Income taxes have been provided using the liability method. Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and the tax bases and are measured using the enacted tax rates. GUARANTY FUND ASSESSMENTS There are a number of insurance companies that are currently under regulatory supervision. This may result in future assessments 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. SEPARATE ACCOUNTS Revenues and expenses related to the separate account assets and liabilities are excluded from the amounts reported in the accompanying statements of income. Assets and liabilities associated with the separate accounts relate to deposits and annuity considerations for variable life and variable annuity products for which the contract owner, rather than the Company, bears the investment risk. Separate account assets are reported at fair value and represent funds held for the exclusive benefit of the variable annuity and variable life insurance contract owners. The Company receives mortality and expense risk fees from the separate accounts. The Company also deducts monthly cost of insurance charges, and receives minimum death benefit guarantee fees and issue and administrative fees from the variable life insurance separate accounts. The Company makes contractual mortality assurances to the variable annuity contract owners that the net assets of the separate accounts will not be affected by future variations in the actual life expectancy experience of the annuitants and beneficiaries from the mortality assumptions implicit in the annuity contracts. The Company makes periodic fund transfers to, or withdrawals from, the separate account assets for such actuarial adjustments for F-10 92 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) variable annuities that are 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. REVENUE RECOGNITION AND FUTURE POLICY BENEFIT RESERVES Premiums for traditional life insurance and pre-need life products are recognized as revenues when due over the premium-paying period. Reserves for future policy benefits are computed using the net level method and include investment yield, mortality, withdrawal, and other assumptions based on the Company's experience, modified as necessary to reflect anticipated trends and to include 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 benefit reserves are computed under the retrospective deposit method and consist of policy account balances before applicable surrender charges. 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 for universal life and investment products ranged from 4% to 15% in 2000, 3.5% to 12% in 1999 and 2.5% to 8.75% in 1998. 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- 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 benefits are based on the 1987 Commissioners Group Disability Table. The valuation interest rate is the Single Premium Immediate Annuity valuation rate less 100 basis points. Claims in the first five years are modified based on the Company's actual experience. 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 related liabilities are continually reviewed and updated. Any adjustments resulting therefrom are reflected in income currently. COMPREHENSIVE INCOME Comprehensive income is comprised of net income and other comprehensive income which includes unrealized gains and losses adjusted for the impact of gains and losses realized during the current year on securities classified as available-for-sale, net of the effect on deferred policy acquisition costs and taxes. STATEMENTS OF CASH FLOWS The Company considers investments with a maturity at the date of their acquisition of three months or less to be cash equivalents. These securities are carried principally at amortized cost which approximates fair value. RECLASSIFICATIONS Certain amounts in the 1999 and 1998 financial statements have been reclassified to conform to the 2000 presentation. F-11 93 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 3. INVESTMENTS AVAILABLE-FOR-SALE SECURITIES The following is a summary of the available-for-sale securities:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- AT DECEMBER 31, 2000: Fixed maturities: Governments.................................. $ 348,795 $15,261 $ 317 $ 363,739 Public utilities............................. 212,371 3,849 3,661 212,559 Industrial and miscellaneous................. 1,794,011 27,815 58,902 1,762,924 Other........................................ 187,863 4,294 899 191,258 ---------- ------- -------- ---------- Total fixed maturities......................... 2,543,040 51,219 63,779 2,530,480 Equity securities.............................. 91,164 5,160 8,412 87,912 ---------- ------- -------- ---------- Total.......................................... $2,634,204 $56,379 $ 72,191 $2,618,392 ========== ======= ======== ========== AT DECEMBER 31, 1999: Fixed maturities: Governments.................................. $ 309,402 $ 46 $ 8,934 $ 300,514 Public utilities............................. 237,579 341 10,375 227,545 Industrial and miscellaneous................. 2,208,281 7,020 81,412 2,133,889 Other........................................ 47,435 184 3,195 44,424 ---------- ------- -------- ---------- Total fixed maturities......................... 2,802,697 7,591 103,916 2,706,372 Equity securities.............................. 81,554 5,825 2,358 85,021 ---------- ------- -------- ---------- Total.......................................... $2,884,251 $13,416 $106,274 $2,791,393 ========== ======= ======== ==========
The amortized cost and fair value of available-for-sale investments in fixed maturities at December 31, 2000, by contractual maturity, are shown below.
AMORTIZED FAIR COST VALUE ---------- ---------- Due in one year or less..................................... $ 83,263 $ 83,164 Due after one year through five years....................... 610,579 609,360 Due after five years through ten years...................... 786,695 778,801 Due after ten years......................................... 1,062,503 1,059,155 ---------- ---------- Total....................................................... $2,543,040 $2,530,480 ========== ==========
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. MORTGAGE LOANS The Company has issued commercial mortgage loans on properties located throughout the United States. Approximately 37% and 38% of outstanding principal is concentrated in the states of New York, California and Florida, at December 31, 2000 and 1999, respectively. Loan commitments outstanding totaled $8,000 at December 31, 2000. F-12 94 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 3. INVESTMENTS (CONTINUED) INVESTMENTS ON DEPOSIT The Company had fixed maturities carried at $11,630 and $17,061 at December 31, 2000 and 1999, respectively, on deposit with various governmental authorities as required by law. NET UNREALIZED GAINS (LOSSES) The adjusted net unrealized gains (losses) on investments recorded in accumulated other comprehensive income for the year ended December 31, are set forth below:
TAX BEFORE-TAX BENEFIT NET-OF-TAX AMOUNT (EXPENSE) AMOUNT ---------- --------- ---------- DECEMBER 31, 2000: Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments........................................... $ 93,933 $(32,873) $ 61,060 Increase in amortization of deferred policy acquisition costs................................................. (2,314) 810 (1,504) Reclassification adjustment for gains (losses) realized in net income......................................... (26,488) 9,271 (17,217) --------- -------- --------- Other comprehensive gain................................... $ 65,131 $(22,792) $ 42,339 ========= ======== ========= DECEMBER 31, 1999: Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments........................................... $(216,270) $ 75,694 $(140,576) Decrease in amortization of deferred policy acquisition costs................................................. 9,142 (3,200) 5,942 Reclassification adjustment for gains (losses) realized in net income......................................... 23,864 (8,352) 15,512 --------- -------- --------- Other comprehensive loss................................... $(183,264) $ 64,142 $(119,122) ========= ======== ========= DECEMBER 31, 1998: Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments.............................................. $ (53,050) $ 18,420 $ (34,630) Decrease in amortization of deferred policy acquisition costs.................................................... 414 (145) 269 Reclassification adjustment for gains (losses) realized in net income............................................... 42,832 (14,991) 27,841 --------- -------- --------- Other comprehensive loss................................... $ (9,804) $ 3,284 $ (6,520) ========= ======== =========
F-13 95 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 3. INVESTMENTS (CONTINUED) NET INVESTMENT INCOME AND NET REALIZED (LOSSES) GAINS ON INVESTMENTS Major categories of net investment income and realized (losses) gains on investments for each year were as follows:
2000 1999 1998 -------- -------- -------- NET INVESTMENT INCOME: Fixed maturities............................................ $193,005 $167,027 $160,163 Equity securities........................................... 14,392 7,320 8,656 Mortgage loans on real estate............................... 68,794 57,684 57,031 Policy loans................................................ 6,617 5,272 4,653 Short-term investments...................................... 522 844 1,701 Real estate and other investments........................... 2,816 6,375 8,194 -------- -------- -------- 286,146 244,522 240,398 Expenses.................................................... (6,574) (5,824) (6,355) -------- -------- -------- $279,572 $238,698 $234,043 ======== ======== ======== NET REALIZED (LOSSES) GAINS ON INVESTMENTS: Fixed maturities............................................ $(31,179) $ (9,750) $ 34,320 Equity securities........................................... 4,691 33,613 8,512 Mortgage loans on real estate............................... -- -- (198) Short-term investments...................................... -- -- 5 Real estate and other investments........................... 9,449 2,099 9,765 -------- -------- -------- $(17,039) $ 25,962 $ 52,404 ======== ======== ========
Proceeds from sales of investments in fixed maturities were $1,756,637, $1,627,450 and $2,460,316 in 2000, 1999 and 1998, respectively. Gross gains of $14,851, $11,996 and $44,360 and gross losses of $46,030, $21,746 and $10,040 were realized on the sales in 2000, 1999 and 1998, respectively. F-14 96 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 4. DEFERRED POLICY ACQUISITION COSTS The changes in deferred policy acquisition costs by product were as follows:
INTEREST TRADITIONAL SENSITIVE AND AND PRE-NEED INVESTMENT ACCIDENT LIFE PRODUCTS AND HEALTH TOTAL ------------ ------------- ---------- -------- Balance, December 31, 1998.................... $ 14,560 $314,462 $ 2,916 $331,938 Acquisition costs deferred.................. 33,783 81,016 17,391 132,190 Acquisition costs amortized................. (2,438) (38,831) (1,809) (43,078) Decreased amortization of deferred acquisition costs from unrealized losses on available-for-sale securities......... -- 9,142 -- 9,142 -------- -------- -------- -------- Balance, December 31, 1999.................... 45,905 365,789 18,498 430,192 Acquisition costs deferred.................. 15,882 95,062 2,983 113,927 Acquisition costs amortized................. (14,216) (32,347) (21,481) (68,044) Increased amortization of deferred acquisition costs from unrealized gains on available-for-sale securities......... -- (2,314) -- (2,314) -------- -------- -------- -------- Balance, December 31, 2000.................... $ 47,571 $426,190 $ -- $473,761 ======== ======== ======== ========
Included in total policy acquisition costs amortized in 2000 is $20,829 of acquisition costs resulting from the long-term care reinsurance cession agreement with John Hancock Life Insurance Company, which became effective March 1, 2000. See Note 9, "Reinsurance" for more information on the reinsurance transaction. Included in total policy acquisition costs deferred in 1999 is $35,882 of present value of future profits (PVP) and $1,416 of subsequent acquisition costs resulting from the reinsurance assumption agreement with United Family Life Insurance Company, an affiliate, which became effective October 1, 1999. PVP is being amortized against the expected premium revenue of the pre-need life insurance business assumed. See Note 9 "Reinsurance" for more information on this reinsurance transaction. During 2000, 1999 and 1998, the Company sold portions of its investment portfolio and in accordance with FASB Statement 97, the recognition of the realized net capital gains resulted in increased (decreased) amortization of deferred acquisition costs of $901, $(224) and $3,357, respectively. 5. PROPERTY AND EQUIPMENT A summary of property and equipment at December 31 for each year follows:
2000 1999 -------- -------- Land........................................................ $ 1,900 $ 1,900 Building and improvements................................... 27,019 26,383 Furniture and equipment..................................... 78,630 81,447 -------- -------- 107,549 109,730 Less accumulated depreciation............................... (86,658) (84,612) -------- -------- Net property and equipment.................................. $ 20,891 $ 25,118 ======== ========
F-15 97 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 6. ACCIDENT AND HEALTH RESERVES Activity for the liability for unpaid accident and health claims is summarized as follows:
YEARS ENDED DECEMBER 31 -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Balance as of January 1, net of reinsurance recoverables.... $1,139,603 $1,061,883 $ 988,036 Add: Incurred losses related to: Current year.............................................. 753,070 824,949 826,009 Prior years............................................... (25,859) (12,800) (27,973) ---------- ---------- ---------- Total incurred losses....................................... 727,211 812,149 798,036 Deduct: Paid losses related to: Current year.............................................. 428,725 468,404 469,881 Prior years............................................... 283,782 266,025 254,308 ---------- ---------- ---------- Total paid losses........................................... 712,507 734,429 724,189 ---------- ---------- ---------- Balance as of December 31, net of reinsurance recoverables.............................................. $1,154,307 $1,139,603 $1,061,883 ========== ========== ==========
The table above differs from the amounts reported on the balance sheet in the following respects: (1) the table above is presented net of ceded reinsurance and the accident and health reserves reported on the balance sheet are gross of ceded reinsurance; and (2) the table above includes accident and health benefits payable which are included with other policy claims and benefits payable reported on the balance sheet. Excluded from incurred losses presented above related to current year is $22,734 of reserves ceded resulting from the long-term care reinsurance agreement with John Hancock Life Insurance Company, which became effective March 1, 2000. See Note 9 "Reinsurance" for more information on this reinsurance transaction. In each of the years presented above, the accident and health insurance line of business experienced overall favorable development on claims reserves established as of the previous year end. The favorable development was a result of lower medical costs and a reduction of loss reserves due to lower than anticipated inflation in medical costs. The liability for unpaid accident and health claims includes $1,042,180 and $994,651 of total disability income reserves as of December 31, 2000 and 1999, respectively, which were discounted for anticipated interest earnings using a rate which varies by incurral year. 7. FEDERAL INCOME TAXES The Company reports its taxable income in a consolidated federal income tax return along with other affiliated subsidiaries of Fortis. 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. Deferred income taxes reflect the net tax effects of temporary differences between the basis of assets and liabilities for financial statement purposes and for income tax purposes. F-16 98 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 7. FEDERAL INCOME TAXES (CONTINUED) The significant components of the Company's deferred tax liabilities and assets as of December 31, 2000 and 1999 are as follows:
2000 1999 -------- -------- Deferred tax assets: Separate account assets/liabilities....................... $ 72,599 $ 60,716 Reserves.................................................. 28,244 35,843 Claims and benefits payable............................... 7,445 7,964 Accrued liabilities....................................... 10,811 6,973 Unrealized losses......................................... 5,543 32,500 Investments............................................... 14,373 4,549 Other..................................................... 8,301 6,755 -------- -------- Total deferred tax assets................................... 147,316 155,300 Deferred tax liabilities: Deferred policy acquisition costs......................... 107,948 98,539 Unrealized gains.......................................... 747 -- Fixed assets.............................................. 3,143 2,963 Investments............................................... 237 1,171 Other..................................................... 1,416 160 -------- -------- Total deferred tax liabilities.............................. 113,491 102,833 -------- -------- Net deferred tax asset...................................... $ 33,825 $ 52,467 ======== ========
The Company is required to establish a valuation allowance for any portion of the deferred tax asset 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, therefore, no such valuation allowance has been established. The Company's tax expense (benefit) for the year ended December 31 is shown as follows:
2000 1999 1998 ------- ------- ------- Current..................................................... $45,706 $10,873 $30,232 Deferred.................................................... (4,151) 29,454 170 ------- ------- ------- $41,555 $40,327 $30,402 ======= ======= =======
Federal income tax payments and refunds resulted in net payments of $54,792, $13,203 and $36,367 in 2000, 1999 and 1998, respectively. The Company's effective income tax rate varied from the statutory federal income tax rate as follows:
2000 1999 1998 ---- ---- ---- Statutory income tax rate................................... 35.0% 35.0% 35.0% Other, net.................................................. (3.0) (2.4) (2.1) ---- ---- ---- 32.0% 32.6% 32.9% ==== ==== ====
F-17 99 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 8. ASSETS HELD IN SEPARATE ACCOUNTS Separate account assets at December 31 were as follows:
2000 1999 ---------- ---------- Premium and annuity considerations for the variable annuity products and variable universal life products for which the contract holder, rather than the Company, bears the investment risk........................................... $5,159,275 $5,082,341 Assets of the separate accounts owned by the Company, at fair value................................................ 24,808 37,811 ---------- ---------- $5,184,083 $5,120,152 ========== ==========
9. REINSURANCE In the second quarter of 1996, First Fortis Life Insurance Company (First Fortis), an affiliate, received approval from the New York State Insurance Department for a reinsurance agreement with the Company. The agreement, which became effective as of January 1, 1996, decreased First Fortis' long-term disability reinsurance retention from a $10 net monthly benefit to a $2 net monthly benefit for claims incurred on and after January 1, 1996. The Company has assumed $6,884, $6,580 and $5,601 of premium from First Fortis in 2000, 1999 and 1998, respectively. The Company has assumed $14,366 and $11,047 of reserves in 2000 and 1999, respectively, from First Fortis. In the fourth quarter of 1999, United Family Life Insurance Company (UFL), an affiliate, received approval from the state of Georgia for a reinsurance agreement with the Company. The agreement, which became effective October 1, 1999, provided for the cession of substantially all of UFL's pre-need life insurance business on a 100% co-insurance basis. The Company assumed approximately $690,806 of reserves and received approximately $654,924 of cash, investments (primarily fixed maturities and mortgages) and other assets as of October 1, 1999. The $35,882 ceding commission was capitalized as an acquisition cost (as described in Note 4). The Company has assumed premium from UFL of $63,069 in 2000 and $31,523 during the period October 1, 1999 to December 31, 1999. The Company has assumed $679,969 and $690,806 of reserves in 2000 and 1999, respectively, from UFL. In the first quarter of 2000, the Company entered into a reinsurance agreement with John Hancock Life Insurance Company (John Hancock) for the sale of the Long-Term Care (LTC) line of business. The sale of the LTC line of business was effective March 1, 2000. The Company recorded a gain on this transaction of $19,019. The gain has been deferred and is being amortized as the level of direct inforce LTC policies decreases over future years, not to exceed 30 years. The amount of gain amortized in 2000 was $3,100. The Company ceded $41,309 of premiums and $32,222 of reserves to John Hancock in 2000. The maximum amount that the Company retains on any one life is $1,000 of life insurance including accidental death. Amounts in excess of $1,000 are reinsured with other life insurance companies on a yearly renewable term basis. Ceded reinsurance premiums for the year ended December 31 were as follows:
2000 1999 1998 ------- ------- ------- Life insurance.............................................. $ 7,413 $ 6,246 $ 6,983 Accident and health insurance............................... 48,403 17,803 13,862 ------- ------- ------- $55,816 $24,049 $20,845 ======= ======= =======
Recoveries under reinsurance contracts for the year ended December 31 were as follows:
2000 1999 1998 ------- ------- ------- Life insurance.............................................. $ 2,877 $ 478 $ 4,549 Accident and health insurance............................... 8,525 13,669 9,465 ------- ------- ------- $11,402 $14,147 $14,014 ======= ======= =======
F-18 100 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 9. REINSURANCE (CONTINUED) Reinsurance ceded would become a liability of the Company in the event the reinsurers are unable to meet the obligations assumed under the reinsurance agreement. To minimize its exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers. 10. DIVIDEND RESTRICTIONS Dividend distributions to the parent are restricted as to the amount by state regulatory requirements. The Company will have $42,895 free from such restrictions during 2001. Distributions in excess of this amount would require regulatory approval. In 2000, the Company declared dividends of $149,286, of which $100,000 was extraordinary. Approval was sought and received from the Minnesota Department of Commerce for the distribution of the extraordinary dividend. The Company paid $74,286 during 2000; $75,000 will be paid in 2001 and is included in other liabilities. 11. REGULATORY ACCOUNTING REQUIREMENTS Statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the Minnesota Department of Commerce. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The Company does not employ any significant permitted practices. In 1998, the NAIC adopted codified statutory accounting practices (Codification) effective January 1, 2001. Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that the Company uses to prepare its statutory-basis financial statements. Codification requires adoption by the various states before it becomes the prescribed statutory basis of accounting for insurance companies domesticated within those states. Minnesota has adopted Codification effective January 1, 2001. The cumulative effect of all changes resulting form the Codification guidance will be recorded as a direct adjustment to statutory surplus on January 1, 2001. The effect of the adoption is expected to increase statutory surplus by a material amount. 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-19 101 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 11.REGULATORY ACCOUNTING REQUIREMENTS (CONTINUED) Reconciliations of net income and shareholder's equity on the basis of statutory accounting to the related amounts presented in the accompanying statements were as follows:
NET INCOME SHAREHOLDER'S EQUITY -------------------- --------------------- 2000 1999 1998 2000 1999 -------- -------- ------- --------- -------- Based on statutory accounting practices...... $ 88,911 $ 9,387 $14,841 $ 433,955 $497,858 Deferred policy acquisition costs............ 66,712 54,049 39,782 473,761 430,192 Investment valuation differences............. 368 953 745 (19,310) (103,361) Deferred and uncollected premiums............ (732) (4,637) 511 (14,399) (13,188) Policy reserves.............................. (12,092) (20,070) (7,041) (150,668) (127,766) Commissions.................................. (45,485) 79,067 -- -- -- Current income taxes payable................. 22 (8,882) 925 (8,977) (9,000) Deferred income taxes........................ 4,151 (18,650) (417) 33,825 52,467 Realized gains on investments................ 439 9 356 -- -- Realized gains (losses) transferred to the Interest Maintenance Reserve (IMR), net of tax........................................ (17,873) (6,163) 22,748 -- -- Amortization of IMR, net of tax.............. (5,396) (8,565) (7,128) -- -- Write-off of investment...................... (3,129) -- -- -- -- Pension expense.............................. (2,145) (1,475) 81 (9,985) (8,235) Property and equipment....................... -- -- -- 3,261 591 Interest maintenance reserve................. -- -- -- 31,482 55,117 Asset valuation reserve...................... -- -- -- 70,955 72,940 Other, net................................... 14,368 8,183 (3,521) (13,176) 1,937 -------- -------- ------- --------- -------- Based on generally accepted accounting principles................................. $ 88,119 $ 83,206 $61,882 $ 830,724 $849,552 ======== ======== ======= ========= ========
12.TRANSACTIONS WITH AFFILIATED COMPANIES The Company receives various services from Fortis and its affiliates. These services include assistance in benefit plan administration, corporate insurance, accounting, tax, auditing, investment and other administrative functions. The fees paid to Fortis, Inc. for these services for years ended December 31, 2000, 1999 and 1998, were $10,094, $11,661 and $13,077, respectively. During 1997, Fortis, Inc. began providing information technology services to the Company. Information technology expenses were $47,123, $59,390 and $55,910 for years ended December 31, 2000, 1999 and 1998, respectively. In conjunction with the marketing of its fixed and variable annuity and variable life products, the Company paid $93,107, $79,413 and $72,638 in commissions to its affiliate, Fortis Investors, Inc., for the years ended December 31, 2000, 1999 and 1998, 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. 13.FAIR VALUE DISCLOSURES VALUATION METHODS AND ASSUMPTIONS The fair values for fixed maturity securities and equity securities are 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. Mortgage loans are reported at unpaid principal balance less allowances for possible losses. The fair values of mortgage loans are estimated using discounted cash flow analyses, using interest rates currently being offered for F-20 102 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 13.FAIR VALUE DISCLOSURES (CONTINUED) similar loans to borrowers with similar credit ratings. Mortgage loans with similar characteristics are aggregated for purposes of the calculations. The carrying amount of policy loans reported in the Balance Sheet approximates fair value. For short-term investments, the carrying amount is a reasonable estimate of fair value. The fair values for the Company's policy reserves under the investment products are determined using cash surrender value. Separate account assets and liabilities are reported at their estimated fair values in the Balance Sheet. The fair values under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.
DECEMBER 31, 2000 DECEMBER 31, 1999 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- Assets: Investments: Securities available-for-sale: Fixed maturities......................... $2,530,480 $2,530,480 $2,706,372 $2,706,372 Equity securities........................ 87,912 87,912 85,021 85,021 Mortgage loans on real estate................. 810,616 844,319 754,514 741,397 Policy loans.................................. 102,308 102,308 83,439 83,439 Short -- term investments..................... 152,736 152,736 115,527 115,527 Assets held in separate accounts.............. 5,184,083 5,184,083 5,120,152 5,120,152 Liabilities: Individual and group annuities (subject to discretionary withdrawal).................. 585,905 571,834 789,002 763,861 Liabilities related to separate accounts...... 5,159,275 5,159,275 5,082,341 5,082,341
14.COMMITMENTS AND CONTINGENCIES The Company is named as a defendant in a number of legal actions arising primarily from claims made under insurance policies. These actions have been considered in establishing policy benefit and loss reserves. Management and its legal counsel are of the opinion that the settlement of these actions will not have a material adverse effect on the Company's financial position or results of operations. 15. RETIREMENT AND OTHER EMPLOYEE BENEFITS The Company is an indirect wholly-owned subsidiary of Fortis, which sponsors a defined benefit pension plan covering employees and certain agents who meet eligibility requirements as to age and length of service. The benefits are based on years of service and career compensation. Fortis Inc.'s 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 $2,097, $2,225 and $1,627 for 2000, 1999 and 1998, respectively. The Company participates in a contributory profit sharing plan, sponsored by Fortis, covering employees and certain agents who meet eligibility requirements as to age and length of service. Benefits are payable to participants on retirement or disability and to the beneficiaries of participants in the event of death. The first three percent of an employee's contribution is matched 200% by the Company. The amount expensed was approximately $4,573, $3,711 and $3,610 for 2000, 1999 and 1998, respectively. In addition to retirement benefits, the Company participates in other health care and life insurance benefit plans (postretirement benefits) for retired employees, sponsored by Fortis. Health care benefits, either through a Fortis sponsored retiree plan for retirees under age 65 or through a cost offset for individually purchased Medigap policies F-21 103 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 15. RETIREMENT AND OTHER EMPLOYEE BENEFITS (CONTINUED) for retirees over age 65, are available to employees who retire on or after January 1, 1993, at age 55 or older, with 15 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, 2000, 1999 and 1998. The Company made contributions to the postretirement benefit plans of approximately $0, $19 and $(5) in 2000, 1999 and 1998, respectively, as claims were incurred. 16. EVENTS SUBSEQUENT On January 25, 2001, Fortis agreed to sell (the "Sale") 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 and 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 and Annuity Insurance Company, an indirect wholly owned subsidiary of The Hartford, will reinsure the Insurance Contracts on a 100% coinsurance basis and perform administration of such Insurance Contracts. In addition, Hartford Life and Accident Insurance Company, another indirect wholly owned subsidiary of The Hartford, will purchase all of the outstanding stock of Fortis Advisers, Inc., which is the investment adviser for the Fund. Thus, upon completion of the Sale, Hartford Life and Accident Insurance Company will own and control Fortis Advisers, Inc. and its subsidiaries, including Fortis Investors, Inc., which is the principal distributor of the Fund. Closing of the Sale is subject to various regulatory and other approvals. Following the Sale, the Fund expects to enter into new investment advisory, subadvisory and distribution agreements with affiliates of The Hartford. Such new agreements will require approvals subsequent to the closing of the Sale by the Fund's board of directors and shareholders and by Insurance Contract holders to the extent required by law. F-22 104 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information of Fortis Benefits Insurance Company is being presented in connection with the Company's Sale of its Fortis Financial Group Division (FFG) to The Hartford on April 1, 2001. The accompanying unaudited pro forma financial statements of the Company for the period ended December 31, 2000 present the financial position and results for the Company as if the Sale and certain transactions and adjustments related to the Sale had occurred as of January 1, 2000. The unaudited pro forma financial information does not purport to represent what the Company's financial position or results of operations actually would have been had the Sale in fact occurred as of the date indicated, or to project the Company's financial position or results of operations for any future date or period. The pro forma adjustments are based on available information and certain assumptions that the Company currently believes are reasonable under the circumstances. The unaudited pro forma financial information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The unaudited pro forma financial information is provided for informational purposes only. The Company's financial statements will reflect the actual effects of the Sale in the 10-Q filing for the period ending June 30, 2001. Although the actual Sale results will differ, the unaudited pro forma financial information reflects management's best estimate based on currently available information. F-23 105 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DEC. 31, 2000 ANNUAL REPORT FFG PRO FORMA ------------- --------- ----------- ASSETS Investments: Fixed maturities, at fair value (amortized cost 2000 -- $2,543,040; 1999 -- $2,802,697)........... $2,530,480 $(158,752) $ 2,371,728 Equity securities, at fair value (cost 2000 -- $91,164; -- 1999 -- $81,554).............. 87,912 -- 87,912 Mortgage loans on real estate, less allowance for possible losses (2000 and 1999 -- $11,085)........ 810,616 (93,115) 717,501 Policy loans......................................... 102,308 (102,192) 116 Short-term investments............................... 152,736 -- 152,736 Real estate and other investments.................... 41,712 -- 41,712 ---------- --------- ----------- 3,725,764 (354,059) 3,371,705 Cash and cash equivalents.............................. 13,209 19,299 32,508 -- -- Receivables: Uncollected premiums................................. 66,505 (260) 66,245 Reinsurance recoverable on unpaid and paid losses.... 64,182 1,077,253 1,141,435 Other................................................ 48,083 (5,934) 42,149 ---------- --------- ----------- 178,770 1,071,059 1,249,829 Accrued investment income.............................. 52,556 (4,839) 47,717 Deferred policy acquisition costs...................... 473,761 (433,192) 40,569 Property and equipment at cost, less accumulated depreciation......................................... 20,891 (18,138) 2,753 Federal income tax recoverable......................... 7,248 (528) 6,720 Deferred federal income taxes.......................... 33,825 154,050 187,875 Other assets........................................... 1,677 -- 1,677 Assets held in separate accounts....................... 5,184,083 -- 5,184,083 ---------- --------- ----------- Total assets...................................... $9,691,784 $ 433,652 $10,125,436 ========== ========= ===========
F-24 106 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DEC. 31, 2000 ANNUAL REPORT FFG PRO FORMA ------------- -------- ----------- POLICY RESERVES AND LIABILITIES AND SHAREHOLDER'S EQUITY Policy reserves and liabilities: Future policy benefit reserves: Traditional and pre-need life insurance............ $1,170,612 $ -- $ 1,170,612 Interest sensitive and investment products......... 970,591 -- 970,591 Accident and health................................ 1,007,328 -- 1,007,328 ---------- -------- ----------- 3,148,531 -- 3,148,531 Unearned revenues..................................... 33,614 (243) 33,371 Other policy claims and benefits payable.............. 240,677 (7,941) 232,736 Policyholder dividends payable........................ 7,438 (7,438) -- ---------- -------- ----------- 3,430,260 (15,622) 3,414,638 Accrued expenses...................................... 69,476 (1,061) 68,415 Current income taxes payable.......................... -- 161,290 161,290 Other liabilities..................................... 181,633 (787) 180,846 Due to affiliates..................................... 4,497 -- 4,497 Deferred gain on LTC & FFG sale....................... 15,919 256,308 272,227 Liabilities related to separate accounts.............. 5,159,275 24,808 5,184,083 ---------- -------- ----------- Total policy reserves and liabilities.............. 8,861,060 424,936 9,285,996 ---------- -------- ----------- Shareholder's equity: Common stock, $5 par value: authorized, issued and outstanding shares -- 1,000,000.................... 5,000 -- 5,000 Additional paid-in capital............................ 468,000 -- 468,000 Retained earnings..................................... 366,644 8,716 375,360 Accumulated other comprehensive loss.................. (8,920) -- (8,920) ---------- -------- ----------- Total shareholder's equity......................... 830,724 8,716 839,440 ---------- -------- ----------- Total policy reserves and liabilities and shareholder's equity............................. $9,691,784 $433,652 $10,125,436 ========== ======== ===========
F-25 107 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA STATEMENT OF INCOME (IN THOUSANDS)
DEC. 31, 2000 ANNUAL REPORT FFG PRO FORMA ------------- --------- ---------- Insurance operations: Traditional life insurance premiums..................... $ 428,641 (10,267) $ 418,374 Interest sensitive and investment product policy charges............................................... 159,728 (157,408) 2,320 Accident and health insurance premiums.................. 952,015 -- 952,015 ---------- --------- ---------- 1,540,384 (167,675) 1,372,709 Net investment income................................... 279,572 (54,622) 224,950 Net realized (losses) gains on investments.............. (17,039) 3,662 (13,377) Other income............................................ 12,687 17,733 30,420 ---------- --------- ---------- Total revenues........................................ 1,815,604 (200,902) 1,614,702 Benefits to policy holders: Traditional life insurance............................ 335,022 (10,621) 324,401 Interest sensitive investment products................ 89,062 (83,105) 5,957 Accident and health claims............................ 749,945 0 749,945 ---------- --------- ---------- 1,174,029 (93,726) 1,080,303 Policy holder dividends................................. 2,685 (2,685) 0 Amortization of deferred policy acquisition costs....... 47,215 (36,055) 11,160 Insurance commissions................................... 128,267 (6,566) 121,701 General and administrative expenses..................... 333,734 (68,697) 265,037 ---------- --------- ---------- Total benefits and expenses........................... 1,685,930 (207,729) 1,478,201 ---------- --------- ---------- Income before federal income taxes...................... 129,674 6,827 136,501 Federal income taxes.................................... 41,555 (1,889) 39,666 ---------- --------- ---------- Net income.............................................. $ 88,119 $ 8,716 $ 96,835 ========== ========= ==========
F-26 108 FORTIS BENEFITS INSURANCE COMPANY NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (IN THOUSANDS) Adjustments to the balance sheet, including invested assets, receivables, accrued investment income, deferred acquisition costs, reserves, unearned revenues, policy claims and dividends payable and accrued expenses, along with adjustments to the income statement, are related to the Division sold to The Hartford. Adjustments to cash and cash equivalents and property and equipment represent the sale of certain personal and real property to The Hartford. Adjustments to deferred federal income taxes and current income taxes payable represent the accrual of federal income tax associated with the Sale. Deferred gain on the Sale will be amortized to income as the business runs off. For 2000, the pro forma income statement includes pre-tax amortization of $18,000. An effective tax rate of 35% has been applied and is reflected in the provision for federal income tax. Pro forma investment income includes estimated earnings from approximately $500 million of cash proceeds from the Sale (after applicable tax payment). Separate accounts business is reinsured under a modified coinsurance agreement with The Hartford. F-27 109 APPENDIX A--SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS The formula which will be used to determine the Market Value Adjustment is: 1 + I n/12 ------------ - 1 ( 1 + J + .005 )
Sample Calculation 1: Positive Adjustment Amount withdrawn or transferred $10,000 Existing Guarantee Period 7 years Time of withdrawal or transfer beginning of 3rd year of Existing Guarantee Period Guaranteed Interest Rate (I) 8%* Guaranteed Interest Rate for new 5-year guarantee (J) 7%* Remaining Guarantee Period (N) 60 months Market Value Adjustment
1 + .08 60/12 $10,000 X -------------- - 1 = $234.73 [( 1 + .07 + .005 ) ]
Amount transferred or withdrawn (adjusted for Market Value Adjustment): $10,234.73 Sample Calculation 2: Negative Adjustment Amount withdrawn or transferred $10,000 Existing Guarantee Period 7 years Time of withdrawal or transfer beginning of 3rd year of Existing Guarantee Period Guaranteed Interest Rate (I) 8%* Guaranteed Interest Rate for new 5-year guarantee (J) 9%* Remaining Guarantee Period (N) 60 months Market Value Adjustment:
1 + .08 60/12 $10,000 X -------------- - 1 = -- $666.42 [( 1 + .09 + .005 ) ]
Amount transferred or withdrawn (adjusted for Market Value Adjustment): $9,333.58 Sample Calculation 3: Negative Adjustment Amount withdrawn or transferred $10,000 Guarantee Period 7 years Time of withdrawal or transfer beginning of 3rd year of Existing Guarantee Period Guaranteed Interest Rate (I) 8%* Guaranteed Interest Rate for new 5-year guarantee (J) 7.75%* Remaining Guarantee Period (N) 60 months Market Value Adjustment:
1 + .08 60/12 $10,000 X ---------------- - 1 = $114.94 [( 1 + .0775 + .005 ) ]
Amount transferred or withdrawn (adjusted for Market Value Adjustment): $9,885.06 ------------------------------ * Assumed for illustrative purposes only. A-1 110 (This page left blank intentionally) 111 APPENDIX B--SAMPLE DEATH BENEFIT CALCULATIONS
EXAMPLE 1 EXAMPLE 2 EXAMPLE 3 DATE OF DEATH IS THE 3RD CONTRACT ANNIVERSARY --------- --------- --------- a. Purchase Payments Made Prior to Death, accumulated at 5% $32,000 $32,000 $32,000 b. Contract Value on Date of Death $20,000 $36,000 $25,000 c. 1 Year Ratchet Option Value $35,000 $36,000 $31,000 Death Benefit is larger of a, b, and c $35,000 $36,000 $32,000
EXAMPLE 1 EXAMPLE 2 EXAMPLE 3 DATE OF DEATH IS THE 5TH CONTRACT ANNIVERSARY --------- --------- --------- a. Purchase Payments Made Prior to Death, accumulated at 5% $34,000 $34,000 $34,000 b. Contract Value on Date of Death $38,000 $38,000 $28,000 c. 1 Year Ratchet Option Value $38,000 $40,000 $33,000 Death Benefit is larger of a, b, and c $38,000 $40,000 $34,000
EXAMPLE 1 EXAMPLE 2 EXAMPLE 3 DATE OF DEATH IS THE 10TH CONTRACT ANNIVERSARY --------- --------- --------- a. Purchase Payments Made Prior to Death, accumulated at 5% $36,000 $36,000 $36,000 b. Contract Value on Date of Death $39,000 $34,000 $31,000 c. 1 Year Ratchet Option Value $39,000 $37,000 $32,000 Death Benefit is larger of a, b, and c $39,000 $37,000 $36,000
B-1 112 (This page left blank intentionally) 113 APPENDIX C--EXPLANATION OF EXPENSE CALCULATIONS The expense for a given year is calculated by multiplying the projected beginning of the year policy value by the total expense rate. The total expense rate is the sum of the variable account expense rate plus the total portfolio expense rate plus the annual administrative charge rate. The policy values are projected by assuming a single payment of $1,000 grows at an annual rate equal to 5% reduced by the total expense rate described above. For example, the 3 year expense for the Growth Stock Series is calculated as follows: -------------------------------------------------------------------------------- Total Variable Account Annual Expenses 1.35% -------------------------------------------------------------------------------- + Total Series Fund Operating Expenses 0.64% -------------------------------------------------------------------------------- = Total Expense Rate 1.99% --------------------------------------------------------------------------------
Year 1 Beginning Policy Value = $1000.00 Year 1 Expense = $1000.00 X 0.0199 = $19.90 Year 2 Beginning Policy Value = $1,030.10 Year 2 Expense = $1,030.10 X 0.0199 = $20.50 Year 3 Beginning Policy Value = $1,061.11 Year 3 Expense = $1,061.11 X 0.0199 = $21.12 So the cumulative expenses for years 1-3 for the Growth Stock Series are equal to: $19.90 + $20.50 + $21.12 = $61.52 If the contract is surrendered, the surrender charge is the surrender charge percentage times the purchase payment minus the 10% free withdrawal amount: Surrender Charge Percentage X (Initial Premium - 10% Free Withdrawal) = Surrender Charge 0.06 X ($1000.00 - $100.00) = $54.00 So the total expense if surrendered is $61.52 + $54.00 = $115.52 C-1 114 (This page left blank intentionally) 115 APPENDIX D--PRO RATA ADJUSTMENTS Pro rata adjustments are made for withdrawals in calculating the death benefit payable under the contract. The benefit is described under the section of this prospectus entitled "Benefit Payable on Death of Contract Owner or Annuitant". A pro rata adjustment is calculated separately for each withdrawal, creating a decrease in the death benefit proportional to the decrease the withdrawal makes in the contract value. Pro rata adjustments are made for amounts withdrawn for partial surrenders and surrender charges, but not for any contract fee-related surrenders. Under the death benefit set forth as (2) in "Benefit Payable on Death of Contract Owner or Annuitant", the pro rata adjustment for a given withdrawal is equal to: (a) the withdrawn amount, divided by (b) the contract value immediately before the amount was withdrawn, the result multiplied by (c) the quality equal to: (i) the contract value on the anniversary, plus (ii) purchase payments made since the anniversary and before withdrawal, minus (iii) pro rata adjustments for withdrawals made since the anniversary and before the given withdrawal. Under the death benefit set forth as (3) in "Benefit Payable on Death of Contract Owner or Annuitant", the pro rata adjustment for a given withdrawal is equal to: (a) the withdrawn amount, divided by (b) the contract value immediately before the amount was withdrawn, the result multiplied by (c) the quantity equal to: (i) the "Roll-Up Amount" prior to the withdrawal, plus (ii) any purchase payments made on or after the date either the contract owner or Annuitant first reaches his or her 75th birthday and before the given withdrawal, reduced by (iii) pro rata adjustments for any withdrawals made on or after the date either the contract owner or Annuitant first reaches his or her 75th birthday and before the given withdrawal. D-1 116 CERTIFICATES UNDER FLEXIBLE PREMIUM DEFERRED COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS (MASTERS AND MASTERS +) Issued by FORTIS BENEFITS INSURANCE COMPANY STATEMENT OF ADDITIONAL INFORMATION MAY 1, 2001 This Statement of Additional Information is not a Prospectus. It is intended that this Statement of Additional Information be read in conjunction with the Prospectus for certificates under flexible premium deferred combination variable and fixed annuity contracts ("Certificates"), dated May 1, 2001. A copy of the Prospectus may be obtained without charge from Woodbury Financial Services, Inc. 1-800-800-2000, mailing address: P.O. Box 64272, St. Paul, MN 55164. You have the option of receiving benefits under a Certificate through Fortis Benefits' Variable Account D or through Fortis Benefits' Fixed Account. TABLE OF CONTENTS Fortis Benefits and the Variable Account.......................................2 Calculation of Annuity Payments................................................2 Postponement of Payments.......................................................3 Services.......................................................................3 - Safekeeping of Variable Account Assets.....................................3 - Experts....................................................................4 - Principal Underwriter .....................................................4 Limitation on Allocations......................................................4 Taxation Under Certain Retirement Plans........................................4 Withholding....................................................................8 Other Information..............................................................9 Variable Account Financial Statements..........................................9 Appendix A -- Performance Information........................................A-1 In order to supplement the description in the Prospectus, the following provides additional information about the Certificates and other matters which may be of interest to you. Terms used in this Statement of Additional Information have the same meanings as are defined in the Prospectus under the heading "Special Terms Used in This Prospectus." 1 117 FORTIS BENEFITS AND THE VARIABLE ACCOUNT Fortis Benefits Insurance Company, the issuer of the Certificates, is a Minnesota corporation qualified to sell life insurance and annuity contracts in the District of Columbia and in all states except New York. Fortis Benefits is a wholly-owned subsidiary of Interfinancial, Inc., a stock company organized under the laws of Georgia, which itself is a wholly-owned subsidiary of Fortis, Inc. Fortis, Inc. is a corporation based in New York, which manages the United States operations of Fortis (NL) N.V. and Fortis (B). Fortis (NL) N.V. has been in business since 1847 and is a publicly-traded, multi-national insurance, real estate, and financial services group headquartered in The Netherlands. It is one of the largest holding companies in Europe, with subsidiary companies in twelve countries on four continents. Fortis (NL) N.V. is the third largest insurance company in the Netherlands. Fortis (B) is a multi-national insurance, real estate and financial services firm that has been in business since 1824. It has subsidiary companies in eight countries. Fortis (B) is one of the largest life insurance companies in Belgium. The assets allocated to the Variable Account are the exclusive property of Fortis Benefits. Registration of the Variable Account under the Investment Company Act of 1940 does not involve supervision of the management or investment practices or policies of the Variable Account or of Fortis Benefits by the Securities and Exchange Commission. Fortis Benefits may accumulate in the Variable Account proceeds from charges under the Contracts and other amounts in excess of the Variable Account assets representing reserves and liabilities under Certificates and other variable annuity contracts issued by Fortis Benefits. Fortis Benefits may from time to time transfer to its General Account any of such excess amounts. Best's Insurance Reports has assigned Fortis Benefits a rating of A (Excellent) for financial position and operating performance. This rating represents such rating agency's independent opinion of Fortis Benefits' financial strength and ability to meet policy holder obligations, but has no relevance to the performance and quality of the assets in Subaccounts of the Variable Account. On April 1, 2001, The Hartford Financial Services Group ("Hartford") acquired facilities and personnel of Fortis Benefits responsible for the administration of the contracts. This was part of a larger transaction whereby Hartford acquired all of the individual life insurance and annuity business of Fortis, Inc. and its affiliates, including Fortis Benefits, for $1.2 billion. The transaction was generally in the form of an indemnity reinsurance arrangement under which Hartford Life and Annuity Insurance Company ("Hartford L&A"), a subsidiary of Hartford, reinsured all of the individual life and annuity business of Fortis Benefits, although Fortis Benefits remains directly obligated to contract owners. As part of this transaction, Fortis Benefits contracted the administrative servicing obligations for the contracts to Hartford L&A. Although Fortis Benefits remains responsible for all contract terms and conditions, Hartford L&A is responsible for servicing the contracts, including the payment of benefits, oversight of investment management (i.e., the available investment portfolios) and overall contract administration. Additionally, as part of the transaction, Hartford Life and Accident, another subsidiary of Hartford, purchased all of the stock of Fortis Investors, Inc., now Woodbury Financial Services, Inc., the principal underwriter of the contracts. CALCULATION OF ANNUITY PAYMENTS FIXED ANNUITY OPTION The amount of each annuity payment under a Fixed Annuity Option is fixed and guaranteed by Fortis Benefits. Monthly fixed annuity payments will start as of the end of the Valuation Period that contains the Annuity Commencement Date. At that time, the Certificate Value, after any Market Value Adjustment, is computed and that portion of the Certificate Value which will be applied to the Fixed Annuity Option selected is determined. The amount of the first monthly 2 118 payment under the Fixed Annuity Option selected will be at least as large as would result from using the annuity tables contained in the Certificate to apply such amount of Certificate Value to the annuity form selected. The dollar amounts of any fixed annuity payments after the first are specified during the entire period of annuity payments according to the provisions of the annuity form selected. VARIABLE ANNUITY OPTION Annuity Units. To the extent a Variable Annuity Option has been selected, we convert the Accumulation Units for each Subaccount of the Variable Account into Annuity Units for each Subaccount at their values determined as of the end of the Valuation Period which contains the Annuity Commencement Date. As of such time, any Fixed Account Value to be applied to a Variable Annuity Option is also converted, after any Market Value Adjustment, to Annuity Units in the Subaccounts selected based on the then-current Annuity Unit value. The initial number of Annuity Units in each Subaccount is determined by dividing the amount of the initial monthly variable annuity payment (see "Variable Annuity Option -- Variable Annuity Payments," below) allocable to that Subaccount by the value of one Annuity Unit in that Subaccount as of the time of the conversion. The number of Annuity Units for each Subaccount will remain constant, as long as an annuity remains in force and the allocation among the Subaccounts has not changed. The value of each Subaccount's Annuity Units will vary to reflect the investment experience of the Subaccount as well as charges deducted from the Subaccount. The value of each Subaccount's Annuity Units is equal to the prior value of the Subaccount's Annuity Units multiplied by the net investment factor for that Subaccount (discussed in the Prospectus under "Certificate Value") for the Valuation Period ending on that Valuation Date, with an offset for the 4% assumed interest rate used in the annuity tables of the Certificate. Variable Annuity Payments. Variable annuity payments start at the end of the Valuation Period that contains the Annuity Commencement Date, and will vary in amount as the related Annuity Unit values vary. The amount of the first monthly payment is shown on the annuity tables contained in the Certificate for each $1,000 of Certificate Value applied to the Variable Annuity Option selected as of the end of such Valuation Period. The first variable annuity payment is, in effect, allocated among the Subaccounts in the same proportion as the Certificate Value is allocated among the Subaccounts upon commencement of annuity payments. Payments after the first will vary in amount and are determined on the first Valuation Date of each subsequent monthly period. If the monthly payment under the annuity form selected is based on the value of Annuity Units of a single Subaccount, the monthly payment is found by multiplying the number of the Certificate's Annuity Units for the Subaccount by the Annuity Unit value of such Subaccount as of the first Valuation Date in each monthly period following the Annuity Commencement Date. If the monthly payment under the Variable Annuity Option selected is based upon the value of Annuity Units in more than one Subaccount, this is repeated for each applicable Subaccount. The sum of these payments is the variable annuity payment. GENDER OF ANNUITANT The amount of each annuity payment ordinarily will be higher for a male Annuitant than for a female Annuitant with an otherwise identical Certificate. This is because, statistically, females tend to have longer life expectancies than males. However, there will be no differences between male and female Annuitants in any jurisdiction, including Montana, where such differences are not permitted. We will also make available Certificates with no such differences in connection with certain employer-sponsored benefit plans. Employers should be aware that, under most such plans, Certificates that make distinctions based on gender are prohibited by law. POSTPONEMENT OF PAYMENTS With respect to amounts in the Subaccounts of the Variable Account, payment of any amount due upon a total or partial surrender, death or under an annuity option will ordinarily be made within seven days after all documents required for such payment are received by Fortis Benefits at its Home Office. However, Fortis Benefits may defer the determination, application or payment of any death benefit, transfer, partial or total surrender or annuity payment, to the extent 3 119 dependent on Accumulation or Annuity Unit Values, for any period during which the New York Stock Exchange is closed (other than customary weekend and holiday closings) or trading on the New York Stock Exchange is restricted as determined by the Securities and Exchange Commission, for any period during which any emergency exists as a result of which it is not reasonably practicable for Fortis Benefits to determine the investment experience for the Certificate, or for such other periods as the Securities and Exchange Commission may by order permit for the protection of investors. SERVICES SAFEKEEPING OF VARIABLE ACCOUNT ASSETS Title to the assets of the Variable Account is held by Fortis Benefits. The assets of the Variable Account are kept segregated and held separate and apart from Fortis Benefits' other assets. Fortis Advisers, Inc., an affiliate of Fortis Benefits, maintains records of all purchases and redemptions of shares of Fortis Series Fund, Inc. held by each of the Subaccounts of the Variable Account. EXPERTS The financial statements of Fortis Benefits Insurance Company at December 31, 2000, and for the year then ended, and the statement of net assets of Fortis Benefits Insurance Company Variable Account D at December 31, 2000 and the related statements of operations and changes in net assets for the period ended December 31, 2000, appearing in the Prospectus, this Statement of Additional Information and Registration Statement have been audited by PricewaterhouseCoopers LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such authority as experts in accounting and auditing. The financial statements of Fortis Benefits Insurance Company at December 31, 1999 and for each of the two years in the period ended December 31, 1999 and the statements of operations and changes in net assets of Fortis Benefits Variable Account D for the period ended December 31, 1999 appearing in the Prospectus, this Statement of Additional Information and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such authority as experts in accounting and auditing. PRINCIPAL UNDERWRITER Woodbury Financial Services, Inc., the principal underwriter of the Certificates, is a Minnesota corporation and a member of the Securities Investors Protection Corporation. Certificates generally will be issued for Participants from ages zero to ninety in all states except New York. LIMITATIONS ON ALLOCATIONS Under the Certificate, Fortis Benefits reserves the right to control the amount of any assets in any investment alternative. Pursuant to this authority, Fortis Benefits has established the following administrative procedures for the protection of the interests of all investors participating in Fortis Series' Portfolios: a Participant may not invest, allocate, transfer or exchange Certificate Value into any Subaccount if the value allocated to the Subaccount under the Certificate (and under any other insurance or annuity contracts directly or indirectly controlled by the same person, jointly or individually) would immediately thereafter equal 25% or more of the related Fortis Series Portfolio's net assets. Fortis Benefits reserves the right to modify these procedures at any time. TAXATION UNDER CERTAIN RETIREMENT PLANS Federal income tax information concerning the purchase of Certificates for specific types of retirement plans is set forth below. You should also refer to "Federal Tax Matters" in the Prospectus. The tax information provided is not comprehensive, and you should consult a qualified tax adviser before taking any action in connection with a retirement plan. 4 120 SECTION 403(B) ANNUITIES FOR EMPLOYEES OF CERTAIN TAX-EXEMPT ORGANIZATIONS OR PUBLIC EDUCATIONAL INSTITUTIONS Purchase Payments. Under Section 403(b) of the Internal Revenue Code ("Code"), payments made by certain employers (i.e., tax-exempt organizations meeting the requirements of Section 501(c)(3) of the Code, or public educational institutions) to purchase Certificates for their employees are excludible from the gross income of employees to the extent that such aggregate purchase payments do not exceed certain limitations prescribed by the Code. This is the case whether the purchase payments are a result of voluntary salary reduction amounts or employer contributions. Salary reduction payments are, however, subject to FICA (social security) taxes. Taxation of Distributions. Distributions from a Section 403(b) tax-deferred annuity are taxed as ordinary income to the recipient as described under "Federal Tax Matters" in the Prospectus. Taxable distributions received before the employee attains age 59 1/2 generally are subject to a 10% penalty tax in addition to regular income tax. Certain distributions are excepted from this penalty tax, including distributions following the employee's death, disability, separation from service after age 55, separation from service at any age if the distribution is in the form of an annuity for the life (or life expectancy) of the employee (or the employee and Beneficiary) and distributions not in excess of deductible medical expenses. In addition, no distributions of voluntary salary reduction amounts will be permitted prior to one of the following events: attainment of age 59 1/2 by the employee or the employee's separation from service, death, disability or hardship. (Hardship distributions will be limited to the lesser of the amount of the hardship or the amount of salary reduction contributions, exclusive of earnings thereon.) Required Distributions. Generally, distributions from Section 403(b) annuities must commence not later than April 1 of the calendar year following the calendar year in which the employee attains age 70 1/2, and such distributions must be made over a period that does not exceed the life expectancy of the employee (or the employee and Beneficiary). A penalty tax of 50% would be imposed on any amount by which the minimum required distribution in any year exceeded the amount actually distributed in that year. In addition, in the event that the employee dies before his or her entire interest in the Certificate has been distributed, the employee's entire interest must be distributed in accordance with rules similar to those applicable upon the death of the Participant or Payee in the case of a Non-Qualified Certificate, as described in the Prospectus. Certain of these and other provisions are incorporated in a special endorsement attached to Certificates that are intended to qualify under Section 403(b), and reference should be made to that endorsement for its complete terms. Tax-Free Exchanges and Rollovers. The Code provides for the tax-free transfer of one Section 403(b) annuity for another Section 403(b) annuity, and the IRS has ruled (Revenue Ruling 90-24) that amounts transferred may qualify as tax-free transfers under certain circumstances. In addition, Section 403(b)(8) of the code permits tax-free rollovers from Section 403(b) programs to individual retirement annuities or other Section 403(b) programs under certain circumstances. SECTION 401 QUALIFIED PENSION, PROFIT-SHARING OR ANNUITY PLANS Purchase Payments. Subject to certain limitations prescribed by the Code, purchase payments made by an employer (or a self-employed individual) under a pension, profit-sharing or annuity plan qualified under Section 401 or Section 403(a) of the Code are generally deductible by the employer and excluded from the taxable income of the employee for federal income tax purposes, whether made under a salary reduction agreement or directly by employer contributions. Salary reduction payments are, however, subject to FICA (social security) taxes. Purchase payments made directly by an employee generally are made on an after-tax basis. Taxation of Distributions. Distributions from Certificates purchased under these qualified plans are taxable as ordinary income, except to the extent allocable to an employee's after-tax contributions, as described under "Federal Tax Matters -- Qualified Plans," in the Prospectus. However, if an employee or other payee receives a "lump sum" distribution, as defined in the Code, from an exempt employees' trust, the taxable portion of the distribution may be subject to special tax treatment. For most individuals receiving lump sum distributions after attaining age 59 1/2, the rate of tax may be determined under a special 5-year income averaging provision. Those who attained age 50 by January 1, 1986 may 5 121 instead elect to use a 10-year income averaging provision based on the income tax rates in effect for 1986. Taxable distributions received prior to attainment of age 59 1/2 under a Certificate purchased under a qualified plan are subject to the same 10% penalty tax (and the same exceptions) as described above with respect to Section 403(b) annuities. Required Distributions. The minimum distribution requirements for these qualified plans are generally the same as described above with respect to Section 403(b) annuities. Tax-Free Rollovers. If, within 60 days of receipt, an employee who receives a single sum distribution transfers all of the taxable amount received to another plan qualified under Section 401 or 403(a), or to an individual retirement account or annuity as provided for under the Code, the transferred amount will not be taxed in the year of distribution. Certain "partial" distributions may also qualify for tax-free rollover treatment, but only if transferred to an individual retirement account or annuity. However, income tax may be withheld from the distribution unless the distribution is transferred directly from the qualified plan to the individual retirement account or individual retirement annuity. INDIVIDUAL RETIREMENT ANNUITIES Purchase Payments. Individuals may make contributions for individual retirement annuity ("IRA") Contracts. Deductible contributions for any year may be made up to the lesser of $2,000 or 100% of compensation for individuals who (1) are not (and whose spouses are not) active participants in another retirement plan, (2) are unmarried and have adjusted gross income of $25,000 or less, or (3) are married and have adjusted gross income of $40,000 or less. An individual may also establish an IRA for his or her spouse if they file a joint return for the taxable year and his or her spouse earns less than the individual does for that year. The annual purchase payments for both spouses' Contracts cannot exceed the lesser of $4,000 or 100% of the couple's combined earned income, and no more than $2,000 may be contributed to either spouse's IRA for any year. Individuals who are active participants in other retirement plans and whose adjusted gross income (with certain special adjustment) exceed the cut-off point ($25,000 for unmarried, $40,000 for married persons filing jointly, and $0 for married persons filing a separate return) by less than $10,000 are entitled to make deductible IRA contributions in proportionately reduced amounts. For example, a married individual who is an active participant in another retirement plan and files a separate tax return is entitled to a partial IRA deduction if the individual's adjusted gross income is less than $10,000 and no IRA deduction if his or her adjusted gross income is equal to or greater than $10,000. An individual may make non-deductible IRA contributions to the extent of (1) the lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100% of compensation over (2) the IRA deductible contribution made with respect to the individual. An individual may not make any contributions to his/her own IRA for the year in which he/she reaches age 70 1/2 or for any year thereafter. Contributions to a spouse's IRA may not be made for any year in which that spouse reaches age 70 1/2 or for any year thereafter. Taxation of Distributions. Distributions from IRA Contracts are taxed as ordinary income to the recipient, although special rules exist for the tax-free return of non-deductible contributions. In addition, taxable distributions received under an IRA Contract prior to age 59 1/2 are subject to a 10% penalty tax in addition to regular income tax. Certain distributions are exempted from this penalty tax including distributions following the owner's death or disability or distribution in the form of an annuity for the life (or life expectancy) of the owner (or the owner and beneficiary), or distributions not in excess of deductible medical expenses or certain distributions to pay health insurance premiums after an extended period of unemployment. Required Distributions. The minimum distribution requirements for IRAs are generally the same as described above with respect to Section 403(b) annuities. Certain of these and other provisions are incorporated in a special endorsement attached to IRA Certificates, and reference should be made to that endorsement for its complete terms. Tax-Free Rollovers. The Code permits funds to be transferred in a tax-free rollover from a qualified employer pension, profit-sharing, annuity, bond purchase or tax-deferred annuity plan to an IRA Certificate if certain conditions are met, 6 122 and if the rollover of assets is completed within 60 days after the distribution from the qualified plan is received. In addition, not more frequently than once every twelve months, amounts may be rolled over tax-free from one IRA to another, subject to the 60-day limitation and other requirements. The once-per-year limitation on rollovers does not apply to direct transfers of funds between IRA custodians or trustees. SIMPLIFIED EMPLOYEE PENSION PLANS Purchase Payments. Under Section 408(k) of the Code, employers may establish a type of IRA plan referred to as a simplified employee pension plan (SEP). Employer contributions to a SEP cannot exceed the lesser of $24,000 or 15% of the employee's earned income. Employees of certain small employers may have contributions made to a special kind of SEP (SARSEP) on their behalf on a salary reduction basis if the SARSEP plan was in effect on December 31, 1996. These salary reduction contributions may not exceed $10,500 in 2000, which is indexed for inflation. Employees of tax-exempt organizations and state or local government agencies have never been eligible for the salary reduction type of SEP. Taxation of Distributions. Generally, distribution payments from SEPs are subject to the same distribution rules described above for IRAs. Required Distributions. SEP distributions are subject to the same minimum required distribution rules described above for IRAs. Tax-Free Rollovers. Generally, rollovers and direct transfers may be made to and from SEPs in the same manner as described above for IRAs, subject to the same conditions and limitations. Rollovers to other IRAs, excluding SIMPLE IRAs are also possible. Special rules apply if the rollover is from a SARSEP IRA. SECTION 408(P) SIMPLE IRA PLANS Purchase Payments: Under Section 408(p) of the Code, small employers may establish a type of IRA plan referred to as a Savings Incentive Match Plan for Employees (SIMPLE Plan). An employee may contribute annually through his or her employer a pre-tax salary reduction contribution not to exceed the lesser of $6,000 or 100% of compensation. The employer must annually either (1) match the employee contribution dollar for dollar up to 3% of pay, or (2) make a 2% of pay contribution for each eligible employee regardless of whether the employee makes any salary reduction contribution. In two out of every five years, the employer has the option to reduce the matching contribution as low as 1% of pay but advance notice must be provided to employees. Taxation of Distributions: Generally, distributions from SIMPLE IRA Plans are subject to the same distribution rules described above for IRAs. However, if an individual withdraws any amount from his SIMPLE IRA Plan within the first two years of his or her commencement of participation in the employer's SIMPLE IRA Plan, the 10% penalty tax for premature distribution, if such tax applies, will be increased to 25%. Required Distributions: SIMPLE distributions are subject to the same minimum distribution rules described above for IRAs. Tax-Free Rollovers: Generally, rollovers and direct transfers may be made to and from SIMPLE IRAs in the same manner as described above for IRAs, subject to the same conditions and limitations. Rollovers or transfers to other IRAs, other than SIMPLE IRAs, are also possible but only after the second anniversary of commencement of participation in the employer's SIMPLE IRA Plan. SECTION 457 UNFUNDED DEFERRED COMPENSATION PLANS OF PUBLIC EMPLOYERS AND TAX-EXEMPT ORGANIZATIONS Purchase Payments. Under Section 457 of the Code, all individuals who perform services for a state or local government or governmental agency may participate in a deferred compensation program. Other tax-exempt employers 7 123 may establish unfunded deferred compensation plans under Section 457 for employees and/or independent contractors. Though not actually a qualified plan as that term is normally used, this type of program allows individuals to defer the receipt of compensation that otherwise would be currently payable and therefore to defer the payment of federal income taxes on such amounts. Assuming that the program meets the requirements to be considered an eligible deferred compensation plan (an "EDCP"), an individual may contribute (and thereby defer from current income for tax purposes) the lesser of $7,500 or 33-1/3% of the individual's includible compensation. (Includible compensation means compensation from the employer which would be currently includible in gross income for federal tax purposes.) In addition, during the last three years before an individual attains normal retirement age, additional "catch-up" deferrals are permitted. The amounts which are deferred may be used by the employer to purchase the Certificates offered by this Prospectus. The Certificate is owned by the employer and is subject to the claims of the employer's creditors. The employee has no rights or interest in the Certificate and is entitled only to payment in accordance with the EDCP provisions. Taxation of Distributions. Amounts received by an individual from an EDCP are includible in gross income for the taxable year in which such amounts are paid or otherwise made available. Distributions Before Separation from Service. Distributions generally are not permitted under an EDCP prior to separation from service or reaching age 70 1/2, except in cases of severe financial hardship. Hardship distributions are includible in the gross income of the individual in the year in which paid. Required Distributions. The distribution requirements for these qualified plans are generally the same as described above with respect to Section 403(b) annuities. However, if distributions do not commence before the employee's death, the entire interest in the Certificate must be distributed within 15 years if the beneficiary is not the employee's surviving spouse. Tax-Free Transfers. The Code permits the tax-free direct transfer of EDCP amounts to another EDCP, subject to certain conditions. Any transfer must be with employer consent PRIVATE EMPLOYER UNFUNDED DEFERRED COMPENSATION PLANS Purchase Payments. Private taxable employers may establish unfunded, non-qualified deferred compensation plans for a select group of management or highly compensated employees and/or for independent contractors. Certain arrangements of tax-exempt employers entered into prior August 16, 1986, and not subsequently modified, are also subject to the rules for private taxable employer deferred compensation plans discussed below. (Unfunded deferred compensation plans of other tax-exempt employers are generally subject to the requirements of Section 457.) These types of programs allow individuals to defer receipt of up to 100% of compensation which would otherwise be includible in income and therefore to defer the payment of federal income taxes on such amounts. Purchase payments made by the employer, however are not immediately deductible by the employer, and the employer is currently taxed on any increase in Certificate Value. Deferred compensation plans represent a contractual promise on the part of the employer to pay current compensation at some future time. The Certificate is owned by the employer and is subject to the claims of the employer's creditors. The individual has no right or interest in the Certificate and is entitled only to payment from the employer's general assets in accordance with plan provisions. Taxation of Distributions. Amounts received by an individual from a private employer deferred compensation plan are includible in gross income for the taxable year in which such amounts are paid or otherwise made available. 8 124 WITHHOLDING Annuity payments and other amounts received under Certificates are subject to income tax withholding unless the recipient elects not to have taxes withheld. The amounts withheld will vary among recipients depending on the tax status of the individual and the type of payments from which taxes are withheld. Notwithstanding the recipient's election, withholding may be required with respect to certain payments to be delivered outside the United States and, with respect to certain distributions from certain types of qualified retirement plans, unless the proceeds are transferred directly to another qualified retirement plan. Moreover, special "backup withholding" rules may require Fortis Benefits to disregard the recipient's election if the recipient fails to supply Fortis Benefits with a "TIN" or taxpayer identification number (social security number for individuals), or if the Internal Revenue Service notifies Fortis Benefits that the TIN provided by the recipient is incorrect. OTHER INFORMATION Fortis Benefits relies upon an SEC No-action letter dated December 22, 1988 providing relief from certain restrictions provided in the Investment Company Act of 1940 relative to restrictions on redemptions and it complies with its conditions. VARIABLE ACCOUNT FINANCIAL STATEMENTS 125 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of Fortis Benefits Insurance Company In our opinion, the accompanying balance sheet and the related statements of income, of changes in shareholder's equity and of cash flows present fairly, in all material respects, the financial position of Fortis Benefits Insurance Company, an indirect, wholly-owned subsidiary of Fortis (B) and Fortis (NL) N.V. (the Company) at December 31, 2000, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, 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 audit provides a reasonable basis for our opinion. The financial statements of the Company as of December 31, 1999 and for the two years in the period then ended were audited by other independent accountants whose report dated February 17, 2000 expressed an unqualified opinion on those statements. [/s/ PRICEWATERHOUSECOOPERS LLP] February 15, 2001 F-1 126 REPORT OF INDEPENDENT AUDITORS Board of Directors Fortis Benefits Insurance Company We have audited the accompanying balance sheet of Fortis Benefits Insurance Company, an indirect, wholly-owned subsidiary of Fortis (B) and Fortis (NL) N.V., as of December 31, 1999, and the related statements of income, changes in shareholder's equity and cash flows for each of the two years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fortis Benefits Insurance Company at December 31, 1999, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. [/s/ ERNST & YOUNG] Minneapolis, Minnesota February 17, 2000 F-2 127 BALANCE SHEETS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 ------------------------ 2000 1999 ---------- ---------- ASSETS Investments: Fixed maturities, at fair value (amortized cost 2000 -- $2,543,040; 1999 -- $2,802,697)................ $2,530,480 $2,706,372 Equity securities, at fair value (cost 2000 -- $91,164; 1999 -- $81,554)....................................... 87,912 85,021 Mortgage loans on real estate, less allowance for possible losses (2000 and 1999 -- $11,085)...................... 810,616 754,514 Policy loans.............................................. 102,308 83,439 Short-term investments.................................... 152,736 115,527 Real estate and other investments......................... 41,712 47,502 ---------- ---------- 3,725,764 3,792,375 Cash and cash equivalents................................... 13,209 18,670 Receivables: Uncollected premiums...................................... 66,505 62,938 Reinsurance recoverable on unpaid and paid losses......... 64,182 23,471 Other..................................................... 48,083 19,406 ---------- ---------- 178,770 105,815 Accrued investment income................................... 52,556 55,464 Deferred policy acquisition costs........................... 473,761 430,192 Property and equipment at cost, less accumulated depreciation.............................................. 20,891 25,118 Federal income tax recoverable.............................. 7,248 -- Deferred federal income taxes............................... 33,825 52,467 Other assets................................................ 1,677 1,582 Due from affiliates......................................... -- 8,304 Assets held in separate accounts............................ 5,184,083 5,120,152 ---------- ---------- Total assets................................................ $9,691,784 $9,610,139 ========== ==========
The accompanying notes are an integral part of the financial statements. F-3 128 BALANCE SHEETS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 ------------------------ 2000 1999 ---------- ---------- POLICY RESERVES AND LIABILITIES AND SHAREHOLDER'S EQUITY Policy reserves and liabilities: Future policy benefit reserves: Traditional and pre-need life insurance................ $1,170,612 $1,106,269 Interest sensitive and investment products............. 970,591 1,147,657 Accident and health.................................... 1,007,328 940,865 ---------- ---------- 3,148,531 3,194,791 Unearned revenues......................................... 33,614 28,673 Other policy claims and benefits payable.................. 240,677 265,486 Policyholder dividends payable............................ 7,438 7,939 ---------- ---------- 3,430,260 3,496,889 Accrued expenses.......................................... 69,476 59,409 Current income taxes payable.............................. -- 1,838 Other liabilities......................................... 181,633 120,110 Due to affiliates......................................... 4,497 -- Deferred gain on LTC sale................................. 15,919 -- Liabilities related to separate accounts.................. 5,159,275 5,082,341 ---------- ---------- Total policy reserves and liabilities....................... 8,861,060 8,760,587 ---------- ---------- Shareholder's equity: Common stock, $5 par value: authorized, issued and outstanding shares -- 1,000,000........................ 5,000 5,000 Additional paid-in capital................................ 468,000 468,000 Retained earnings......................................... 366,644 427,811 Accumulated other comprehensive loss...................... (8,920) (51,259) ---------- ---------- Total shareholder's equity.................................. 830,724 849,552 ---------- ---------- Total policy reserves and liabilities and shareholder's equity.................................................... $9,691,784 $9,610,139 ========== ==========
The accompanying notes are an integral part of the financial statements. F-4 129 STATEMENTS OF INCOME FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
YEARS ENDED DECEMBER 31 -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- REVENUES: Insurance operations: Traditional life insurance premiums....................... $ 428,641 $ 301,377 $ 260,567 Interest sensitive and investment product policy charges................................................ 159,728 141,285 119,039 Accident and health insurance premiums.................... 952,015 1,002,867 953,652 ---------- ---------- ---------- 1,540,384 1,445,529 1,333,258 Net investment income....................................... 279,572 238,698 234,043 Net realized (losses) gains on investments.................. (17,039) 25,962 52,404 Other income................................................ 12,687 11,610 11,183 ---------- ---------- ---------- Total revenues.............................................. 1,815,604 1,721,799 1,630,888 BENEFITS AND EXPENSES: Benefits to policyholders: Traditional life insurance................................ 335,022 218,993 189,337 Interest sensitive investment products.................... 89,062 93,668 96,178 Accident and health claims................................ 749,945 812,149 798,036 ---------- ---------- ---------- 1,174,029 1,124,810 1,083,551 Policyholder dividends...................................... 2,685 3,114 3,486 Amortization of deferred policy acquisition costs........... 47,215 43,078 33,365 Insurance commissions....................................... 128,267 124,601 118,710 General and administrative expenses......................... 333,734 302,663 299,492 ---------- ---------- ---------- Total benefits and expenses................................. 1,685,930 1,598,266 1,538,604 ---------- ---------- ---------- Income before federal income taxes.......................... 129,674 123,533 92,284 Federal income taxes........................................ 41,555 40,327 30,402 ---------- ---------- ---------- Net income.................................................. $ 88,119 $ 83,206 $ 61,882 ========== ========== ==========
The accompanying notes are an integral part of the financial statements. F-5 130 STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE TOTAL STOCK CAPITAL EARNINGS (LOSS) INCOME --------- ------ ---------- --------- ------------- Balance, December 31, 1997.......... $ 880,106 $5,000 $468,000 $ 332,723 $ 74,383 Comprehensive income: Net income..................... 61,882 -- -- 61,882 -- Change in unrealized gain (losses) on investments, net.......................... (6,520) -- -- -- (6,520) --------- Total comprehensive income........ 55,362 Dividend.......................... (50,000) -- -- (50,000) -- --------- ------ -------- --------- --------- Balance, December 31, 1998.......... 885,468 5,000 468,000 344,605 67,863 Comprehensive income: Net income..................... 83,206 -- -- 83,206 -- Change in unrealized gain (losses) on investments, net.......................... (119,122) -- -- -- (119,122) --------- Total comprehensive loss.......... (35,916) --------- ------ -------- --------- --------- Balance, December 31, 1999.......... 849,552 5,000 468,000 427,811 (51,259) Comprehensive income: Net income..................... 88,119 -- -- 88,119 -- Change in unrealized gain (losses) on investments, net.......................... 42,339 -- -- -- 42,339 --------- Total comprehensive income........ 130,458 Dividend.......................... (149,286) -- -- (149,286) -- --------- ------ -------- --------- --------- Balance, December 31, 2000.......... $ 830,724 $5,000 $468,000 $ 366,644 $ (8,920) ========= ====== ======== ========= =========
The accompanying notes are an integral part of the financial statements. F-6 131 STATEMENTS OF CASH FLOWS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
YEARS ENDED DECEMBER 31 ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................... $ 88,119 $ 83,206 $ 61,882 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation.......................... 4,830 12,807 12,409 Amortization of gain on reinsured business.......... (3,100) -- -- Amortization of investment (discounts) premiums, net............................................... 1,574 1,930 (3,200) Net realized losses (gains) on sold investments..... 13,910 (25,962) (52,404) Write-off of investment............................. 3,129 -- -- Policy acquisition costs deferred................... (113,927) (96,308) (73,147) Amortization of deferred policy acquisition costs... 47,215 43,078 33,365 Provision for deferred federal income taxes......... (4,151) 29,454 417 Decrease in income taxes recoverable................ (9,086) (2,330) (6,381) Change in receivables, accrued investment income, unearned premiums, accrued expenses, other assets, due to and from affiliates and other liabilities....................................... (48,646) 27,227 (4,455) Increase (decrease) in future policy benefit reserves for traditional, interest sensitive and accident and health policies...................... 158,150 97,931 106,135 (Decrease) increase in other policy claims and benefits and policyholder dividends payable....... (25,303) 5,012 (2,514) Other............................................... -- -- 169 ----------- ----------- ----------- Net cash provided by operating activities................ 112,714 176,045 72,276 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed maturity investments.................. (1,546,720) (1,654,104) (2,380,511) Sales and repayments of fixed maturity investments....... 1,777,428 1,675,488 2,428,207 (Increase) decrease in short-term investments............ (37,208) (83,659) 38,669 Purchases of other investments........................... (363,978) (305,889) (408,998) Sales of other investments............................... 298,925 353,267 352,873 Purchases of property and equipment...................... (603) (7,213) (356) Cash received pursuant to reinsurance agreement.......... 17,591 3,374 -- ----------- ----------- ----------- Net cash provided by (used in) investing activities...... 145,435 (18,736) 29,884 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Activities related to investment products: Considerations received................................ 226,139 237,375 215,693 Surrenders and death benefits.......................... (448,349) (416,537) (326,457) Interest credited to policyholders..................... 32,886 39,855 49,371 Dividend................................................. (74,286) -- (50,000) ----------- ----------- ----------- Net cash used in financing activities.................... (263,610) (139,307) (111,393) ----------- ----------- ----------- (Decrease) increase in cash and cash equivalents......... (5,461) 18,002 (9,233) Cash and cash equivalents at beginning of year........... 18,670 668 9,901 ----------- ----------- ----------- Cash and cash equivalents at end of year................. $ 13,209 $ 18,670 $ 668 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-7 132 STATEMENTS OF CASH FLOWS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
YEARS ENDED DECEMBER 31 --------------------------------- 2000 1999 1998 -------- --------- -------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: Assets and liabilities transferred in reinsurance transactions (Note 9): Non-cash assets (ceded) received: Fixed maturities.......................................... $ -- $ 517,091 $ -- Other investments......................................... -- 121,696 -- Other assets.............................................. (157) 12,763 -- Deferred acquisition costs................................ (20,829) 35,882 -- -------- --------- -------- Total value of assets (ceded) received...................... $(20,986) $ 687,432 $ -- -------- --------- -------- Non-cash liabilities ceded (assumed): Future policy benefit reserves............................ $ 15,086 $(685,932) $ -- Claim reserves............................................ 7 (4,874) -- Unearned premium reserves................................. 7,641 -- -- Other liabilities......................................... (320) -- -- -------- --------- -------- Total liabilities ceded (assumed)........................... $ 22,414 $(690,806) $ -- ======== ========= ========
The accompanying notes are an integral part of the financial statements. F-8 133 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS) 1. NATURE OF OPERATIONS Fortis Benefits Insurance Company (the Company) is an indirect wholly-owned subsidiary of Fortis, Inc. (Fortis), which itself is an indirect, wholly-owned subsidiary of Fortis (B) and Fortis (NL) N.V. The Company is incorporated in Minnesota and distributes its products in all states except New York. The Company's revenues are derived principally from group employee benefits products and from individual life and annuity products. Effective October 1, 1999, the Company assumed pre-need life insurance business from an affiliate on a 100% co-insurance basis. These life insurance and annuity products are marketed in connection with the advance funding of funeral expenses. (See Note 9 "Reinsurance" for more information on this reinsurance transaction.) Effective March 1, 2000, the Company ceded long-term care insurance business to John Hancock Life Insurance Company on a 100% co-insurance basis. (See Note 9 "Reinsurance" for more information on this reinsurance transaction.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FAS 133," which deferred to January 1, 2001 the effective date of the accounting and reporting requirements of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The adoption of SFAS 133 is not expected to have a material effect on the Company's results of operations or financial position. Effective January 1, 2000, the Company adopted Statement of Position ("SOP") 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts that do not Transfer Insurance Risk. SOP 98-7 provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk. The adoption of SOP 98-7 did not have a material effect on the Company's results of operations or financial position. INVESTMENTS The Company's investment strategy is developed based on many factors including insurance liability matching, rate of return, maturity, credit risk, tax considerations and regulatory requirements. All fixed maturity investments and all marketable equity securities are classified as available-for-sale and carried at fair value. Changes in fair values of available for sale securities, after related deferred income taxes and after adjustment for the changes in the pattern of amortization of deferred policy acquisition costs and participating policyholder dividends, are reported directly in shareholder's equity as accumulated other comprehensive income and, accordingly, have no effect on net income. The unrealized appreciation or depreciation is net of deferred policy acquisition cost amortization and taxes that would have been required as a charge or credit to income had such unrealized amounts been realized. Mortgage loans constitute first liens on commercial real estate and other income producing properties. The insurance statutes in Minnesota generally require that the initial principal loaned not exceed 80% of the appraised value of the property securing the loan. The Company's policy fully complies with this statute. Mortgage loans on real estate are reported at amortized cost, less allowance for possible losses. The change in the allowance for possible losses is recorded with realized gains and losses on investments. F-9 134 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Policy loans are reported at their unpaid balance. Short-term investments are carried at cost which approximates fair value. Real estate and other investments consist principally of property acquired in satisfaction of debt and limited partnerships, respectively. Real estate is recorded at cost or carrying value of loans foreclosed less allowances for depreciation. The Company provides for depreciation on a straight-line basis over the estimated useful lives. Other investments are accounted for using the equity method of accounting. 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. DEFERRED POLICY ACQUISITION COSTS The costs of acquiring new business, which vary with and are directly related to the production of new business, are deferred to the extent recoverable and amortized. For traditional and pre-need life insurance and long-term care products (included as accident and health products), such costs are amortized over the premium paying period. For interest sensitive and investment products, such costs are amortized in relation to expected future gross profits. Estimation of future gross profits requires significant management judgment and is reviewed periodically. As excess amounts of deferred costs over future premiums or gross profits are identified, such excess amounts are expensed. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost less accumulated depreciation. The Company provides for depreciation principally on the straight-line method over the estimated useful lives of the related property. Depreciation expense was $4,830, $12,807 and $12,409 for the year ended December 31, 2000, 1999 and 1998, respectively. INCOME TAXES Income taxes have been provided using the liability method. Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and the tax bases and are measured using the enacted tax rates. GUARANTY FUND ASSESSMENTS There are a number of insurance companies that are currently under regulatory supervision. This may result in future assessments 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. SEPARATE ACCOUNTS Revenues and expenses related to the separate account assets and liabilities are excluded from the amounts reported in the accompanying statements of income. Assets and liabilities associated with the separate accounts relate to deposits and annuity considerations for variable life and variable annuity products for which the contract owner, rather than the Company, bears the investment risk. Separate account assets are reported at fair value and represent funds held for the exclusive benefit of the variable annuity and variable life insurance contract owners. The Company receives mortality and expense risk fees from the separate accounts. The Company also deducts monthly cost of insurance charges, and receives minimum death benefit guarantee fees and issue and administrative fees from the variable life insurance separate accounts. The Company makes contractual mortality assurances to the variable annuity contract owners that the net assets of the separate accounts will not be affected by future variations in the actual life expectancy experience of the annuitants and beneficiaries from the mortality assumptions implicit in the annuity contracts. The Company makes periodic fund transfers to, or withdrawals from, the separate account assets for such actuarial adjustments for F-10 135 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) variable annuities that are 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. REVENUE RECOGNITION AND FUTURE POLICY BENEFIT RESERVES Premiums for traditional life insurance and pre-need life products are recognized as revenues when due over the premium-paying period. Reserves for future policy benefits are computed using the net level method and include investment yield, mortality, withdrawal, and other assumptions based on the Company's experience, modified as necessary to reflect anticipated trends and to include 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 benefit reserves are computed under the retrospective deposit method and consist of policy account balances before applicable surrender charges. 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 for universal life and investment products ranged from 4% to 15% in 2000, 3.5% to 12% in 1999 and 2.5% to 8.75% in 1998. 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- 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 benefits are based on the 1987 Commissioners Group Disability Table. The valuation interest rate is the Single Premium Immediate Annuity valuation rate less 100 basis points. Claims in the first five years are modified based on the Company's actual experience. 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 related liabilities are continually reviewed and updated. Any adjustments resulting therefrom are reflected in income currently. COMPREHENSIVE INCOME Comprehensive income is comprised of net income and other comprehensive income which includes unrealized gains and losses adjusted for the impact of gains and losses realized during the current year on securities classified as available-for-sale, net of the effect on deferred policy acquisition costs and taxes. STATEMENTS OF CASH FLOWS The Company considers investments with a maturity at the date of their acquisition of three months or less to be cash equivalents. These securities are carried principally at amortized cost which approximates fair value. RECLASSIFICATIONS Certain amounts in the 1999 and 1998 financial statements have been reclassified to conform to the 2000 presentation. F-11 136 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 3. INVESTMENTS AVAILABLE-FOR-SALE SECURITIES The following is a summary of the available-for-sale securities:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- AT DECEMBER 31, 2000: Fixed maturities: Governments.................................. $ 348,795 $15,261 $ 317 $ 363,739 Public utilities............................. 212,371 3,849 3,661 212,559 Industrial and miscellaneous................. 1,794,011 27,815 58,902 1,762,924 Other........................................ 187,863 4,294 899 191,258 ---------- ------- -------- ---------- Total fixed maturities......................... 2,543,040 51,219 63,779 2,530,480 Equity securities.............................. 91,164 5,160 8,412 87,912 ---------- ------- -------- ---------- Total.......................................... $2,634,204 $56,379 $ 72,191 $2,618,392 ========== ======= ======== ========== AT DECEMBER 31, 1999: Fixed maturities: Governments.................................. $ 309,402 $ 46 $ 8,934 $ 300,514 Public utilities............................. 237,579 341 10,375 227,545 Industrial and miscellaneous................. 2,208,281 7,020 81,412 2,133,889 Other........................................ 47,435 184 3,195 44,424 ---------- ------- -------- ---------- Total fixed maturities......................... 2,802,697 7,591 103,916 2,706,372 Equity securities.............................. 81,554 5,825 2,358 85,021 ---------- ------- -------- ---------- Total.......................................... $2,884,251 $13,416 $106,274 $2,791,393 ========== ======= ======== ==========
The amortized cost and fair value of available-for-sale investments in fixed maturities at December 31, 2000, by contractual maturity, are shown below.
AMORTIZED FAIR COST VALUE ---------- ---------- Due in one year or less..................................... $ 83,263 $ 83,164 Due after one year through five years....................... 610,579 609,360 Due after five years through ten years...................... 786,695 778,801 Due after ten years......................................... 1,062,503 1,059,155 ---------- ---------- Total....................................................... $2,543,040 $2,530,480 ========== ==========
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. MORTGAGE LOANS The Company has issued commercial mortgage loans on properties located throughout the United States. Approximately 37% and 38% of outstanding principal is concentrated in the states of New York, California and Florida, at December 31, 2000 and 1999, respectively. Loan commitments outstanding totaled $8,000 at December 31, 2000. F-12 137 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 3. INVESTMENTS (CONTINUED) INVESTMENTS ON DEPOSIT The Company had fixed maturities carried at $11,630 and $17,061 at December 31, 2000 and 1999, respectively, on deposit with various governmental authorities as required by law. NET UNREALIZED GAINS (LOSSES) The adjusted net unrealized gains (losses) on investments recorded in accumulated other comprehensive income for the year ended December 31, are set forth below:
TAX BEFORE-TAX BENEFIT NET-OF-TAX AMOUNT (EXPENSE) AMOUNT ---------- --------- ---------- DECEMBER 31, 2000: Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments........................................... $ 93,933 $(32,873) $ 61,060 Increase in amortization of deferred policy acquisition costs................................................. (2,314) 810 (1,504) Reclassification adjustment for gains (losses) realized in net income......................................... (26,488) 9,271 (17,217) --------- -------- --------- Other comprehensive gain................................... $ 65,131 $(22,792) $ 42,339 ========= ======== ========= DECEMBER 31, 1999: Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments........................................... $(216,270) $ 75,694 $(140,576) Decrease in amortization of deferred policy acquisition costs................................................. 9,142 (3,200) 5,942 Reclassification adjustment for gains (losses) realized in net income......................................... 23,864 (8,352) 15,512 --------- -------- --------- Other comprehensive loss................................... $(183,264) $ 64,142 $(119,122) ========= ======== ========= DECEMBER 31, 1998: Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments.............................................. $ (53,050) $ 18,420 $ (34,630) Decrease in amortization of deferred policy acquisition costs.................................................... 414 (145) 269 Reclassification adjustment for gains (losses) realized in net income............................................... 42,832 (14,991) 27,841 --------- -------- --------- Other comprehensive loss................................... $ (9,804) $ 3,284 $ (6,520) ========= ======== =========
F-13 138 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 3. INVESTMENTS (CONTINUED) NET INVESTMENT INCOME AND NET REALIZED (LOSSES) GAINS ON INVESTMENTS Major categories of net investment income and realized (losses) gains on investments for each year were as follows:
2000 1999 1998 -------- -------- -------- NET INVESTMENT INCOME: Fixed maturities............................................ $193,005 $167,027 $160,163 Equity securities........................................... 14,392 7,320 8,656 Mortgage loans on real estate............................... 68,794 57,684 57,031 Policy loans................................................ 6,617 5,272 4,653 Short-term investments...................................... 522 844 1,701 Real estate and other investments........................... 2,816 6,375 8,194 -------- -------- -------- 286,146 244,522 240,398 Expenses.................................................... (6,574) (5,824) (6,355) -------- -------- -------- $279,572 $238,698 $234,043 ======== ======== ======== NET REALIZED (LOSSES) GAINS ON INVESTMENTS: Fixed maturities............................................ $(31,179) $ (9,750) $ 34,320 Equity securities........................................... 4,691 33,613 8,512 Mortgage loans on real estate............................... -- -- (198) Short-term investments...................................... -- -- 5 Real estate and other investments........................... 9,449 2,099 9,765 -------- -------- -------- $(17,039) $ 25,962 $ 52,404 ======== ======== ========
Proceeds from sales of investments in fixed maturities were $1,756,637, $1,627,450 and $2,460,316 in 2000, 1999 and 1998, respectively. Gross gains of $14,851, $11,996 and $44,360 and gross losses of $46,030, $21,746 and $10,040 were realized on the sales in 2000, 1999 and 1998, respectively. F-14 139 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 4. DEFERRED POLICY ACQUISITION COSTS The changes in deferred policy acquisition costs by product were as follows:
INTEREST TRADITIONAL SENSITIVE AND AND PRE-NEED INVESTMENT ACCIDENT LIFE PRODUCTS AND HEALTH TOTAL ------------ ------------- ---------- -------- Balance, December 31, 1998.................... $ 14,560 $314,462 $ 2,916 $331,938 Acquisition costs deferred.................. 33,783 81,016 17,391 132,190 Acquisition costs amortized................. (2,438) (38,831) (1,809) (43,078) Decreased amortization of deferred acquisition costs from unrealized losses on available-for-sale securities......... -- 9,142 -- 9,142 -------- -------- -------- -------- Balance, December 31, 1999.................... 45,905 365,789 18,498 430,192 Acquisition costs deferred.................. 15,882 95,062 2,983 113,927 Acquisition costs amortized................. (14,216) (32,347) (21,481) (68,044) Increased amortization of deferred acquisition costs from unrealized gains on available-for-sale securities......... -- (2,314) -- (2,314) -------- -------- -------- -------- Balance, December 31, 2000.................... $ 47,571 $426,190 $ -- $473,761 ======== ======== ======== ========
Included in total policy acquisition costs amortized in 2000 is $20,829 of acquisition costs resulting from the long-term care reinsurance cession agreement with John Hancock Life Insurance Company, which became effective March 1, 2000. See Note 9, "Reinsurance" for more information on the reinsurance transaction. Included in total policy acquisition costs deferred in 1999 is $35,882 of present value of future profits (PVP) and $1,416 of subsequent acquisition costs resulting from the reinsurance assumption agreement with United Family Life Insurance Company, an affiliate, which became effective October 1, 1999. PVP is being amortized against the expected premium revenue of the pre-need life insurance business assumed. See Note 9 "Reinsurance" for more information on this reinsurance transaction. During 2000, 1999 and 1998, the Company sold portions of its investment portfolio and in accordance with FASB Statement 97, the recognition of the realized net capital gains resulted in increased (decreased) amortization of deferred acquisition costs of $901, $(224) and $3,357, respectively. 5. PROPERTY AND EQUIPMENT A summary of property and equipment at December 31 for each year follows:
2000 1999 -------- -------- Land........................................................ $ 1,900 $ 1,900 Building and improvements................................... 27,019 26,383 Furniture and equipment..................................... 78,630 81,447 -------- -------- 107,549 109,730 Less accumulated depreciation............................... (86,658) (84,612) -------- -------- Net property and equipment.................................. $ 20,891 $ 25,118 ======== ========
F-15 140 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 6. ACCIDENT AND HEALTH RESERVES Activity for the liability for unpaid accident and health claims is summarized as follows:
YEARS ENDED DECEMBER 31 -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Balance as of January 1, net of reinsurance recoverables.... $1,139,603 $1,061,883 $ 988,036 Add: Incurred losses related to: Current year.............................................. 753,070 824,949 826,009 Prior years............................................... (25,859) (12,800) (27,973) ---------- ---------- ---------- Total incurred losses....................................... 727,211 812,149 798,036 Deduct: Paid losses related to: Current year.............................................. 428,725 468,404 469,881 Prior years............................................... 283,782 266,025 254,308 ---------- ---------- ---------- Total paid losses........................................... 712,507 734,429 724,189 ---------- ---------- ---------- Balance as of December 31, net of reinsurance recoverables.............................................. $1,154,307 $1,139,603 $1,061,883 ========== ========== ==========
The table above differs from the amounts reported on the balance sheet in the following respects: (1) the table above is presented net of ceded reinsurance and the accident and health reserves reported on the balance sheet are gross of ceded reinsurance; and (2) the table above includes accident and health benefits payable which are included with other policy claims and benefits payable reported on the balance sheet. Excluded from incurred losses presented above related to current year is $22,734 of reserves ceded resulting from the long-term care reinsurance agreement with John Hancock Life Insurance Company, which became effective March 1, 2000. See Note 9 "Reinsurance" for more information on this reinsurance transaction. In each of the years presented above, the accident and health insurance line of business experienced overall favorable development on claims reserves established as of the previous year end. The favorable development was a result of lower medical costs and a reduction of loss reserves due to lower than anticipated inflation in medical costs. The liability for unpaid accident and health claims includes $1,042,180 and $994,651 of total disability income reserves as of December 31, 2000 and 1999, respectively, which were discounted for anticipated interest earnings using a rate which varies by incurral year. 7. FEDERAL INCOME TAXES The Company reports its taxable income in a consolidated federal income tax return along with other affiliated subsidiaries of Fortis. 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. Deferred income taxes reflect the net tax effects of temporary differences between the basis of assets and liabilities for financial statement purposes and for income tax purposes. F-16 141 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 7. FEDERAL INCOME TAXES (CONTINUED) The significant components of the Company's deferred tax liabilities and assets as of December 31, 2000 and 1999 are as follows:
2000 1999 -------- -------- Deferred tax assets: Separate account assets/liabilities....................... $ 72,599 $ 60,716 Reserves.................................................. 28,244 35,843 Claims and benefits payable............................... 7,445 7,964 Accrued liabilities....................................... 10,811 6,973 Unrealized losses......................................... 5,543 32,500 Investments............................................... 14,373 4,549 Other..................................................... 8,301 6,755 -------- -------- Total deferred tax assets................................... 147,316 155,300 Deferred tax liabilities: Deferred policy acquisition costs......................... 107,948 98,539 Unrealized gains.......................................... 747 -- Fixed assets.............................................. 3,143 2,963 Investments............................................... 237 1,171 Other..................................................... 1,416 160 -------- -------- Total deferred tax liabilities.............................. 113,491 102,833 -------- -------- Net deferred tax asset...................................... $ 33,825 $ 52,467 ======== ========
The Company is required to establish a valuation allowance for any portion of the deferred tax asset 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, therefore, no such valuation allowance has been established. The Company's tax expense (benefit) for the year ended December 31 is shown as follows:
2000 1999 1998 ------- ------- ------- Current..................................................... $45,706 $10,873 $30,232 Deferred.................................................... (4,151) 29,454 170 ------- ------- ------- $41,555 $40,327 $30,402 ======= ======= =======
Federal income tax payments and refunds resulted in net payments of $54,792, $13,203 and $36,367 in 2000, 1999 and 1998, respectively. The Company's effective income tax rate varied from the statutory federal income tax rate as follows:
2000 1999 1998 ---- ---- ---- Statutory income tax rate................................... 35.0% 35.0% 35.0% Other, net.................................................. (3.0) (2.4) (2.1) ---- ---- ---- 32.0% 32.6% 32.9% ==== ==== ====
F-17 142 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 8. ASSETS HELD IN SEPARATE ACCOUNTS Separate account assets at December 31 were as follows:
2000 1999 ---------- ---------- Premium and annuity considerations for the variable annuity products and variable universal life products for which the contract holder, rather than the Company, bears the investment risk........................................... $5,159,275 $5,082,341 Assets of the separate accounts owned by the Company, at fair value................................................ 24,808 37,811 ---------- ---------- $5,184,083 $5,120,152 ========== ==========
9. REINSURANCE In the second quarter of 1996, First Fortis Life Insurance Company (First Fortis), an affiliate, received approval from the New York State Insurance Department for a reinsurance agreement with the Company. The agreement, which became effective as of January 1, 1996, decreased First Fortis' long-term disability reinsurance retention from a $10 net monthly benefit to a $2 net monthly benefit for claims incurred on and after January 1, 1996. The Company has assumed $6,884, $6,580 and $5,601 of premium from First Fortis in 2000, 1999 and 1998, respectively. The Company has assumed $14,366 and $11,047 of reserves in 2000 and 1999, respectively, from First Fortis. In the fourth quarter of 1999, United Family Life Insurance Company (UFL), an affiliate, received approval from the state of Georgia for a reinsurance agreement with the Company. The agreement, which became effective October 1, 1999, provided for the cession of substantially all of UFL's pre-need life insurance business on a 100% co-insurance basis. The Company assumed approximately $690,806 of reserves and received approximately $654,924 of cash, investments (primarily fixed maturities and mortgages) and other assets as of October 1, 1999. The $35,882 ceding commission was capitalized as an acquisition cost (as described in Note 4). The Company has assumed premium from UFL of $63,069 in 2000 and $31,523 during the period October 1, 1999 to December 31, 1999. The Company has assumed $679,969 and $690,806 of reserves in 2000 and 1999, respectively, from UFL. In the first quarter of 2000, the Company entered into a reinsurance agreement with John Hancock Life Insurance Company (John Hancock) for the sale of the Long-Term Care (LTC) line of business. The sale of the LTC line of business was effective March 1, 2000. The Company recorded a gain on this transaction of $19,019. The gain has been deferred and is being amortized as the level of direct inforce LTC policies decreases over future years, not to exceed 30 years. The amount of gain amortized in 2000 was $3,100. The Company ceded $41,309 of premiums and $32,222 of reserves to John Hancock in 2000. The maximum amount that the Company retains on any one life is $1,000 of life insurance including accidental death. Amounts in excess of $1,000 are reinsured with other life insurance companies on a yearly renewable term basis. Ceded reinsurance premiums for the year ended December 31 were as follows:
2000 1999 1998 ------- ------- ------- Life insurance.............................................. $ 7,413 $ 6,246 $ 6,983 Accident and health insurance............................... 48,403 17,803 13,862 ------- ------- ------- $55,816 $24,049 $20,845 ======= ======= =======
Recoveries under reinsurance contracts for the year ended December 31 were as follows:
2000 1999 1998 ------- ------- ------- Life insurance.............................................. $ 2,877 $ 478 $ 4,549 Accident and health insurance............................... 8,525 13,669 9,465 ------- ------- ------- $11,402 $14,147 $14,014 ======= ======= =======
F-18 143 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 9. REINSURANCE (CONTINUED) Reinsurance ceded would become a liability of the Company in the event the reinsurers are unable to meet the obligations assumed under the reinsurance agreement. To minimize its exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers. 10. DIVIDEND RESTRICTIONS Dividend distributions to the parent are restricted as to the amount by state regulatory requirements. The Company will have $42,895 free from such restrictions during 2001. Distributions in excess of this amount would require regulatory approval. In 2000, the Company declared dividends of $149,286, of which $100,000 was extraordinary. Approval was sought and received from the Minnesota Department of Commerce for the distribution of the extraordinary dividend. The Company paid $74,286 during 2000; $75,000 will be paid in 2001 and is included in other liabilities. 11. REGULATORY ACCOUNTING REQUIREMENTS Statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the Minnesota Department of Commerce. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The Company does not employ any significant permitted practices. In 1998, the NAIC adopted codified statutory accounting practices (Codification) effective January 1, 2001. Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that the Company uses to prepare its statutory-basis financial statements. Codification requires adoption by the various states before it becomes the prescribed statutory basis of accounting for insurance companies domesticated within those states. Minnesota has adopted Codification effective January 1, 2001. The cumulative effect of all changes resulting form the Codification guidance will be recorded as a direct adjustment to statutory surplus on January 1, 2001. The effect of the adoption is expected to increase statutory surplus by a material amount. 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-19 144 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 11.REGULATORY ACCOUNTING REQUIREMENTS (CONTINUED) Reconciliations of net income and shareholder's equity on the basis of statutory accounting to the related amounts presented in the accompanying statements were as follows:
NET INCOME SHAREHOLDER'S EQUITY -------------------- --------------------- 2000 1999 1998 2000 1999 -------- -------- ------- --------- -------- Based on statutory accounting practices...... $ 88,911 $ 9,387 $14,841 $ 433,955 $497,858 Deferred policy acquisition costs............ 66,712 54,049 39,782 473,761 430,192 Investment valuation differences............. 368 953 745 (19,310) (103,361) Deferred and uncollected premiums............ (732) (4,637) 511 (14,399) (13,188) Policy reserves.............................. (12,092) (20,070) (7,041) (150,668) (127,766) Commissions.................................. (45,485) 79,067 -- -- -- Current income taxes payable................. 22 (8,882) 925 (8,977) (9,000) Deferred income taxes........................ 4,151 (18,650) (417) 33,825 52,467 Realized gains on investments................ 439 9 356 -- -- Realized gains (losses) transferred to the Interest Maintenance Reserve (IMR), net of tax........................................ (17,873) (6,163) 22,748 -- -- Amortization of IMR, net of tax.............. (5,396) (8,565) (7,128) -- -- Write-off of investment...................... (3,129) -- -- -- -- Pension expense.............................. (2,145) (1,475) 81 (9,985) (8,235) Property and equipment....................... -- -- -- 3,261 591 Interest maintenance reserve................. -- -- -- 31,482 55,117 Asset valuation reserve...................... -- -- -- 70,955 72,940 Other, net................................... 14,368 8,183 (3,521) (13,176) 1,937 -------- -------- ------- --------- -------- Based on generally accepted accounting principles................................. $ 88,119 $ 83,206 $61,882 $ 830,724 $849,552 ======== ======== ======= ========= ========
12.TRANSACTIONS WITH AFFILIATED COMPANIES The Company receives various services from Fortis and its affiliates. These services include assistance in benefit plan administration, corporate insurance, accounting, tax, auditing, investment and other administrative functions. The fees paid to Fortis, Inc. for these services for years ended December 31, 2000, 1999 and 1998, were $10,094, $11,661 and $13,077, respectively. During 1997, Fortis, Inc. began providing information technology services to the Company. Information technology expenses were $47,123, $59,390 and $55,910 for years ended December 31, 2000, 1999 and 1998, respectively. In conjunction with the marketing of its fixed and variable annuity and variable life products, the Company paid $93,107, $79,413 and $72,638 in commissions to its affiliate, Fortis Investors, Inc., for the years ended December 31, 2000, 1999 and 1998, 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. 13.FAIR VALUE DISCLOSURES VALUATION METHODS AND ASSUMPTIONS The fair values for fixed maturity securities and equity securities are 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. Mortgage loans are reported at unpaid principal balance less allowances for possible losses. The fair values of mortgage loans are estimated using discounted cash flow analyses, using interest rates currently being offered for F-20 145 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 13.FAIR VALUE DISCLOSURES (CONTINUED) similar loans to borrowers with similar credit ratings. Mortgage loans with similar characteristics are aggregated for purposes of the calculations. The carrying amount of policy loans reported in the Balance Sheet approximates fair value. For short-term investments, the carrying amount is a reasonable estimate of fair value. The fair values for the Company's policy reserves under the investment products are determined using cash surrender value. Separate account assets and liabilities are reported at their estimated fair values in the Balance Sheet. The fair values under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.
DECEMBER 31, 2000 DECEMBER 31, 1999 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- Assets: Investments: Securities available-for-sale: Fixed maturities......................... $2,530,480 $2,530,480 $2,706,372 $2,706,372 Equity securities........................ 87,912 87,912 85,021 85,021 Mortgage loans on real estate................. 810,616 844,319 754,514 741,397 Policy loans.................................. 102,308 102,308 83,439 83,439 Short -- term investments..................... 152,736 152,736 115,527 115,527 Assets held in separate accounts.............. 5,184,083 5,184,083 5,120,152 5,120,152 Liabilities: Individual and group annuities (subject to discretionary withdrawal).................. 585,905 571,834 789,002 763,861 Liabilities related to separate accounts...... 5,159,275 5,159,275 5,082,341 5,082,341
14.COMMITMENTS AND CONTINGENCIES The Company is named as a defendant in a number of legal actions arising primarily from claims made under insurance policies. These actions have been considered in establishing policy benefit and loss reserves. Management and its legal counsel are of the opinion that the settlement of these actions will not have a material adverse effect on the Company's financial position or results of operations. 15. RETIREMENT AND OTHER EMPLOYEE BENEFITS The Company is an indirect wholly-owned subsidiary of Fortis, which sponsors a defined benefit pension plan covering employees and certain agents who meet eligibility requirements as to age and length of service. The benefits are based on years of service and career compensation. Fortis Inc.'s 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 $2,097, $2,225 and $1,627 for 2000, 1999 and 1998, respectively. The Company participates in a contributory profit sharing plan, sponsored by Fortis, covering employees and certain agents who meet eligibility requirements as to age and length of service. Benefits are payable to participants on retirement or disability and to the beneficiaries of participants in the event of death. The first three percent of an employee's contribution is matched 200% by the Company. The amount expensed was approximately $4,573, $3,711 and $3,610 for 2000, 1999 and 1998, respectively. In addition to retirement benefits, the Company participates in other health care and life insurance benefit plans (postretirement benefits) for retired employees, sponsored by Fortis. Health care benefits, either through a Fortis sponsored retiree plan for retirees under age 65 or through a cost offset for individually purchased Medigap policies F-21 146 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY (CONTINUED) 15. RETIREMENT AND OTHER EMPLOYEE BENEFITS (CONTINUED) for retirees over age 65, are available to employees who retire on or after January 1, 1993, at age 55 or older, with 15 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, 2000, 1999 and 1998. The Company made contributions to the postretirement benefit plans of approximately $0, $19 and $(5) in 2000, 1999 and 1998, respectively, as claims were incurred. 16. EVENTS SUBSEQUENT On January 25, 2001, Fortis agreed to sell (the "Sale") 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 and 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 and Annuity Insurance Company, an indirect wholly owned subsidiary of The Hartford, will reinsure the Insurance Contracts on a 100% coinsurance basis and perform administration of such Insurance Contracts. In addition, Hartford Life and Accident Insurance Company, another indirect wholly owned subsidiary of The Hartford, will purchase all of the outstanding stock of Fortis Advisers, Inc., which is the investment adviser for the Fund. Thus, upon completion of the Sale, Hartford Life and Accident Insurance Company will own and control Fortis Advisers, Inc. and its subsidiaries, including Fortis Investors, Inc., which is the principal distributor of the Fund. Closing of the Sale is subject to various regulatory and other approvals. Following the Sale, the Fund expects to enter into new investment advisory, subadvisory and distribution agreements with affiliates of The Hartford. Such new agreements will require approvals subsequent to the closing of the Sale by the Fund's board of directors and shareholders and by Insurance Contract holders to the extent required by law. F-22 147 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information of Fortis Benefits Insurance Company is being presented in connection with the Company's Sale of its Fortis Financial Group Division (FFG) to The Hartford on April 1, 2001. The accompanying unaudited pro forma financial statements of the Company for the period ended December 31, 2000 present the financial position and results for the Company as if the Sale and certain transactions and adjustments related to the Sale had occurred as of January 1, 2000. The unaudited pro forma financial information does not purport to represent what the Company's financial position or results of operations actually would have been had the Sale in fact occurred as of the date indicated, or to project the Company's financial position or results of operations for any future date or period. The pro forma adjustments are based on available information and certain assumptions that the Company currently believes are reasonable under the circumstances. The unaudited pro forma financial information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The unaudited pro forma financial information is provided for informational purposes only. The Company's financial statements will reflect the actual effects of the Sale in the 10-Q filing for the period ending June 30, 2001. Although the actual Sale results will differ, the unaudited pro forma financial information reflects management's best estimate based on currently available information. F-23 148 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DEC. 31, 2000 ANNUAL REPORT FFG PRO FORMA ------------- --------- ----------- ASSETS Investments: Fixed maturities, at fair value (amortized cost 2000 -- $2,543,040; 1999 -- $2,802,697)........... $2,530,480 $(158,752) $ 2,371,728 Equity securities, at fair value (cost 2000 -- $91,164; -- 1999 -- $81,554).............. 87,912 -- 87,912 Mortgage loans on real estate, less allowance for possible losses (2000 and 1999 -- $11,085)........ 810,616 (93,115) 717,501 Policy loans......................................... 102,308 (102,192) 116 Short-term investments............................... 152,736 -- 152,736 Real estate and other investments.................... 41,712 -- 41,712 ---------- --------- ----------- 3,725,764 (354,059) 3,371,705 Cash and cash equivalents.............................. 13,209 19,299 32,508 -- -- Receivables: Uncollected premiums................................. 66,505 (260) 66,245 Reinsurance recoverable on unpaid and paid losses.... 64,182 1,077,253 1,141,435 Other................................................ 48,083 (5,934) 42,149 ---------- --------- ----------- 178,770 1,071,059 1,249,829 Accrued investment income.............................. 52,556 (4,839) 47,717 Deferred policy acquisition costs...................... 473,761 (433,192) 40,569 Property and equipment at cost, less accumulated depreciation......................................... 20,891 (18,138) 2,753 Federal income tax recoverable......................... 7,248 (528) 6,720 Deferred federal income taxes.......................... 33,825 154,050 187,875 Other assets........................................... 1,677 -- 1,677 Assets held in separate accounts....................... 5,184,083 -- 5,184,083 ---------- --------- ----------- Total assets...................................... $9,691,784 $ 433,652 $10,125,436 ========== ========= ===========
F-24 149 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DEC. 31, 2000 ANNUAL REPORT FFG PRO FORMA ------------- -------- ----------- POLICY RESERVES AND LIABILITIES AND SHAREHOLDER'S EQUITY Policy reserves and liabilities: Future policy benefit reserves: Traditional and pre-need life insurance............ $1,170,612 $ -- $ 1,170,612 Interest sensitive and investment products......... 970,591 -- 970,591 Accident and health................................ 1,007,328 -- 1,007,328 ---------- -------- ----------- 3,148,531 -- 3,148,531 Unearned revenues..................................... 33,614 (243) 33,371 Other policy claims and benefits payable.............. 240,677 (7,941) 232,736 Policyholder dividends payable........................ 7,438 (7,438) -- ---------- -------- ----------- 3,430,260 (15,622) 3,414,638 Accrued expenses...................................... 69,476 (1,061) 68,415 Current income taxes payable.......................... -- 161,290 161,290 Other liabilities..................................... 181,633 (787) 180,846 Due to affiliates..................................... 4,497 -- 4,497 Deferred gain on LTC & FFG sale....................... 15,919 256,308 272,227 Liabilities related to separate accounts.............. 5,159,275 24,808 5,184,083 ---------- -------- ----------- Total policy reserves and liabilities.............. 8,861,060 424,936 9,285,996 ---------- -------- ----------- Shareholder's equity: Common stock, $5 par value: authorized, issued and outstanding shares -- 1,000,000.................... 5,000 -- 5,000 Additional paid-in capital............................ 468,000 -- 468,000 Retained earnings..................................... 366,644 8,716 375,360 Accumulated other comprehensive loss.................. (8,920) -- (8,920) ---------- -------- ----------- Total shareholder's equity......................... 830,724 8,716 839,440 ---------- -------- ----------- Total policy reserves and liabilities and shareholder's equity............................. $9,691,784 $433,652 $10,125,436 ========== ======== ===========
F-25 150 FORTIS BENEFITS INSURANCE COMPANY UNAUDITED PRO FORMA STATEMENT OF INCOME (IN THOUSANDS)
DEC. 31, 2000 ANNUAL REPORT FFG PRO FORMA ------------- --------- ---------- Insurance operations: Traditional life insurance premiums..................... $ 428,641 (10,267) $ 418,374 Interest sensitive and investment product policy charges............................................... 159,728 (157,408) 2,320 Accident and health insurance premiums.................. 952,015 -- 952,015 ---------- --------- ---------- 1,540,384 (167,675) 1,372,709 Net investment income................................... 279,572 (54,622) 224,950 Net realized (losses) gains on investments.............. (17,039) 3,662 (13,377) Other income............................................ 12,687 17,733 30,420 ---------- --------- ---------- Total revenues........................................ 1,815,604 (200,902) 1,614,702 Benefits to policy holders: Traditional life insurance............................ 335,022 (10,621) 324,401 Interest sensitive investment products................ 89,062 (83,105) 5,957 Accident and health claims............................ 749,945 0 749,945 ---------- --------- ---------- 1,174,029 (93,726) 1,080,303 Policy holder dividends................................. 2,685 (2,685) 0 Amortization of deferred policy acquisition costs....... 47,215 (36,055) 11,160 Insurance commissions................................... 128,267 (6,566) 121,701 General and administrative expenses..................... 333,734 (68,697) 265,037 ---------- --------- ---------- Total benefits and expenses........................... 1,685,930 (207,729) 1,478,201 ---------- --------- ---------- Income before federal income taxes...................... 129,674 6,827 136,501 Federal income taxes.................................... 41,555 (1,889) 39,666 ---------- --------- ---------- Net income.............................................. $ 88,119 $ 8,716 $ 96,835 ========== ========= ==========
F-26 151 FORTIS BENEFITS INSURANCE COMPANY NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (IN THOUSANDS) Adjustments to the balance sheet, including invested assets, receivables, accrued investment income, deferred acquisition costs, reserves, unearned revenues, policy claims and dividends payable and accrued expenses, along with adjustments to the income statement, are related to the Division sold to The Hartford. Adjustments to cash and cash equivalents and property and equipment represent the sale of certain personal and real property to The Hartford. Adjustments to deferred federal income taxes and current income taxes payable represent the accrual of federal income tax associated with the Sale. Deferred gain on the Sale will be amortized to income as the business runs off. For 2000, the pro forma income statement includes pre-tax amortization of $18,000. An effective tax rate of 35% has been applied and is reflected in the provision for federal income tax. Pro forma investment income includes estimated earnings from approximately $500 million of cash proceeds from the Sale (after applicable tax payment). Separate accounts business is reinsured under a modified coinsurance agreement with The Hartford. F-27 152 REPORT OF INDEPENDENT ACCOUNTANTS To Fortis Benefits Insurance Company and Contract Owners of Fortis Benefits Insurance Company Variable Account D: In our opinion, the accompanying statement of net assets and the related combined and separate statements of operations and changes in net assets present fairly, in all material respects, the financial position of Fortis Benefits Insurance Company Variable Account D, comprised of the Fortis Series Fund, Inc. Growth Stock, U.S. Government Securities, Money Market, Asset Allocation, Diversified Income, Global Growth, Aggressive Growth, Growth & Income, High Yield, International Stock II (formerly Global Asset Allocation), Multisector Bond (formerly Global Bond), International Stock, Value, S & P 500, Blue Chip Stock, Mid Cap Stock, Large Cap Growth, Small Cap Value, Global Equity, Investors Growth, Blue Chip II, Capital Opportunities, and American Leaders Subaccounts; the Wells Fargo Variable Trust Large Cap, Corporate Bond, Small Cap Stock, Income Equity, Growth, Equity Value, Asset Allocation and International Subaccounts; the Scudder Variable Life Investment Fund International Subaccount; the AIM Variable Insurance Funds, Inc. V.I. Value and V.I. International Equity Subaccounts; the Alliance Variable Product Series Money Market, International and Premier Growth Subaccounts; the SAFECO Resource Series Growth and Equity Subaccounts; the Federated Insurance Series U .S. Government Securities II, High Income Bond Fund II, Utility II, American Leaders II, Equity Income, Growth Strategies, International Equity, Money Fund, Strategic Income, Small Cap Strategies, Quality Bond, Large Cap and International Small Co. Subaccounts; the Lexington Funds, Inc. Natural Resources and Emerging Markets Subaccounts; the MFS Variable Insurance Trust Emerging Growth, High Income and World Government Subaccounts; the Montgomery Variable Fund Emerging Markets and Growth Subaccounts; the Strong Variable Insurance Funds Discovery II and International II Subaccounts; the American Century Investments VP Balanced and VP Growth Subaccounts; the Van Eck Worldwide Insurance Trust Bond and Hard Assets Subaccounts; the Neuberger & Berman, Inc. AMT Limited Maturity Bond and AMT Partners Subaccounts; INVESCO, Inc. Health & Sciences, Industrial Income and Technology Subaccounts; and Kelmoore Strategy Variable Fund and Variable Eagle Fund Subaccounts thereof at December 31, 2000, and the results of each of their operations and the changes in each of their net assets for the year or period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Fortis Benefits Insurance Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States of America, 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 audit, which included confirmation of securities at December 31, 2000 by correspondence with the custodian, provides a reasonable basis for our opinion. The financial statements of the Fortis Benefits Insurance Company Variable Account D as of December 31, 1999, and for the year then ended were audited by other independent accountants whose report dated March 29, 2000, expressed an unqualified opinion on those statements. PricewaterhouseCoopers LLP April 6, 2001 1 153 Report of Independent Auditors Board of Directors Fortis Benefits Insurance Company We have audited the accompanying individual and combined statements of operations and changes in net assets of the segregated subaccounts of Fortis Benefits Insurance Company Variable Account D (comprised of, respectively, the Fortis Series Fund, Inc.'s Growth Stock, U.S. Government Securities, Money Market, Asset Allocation, Diversified Income, Global Growth, Aggressive Growth, Growth & Income, High Yield, Global Asset Allocation, Global Bond, International Stock, Value, S & P 500, Blue Chip Stock, Mid Cap Stock, Large Cap Growth and Small Cap Value Subaccounts; the Wells Fargo Variable Trust's Large Cap (formerly Norwest ValuGrowth), Corporate Bond (formerly Norwest Income), Small Cap Stock (formerly Norwest Small Company Stock), Income Equity (formerly Norwest Income Equity), Growth, Equity Value, and Asset Allocation Subaccounts; the Scudder Variable Life Investment Fund's International Subaccount; the AIM Variable Insurance Funds, Inc.'s V.I. Value and V.I. International Equity Subaccounts; the Alliance Variable Product Series' Money Market, International and Premier Growth Subaccounts; the SAFECO Resource Series' Growth and Equity Subaccounts; the Federated Insurance Series' U.S. Government Securities II, High Income Bond Fund II, Utility II and American Leaders II, Equity Income, Growth Strategies, International Equity, Money Fund, Strategic Income and Small Cap Strategies Subaccounts; the Lexington Funds, Inc.'s Natural Resources Trust and Emerging Markets Subaccounts; the MFS Variable Insurance Trusts' Emerging Growth, High Income and World Government Subaccounts; the Montgomery Variable Fund's Emerging Markets and Growth Subaccounts; the Strong Variable Insurance Funds' Discovery II and International II Subaccounts; the American Century Investments' VP Balanced and VP Growth Subaccounts; the Van Eck Worldwide Insurance Trust's Worldwide Bond Fund and Worldwide Hard Assets Fund Subaccounts; the Neuberger & Berman, Inc.'s AMT Limited Maturity Bond and AMT Partners Subaccounts; and INVESCO, Inc.'s Health & Sciences, Industrial Income and Technology Subaccounts) for the period ended December 31, 1999. These financial statements are the responsibility of the management of Fortis Benefits Insurance Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and changes in net assets of each individual and combined portfolio subaccounts of Fortis Benefits Insurance Company Variable Account D for the periods described in the first paragraph, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Minneapolis, Minnesota March 29, 2000 2 154 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENT OF NET ASSETS DECEMBER 31, 2000 --------------------------------------------------------------------------------
ATTRIBUTABLE TO FORTIS BENEFITS ATTRIBUTABLE TO ACCUMULATION NET ASSETS AT INSURANCE VARIABLE ANNUITY UNITS SHARES COST MARKET VALUE COMPANY CONTRACTS OUTSTANDING Investments in Fortis Series Fund, Inc.: Growth Stock 17,808,197 $ 528,387,360 $ 724,147,867 $ - $ 724,147,867 113,790,012 U.S. Government Securities 12,110,096 129,014,386 128,203,771 - 128,203,771 6,939,291 Money Market 7,180,447 81,143,408 81,276,917 - 81,276,917 40,915,690 Asset Allocation 30,439,524 510,693,187 588,037,608 - 588,037,608 147,058,829 Diversified Income 7,570,416 87,671,021 81,712,794 - 81,712,794 37,731,007 Global Growth 11,258,946 227,509,790 286,067,875 - 286,067,875 11,183,345 Aggressive Growth 10,237,728 241,373,747 242,936,424 - 242,936,424 9,405,616 Growth & Income 11,783,252 187,700,869 233,576,004 - 233,576,004 9,751,671 High Yield 6,180,936 60,275,380 47,010,342 - 47,010,342 4,034,364 International Stock II 3,306,072 41,683,341 36,854,580 - 36,854,580 2,586,901 Multisector Bond 1,875,298 20,419,648 19,684,437 - 19,684,437 1,627,384 International Stock 7,227,389 102,497,803 109,086,595 - 109,086,595 6,595,417 Value 4,930,600 67,289,011 85,691,737 - 85,691,737 4,716,881 S & P 500 15,120,075 262,112,748 304,660,448 - 304,660,448 16,104,803 Blue Chip Stock 11,834,163 202,244,063 232,309,355 - 232,309,355 11,868,756 Mid Cap Stock 2,997,970 31,410,550 30,909,670 - 30,909,670 2,711,670 Large Cap Growth 6,772,251 91,732,424 80,331,083 - 80,331,083 6,877,397 Small Cap Value 3,915,718 39,448,223 45,966,619 - 45,966,619 3,442,239 Global Equity 841,798 8,435,490 8,063,079 4,572,122 3,490,957 377,135 Investors Growth 1,223,959 12,341,129 11,446,706 4,444,881 7,001,825 787,044 Blue Chip II 1,450,454 14,541,578 13,234,382 2,861,851 10,372,531 1,189,413 Capital Opportunities 1,480,603 15,004,016 13,870,439 4,443,436 9,427,003 1,077,680 American Leaders 612,280 6,310,253 6,612,074 3,524,436 3,087,638 297,512 Investments in Wells Fargo Variable Trust: Large Cap 6,102,213 66,708,311 72,982,467 - 72,982,467 2,985,336 Corporate Bond 2,916,947 31,156,041 29,577,846 - 29,577,846 2,145,925 Small Cap Stock 1,605,751 21,206,141 16,667,693 - 16,667,693 977,178 Equity Income 6,104,379 89,560,710 103,835,486 - 103,835,486 6,073,556
The accompanying notes are an integral part of the financial statements. 3 155 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENT OF NET ASSETS DECEMBER 31, 2000 --------------------------------------------------------------------------------
ATTRIBUTABLE TO FORTIS BENEFITS NET ASSETS AT INSURANCE SHARES COST MARKET VALUE COMPANY Investments in Wells Fargo Variable Trust: (continued) Growth 26,637 $ 602,434 $ 507,710 $ - Equity Value 61,388 570,316 595,462 - Asset Allocation 549,618 7,956,526 7,595,718 - International 6,353 59,151 56,800 - Investments in Scudder Variable Life: International 501,960 6,868,064 7,157,954 - Investment in AIM Variable Insurance Funds, Inc.: V.I. Value 1,081,354 31,884,052 29,531,789 - V.I. International Equity 329,028 7,609,179 6,620,039 - Investments in Alliance Variable Product Series: Money Market 23,456,726 23,462,671 23,456,726 - International 109,994 1,764,646 1,760,999 - Premier Growth 265,601 9,836,194 8,512,512 - Investments in SAFECO Resource Series: Growth 171,492 3,773,743 3,225,768 - Equity 106,486 3,184,953 2,924,101 - Investments in Federated Insurance Series: U.S. Government Securities II 929,598 9,813,550 10,327,832 - High Income Bond Fund II 1,305,571 12,575,469 11,045,133 - Utility II 869,754 12,082,355 10,819,740 - American Leaders II 3,886,419 78,542,950 79,749,313 - Equity Income 3,565,547 56,053,290 51,058,632 - Growth Strategies 2,092,424 56,089,350 48,439,624 - International Equity 1,193,240 26,391,888 22,063,011 - Money Fund 1,911,011 1,911,395 1,911,011 - ATTRIBUTABLE TO ACCUMULATION VARIABLE ANNUITY UNITS CONTRACTS OUTSTANDING Investments in Wells Fargo Variable Trust: (continued) Growth $ 507,710 54,279 Equity Value 595,462 57,617 Asset Allocation 7,595,718 727,986 International 56,800 6,378 Investments in Scudder Variable Life: International 7,157,954 368,135 Investment in AIM Variable Insurance Funds, Inc.: V.I. Value 29,531,789 2,378,430 V.I. International Equity 6,620,039 610,478 Investments in Alliance Variable Product Series: Money Market 23,456,726 1,879,633 International 1,760,999 130,016 Premier Growth 8,512,512 335,713 Investments in SAFECO Resource Series: Growth 3,225,768 215,448 Equity 2,924,101 200,297 Investments in Federated Insurance Series: U.S. Government Securities II 10,327,832 910,872 High Income Bond Fund II 11,045,133 1,162,282 Utility II 10,819,740 1,163,164 American Leaders II 79,749,313 7,319,742 Equity Income 51,058,632 4,974,118 Growth Strategies 48,439,624 3,573,213 International Equity 22,063,011 1,648,875 Money Fund 1,911,011 177,179
The accompanying notes are an integral part of the financial statements. 4 156 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENT OF NET ASSETS DECEMBER 31, 2000 --------------------------------------------------------------------------------
ATTRIBUTABLE TO FORTIS BENEFITS NET ASSETS AT INSURANCE SHARES COST MARKET VALUE COMPANY Investments in Federated Insurance Series: (continued) Strategic Income 193,000 $ 1,975,801 $ 1,825,784 $ - Small Cap Strategies 626,853 7,602,927 5,961,373 - Quality Bond 32,544 339,398 348,875 - Large Cap 540,860 4,855,067 4,148,393 - International Small Co. 149,314 1,323,522 1,184,060 - Investments in Lexington Funds Inc.: Natural Resources 32,495 441,827 479,305 - Emerging Markets 7,169 90,558 54,700 - Investments in MFS Variable Insurance Trust: Emerging Growth 850,862 24,076,691 24,538,874 - High Income 758,799 8,528,654 7,466,587 - World Government 6,782 66,602 67,890 - Investments in Montgomery Variable Funds: Emerging Markets 79,851 643,047 619,647 - Growth 38,647 685,399 600,571 - Investments in Strong Variable Insurance Funds: Discovery II 29,959 373,771 355,917 - International II 120,726 1,279,380 1,195,189 - Investments in American Century Investments: VP Balanced 149,978 1,125,554 1,090,338 - VP Growth 108,968 1,877,801 1,719,518 - Investments in Van Eck Worldwide Insurance Trust: Bond 23,992 241,233 248,796 - Hard Assets 16,163 183,851 195,093 - ATTRIBUTABLE TO ACCUMULATION VARIABLE ANNUITY UNITS CONTRACTS OUTSTANDING Investments in Federated Insurance Series: (continued) Strategic Income $ 1,825,784 190,036 Small Cap Strategies 5,961,373 610,913 Quality Bond 348,875 32,779 Large Cap 4,148,393 544,569 International Small Co. 1,184,060 142,959 Investments in Lexington Funds Inc.: Natural Resources 479,305 32,495 Emerging Markets 54,700 6,857 Investments in MFS Variable Insurance Trust: Emerging Growth 24,538,874 1,465,462 High Income 7,466,587 781,443 World Government 67,890 6,081 Investments in Montgomery Variable Funds: Emerging Markets 619,647 81,099 Growth 600,571 33,166 Investments in Strong Variable Insurance Funds: Discovery II 355,917 27,483 International II 1,195,189 124,186 Investments in American Century Investments: VP Balanced 1,090,338 70,538 VP Growth 1,719,518 109,648 Investments in Van Eck Worldwide Insurance Trust: Bond 248,796 22,665 Hard Assets 195,093 21,684
The accompanying notes are an integral part of the financial statements. 5 157 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENT OF NET ASSETS DECEMBER 31, 2000 --------------------------------------------------------------------------------
ATTRIBUTABLE TO FORTIS BENEFITS NET ASSETS AT INSURANCE SHARES COST MARKET VALUE COMPANY Investments in Neuberger & Berman, Inc.: AMT Limited Maturity Bond 45,511 $ 594,197 $ 600,292 $ - AMT Partners 68,739 1,192,959 1,111,505 - Investments in INVESCO, Inc.: Health & Sciences 293,477 5,813,094 6,130,745 - Industrial Income 125,893 2,676,019 2,607,238 - Technology 428,490 17,136,872 12,156,249 - Investments in Kelmoore Strategy: Variable Fund 25,343 254,060 254,190 - Variable Eagle Fund 9,803 98,221 98,324 - ---------------- ----------------- ------------ Totals $ 3,612,379,309 $ 4,037,173,625 $ 19,846,726 ================ ================= ============ ATTRIBUTABLE TO ACCUMULATION VARIABLE ANNUITY UNITS CONTRACTS OUTSTANDING Investments in Neuberger & Berman, Inc.: AMT Limited Maturity Bond $ 600,292 51,235 AMT Partners 1,111,505 80,103 Investments in INVESCO, Inc.: Health & Sciences 6,130,745 288,697 Industrial Income 2,607,238 156,986 Technology 12,156,249 431,915 Investments in Kelmoore Strategy: Variable Fund 254,190 25,381 Variable Eagle Fund 98,324 9,817 --------------- -------------- Totals $ 4,017,326,899 486,494,104 =============== ==============
The accompanying notes are an integral part of the financial statements. 6 158 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 2000 --------------------------------------------------------------------------------
FORTIS FORTIS U.S. FORTIS GROWTH GOVERNMENT MONEY STOCK SECURITIES MARKET OPERATIONS Dividend income $ 115,436,415 $ 7,617,281 $ 3,765,277 Mortality and expense and administrative charges (10,598,443) (1,620,635) (1,097,322) Net realized gain (loss) on investments 19,029,609 (1,167,253) 1,442,396 Net unrealized appreciation (depreciation) of investments during the year (105,655,263) 6,977,878 (319,174) -------------- -------------- --------------- Net increase (decrease) in net assets resulting from operations $ 18,212,318 $ 11,807,271 $ 3,791,177 ============== =============== =============== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 18,212,318 $ 11,807,271 $ 3,791,177 -------------- -------------- --------------- Capital transactions: Purchase of Variable Account units 33,341,454 12,879,334 110,060,904 Redemption of Variable Account units (45,423,085) (27,088,145) (140,521,964) Redemptions for mortality and expense and administrative charges 10,598,443 1,620,635 1,097,322 Funding of subaccount by Fortis Benefits Insurance Company - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - Dividend income distribution to Fortis Benefits Insurance Company - - - -------------- -------------- --------------- Net increase (decrease) from capital transactions (1,483,188) (12,588,176) (29,363,738) -------------- -------------- --------------- Net increase (decrease) in net assets 16,729,130 (780,905) (25,572,561) Net assets at beginning of year 707,418,737 128,984,676 106,849,478 -------------- -------------- --------------- Net assets at end of year $ 724,147,867 $ 128,203,771 $ 81,276,917 ============== ============== =============== FORTIS FORTIS FORTIS FORTIS ASSET DIVERSIFIED GLOBAL AGGRESSIVE ALLOCATION INCOME GROWTH GROWTH OPERATIONS Dividend income $ 95,504,709 $ 6,689,026 $ 38,539,443 $ 55,510,091 Mortality and expense and administrative charges (8,176,812) (1,153,452) (4,576,140) (3,674,059) Net realized gain (loss) on investments 10,604,950 (1,365,648) 28,823,194 10,723,677 Net unrealized appreciation (depreciation) of investments during the year (105,022,757) 743,006 (130,661,038) (119,258,277) -------------- -------------- ------------- --------------- Net increase (decrease) in net assets resulting from operations $ (7,089,910) $ 4,912,932 $ (67,874,541) $ (56,698,568) ============== ============== ============= =============== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ (7,089,910) $ 4,912,932 $ (67,874,541) $ (56,698,568) -------------- -------------- ------------- --------------- Capital transactions: Purchase of Variable Account units 23,901,447 1,758,935 77,997,702 109,499,770 Redemption of Variable Account units (44,808,396) (19,921,354) (65,661,592) (27,062,457) Redemptions for mortality and expense and administrative charges 8,176,812 1,153,452 4,576,140 3,674,059 Funding of subaccount by Fortis Benefits Insurance Company - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - - -------------- -------------- ------------- --------------- Net increase (decrease) from capital transactions (12,730,137) (17,008,967) 16,912,250 86,111,372 -------------- -------------- ------------- --------------- Net increase (decrease) in net assets (19,820,047) (12,096,035) (50,962,291) 29,412,804 Net assets at beginning of year 607,857,655 93,808,829 337,030,166 213,523,620 -------------- -------------- ------------- --------------- Net assets at end of year $ 588,037,608 $ 81,712,794 $ 286,067,875 $ 242,936,424 ============== ============== ============= ===============
The accompanying notes are an integral part of the financial statements. 7 159 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 2000 --------------------------------------------------------------------------------
FORTIS FORTIS INTERNATIONAL MULTISECTOR FORTIS FORTIS STOCK II BOND GROWTH & HIGH (FORMERLY GLOBAL (FORMERLY INCOME YIELD ASSET ALLOCATION) GLOBAL BOND) OPERATIONS Dividend income $ 34,368,921 $ 5,724,993 $ 3,187,427 $ 343,484 Mortality and expense and administrative charges (3,272,121) (730,197) (595,577) (238,960) Net realized gain (loss) on investments 12,183,257 (2,286,046) 611,583 (301,922) Net unrealized appreciation (depreciation) of investments during the year (34,620,997) (6,814,869) (7,507,640) 622,597 --------------- --------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations $ 8,659,060 $ (4,106,119) $ (4,304,207) $ 425,199 =============== =============== =============== =============== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 8,659,060 $ (4,106,119) $ (4,304,207) $ 425,199 --------------- --------------- --------------- --------------- Capital transactions: Purchase of Variable Account units 1,512,968 4,013,228 1,702,573 4,041,432 Redemption of Variable Account units (43,616,464) (14,876,144) (14,154,194) (2,781,048) Redemptions for mortality and expense and administrative charges 3,272,121 730,197 595,577 238,960 Funding of subaccount by Fortis Benefits Insurance Company - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - (3,939,373) (5,208,256) Dividend income distribution to Fortis Benefits Insurance Company - - - - --------------- --------------- --------------- --------------- Net increase (decrease) from capital transactions (38,831,375) (10,132,719) (15,795,417) (3,708,912) --------------- --------------- --------------- --------------- Net increase (decrease) in net assets (30,172,315) (14,238,838) (20,099,624) (3,283,713) Net assets at beginning of year 263,748,319 61,249,180 56,954,204 22,968,150 --------------- --------------- --------------- --------------- Net assets at end of year $ 233,576,004 $ 47,010,342 $ 36,854,580 $ 19,684,437 =============== =============== =============== =============== FORTIS INTERNATIONAL FORTIS FORTIS STOCK VALUE S & P 500 OPERATIONS Dividend income $ 7,768,795 $ 4,990,562 $ 5,970,730 Mortality and expense and administrative charges (1,490,302) (1,020,012) (4,355,062) Net realized gain (loss) on investments 1,707,857 1,884,519 7,378,378 Net unrealized appreciation (depreciation) of investments during the year (20,489,899) 6,156,606 (45,717,365) ---------------- -------------- --------------- Net increase (decrease) in net assets resulting from operations $ (12,503,549) $ 12,011,675 $ (36,723,319) ================ ============== =============== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ (12,503,549) $ 12,011,675 $ (36,723,319) ---------------- -------------- --------------- Capital transactions: Purchase of Variable Account units 23,193,571 8,234,738 64,860,316 Redemption of Variable Account units (12,019,030) (12,167,598) (62,854,725) Redemptions for mortality and expense and administrative charges 1,490,302 1,020,012 4,355,062 Funding of subaccount by Fortis Benefits Insurance Company - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - Dividend income distribution to Fortis Benefits Insurance Company - - - ---------------- -------------- --------------- Net increase (decrease) from capital transactions 12,664,843 (2,912,848) 6,360,653 ---------------- -------------- --------------- Net increase (decrease) in net assets 161,294 9,098,827 (30,362,666) Net assets at beginning of year 108,925,301 76,592,910 335,023,114 ---------------- -------------- --------------- Net assets at end of year $ 109,086,595 $ 85,691,737 $ 304,660,448 ================ ============== ===============
The accompanying notes are an integral part of the financial statements. 8 160 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 2000 --------------------------------------------------------------------------------
FORTIS FORTIS FORTIS FORTIS BLUE CHIP MID CAP LARGE CAP SMALL CAP STOCK STOCK GROWTH VALUE OPERATIONS Dividend income $ 20,376,299 $ 4,642,725 $ 3,557,944 $ 4,167,777 Mortality and expense and administrative charges (3,167,237) (328,324) (1,125,146) (477,314) Net realized gain (loss) on investments 6,508,229 191,896 2,216,579 461,021 Net unrealized appreciation (depreciation) of investments during the year (33,726,821) (3,074,569) (22,859,684) 4,676,172 --------------- --------------- --------------- ------------- Net increase (decrease) in net assets resulting from operations $ (10,009,530) $ 1,431,728 $ (18,210,307) $ 8,827,656 =============== =============== =============== ============= CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ (10,009,530) $ 1,431,728 $ (18,210,307) $ 8,827,656 --------------- --------------- --------------- ------------- Capital transactions: Purchase of Variable Account units 32,509,095 15,683,661 40,094,007 11,756,863 Redemption of Variable Account units (11,231,376) (2,615,354) (7,162,995) (3,811,269) Redemptions for mortality and expense and administrative charges 3,167,237 328,324 1,125,146 477,314 Funding of subaccount by Fortis Benefits Insurance Company - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount (7,081,948) (4,701,693) (5,976,712) (4,203,407) Dividend income distribution to Fortis Benefits Insurance Company - - - - --------------- --------------- --------------- ------------- Net increase (decrease) from capital transactions 17,363,008 8,694,938 28,079,446 4,219,501 --------------- --------------- --------------- ------------- Net increase (decrease) in net assets 7,353,478 10,126,666 9,869,139 13,047,157 Net assets at beginning of year 224,955,877 20,783,004 70,461,944 32,919,462 --------------- --------------- --------------- ------------- Net assets at end of year $ 232,309,355 $ 30,909,670 $ 80,331,083 $ 45,966,619 =============== =============== =============== ============= FORTIS FORTIS GLOBAL INVESTORS FORTIS EQUITY * GROWTH * BLUE CHIP II * OPERATIONS Dividend income $ 44,987 $ 10,047 $ - Mortality and expense and administrative charges (17,886) (30,817) (45,556) Net realized gain (loss) on investments (49,132) (55,212) (72,960) Net unrealized appreciation (depreciation) of investments during the year (372,411) (894,423) (1,307,196) --------------- -------------- --------------- Net increase (decrease) in net assets resulting from operations $ (394,442) $ (970,405) $ (1,425,712) =============== ============== =============== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ (394,442) $ (970,405) $ (1,425,712) --------------- -------------- --------------- Capital transactions: Purchase of Variable Account units 4,404,264 7,684,732 12,518,100 Redemption of Variable Account units (764,629) (98,438) (1,103,562) Redemptions for mortality and expense and administrative charges 17,886 30,817 45,556 Funding of subaccount by Fortis Benefits Insurance Company 5,600,000 5,600,000 4,000,000 Redemption of Fortis Benefits Insurance Company investment in subaccount (800,000) (800,000) (800,000) Dividend income distribution to Fortis Benefits Insurance Company - - - --------------- -------------- --------------- Net increase (decrease) from capital transactions 8,457,521 12,417,111 14,660,094 --------------- -------------- --------------- Net increase (decrease) in net assets 8,063,079 11,446,706 13,234,382 Net assets at beginning of year - - - --------------- -------------- --------------- Net assets at end of year $ 8,063,079 $ 11,446,706 $ 13,234,382 =============== ============== ===============
* For the period from May 1, 2000 to December 31, 2000. The accompanying notes are an integral part of the financial statements. 9 161 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 2000
FORTIS FORTIS WELLS FARGO CAPITAL AMERICAN WELLS FARGO CORPORATE OPPORTUNITIES * LEADERS * LARGE CAP BOND OPERATIONS Dividend income $ - $ 60,370 $ - $ 1,933,709 Mortality and expense and administrative charges (41,905) (12,550) (1,018,239) (409,922) Net realized gain (loss) on investments (61,414) 46,521 730,093 (681,957) Net unrealized appreciation (depreciation) of investments during the year (1,133,577) 301,821 (1,714,213) 1,685,759 --------------- ------------- -------------- -------------- Net increase (decrease) in net assets resulting from operations $ (1,236,896) $ 396,162 $ (2,002,359) $ 2,527,589 =============== ============= ============== ============== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ (1,236,896) $ 396,162 $ (2,002,359) $ 2,527,589 --------------- ------------- -------------- -------------- Capital transactions: Purchase of Variable Account units 10,321,441 3,135,400 30,403,252 2,474,653 Redemption of Variable Account units (56,011) (132,038) (5,164,724) (6,828,816) Redemptions for mortality and expense and administrative charges 41,905 12,550 1,018,239 409,922 Funding of subaccount by Fortis Benefits Insurance Company 5,600,000 4,000,000 - - Redemption of Fortis Benefits Insurance Company investment in subaccount (800,000) (800,000) - - Dividend income distribution to Fortis Benefits Insurance Company - - - - --------------- ------------- -------------- -------------- Net increase (decrease) from capital transactions 15,107,335 6,215,912 26,256,767 (3,944,241) --------------- ------------- -------------- -------------- Net increase (decrease) in net assets 13,870,439 6,612,074 24,254,408 (1,416,652) Net assets at beginning of year - - 48,728,059 30,994,498 --------------- ------------- -------------- -------------- Net assets at end of year $ 13,870,439 $ 6,612,074 $ 72,982,467 $ 29,577,846 =============== ============= ============== ============== WELLS FARGO WELLS FARGO EQUITY WELLS FARGO SMALL CAP INCOME GROWTH OPERATIONS Dividend income $ 4,705,602 $ 2,861,486 $ 39,190 Mortality and expense and administrative charges (297,655) (1,468,529) (5,057) Net realized gain (loss) on investments 554,437 3,154,772 (3,500) Net unrealized appreciation (depreciation) of investments during the year (10,283,591) (4,789,027) (99,650) ---------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations $ (5,321,207) $ (241,298) $ (69,017) ================ ============= ============= CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ (5,321,207) $ (241,298) $ (69,017) ---------------- ------------- ------------- Capital transactions: Purchase of Variable Account units 4,620,702 6,530,302 592,903 Redemption of Variable Account units (2,368,460) (30,392,095) (82,424) Redemptions for mortality and expense and administrative charges 297,655 1,468,529 5,057 Funding of subaccount by Fortis Benefits Insurance Company - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - Dividend income distribution to Fortis Benefits Insurance Company - - - ---------------- ------------- ------------- Net increase (decrease) from capital transactions 2,549,897 (22,393,264) 515,536 ---------------- ------------- ------------- Net increase (decrease) in net assets (2,771,310) (22,634,562) 446,519 Net assets at beginning of year 19,439,003 126,470,048 61,191 ---------------- ------------- ------------- Net assets at end of year $ 16,667,693 $ 103,835,486 $ 507,710 ================ ============= =============
* For the period from May 1, 2000 to December 31, 2000. The accompanying notes are an integral part of the financial statements. 10 162 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 2000 --------------------------------------------------------------------------------
WELLS FARGO WELLS FARGO EQUITY ASSET WELLS FARGO SCUDDER VALUE ALLOCATION INTERNATIONAL ** INTERNATIONAL OPERATIONS Dividend income $ 2,699 $ 313,740 $ 120 $ 1,021,042 Mortality and expense and administrative charges (5,404) (68,851) (294) (125,950) Net realized gain (loss) on investments 5,593 836 (2,914) 286,497 Net unrealized appreciation (depreciation) of investments during the year 23,525 (397,570) (2,351) (3,584,202) --------- ----------- --------- ------------ Net increase (decrease) in net assets resulting from operations $ 26,413 $ (151,845) $ (5,439) $ (2,402,613) ========= =========== ========= ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 26,413 $ (151,845) $ (5,439) $ (2,402,613) --------- ----------- --------- ------------ Capital transactions: Purchase of Variable Account units 604,073 6,712,145 100,703 349,636 Redemption of Variable Account units (142,171) (257,132) (38,758) (2,042,633) Redemptions for mortality and expense and administrative charges 5,404 68,851 294 125,950 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- --------- ----------- --------- ------------ Net increase (decrease) from capital transactions 467,306 6,523,864 62,239 (1,567,047) --------- ----------- --------- ------------ Net increase (decrease) in net assets 493,719 6,372,019 56,800 (3,969,660) Net assets at beginning of year 101,743 1,223,699 -- 11,127,614 --------- ----------- --------- ------------ Net assets at end of year $ 595,462 $ 7,595,718 $ 56,800 $ 7,157,954 ========= =========== ========= ============
AIM V.I. ALLIANCE AIM V.I. INTERNATIONAL MONEY VALUE EQUITY MARKET OPERATIONS Dividend income $ 1,341,667 $ 449,018 $ 1,244,916 Mortality and expense and administrative charges (428,274) (96,968) (96,908) Net realized gain (loss) on investments 93,093 49,405 1,030 Net unrealized appreciation (depreciation) of investments during the year (6,532,583) (2,661,755) (6,651) ------------ ----------- ------------- Net increase (decrease) in net assets resulting from operations $ (5,526,097) $(2,260,300) $ 1,142,387 ============ =========== ============= CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ (5,526,097) $(2,260,300) $ 1,142,387 ------------ ----------- ------------- Capital transactions: Purchase of Variable Account units 10,576,174 3,766,080 173,722,278 Redemption of Variable Account units (1,274,031) (813,562) (167,666,091) Redemptions for mortality and expense and administrative charges 428,274 96,968 96,908 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ------------ ----------- ------------- Net increase (decrease) from capital transactions 9,730,417 3,049,486 6,153,095 ------------ ----------- ------------- Net increase (decrease) in net assets 4,204,320 789,186 7,295,482 Net assets at beginning of year 25,327,469 5,830,853 16,161,244 ------------ ----------- ------------- Net assets at end of year $ 29,531,789 $ 6,620,039 $ 23,456,726 ============ =========== =============
** For the period from June 30, 2000 to December 31, 2000. The accompanying notes are an integral part of the financial statements. 11 163 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 2000 --------------------------------------------------------------------------------
ALLIANCE ALLIANCE PREMIER SAFECO SAFECO INTERNATIONAL GROWTH GROWTH EQUITY OPERATIONS Dividend income $ 135,256 $ 512,283 $ 351,430 $ 22,519 Mortality and expense and administrative charges (9,325) (41,358) (17,642) (13,691) Net realized gain (loss) on investments 175,829 437,155 162,071 (2,692) Net unrealized appreciation (depreciation) of investments during the year (108,001) (2,807,043) (759,497) (383,323) ------------ ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations $ 193,759 $(1,898,963) $ (263,638) $ (377,187) ============ =========== =========== =========== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 193,759 $(1,898,963) $ (263,638) $ (377,187) ------------ ----------- ----------- ----------- Capital transactions: Purchase of Variable Account units 67,459,692 8,787,469 2,907,659 1,844,172 Redemption of Variable Account units (67,838,597) (6,739,376) (3,572,934) (1,946,070) Redemptions for mortality and expense and administrative charges 9,325 41,358 17,642 13,691 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- ------------ ----------- ----------- ----------- Net increase (decrease) from capital transactions (369,580) 2,089,451 (647,633) (88,207) ------------ ----------- ----------- ----------- Net increase (decrease) in net assets (175,821) 190,488 (911,271) (465,394) Net assets at beginning of year 1,936,820 8,322,024 4,137,039 3,389,495 ------------ ----------- ----------- ----------- Net assets at end of year $ 1,760,999 $ 8,512,512 $ 3,225,768 $ 2,924,101 ============ =========== =========== ===========
FEDERATED U.S. FEDERATED GOVERNMENT HIGH INCOME FEDERATED SECURITIES II BOND FUND II UTILITY II OPERATIONS Dividend income $ 314,437 $ 787,392 $ 418,976 Mortality and expense and administrative charges (82,761) (116,853) (121,580) Net realized gain (loss) on investments 45,526 (193,467) (125,671) Net unrealized appreciation (depreciation) of investments during the year 522,685 (1,529,401) (1,295,762) ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations $ 799,887 $ (1,052,329) $ (1,124,037) ============ ============ ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 799,887 $ (1,052,329) $ (1,124,037) ------------ ------------ ------------ Capital transactions: Purchase of Variable Account units 8,220,007 12,607,325 8,699,463 Redemption of Variable Account units (3,580,604) (9,281,299) (3,505,847) Redemptions for mortality and expense and administrative charges 82,761 116,853 121,580 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ------------ ------------ ------------ Net increase (decrease) from capital transactions 4,722,164 3,442,879 5,315,196 ------------ ------------ ------------ Net increase (decrease) in net assets 5,522,051 2,390,550 4,191,159 Net assets at beginning of year 4,805,781 8,654,583 6,628,581 ------------ ------------ ------------ Net assets at end of year $ 10,327,832 $ 11,045,133 $ 10,819,740 ============ ============ ============
The accompanying notes are an integral part of the financial statements. 12 164 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 2000 --------------------------------------------------------------------------------
FEDERATED FEDERATED FEDERATED FEDERATED AMERICAN EQUITY GROWTH INTERNATIONAL LEADERS II INCOME STRATEGIES EQUITY OPERATIONS Dividend income $ 1,934,161 $ 345,753 $ 2,539,754 $ 2,213,583 Mortality and expense and administrative charges (792,002) (555,719) (555,722) (235,792) Net realized gain (loss) on investments (312) (1,161) (13,712) 2,805 Net unrealized appreciation (depreciation) of investments during the year 918,150 (6,930,881) (14,020,653) (7,748,997) ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations $ 2,059,997 $ (7,142,008) $(12,050,333) $ (5,768,401) ============ ============ ============ ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 2,059,997 $ (7,142,008) $(12,050,333) $ (5,768,401) ------------ ------------ ------------ ------------ Capital transactions: Purchase of Variable Account units 46,663,203 33,803,679 35,661,750 17,264,219 Redemption of Variable Account units (8,714,497) (162,329) (187,931) (15,291) Redemptions for mortality and expense and administrative charges 792,002 555,719 555,722 235,792 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- ------------ ------------ ------------ ------------ Net increase (decrease) from capital transactions 38,740,708 34,197,069 36,029,541 17,484,720 ------------ ------------ ------------ ------------ Net increase (decrease) in net assets 40,800,705 27,055,061 23,979,208 11,716,319 Net assets at beginning of year 38,948,608 24,003,571 24,460,416 10,346,692 ------------ ------------ ------------ ------------ Net assets at end of year $ 79,749,313 $ 51,058,632 $ 48,439,624 $ 22,063,011 ============ ============ ============ ============
FEDERATED FEDERATED FEDERATED MONEY STRATEGIC SMALL CAP FUND INCOME STRATEGIES OPERATIONS Dividend income $ 79,784 $ 46,925 $ 125,084 Mortality and expense and administrative charges (18,137) (20,346) (55,360) Net realized gain (loss) on investments (18) (2,767) (17,300) Net unrealized appreciation (depreciation) of investments during the year (383) (166,185) (1,816,876) ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations $ 61,246 $ (142,373) $(1,764,452) =========== =========== =========== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 61,246 $ (142,373) $(1,764,452) ----------- ----------- ----------- Capital transactions: Purchase of Variable Account units 3,883,841 1,904,485 6,578,134 Redemption of Variable Account units (3,329,935) (558,410) (101,529) Redemptions for mortality and expense and administrative charges 18,137 20,346 55,360 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ----------- ----------- ----------- Net increase (decrease) from capital transactions 572,043 1,366,421 6,531,965 ----------- ----------- ----------- Net increase (decrease) in net assets 633,289 1,224,048 4,767,513 Net assets at beginning of year 1,277,722 601,736 1,193,860 ----------- ----------- ----------- Net assets at end of year $ 1,911,011 $ 1,825,784 $ 5,961,373 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. 13 165 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 2000 --------------------------------------------------------------------------------
FEDERATED FEDERATED LEXINGTON QUALITY FEDERATED INTERNATIONAL NATURAL BOND *** LARGE CAP *** SMALL CO. *** RESOURCES OPERATIONS Dividend income $ -- $ -- $ -- $ 1,381 Mortality and expense and administrative charges (702) (14,320) (4,405) (1,975) Net realized gain (loss) on investments 290 110 (19) (7,892) Net unrealized appreciation (depreciation) of investments during the year 9,477 (706,674) (139,462) 67,824 --------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations $ 9,065 $ (720,884) $ (143,886) $ 59,338 ========= =========== =========== =========== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 9,065 $ (720,884) $ (143,886) $ 59,338 --------- ----------- ----------- ----------- Capital transactions: Purchase of Variable Account units 350,943 4,858,040 1,326,488 3,203,236 Redemption of Variable Account units (11,835) (3,083) (2,947) (3,703,011) Redemptions for mortality and expense and administrative charges 702 14,320 4,405 1,975 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- --------- ----------- ----------- ----------- Net increase (decrease) from capital transactions 339,810 4,869,277 1,327,946 (497,800) --------- ----------- ----------- ----------- Net increase (decrease) in net assets 348,875 4,148,393 1,184,060 (438,462) Net assets at beginning of year -- -- -- 917,767 --------- ----------- ----------- ----------- Net assets at end of year $ 348,875 $ 4,148,393 $ 1,184,060 $ 479,305 ========= =========== =========== ===========
LEXINGTON MFS EMERGING EMERGING MFS HIGH MARKETS GROWTH INCOME OPERATIONS Dividend income $ -- $ 1,369,079 $ 613,809 Mortality and expense and administrative charges (370) (315,212) (98,883) Net realized gain (loss) on investments 41,342 1,060,420 (143,003) Net unrealized appreciation (depreciation) of investments during the year (71,690) (8,250,615) (989,159) --------- ------------ ----------- Net increase (decrease) in net assets resulting from operations $ (30,718) $ (6,136,328) $ (617,236) ========= ============ =========== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ (30,718) $ (6,136,328) $ (617,236) --------- ------------ ----------- Capital transactions: Purchase of Variable Account units 211,233 16,409,070 5,082,226 Redemption of Variable Account units (257,728) (8,402,567) (5,305,660) Redemptions for mortality and expense and administrative charges 370 315,212 98,883 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- --------- ------------ ----------- Net increase (decrease) from capital transactions (46,125) 8,321,715 (124,551) --------- ------------ ----------- Net increase (decrease) in net assets (76,843) 2,185,387 (741,787) Net assets at beginning of year 131,543 22,353,487 8,208,374 --------- ------------ ----------- Net assets at end of year $ 54,700 $ 24,538,874 $ 7,466,587 ========= ============ ===========
*** For the period from May 1, 2000 to December 31, 2000. The accompanying notes are an integral part of the financial statements. 14 166 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 2000
MFS MONTGOMERY WORLD EMERGING MONTGOMERY STRONG GOVERNMENT MARKETS GROWTH DISCOVERY II OPERATIONS Dividend income $ 1,392 $ -- $ 42,084 $ -- Mortality and expense and administrative charges (257) (4,348) (2,675) (1,991) Net realized gain (loss) on investments 2,027 (46,084) 9,660 39,390 Net unrealized appreciation (depreciation) of investments during the year 1,408 (102,787) (117,420) (64,058) --------- ------------ --------- ----------- Net increase (decrease) in net assets resulting from operations $ 4,570 $ (153,219) $ (68,351) $ (26,659) ========= ============ ========= =========== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 4,570 $ (153,219) $ (68,351) $ (26,659) --------- ------------ --------- ----------- Capital transactions: Purchase of Variable Account units 366,168 24,155,648 735,169 1,318,611 Redemption of Variable Account units (330,879) (24,412,588) (543,744) (1,213,302) Redemptions for mortality and expense and administrative charges 257 4,348 2,675 1,991 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- --------- ------------ --------- ----------- Net increase (decrease) from capital transactions 35,546 (252,592) 194,100 107,300 --------- ------------ --------- ----------- Net increase (decrease) in net assets 40,116 (405,811) 125,749 80,641 Net assets at beginning of year 27,774 1,025,458 474,822 275,276 --------- ------------ --------- ----------- Net assets at end of year $ 67,890 $ 619,647 $ 600,571 $ 355,917 ========= ============ ========= ===========
AMERICAN AMERICAN STRONG CENTURY VP CENTURY VP INTERNATIONAL II BALANCED GROWTH OPERATIONS Dividend income $ -- $ 55,828 $ 28,522 Mortality and expense and administrative charges (6,304) (5,658) (6,909) Net realized gain (loss) on investments 237,170 (28,212) 202,323 Net unrealized appreciation (depreciation) of investments during the year (481,121) (48,523) (312,209) ------------ ----------- ----------- Net increase (decrease) in net assets resulting from operations $ (250,255) $ (26,565) $ (88,273) ============ =========== =========== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ (250,255) $ (26,565) $ (88,273) ------------ ----------- ----------- Capital transactions: Purchase of Variable Account units 13,570,147 1,175,647 6,387,122 Redemption of Variable Account units (14,835,847) (1,547,641) (5,328,715) Redemptions for mortality and expense and administrative charges 6,304 5,658 6,909 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ------------ ----------- ----------- Net increase (decrease) from capital transactions (1,259,396) (366,336) 1,065,316 ------------ ----------- ----------- Net increase (decrease) in net assets (1,509,651) (392,901) 977,043 Net assets at beginning of year 2,704,840 1,483,239 742,475 ------------ ----------- ----------- Net assets at end of year $ 1,195,189 $ 1,090,338 $ 1,719,518 ============ =========== ===========
The accompanying notes are an integral part of the financial statements. 15 167 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 2000 --------------------------------------------------------------------------------
NEUBERGER & VAN ECK VAN ECK BERMAN AMT NEUBERGER & WORLDWIDE WORLDWIDE LIMITED BERMAN AMT BOND HARD ASSETS MATURITY BOND PARTNERS OPERATIONS Dividend income $ 18,879 $ 2,642 $ 34,902 $ 122,965 Mortality and expense and administrative charges (1,895) (1,447) (2,490) (3,690) Net realized gain (loss) on investments (32,286) 18,767 (7,160) (17,441) Net unrealized appreciation (depreciation) of investments during the year 15,035 (6,262) 10,070 (85,327) ----------- ----------- --------- ----------- Net increase (decrease) in net assets resulting from operations $ (267) $ 13,700 $ 35,322 $ 16,507 =========== =========== ========= =========== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ (267) $ 13,700 $ 35,322 $ 16,507 ----------- ----------- --------- ----------- Capital transactions: Purchase of Variable Account units 3,291,797 6,535,102 288,928 644,412 Redemption of Variable Account units (3,354,048) (7,173,135) (271,039) (179,313) Redemptions for mortality and expense and administrative charges 1,895 1,447 2,490 3,690 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- ----------- ----------- --------- ----------- Net increase (decrease) from capital transactions (60,356) (636,586) 20,379 468,789 ----------- ----------- --------- ----------- Net increase (decrease) in net assets (60,623) (622,886) 55,701 485,296 Net assets at beginning of year 309,419 817,979 544,591 626,209 ----------- ----------- --------- ----------- Net assets at end of year $ 248,796 $ 195,093 $ 600,292 $ 1,111,505 =========== =========== ========= ===========
INVESCO INVESCO HEALTH & INDUSTRIAL INVESCO SCIENCES INCOME TECHNOLOGY OPERATIONS Dividend income $ 5,262 $ 134,368 $ 28,375 Mortality and expense and administrative charges (18,821) (6,109) (68,107) Net realized gain (loss) on investments 828,420 34,534 2,028,151 Net unrealized appreciation (depreciation) of investments during the year 172,571 (110,400) (7,977,902) ------------ ----------- ------------ Net increase (decrease) in net assets resulting from operations $ 987,432 $ 52,393 $ (5,989,483) ============ =========== ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 987,432 $ 52,393 $ (5,989,483) ------------ ----------- ------------ Capital transactions: Purchase of Variable Account units 19,045,639 2,633,196 38,589,645 Redemption of Variable Account units (15,950,381) (947,744) (33,252,707) Redemptions for mortality and expense and administrative charges 18,821 6,109 68,107 Funding of subaccount by Fortis Benefits Insurance Company -- -- -- Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- -- Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ------------ ----------- ------------ Net increase (decrease) from capital transactions 3,114,079 1,691,561 5,405,045 ------------ ----------- ------------ Net increase (decrease) in net assets 4,101,511 1,743,954 (584,438) Net assets at beginning of year 2,029,234 863,284 12,740,687 ------------ ----------- ------------ Net assets at end of year $ 6,130,745 $ 2,607,238 $ 12,156,249 ============ =========== ============
The accompanying notes are an integral part of the financial statements. 16 168 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 2000 --------------------------------------------------------------------------------
KELMOORE COMBINED KELMOORE VARIABLE VARIABLE VARIABLE **** EAGLE **** ACCOUNT OPERATIONS Dividend income $ -- $ -- $ 444,477,317 Mortality and expense and administrative charges (42) (35) (55,070,813) Net realized gain (loss) on investments -- -- 107,328,257 Net unrealized appreciation (depreciation) of investments during the year 130 103 (703,633,347) --------- -------- --------------- Net increase (decrease) in net assets resulting from operations $ 88 $ 68 $ (206,898,586) ========= ======== =============== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 88 $ 68 $ (206,898,586) --------- -------- --------------- Capital transactions: Purchase of Variable Account units 254,060 98,221 1,262,374,682 Redemption of Variable Account units -- -- (1,013,565,328) Redemptions for mortality and expense and administrative charges 42 35 55,070,813 Funding of subaccount by Fortis Benefits Insurance Company -- -- 24,800,000 Redemption of Fortis Benefits Insurance Company investment in subaccount -- -- (35,111,389) Dividend income distribution to Fortis Benefits Insurance Company -- -- -- --------- -------- --------------- Net increase (decrease) from capital transactions 254,102 98,256 293,568,778 --------- -------- --------------- Net increase (decrease) in net assets 254,190 98,324 86,670,192 Net assets at beginning of year -- -- 3,950,503,433 --------- -------- --------------- Net assets at end of year $ 254,190 $ 98,324 $ 4,037,173,625 ========= ======== ===============
**** For the period from December 12, 2000 to December 31, 2000. The accompanying notes are an integral part of the financial statements. 17 169 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------
FORTIS FORTIS U.S. FORTIS FORTIS GROWTH GOVERNMENT MONEY ASSET STOCK SECURITIES MARKET ALLOCATION OPERATIONS Dividend income $ 156,278,060 $ 7,341,601 $ 2,857,701 $ 52,954,375 Mortality and expense and administrative charges (7,253,321) (1,829,055) (1,055,231) (7,448,244) Net realized gain (loss) on investments 38,796,330 (473,995) 417,343 15,517,181 Net unrealized appreciation (depreciation) of investments during the year 64,391,185 (9,573,286) 566,889 32,399,647 ------------- ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations $ 252,212,254 $ (4,534,735) $ 2,786,702 $ 93,422,959 ============= ============= ============= ============= CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 252,212,254 $ (4,534,735) $ 2,786,702 $ 93,422,959 ------------- ------------- ------------- ------------- Capital transactions: Purchase of Variable Account units 5,164,180 12,588,731 100,156,439 29,210,874 Redemption of Variable Account units (98,848,155) (22,667,841) (64,268,081) (58,609,370) Redemptions for mortality and expense and administrative charges 7,253,321 1,829,055 1,055,231 7,448,244 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- ------------- ------------- ------------- ------------- Net increase (decrease) from capital transactions (86,430,654) (8,250,055) 36,943,589 (21,950,252) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets 165,781,600 (12,784,790) 39,730,291 71,472,707 Net assets at beginning of year 541,637,137 141,769,466 67,119,187 536,384,948 ------------- ------------- ------------- ------------- Net assets at end of year $ 707,418,737 $ 128,984,676 $ 106,849,478 $ 607,857,655 ============= ============= ============= =============
FORTIS FORTIS FORTIS DIVERSIFIED GLOBAL AGGRESSIVE INCOME GROWTH GROWTH OPERATIONS Dividend income $ 6,588,253 $ 6,231,012 $ 4,272,056 Mortality and expense and administrative charges (1,347,702) (3,494,668) (1,633,787) Net realized gain (loss) on investments (450,747) 27,458,315 8,003,910 Net unrealized appreciation (depreciation) of investments during the year (7,886,977) 93,670,078 97,554,749 ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations $ (3,097,173) $ 123,864,737 $ 108,196,928 ============= ============= ============= CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ (3,097,173) $ 123,864,737 $ 108,196,928 ------------- ------------- ------------- Capital transactions: Purchase of Variable Account units 6,766,415 13,910,010 24,360,173 Redemption of Variable Account units (17,836,999) (66,121,442) (18,643,812) Redemptions for mortality and expense and administrative charges 1,347,702 3,494,668 1,633,787 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ------------- ------------- ------------- Net increase (decrease) from capital transactions (9,722,882) (48,716,764) 7,350,148 ------------- ------------- ------------- Net increase (decrease) in net assets (12,820,055) 75,147,973 115,547,076 Net assets at beginning of year 106,628,884 261,882,193 97,976,544 ------------- ------------- ------------- Net assets at end of year $ 93,808,829 $ 337,030,166 $ 213,523,620 ============= ============= =============
The accompanying notes are an integral part of the financial statements. 18 170 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------
FORTIS FORTIS INTERNATIONAL MULTISECTOR FORTIS FORTIS STOCK II BOND GROWTH & HIGH (FORMERLY GLOBAL (FORMERLY INCOME YIELD ASSET ALLOCATION) GLOBAL BOND) OPERATIONS Dividend income $ 16,740,826 $ 5,638,326 $ 4,151,122 $ 934,589 Mortality and expense and administrative charges (3,525,734) (852,587) (725,621) (233,375) Net realized gain (loss) on investments 10,556,035 (540,865) 797,158 (163,594) Net unrealized appreciation (depreciation) of investments during the year (944,596) (4,416,777) (5,443,279) (2,534,224) ------------- ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations $ 22,826,531 $ (171,903) $ (1,220,620) $ (1,996,604) ============= ============ ============ ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 22,826,531 $ (171,903) $ (1,220,620) $ (1,996,604) ------------- ------------ ------------ ------------ Capital transactions: Purchase of Variable Account units 6,731,588 7,450,001 5,772,394 6,930,636 Redemption of Variable Account units (35,318,719) (11,427,963) (7,483,000) (4,592,843) Redemptions for mortality and expense and administrative charges 3,525,734 852,587 725,621 233,375 Dividend income distribution to Fortis Benefits Insurance Company -- -- (310,930) (224,878) ------------- ------------ ------------ ------------ Net increase (decrease) from capital transactions (25,061,397) (3,125,375) (1,295,915) 2,346,290 ------------- ------------ ------------ ------------ Net increase (decrease) in net assets (2,234,866) (3,297,278) (2,516,535) 349,686 Net assets at beginning of year 265,983,185 64,546,458 59,470,739 22,618,464 ------------- ------------ ------------ ------------ Net assets at end of year $ 263,748,319 $ 61,249,180 $ 56,954,204 $ 22,968,150 ============= ============ ============ ============
FORTIS INTERNATIONAL FORTIS FORTIS STOCK VALUE S & P 500 OPERATIONS Dividend income $ 118,653 $ 55,659 $ 47,291 Mortality and expense and administrative charges (1,171,613) (1,000,548) (3,567,274) Net realized gain (loss) on investments 2,066,505 1,028,902 2,830,868 Net unrealized appreciation (depreciation) of investments during the year 17,734,463 5,071,121 47,715,826 ------------- ------------ ------------- Net increase (decrease) in net assets resulting from operations $ 18,748,008 $ 5,155,134 $ 47,026,711 ============= ============ ============= CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 18,748,008 $ 5,155,134 $ 47,026,711 ------------- ------------ ------------- Capital transactions: Purchase of Variable Account units 24,277,772 6,767,673 125,498,102 Redemption of Variable Account units (12,675,634) (8,924,070) (41,233,954) Redemptions for mortality and expense and administrative charges 1,171,613 1,000,548 3,567,274 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ------------- ------------ ------------- Net increase (decrease) from capital transactions 12,773,751 (1,155,849) 87,831,422 ------------- ------------ ------------- Net increase (decrease) in net assets 31,521,759 3,999,285 134,858,133 Net assets at beginning of year 77,403,542 72,593,625 200,164,981 ------------- ------------ ------------- Net assets at end of year $ 108,925,301 $ 76,592,910 $ 335,023,114 ============= ============ =============
The accompanying notes are an integral part of the financial statements. 19 171 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------
FORTIS FORTIS FORTIS FORTIS BLUE CHIP MID CAP LARGE CAP SMALL CAP STOCK STOCK GROWTH VALUE OPERATIONS Dividend income $ 3,230,163 $ 21,642 $ 1,132,189 $ 1,423,506 Mortality and expense and administrative charges (2,402,586) (152,523) (451,055) (251,882) Net realized gain (loss) on investments 1,198,634 87,767 109,210 114,238 Net unrealized appreciation (depreciation) of investments during the year 30,746,993 2,028,045 9,195,175 1,783,939 ------------- ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations $ 32,773,204 $ 1,984,931 $ 9,985,519 $ 3,069,801 ============= ============ ============ ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 32,773,204 $ 1,984,931 $ 9,985,519 $ 3,069,801 ------------- ------------ ------------ ------------ Capital transactions: Purchase of Variable Account units 49,470,137 8,507,383 45,928,848 17,798,817 Redemption of Variable Account units (5,494,982) (1,224,101) (706,824) (2,200,370) Redemptions for mortality and expense and administrative charges 2,402,586 152,523 451,055 251,882 Dividend income distribution to Fortis Benefits Insurance Company (109,184) (4,648) (105,952) (139,251) ------------- ------------ ------------ ------------ Net increase (decrease) from capital transactions 46,268,557 7,431,157 45,567,127 15,711,078 ------------- ------------ ------------ ------------ Net increase (decrease) in net assets 79,041,761 9,416,088 55,552,646 18,780,879 Net assets at beginning of year 145,914,116 11,366,916 14,909,298 14,138,583 ------------- ------------ ------------ ------------ Net assets at end of year $ 224,955,877 $ 20,783,004 $ 70,461,944 $ 32,919,462 ============= ============ ============ ============
WELLS FARGO WELLS FARGO WELLS FARGO SMALL CAP LARGE CAP CORPORATE BOND (FORMERLY NORWEST (FORMERLY NORWEST (FORMERLY NORWEST SMALL COMPANY VALUGROWTH) INCOME EQUITY) STOCK) OPERATIONS Dividend income $ 11,571,999 $ 1,501,450 $ -- Mortality and expense and administrative charges (531,353) (370,235) (177,088) Net realized gain (loss) on investments 879,862 (183,430) (410,559) Net unrealized appreciation (depreciation) of investments during the year (1,863,822) (2,049,455) 8,208,680 ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations $ 10,056,686 $ (1,101,670) $ 7,621,033 ============ ============ ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 10,056,686 $ (1,101,670) $ 7,621,033 ------------ ------------ ------------ Capital transactions: Purchase of Variable Account units 6,308,101 12,059,360 1,380,420 Redemption of Variable Account units (3,919,806) (2,490,066) (3,031,763) Redemptions for mortality and expense and administrative charges 531,353 370,235 177,088 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ------------ ------------ ------------ Net increase (decrease) from capital transactions 2,919,648 9,939,529 (1,474,255) ------------ ------------ ------------ Net increase (decrease) in net assets 12,976,334 8,837,859 6,146,778 Net assets at beginning of year 35,751,725 22,156,639 13,292,225 ------------ ------------ ------------ Net assets at end of year $ 48,728,059 $ 30,994,498 $ 19,439,003 ============ ============ ============
The accompanying notes are an integral part of the financial statements. 20 172 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------
WELLS FARGO EQUITY INCOME WELLS FARGO WELLS FARGO (FORMERLY NORWEST WELLS FARGO EQUITY ASSET INCOME EQUITY) GROWTH * VALUE * ALLOCATION * OPERATIONS Dividend income $ 1,270,864 $ 7 $ 207 $ 8,345 Mortality and expense and administrative charges (1,528,635) (128) (253) (2,723) Net realized gain (loss) on investments 558,248 -- -- 87 Net unrealized appreciation (depreciation) of investments during the year 5,205,012 4,926 1,622 36,841 ------------- -------- --------- ----------- Net increase (decrease) in net assets resulting from operations $ 5,505,489 $ 4,805 $ 1,576 $ 42,550 ============= ======== ========= =========== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 5,505,489 $ 4,805 $ 1,576 $ 42,550 ------------- -------- --------- ----------- Capital transactions: Purchase of Variable Account units 36,840,158 56,259 99,914 1,182,701 Redemption of Variable Account units (3,461,257) (1) -- (4,275) Redemptions for mortality and expense and administrative charges 1,528,635 128 253 2,723 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- ------------- -------- --------- ----------- Net increase (decrease) from capital transactions 34,907,536 56,386 100,167 1,181,149 ------------- -------- --------- ----------- Net increase (decrease) in net assets 40,413,025 61,191 101,743 1,223,699 Net assets at beginning of year 86,057,023 -- -- -- ------------- -------- --------- ----------- Net assets at end of year $ 126,470,048 $ 61,191 $ 101,743 $ 1,223,699 ============= ======== ========= ===========
AIM V.I. SCUDDER AIM V.I. INTERNATIONAL INTERNATIONAL VALUE EQUITY OPERATIONS Dividend income $ 825,077 $ 410,251 $ 188,386 Mortality and expense and administrative charges (123,780) (194,130) (40,956) Net realized gain (loss) on investments 252,120 28,203 39,670 Net unrealized appreciation (depreciation) of investments during the year 3,033,017 3,720,163 1,649,575 ------------ ------------ ----------- Net increase (decrease) in net assets resulting from operations $ 3,986,434 $ 3,964,487 $ 1,836,675 ============ ============ =========== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 3,986,434 $ 3,964,487 $ 1,836,675 ------------ ------------ ----------- Capital transactions: Purchase of Variable Account units 226,709 16,475,875 2,617,843 Redemption of Variable Account units (1,596,240) (279,283) (238,984) Redemptions for mortality and expense and administrative charges 123,780 194,130 40,956 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ------------ ------------ ----------- Net increase (decrease) from capital transactions (1,245,751) 16,390,722 2,419,815 ------------ ------------ ----------- Net increase (decrease) in net assets 2,740,683 20,355,209 4,256,490 Net assets at beginning of year 8,386,931 4,972,260 1,574,363 ------------ ------------ ----------- Net assets at end of year $ 11,127,614 $ 25,327,469 $ 5,830,853 ============ ============ ===========
* For the period from September 20, 1999 to December 31, 1999 The accompanying notes are an integral part of the financial statements. 21 173 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------
ALLIANCE ALLIANCE MONEY ALLIANCE PREMIER SAFECO MARKET INTERNATIONAL GROWTH GROWTH OPERATIONS Dividend income $ 980,514 $ 60,854 $ 99,520 $ -- Mortality and expense and administrative charges (93,511) (5,299) (35,830) (20,651) Net realized gain (loss) on investments -- 783,355 1,669,250 (539,748) Net unrealized appreciation (depreciation) of investments during the year (1,972) 85,364 257,229 702,775 ------------- ------------ ------------ ----------- Net increase (decrease) in net assets resulting from operations $ 885,031 $ 924,274 $ 1,990,169 $ 142,376 ============= ============ ============ =========== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 885,031 $ 924,274 $ 1,990,169 $ 142,376 ------------- ------------ ------------ ----------- Capital transactions: Purchase of Variable Account units 200,368,900 61,396,606 13,223,689 4,984,999 Redemption of Variable Account units (201,747,571) (61,575,309) (15,623,413) (6,589,089) Redemptions for mortality and expense and administrative charges 93,511 5,299 35,830 20,651 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- ------------- ------------ ------------ ----------- Net increase (decrease) from capital transactions (1,285,160) (173,404) (2,363,894) (1,583,439) ------------- ------------ ------------ ----------- Net increase (decrease) in net assets (400,129) 750,870 (373,725) (1,441,063) Net assets at beginning of year 16,561,373 1,185,950 8,695,749 5,578,102 ------------- ------------ ------------ ----------- Net assets at end of year $ 16,161,244 $ 1,936,820 $ 8,322,024 $ 4,137,039 ============= ============ ============ ===========
FEDERATED U.S. FEDERATED SAFECO GOVERNMENT HIGH INCOME EQUITY SECURITIES II BOND FUND II OPERATIONS Dividend income $ 179,477 $ 58,331 $ 384,300 Mortality and expense and administrative charges (15,168) (19,646) (42,973) Net realized gain (loss) on investments 137,678 (28,762) (136,499) Net unrealized appreciation (depreciation) of investments during the year (20,217) (19,403) (121,670) ----------- ----------- ------------ Net increase (decrease) in net assets resulting from operations $ 281,770 $ (9,480) $ 83,158 =========== =========== ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 281,770 $ (9,480) $ 83,158 ----------- ----------- ------------ Capital transactions: Purchase of Variable Account units 2,726,246 6,472,452 21,516,246 Redemption of Variable Account units (1,922,280) (2,731,024) (16,700,953) Redemptions for mortality and expense and administrative charges 15,168 19,646 42,973 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ----------- ----------- ------------ Net increase (decrease) from capital transactions 819,134 3,761,074 4,858,266 ----------- ----------- ------------ Net increase (decrease) in net assets 1,100,904 3,751,594 4,941,424 Net assets at beginning of year 2,288,591 1,054,187 3,713,159 ----------- ----------- ------------ Net assets at end of year $ 3,389,495 $ 4,805,781 $ 8,654,583 =========== =========== ============
The accompanying notes are an integral part of the financial statements. 22 174 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------
FEDERATED FEDERATED FEDERATED FEDERATED AMERICAN EQUITY GROWTH UTILITY II LEADERS II INCOME STRATEGIES * OPERATIONS Dividend income $ 64,933 $ 459,974 $ 35,871 $ -- Mortality and expense and administrative charges (32,151) (183,354) (106,207) (90,114) Net realized gain (loss) on investments (5,840) (274,924) 1,692 10,040 Net unrealized appreciation (depreciation) of investments during the year (17,935) 111,282 1,936,223 6,370,927 ----------- ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations $ 9,007 $ 112,978 $ 1,867,579 $ 6,290,853 =========== ============ ============ ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 9,007 $ 112,978 $ 1,867,579 $ 6,290,853 ----------- ------------ ------------ ------------ Capital transactions: Purchase of Variable Account units 7,849,681 80,714,962 22,067,857 18,226,511 Redemption of Variable Account units (2,352,749) (43,728,259) (38,072) (147,062) Redemptions for mortality and expense and administrative charges 32,151 183,354 106,207 90,114 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- ----------- ------------ ------------ ------------ Net increase (decrease) from capital transactions 5,529,083 37,170,057 22,135,992 18,169,563 ----------- ------------ ------------ ------------ Net increase (decrease) in net assets 5,538,090 37,283,035 24,003,571 24,460,416 Net assets at beginning of year 1,090,491 1,665,573 -- -- ----------- ------------ ------------ ------------ Net assets at end of year $ 6,628,581 $ 38,948,608 $ 24,003,571 $ 24,460,416 =========== ============ ============ ============
FEDERATED FEDERATED FEDERATED INTERNATIONAL MONEY STRATEGIC EQUITY * FUND * INCOME ** OPERATIONS Dividend income $ 10,135 $ 45,051 $ -- Mortality and expense and administrative charges (34,075) (12,240) (1,532) Net realized gain (loss) on investments (41) -- 9 Net unrealized appreciation (depreciation) of investments during the year 3,420,120 -- 16,167 ------------ ----------- --------- Net increase (decrease) in net assets resulting from operations $ 3,396,139 $ 32,811 $ 14,644 ============ =========== ========= CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 3,396,139 $ 32,811 $ 14,644 ------------ ----------- --------- Capital transactions: Purchase of Variable Account units 6,923,501 8,313,016 586,922 Redemption of Variable Account units (7,023) (7,080,345) (1,362) Redemptions for mortality and expense and administrative charges 34,075 12,240 1,532 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ------------ ----------- --------- Net increase (decrease) from capital transactions 6,950,553 1,244,911 587,092 ------------ ----------- --------- Net increase (decrease) in net assets 10,346,692 1,277,722 601,736 Net assets at beginning of year -- -- -- ------------ ----------- --------- Net assets at end of year $ 10,346,692 $ 1,277,722 $ 601,736 ============ =========== =========
* For the period from February 1, 1999 to December 31, 1999. ** For the period from June 1, 1999 to December 31, 1999. The accompanying notes are an integral part of the financial statements. 23 175 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------
FEDERATED LEXINGTON LEXINGTON MFS SMALL CAP NATURAL EMERGING EMERGING STRATEGIES ** RESOURCES MARKETS GROWTH OPERATIONS Dividend income $ -- $ 5,210 $ 275 $ -- Mortality and expense and administrative charges (2,128) (3,122) (293) (127,446) Net realized gain (loss) on investments 74 (87,178) 35,831 969,753 Net unrealized appreciation (depreciation) of investments during the year 175,321 128,261 25,869 7,798,184 ----------- ----------- --------- ------------ Net increase (decrease) in net assets resulting from operations $ 173,267 $ 43,171 $ 61,682 $ 8,640,491 =========== =========== ========= ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 173,267 $ 43,171 $ 61,682 $ 8,640,491 ----------- ----------- --------- ------------ Capital transactions: Purchase of Variable Account units 1,018,966 2,156,000 135,498 14,159,113 Redemption of Variable Account units (501) (1,817,326) (124,824) (7,363,014) Redemptions for mortality and expense and administrative charges 2,128 3,122 293 127,446 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- ----------- ----------- --------- ------------ Net increase (decrease) from capital transactions 1,020,593 341,796 10,967 6,923,545 ----------- ----------- --------- ------------ Net increase (decrease) in net assets 1,193,860 384,967 72,649 15,564,036 Net assets at beginning of year -- 532,800 58,894 6,789,451 ----------- ----------- --------- ------------ Net assets at end of year $ 1,193,860 $ 917,767 $ 131,543 $ 22,353,487 =========== =========== ========= ============
MFS MONTGOMERY MFS HIGH WORLD EMERGING INCOME GOVERNMENT MARKETS OPERATIONS Dividend income $ 401,657 $ 14,302 $ 74 Mortality and expense and administrative charges (77,640) (707) (3,647) Net realized gain (loss) on investments (43,906) (24,456) 445,265 Net unrealized appreciation (depreciation) of investments during the year (31,441) (1,365) 74,782 ----------- --------- ------------ Net increase (decrease) in net assets resulting from operations $ 248,670 $ (12,226) $ 516,474 =========== ========= ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 248,670 $ (12,226) $ 516,474 ----------- --------- ------------ Capital transactions: Purchase of Variable Account units 9,777,837 705,250 20,340,446 Redemption of Variable Account units (5,404,573) (990,963) (20,144,272) Redemptions for mortality and expense and administrative charges 77,640 707 3,647 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ----------- --------- ------------ Net increase (decrease) from capital transactions 4,450,904 (285,006) 199,821 ----------- --------- ------------ Net increase (decrease) in net assets 4,699,574 (297,232) 716,295 Net assets at beginning of year 3,508,800 325,006 309,163 ----------- --------- ------------ Net assets at end of year $ 8,208,374 $ 27,774 $ 1,025,458 =========== ========= ============
** For the period from June 1, 1999 to December 31, 1999. The accompanying notes are an integral part of the financial statements. 24 176 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------
AMERICAN MONTGOMERY STRONG STRONG CENTURY VP GROWTH DISCOVERY II INTERNATIONAL II BALANCED OPERATIONS Dividend income $ 5,201 $ 27,272 $ 1,845 $ 204,087 Mortality and expense and administrative charges (4,566) (963) (3,930) (6,370) Net realized gain (loss) on investments 233,717 (52,371) 606,345 11,391 Net unrealized appreciation (depreciation) of investments during the year (1,115) 39,168 395,740 (74,370) ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations $ 233,237 $ 13,106 $ 1,000,000 $ 134,738 ============ ============ ============ ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 233,237 $ 13,106 $ 1,000,000 $ 134,738 ------------ ------------ ------------ ------------ Capital transactions: Purchase of Variable Account units 3,986,865 1,505,925 17,404,182 713,675 Redemption of Variable Account units (4,518,176) (1,729,824) (16,023,839) (700,154) Redemptions for mortality and expense and administrative charges 4,566 963 3,930 6,370 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- -- ------------ ------------ ------------ ------------ Net increase (decrease) from capital transactions (526,745) (222,936) 1,384,273 19,891 ------------ ------------ ------------ ------------ Net increase (decrease) in net assets (293,508) (209,830) 2,384,273 154,629 Net assets at beginning of year 768,330 485,106 320,567 1,328,610 ------------ ------------ ------------ ------------ Net assets at end of year $ 474,822 $ 275,276 $ 2,704,840 $ 1,483,239 ============ ============ ============ ============ AMERICAN VAN ECK VAN ECK CENTURY VP WORLDWIDE WORLDWIDE GROWTH BOND HARD ASSETS OPERATIONS Dividend income $ - $ 32,424 $ 5,800 Mortality and expense and administrative charges (1,427) (1,686) (3,390) Net realized gain (loss) on investments 74,376 (59,331) 19,792 Net unrealized appreciation (depreciation) of investments during the year 129,007 (13,943) 123,503 ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations $ 201,956 $ (42,536) $ 145,705 ============ ============ ============ CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 201,956 $ (42,536) $ 145,705 ------------ ------------ ------------ Capital transactions: Purchase of Variable Account units 1,507,118 1,050,294 5,494,999 Redemption of Variable Account units (1,098,083) (1,582,123) (5,197,598) Redemptions for mortality and expense and administrative charges 1,427 1,686 3,390 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- ------------ ------------ ------------ Net increase (decrease) from capital transactions 410,462 (530,143) 300,791 ------------ ------------ ------------ Net increase (decrease) in net assets 612,418 (572,679) 446,496 Net assets at beginning of year 130,057 882,098 371,483 ------------ ------------ ------------ Net assets at end of year $ 742,475 $ 309,419 $ 817,979 ============ ============ ============
The accompanying notes are an integral part of the financial statements. 25 177 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------
NEUBERGER & BERMAN AMT NEUBERGER & INVESCO LIMITED BERMAN AMT HEALTH & MATURITY BOND PARTNERS SCIENCES OPERATIONS Dividend income $ 34,231 $ 22,384 $ 1,773 Mortality and expense and administrative charges (2,313) (3,261) (8,720) Net realized gain (loss) on investments (20,107) (5,353) 58,119 Net unrealized appreciation (depreciation) of investments during the year (8,853) 32,264 (29,108) --------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations $ 2,958 $ 46,034 $ 22,064 =============== =============== =============== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 2,958 $ 46,034 $ 22,064 --------------- --------------- --------------- Capital transactions: Purchase of Variable Account units 578,191 597,368 4,368,976 Redemption of Variable Account units (714,271) (873,323) (4,238,621) Redemptions for mortality and expense and administrative charges 2,313 3,261 8,720 Dividend income distribution to Fortis Benefits Insurance Company -- -- -- --------------- --------------- --------------- Net increase (decrease) from capital transactions (133,767) (272,694) 139,075 --------------- --------------- --------------- Net increase (decrease) in net assets (130,809) (226,660) 161,139 Net assets at beginning of year 675,400 852,869 1,868,095 --------------- --------------- --------------- Net assets at end of year $ 544,591 $ 626,209 $ 2,029,234 =============== =============== =============== INVESCO COMBINED INDUSTRIAL INVESCO VARIABLE INCOME TECHNOLOGY ACCOUNT OPERATIONS Dividend income $ 15,560 $ - $ 288,944,665 Mortality and expense and administrative charges (3,233) (18,191) (42,331,871) Net realized gain (loss) on investments 50,003 1,995,638 114,341,208 Net unrealized appreciation (depreciation) of investments during the year 22,334 2,842,497 414,351,155 --------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations $ 84,664 $ 4,819,944 $ 775,305,157 =============== =============== =============== CHANGES IN NET ASSETS Operations: Net increase (decrease) in net assets resulting from operations $ 84,664 $ 4,819,944 $ 775,305,157 --------------- --------------- --------------- Capital transactions: Purchase of Variable Account units 1,629,081 24,971,634 1,142,010,519 Redemption of Variable Account units (1,394,230) (18,308,129) (945,768,190) Redemptions for mortality and expense and administrative charges 3,233 18,191 42,331,871 Dividend income distribution to Fortis Benefits Insurance Company -- -- (894,843) --------------- --------------- --------------- Net increase (decrease) from capital transactions 238,084 6,681,696 237,679,357 --------------- --------------- --------------- Net increase (decrease) in net assets 322,748 11,501,640 1,012,984,514 Net assets at beginning of year 540,536 1,239,047 2,937,518,919 --------------- --------------- --------------- Net assets at end of year $ 863,284 $ 12,740,687 $ 3,950,503,433 =============== =============== ===============
The accompanying notes are an integral part of the financial statements. 26 178 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 -------------------------------------------------------------------------------- 1. GENERAL FORTIS BENEFITS INSURANCE COMPANY Variable Account D (the "Account") was established as a segregated asset account of Fortis Benefits Insurance Company ("Fortis Benefits") on October 14, 1987 under Minnesota law. The Account is registered under the Investment Company Act of 1940 as a unit investment trust. The variable annuity contracts are sold under the names of EmPower Variable Annuity, Opportunity Variable Annuity, Opportunity + Variable Annuity, Wells Fargo Passage Variable Annuity (formerly known as Norwest Passage Variable Annuity), Maters + Variable Annuity, TD Waterhouse Variable Annuity, Income Preferred Variable Annuity, Federated Triple Crown Variable Annuity and Kelmoore Strategy Variable Annuity. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The assets of the Account are segregated from Fortis Benefits' other assets. The following is a summary of significant accounting policies consistently followed by the Account in the preparation of its financial statements. INVESTMENT TRANSACTIONS All assets of each Subaccount of the Account are invested in shares of the corresponding portfolios of Fortis Series Fund, Inc.; Wells Fargo Variable Trust; Scudder Variable Life; AIM Variable Insurance Funds, Inc.; Alliance Variable Product Series; SAFECO Resource Series; Federated Insurance Series; Lexington Funds, Inc.; MFS Variable Insurance Trust; Montgomery Variable Funds; Strong Variable Insurance Funds; American Century Investments; Van Eck Worldwide Insurance Trust; Neuberger & Berman, Inc.; INVESCO, Inc.; and Kelmoore Funds (collectively known as "the Funds"). The shares are valued at the Funds' offering and redemption prices per share. Purchases and sales of shares of the Fund are recorded on the trade date. The cost of investments sold and redeemed is determined on the average cost method. Dividend income from the Funds is recorded in recorded on the ex-dividend date. All distributions from the Funds are reinvested upon receipt. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of net assets at the date of the financial statements and the reported results of operations and changes in net assets during the reporting period. Actual results could differ from these estimates. 27 179 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 -------------------------------------------------------------------------------- 3. INVESTMENTS There were 72 subaccounts within the Account (only 61 of which were active in 1999). On September 20, 1999, the Norwest Series Funds changed its name to the Wells Fargo Variable Trust. As a result of the change from Norwest to Wells Fargo, the following funds changed names: The Norwest Select Income Equity Fund changed to Wells Fargo Variable Trust Equity Income Fund, the Norwest Select Valugrowth Fund changed to Wells Fargo Variable Trust Large Company Growth Fund, the Norwest Income Fund changed to the Wells Fargo Variable Trust Corporate Bond Fund, and the Norwest Select Small Company Stock Fund changed to the Wells Fargo Variable Trust Small Cap Stock Fund. The number of shares and aggregate cost of purchases, including reinvested dividends and realized capital gains, and aggregate cost of investments sold or redeemed were as follows:
YEAR ENDED DECEMBER 31, 2000 -------------------------------------------------------------------------- SHARES --------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS Fortis Series Fund, Inc.: Growth Stock 3,082,558 952,406 $148,777,870 $ 26,393,476 U.S. Government Securities 2,005,082 2,635,974 20,496,616 28,255,399 Money Market 10,023,019 12,381,426 113,826,181 139,079,568 Asset Allocation 5,842,450 2,089,948 119,406,155 34,203,446 Diversified Income 796,517 1,826,341 8,447,960 21,287,002 Global Growth 3,585,032 2,034,182 116,537,145 36,838,397 Aggressive Growth 4,726,863 808,309 165,009,861 16,338,779 Growth & Income 1,797,955 2,036,596 35,881,888 31,433,207 High Yield 1,169,700 1,724,477 9,738,220 17,162,190 International Stock II 403,820 1,423,246 4,889,999 17,481,984 Multisector Bond 429,023 791,639 4,384,916 8,291,226 International Stock 1,891,745 737,693 30,962,366 10,311,173 Value 809,471 773,454 13,225,300 10,283,080 S & P 500 3,210,751 2,874,803 70,831,046 55,476,346 Blue Chip Stock 2,432,582 848,691 52,885,394 11,805,094 Mid Cap Stock 1,773,991 710,503 20,326,386 7,125,152 Large Cap Growth 3,021,331 920,931 43,651,951 10,923,127 Small Cap Value 3,980,312 762,940 15,924,640 7,553,655 Global Equity 1,002,095 174,260 10,049,251 1,613,761 Investors Growth 1,319,099 95,057 13,294,779 953,650 Blue Chip II 1,643,590 193,136 16,518,100 1,976,522 Capital Opportunities 1,572,079 91,476 15,921,441 917,424 American Leaders 700,693 87,875 7,195,770 885,517
28 180 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000 --------------------------------------------------------------------- SHARES ------------------------------ COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS Wells Fargo Variable Trust: Large Cap 2,461,734 410,066 $ 30,403,252 $ 4,434,630 Corporate Bond 257,438 697,319 4,408,362 7,510,773 Small Cap Stock 253,802 132,702 9,326,305 1,814,023 Equity Income 400,270 1,869,549 9,391,788 27,237,323 Growth 26,104 3,743 632,093 85,924 Equity Value 64,973 14,901 606,772 136,577 Asset Allocation 460,943 17,687 7,025,886 256,295 International 10,480 4,140 100,823 41,672 Scudder Variable Life Investment Fund: International 21,828 129,071 1,370,678 1,756,137 AIM Variable Insurance Funds, Inc.: V.I. Value Fund 317,087 40,230 11,917,841 1,180,938 V.I. International Equity 141,032 32,992 4,215,098 764,157 Alliance Variable Product Series: Money Market 173,715,616 167,666,091 174,967,194 167,665,061 International 3,338,268 3,324,109 67,594,948 67,662,767 Premier Growth 219,655 172,655 9,299,752 6,302,222 SAFECO Resource Series: Growth 123,878 154,994 3,259,089 3,410,862 Equity 61,466 65,034 1,866,691 1,948,762 Federated Insurance Series: U.S. Government Securities II 778,172 334,634 8,534,444 3,535,078 High Income Bond Fund II 1,368,193 993,844 13,394,717 9,474,766 American Leaders II 2,352,628 434,982 9,118,439 3,631,518 Equity Income 2,081,872 10,473 48,597,365 8,714,809 Growth Strategies 1,232,656 7,529 34,149,431 163,490 International Equity II 738,277 637 38,201,504 201,643 Utility II 641,937 263,754 19,477,802 12,486 Money II 3,890,335 3,329,935 3,963,625 3,329,953 Strategic Income II 185,343 54,992 1,951,410 561,177 Small Cap II 541,601 9,244 6,703,218 118,829 Quality Bond 33,653 1,109 350,943 11,545 Large Cap 541,160 300 4,858,040 2,973 International Small Co. 149,630 316 1,326,488 2,966 Lexington Funds, Inc.: Natural Resources 243,512 284,491 3,204,617 3,710,903 Emerging Markets 15,314 18,414 211,233 216,386 MFS Variable Insurance Trust: Emerging Growth 456,974 234,532 17,778,149 7,342,148 High Income 470,220 484,225 5,696,035 5,448,662 World Government 37,537 33,676 367,561 328,852 Montgomery Variable Funds: Emerging Markets 2,392,422 2,406,999 24,155,648 24,458,673 Growth 40,705 30,465 777,253 534,084
29 181 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000 -------------------------------------------------------------------- SHARES --------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS Strong Variable Insurance Funds: Discovery II 106,240 100,471 $ 1,318,611 $ 1,173,912 International II 978,293 1,022,798 13,570,147 14,598,677 American Century Investments: VP Balanced 157,445 205,453 1,231,475 1,575,853 VP Capital Appreciation 367,523 310,042 6,415,644 5,126,392 Van Eck Worldwide Insurance Trust: Bond 326,759 333,634 3,310,676 3,386,334 Hard Assets 570,665 629,402 6,537,744 7,154,369 Neuberger & Berrnan, Inc.: AMT Limited Maturity Bond 22,706 21,146 323,830 47,481 AMT Partners 39,385 10,749 767,377 196,754 INVESCO, Inc.: Health & Sciences 1,009,883 843,995 19,050,901 15,121,961 Industrial Income 121,408 43,461 2,767,564 913,210 Technology 915,304 830,776 38,618,020 31,224,556 Investments in Kelmoore Strategy: Variable Fund 25,343 -- 254,060 -- Variable Eagle Fund 9,803 -- 98,221 --
YEAR ENDED DECEMBER 31, 1999 ------------------------------------------------------------------------ SHARES ------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS Fortis Series Fund, Inc.: Growth Stock 4,978,132 2,488,571 $161,442,240 $ 60,051,825 U.S. Government Securities 1,916,594 2,147,519 19,930,332 23,141,836 Money Market 9,210,743 5,738,592 103,104,140 63,850,738 Asset Allocation 4,015,172 2,762,388 82,165,249 43,092,189 Diversified Income 1,206,078 1,555,645 13,354,668 18,287,745 Global Growth 770,088 2,667,719 20,141,023 38,663,127 Aggressive Growth 1,237,296 784,771 28,632,229 10,639,902 Growth & Income 1,147,912 1,657,035 23,472,414 24,762,684 High Yield 1,396,065 1,176,380 13,088,327 11,968,830 Global Asset Allocation 730,517 535,027 10,234,446 6,996,772 Global Bond 728,969 425,728 8,090,103 4,981,315 International Stock 1,543,903 815,081 24,396,424 10,609,129 Value 449,284 605,528 6,823,332 7,895,168 S & P 500 6,179,339 2,022,842 125,545,450 38,403,086 Blue Chip Stock 2,679,741 277,993 52,655,703 4,405,532 Mid Cap Stock 891,979 125,899 8,528,073 1,140,982 Large Cap Growth 3,491,409 50,255 47,009,337 703,566 Small Cap Value 1,921,850 222,974 19,193,803 2,225,383
30 182 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 ------------------------------------------------------------------------ SHARES ---------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS Wells Fargo Variable Trust: Large Cap 467,130 240,704 $ 17,880,099 $ 3,039,944 Corporate Bond 1,120,765 230,185 13,560,810 2,673,496 Small Cap Stock 122,610 269,659 1,382,121 3,442,322 Equity Income 2,148,439 203,437 38,111,023 2,903,009 Growth 2,183 -- 56,266 -- Equity Value 10,708 -- 100,121 -- Asset Allocation 75,891 302 1,191,046 4,188 Scudder Variable Life Investment Fund: International 14,987 101,879 1,051,785 1,344,120 AIM Variable Insurance Funds, Inc.: V.I. Value Fund 563,265 9,554 16,886,126 251,080 V.I. International Equity 121,509 9,905 2,806,228 199,314 Alliance Variable Product Series: Money Market 200,370,409 201,747,571 201,349,414 201,747,571 International 3,557,215 3,535,060 61,457,460 60,791,954 Premier Growth 385,714 459,541 13,323,209 13,954,163 SAFECO Resource Series: Growth 243,582 321,802 5,005,304 7,128,837 Equity 88,378 61,277 2,905,724 1,784,602 Federated Insurance Series: U.S. Government Securities II 610,469 256,608 6,530,790 2,759,786 High Income Bond Fund II 2,064,857 1,597,032 21,900,547 16,837,452 American Leaders II 3,837,639 2,066,898 81,174,935 44,003,183 Equity Income 1,474,209 2,456 22,103,728 36,380 Growth Strategies 798,642 6,531 18,226,511 137,022 International Equity II 374,118 439 6,933,636 7,065 Utility II 548,821 163,128 7,914,617 2,358,588 Money II 8,313,351 7,080,345 8,358,067 7,080,345 Strategic Income II 58,160 138 586,922 1,353 Small Cap II 85,863 36 1,018,966 427 Lexington Funds, Inc.: Natural Resources Trust 170,459 145,816 2,161,210 1,904,504 Emerging Markets 135,638 14,322 135,773 105,456 MFS Variable Insurance Trust: Emerging Growth 249,835 301,231 14,159,112 6,393,261 High Income 455,613 466,550 10,179,495 5,448,479 World Government 67,910 96,403 719,554 1,015,419 Montgomery Variable Funds: Emerging Markets 2,441,174 2,392,615 20,357,660 19,699,007 Growth 235,480 260,002 3,992,065 4,284,459 Strong Variable Insurance Funds: Discovery II 150,502 167,330 1,533,197 1,782,195 International II 1,729,393 1,600,904 17,406,027 15,417,494 American Century Investments: VP Balanced 90,380 88,096 917,761 688,763 VP Capital Appreciation 141,050 105,438 1,507,118 1,023,707
31 183 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 ---------------------------------------------------------------------- SHARES ------------------------------ COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS Van Eck Worldwide Insurance Trust: Bond 96,979 142,677 $ 1,082,718 $ 1,641,454 Hard Assets 523,306 479,248 5,500,799 5,177,805 Neuberger & Berrnan, Inc.: AMT Limited Maturity Bond 43,964 54,339 612,422 734,378 AMT Partners 30,511 44,921 619,752 878,676 INVESCO, Inc.: Health & Sciences 289,246 284,870 4,370,749 4,180,502 Industrial Income 81,284 69,977 1,644,642 1,344,227 Technology 1,106,916 850,184 24,971,634 16,312,491
Fortis Benefits' investment in the subaccounts represented the following number of shares of the Funds held and aggregate cost of amounts invested at December 31, 2000:
COST OF SHARES SHARES Fortis Series Fund, Inc.: American Leaders 326,364 $3,244,546 Blue Chip II 313,652 3,136,516 Capital Opportunities 474,316 4,743,156 Global Equity 477,337 4,757,565 Investors Growth 475,277 4,749,727
4. ACCOUNT CHARGES ADMINISTRATION CHARGE A $35 annual contract administrative charge is deducted each contract year from the value of each Opportunity Variable Annuity and $30 for each EmPower Variable Annuity, Opportunity + Variable Annuity, Wells Fargo Passage Variable Annuity, and TD Waterhouse Annuity on each anniversary of the contract date and upon total surrender of the contract. This charge will be waived during the accumulation period if the contract value at the end of the contract year (or upon total surrender) is $25,000 or more for the Opportunity Variable Annuity, Masters Variable Annuity and Wells Fargo Passage Variable Annuity and $100,000 or more for the EmPower Variable Annuity. In addition, Fortis Benefits assesses each subaccount of the Opportunity Variable Annuity, Opportunity + Variable Annuity, Masters Variable Annuity, Master + Variable Annuity, Income Preferred Variable Annuity, Federated Triple Crown Variable Annuity and Kelmoore Strategy Variable Annuity, a daily charge for administrative expense at annual rate of 0.10% of the net assets. For the EmPower Variable Annuity and Wells Fargo Passage Variable Annuity, the daily charge is assessed at an annual rate of 0.15%. 32 184 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 -------------------------------------------------------------------------------- MORTALITY AND EXPENSE RISK CHARGE Fortis Benefits assesses each subaccount of the Opportunity Variable Annuity, Opportunity + Variable Annuity, Masters Variable Annuity, Masters + Variable Annuity and Wells Fargo Passage Variable Annuity a daily charge for mortality and expense risk at an annual rate of 1.25% of the net assets. For the EmPower Variable Annuity, the daily charge is assessed at an annual rate of 1.10%. For the Income Preferred Variable Annuity, the daily charge is assessed at an annual rate of 1.40% (reduced to 1.25% during the annuity period). For the TD Waterhouse Variable Annuity, the daily charge is assessed at an annual rate of 0.45%. For the Federated Triple Crown Variable Annuity, the daily charge for contract owners less than 61 years old is 1.10%, and for contract owners 61 years or older is 1.30%. For the Kelmoore Strategy Variable Annuity, the daily charge is assessed at an annual rate of 1.05% (1.50% on enhanced death benefit contracts). Fortis Benefits bears an investment risk associated with the Income Preferred Variable Annuity in relation to the Guaranteed Payout Plan Benefit. With this benefit Fortis bears the risk that investment performance is insufficient to cover the guarantee of the return of purchase payment. Fortis assesses a daily charge at an annual rate of .35% for this risk. 5. SURRENDER AND PREMIUM TAX CHARGES AMOUNT OF SURRENDER CHARGE Surrender charges apply only if the amount being withdrawn exceeds the sum of the amounts listed below under Free Surrenders. The surrender charge is based on a percentage of the amount of purchase payments surrendered. The percentage of payments is set at 5% and slides to zero during the first five years on the Opportunity Variable Annuity, Opportunity + Variable Annuity and Wells Fargo Passage Variable Annuity contracts. The percentage is set at 7% and slides to zero during the first seven years of the Masters Variable Annuity contracts. The following contracts have the following surrender charge periods and percentage charge scales: Masters + Variable Annuity 8 years 7, 7, 6, 6, 5, 3, 1, 0 Income Preferred Variable Annuity 9 years 8, 8, 7, 7, 6, 5, 3, 2, 1 Federated Triple Crown Variable Annuity 8 years 7, 7, 7, 5, 4, 3, 2, 0 Kelmoore Strategy Variable Annuity 8 years 8, 7, 6, 5, 4, 3, 2, 0
FREE SURRENDERS The following amounts can be withdrawn from the contract without a surrender charge: - For EmPower Variable Annuity and TD Waterhouse Variable Annuity, there is no surrender charge. - Any purchase payments received more than five years prior to the surrender date for Opportunity Variable Annuity and the Wells Fargo Passage Variable Annuity, seven years for Masters Variable Annuity and the Federated Triple Crown Variable Annuity, and nine years for Income Preferred Variable Annuity and have not been previously surrendered. 33 185 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 -------------------------------------------------------------------------------- - In any contract year, up to 10% of the purchase payments received less than five years prior to the surrender date for Opportunity Variable Annuity, Opportunity + Variable Annuity and Wells Fargo Passage Variable Annuity, seven years prior to the surrender date for Masters Variable Annuity, Masters + Variable Annuity, Federated Triple Crown Variable Annuity and Kelmoore Strategy Variable Annuity, and nine years prior to the surrender date for Income Preferred Variable Annuity. - For Masters Variable Annuity, Masters + Variable Annuity, Wells Fargo Passage Variable Annuity and Federated Triple Crown Variable Annuity after age 61, any earnings that have not been previously surrendered. PREMIUM TAXES Where premium taxes or similar assessments are imposed by states or other jurisdictions upon receipt of purchase payments, Fortis Benefits pays such taxes on behalf of the contract owner and will deduct a charge for these amounts from the contract value upon surrender, death of the annuitant or contract owner, or annuitization of the contract. In jurisdictions where premium taxes or similar assessments are imposed at the time annuity payments begin, Fortis Benefits will deduct a charge on a pro rata basis from the contract value at that time. Redemptions are reported prior to deduction surrender and premium tax charges which are paid directly to Fortis Benefits. The surrender charges and premium tax charges collected by Fortis Benefits were $4,828,465 and $6,252,617 in 2000 and 1999, respectively. 6. FEDERAL INCOME TAXES The operations of the Account form part of, and are taxed with, the operations of Fortis Benefits, which is taxed as a life insurance company under the Internal Revenue Code. As a result, the net asset value of the subaccounts are not affected by income taxes on income distributions received by the subaccounts. 7. RELATED PARTY TRANSACTIONS Fortis Advisers, Inc. (Fortis Advisers), an affiliate of Fortis Benefits, provides investment management services to Fortis Series Fund, Inc. in exchange for investment advisory and management fees. Investment advisory and management fees are based on each portfolio's daily net assets and decrease through reduced percentages as average daily net assets increase. The fees represent an investment expense to Fortis Series Fund, Inc. which reduces the portfolios' net assets. The fees charged by Fortis Advisers are not available on an individual variable account basis. Fees for all variable accounts to which Fortis Advisers provided investment management services amounted to $28,398,906 and $21,779,394 in 2000 and 1999, respectively. 34 186 FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 -------------------------------------------------------------------------------- 8. SUBSEQUENT EVENT 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 Fortis Benefits Insurance Company (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 and Annuity Insurance Company ("Hartford Annuity"), 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. The Sale also included Hartford Annuity's purchase of certain real and personal property owned by the Company and used in connection with the Division's business. Also as part of the Sale, Hartford Life and Accidence 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. 35 187 APPENDIX A PERFORMANCE INFORMATION In advertising and other sales material for the Contracts, yield and total return information for the Subaccounts of the Separate Account may be included. The information below provides investment results for the indicated Subaccounts of the Separate Account. The results shown in this section are not an estimate or guarantee of future investment performance, and do not represent the actual experience of amounts invested by a particular Participant. YIELD CALCULATIONS Yield information for the Money Market Subaccount will be based on the seven days ended on a specified date. It will be computed by determining the net change, exclusive of capital changes, in the value of a hypothetical pre-existing account (after the deduction of all asset based charges) having a balance of one Accumulation Unit at the beginning of the period, subtracting a proportionate amount of the annual administrative charge (based on average Contract size), and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and multiplying the base period return by (365/7), with the resulting yield figure carried to the nearest hundredth of one percent. The seven day yield for the Money Market Subaccount as of December 31, 2000 was 4.69%. An effective yield may also be quoted for the Money Market Subaccount. Effective yield is calculated by compounding the current yield as follows: 365/7 ....................... Effective Yield = [(Base Period Return + 1) ] - 1 The seven day effective yield for the Money Market Subaccount as of December 31, 2000 was 4.80%. Yield information for the other Subaccounts will be based on the thirty days ended on a specified date and carried to the nearest hundredth of a percent, according to the following formula: [ ( a-b )6 ] Yield = 2 [ ( ----- + 1 ) - 1 ] [ ( cd ) ] Where: a = net investment income earned during the period by the Portfolio whose shares are owned by the Subaccount. b = expenses accrued for the period, including a proportionate amount of the annual administrative charge (based on average Contract size), c = the average daily number of Accumulation Units outstanding during the period, and d = the offering price per Accumulation Unit at the end of the last day of the period. The following table sets forth yield figures for the thirty days ended December 31, 2000:
SUBACCOUNT YIELD ---------- ----- U.S. Government Securities................................ 6.02% Diversified Income........................................ 8.33% High Yield................................................ 12.49% Multisector Bond.......................................... 1.75%
A-1 188 TOTAL RETURN CALCULATIONS Total return information will be given for the one year and five year periods ended on a specific date, provided that, if the registration statement has been effective for a Subaccount only during a shorter period, then such shorter period will be used. AVERAGE ANNUAL TOTAL RETURN Total average annual compounded rates of return for each period will be computed to the nearest one hundredth of a percent, according to the following formula: n P(1 + T) = CSV Where: P = a hypothetical initial purchase payment of $1000, T = average annual total return, n = number of years, and CSV = end of period Cash Surrender Value of hypothetical $1,000 purchase payment made at the beginning of the period.
SUBACCOUNT ONE YEAR PERIOD FIVE YEAR PERIOD TEN YEAR PERIOD COMMENCEMENT TO ENDED DEC 31, 2000 ENDED DEC 31, 2000 ENDED DEC 31, 2000 DEC 31, 2000 ------------------------------------ --------------------------------------------------------------------------------- Growth Stock -0.90% 16.81% 15.79% 14.66% U.S. Government Securities 6.78% 1.34% 3.17% 4.00% Diversified Income 2.51% 0.64% 3.33% 4.27% Asset Allocation -4.67% 10.42% 10.62% 10.29% Global Growth -22.41% 9.04% NA 10.75% High Yield -11.20% -1.98% NA -0.43% Growth & Income 0.23% 11.66% NA 12.97% Aggressive Growth -19.71% 15.13% NA 14.92% International Stock II -12.89% 1.69% NA 3.83% MultiSector Bond -0.66% -2.44% NA 0.55% International Stock -14.35% 6.71% NA 7.55% Value 13.41% NA NA 12.26% S & P 500 -14.23% NA NA 13.96% Blue Chip -7.27% NA NA 15.19% Mid Cap Stock 3.76% NA NA 2.22% Large Cap Growth -22.53% NA NA 4.50% Small Cap Value 21.81% NA NA 9.23% Global Equity NA NA NA NA Investors Growth NA NA NA NA Blue Chip II NA NA NA NA Capital Opportunities NA NA NA NA American Leaders NA NA NA NA
A-2 189 CUMULATIVE TOTAL RETURN Total cumulative rates of return for each period will be computed to the nearest one hundredth of a percent, according to the following formula: CTR = CSV - P 100 ------- P Where: P = a hypothetical initial purchase payment of $1,000, CTR = cumulative total return, and CSV = end of period Cash Surrender Value of hypothetical $1,000 purchase payment made at the beginning of the period.
Subaccount One Year Period Five Year Period Ten Year Period Commencement to Ended Dec 31, 2000 Ended Dec 31, 2000 Ended Dec 31, 2000 Dec 31, 2000 ------------------------------------ -------------------------------------------------------------------------------- Growth Stock -0.90% 117.48% 333.34% 465.90% U.S. Government Securities 6.78% 6.86% 36.60% 58.05% Diversified Income 2.51% 3.25% 38.75% 69.80% Asset Allocation -4.67% 64.18% 174.42% 245.70% Global Growth -22.41% 54.13% NA 142.39% High Yield -11.20% -9.52% NA -2.86% Growth & Income 0.23% 73.61% NA 125.61% Aggressive Growth -19.71% 102.24% NA 152.82% International Stock II -12.89% 8.76% NA 25.33% MultiSector Bond -0.66% -11.60% NA 3.36% International Stock -14.35% 38.39% NA 54.72% Value 13.41% NA NA 71.59% S & P 500 -14.23% NA NA 84.08% Blue Chip -7.27% NA NA 93.58% Mid Cap Stock 3.76% NA NA 6.03% Large Cap Growth -22.53% NA NA 12.46% Small Cap Value 21.81% NA NA 26.57% Global Equity NA NA NA -10.86% Investors Growth NA NA NA -14.45% Blue Chip II NA NA NA -16.22% Capital Opportunities NA NA NA -15.96% American Leaders NA NA NA 0.42%
Yield figures do not reflect any surrender charge, and yield and total return figures do not reflect any premium tax charge. Yield and total return figures do reflect the reimbursement of certain Fortis Series expenses. Current Fixed Account effective annual rates of interest may also be quoted in advertising and other sales materials, and these rates do not reflect any deductions or charges. Fortis Benefits may advertise its relative performance as compiled by outside organizations. Following is a list of ratings services which may be referred to in advertisements, along with the category in which the applicable Subaccount is included:
PORTFOLIO NAME RATING SERVICE CATEGORY International Stock Morningstar Publications, Inc. Foreign Stock Subaccount Lipper Analytical Services, Inc. International Fund Variable Annuity Research & Data Service International Stock
A-3 190 Global Growth Morningstar Publications, Inc. World Stock Subaccount Lipper Analytical Services, Inc. Global Fund Variable Annuity Research & Data Service International Stock Global Asset Morningstar Publications, Inc. International Hybrid Allocation Subaccount Lipper Analytical Services, Inc. Global Flexible Portfolio Variable Annuity Research & Data Service Balanced/International Aggressive Growth Morningstar Publications, Inc. Small Growth Subaccount Lipper Analytical Services, Inc. Small Cap Fund Variable Annuity Research & Data Service Aggressive Growth Small Cap Value Morningstar Publications, Inc. Small Value Subaccount Lipper Analytical Services, Inc. Small Cap Fund Variable Annuity Research & Data Service Small Company Funds Growth Stock Morningstar Publications, Inc. Mid Cap Growth Subaccount Lipper Analytical Services, Inc. Mid Cap Fund Variable Annuity Research & Data Service Growth Mid Cap Stock Morningstar Publications, Inc. Mid Cap Blend Subaccount Lipper Analytical Services, Inc. Mid Cap Fund Variable Annuity Research & Data Service All Equity Funds Large Cap Growth Morningstar Publications, Inc. Large Blend Subaccount Lipper Analytical Services, Inc. Growth Fund Variable Annuity Research & Data Service Growth Blue Chip Stock Morningstar Publications, Inc. Large Blend Subaccount Lipper Analytical Services, Inc. Growth Fund Variable Annuity Research & Data Service Growth S&P 500 Index Morningstar Publications, Inc. Large Blend Subaccount Lipper Analytical Services, Inc. Index Fund Variable Annuity Research & Data Service Growth and Income Funds Growth & Income Morningstar Publications, Inc. Mid Cap Blend Subaccount Lipper Analytical Services, Inc. Growth & Income Variable Annuity Research & Data Service Growth and Income Value Subaccount Morningstar Publications, Inc. Large Blend Lipper Analytical Services, Inc. Growth & Income Variable Annuity Research & Data Service Equity-Income Asset Allocation Morningstar Publications, Inc. Domestic Hybrid Subaccount Lipper Analytical Services, Inc. Flexible Portfolio Variable Annuity Research & Data Service Balanced Multisector Bond Morningstar Publications, Inc. International Bond Subaccount Lipper Analytical Services, Inc. Global Income Variable Annuity Research & Data Service International Bonds High Yield Morningstar Publications, Inc. High Yield Bond Subaccount Lipper Analytical Services, Inc. High Current Yield Variable Annuity Research & Data Service Corporate Bond High Yield Diversified Income Morningstar Publications, Inc. Intermediate-Term Bond Subaccount Lipper Analytical Services, Inc. Corp Debt BBB Rated Variable Annuity Research & Data Service Corporate Bond General Funds
A-4 191 U.S. Government Morningstar Publications, Inc. Intermediate Government Subaccount Lipper Analytical Services, Inc. Intermediate U.S. Govt. Variable Annuity Research & Data Service Government Bond General Funds Money Market Morningstar Publications, Inc. Money Market Subaccount Lipper Analytical Services, Inc. Money Market Variable Annuity Research & Data Service Money Market
A-5 192 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The estimated expenses of the issuance and distribution of the Contracts, other than commissions on sales of the Contracts are as follows:
Amount Securities and Exchange Commission registration fee $ 0 Printing and engraving $1,500 Accounting fees and expenses $1,500 Legal fees and expenses $3,000
Item 15. Indemnification of Directors and Officers Section 300.083 of Minnesota Law General Provision provides in part that a corporation organized under such law shall have power to indemnify anyone made, or threatened to be made, a party to a threatened, pending or completed proceeding, whether civil or criminal, administrative or investigative, because he is or was a director or officer of the corporation, or served as a director or officer of another corporation at the request of the corporation. Indemnification in such a proceeding may extend to judgments, penalties, fines and amounts paid in settlement, as well as to reasonable expenses, including attorneys' fees and disbursements. In a civil proceeding, there can be no indemnification under the statute, unless it appears that the person seeking indemnification has acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and its shareholders and unless such person has received no improper personal benefit; in a criminal proceeding, the person seeking indemnification must also have no reasonable cause to believe his conduct was unlawful. Article VI Section 5 of the By-laws of the Fortis Benefits Insurance Company provides as follows: Section 5. The Company shall indemnify (including therein the prepayment of expenses) any person who is or was a director, officer or employee, or who is or was serving at the request of the Company as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise for expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him with respect to any threatened, pending or completed action, suit or proceedings against him by reason of the fact that he is or was such a director, officer or employee to the extent and in the manner permitted by law. Section 12 of the Principal Underwriter agreement incorporated as exhibit 1 to this registration statement (which is incorporated herein by this reference) provides that Woodbury Financial Services, Inc. and Fortis Benefits will indemnify each other, and each other's officers, directors and controlling persons, with respect to certain types of misstatements or omissions in connection with the offer and sale of the Certificates. Certain officers, directors or controlling persons of Woodbury Financial Services, Inc. are also officers, directors and controlling persons of Fortis Benefits. Pursuant to the Principal Underwriter and Servicing Agreement, Woodbury Financial Services has agreed to indemnify Variable Account D, Fortis Benefits, and each of its officers, directors and controlling persons for damages and expenses (1) arising out of certain material misstatements and omissions in connection with the offer and sale of the Contracts, if the misstatement or omission was based on information furnished by Fortis Investors or (2) otherwise arising out of Fortis Investors' negligence, bad faith, willful misfeasance or reckless disregard of its responsibilities. Pursuant to its Dealer Sales Agreements, a form of which is filed as Exhibit 3(b) to this registration statement and is incorporated herein by this reference, firms that sell the contracts agree to indemnify Fortis Benefits, Fortis Investors, the Separate Account, and their officers, directors, employees, agents, and controlling persons from liabilities and expenses arising out of the wrongful conduct or omissions of said selling firm or its officers, directors, employees, controlling persons or agents. 193 Item 16. Exhibits and Financial Statement Schedule a. Exhibits 1. Form of Principal Underwriter and Servicing Agreement (Incorporated by reference from Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on January 11, 1994, File No. 33-73986). Form of Amendment to Principal Underwriting (Incorporated by reference from Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on January 11, 1994, File No. 33-73986). 2. Form of Asset Transfer and Acquisition Agreement dated August 28, 1991 and supplement thereto dated October 1, 1991 (Incorporated by reference from Form 8-K filed on October 16, 1991 (as amended by Form 8 filed on October 21, 1991), File No. 33-37576). 3. (a) Articles of Incorporation of Fortis Benefits Insurance Company (Incorporated by reference from Form S-6 Registration Statement of Fortis Benefits and its Variable Account C filed on March 17, 1986, File No. 33-03919); (b) By-laws of Fortis Benefits Insurance Company (Incorporated by reference from Form S-6 Registration Statement of Fortis Benefits and its Variable Account C filed on March 17, 1986, File No. 33-03919); (c) Amendment to Articles of Incorporation and By-laws dated November 21, 1991. (Incorporated by reference from Post-Effective Amendment No. 1 to the Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on March 2, 1992, File No. 33-37577.) (d) Certificate of Amendment to Bylaws of depositor dated May 1, 1999 (incorporated by reference from Form 10-K of Fortis Benefits Insurance Company filed March 29, 2000, File No. 33-37576). 4. (a) Form of Combination Fixed and Variable Group Annuity Contract; (Incorporated by reference from Post-Effective Amendment No. 1 to the Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on March 2, 1992, File No. 33-37577). (b) Form of Certificate to be used in connection with Contract filed as Exhibit 4(a); (Incorporated by reference from Post-Effective Amendment No. 1 to Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on March 2, 1992, File No. 33-37577). (c) Form of Enhanced Variable Annuity Contract--filed simultaneously herewith as a part of Post-Effective Amendment No. 13 to Form N-4 File No. 33-37577. (d) Form of Application to be used in connection with Certificate filed as Exhibit 4(b). (Incorporated by reference from Post-Effective Amendment No. 1 to the Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on October 27, 1995, File No. 33-37577). (e) Form of IRA Endorsement (Incorporated by reference from Pre-Effective Amendment No. 1 to the Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on March 28, 1991, File No. 33-37577.) (f) Form of Section 403(b) Annuity Endorsement (Incorporated by reference from Pre-Effective Amendment No. 1 to Form N-4 Registration Statement of Western Life and its Variable Account D filed on March 28, 1991). (g) Annuity Contract Exchange Form (Incorporated by reference from Pre-Effective Amendment No. 1 to the Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on April 18, 1988, File No. 33-19421). (h) Form of Endorsement (incorporated by reference from Form N-4 Registration Statement filed by Fortis Benefits and its Variable Account D on April 27, 1995, File No. 33-37577). (i) Nursing Care/Hospitalization Waiver of Surrender Charge Rider (incorporated by reference from Form N-4 Registration Statement filed by Fortis Benefits and its Variable Account D on April 27, 1995, File No. 33-19421). (j) Enhanced Death Benefit Rider (incorporated by reference from Form N-4 Registration Statement filed by Fortis Benefits and its Variable Account D April 28, 1997, File No. 33-37577.) (k) Disability Waiver of Surrender Charge Rider (incorporated by reference from Form N-4 Registration Statement filed by Fortis Benefits and its Variable Account D contemporaneously herewith, File No. 33-37577.) 194 5. Opinion and consent of Douglas R. Lowe, Esq., Assistant General Counsel of Fortis Benefits Insurance Company, as to the legality of the securities being registered. (Included as part of the original filing of this form S-1 Registration Statement filed on March 30, 1992). 10. (a) Fortis, Inc. Executive Incentive Compensation Plan (Incorporated by reference from (b) Fortis Appreciation Incentive Rights Plan [incorporated by reference from Form 10-K of Fortis Benefits Insurance Company filed March 29, 2000, File No. 33-37576]. Amendment No. 1 to Form S-1 Registration Statement of Fortis Benefits filed on March 28, 1991, File No. 33-37576). 23. Consent of PricewaterhouseCoopers LLP and Ernst & Young LLP -- filed herewith. 24. Power of Attorney for Mr. Clayton. (Incorporated by reference from Form S-6 Registration Statement of Fortis Benefits and its Variable Account C filed on December 17, 1993, File No. 33-73138). b. Not applicable. Item 17. Undertakings The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement, including (but not limited to) any addition or deletion of a managing underwriter. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the indemnification provision described in response to Item 14, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will governed by the final adjudication of such issue. 195 SIGNATURES As required by the Securities Act of 1933, the Registrant has caused this amended Registration Statement to be signed on its behalf in the City of St. Paul, State of Minnesota on this 17th day of April, 2001. FORTIS BENEFITS INSURANCE COMPANY (Registrant) By: /s/ Robert Brian Pollock ----------------------------------- Robert Brian Pollock, President As required by the Securities Act of 1933, this amended Registration Statement has been signed by the following persons, in the capacities indicated, on April 17, 2001. Signature Title With Fortis Benefits * ------------------------------- Chairman of the Board J. Kerry Clayton -------------------------------- Director Arie Aristide Fakkert -------------------------------- Director Alan W. Feagin /s/ Robert Brian Pollock President and Director -------------------------------- (Chief Executive Officer) Robert Brian Pollock /s/ Michael John Peninger -------------------------------- Director Michael John Peninger /s/ -------------------------------- Treasurer Larry M. Cains (Principal Accounting Officer and Principal Financial Officer) *By: /s/Robert Brian Pollock --------------------------- Robert Brian Pollock Attorney-in-fact 196 EXHIBIT INDEX Item Number Description ------ ----------- 23. Consent of PricewaterhouseCoopers LLP 23.1 Consent of Ernst & Young LLP