-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QGrVHKx3yN2dQshda6k+toFWciiJiRfULQOiwgDDJBe8ZxGrGNn5I2oM4kqfQi1g DY3nXqiXKSj0Fm/q1qZBaQ== 0001047469-99-016580.txt : 19990428 0001047469-99-016580.hdr.sgml : 19990428 ACCESSION NUMBER: 0001047469-99-016580 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19990427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORTIS BENEFITS INSURANCE CO CENTRAL INDEX KEY: 0000823533 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 810170040 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: SEC FILE NUMBER: 333-65231 FILM NUMBER: 99602174 BUSINESS ADDRESS: STREET 1: 500 BIELENBERG DRIVE CITY: WOODBURY STATE: MN ZIP: 55125 BUSINESS PHONE: 6517384000 MAIL ADDRESS: STREET 1: P O BOX 64284 CITY: ST PAUL STATE: MN ZIP: 55164 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN LIFE INSURANCE CO DATE OF NAME CHANGE: 19920329 POS AM 1 POS AM As filed with the Securities and Exchange Comission on April 28, 1999 Registration No. 333-65231 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-2 Amendment #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 500 Bielenberg Drive Woodbury, Minnesota 55125 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. FORTIS BENEFITS INSURANCE COMPANY Cross-Reference Sheet Pursuant to Regulation S-K Item 501(b) Form S-2 Item Number Prospectus Caption - -------------------- ------------------ 1. Forepart of the Registration Cover Page; Table of Contents; Statement andOutside 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 ratio of Factors and Ratio of earnings to fixed charges, Not Applicable Earnings to Fixed Charges 4. Use of Proceeds The Variable Account; The Portfolios; 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 Fund; to be Registered 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 Member; to the Registrant Further Information About Fortis Benefits; Financial Statements; Distribution and Servicing 12. Disclosure of Commission Not Applicable Position on Indemnification for Securities Act Liabilities VARIABLE ACCOUNT D OF FORTIS BENEFITS INSURANCE COMPANY MAILING ADDRESS: STREET ADDRESS: PHONE: 1-800-963-9222 P.O. BOX 64273 500 BIELENBERG DRIVE ST. PAUL WOODBURY MINNESOTA 55164 MINNESOTA 55125 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 variable return accumulation option, you can choose among the following investment portfolios: Federated American Leaders Fund II Federated High Income Bond Fund II Federated Equity Income Fund II Federated International Equity Fund II Federated Fund for U.S. Government Securities II Federated Prime Money Fund II Federated Growth Strategies Fund II Federated Utility Fund II
It is anticipated that the following two additional portfolios will be available to you sometime in the later part of May or in June of 1999. See your representative for their current availability. Federated Strategic Income Fund II Federated Small Cap Strategies Fund II
The accompanying prospectus for these investment portfolios describes the investment objectives, policies and risks of each of the portfolios. You can choose among different guarantee periods under the guaranteed interest accumulation option, each of which has its own current interest rate which is guaranteed for the entire guarantee period. In states where guarantee periods fixed accounts are not offered, you can choose an interest in a fixed account which has a minimum interest rate guarantee and a higher current rate which can be changed from time to time. There are two different forms of contract offered by this prospectus. One form is offered where all of the proposed owners of the contract are less than 61 years old when the contract is purchased. A second form is offered where one or more of the proposed owners are 61 years old, or older. The differences between the two forms of contracts are: (1) the death benefit provided; (2) the provision for withdrawals from the contract without a surrender charge during the surrender charge period, and (3) the mortality and expense risk charge imposed. These provisions are discussed in this prospectus under the sections entitled (1) Accumulation Period--Benefit Payable on Death of Owner (or Annuitant); (2) Charges and Deductions--Surrender Charge--Free Surrenders; and (3) Charges and Deductions--Charges Against the Variable Account. This prospectus gives you information about the contracts 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, 1999, 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. FORTIS-Registered Trademark- and Fortis-Registered Trademark- are registered servicemarks of Fortis (NL) N.V. and Fortis (B). TRIPLE CROWN VARIABLE ANNUITY Contracts Under Flexible Premium Deferred Combination Variable and Fixed Annuity Contracts PROSPECTUS DATED May 1, 1999 [LOGO] TABLE OF CONTENTS
PAGE Special Terms Used in this Prospectus................................. 3 Information Concerning Fees and Charges............................... 4 Summary of Contract Features.......................................... 6 Fortis Benefits/Fortis Financial Group Member......................... 8 The Variable Account.................................................. 8 The Portfolios........................................................ 8 The Fixed Account..................................................... 8 - Guarantee Periods Fixed Account................................. 9 - Market Value Adjustment......................................... 9 - General Account Fixed Account................................... 10 - General Account Fixed Account Transfers......................... 10 - Investments by Fortis Benefits.................................. 10 Accumulation Period................................................... 11 - Issuance of a Contract and Purchase Payments.................... 11 - Contract Value.................................................. 11 - Allocation of Purchase Payments and Contract Value.............. 12 - Total and Partial Surrenders.................................... 12 - Telephone Transactions.......................................... 13 - Benefit Payable on Death of Owner (or Annuitant)................ 13 The Annuity Period.................................................... 14 - Annuity Commencement Date....................................... 14 - Commencement of Annuity Payments................................ 14 - Relationship Between Subaccount Investment Performance and Amount of Variable Annuity Payments............................ 15 - Annuity Options................................................. 15 - Death of Annuitant or Other Payee............................... 15 - Contract Owner Services......................................... 15 - Dollar Cost Averaging....................................... 15 - Rebalancing................................................. 16 Charges and Deductions................................................ 16 - Premium Taxes................................................... 16 - Charges Against the Variable Account............................ 16 - Tax Charge...................................................... 16 - Surrender Charge................................................ 16 - Free Surrenders............................................. 17 - Nursing Care/Hospitalization Waiver of Surrender Charges.... 17 - Miscellaneous................................................... 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.......................................................... 19 Federal Tax Matters................................................... 19 Further Information about Fortis Benefits............................. 22 - General......................................................... 22 - Ownership of Securities......................................... 22 - Selected Financial Data......................................... 22 - Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 22 Voting Privileges..................................................... 25 Legal Matters......................................................... 25 Other Information..................................................... 25 Contents of Statement of Additional Information....................... 25 Fortis Benefits Financial Statements.................................. 25
PAGE Appendix A--Sample Market Value Adjustment Calculations............... A-1 Appendix B--Explanation of Expense Calculations....................... B-1 Appendix C--Sample Death Benefit Calculations......................... C-1 Appendix D--Participating Portfolios.................................. D-1 Appendix E--Pro Rata Adjustments...................................... E-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. SPECIAL TERMS USED IN THIS PROSPECTUS Accumulation The time period under a contract between the contract issue date and the Annuity Commencement Period Date. Accumulation A unit of measure used to calculate the owners' interest in the Variable Account during the Unit 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 The date on which the Annuity Period commences. Commencement Date 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. Beneficiary The person entitled to receive the death benefits under the terms of the contract. Fixed Account The Guarantee Periods Fixed Account or the General Account Fixed Account. 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. General The name of the alternative under which purchase payments are allocated to Fortis Benefits' Account Fixed general account. Account Guarantee The non-unitized separate account that Fortis Benefits uses to account for amounts allocated Periods Fixed to guarantee periods. Account Market Value Positive or negative adjustment in Guarantee Periods Fixed Account value that we make if such Adjustment 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 that do not qualify for the special federal income tax treatment applicable in Contracts connection with certain retirement plans. Portfolio Each separate investment portfolio eligible for investment by the Variable Account as set forth on the cover page of this prospectus. Qualified Contracts that are qualified for the special federal income tax treatment applicable in Contracts connection with certain retirement plans. Valuation Date All business days except, with respect to any subaccount of the Variable Account, 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 The period that starts at the close of regular trading on the New York Stock Exchange on a Period 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 of Fortis Benefits Insurance Account Company established to receive and invest purchase payments under contracts. Variable An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee Annuity Option 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 INFORMATION CONCERNING FEES AND CHARGES CONTRACTOWNER TRANSACTION CHARGES Front-End Sales Charge Imposed on Purchases................................... 0% Maximum Surrender Charge for Sales Expenses.................................... 7%
NUMBER OF YEARS SURRENDER CHARGE AS A SINCE PURCHASE PERCENTAGE OF PURCHASE PAYMENT WAS APPLIED PAYMENT - -------------------- ------------------------- Less than 3 7% At least 3 but less than 4 5% At least 4 but less than 5 4% At least 5 but less than 6 3% At least 6 but less than 7 2% 7 or more 0%
Other Surrender Fees....................... 0% Exchange Fee............................... 0% ANNUAL CONTRACT ADMINISTRATION CHARGE............. $0
ALL CONTRACT ONE OR MORE CONTRACT OWNERS UNDER 61 OWNERS 61 OR OLDER --------------- --------------------- VARIABLE ACCOUNT ANNUAL CHARGES (AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE) Mortality and Expense Risk Charge............... 1.10% 1.30% Variable Account Administrative Charge.......... 0.10% 0.10% --- --- Total Variable Account Annual Expenses........ 1.20% 1.40%
MARKET VALUE ADJUSTMENT WITH RESPECT TO GUARANTEE PERIODS FIXED ACCOUNT Surrenders and other withdrawals from the Guarantee Periods 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. It is computed pursuant to a formula that is described in more detail under "Market Value Adjustment." PORTFOLIO ANNUAL EXPENSES The following table illustrates the advisory fees and other expenses applicable to the Portfolios. Except as noted, the following figures are a percentage of average net assets and are based on figures for the year ended December 31, 1998. The information set forth in this table was provided to Fortis Benefits by the Portfolio managers and Fortis Benefits has not independently verified such information. These expenses are reflected in the Portfolio's net asset value and are not deducted from a contract's account value.
TOTAL PORTFOLIO OPERATING INVESTMENT EXPENSES ADVISORY AND OTHER (AFTER EXPENSE MANAGEMENT FEE EXPENSES REIMBURSEMENT)(a) -------------- -------- ----------------- Federated American Leaders Fund II.......................... 0.74% 0.14% 0.88% Federated Equity Income Fund II (b)......................... 0.32% 0.61% 0.93% Federated Fund for U.S. Government Securities II............ 0.52% 0.33% 0.85% Federated Growth Strategies Fund II......................... 0.44% 0.42% 0.86% Federated High Income Bond Fund II.......................... 0.60% 0.18% 0.78% Federated International Equity Fund II...................... 0.53% 0.72% 1.25% Federated Prime Money Fund II............................... 0.49% 0.31% 0.80% Federated Small Cap Strategies Fund II (c).................. 0.31% 0.72% 1.03% Federated Strategic Income Fund II (c)...................... 0.54% 0.31% 0.85% Federated Utility Fund II................................... 0.68% 0.25% 0.93%
- ------------------------ (a) The total operating expenses of each of the funds, absent the voluntary waiver of a portion of the management fee, would have been: 0.89% for the American Leaders Fund II; 1.36% for the Equity Income Fund II; 0.93% for the Fund for U.S. Government Securities II; 1.17% for the Growth Strategies Fund II; 1.72% for the International Equity Fund II; 0.81% for the Prime Money Fund II; and 1.00% for the Utility Fund II. (b) This Portfolio has adopted a Rule 12b-1 distribution plan but has no present intention of paying or accruing the 12b-1 fee under the plan. If the Portfolio were paying or accruing the 12b-1 fee, the Portfolio would be able to pay up to 0.25% of its average daily net Portfolio assets for the 12b-1 fee. See "Distribution of Fund Shares" in the Portfolio prospectus. (c) Fund expenses for Small Cap Strategies Fund II and Strategic Income Fund II based on estimates. 4 EXAMPLES* A. CONTRACTS/ALL OWNERS UNDER 61 If you 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 - ------------------------------------------------------------ ------- ------- ------- -------- Federated American Leaders Fund II.......................... 84 118 146 238 Federated Equity Income Fund II............................. 84 120 149 243 Federated Fund for U.S. Gov't Securities II................. 84 117 145 234 Federated Growth Strategies Fund II......................... 84 118 145 236 Federated High Income Bond Fund II.......................... 83 115 141 227 Federated International Equity Fund II...................... 88 129 165 275 Federated Prime Money Fund II............................... 83 116 142 229 Federated Small Cap Strategies Fund II...................... 85 123 154 253 Federated Strategic Income Fund II.......................... 84 117 145 234 Federated Utility Fund II................................... 85 121 150 246
If you COMMENCE AN ANNUITY payment option, or DO NOT SURRENDER your contract, you would pay the following cumulative expenses on a $1000 investment, assuming a 5% annual return on assets:
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------ ------- ------- ------- -------- Federated American Leaders Fund II.......................... 21 64 110 238 Federated Equity Income Fund II............................. 21 66 113 243 Federated Fund for U.S. Gov't Securities II................. 21 63 109 234 Federated Growth Strategies Fund II......................... 21 64 109 236 Federated High Income Bond Fund II.......................... 20 61 105 227 Federated International Equity Fund II...................... 25 75 129 275 Federated Prime Money Fund II............................... 20 62 106 229 Federated Small Cap Strategies Fund II...................... 22 69 118 253 Federated Strategic Income Fund II.......................... 21 63 109 234 Federated Utility Fund II................................... 22 67 114 246
B. CONTRACTS/ONE OR MORE OWNERS 61 OR OLDER If you 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 - ------------------------------------------------------------ ------- ------- ------- -------- Federated American Leaders Fund II.......................... 86 124 156 258 Federated Equity Income Fund II............................. 86 126 159 263 Federated Fund for U.S. Gov't Securities II................. 86 123 155 255 Federated Growth Strategies Fund II......................... 86 124 155 256 Federated High Income Bond Fund II.......................... 85 121 151 248 Federated International Equity Fund II...................... 90 135 175 295 Federated Prime Money Fund II............................... 85 122 152 250 Federated Small Cap Strategies Fund II...................... 87 129 164 273 Federated Strategic Income Fund II.......................... 86 123 155 255 Federated Utility Fund II................................... 87 127 160 266
If you COMMENCE AN ANNUITY payment option, or DO NOT SURRENDER your contract, you would pay the following cumulative expenses on a $1000 investment, assuming a 5% annual return on assets:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------- ------- ------- -------- Federated American Leaders Fund II.......................... 23 70 120 258 Federated Equity Income Fund II............................. 23 72 123 263 Federated Fund for U.S. Gov't Securities II................. 23 69 119 255 Federated Growth Strategies Fund II......................... 23 70 119 256 Federated High Income Bond Fund II.......................... 22 67 115 248 Federated International Equity Fund II...................... 27 81 139 295 Federated Prime Money Fund II............................... 22 68 116 250 Federated Small Cap Strategies Fund II...................... 24 75 128 273 Federated Strategic Income Fund II.......................... 23 69 119 255 Federated Utility Fund II................................... 24 73 124 266
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. ------------------------ The foregoing tables and examples are included to assist you in understanding the transaction and operating expenses imposed directly or indirectly under the contracts and the Portfolios. Amounts for state premium taxes or similar assessments will also be deducted, where applicable. See Appendix B for an explanation of the calculation of the amounts set forth above. 5 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 a part of a qualified plan). Additional purchase payments under a contract must be at least $500 (or $50 if part of a systematic investment plan). For contract issues in the state of Washington only, a single purchase payment may be made and no further purchase payments can be accepted. See "Issuance of a Contract and Purchase Payments." ALLOCATION OF PURCHASE PAYMENTS On the date that the contract is issued, except as hereafter explained, 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 Guarantee Periods Fixed Account (or to the General Account Fixed Account if the owner resides in a state in which the Guaranteed Periods Fixed Account is not offered), or to a combination thereof. If you reside in a state requiring a refund of all purchase payments under the "free look" privilege, the initial purchase payment will be allocated to the Federated Prime Money Fund II until the following number of days after we mail the contract to you: (1) the number of days in the "free look" period, plus (2) five days. After the expiration of the period, the contract value will be allocated to the fixed account and the Portfolios as directed by you. Subsequent purchase payments are allocated in the same way, or pursuant to different allocation percentages that you may subsequently request in writing. VARIABLE ACCOUNT INVESTMENT OPTIONS Each of the subaccounts of the Variable Account invests in shares of a 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. A full description of the Portfolios and their investment objectives, policies, risks and expenses can be found in the current prospectus for the Portfolio, which accompanies this prospectus, and the Statement of Additional Information for the Portfolio which is available upon request. (See Appendix D which contains a summary of the investment objectives of each Portfolio.) FIXED ACCOUNT INVESTMENT OPTIONS Either a Guarantee Periods Fixed Account or a General Account Fixed Account is available, depending upon your state of residence. Any amount allocated by the owner to the Guarantee Periods 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 (less in some states where required by state limitations). 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 that is paid out. Accordingly, the Market Value Adjustment can result in gains or losses to you. Any amount allocated to the General Account Fixed Account will accrue interest at a minimum effective annual rate plus such additional excess interest rate which we may declare from time-to-time. For a more complete discussion of the Fixed Accounts investment option 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 of a Guarantee Periods Fixed Account to another or into a subaccount. There are limitations on the frequency and amounts of transfers from the General Account Fixed Account. 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." 6 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 from the Guarantee Periods Fixed Account may be subject to a Market Value Adjustment. See "Total and Partial Surrenders" 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." CHARGES AND DEDUCTIONS We deduct daily charges at a percentage rate per annum of the value of the average net assets in the Variable Account for the mortality and expense risks we assume. The percentage rate for contracts issued where all owners are less than 61 years old at the time of purchase is 1.20%. The percentage rate for contracts issued where one or more owner is 61 years old, or older, at the time of purchase is 1.40%. Also, there may be state premium tax charges deducted from your contract value. See "Charges and Deductions." ANNUITY PAYMENTS The contract provides several types of annuity benefits to you or other persons you properly designate to receive such payments, including Fixed and Variable Annuity Options. You have 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. 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. See "Benefit Payable on Death of 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 may 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 a 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 64273, St. Paul, Minnesota, 55164: 1-800-963-9222. 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 1-800-963-9222. Any purchase payment or other communication, except a free-look 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. FINANCIAL AND PERFORMANCE INFORMATION This prospectus contains no Accumulation Unit Information for the applicable subaccounts of the Variable Account because no contracts had been sold as of December 31, 1998 and therefore no Accumulation Units had been issued as of that date. Audited financial statements of the available subaccounts of the Variable Account are not included in the Statement of Additional Information because those subaccounts have not yet commenced operations, have no assets or liabilities, and have received no income nor incurred any expenses as of the date of this prospectus. 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 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 "Further Information About Fortis Benefits" and "Fortis Benefits Financial Statements." 7 FORTIS BENEFITS/FORTIS FINANCIAL GROUP MEMBER Fortis Benefits Insurance Company is the issuer of the contracts. At the end of 1998, Fortis Benefits had approximately $99 billion of total life insurance in force. 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 Benefits is a member of the Fortis Financial Group. That Group is a joint effort by Fortis Benefits, Fortis Advisers, Inc., Fortis Investors, Inc., and Fortis Insurance Company to offer financial products through the management, marketing and servicing of mutual funds, annuities and life insurance, and disability income products. 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. The Fortis group of companies had approximately $390 billion in assets at the end of 1998. 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. 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 a number of subaccounts. The assets in each subaccount are invested exclusively in one of the Portfolios listed on page one of this prospectus. 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 Portfolios. Each is a mutual fund available for purchase only as a funding vehicle for benefits under variable life insurance and variable annuities issued by Fortis Benefits and other life insurance companies. (See Appendix D for a summary of the investment objectives of each Portfolio.) Each Portfolio corresponds to one of the subaccounts of the Variable Account. The assets of each Portfolio are separate from the others, and each Portfolio operates as a separate investment portfolio whose performance has no effect on the investment performance of any other Portfolio. See the prospectus for each Portfolio for more detailed information for each Portfolio, such as its investment policies and restrictions, charges, risks associated with investing in it, and other aspects of its operations. A prospectus for the Portfolios you are considering must accompany this prospectus and you should read it together with this prospectus. Federated Advisers is the investment adviser for all of the Portfolios other than Federated International Equity Fund II, which is advised by Federated Global Research Corp. You may obtain any prospectus without charge from Fortis Benefits by calling 1-800-963-9222, or writing P.O. Box 64273, St. Paul, Minnesota 55164. 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 any dividend 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. Portfolios may also be available to registered separate accounts supporting variable annuity and variable life products of other participating insurance companies, as well as 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. A conflict may occur due to a change in law affecting the operations of variable life and variable annuity separate accounts, differences in the voting instructions of the owners and those of other companies, or some other reason. In the event of conflict, Fortis Benefits will take any steps necessary to protect you or your beneficiaries. THE FIXED ACCOUNT This prospectus offers interests in either of two Fixed Accounts, depending upon your state. The Fixed Accounts are (1) a Guarantee Periods Fixed Account or (2) a General Account Fixed Account. This prospectus refers to both of these Fixed Accounts as the Fixed Account unless a distinction is not relevant. We offer a Guaranteed Periods Fixed Account in most states. However, in a limited number of states we offer a General Account Fixed Account in lieu of the Guarantee Periods Fixed Account. You should ask Fortis 8 Benefits or your account representative to determine which Fixed Account is available in your state. Charges under the contract are the same as when you allocate monies to the Variable Account, except that we do not impose the Variable Account charges for mortality and expense risk and administrative expenses (see Charges and Deductions--Charges Against the Variable Account) on amounts of Contract Value in the Fixed Account. GUARANTEE PERIODS FIXED ACCOUNT Any amount that you allocate to the Guarantee Periods Fixed Account earns a guaranteed interest rate beginning on the date of your allocation. This guaranteed interest rate continues for a number of years (not to exceed ten) that you select. At the end of this guarantee period, we will allocate your contract value in that guarantee period, including accrued interest, to a new guarantee period of the same length, unless we have received your written request to allocate this amount to a different guarantee period or periods or to one or more of the subaccounts. We must receive this written request at least three business days prior to the end of the guarantee period. The first day of the new guarantee period (or other reallocation) will be the day after the end of the prior guarantee period. We will notify you at least 45 days, and not more than 75 days, prior to the end of any guarantee period. We currently make available ten different guarantee periods, ranging from one to ten years. All ten of these guarantee periods may not be available in some states because of state limitations. 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 of various lengths. These changes will not affect the guaranteed interest rates being paid on guarantee periods that have already commenced. Each allocation or transfer of an amount to a guarantee period commences the running of a new guarantee period for that amount. The amount will earn a guaranteed interest rate that will continue unchanged until the end of that period. The guaranteed interest rate will never be less than an effective annual rate of 3%. Fortis Benefits declares the guaranteed interest rates from time to time as market conditions dictate. Fortis Benefits advises you of the guaranteed interest rate for a chosen guarantee period: - at the time we receive a purchase payment; we effect a transfer, or we renew a guarantee period. Fortis Benefits has no specific formula for determining the guaranteed interest rates for the guarantee periods. The rate may be influenced by, but not necessarily correspond to, interest rates generally available on the types of investments acquired with amounts allocated to the guarantee period. See "Investments by Fortis Benefits." In determining guaranteed interest rates, may also consider, among other factors, - the duration of a guarantee period, - regulatory and tax requirements, - our sales and administrative expenses, - our assumed risks, - our profitability objectives, and - general economic trends. FORTIS BENEFITS' MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES TO BE DECLARED. FORTIS BENEFITS CANNOT PREDICT OR ASSURE THE LEVEL OF ANY FUTURE GUARANTEED INTEREST RATES IN EXCESS OF AN EFFECTIVE ANNUAL RATE OF 3%. You may get information about the guaranteed interest rates applicable to the various guarantee periods at any time from our home office or from your sales representative. MARKET VALUE ADJUSTMENT We usually apply a Market Value Adjustment: - for contracts with amounts allocated to the Guarantee Periods Fixed Account, - to any Fixed Account Value that we (1) pay out on surrender, (2) transfer, (3) apply to an annuity option, or (4) pay out as a single sum in lieu of an annuity, - before the end of the guarantee period in which we hold the Fixed Account. However, we do not apply a Market Value Adjustment to any Fixed Account Value that we: - pay out during the period beginning fifteen days before, and 15 days after, the end of a guarantee period in which we hold Fixed Account Value; - we pay out, or transfer, to the Variable Account, on an automatic periodic basis under a formal Fortis Benefits program for that purpose, which may be subject to conditions and limitations in your state (see your sales representative for information about program availability and conditions and limitations in your state); - pay out as a death benefit under a contract; or - pay out, or transfer, from the one-year guarantee period. The Market Value Adjustment may increase or decrease the amount of Fixed Account Value being withdrawn or transferred. The comparison of two guaranteed interest rates determines whether the Market Value Adjustment produces an increase or a decrease. The first rate to compare is the guaranteed interest rate for the amount being transferred or withdrawn. The second rate is the guaranteed interest rate then being offered for new guarantee periods of the same duration as that remaining in the guarantee period from which the Fixed Account Value are being withdrawn or transferred. If the first rate exceeds the second by more than 1/2%, the Market Value Adjustment produces an increase. If the first rate does not exceed the second by at least 1/2%, the Market Value Adjustment produces a decrease. Sample calculations are shown in Appendix A. The Market Value Adjustment will be determined by multiplying the amount being withdrawn or transferred from the guarantee period (before deduction of any applicable surrender charge) by the following factor: 1 + I n / 12 ( ----------) - 1 1 + J + .005 9 where, - I is the guaranteed interest rate being credited to the amount being withdrawn from the existing guarantee period, - J is the guaranteed interest rate then being offered 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), and - N is the number of months remaining in the existing guarantee period (rounded up to the next higher number of months). GENERAL ACCOUNT FIXED ACCOUNT We hold amounts that you allocate to the General Account Fixed Account in the general account of Fortis Benefits. We have not registered interests in the General Account Fixed Account under the Securities Act of 1933, and we have not registered the General Account Fixed Account as an investment company under the Investment Company Act of 1940, because of exemptive and exclusionary provisions. Accordingly, neither the General Account Fixed Account nor any interests in that Account are subject to these Acts and, the staff of the Securities and Exchange Commission has not reviewed the disclosures in the prospectus relating to the General Account Fixed Account. Disclosures regarding the Fixed Account may, however, be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in prospectuses. For contracts with amounts allocated to the General Account Fixed Account, this prospectus serves as a disclosure document only for the aspects of the contract involving the Variable Account. This prospectus contains only selected information regarding the General Account Fixed Account. You can get more information about the General Account Fixed Account from Fortis Benefits' home office or from your sales representative. Fortis Benefits guarantees that the contract value in the General Account Fixed Account will accrue interest at an effective annual rate of at least 3%, independent of the actual investment experience of the general account. We may, at our sole discretion, credit higher rates of interest. However, we have no obligation to credit interest in excess of the guaranteed rate of 3% per year. We will not modify any interest rate in excess of 3% per year for any amount in the General Account Fixed Account more than once each calendar year. We will quote any higher rate of interest at an effective annual rate. The rate of any excess interest that we initially or subsequently credit to any amount can in many cases vary, depending on when you originally allocated that amount to the General Account Fixed Account. Once credited, we: - make such interest part of the contract value in the General Account Fixed Account, - guarantee the interest, and - subject the interest to applicable fees and charges. GENERAL ACCOUNT FIXED ACCOUNT TRANSFERS Transfers out of the General Account Fixed Account have special limitations. Prior to the Annuity Commencement Date, you may transfer part or all of the contract value from the General Account Fixed Account to the Variable Account, provided that: (1) no more than one such transfer is made each contract year, (2) no more than 50% of the General Account Fixed Account value is transferred at any time (unless the balance in the General Account Fixed Account after the transfer would be less than $1,000, in which case we may transfer up to the entire balance), (3) at least $1,000 is transferred at any one time (or, if less, the entire amount in the General Account Fixed Account), and (4) you may not make a transfer into the General Account Fixed Account within six months after a transfer out of that Account. Nevertheless, we may, in our discretion, permit a continuing request for transfer of lesser specified amounts automatically on a periodic basis. However, we reserve the right to discontinue or modify any such arrangements in our discretion. You may make no transfer from the General Account Fixed Account after the Annuity Commencement Date. INVESTMENTS BY FORTIS BENEFITS Our obligations with respect to the Guarantee Periods Fixed Account and the General Account Fixed Account are legal obligations of Fortis Benefits. Our general account assets support the obligations, as well as the obligations we incur under other insurance and annuity contracts. Investments purchased with amounts allocated to both Fixed Accounts are the property of Fortis Benefits, and you have no legal rights in such investments. We have sole discretion over the investment of assets in our general account and in the Fixed Account, subject to applicable law. We will invest amounts in the Fortis Benefits' general account and the Fixed Account in compliance with applicable state insurance laws and regulations concerning the nature and quality of investments for the general account. These laws generally permit investment in federal, state and municipal obligations, preferred and common stocks, corporate bonds, real estate mortgages, real estate and certain other investments, within specified limits and subject to certain standards and limitations. See "Fortis Benefits' Financial Statements" for information on Fortis Benefits' investments. Fortis Advisers Inc. manages amounts held in the general account and in the Fixed Account. Fortis Benefits intends to consider the return available on the instruments in which the Fixed Account invests, when Fortis Benefits establishes guaranteed interest rates. This return is only one of many factors that we consider in determining the guaranteed interest rates. See "Guarantee Periods Fixed Account." Fortis Benefits generally expects to invest the amounts that you allocate to the Fixed Account in debt instruments that approximately match Fortis Benefits' liabilities with regard to (1) the guarantee periods for purchase payments allocated to Guarantee Periods Fixed Accounts and (2) expected holding periods for purchase payments allocated to the General Account Fixed Account. Fortis Benefits expects that these will include primarily the following types of debt instruments: (1) securities issued by the United States Government or its agencies or instrumentalities, which securities may or may not be guaranteed by the United States Government; (2) debt securities which have an investment grade, at the time of purchase, within the four highest grades assigned by Moody's 10 Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other nationally recognized rating service; (3) other debt instruments including, but not limited to, issues of, or guaranteed by banks or bank holding companies and corporations, which obligations, although not rated by Moody's or Standard & Poor's, we deem to have an investment quality comparable to securities that may be purchased as stated above; and (4) other evidences of indebtedness secured by mortgages or deeds of trust representing liens upon real estate. Nevertheless, Fortis Benefits has no obligation to invest amounts allocated to the Fixed Account according to any particular strategy, except as may be required by applicable state insurance laws and regulations. ACCUMULATION PERIOD ISSUANCE OF A CONTRACT AND PURCHASE PAYMENTS Fortis Benefits reserves 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 Fortis Benefits' home office. If we cannot credit 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 crediting 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. You may make 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 credit 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 in good order. Each additional purchase payment must be at least $500 (or $50 if part of a systematic investment plan). 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 Fortis Benefits' 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 systematic investment 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. We may cancel any contract with a contract value of less than $1,000 on any Valuation Date. We will notify the owner at least 90 days in advance of our intention to cancel the contract. We would consider a cancellation to be 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. The contract guarantees no 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 (1) the number of Accumulation Units and (2) Accumulation Unit values that we determine 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 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. 11 If a subaccount's net investment factor is greater than one, the subaccount's Accumulation Unit value has increased. If the net investment factor is less than one, the subaccount's Accumulation Unit value has decreased. DETERMINATION OF FIXED ACCOUNT VALUE. Fortis Benefits guarantees a contract's Fixed Account value. Therefore, Fortis Benefits bears the investment risk for amounts allocated to the Fixed Account, except to the extent that: (1) Fortis Benefits may vary the guaranteed interest rate for future guarantee periods for Guarantee Periods Fixed Accounts and the current interest for General Account Fixed Accounts (subject to the 3% effective annual minimum) and (2) the Market Value Adjustment for Guarantee Periods Fixed Accounts imposes investment risks on you. The contract's Fixed Account value on any Valuation Date is equal to the following amounts, in each case increased by accrued interest: - The amount of purchase payments or transferred amounts allocated to the Fixed Account; less - The amount of any transfers or surrenders out of the Fixed Account. 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 - the Fixed Account (and to guarantee periods within the Fixed Account for contracts issued in states where the Guarantee Periods Fixed Account is offered), or - a combination of the Variable Account or Fixed Account. Percentages must be in whole numbers. The total allocation must equal 100%. You may change the percentage allocations for future purchase payments, 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 or into the Fixed Account, - from the Fixed Account to one of the available subaccounts, or - in the case of a Guarantee Periods Fixed Account, transfers from one guarantee period to another guarantee period. You must request transfers by written request to Fortis Benefits' home office, or by telephone transfer as described below. We currently impose no charge for any transfer. However, transfers from a guarantee period other than the one-year guarantee period of a Guarantee Period Fixed Account that are (1) more than fifteen days before or after the expiration thereof, or (2) are not a part of a formal Fortis Benefits program for the transfer of earnings of the Fixed Account, may be subject to a Market Value Adjustment. See "Market Value Adjustment." We restrict transfers of contract value from the general account Fixed Account in both amount and timing. See "Fixed Account--General Account Fixed Account--General Account Fixed Account Transfers." 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 Fixed Account. Nevertheless, we may permit a continuing request for transfers of lesser specified amounts automatically on a periodic basis. However, we reserve the right to restrict the frequency of transfers or to otherwise condition, terminate or impose charges (not to exceed $25 per transfer) upon transfers. We will count all transfers between and among the subaccounts of the Variable Account and the Fixed Account as one transfer, if all the transfer requests are made at the same time as part of one request. We will execute the transfers and determine all values in connection with transfers as of the end of the Valuation Period in which we receive the transfer request. We will add or deduct respectively from the transferred amount the amount of any positive or negative Market Value Adjustment associated with a transfer from a guarantee period of the Guarantee Periods Fixed Account. 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. You must request total surrender by a written request sent to Fortis Benefits' 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 Fortis Benefits receives the written request for total surrender at its home office, less - any applicable surrender charge and plus or minus - any applicable Market Value Adjustment. See "Market Value Adjustment." We must receive the 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 Fortis Benefits' home office of the written request. We may postpone payment, however, 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. You may surrender a portion of the Fixed Account value and/or the Variable Account at any time during the life of the Annuitant and prior to the Commencement Date. You must request partial surrender by a written request sent to Fortis Benefits' 12 home office. We will not accept a partial surrender request unless the net proceeds payable to you are at least $1,000. Fortis Benefits 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 if applicable, that you wish to partially surrender. If you do not specify, we take the partial surrender from the subaccounts and 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 amount payable to you by: - any applicable surrender charge and - if the surrender is from a guarantee period, other than the one-year guarantee period, by any applicable negative Market Value Adjustment, or increased by any positive Market Value Adjustment unless the surrender is (1) within 15 days before or after the expiration of a guarantee period, or (2) is a part of a formal Fortis Benefits program for the transfer of earnings from the Fixed Account. The partial surrender will be effective at the end of the Valuation Period in which Fortis Benefits receives the written request for partial surrender at its home office. We will pay partial surrenders as we describe above for total surrenders. The Internal Revenue Code imposes a penalty tax 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, Section 403(b) of the Internal Revenue Code, bars distributions of voluntary salary reduction amounts under tax deferred annuity contracts: prior to one of the following events: (1) attainment of age 59 1/2 by the employee or, (2) 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 program and systematic withdrawal. 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 OWNER (OR ANNUITANT) If the owner dies prior to the Annuity Commencement Date, we will pay a death benefit. If there is more than one owner, we will pay the death benefit upon the first death. If the 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 this 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 Annuitants so named. The term "decedent" in the death benefit description below refers to the death of the owner unless the owner is a non-natural person. In that case, we will read that term to refer to the death of the Annuitant. Also, the death benefit description refers to the age of the owner. If the owner is a non-natural person, the relevant age that we use 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 we shall deem to be an amount withdrawn). The death benefit will be different if all of the owners are less than 61 years old than if one or more of them is 61 years old, or older, when the contract is purchased. BENEFIT/ALL OWNERS LESS THAN 61. If all of the owners are less than 61 years old, when the contract is purchased, the death benefit will be the greatest of (1), (2), or (3), as follows: (1) The contract value as of the date used for valuing the death benefit. (2) The highest Anniversary Value on each of the contract's anniversaries prior to the earlier of: (a) the decedent's death, or (b) the owner's attainment of age 80. An Anniversary Value is equal to: (i) the contract value on the anniversary, plus (ii) any purchase payments made since the anniversary, reduced by (iii) pro rata adjustments for any withdrawals made since the anniversary. (3) If the decedent dies prior to the date the owner reaches age 80, the amount of the death benefit is the sum of: (i) the accumulation (without interest) of purchase payments, reduced by pro rata adjustments for any withdrawals; plus 13 (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 4.0% (3% for policies issued in the State of Washington). The resulting amount will be referred to as the "Roll-up Amount." If the decedent dies on or after the date the owner reaches age 80, the amount of the death benefit is equal to: (iii) the "Roll-up Amount" as of the date the owner reached age 80; plus (iv) the accumulation (without interest) of purchase payments made on or after the date the owner reach age 80; reduced by (v) pro rata adjustments for any withdrawals made on or after the date the owner reached age 80. We describe the pro rata adjustments referred to above more fully in Appendix E at the end of this prospectus. BENEFIT/ONE OR MORE OWNERS 61. If one or more of the owners is 61 years old, or older, when the contract is purchased, the death benefit will be the same as provided above, except that all references to age 80 in (2) and (3) are changed to age 75. See Appendix C 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, up to age 110, in your application. The Annuity Commencement Date marks the beginning of the period during which an Annuitant or other payee that you designate receives annuity payments under the contract. The Annuity Commencement Date must be at least two years after the date of issue of your contract. 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 to us in order to advance or defer the Annuity Commencement Date. We must receive the request at our home office at least thirty days before the then-scheduled Annuity Commencement Date. The new Annuity Commencement Date must also be at least thirty days after we receive your 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 that 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 change other than the premium tax charge. Otherwise, Fortis Benefits 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 any 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 14 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 interest 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. "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, (See "Charges and Deductions--Charges Against the Variable Account.") 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 and conditions for 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, but 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 any 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 make no 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 The amounts that we generally pay on the death of the annuitant during the Annuity Period are the continuation of annuity payments (1) for any remaining guarantee period or (2) 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 option in effect. We describe additional rules applicable to such distributions under Non-Qualified contracts under "Federal Tax Matters--Required Distributions for Non-Qualified Contracts." Our description does not apply to contracts issued in connection with qualified plans, but similar rules apply to the plans themselves. CONTRACT OWNER SERVICES DOLLAR COST AVERAGING. If you reside in a state where we offer the General Account Fixed Account, you can elect when you apply for your contract to allocate your initial purchase payment to a special account in the Fixed Account where it will be credited with interest at a guaranteed fixed rate. Amounts will be transferred from the special account to a designated Portfolio on a periodic basis over a designated period of time. If you request a transfer (other than the dollar cost averaging transfers) or a withdrawal from amounts in the special 15 account, the dollar cost averaging program will end. Any amounts remaining in the dollar cost averaging special account will, unless otherwise directed, immediately be transferred to the other options according to your previous allocation instructions we have on file. You can also elect at any time to have money in one of the available investment allocation options transferred on a systematic basis over a designated period of time to one or more of the other available Portfolios. Dollar cost averaging does not assure a profit or protect against a loss should market prices decline. Transfers under this program do not count against any limitations otherwise provided limiting transfers among the available investment options. Ask your Fortis representative about the specific terms of the dollar cost averaging programs currently available. REBALANCING. You can have your contract value automatically readjusted among the available investment allocation options on a selected periodic basis. The amounts you have in each selected available investment allocation option will grow or decline in value at different rates during each time period. Rebalancing is intended to transfer amounts among the chosen available investment allocation options in order to retain the allocation percentages you specify. Rebalancing does not assure a profit or protect against a loss should market prices decline and should be reviewed periodically, as your needs may change. Transfers under this program do not count against any limitations otherwise provided limiting transfers among the available investment options. Ask your Fortis representative about the specific terms of the rebalancing program currently available. 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 on a pro-rata basis from the then-current Fixed Account value and, by redemption of Accumulation Units, the then-current Variable Account value in each subaccount. 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 at a nominal annual rate as follows: - If all of the owners of a contract are less than 61 years old when the contract is purchased, the rate is 1.10% of the average daily net assets of the Variable Account. - If one or more of the owners of the contract is 61 years old, or older, the rate is 1.30% of the average daily net assets of the Variable Account. We assess this charge during both the Accumulation Period and the Annuity Period. We guarantee not to increase this charge for the duration of the contract. The mortality risk borne by Fortis Benefits arises from its 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, Fortis Benefits bears a mortality risk in that it guarantees to pay a death benefit upon the death of an Annuitant or owner prior to the Annuity Commencement Date. 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 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 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 charges against the Variable Account described above are for the purposes described and Fortis Benefits may receive a profit as a result of these charges. SURRENDER CHARGE We deduct no sales charge from purchase payments. We deduct a surrender charge on certain total or partial surrenders. We use the revenues from the surrender charge 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 FREE SURRENDERS. Subject to the deemed order of withdrawal rules set forth below, 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 been previously surrendered the purchase payments). We determine the portion of a surrender qualifying for free surrender treatment by deeming amounts to be withdrawn in the following order: - For contracts issued where all of the owners of the contract were less than 61 years old when the contract was purchased: 1. purchase payments that we received more than seven years before the surrender date, and therefore not subject to a surrender charge. 2. 10% of purchase payments that we received less than seven years before the surrender date. 3. purchase payments that we received less than seven years before the surrender date and that you have not previously surrendered. 4. earnings. - For contracts issued where one or more of the owners of the contract was 61 years old, or older, when the contract was purchased: 1. earnings. 2. purchase payments that we received more than seven years before the surrender date, and therefore not subject to a surrender charge. 3. 10% of purchase payments that we received less than seven years before the surrender date. 4. purchase payments that we received less than seven years before the surrender date and that you have not previously surrendered. We impose no 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 the contracts only since 1999, and, 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. Surrender charges apply only 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 that we received made less than seven years before 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 3 7% At least 3 but less than 4 5% At least 4 but less than 5 4% At least 5 but less than 6 3% At least 6 but less than 7 2% 7 or more 0%
We anticipate the surrender charge will not be sufficient to cover our distribution expenses. To the extent the surrender charge is insufficient, we will pay such costs from our general account assets. Those assets will include any profit that we derive from the mortality and expense risk charge. NURSING CARE/HOSPITALIZATION WAIVER OF SURRENDER CHARGES. We deduct no surrender charge 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, to be an organic disease. 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 prospectuses. GENERAL PROVISIONS THE CONTRACTS The entire contract includes any application, amendment, rider, endorsement and revised contract page. 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 POSTPONEMENT OF PAYMENT With respect to amounts in the Portfolios 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 us at our 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 dependent on Accumulation or Annuity Unit Values as follows: (1) 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, (2) 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 Contract, or (3) for such other periods as the Securities and Exchange Commission may by order permit for the protection of investors. Additionally, 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. Fortis Benefits 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 will credit or charge the amount of any adjustment with interest at the effective 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 to Fortis Benefits' 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 the home office of Fortis Benefits. 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. We will determine the Beneficiary, as follows, upon the death of an owner, or the Annuitant if the owner is a non-natural person, prior to the Annuity Commencement date: - 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, 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 Portfolios, but not necessarily of the Variable Account or Fortis Benefits. RIGHTS RESERVED BY FORTIS BENEFITS Fortis Benefits reserves the right to make certain changes if, in its 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. Fortis Benefits will obtain your approval of the changes and approval from any appropriate regulatory authority, if required by law. Examples of the changes Fortis Benefits 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 Fortis Benefits to take, including to change the way 18 Fortis Benefits assesses charges, but without increasing, as to any then outstanding contract, the aggregate amount of the types of charges that Fortis Benefits has guaranteed. DISTRIBUTION Fortis Investors, Inc. ("Fortis Investors") is the principal underwriter of the contracts. The contracts will be sold by individuals who (1) are licensed by state insurance authorities to sell the contracts of Fortis Benefits and (2) registered representatives of broker-dealer firms or representatives of other firms that are exempt from broker dealer regulation. Fortis Investors and any other broker-dealer firm 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. Fortis Investors will pay an allowance to selling brokers in varying amounts. Fortis Investors does not expect the allowance, under normal circumstances, to exceed 4.75% of purchase payments plus a servicing fee of .25% of contract value per year, starting in the first contract year. Fortis Investors may, under certain flexible compensation arrangements, pay lesser or greater allowances and larger or smaller service fees to 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, broker-dealer firms and exempt firms may qualify for additional compensation based upon meeting certain production standards. Fortis Investors 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 $30,567,607, $37,705,676 and $32,874,801 to Fortis Investors for annuity contract distribution services during 1996, 1997 and 1998, respectively. Of these amounts, $7,531,629 in 1996, $5,091,431 in 1997 and $5,389,151 in 1998 was not reallowed to other broker-dealers or exempt firms. The distribution agreement provides for Fortis Benefits to indemnify Fortis Investors (and its agents, employees, and controlling persons) for certain damages and expenses, including those arising under federal securities laws. See Note 12 to the Notes to Fortis Benefits' Financial Statements for the amounts Fortis Benefits has paid to Fortis Investors for various services. Fortis Investors is an indirect subsidiary of Fortis AMEV and Fortis AG. Fortis Investors is under common control with Fortis Benefits. Fortis Investors' 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. $157,238,983 of interests in the Guarantee Periods 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, and 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 the "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 "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. 19 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 reaches age 59 1/2 - made to a Beneficiary on or after your death, - made upon your disability or that of another payee, or - part of a series of substantially equal annuity payments for your life or life expectancy or 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, partial surrender or assignment of a contract, or - 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 other 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 For a Non-Qualified Contract to receive annuity tax treatment 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 owner. Where the owner or other person receiving payments is not a natural person, the required distributions under Section 72(s) 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 educational 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. We discuss the tax implications of these plans 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, 20 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 the investments underlying the Non-Qualified Contracts. We believe that the investments will satisfy those requirements. Failure to do so would result in immediate taxation to you or another person receiving annuity payments 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 upon 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 contract 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. 21 FURTHER INFORMATION ABOUT FORTIS BENEFITS GENERAL Fortis Benefits offers and sells insurance products, including fixed and variable life insurance policies, fixed and variable annuity contracts, and group life, accident and health insurance policies. Fortis Benefits markets its 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 Fortis Insurance, 515 West Wells, Milwaukee, Wisc. 53201. Fortis Insurance is wholly owned by Fortis, Inc., 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. 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) 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- INCOME STATEMENT DATA Premiums and policy charges.............................. $1,299,770 $1,238,006 $1,295,878 $1,232,329 $1,022,446 Net investment income.................................... 234,043 228,724 206,023 203,537 162,514 Net realized gains (losses) on investment................ 52,404 41,101 25,731 55,080 (28,815) Other income............................................. 44,671 36,458 31,725 33,085 35,958 ---------- ---------- ---------- ---------- ---------- TOTAL REVENUES......................................... $1,630,888 $1,544,289 $1,559,357 $1,524,031 $1,192,103 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total benefits and expenses.............................. $1,538,604 $1,442,059 $1,470,066 $1,442,270 $1,157,651 Federal Income taxes..................................... 30,402 35,120 31,099 27,891 11,595 Net income............................................... 61,882 67,110 58,192 53,870 22,857 BALANCE SHEET DATA Total assets............................................. $7,598,186 $6,819,484 $5,951,876 $5,143,012 $4,043,914 Total liabilities........................................ 6,712,728 5,939,378 5,171,203 4,431,914 3,569,717 Total shareholder's equity............................... 885,468 880,106 780,673 711,098 474,197
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1998 COMPARED TO 1997 FINANCIAL POSITION 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. 1998 total group disability and dental, group medical, group life, and annuity and individual life premiums represented 38%, 36%, 19% and 7% respectively of total premium in 1998 and 34%, 38%, 21% and 7% respectively in 1997. Strong group sales over the last three quarters of 1997 and throughout 1998, in both the long term disability and dental products is the primary reason for the increase in group disability and dental premium. Additionally, short term disability products had a larger than usual upswing in sales during the second and third quarters of 1998. The decrease in group medical premium is the result of a decision in 1996 to discontinue new sales of certain medical products coupled with higher than normal lapses of current medical business. The Company continues to match investment portfolio composition to liquidity needs and capital requirements. Changes in interest rates during 1998 and 1997 resulted in recognition of realized gains and losses. BENEFITS The total year-to-date policyholder benefit to premium ratio remained relatively flat increasing to 83% in 1998 from 82% in 1997. The group disability and dental, group medical, group life, and annuity and individual life benefit to premium ratios for the year ended December 31, were 83%, 85%, 73% and 108% respectively in 1998 and 82%, 77%, 76% and 124% respectively in 1997. The group medical business experienced a higher premium to benefit ratio due to higher incurred benefits than anticipated. Group life experienced favorable year-to- date experience in 1998 compared to 1997. The annuity and individual life business also experienced lower mortality experience in 1998 22 compared to 1997, in addition to higher interest crediting on the Company's steadily increasing policy base of interest sensitive and investment products. EXPENSES The Company's general and administrative expense to premium ratio has increased slightly to 23% in 1998, up from 22% in 1997. Commission rates remained level from 1997 to 1998. YEAR 2000 INTRODUCTION. The Company relies heavily on information technology ("IT") systems to conduct its business. These IT systems include both internally developed and vendor-supplied systems. The Company also has business relationships with numerous entities including but not limited to financial institutions, financial intermediaries, third party administrators and other critical vendors as well as regulators and customers. These entities are themselves reliant on their IT systems to conduct their businesses. Therefore, there is a supply chain of dependency among and between all involved entities. STATE OF READINESS. In 1997, the Fortis parent company organized a multi-disciplinary Year 2000 Project Team ("Team"). The Company is a part of the Team. The Team consists of employees at each subsidiary, audit, legal and outside consultants. The Team has developed and is currently executing a comprehensive plan designed to make the Company's IT systems Year 2000 ready. The plan covers four stages including (i) inventory, (ii) assessment, (iii) programming, and (iv) testing and certification. The Company has completed the inventory stage for its internal hardware, software and telecommunications systems (mainframe and client/server applications). The assessment process is also complete and the Company is utilizing both internal and external resources to reprogram or replace the systems where necessary, and testing the applications for Year 2000 readiness. Programming, testing and certification of these systems and applications are targeted for completion by the end of 1999. COSTS. The cost of the Company portion of the Year 2000 project is estimated at $27.7 million (pre-tax) and is being funded through operating cash flows. Total Year 2000 project costs are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. Costs to upgrade and replace systems in the normal course of business are not included in this estimate. As of December 31, 1998, approximately $15.5 million (pre-tax) had already been expensed. The Company believes that its Year 2000 project generally is on schedule. RISKS. The Company is attempting to limit the potential impact of the Year 2000 by monitoring the progress of its own Year 2000 project and those of its critical external relationships and by developing contingency/recovery plans. The Company cannot guarantee that it will be able to identify and/or resolve all of its Year 2000 issues. Any critical unresolved Year 2000 issues at the Company or its external relationships, however, could have a material adverse effect on the Company's results of operations, liquidity or financial condition. If the Company's Year 2000 issues were unresolved, potential consequence would include, among other possibilities, the inability to accurately and timely process benefit claims, update customer's accounts, process financial transactions, bill customers, assess exposure to risks, determine liquidity requirements or report accurate data to management, shareholders, customers, regulators and others as well as business interruptions or shutdowns, financial losses, harm to its reputation, increased scrutiny by regulators and litigation related to Year 2000 issues. CONTINGENCY PLANS. Consistent with prudent due diligence efforts, the Company has defined contingency plans aimed at ensuring the continuity of critical business functions before and after December 31, 1999, should there be an unexpected system failure. The Company has developed plans that are designed to reduce the negative impact on Fortis, and provide methods of returning to normal operations, if failure occurs. 1997 COMPARED TO 1996 FINANCIAL POSITION Total invested assets of Fortis Benefits Insurance Company (the "Company") increased to $3.3 billion in 1997 compared to $3.1 billion in 1996. As of December 31, 1997, 96% of the Company's fixed maturity securities consisted of investment grade bonds. Mortgage loans represent 18.1% of total invested assets compared to 18.9% in 1996. The Company believes that adequate reserves have been established for potential delinquencies and foreclosures. The mortgage loan portfolio consists generally of small loans on commercial properties, dispersed throughout the United States. The Company's delinquency and foreclosure rate are well below industry averages. RESULTS OF OPERATIONS REVENUES The Company's major products are group medical, group disability and dental, group life, and annuity and individual life insurance coverages sold through a network of independent agents and brokers. Total group medical, group disability and dental, group life, and annuity and individual life premiums represented 37%, 35%, 21% and 7% respectively of total premium in 1997 and 45%, 30%, 19% and 6% respectively in 1996. The decrease in group medical premium is the result of a decision in 1996 to discontinue new sales of certain medical products. The Company continues to match investment portfolio composition to liquidity needs and capital requirements. Changes in interest rates during 1997, 1996, and 1995 resulted in recognition of realized gains and losses. BENEFITS Policyholder benefit to premium ratio decreased from 84% in 1996 to 82% in 1997, as a result of general improved experience. The primary improvement was in the group life business which experienced these mortality declines consistently throughout 1997. Annuity and individual life also experienced lower mortality experience in 1997 in addition to higher interest crediting on the Company's steadily increasing policy base of interest sensitive and investment products. Group medical, group disability and dental, group life, and annuity and individual life benefit to premium ratio was 77%, 82%, 76% and 124% respectively in 1997 and 78%, 84%, 86%, and 131% respectively in 1996. 23 EXPENSES The Company's general and administrative expense to premium ratio has increased in 1997 to 22% from 19% in 1996. Enabling the application systems to be Year 2000 compliant and managed dental initiatives are the primary reasons for this increase. Included in the managed dental initiative expense is an $13.5 million write-off of the expenses incurred on behalf of a company that provides the managed care services. Commission rates have increased from the levels in 1996. 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. 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 calculation using these risk-based capital standards, the Company's percentage of total adjusted capital is in excess of ratios which would require regulatory attention. The Company's fixed maturity investments consisted of 96% investment grade bonds as of December 31, 1998 and the Company does not expect this percentage to change significantly in the future. MARKET RISK 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. 24 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, and Beneficiaries after the death of the Annuitant or owner, have the voting interest during the annuity period. 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 Fortis Benefits determines that it is permitted to vote shares of the Portfolios in its own right, it 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 owners 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 participants 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 LEGAL MATTERS David A. Peterson, Esquire, Vice President and Assistant General Counsel with our law department has passed on the legality of the contracts described in this prospectus. Messrs. Freedman, Levy, Kroll & Simonds, Washington, D.C., have advised Fortis Benefits on certain federal securities law matters. 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................ Services....................................... - Safekeeping of Variable Account Assets..... - Experts.................................... - Principal Underwriter...................... Taxation Under Certain Retirement Plans........ Withholding.................................... 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 REPORT OF INDEPENDENT AUDITORS The Board of Directors Fortis Benefits Insurance Company We have audited the accompanying balance sheets of Fortis Benefits Insurance Company, an indirect, wholly-owned subsidiary of Fortis (B) and Fortis (NL) N.V., as of December 31, 1998 and 1997, and the related statements of income, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing standards. 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, 1998 and 1997, and the results of its operations and its cash flows for each of three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young, LLP February 19, 1999 Minneapolis, MN F-1 BALANCE SHEETS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 ------------------------- 1998 1997 ----------- ----------- ASSETS Investments: Fixed maturities, at fair value (amortized cost 1998--$2,315,904; 1997--$2,325,589)...................... $ 2,402,343 $ 2,415,915 Equity securities, at fair value (cost 1998--$141,947; 1997--$88,719)........................................... 157,851 109,832 Mortgage loans on real estate, less allowance for possible losses (1998 and 1997--$11,085).......................... 610,131 602,064 Policy loans.............................................. 74,950 68,566 Short-term investments.................................... 31,868 70,537 Real estate and other investments......................... 56,297 55,035 ----------- ----------- 3,333,440 3,321,949 Cash and cash equivalents................................... 668 9,901 Receivables: Uncollected premiums...................................... 61,883 74,220 Reinsurance recoverable on unpaid and paid losses......... 14,853 13,852 Other..................................................... 17,641 19,762 ----------- ----------- 94,377 107,834 Accrued investment income................................... 42,831 47,376 Deferred policy acquisition costs........................... 331,938 291,742 Property and equipment at cost, less accumulated depreciation............................................... 30,712 42,773 Deferred federal income taxes............................... 17,904 15,037 Other assets................................................ 3,923 4,250 Assets held in separate accounts............................ 3,742,403 2,978,622 ----------- ----------- TOTAL ASSETS................................................ $ 7,598,196 $ 6,819,484 ----------- ----------- ----------- -----------
See accompanying notes. F-2 BALANCE SHEETS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 ------------------------- 1998 1997 ----------- ----------- POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY POLICY RESERVES AND LIABILITIES: Future policy benefit reserves: Traditional life insurance.............................. $ 450,776 $ 449,017 Interest sensitive and investment products.............. 1,238,125 1,264,227 Accident and health..................................... 861,334 792,249 ----------- ----------- 2,550,235 2,505,493 Unearned revenues......................................... 13,393 10,653 Other policy claims and benefits payable.................. 255,350 260,596 Policyholder dividends payable............................ 8,189 8,197 ----------- ----------- 2,827,167 2,784,939 Debt...................................................... 20,141 26,433 Accrued expenses.......................................... 57,860 49,909 Current income taxes payable.............................. 4,168 10,549 Other liabilities......................................... 86,226 113,222 Due to affiliates......................................... 9,479 6,925 Liabilities related to separate accounts.................. 3,707,687 2,947,401 ----------- ----------- TOTAL POLICY RESERVES AND LIABILITIES....................... 6,712,728 5,939,378 COMMITMENTS AND CONTINGENCIES 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......................................... 344,605 332,723 Accumulated other comprehensive income.................... 67,863 74,383 ----------- ----------- TOTAL SHAREHOLDER'S EQUITY.................................. 885,468 880,106 ----------- ----------- TOTAL POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY..................................................... $ 7,598,196 $ 6,819,484 ----------- ----------- ----------- -----------
See accompanying notes. F-3 FORTIS BENEFITS INSURANCE COMPANY STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ------------------------------- 1998 1997 1996 --------- --------- --------- REVENUES Insurance operations: Traditional life insurance premiums........................................ $ 260,567 $ 269,540 $ 258,496 Interest sensitive and investment product policy charges................... 85,551 77,429 63,336 Accident and health insurance premiums..................................... 953,652 891,037 974,046 --------- --------- --------- 1,299,770 1,238,006 1,295,878 Net investment income........................................................ 234,043 228,724 206,023 Net realized gains on investments............................................ 52,404 41,101 25,731 Other income................................................................. 44,671 36,458 31,725 --------- --------- --------- TOTAL REVENUES............................................................. 1,630,888 1,544,289 1,559,357 BENEFITS AND EXPENSES Benefits to policyholders: Traditional life insurance................................................. 189,337 204,497 220,227 Interest sensitive investment products..................................... 96,178 103,077 90,358 Accident and health claims................................................. 798,036 707,113 778,439 --------- --------- --------- 1,083,551 1,014,687 1,089,024 Policyholder dividends......................................................... 3,486 2,935 4,169 Amortization of deferred policy acquisition costs.............................. 33,365 43,931 39,325 Insurance commissions.......................................................... 118,710 107,378 94,723 General and administrative expenses............................................ 299,492 273,128 242,825 --------- --------- --------- TOTAL BENEFITS AND EXPENSES................................................ 1,538,604 1,442,059 1,470,066 --------- --------- --------- Income before federal income taxes............................................. 92,284 102,230 89,291 Federal income taxes........................................................... 30,402 35,120 31,099 --------- --------- --------- NET INCOME..................................................................... $ 61,882 $ 67,110 $ 58,192 --------- --------- --------- --------- --------- ---------
See accompanying notes. F-4 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, January 1, 1996........................ $ 711,098 $ 5,000 $408,000 $207,421 $ 90,677 Comprehensive income (loss): Net income.................................. 58,192 -- -- 58,192 -- Change in unrealized gains (losses) on investments, net........................... (48,617) -- -- -- (48,617) ------------ Total Comprehensive income (loss)............. 9,575 Additional paid-in capital.................... 60,000 -- 60,000 -- -- ------------ ------ ------------ ------------- ------- Balance, December 31, 1996...................... 780,673 5,000 468,000 265,613 42,060 Comprehensive income: Net income.................................. 67,110 -- -- 67,110 -- Change in unrealized gains (losses) on investments, net........................... 32,323 -- -- -- 32,323 ------------ ------ ------------ ------------- ------- Total Comprehensive income.................... 99,433 ------------ Balance, December 31, 1997...................... 880,106 5,000 468,000 332,723 74,383 Comprehensive income (loss): Net income.................................. 61,882 -- -- 61,882 -- Change in unrealized gains (losses) on investments, net........................... (6,520) -- -- -- (6,520) ------------ Total Comprehensive income (loss)............. 55,362 Dividend...................................... (50,000) -- -- (50,000) -- ------------ ------ ------------ ------------- ------- Balance, December 31, 1998...................... $ 885,468 $ 5,000 $468,000 $344,605 $ 67,863 ------------ ------ ------------ ------------- ------- ------------ ------ ------------ ------------- -------
See accompanying notes. F-5 STATEMENTS OF CASH FLOWS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ------------------------------------- 1998 1997 1996 ----------- ----------- ----------- OPERATING ACTIVITIES Net income.................................................................... $ 61,882 $ 67,110 $ 58,192 Adjustments to reconcile net income to net cash provided by operating activities: Increase (decrease) in future policy benefit reserves for traditional, interest sensitive and acc and health policies............................. 106,135 (2,496) 26,193 (Decrease) increase in other policy claims and benefits and policyholder dividends payable.......................................................... (2,514) 68,070 18,638 Provision for deferred federal income taxes................................. 417 (6,449) (1,094) (Decrease) increase in income taxes payable................................. (6,381) (6,875) 12,049 Amortization of deferred policy acquisition costs........................... 33,365 43,931 39,325 Policy acquisition costs deferred........................................... (73,147) (69,694) (66,515) Provision for mortgage loan losses.......................................... -- 1,388 1,344 Provision for depreciation.................................................. 12,409 14,351 17,312 Write-off of investment..................................................... -- 3,000 -- Amortization of investment (discounts) premiums, net........................ (3,200) (466) 1,821 Change in receivables, accrued investment income, unearned premiums, accrued expenses and other liabilities............................................. (4,455) (2,720) 38,614 Net realized gains on investments........................................... (52,404) (41,101) (25,731) Other....................................................................... 169 (12,496) (261) ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................... 72,276 55,553 119,887 INVESTING ACTIVITIES Purchases of fixed maturity investments....................................... (2,380,511) (3,611,770) (2,778,352) Sales and repayments of fixed maturity investments............................ 2,428,207 3,378,898 2,652,887 Decrease (increase) in short-term investments................................. 38,669 112,280 (29,318) Purchases of other investments................................................ (408,998) (209,771) (210,182) Sales of other investments.................................................... 352,873 205,084 163,569 Purchases of property and equipment........................................... (356) (4,242) (10,992) Other......................................................................... -- (617) -- ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES..................... 29,884 (130,138) (212,388) FINANCING ACTIVITIES Activities related to investment products: Considerations received..................................................... 215,693 200,760 128,446 Surrenders and death benefits............................................... (326,457) (190,361) (125,274) Interest credited to policyholders.......................................... 49,371 53,613 49,802 Dividend...................................................................... (50,000) -- -- Additional paid-in capital from shareholder................................... -- -- 60,000 ----------- ----------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES..................... (111,393) 64,012 112,974 ----------- ----------- ----------- (Decrease) increase in cash and cash equivalents................................ ( 9,233) (10,573) 20,473 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......................... 9,901 20,474 1 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR................................ $ 668 $ 9,901 $ 20,474 ----------- ----------- ----------- ----------- ----------- ----------- NON CASH ACTIVITY Investment acquired through issuance of debt.................................. $ 11,948 $ 18,100 -- ----------- ----------- -----------
See accompanying notes. F-6 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY DECEMBER 31, 1998 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Fortis Benefits Insurance Company (the Company) 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. To date, the majority of the Company's revenues have been derived from group employee benefits products and the remainder from individual life and annuity products. BASIS OF STATEMENT PRESENTATION During 1998, the Company adopted Statement of Financial Accounting Standards Board (SFAS) 130, REPORTING COMPREHENSIVE INCOME. SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this SFAS had no impact on the Company's net income or shareholder's equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in shareholder's equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. The preparation of financial statements in conformity with generally accepted accounting principles 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. The Company follows generally accepted accounting principles which differ in certain respects from statutory accounting practices prescribed or permitted by regulatory authorities. The more significant of these principles are: REVENUE RECOGNITION AND FUTURE POLICY BENEFIT RESERVES Premiums for traditional life insurance 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 2.5% to 8.75% in 1998, 1997 and 1996. 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 1964 Commissioners Disability Table at 6% interest. Calculated reserves are modified based on the Company's actual experience. CLAIMS AND BENEFITS PAYABLE 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. 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 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. For accident and health (excluding long-term care) and group life insurance products, these costs represent the present value at the acquisition of these lines in the October 1, 1991 purchase (see Note 2) of future profits which are amortized against the expected premium revenues of the lines acquired. Estimation of future gross profits requires significant management judgment and are reviewed periodically. As excess amounts of deferred costs over future premiums or gross profits are identified, such excess amounts are expensed. 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 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. F-7 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 unpaid balance, adjusted for amortization of premium or discount, less allowance for possible losses. The change in the allowance for possible losses is recorded with realized gains and losses on investments. Policy loans are reported at their unpaid balance. Short term investments are at cost which approximates fair value. Real estate and other investments consists principally of property acquired in satisfaction of debt and limited partnerships, respectively. Real estate is recorded at cost 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 basis 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. 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. 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. SEPARATE ACCOUNTS Revenues and expenses related to the separate account assets and liabilities are excluded from the amounts reported in the accompanying statements of operations. Assets and liabilities associated with the separate accounts relate to deposits and annuity considerations for variable life and annuity products for which the contract holder, 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 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 payable at the initial level regardless of investment performance so long as minimum premium payments are made. 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. 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 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. 2. ACQUIRED BUSINESS In 1991, the Company purchased certain assets and assumed certain liabilities from The Mutual Benefit Life Insurance Company in Rehabilitation (MBL). The seller transferred to the Company, the assets and liabilities relating to the group life, accident and health, disability and dental insurance business of MBL. The acquisition was accounted for as a purchase. The original purchase price of the acquisition was $318,000,000. Subsequent additional payments of $20,850,000 were made in 1994. These additional payments, as well as $126,515,000 of the original purchase price represent the estimated present value of future profits on the lines of business acquired at the date of acquisition and have been accounted for as deferred policy acquisition costs (see Note 4). F-8 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 3. INVESTMENTS AVAILABLE-FOR-SALE SECURITIES The following is a summary of the available-for-sale securities (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE ----------- --------- --------- ----------- December 31, 1998 Fixed maturities: Governments.................................. $ 321,047 $ 5,994 $ 436 $ 326,605 Public utilities............................. 190,792 7,769 1,704 196,857 Industrial and miscellaneous................. 1,723,183 79,137 6,451 1,795,869 Other........................................ 80,882 2,181 51 83,012 ----------- --------- --------- ----------- Total fixed maturities....................... 2,315,904 95,081 8,642 2,402,343 Equity securities............................ 141,947 18,238 2,334 157,851 ----------- --------- --------- ----------- Total...................................... $ 2,457,851 $113,319 $ 10,976 $ 2,560,194 ----------- --------- --------- ----------- ----------- --------- --------- ----------- December 31, 1997 Fixed maturities: Governments.................................. $ 228,856 $ 8,698 $ 30 $ 237,524 Public utilities............................. 121,128 4,217 13 125,332 Industrial and miscellaneous................. 1,932,894 77,442 1,625 2,008,711 Other........................................ 42,711 1,637 -- 44,348 ----------- --------- --------- ----------- Total fixed maturities....................... 2,325,589 91,994 1,668 2,415,915 Equity securities............................ 88,719 24,769 3,656 109,832 ----------- --------- --------- ----------- Total...................................... $ 2,414,308 $116,763 $ 5,324 $ 2,525,747 ----------- --------- --------- ----------- ----------- --------- --------- -----------
The amortized cost and fair value of available-for-sale investments in fixed maturities at December 31, 1998, by contractual maturity, are shown below (in thousands).
AMORTIZED FAIR COST VALUE ----------- ----------- Due in one year or less............................................... $ 89,349 $ 89,935 Due after one year through five years................................. 759,046 775,131 Due after five years through ten years................................ 614,280 640,042 Due after ten years................................................... 853,229 897,235 ----------- ----------- Total................................................................. $ 2,315,904 $ 2,402,343 ----------- ----------- ----------- -----------
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 36% and 37% of outstanding principal is concentrated in the states of New York, California and Florida, at December 31, 1998 and 1997, respectively. Loan commitments outstanding totaled $11,590,000 at December 31, 1998. INVESTMENTS ON DEPOSIT The Company had fixed maturities carried at $19,978,000 and $2,548,000 at December 31, 1998 and 1997, respectively, on deposit with various governmental authorities as required by law. INVESTMENT IN MANAGED DENTAL INITIATIVE In 1997, the Company acquired a 99% ownership in a managed dental initiative called Dental Health Alliance, Inc. (DHA). Based on an analysis of future DHA profitability, the entire investment of $8,132,000 was written-off at December 31, 1997. F-9 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 3. INVESTMENTS (CONTINUED) 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 (in thousands):
TAX BEFORE-TAX (BENEFIT) NET-OF-TAX AMOUNT EXPENSE AMOUNT ----------- ----------- ----------- December 31, 1998 Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments............................................. $ 32,614 $ (11,562) $ 21,052 Decrease (increase) in amortization of deferred policy acquisition costses..................................... 414 (145) 269 Reclassification adjustment for gains realized in net income.................................................. (42,832) 14,991 (27,841) ----------- ----------- ----------- Other comprehensive income (loss).......................... $ (9,804) $ 3,284 $ (6,520) ----------- ----------- ----------- ----------- ----------- ----------- December 31, 1997 Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments............................................. $ 93,826 $ (33,796) $ 60,030 Decrease (increase) in amortization of deferred policy acquisition costs....................................... (2,096) 771 (1,325) Reclassification adjustment for gains realized in net income.................................................. (40,587) 14,205 (26,382) ----------- ----------- ----------- Other comprehensive income................................. $ 51,143 $ (18,820) $ 32,323 ----------- ----------- ----------- ----------- ----------- ----------- December 31, 1996 Unrealized gains (losses) on investments: Unrealized gains (losses) on available-for-sale investments............................................. $ (61,450) $ 24,823 $ (36,627) Decrease (increase) in amortization of deferred policy acquisition costs....................................... 3,376 (1,316) 2,060 Reclassification adjustment for gains realized in net income.................................................. (21,615) 7,565 (14,050) ----------- ----------- ----------- Other comprehensive loss................................... $ (79,689) $ 31,072 $ (48,617) ----------- ----------- ----------- ----------- ----------- -----------
NET INVESTMENT INCOME AND NET REALIZED GAINS ON INVESTMENTS Major categories of net investment income and realized gains on investments for each year were as follows (in thousands):
1998 1997 1996 --------- --------- --------- NET INVESTMENT INCOME Fixed maturities................................................ $ 160,163 $ 160,444 $ 141,973 Equity securities............................................... 8,656 9,306 6,682 Mortgage loans on real estate................................... 57,031 54,662 52,949 Policy loans.................................................... 4,653 4,144 3,195 Short-term investments.......................................... 1,701 2,851 5,175 Real estate and other investments............................... 8,194 4,635 5,358 --------- --------- --------- 240,398 236,042 215,332 Expenses........................................................ (6,355) (7,318) (9,309) --------- --------- --------- $ 234,043 $ 228,724 $ 206,023 --------- --------- --------- --------- --------- --------- NET REALIZED GAINS ON INVESTMENTS Fixed maturities................................................ $ 34,320 $ 13,827 $ 3,334 Equity securities............................................... 8,512 26,760 18,281 Mortgage loans on real estate................................... (198) 301 (144) Short-term investments.......................................... 5 -- 57 Real estate and other investments............................... 9,765 213 4,203 --------- --------- --------- $ 52,404 $ 41,101 $ 25,731 --------- --------- --------- --------- --------- ---------
Proceeds from sales of investments in fixed maturities were $2,460,316,000, $3,360,682,000 and $2,652,887,000 in 1998, 1997 and 1996, respectively. Gross gains of $44,360,000, $30,860,000 and $28,606,000 and gross losses of $10,040,000, $17,033,000 and $25,272,000 were realized on the sales in 1998, 1997 and 1996, respectively. F-10 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 4. DEFERRED POLICY ACQUISITION COSTS The changes in deferred policy acquisition costs by product were as follows (in thousands):
INTEREST SENSITIVE AND ACCIDENT TRADITIONAL INVESTMENT AND LIFE PRODUCTS HEALTH TOTAL ----------- --------------- ----------- --------- Balance January 1, 1997..................... $ 33,157 $ 221,036 $ 13,882 $ 268,075 Acquisition costs deferred.................. -- 69,694 -- 69,694 Acquisition costs amortized................. (10,988) (24,251) (8,692) (43,931) Increased amortization of deferred acquisition costs from unrealized gains on available-for-sale securities.............. -- (2,096) -- (2,096) ----------- --------------- ----------- --------- Balance, December 31, 1997.................. 22,169 264,383 5,190 291,742 Acquisition costs deferred.................. -- 69,921 3,226 73,147 Acquisition costs amortized................. (7,609) (20,256) (5,500) (33,365) Decreased amortization of deferred acquisition costs from unrealized gains on available-for-sale securities.............. -- 414 -- 414 ----------- --------------- ----------- --------- Balance, December 31, 1998.................. $ 14,560 $ 314,462 $ 2,916 $ 331,938 ----------- --------------- ----------- --------- ----------- --------------- ----------- ---------
Included within total deferred policy acquisition costs at December 31, 1997 is $10,434,000 of present value of future profits (PVP) resulting from acquisitions accounted for as a purchase. All remaining PVP was amortized in 1998. During 1998, 1997 and 1996, 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 additional amortization of deferred acquisition costs of $3,357,000, $732,000 and $1,894,000, respectively. 5. PROPERTY AND EQUIPMENT A summary of property and equipment at December 31 for each year follows (in thousands):
1998 1997 --------- --------- Land..................................................................... $ 1,900 $ 1,900 Building and improvements................................................ 24,319 24,148 Furniture and equipment.................................................. 87,714 87,537 --------- --------- 113,933 113,585 Less accumulated depreciation............................................ (83,221) (70,812) --------- --------- Net property and equipment............................................... $ 30,712 $ 42,773 --------- --------- --------- ---------
6. ACCIDENT AND HEALTH RESERVES Activity for the liability for unpaid accident and health claims is summarized as follows (in thousands):
YEAR ENDED DECEMBER 31 ------------------------------- 1998 1997 1996 --------- --------- --------- Balance as of January 1, net of reinsurance recoverables....... $ 988,036 $ 947,711 $ 928,832 Add: Incurred losses related to: Current year................................................. 826,009 773,316 865,907 Prior years.................................................. (27,973) (59,634) (64,094) --------- --------- --------- Total incurred losses...................................... 798,036 713,682 801,813 Deduct: Paid losses related to: Current year................................................. 469,881 437,405 549,144 Prior years.................................................. 254,308 235,952 233,790 --------- --------- --------- Total paid losses.......................................... 724,189 673,357 782,934 --------- --------- --------- Balance as of December 31, net of reinsurance recoverables..... $1,061,883 $ 988,036 $ 947,711 --------- --------- --------- --------- --------- ---------
The table above compares to 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. The liability for unpaid accident and health claims includes $915,368,000, $854,940,000 and $805,510,000 of total disability income reserves as of December 31, 1998, 1997 and 1996, respectively, which were discounted for anticipated interest earnings assuming a 6.0% interest rate. F-11 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 6. ACCIDENT AND HEALTH RESERVES (CONTINUED) 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 due to less uncertainty in the health business and a reduction of loss reserves due to lower than anticipated inflation in medical costs. 7. FEDERAL INCOME TAXES The Company reports its taxable income in a consolidated federal income tax return along with other affiliated subsidiaries of Fortis, Inc. (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. The significant components of the Company's deferred tax liabilities and assets as of December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 --------- --------- Deferred tax assets: Separate account assets/liabilities.................................... $ 87,300 $ 56,620 Reserves............................................................... 27,586 43,143 Claims and benefits payable............................................ 8,089 15,238 Accrued liabilities.................................................... 10,113 8,785 Investments............................................................ 3,861 4,795 Other.................................................................. 2,723 3,042 --------- --------- Total deferred tax assets............................................ 139,672 131,623 Deferred tax liabilities: Deferred policy acquisition costs...................................... 82,031 72,369 Unrealized gains....................................................... 35,591 39,015 Fixed assets........................................................... 3,150 3,914 Investments............................................................ 982 1,220 Other.................................................................. 14 68 --------- --------- Total deferred tax liabilities....................................... 121,768 116,586 --------- --------- Net deferred tax asset............................................... $ 17,904 $ 15,037 --------- --------- --------- ---------
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 (in thousands):
1998 1997 1996 --------- --------- --------- Current............................................................ $ 30,232 $ 41,569 $ 32,193 Deferred........................................................... 170 (6,449) (1,094) --------- --------- --------- $ 30,402 $ 35,120 $ 31,099 --------- --------- --------- --------- --------- ---------
Federal income tax payments and refunds resulted in net payments of $36,367,000, $58,859,000 and $16,434,000 in 1998, 1997 and 1996, respectively. The Company's effective income tax rate varied from the statutory federal income tax rate as follows:
1998 1997 1996 --- --- --- Statutory income tax rate................................................ 35.0% 35.0% 35.0% Other, net............................................................... (2.1) (.6) (.2) --- --- --- 32.9% 34.4% 34.8% --- --- --- --- --- ---
F-12 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 8. ASSETS HELD IN SEPARATE ACCOUNTS Separate account assets at December 31 were as follows (in thousands):
1998 1997 ---------- ---------- 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................... $3,707,687 $2,947,401 Assets of the separate accounts owned by the Company, at fair value... 34,716 31,221 ---------- ---------- $3,742,403 $2,978,622 ---------- ---------- ---------- ----------
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 $10,000 net monthly benefit to a $2,000 net monthly benefit for claims incurred on and after January 1, 1996. The Company has assumed $5,601,000, $5,742,000 and $6,144,000 of premium from First Fortis in 1998, 1997 and 1996, respectively. The Company has assumed $9,315,000, $5,452,000 and $3,599,000 of reserves in 1998, 1997 and 1996, respectively, from First Fortis. The maximum amount that the Company retains on any one life is $500,000 of life insurance including accidental death. Amounts in excess of $500,000 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 (in thousands):
1998 1997 1996 --------- --------- --------- Life insurance..................................................... $ 6,983 $ 8,159 $ 8,680 Accident and health insurance...................................... 13,862 13,712 6,793 --------- --------- --------- $ 20,845 $ 21,871 $ 15,473 --------- --------- --------- --------- --------- ---------
Recoveries under reinsurance contracts for the year ended December 31 were as follows (in thousands):
1998 1997 1996 --------- --------- --------- Life insurance..................................................... $ 4,549 $ 2,973 $ 7,225 Accident and health insurance...................................... 9,465 14,781 5,993 --------- --------- --------- $ 14,014 $ 17,754 $ 13,218 --------- --------- --------- --------- --------- ---------
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 parent are restricted as to amount by state regulatory requirements. The Company had $47,341,000 free from such restrictions as December 31, 1998. Distributions in excess of this amount would require regulatory approval. 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. While the NAIC has recently completed a project to codify statutory accounting practices, which may result in changes to the accounting practices that insurance enterprises use to prepare their statutory-basis financial statements, adoption by Minnesota is not anticipated before 2001. 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-13 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 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 (in thousands):
NET INCOME (LOSS) SHAREHOLDER'S EQUITY ------------------------------- -------------------- 1998 1997 1996 1998 1997 --------- --------- --------- --------- --------- Based on statutory accounting practices.... $ 14,841 $ 62,593 $ 55,046 $ 478,405 $ 528,671 Deferred policy acquisition costs.......... 39,782 25,763 27,190 331,938 291,742 Investment valuation differences........... 745 (497) (2,219) 100,165 80,245 Deferred and uncollected premiums.......... (103,982) (107,194) (4,096) (7,246) (7,453) Policy reserves............................ 97,452 89,895 (19,873) (156,889) (150,649) Commissions................................ -- (3,171) (1,639) -- -- Current income taxes payable............... 925 6,450 2,386 (10,920) 3,712 Deferred income taxes...................... (417) 6,449 (1,094) 17,904 (520) Realized gains on investments.............. 356 251 2,599 -- -- Realized gains transferred to the Interest Maintenance Reserve (IMR), net of tax..... 22,748 9,644 2,335 -- -- Amortization of IMR, net of tax............ (7,128) (6,315) (6,130) -- -- Write-off of investment.................... -- (11,705) -- -- -- Pension expense............................ 81 (4,153) -- (6,440) (6,137) Guaranty Funds............................. -- -- 3,023 -- -- Property and equipment..................... -- -- -- 5,951 15,520 Interest maintenance reserve............... -- -- -- 68,968 53,348 Asset valuation reserve.................... -- -- -- 90,986 75,939 Mortgage loans on real estate.............. -- -- -- (20,141) -- Other, net................................. (3,521) (900) 664 (7,213) (4,312) --------- --------- --------- --------- --------- As reported herein......................... $ 61,882 $ 67,110 $ 58,192 $ 885,468 $ 880,106 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
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, 1998, 1997 and 1996, were $13,077,000, $12,015,000 and $13,319,000, respectively. During 1997 Fortis, Inc. began providing information technology services to the Company. Information technology expenses were $55,910,000 and $28,525,000 for years ended December 31, 1998 and 1997, respectively. In conjunction with the marketing of its variable annuity products, the Company paid $72,638,000, $72,105,000 and $68,616,000 in commissions to its affiliate, Fortis Investors, Inc., for the years ended December 31, 1998, 1997 and 1996, 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 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. As the debt was underwritten in 1998 and 1997, the outstanding balance is considered a reasonable estimate of fair value. Separate account assets and liabilities are reported at their estimated fair values in the Balance Sheet. F-14 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 13. FAIR VALUE DISCLOSURES (CONTINUED) 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.
(IN THOUSANDS) DECEMBER 31 ----------------------------------------------------- 1998 1997 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- Assets: Investments: Securities available-for-sale: Fixed maturities...................................... $ 2,402,343 $ 2,402,343 $ 2,415,915 $ 2,415,915 Equity securities..................................... 157,851 157,851 109,832 109,832 Mortgage loans on real estate............................. 610,131 662,984 602,064 661,055 Policy loans.............................................. 74,950 74,950 68,566 68,566 Short-term investments.................................... 31,868 31,868 70,537 70,537 Assets held in separate accounts.......................... 3,742,403 3,742,403 2,978,622 2,978,622 Liabilities: Individual and group annuities (subject to discretionary withdrawal).............................................. $ 923,102 $ 894,019 $ 977,495 $ 945,558 Debt...................................................... 20,141 20,141 26,433 26,433 Liabilities related to Separate Accounts.................. 3,707,687 3,707,687 2,947,401 2,947,401
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' 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 $1,627,000, $1,594,000 and $1,354,000 for 1998, 1997 and 1996, 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 $3,610,000, $3,926,000 and $3,913,000 for 1998, 1997 and 1996, 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 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. Net postretirement benefit costs allocated to the Company for the years ended December 31, 1998, 1997 and 1996 were $0, $304,000 and $290,000, respectively, and includes the expected cost of such benefits for newly eligible or vested employees, interest cost, gains and losses arising from differences between actuarial assumptions and actual experience, and amortization of the transition obligation. The Company made contributions to the plans of approximately $(5,200), $20,000 and $8,000 in 1998, 1997 and 1996, respectively, as claims were incurred. F-15 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 16. DEBT A summary of debt at December 31 for each year follows (in thousands):
1998 1997 --------- --------- Mortgage note bearing a floating interest rate of 200 basis points over LIBOR, (5.07% at December 31, 1998 and 5.84% at December 31, 1997) adjustable every six months, principal and interest due monthly, matures July 2001................................................................. $ 3,088 $ 3,150 Mortgage note bearing fixed interest at 7.6% principal and interest due monthly, matures October 2002............................................. 5,105 5,183 Mortgage note bearing fixed interest at 6.52%, principal and interest due monthly, matures July 2009................................................ 5,000 -- Mortgage note bearing fixed interest at 7.14%, principal and interest due monthly, matures April 2008............................................... 6,948 -- Mortgage note bearing a floating interest rate of 225 basis points over LIBOR..................................................................... -- 18,100 --------- --------- $ 20,141 $ 26,433 --------- --------- --------- ---------
Maturities of the debt as of December 31, 1998 are as follows (in thousands): 1998............................................................................... $ 280 1999............................................................................... 344 2000............................................................................... 3,328 2001............................................................................... 5,030 2002............................................................................... 251 Thereafter......................................................................... 10,908 --------- $ 20,141 --------- ---------
These mortgage notes are collateralized by certain real estate investments included in real estate and other investments in the balance sheet. Interest expense paid by the Company during 1998 and 1997 on this debt was approximately $1,362,000 and $1,075,000, respectively. 17. YEAR 2000 (UNAUDITED) INTRODUCTION. The Company relies heavily on information technology ("IT") systems to conduct its business. These IT systems include both internally developed and vendor-supplied systems. The Company also has business relationships with numerous entities including but not limited to financial institutions, financial intermediaries, third party administrators and other critical vendors as well as regulators and customers. These entities are themselves reliant on their IT systems to conduct their businesses. Therefore, there is a supply chain of dependency among and between all involved entities. STATE OF READINESS. In 1997, the Fortis parent company organized a multi-disciplinary Year 2000 Project Team ("Team"). The Company is a part of the Team. The Team consists of employees at each subsidiary, audit, legal and outside consultants. The Team has developed and is currently executing a comprehensive plan designed to make the Company's IT systems Year 2000 ready. The plan covers four stages including (i) inventory, (ii) assessment, (iii) programming, and (iv) testing and certification. The Company has completed the inventory stage for its internal hardware, software and telecommunications systems (mainframe and client/server applications). The assessment process is also complete and the Company is utilizing both internal and external resources to reprogram or replace the systems where necessary, and testing the applications for Year 2000 readiness. Programming, testing and certification of these systems and applications are targeted for completion by the end of 1999. COSTS. The cost of the Company portion of the Year 2000 project is estimated at $27.7 million (pre-tax) and is being funded through operating cash flows. Total Year 2000 project costs are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. Costs to upgrade and replace systems in the normal course of business are not included in this estimate. As of December 31, 1998, approximately $15.5 million (pre-tax) had already been expensed. The Company believes that its Year 2000 project generally is on schedule. RISKS. The Company is attempting to limit the potential impact of the Year 2000 by monitoring the progress of its own Year 2000 project and those of its critical external relationships and by developing contingency/recovery plans. The Company cannot guarantee that it will be able to identify and/or resolve all of its Year 2000 issues. Any critical unresolved Year 2000 issues at the Company or its external relationships, however, could have a material adverse effect on the Company's results of operations, liquidity or financial condition. If the Company's Year 2000 issues were unresolved, potential consequence would include, among other possibilities, the inability to accurately and timely process benefit claims, update customer's accounts, process financial transactions, bill customers, assess exposure to risks, determine liquidity requirements or report accurate data to management, shareholders, customers, regulators and others as well as business interruptions or shutdowns, financial losses, harm to its reputation, increased scrutiny by regulators and litigation related to Year 2000 issues. CONTINGENCY PLANS. Consistent with prudent due diligence efforts, the Company has defined contingency plans aimed at ensuring the continuity of critical business functions before and after December 31, 1999, should there be an unexpected system failure. The Company has developed plans that are designed to reduce the negative impact on Fortis, and provide methods of returning to normal operations, if failure occurs. F-16 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 APPENDIX B--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 Federated Prime Money Fund II for a contract issued when all owners are less than 61 years old at the time of purchase is calculated as follows: Total Variable Account Annual Expenses 1.20% + Total Portfolio Operating Expenses 0.80% = Total Expense Rate 2.00%
The Annual Administrative Charge rate is calculated by dividing the total Annual Contract Charges we collected in 1998 on similar contracts by the average policy value in force in 1998 on such contracts. Year 1 Beginning Policy Value = $1000.00 Year 1 Expense = $1000.00 x 0.0200 = $20.00 Year 2 Beginning Policy Value = $1030.00 Year 2 Expense = $1030.00 x 0.0200 = $20.60 Year 3 Beginning Policy Value = $1060.90 Year 3 Expense = $1060.90 x 0.0200 = $21.22 So the cumulative expenses for years 1-3 for the Federated Prime Money Fund II are equal to: $20.00 + $20.60 + $21.22 = $61.82 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 0.07 x ($1000.00 - $100.00) = $63.00 So the total expense if surrendered is $61.82 + $63.00 = $124.82. B-1 APPENDIX C--SAMPLE DEATH BENEFIT CALCULATIONS
Date of Death Assumed Premiums and Values: Example 1 Example 2 Example 3 ----------- ----------- ----------- a. Purchase payments made prior to death, accumulated at 4% $ 32,000 $ 32,000 $ 32,000 b. Contract Value on date of death $ 20,000 $ 36,000 $ 25,000 c. One 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
C-1 APPENDIX D--PARTICIPATING PORTFOLIOS FEDERATED INSURANCE SERIES Federated Insurance Series is an open-end management investment company. It was established as a Massachusetts business trust under a Declaration of Trust dated September 15, 1993. Federated Advisers is the investment adviser for all of its portfolios other than Federated International Equity Fund II, which is advised by Federated Global Research Corp. AMERICAN LEADERS FUND II INVESTMENT OBJECTIVE: Seeks to achieve long-term growth of capital with a secondary objective to provide income. It invests, under normal conditions, at least 65% of its total assets in common stock of "blue-chip" companies. GROWTH STRATEGIES FUND II INVESTMENT OBJECTIVE: Capital appreciation. It invests at least 65% of its assets in equity securities of companies with prospects for above-average growth in earnings and dividends or companies where significant fundamental changes are taking place. UTILITY FUND II INVESTMENT OBJECTIVE: To achieve high current income and moderate capital appreciation. It invests primarily in a professionally managed, diversified portfolio of equity and debt securities of utility companies. PRIME MONEY FUND II INVESTMENT OBJECTIVE: To provide current income consistent with stability of principal and liquidity. It invests exclusively in a portfolio of money market instruments maturing in 397 days or less. FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II INVESTMENT OBJECTIVE: Seeks to provide current income. Under normal circumstances, it invests at least 65% of the value of its total assets in securities issued or guaranteed as to payment of principal and interest by the U.S. Government, its agencies or instrumentalists. HIGH INCOME BOND FUND II INVESTMENT OBJECTIVE: To seek high current income. It invests primarily in a professionally managed, diversified portfolio of fixed income securities. The fixed income securities in which it invests are lower-rated corporate debt obligations, which are commonly referred to as "junk bonds." INTERNATIONAL EQUITY FUND II INVESTMENT OBJECTIVE: To obtain a total return on its assets. It invests at least 65% of its assets (and under normal market conditions substantially all of its assets) in equity securities of issuers located in at least three different countries outside of the United States. EQUITY INCOME FUND II INVESTMENT OBJECTIVE: To provide above average income and capital appreciation. It invests at least 65% of its assets in income-producing equity securities. STRATEGIC INCOME FUND II INVESTMENT OBJECTIVE: To seek a high level of current income by investing in three categories of fixed income securities: domestic investment grade, domestic non-investment grade corporate and foreign. SMALL CAP STRATEGIES FUND II INVESTMENT OBJECTIVE: To seek capital appreciation by investing primarily in equity securities of small cap companies. D-1 APPENDIX E--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 Owner (or Annuitant). Under the death benefit set forth as (2) in that section, 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 contract value on the anniversary, plus (ii) purchase payments made since the anniversary and before the withdrawal, plus (iii) pro rata adjustments for withdrawals made since the anniversary and before the given withdrawal. Under the death benefit set forth as (3) in that section, 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 withdrawal; plus (ii) any purchase payments made on or after the date the owner reached age 80 and before the given withdrawal; reduced by (iii) pro rata adjustments for any withdrawals made on or after the date the owner reached age 80 and before the given withdrawal. E-1 CONTRACTS UNDER FLEXIBLE PREMIUM DEFERRED COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS TRIPLE CROWN VARIABLE ANNUITY Issued by FORTIS BENEFITS INSURANCE COMPANY (AND ITS VARIABLE ACCOUNT D) STATEMENT OF ADDITIONAL INFORMATION MAY 1, 1999 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 Contracts under flexible premium deferred combination variable and fixed annuity contracts ("Contracts"), dated May 1, 1999. A copy of the Prospectus may be obtained without charge from Fortis Investors, Inc. 1-800-963- 9222, mailing address: P.O. Box 64273, St. Paul, MN 55164. You have the option of receiving benefits under a Contract through Fortis Benefits' Variable Account D or through Fortis Benefits' Guarantee Periods Fixed Account or its General Account Fixed Account. TABLE OF CONTENTS Fortis Benefits and the Variable Account ...................................1 Calculation of Annuity Payments ............................................2 Services....................................................................3 - Safekeeping of Variable Account Assets .................................3 - Experts ................................................................3 - Principal Underwriter ..................................................3 Taxation Under Certain Retirement Plans ....................................3 Withholding.................................................................8 Miscellaneous ..............................................................8 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 Contracts 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." FORTIS BENEFITS AND THE VARIABLE ACCOUNT Fortis Benefits Life Insurance Company, the issuer of the Contracts, 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 Fortis Insurance Company, a stock company organized under the laws of Wisconsin, 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). 1 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. Fortis (NL) N.V. and Fortis (B) have combined assets of approximately $390 billion. 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 Contracts 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. Fortis Benefits has a rating of AA from Standard & Poor's. As defined by Standard & Poor's, insurers rated AA offer "excellent financial security." These ratings represent such rating agencies' independent opinion of Fortis Benefits' financial strength and ability to meet policy holder obligations, but have no relevance to the performance and quality of the assets in Subaccounts of the Variable Account. 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 Contract Value, after any Market Value Adjustment, is computed and that portion of the Contract Value which will be applied to the Fixed Annuity Option selected is determined. The amount of the first monthly payment under the Fixed Annuity Option selected will be at least as large as would result from using the annuity tables contained in the Contract to apply such amount of Contract 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 chosen 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 "Contract Value") for the Valuation Period ending on that Valuation Date, with an offset for the 3% assumed interest rate used in the annuity tables of the Contract. 2 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 Contract for each $1,000 of Contract 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 Contract 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 Contract'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 Contract. 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 Contracts with no such differences in connection with certain employer-sponsored benefit plans. Employers should be aware that, under most such plans, Contracts that make distinctions based on gender are prohibited by law. 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. EXPERTS The financial statements of Fortis Benefits Insurance Company at December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and the statements of net assets of Fortis Benefits Insurance Company Variable Account D at December 31, 1998 and the related statements of changes in net assets for each of the two years in the period ended December 31, 1998, 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 Fortis Investors, Inc. ("Fortis Investors"), the principal underwriter of the Contracts, is a Minnesota corporation and a member of the Securities Investors Protection Corporation. The offering of the Contracts is continuous, and Fortis Investors does not anticipate discontinuing the offering of the Contracts, although it reserves the right to do so. Contracts generally will be issued for Annuitants from ages zero to ninety in all states. TAXATION UNDER CERTAIN RETIREMENT PLANS Federal income tax information concerning the purchase of Contracts 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. 3 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 Contracts 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 Contract 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 Contract, as described in the Prospectus. Certain of these and other provisions are incorporated in a special endorsement attached to Contracts 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 Contracts 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 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 4 attainment of age 59 1/2 under a Contract 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 Contracts, 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 Contract if certain conditions are met, 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 5 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 $9,500 in 1997, 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 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 6 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 Contracts offered by this Prospectus. The Contract 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 Contract 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 Contract 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 transfers 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 Contract Value. Deferred compensation plans represent a contractual promise on the part of the employer to pay current compensation at some future time. The Contract 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 Contract 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. 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. 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 7 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. MISCELLANEOUS The computer systems Fortis Benefits uses to process policy transactions and valuations need to be adjusted to be able to continue to administer its policies after Year 2000. Fortis Benefits is devoting all resources necessary to make these systems modifications and expects that the necessary changes will be completed on time and in a way that will result in no disruption to its policy servicing operations. However, as is the case with most system conversion projects, risks and uncertainties exist, due in part to reliance on third party vendors. Nonperformance by any of these entities, or other unforeseen circumstances, could have a material adverse impact on Fortis Benefits' ability to perform its policy servicing operations. Fortis Benefits is closely monitoring these entities to avoid any unforeseen circumstances. VARIABLE ACCOUNT FINANCIAL STATEMENTS 8 FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY VARIABLE ACCOUNT D YEAR ENDED DECEMBER 31, 1998 Fortis Benefits Insurance Company Variable Account D Financial Statements Year ended December 31, 1998 CONTENTS Report of Independent Auditors..........................................1 Audited Financial Statements Statements of Net Assets................................................3 Statements of Changes in Net Assets.....................................6 Notes to Financial Statements..........................................21 REPORT OF INDEPENDENT AUDITORS Board of Directors Fortis Benefits Insurance Company We have audited the accompanying individual and combined statements of net assets of the segregated asset subaccounts of Fortis Benefits Insurance Company Variable Account D (comprised of 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 Norwest Select Fund's ValuGrowth, Income, Small Company Stock and Income Equity Subaccounts; the Scudder Variable Life Investment Fund's International Subaccount; the AIM Variable Insurance Funds' 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 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) as of December 31, 1998, and the related statements of changes in net assets for each of the two years in the period then ended, except for the Federated Insurance Series' U.S. Government Securities II Subaccount; the Neuberger & Berman, Inc.'s AMT Limited Maturity Bond and AMT Partners Subaccounts; and INVESCO, Inc.'s Health & Sciences, Industrial Income and Technology Subaccounts which are for the period from May 1, 1997 to December 31, 1997 and the Fortis Mid Cap Stock, Large Cap Growth and Small Cap Value Subaccounts which are for the period May 1, 1998 (commencement of operations) to December 31, 1998. 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. 1 We conducted our audits in accordance with generally accepted auditing standards. 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. Our procedures included confirmation of securities owned as of December 31, 1998 by correspondence with the custodian. 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 individual and combined financial position of the segregated asset subaccounts of Fortis Benefits Insurance Company Variable Account D at December 31, 1998, and the individual and combined changes in its net assets for the periods described above, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota March 19, 1999 2 Fortis Benefits Insurance Company Variable Account D Statements of Net Assets December 31, 1998
ATTRIBUTABLE TO FORTIS BENEFITS NET ASSETS AT INSURANCE SHARES COST MARKET VALUE COMPANY ---------------------------------------------------------------------- Investments in Fortis Series Fund, Inc.: Growth Stock 13,182,400 $ 304,612,551 $ 541,637,137 $ - U.S. Government Securities 12,972,929 139,984,673 141,769,466 - Money Market 6,066,668 67,233,393 67,119,187 - Asset Allocation 25,429,403 386,417,417 536,384,948 - Diversified Income 8,949,806 105,443,140 106,628,884 - Global Growth 11,604,190 166,333,148 261,882,193 - Aggressive Growth 5,866,648 74,710,338 97,976,544 - Growth & Income 12,530,359 184,542,458 265,983,185 - High Yield 6,516,027 66,579,853 64,546,458 - Global Asset Allocation 4,152,609 51,348,582 59,470,739 4,289,789 Global Bond 1,956,513 21,442,048 22,618,464 5,997,500 International Stock 5,344,515 68,059,314 77,403,542 - Value 5,049,921 65,418,627 72,593,625 - S & P 500 10,627,627 159,615,684 200,164,981 - Blue Chip Stock 7,854,812 112,868,995 145,914,116 6,352,455 Mid Cap Stock 1,179,582 10,821,273 11,366,916 3,999,212 Large Cap Growth 1,237,860 12,646,130 14,909,298 4,998,441 Small Cap Value 1,523,604 14,080,298 14,138,583 3,851,404 Investments in Norwest Select Fund: ValuGrowth 1,794,765 25,899,534 35,751,725 - Income 1,931,703 23,371,139 22,156,639 - Small Company Stock 1,221,712 15,755,762 13,292,225 - Income Equity 5,378,564 72,198,232 86,057,023 - NET ASSET VALUE FOR ATTRIBUTABLE TO ACCUMULATION VARIABLE ANNUITY VARIABLE ANNUITY UNITS CONTRACTS PER CONTRACTS OUTSTANDING ACCUMULATION UNIT ----------------------------------------------------- Investments in Fortis Series Fund, Inc.: Growth Stock $ 541,637,137 136,880,970 $ 3.96 U.S. Government Securities 141,769,466 7,783,287 18.21 Money Market 67,119,187 40,111,614 1.67 Asset Allocation 536,384,948 160,947,627 3.33 Diversified Income 106,628,884 51,414,422 2.07 Global Growth 261,882,193 12,352,444 21.20 Aggressive Growth 97,976,544 6,201,905 15.80 Growth & Income 265,983,185 12,274,208 21.67 High Yield 64,546,458 5,048,995 12.78 Global Asset Allocation 55,180,950 3,357,472 16.44 Global Bond 16,620,964 1,257,641 13.22 International Stock 77,403,542 4,837,037 16.00 Value 72,593,625 4,940,205 14.69 S & P 500 200,164,981 10,826,253 18.49 Blue Chip Stock 139,561,661 7,720,323 18.08 Mid Cap Stock 7,367,704 765,338 9.63 Large Cap Growth 9,910,857 842,995 11.76 Small Cap Value 10,287,179 1,098,102 9.37 Investments in Norwest Select Fund: ValuGrowth 35,751,725 1,814,816 19.70 Income 22,156,639 1,663,176 13.32 Small Company Stock 13,292,225 975,631 13.62 Income Equity 86,057,023 5,406,120 15.92
SEE ACCOMPANYING NOTES. 3 Fortis Benefits Insurance Company Variable Account D Statements of Net Assets (continued) December 31, 1998
ATTRIBUTABLE TO FORTIS BENEFITS NET ASSETS AT INSURANCE SHARES COST MARKET VALUE COMPANY ------------------------------------------------------------------- Investments in Scudder Variable Life Investment Fund: International 576,026 $ 7,545,857 $ 8,386,931 $ - Investment in AIM Variable Insurance Funds, Inc.: AIM V.I. Value 189,419 4,512,103 4,972,260 - AIM V.I. International Equity 80,243 1,551,323 1,574,363 - Investments in Alliance Variable Product Series: Money Market 16,561,373 16,561,373 16,561,373 - International 73,343 1,166,959 1,185,950 - Premier Growth 280,237 7,469,617 8,695,749 - Investments in SAFECO Resource Series: Growth 262,623 6,069,354 5,578,102 - Equity 76,363 2,145,904 2,288,591 - Investments in Federated Insurance Series: U.S. Government Securities II 94,546 1,043,181 1,054,187 - High Income Bond Fund II 340,033 3,592,424 3,713,159 - Utility II 71,414 1,039,405 1,090,491 - American Leaders II 76,825 1,488,642 1,665,573 - Investments in Lexington Funds, Inc.: Natural Resources Trust 48,305 691,407 532,800 - Emerging Markets 10,424 65,395 58,894 - Investments in MFS Variable Insurance Trust: Emerging Growth 316,230 5,874,837 6,789,451 - High Income 304,319 3,550,267 3,508,800 - World Government 29,872 323,759 325,006 - NET ASSET VALUE FOR ATTRIBUTABLE TO ACCUMULATION VARIABLE ANNUITY VARIABLE ANNUITY UNITS CONTRACTS PER CONTRACTS OUTSTANDING ACCUMULATION UNIT ------------------------------------------------------------- Investments in Scudder Variable Life Investment Fund: International $ 8,386,931 507,370 $16.53 Investment in AIM Variable Insurance Funds, Inc.: AIM V.I. Value 4,972,260 431,724 11.52 AIM V.I. International Equity 1,574,363 161,048 9.78 Investments in Alliance Variable Product Series: Money Market 16,561,373 1,459,472 11.35 International 1,185,950 97,422 12.17 Premier Growth 8,695,749 375,294 23.17 Investments in SAFECO Resource Series: Growth 5,578,102 367,234 15.19 Equity 2,288,591 151,516 15.10 Investments in Federated Insurance Series: U.S. Government Securities II 1,054,187 93,034 11.33 High Income Bond Fund II 3,713,159 291,909 12.72 Utility II 1,090,491 70,928 15.37 American Leaders II 1,665,573 94,738 17.58 Investments in Lexington Funds, Inc.: Natural Resources Trust 532,800 51,807 10.28 Emerging Markets 58,894 9,929 5.93 Investments in MFS Variable Insurance Trust: Emerging Growth 6,789,451 493,984 13.74 High Income 3,508,800 351,903 9.97 World Government 325,006 29,522 11.01
4 Fortis Benefits Insurance Company Variable Account D Statements of Net Assets (continued) December 31, 1998
ATTRIBUTABLE TO FORTIS BENEFITS NET ASSETS AT INSURANCE SHARES COST MARKET VALUE COMPANY ------------------------------------------------------------------- Investments in Montgomery Variable Funds: Emerging Markets 46,914 $ 304,633 $ 309,163 $ - Growth 49,924 734,623 768,330 - Investments in Strong Variable Insurance Funds: Discovery II 38,137 478,071 485,106 - International II 36,511 319,377 320,567 - Investments in American Century Investments: VP Balanced 159,306 1,240,933 1,328,610 - VP Growth 14,419 105,138 130,057 - Investments in Van Eck Worldwide Insurance Trust: Worldwide Bond Fund 71,832 875,627 882,098 - Worldwide Hard Assets Fund 40,379 477,482 371,483 - Investments in Neuberger & Berman, Inc.: AMT Limited Maturity Bond 48,871 670,521 675,400 - AMT Partners 45,054 881,251 852,869 - Investments in INVESCO, Inc.: Health & Sciences 122,178 1,693,908 1,868,095 - Industrial Income 29,045 521,251 540,536 - Technology 86,405 1,084,265 1,239,047 - ------------------------------------------------- Totals $2,223,461,476 $2,937,518,919 $29,488,801 ------------------------------------------------- ------------------------------------------------- NET ASSET VALUE FOR ATTRIBUTABLE TO ACCUMULATION VARIABLE ANNUITY VARIABLE ANNUITY UNITS CONTRACTS PER CONTRACTS OUTSTANDING ACCUMULATION UNIT ------------------------------------------------------------- Investments in Montgomery Variable Funds: Emerging Markets $ 309,163 47,224 $ 6.55 Growth 768,330 46,194 16.63 Investments in Strong Variable Insurance Funds: Discovery II 485,106 40,736 11.91 International II 320,567 37,361 8.58 Investments in American Century Investments: VP Balanced 1,328,610 91,205 14.57 VP Growth 130,057 14,731 8.83 Investments in Van Eck Worldwide Insurance Trust: Worldwide Bond Fund 882,098 74,895 11.78 Worldwide Hard Assets Fund 371,483 55,190 6.73 Investments in Neuberger & Berman, Inc.: AMT Limited Maturity Bond 675,400 61,900 10.91 AMT Partners 852,869 65,873 12.95 Investments in INVESCO, Inc.: Health & Sciences 1,868,095 119,097 15.69 Industrial Income 540,536 38,817 13.93 Technology 1,239,047 86,462 14.33 ---------------------------------- Totals $2,908,030,118 484,339,100 ---------------------------------- ----------------------------------
SEE ACCOMPANYING NOTES. 5 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets Year ended December 31, 1998
FORTIS U.S. FORTIS GROWTH GOVERNMENT FORTIS MONEY FORTIS ASSET STOCK SECURITIES MARKET ALLOCATION ------------------------------------------------------------------- OPERATIONS Dividend income $ 26,467,526 $ 8,254,423 $ 2,881,782 $ 944,495 Mortality and expense and administrative charges (7,108,278) (1,819,718) (754,138) (6,446,486) Net realized gain (loss) on investments 34,160,134 378,287 317,058 5,833,283 Net unrealized appreciation (depreciation) of investments during the period 29,707,787 2,601,264 (332,026) 80,554,775 ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 83,227,169 9,414,256 2,112,676 80,886,067 CAPITAL TRANSACTIONS Purchase of Variable Account units 8,096,970 29,320,325 56,925,744 38,225,062 Redemption of Variable Account units (83,484,018) (31,609,712) (41,411,119) (27,638,570) Mortality and expense and administrative charges redeemed 7,108,278 1,819,718 754,138 6,446,486 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 (decrease) increase from capital transactions (68,278,770) (469,669) 16,268,763 17,032,978 Net assets at beginning of period 526,688,738 132,824,879 48,737,748 438,465,903 ------------------------------------------------------------------- Net assets at end of period $541,637,137 $141,769,466 $67,119,187 $536,384,948 ------------------------------------------------------------------- ------------------------------------------------------------------- FORTIS FORTIS DIVERSIFIED FORTIS GLOBAL AGGRESSIVE INCOME GROWTH GROWTH ----------------------------------------------------- OPERATIONS Dividend income $ 6,770,367 $ 295,915 $ 171,175 Mortality and expense and administrative charges (1,387,204) (3,706,532) (1,205,738) Net realized gain (loss) on investments 248,128 15,447,835 1,786,779 Net unrealized appreciation (depreciation) of investments during the period (806,741) 12,596,119 15,717,735 ----------------------------------------------------- Net increase (decrease) in net assets resulting from operations 4,824,550 24,633,337 16,469,951 CAPITAL TRANSACTIONS Purchase of Variable Account units 11,808,123 5,585,488 6,778,089 Redemption of Variable Account units (9,454,092) (47,585,475) (13,235,104) Mortality and expense and administrative charges redeemed 1,387,204 3,706,532 1,205,738 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 (decrease) increase from capital transactions 3,741,235 (38,293,455) (5,251,277) Net assets at beginning of period 98,063,099 275,542,311 86,757,870 ----------------------------------------------------- Net assets at end of period $106,628,884 $261,882,193 $97,976,544 ----------------------------------------------------- -----------------------------------------------------
SEE ACCOMPANYING NOTES. 6 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1998
FORTIS GROWTH FORTIS HIGH FORTIS GLOBAL FORTIS GLOBAL & INCOME YIELD ASSET ALLOCATION BOND --------------------------------------------------------------------- OPERATIONS Dividend income $ 74,701 $ 5,211,819 $ 4,126,850 $ 963,909 Mortality and expense and administrative charges (3,367,889) (833,772) (659,482) (190,032) Net realized gain (loss) on investments 3,162,729 117,060 501,769 158,614 Net unrealized appreciation (depreciation) of investments during the period 26,107,816 (5,113,753) 3,060,304 1,473,210 --------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 25,977,357 (618,646) 7,029,441 2,405,701 CAPITAL TRANSACTIONS Purchase of Variable Account units 34,565,822 17,120,211 9,260,170 6,259,719 Redemption of Variable Account units (12,370,869) (6,968,139) (3,266,333) (4,791,843) Mortality and expense and administrative charges redeemed 3,367,889 833,772 659,482 190,032 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 - - (265,877) (241,695) --------------------------------------------------------------------- Net increase (decrease) from capital transactions 25,562,842 10,985,844 6,387,442 1,416,213 Net assets at beginning of period 214,442,986 54,179,260 46,053,856 18,796,550 --------------------------------------------------------------------- Net assets at end of period $265,983,185 $64,546,458 $59,470,739 $22,618,464 --------------------------------------------------------------------- --------------------------------------------------------------------- FORTIS INTERNATIONAL FORTIS STOCK FORTIS VALUE S & P 500 ------------------------------------------------- OPERATIONS Dividend income $ 5,327,524 $ 1,608,314 $ 2,986,482 Mortality and expense and administrative charges (950,221) (871,723) (1,887,000) Net realized gain (loss) on investments 2,690,314 700,432 3,863,409 Net unrealized appreciation (depreciation) of investments during the period 2,473,473 2,820,051 29,200,375 ------------------------------------------------- Net increase (decrease) in net assets resulting from operations 9,541,090 4,257,074 34,163,266 CAPITAL TRANSACTIONS Purchase of Variable Account units 16,782,466 26,693,597 100,704,775 Redemption of Variable Account units (8,715,471) (5,550,357) (19,641,461) Mortality and expense and administrative charges redeemed 950,221 871,723 1,887,000 Funding of subaccount by Fortis Benefits Insurance Company - - - Redemption of Fortis Benefits Insurance Company investment in subaccount (4,534,143) (1,111,186) (6,137,363) Dividend income distribution to Fortis Benefits Insurance Company - - - ------------------------------------------------- Net increase (decrease) from capital transactions 4,483,073 20,903,777 76,812,951 Net assets at beginning of period 63,379,379 47,432,774 89,188,764 ------------------------------------------------- Net assets at end of period $77,403,542 $72,593,625 $200,164,981 ------------------------------------------------- -------------------------------------------------
SEE ACCOMPANYING NOTES. 7 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1998
FORTIS BLUE FORTIS FORTIS FORTIS CHIP MID CAP LARGE CAP SMALL CAP STOCK STOCK* GROWTH* VALUE* -------------------------------------------------------------------- OPERATIONS Dividend income $ 2,429,183 $ 19,450 $ 3,827 $ 189,053 Mortality and expense and administrative charges (1,324,309) (22,225) (6,487) (41,502) Net realized gain (loss) on investments 368,440 (12,512) (8,719) (17,305) Net unrealized appreciation (depreciation) of investments during the period 23,595,863 545,643 2,263,168 58,284 -------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 25,069,177 530,356 2,251,789 188,530 CAPITAL TRANSACTIONS Purchase of Variable Account units 57,253,131 6,896,405 8,728,546 10,421,155 Redemption of Variable Account units (2,538,109) (225,181) (226,237) (610,438) Mortality and expense and administrative charges redeemed 1,324,309 22,225 6,487 41,502 Funding of subaccount by Fortis Benefits Insurance Company - 4,150,000 4,150,000 4,150,000 Redemption of Fortis Benefits Insurance Company investment in subaccount (182,209) - - - Dividend income distribution to Fortis Benefits Insurance Company (106,437) (6,889) (1,287) (52,166) -------------------------------------------------------------------- Net increase (decrease) from capital transactions 55,750,685 10,836,560 12,657,509 13,950,053 Net assets at beginning of period 65,094,254 - - - -------------------------------------------------------------------- Net assets at end of period $145,914,116 $11,366,916 $14,909,298 $14,138,583 -------------------------------------------------------------------- -------------------------------------------------------------------- NORWEST NORWEST NORWEST INCOME SMALL COMPANY VALUGROWTH BOND STOCK ------------------------------------------------ OPERATIONS Dividend income $ 238,581 $ 1,098,033 $ 39,626 Mortality and expense and administrative charges (411,392) (207,725) (168,037) Net realized gain (loss) on investments 14,844 58,241 222,258 Net unrealized appreciation (depreciation) of investments during the period 5,752,937 (1,238,385) (2,310,701) ------------------------------------------------ Net increase (decrease) in net assets resulting from operations 5,594,970 (289,836) (2,216,854) CAPITAL TRANSACTIONS Purchase of Variable Account units 9,841,845 14,092,379 6,325,057 Redemption of Variable Account units (1,757,906) (1,034,235) (779,846) Mortality and expense and administrative charges redeemed 411,392 207,725 168,037 Funding of subaccount by Fortis Benefits Insurance Company - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - (1,710,197) Dividend income distribution to Fortis Benefits Insurance Company - - - ------------------------------------------------ Net increase (decrease) from capital transactions 8,495,331 13,265,869 4,003,051 Net assets at beginning of period 21,661,424 9,180,606 11,506,028 ------------------------------------------------ Net assets at end of period $35,751,725 $22,156,639 $13,292,225 ------------------------------------------------ ------------------------------------------------
* For the period from May 1, 1998 to December 31, 1998. SEE ACCOMPANYING NOTES. 8 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1998
AIM V.I. NORWEST INCOME SCUDDER AIM V.I. INTERNATIONAL EQUITY INTERNATIONAL VALUE EQUITY ------------------------------------------------------------------ OPERATIONS Dividend income $ 1,056,309 $ 896,543 $ 211,271 $ 12,369 Mortality and expense and administrative charges (888,643) (109,417) (18,617) (7,795) Net realized gain (loss) on investments 230,940 30,845 847 (627) Net unrealized appreciation (depreciation) of investments during the period 8,996,308 252,510 460,156 23,040 ------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 9,394,914 1,070,481 653,657 26,987 CAPITAL TRANSACTIONS Purchase of Variable Account units 37,762,541 1,811,004 4,403,159 1,598,178 Redemption of Variable Account units (1,797,881) (788,697) (103,173) (58,597) Mortality and expense and administrative charges redeemed 888,643 109,417 18,617 7,795 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 36,853,303 1,131,724 4,318,603 1,547,376 Net assets at beginning of period 39,808,806 6,184,726 - - ------------------------------------------------------------------ Net assets at end of period $86,057,023 $8,386,931 $4,972,260 $1,574,363 ------------------------------------------------------------------ ------------------------------------------------------------------ ALLIANCE ALLIANCE MONEY ALLIANCE PREMIER MARKET INTERNATIONAL GROWTH ------------------------------------------------------ OPERATIONS Dividend income $ 1,519,027 $ 275,640 $ 43,994 Mortality and expense and administrative charges (71,287) (9,699) (21,589) Net realized gain (loss) on investments - 670,420 539,395 Net unrealized appreciation (depreciation) of investments during the period - (11,830) 1,207,289 ------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 1,447,740 924,531 1,769,089 CAPITAL TRANSACTIONS Purchase of Variable Account units 275,790,809 112,885,826 44,398,125 Redemption of Variable Account units (267,800,970) (115,289,922) (39,496,646) Mortality and expense and administrative charges redeemed 71,287 9,699 21,589 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 8,061,126 (2,394,397) 4,923,068 Net assets at beginning of period 7,052,507 2,655,816 2,003,592 ------------------------------------------------------ Net assets at end of period $ 16,561,373 $ 1,185,950 $ 8,695,749 ------------------------------------------------------ ------------------------------------------------------
SEE ACCOMPANYING NOTES. 9 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1998
FEDERATED U.S. FEDERATED SAFECO SAFECO GOVERNMENT HIGH INCOME BOND GROWTH EQUITY SECURITIES II FUND II ---------------------------------------------------------------------- OPERATIONS Dividend income $ 611,481 $ 107,105 $ 1,490 $ 145,006 Mortality and expense and administrative charges (23,023) (8,994) (3,497) (14,352) Net realized (loss) gain on investments (298,311) 106,229 38,761 102,512 Net unrealized appreciation (depreciation) of investments during the period 20,810 181,464 10,223 70,747 ---------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 310,957 385,804 46,977 303,913 CAPITAL TRANSACTIONS Purchase of Variable Account units 38,247,904 5,017,777 8,903,906 12,041,460 Redemption of Variable Account units (36,738,247) (4,563,051) (8,113,615) (11,229,632) Mortality and expense and administrative charges redeemed 23,023 8,994 3,497 14,352 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 1,532,680 463,720 793,788 826,180 Net assets at beginning of period 3,734,465 1,439,067 213,422 2,583,066 ---------------------------------------------------------------------- Net assets at end of period $ 5,578,102 $2,288,591 $1,054,187 $ 3,713,159 ---------------------------------------------------------------------- ---------------------------------------------------------------------- FEDERATED LEXINGTON FEDERATED AMERICAN NATURAL RESOURCES UTILITY II LEADERS II TRUST --------------------------------------------------- OPERATIONS Dividend income $ 17,235 $ 233,707 $ 43,384 Mortality and expense and administrative charges (3,159) (12,652) (3,193) Net realized (loss) gain on investments (30,623) 274,612 (119,305) Net unrealized appreciation (depreciation) of investments during the period 3,687 77,514 (105,350) --------------------------------------------------- Net increase (decrease) in net assets resulting from operations (12,860) 573,181 (184,464) CAPITAL TRANSACTIONS Purchase of Variable Account units 6,829,897 26,396,563 1,760,109 Redemption of Variable Account units (7,379,883) (28,510,268) (2,202,365) Mortality and expense and administrative charges redeemed 3,159 12,652 3,193 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 (546,827) (2,101,053) (439,063) Net assets at beginning of period 1,650,178 3,193,445 1,156,327 --------------------------------------------------- Net assets at end of period $1,090,491 $ 1,665,573 $ 532,800 --------------------------------------------------- ---------------------------------------------------
SEE ACCOMPANYING NOTES. 10 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1998
LEXINGTON EMERGING MFS EMERGING MFS HIGH MFS WORLD MARKETS GROWTH INCOME GOVERNMENT ------------------------------------------------------------------ OPERATIONS Dividend income $ 6,180 $ 14,899 $ 68,432 $ 1,291 Mortality and expense and administrative charges (496) (10,192) (4,620) (565) Net realized (loss) gain on investments (9,637) 533,200 (9,817) 3,733 Net unrealized (depreciation) appreciation of investments during the period (21,006) 819,762 (69,962) 1,201 ------------------------------------------------------------------ Net (decrease) increase in net assets resulting from operations (24,959) 1,357,669 (15,967) 5,660 CAPITAL TRANSACTIONS Purchase of Variable Account units 1,654,144 29,085,014 5,754,624 1,429,924 Redemption of Variable Account units (2,210,494) (27,832,016) (2,913,514) (1,219,491) Mortality and expense and administrative charges redeemed 496 10,192 4,620 565 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 (decrease) increase from capital transactions (555,854) 1,263,190 2,845,730 210,998 Net assets at beginning of period 639,707 4,168,592 679,037 108,348 ------------------------------------------------------------------ Net assets at end of period $ 58,894 $ 6,789,451 $3,508,800 $ 325,006 ------------------------------------------------------------------ ------------------------------------------------------------------ MONTGOMERY STRONG EMERGING MONTGOMERY DISCOVERY MARKETS GROWTH FUND II -------------------------------------------------- OPERATIONS Dividend income $ 1,019 $ 27,444 $ 28,115 Mortality and expense and administrative charges (2,277) (5,823) (2,038) Net realized (loss) gain on investments (251,784) 63,647 17,142 Net unrealized (depreciation) appreciation of investments during the period 12,116 (104,066) 17,556 -------------------------------------------------- Net (decrease) increase in net assets resulting from operations (240,926) (18,798) 60,775 CAPITAL TRANSACTIONS Purchase of Variable Account units 3,568,166 958,991 8,735,012 Redemption of Variable Account units (3,677,901) (2,080,709) (8,549,511) Mortality and expense and administrative charges redeemed 2,277 5,823 2,038 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 (decrease) increase from capital transactions (107,458) (1,115,895) 187,539 Net assets at beginning of period 657,547 1,903,023 236,792 -------------------------------------------------- Net assets at end of period $ 309,163 $ 768,330 $ 485,106 -------------------------------------------------- --------------------------------------------------
SEE ACCOMPANYING NOTES. 11 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1998
AMERICAN AMERICAN STRONG CENTURY VP CENTURY VP INTERNATIONAL II BALANCED GROWTH -------------------------------------------------- OPERATIONS Dividend income $ 4,316 $ 97,253 $ 5,760 Mortality and expense and administrative charges (1,711) (2,774) (2,218) Net realized gain (loss) on investments 62,354 (77,370) 67,659 Net unrealized appreciation (depreciation) of investments during the period 9,766 86,667 32,986 -------------------------------------------------- Net increase (decrease) in net assets resulting from operations 74,725 103,776 104,187 CAPITAL TRANSACTIONS Purchase of Variable Account units 11,439,550 3,176,516 22,191,371 Redemption of Variable Account units (11,526,224) (2,521,079) (22,309,476) Mortality and expense and administrative charges redeemed 1,711 2,774 2,218 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 (decrease) increase from capital transactions (84,963) 658,211 (115,887) Net assets at beginning of period 330,805 566,623 141,757 -------------------------------------------------- Net assets at end of period $ 320,567 $ 1,328,610 $ 130,057 -------------------------------------------------- -------------------------------------------------- VAN ECK NEUBERGER & VAN ECK WORLDWIDE BERMAN AMT NEUBERGER & WORLDWIDE BOND HARD ASSETS LIMITED MATURITY BERMAN AMT FUND FUND BOND PARTNERS ----------------------------------------------------------------- OPERATIONS Dividend income $ 7,031 $ 146,361 $ 23,272 $ 123,635 Mortality and expense and administrative charges (2,373) (3,044) (2,433) (4,346) Net realized gain (loss) on investments 45,162 (314,422) (4,949) (90,988) Net unrealized appreciation (depreciation) of investments during the period 5,746 (47,362) 3,288 (45,410) ----------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 55,566 (218,467) 19,178 (17,109) CAPITAL TRANSACTIONS Purchase of Variable Account units 3,619,169 4,113,612 1,490,835 1,326,782 Redemption of Variable Account units (3,073,617) (4,849,914) (1,173,233) (1,051,703) Mortality and expense and administrative charges redeemed 2,373 3,044 2,433 4,346 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 (decrease) increase from capital transactions 547,925 (733,258) 320,035 279,425 Net assets at beginning of period 278,607 1,323,208 336,187 590,553 ----------------------------------------------------------------- ----------------------------------------------------------------- Net assets at end of period $ 882,098 $ 371,483 $ 675,400 $ 852,869 ----------------------------------------------------------------- -----------------------------------------------------------------
SEE ACCOMPANYING NOTES. 12 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1998
INVESCO INVESCO HEALTH & INDUSTRIAL INVESCO COMBINED VARIABLE SCIENCES INCOME TECHNOLOGY ACCOUNT -------------------------------------------------------------------------- OPERATIONS Dividend income $ 45,713 $ 25,527 $ 5,212 $ 75,909,056 Mortality and expense and administrative charges (4,325) (2,272) (2,193) (34,619,507) Net realized gain (loss) on investments 83,990 (17,099) (30,307) 71,607,287 Net unrealized appreciation (depreciation) of investments during the period 170,413 32,862 160,236 240,978,559 -------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 295,791 39,018 132,948 353,875,395 CAPITAL TRANSACTIONS Purchase of Variable Account units 5,191,549 1,055,446 4,726,295 1,169,049,337 Redemption of Variable Account units (3,777,233) (893,692) (3,791,287) (950,418,556) Mortality and expense and administrative charges redeemed 4,325 2,272 2,193 34,619,507 Funding of subaccount by Fortis Benefits Insurance Company - - - 12,450,000 Redemption of Fortis Benefits Insurance Company investment in subaccount - - - (13,675,098) Dividend income distribution to Fortis Benefits Insurance Company - - - (674,351) -------------------------------------------------------------------------- Net increase (decrease) from capital transactions 1,418,641 164,026 937,201 251,350,839 Net assets at beginning of period 153,663 337,492 168,898 2,332,292,685 -------------------------------------------------------------------------- Net assets at end of period $ 1,868,095 $ 540,536 $ 1,239,047 $2,937,518,919 -------------------------------------------------------------------------- --------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 13 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets Year ended December 31, 1997
FORTIS U.S. FORTIS GROWTH GOVERNMENT FORTIS MONEY FORTIS ASSET STOCK SECURITIES MARKET ALLOCATION --------------------------------------------------------------- OPERATIONS Dividend income $ 49,675 $ 9,784,129 $ 2,375,151 $ 60,002,739 Mortality and expense and administrative charges (7,089,187) (1,875,555) (750,583) (5,433,367 Net realized gain (loss) on investments 20,147,178 (347,001) 820,447 6,303,022 Net unrealized appreciation (depreciation) of investments during the period 41,012,209 2,402,114 (304,737) 7,447,945 --------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 54,119,875 9,963,687 2,140,278 68,320,339 CAPITAL TRANSACTIONS Purchase of Variable Account units 11,292,630 5,975,823 49,678,086 25,706,170 Redemption of Variable Account units (53,729,345) (38,528,792) (58,875,709) (27,015,058 Mortality and expense and administrative charges redeemed 7,089,187 1,875,555 750,583 5,433,367 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 (decrease) increase from capital transactions (35,347,528) (30,677,414) (8,447,040) 4,124,479 Net assets at beginning of period 507,916,391 153,538,606 55,044,510 366,021,085 --------------------------------------------------------------- Net assets at end of period $526,688,738 $132,824,879 $ 48,737,748 $438,465,903 --------------------------------------------------------------- --------------------------------------------------------------- FORTIS FORTIS DIVERSIFIED FORTIS GLOBAL AGGRESSIVE INCOME GROWTH GROWTH ----------------------------------------------- OPERATIONS Dividend income $ 6,905,359 $ - $ 1,231 Mortality and expense and administrative charges (1,307,512) (3,682,512) (1,052,753) Net realized gain (loss) on investments 177,507 5,836,551 102,856 Net unrealized appreciation (depreciation) of investments during the period 2,515,054 12,455,062 2,161,309 ----------------------------------------------- Net increase (decrease) in net assets resulting from operations 8,290,408 14,609,101 1,212,643 CAPITAL TRANSACTIONS Purchase of Variable Account units 3,115,896 19,063,321 14,369,199 Redemption of Variable Account units (14,932,392) (19,838,860) (5,395,939) Mortality and expense and administrative charges redeeme 1,307,512 3,682,512 1,052,753 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 (decrease) increase from capital transactions (10,508,984) 2,906,973 10,026,013 Net assets at beginning of period 100,281,675 258,026,237 75,519,214 ----------------------------------------------- Net assets at end of period $ 98,063,099 $275,542,311 $ 86,757,870 ----------------------------------------------- -----------------------------------------------
SEE ACCOMPANYING NOTES. 14 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1997
FORTIS GROWTH FORTIS HIGH FORTIS GLOBAL FORTIS GLOBAL & INCOME YIELD ASSET ALLOCATION BOND -------------------------------------------------------------- OPERATIONS Dividend income $ 6,654,164 $ 71,851 $ 2,358,159 $ 805,285 Mortality and expense and administrative charges (2,311,419) (641,985) (489,857) (172,763) Net realized gain (loss) on investments 1,120,673 85,907 218,706 (68,168) Net unrealized appreciation (depreciation) of investments during the period 33,449,045 4,156,960 2,537,910 (676,900) -------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 38,912,463 3,672,733 4,624,918 (112,546) CAPITAL TRANSACTIONS Purchase of Variable Account units 56,082,796 14,037,885 9,248,738 2,704,435 Redemption of Variable Account units (4,951,613) (3,986,387) (1,791,957) (2,463,332) Mortality and expense and administrative charges redeemed 2,311,419 641,983 489,857 172,763 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 - - (193,973) (128,042) -------------------------------------------------------------- Net increase (decrease) from capital transactions 53,442,602 10,693,483 7,752,665 285,824 Net assets at beginning of period 122,087,921 39,813,044 33,676,273 18,623,272 -------------------------------------------------------------- Net assets at end of period $214,442,986 $ 54,179,260 $ 46,053,856 $ 18,796,550 -------------------------------------------------------------- -------------------------------------------------------------- FORTIS INTERNATIONAL FORTIS STOCK FORTIS VALUE S & P 500 ----------------------------------------------- OPERATIONS Dividend income $ 2,559,479 $ 2,718,491 $ 1,361,090 Mortality and expense and administrative charges (684,830) (377,532) (607,630) Net realized gain (loss) on investments 309,917 61,399 831,297 Net unrealized appreciation (depreciation) of investments during the period 2,974,721 3,471,343 9,928,599 ----------------------------------------------- Net increase (decrease) in net assets resulting from operations 5,159,287 5,873,701 11,513,356 CAPITAL TRANSACTIONS Purchase of Variable Account units 16,326,079 29,249,997 82,381,056 Redemption of Variable Account units (2,103,233) (695,317) (23,769,708) Mortality and expense and administrative charges redeemed 684,830 377,532 607,630 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 (157,141) (21,662) (79,618) ----------------------------------------------- Net increase (decrease) from capital transactions 14,750,535 28,910,550 59,139,360 Net assets at beginning of period 43,469,557 12,648,523 18,536,048 ----------------------------------------------- Net assets at end of period $ 63,379,379 $ 47,432,774 $ 89,188,764 ----------------------------------------------- -----------------------------------------------
SEE ACCOMPANYING NOTES. 15 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1997
NORWEST NORWEST FORTIS BLUE NORWEST INTERMEDIATE SMALL COMPANY CHIP STOCK VALUGROWTH BOND STOCK --------------------------------------------------------------- OPERATIONS Dividend income $ 293,654 $ 579,724 $ 633,659 $ 1,503,400 Mortality and expense and administrative charges (447,570) (221,359) (101,678) (95,073) Net realized gain (loss) on investments 107,559 104,535 2,550 25,285 Net unrealized appreciation (depreciation) of investments during the period 8,118,339 2,305,264 165,968 (863,445) --------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 8,071,982 2,768,164 700,499 570,167 CAPITAL TRANSACTIONS Purchase of Variable Account units 42,777,440 8,653,105 3,293,135 5,021,855 Redemption of Variable Account units (832,257) (476,484) (779,906) (276,048) Mortality and expense and administrative charges redeemed 447,570 221,359 101,678 95,073 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 (58,517) - - - --------------------------------------------------------------- Net increase (decrease) from capital transactions 42,334,236 8,397,980 2,614,907 4,840,880 Net assets at beginning of period 14,688,036 10,495,280 5,865,200 6,094,981 --------------------------------------------------------------- Net assets at end of period $ 65,094,254 $ 21,661,424 $ 9,180,606 $ 11,506,028 --------------------------------------------------------------- --------------------------------------------------------------- NORWEST INCOME SCUDDER ALLIANCE MONEY EQUITY INTERNATIONAL MARKET ----------------------------------------------- OPERATIONS Dividend income $ 330,791 $ 89,071 $ 375,670 Mortality and expense and administrative charges (305,439) (66,114) (33,431) Net realized gain (loss) on investments 38,572 40,064 - Net unrealized appreciation (depreciation) of investments during the period 4,243,198 164,076 - ----------------------------------------------- Net increase (decrease) in net assets resulting from operations 4,307,122 227,097 342,239 CAPITAL TRANSACTIONS Purchase of Variable Account units 25,830,279 2,768,738 168,171,990 Redemption of Variable Account units (309,223) (302,454) (167,088,962) Mortality and expense and administrative charges redeemed 305,439 66,114 33,431 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 25,826,495 2,532,398 1,116,459 Net assets at beginning of period 9,675,189 3,425,231 5,593,809 ----------------------------------------------- Net assets at end of period $ 39,808,806 $ 6,184,726 $ 7,052,507 ----------------------------------------------- -----------------------------------------------
SEE ACCOMPANYING NOTES. 16 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1997
ALLIANCE ALLIANCE SAFECO SAFECO INTERNATIONAL PREMIER GROWTH GROWTH EQUITY -------------------------------------------------------------- OPERATIONS Dividend income $ 19,713 $ 954 $ 506,511 $ 102,844 Mortality and expense and administrative charges (4,653) (4,656) (4,146) (4,251) Net realized gain (loss) on investments 524,319 185,183 260,166 21,442 Net unrealized appreciation (depreciation) of investments during the period 25,774 12,341 (501,499) (19,125) -------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 565,153 193,822 261,032 100,910 CAPITAL TRANSACTIONS Purchase of Variable Account units 65,480,879 13,005,720 13,595,285 4,689,201 Redemption of Variable Account units (63,692,893) (11,432,296) (10,315,753) (3,551,876) Mortality and expense and administrative charges redeemed 4,653 4,656 4,146 4,251 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 1,792,639 1,578,080 3,283,678 1,141,576 Net assets at beginning of period 298,024 231,690 189,755 196,581 -------------------------------------------------------------- Net assets at end of period $ 2,655,816 $ 2,003,592 $ 3,734,465 $ 1,439,067 -------------------------------------------------------------- -------------------------------------------------------------- FEDERATED U.S. FEDERATED GOVERNMENT HIGH INCOME FEDERATED SECURITIES II * BOND FUND II UTILITY II ------------------------------------------------- OPERATIONS Dividend income $ 3,957 $ 67,548 $ 4,035 Mortality and expense and administrative charges (265) (3,413) (1,118) Net realized gain (loss) on investments (1,381) 120,901 48,748 Net unrealized appreciation (depreciation) of investments during the period 784 31,419 44,341 ------------------------------------------------- Net increase (decrease) in net assets resulting from operations 3,095 216,455 96,006 CAPITAL TRANSACTIONS Purchase of Variable Account units 1,957,483 7,473,177 8,386,519 Redemption of Variable Account units (1,747,421) (6,024,386) (7,031,477) Mortality and expense and administrative charges redeemed 265 3,413 1,118 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 210,327 1,452,204 1,356,160 Net assets at beginning of period - 914,407 198,012 ------------------------------------------------- Net assets at end of period $ 213,422 $ 2,583,066 $ 1,650,178 ------------------------------------------------- -------------------------------------------------
*For the period from May 1, 1997 to December 31, 1997. SEE ACCOMPANYING NOTES. 17 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1997
LEXINGTON FEDERATED NATURAL LEXINGTON AMERICAN RESOURCES EMERGING LEADERS II TRUST MARKETS ------------------------------------------------ OPERATIONS Dividend income $ 11,802 $ 37,809 $ 238 Mortality and expense and administrative charges (6,487) (4,044) (1,766) Net realized gain (loss) on investments 366,916 147,314 22,277 Net unrealized appreciation (depreciation) of investments during the period 87,367 (60,160) 13,703 ------------------------------------------------ Net increase (decrease) in net assets resulting from operations 459,598 120,919 34,452 CAPITAL TRANSACTIONS Purchase of Variable Account units 20,909,386 7,675,556 10,873,736 Redemption of Variable Account units (18,677,016) (7,422,947) (10,335,967) Mortality and expense and administrative charges redeemed 6,487 4,044 1,766 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 2,238,857 256,653 539,535 Net assets at beginning of period 494,990 778,755 65,720 ------------------------------------------------ Net assets at end of period $ 3,193,445 $ 1,156,327 $ 639,707 ------------------------------------------------ ------------------------------------------------ MONTGOMERY MFS EMERGING MFS HIGH MFS WORLD EMERGING GROWTH INCOME GOVERNMENT MARKETS --------------------------------------------------------------- OPERATIONS Dividend income $ 5,222 $ - $ 3,011 $ 585 Mortality and expense and administrative charges (8,094) (3,208) (888) (2,178) Net realized gain (loss) on investments 278,077 64,089 (9,538) 17,971 Net unrealized appreciation (depreciation) of investments during the period 124,482 28,378 (237) (9,020) --------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 399,687 89,259 (7,652) 7,358 CAPITAL TRANSACTIONS Purchase of Variable Account units 50,380,648 2,109,055 4,223,973 7,351,843 Redemption of Variable Account units (48,657,063) (1,917,469) (4,151,384) (6,894,401) Mortality and expense and administrative charges redeemed 8,094 3,208 888 2,178 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 1,731,679 194,794 73,477 459,620 Net assets at beginning of period 2,037,226 394,984 42,523 190,569 --------------------------------------------------------------- Net assets at end of period $ 4,168,592 $ 679,037 $ 108,348 $ 657,547 --------------------------------------------------------------- ---------------------------------------------------------------
SEE ACCOMPANYING NOTES. 18 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1997
STRONG STRONG MONTGOMERY DISCOVERY GOVERNMENT STRONG GROWTH FUND II SECURITIES II ADVANTAGE II -------------------------------------------------------------- OPERATIONS Dividend income $ 80,509 $ - $ 4,238 $ 6,644 Mortality and expense and administrative charges (2,758) (673) (446) (122) Net realized gain (loss) on investments 110,597 6,584 1,688 6,199 Net unrealized appreciation (depreciation) of investments during the period 156,818 (12,707) 277 1,352 -------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 345,166 (6,796) 5,757 14,073 CAPITAL TRANSACTIONS Purchase of Variable Account units 4,720,065 1,491,187 192,449 40,789 Mortality and expense and administrative charges redeemed (4,059,313) (1,339,858) (267,953) (356,157) Mortality and expense and administrative charges redeemed 2,758 673 446 122 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 663,510 152,002 (75,058) (315,246) Net assets at beginning of period 894,347 91,586 69,301 301,173 -------------------------------------------------------------- Net assets at end of period $ 1,903,023 $ 236,792 $ - $ - -------------------------------------------------------------- -------------------------------------------------------------- AMERICAN AMERICAN STRONG CENTURY VP CENTURY INTERNATIONAL II BALANCED VP GROWTH ------------------------------------------------- OPERATIONS Dividend income $ 25,600 $ 8,363 $ 2,139 Mortality and expense and administrative charges (2,462) (1,284) (355) Net realized gain (loss) on investments (1,178) (65,865) 32,718 Net unrealized appreciation (depreciation) of investments during the period (11,451) 51 (7,181) ------------------------------------------------- Net increase (decrease) in net assets resulting from operations 10,509 (58,735) 27,321 CAPITAL TRANSACTIONS Purchase of Variable Account units 13,896,848 9,336,521 5,761,482 Mortality and expense and administrative charges redeemed (13,937,360) (8,825,530) (5,717,321) Mortality and expense and administrative charges redeemed 2,462 1,284 355 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 (38,050) 512,275 44,516 Net assets at beginning of period 358,346 113,083 69,920 ------------------------------------------------- Net assets at end of period $ 330,805 $ 566,623 $ 141,757 ------------------------------------------------- -------------------------------------------------
SEE ACCOMPANYING NOTES. 19 Fortis Benefits Insurance Company Variable Account D Statements of Changes in Net Assets (continued) Year ended December 31, 1997
VAN ECK NEUBERGER & VAN ECK WORLDWIDE BERMAN AMT NEUBERGER & WORLDWIDE HARD ASSETS LIMITED BERMAN AMT BOND FUND FUND MATURITY BOND* PARTNERS* --------------------------------------------------------------- OPERATIONS Dividend income $ 1,403 $ 21,541 $ - $ - Mortality and expense and administrative charges (1,009) (4,933) (742) (1,259) Net realized gain (loss) on investments 15,991 176,670 8,178 12,902 Net unrealized appreciation (depreciation) of investments during the period 325 (76,669) 1,593 17,027 --------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 16,710 116,609 9,029 28,670 CAPITAL TRANSACTIONS Purchase of Variable Account units 2,437,708 13,173,938 3,132,473 1,237,645 Redemption of Variable Account units (2,213,520) (12,443,877) (2,806,057) (677,021) Mortality and expense and administrative charges redeemed 1,009 4,933 742 1,259 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 225,197 734,994 327,158 561,883 Net assets at beginning of period 36,700 471,605 - - --------------------------------------------------------------- Net assets at end of period $ 278,607 $ 1,323,208 $ 336,187 $ 590,553 --------------------------------------------------------------- --------------------------------------------------------------- INVESCO INVESCO HEALTH & INDUSTRIAL INVESCO COMBINED SCIENCES* INCOME* TECHNOLOGY* VARIABLE ACCOUNT ------------------------------------------------------------ OPERATIONS Dividend income $ 1,508 $ 23,677 $ - $ 100,392,623 Mortality and expense and administrative charges (293) (361) (393) (27,814,406) Net realized gain (loss) on investments (3,047) 5,339 1,683 38,273,799 Net unrealized appreciation (depreciation) of investments during the period 3,774 (13,577) (5,452) 137,496,762 ------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 1,942 15,078 (4,162) 248,348,778 CAPITAL TRANSACTIONS Purchase of Variable Account units 664,230 512,375 1,293,756 871,752,580 Redemption of Variable Account units (512,802) (190,322) (1,121,089) (684,463,505) Mortality and expense and administrative charges redeemed 293 361 393 27,814,406 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 - - - (638,953) ------------------------------------------------------------ Net increase (decrease) from capital transactions 151,721 322,414 173,060 214,464,528 Net assets at beginning of period - - - 1,869,479,379 ------------------------------------------------------------ Net assets at end of period $ 153,663 $ 337,492 $ 168,898 $2,332,292,685 ------------------------------------------------------------ ------------------------------------------------------------
*For the period from May 1, 1997 to December 31, 1997. SEE ACCOMPANYING NOTES. 20 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements December 31, 1998 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, Norwest Passage Variable Annuity, Masters Variable Annuity and Value Advantage Plus Variable Annuity. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The assets of the Account are segregated from Fortis Benefits' other assets. The operations of the Account are part of Fortis Benefits. The following is a summary of significant accounting policies consistently followed by the Account in the preparation of its financial statements. INVESTMENT TRANSACTIONS Capital gain distributions from subaccounts are recorded on the ex-dividend date and reinvested upon receipt. INVESTMENT INCOME Dividend income distributions from subaccounts are recorded on the ex-dividend date and reinvested upon receipt. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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 amounts of net increase and decrease in net assets from operations during the reporting period. Actual results could differ from these estimates. 21 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 3. INVESTMENTS There were fifty-two subaccounts within the Account. Investment in shares of the Fortis Series Fund, Inc. (the Series) subaccounts are stated at market value, which is based on the percentage owned by the Account of the net asset value of the respective portfolios of these Series. The Series' net asset value is based on market quotations of the securities held in the portfolio. Investments in the other subaccounts are valued at the net asset (market) value per share at the close of business on December 31, as reported by the respective mutual fund. The cost of investments sold and redeemed is determined on the average cost method. Unrealized appreciation or depreciation of investments represents the Account's share of the subaccounts' undistributed net investment income, undistributed realized gains or losses and unrealized appreciation or depreciation. Purchases and sales of shares of the Fund are recorded on the trade date. 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, 1998 SHARES ---------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS ------------------------------------------------------------------- Fortis Series Fund, Inc.: Growth Stock 1,004,034 2,196,640 $ 34,564,496 $ 49,323,884 U.S. Government Securities 3,437,980 2,901,372 37,574,748 31,231,425 Money Market 5,363,997 3,716,023 59,807,526 41,094,061 Asset Allocation 2,001,168 1,458,017 39,169,557 21,805,287 Diversified Income 1,549,018 782,457 18,578,490 9,205,964 Global Growth 285,660 2,261,137 5,881,403 32,137,640 Aggressive Growth 487,885 901,804 6,949,264 11,448,325 Growth & Income 1,726,589 629,713 34,640,523 9,208,139 High Yield 2,152,596 667,421 22,332,030 6,851,079 Global Asset Allocation 936,706 250,285 13,387,020 3,303,440 Global Bond 631,500 440,320 7,223,628 4,874,924 International Stock 1,503,232 902,541 22,109,990 10,559,299 Value 1,993,402 477,833 28,301,911 5,961,110 S & P 500 6,188,109 1,534,358 103,691,257 21,915,415 Blue Chip Stock 3,595,998 155,356 59,682,314 2,458,315 Mid Cap Stock 1,205,928 26,346 11,065,855 244,582 Large Cap Growth 1,260,680 22,820 12,882,373 236,243 Small Cap Value 1,598,441 74,837 14,760,208 679,909
22 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 (CONTINUED) SHARES ---------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS ------------------------------------------------------------------- Norwest Select Fund: ValuGrowth 660,500 120,742 $ 10,080,966 $ 1,743,062 Income Bond 1,183,655 82,025 15,190,412 975,994 Small Company Stock 517,603 197,617 6,364,683 2,267,785 Income Equity 2,588,219 119,655 38,818,850 1,566,941 Scudder Variable Life Investment Fund: International 195,728 58,024 2,707,547 757,852 AIM Variable Insurance Funds, Inc.: V.I. Value Fund 193,718 4,299 4,614,430 102,326 V.I. International Equity 83,290 3,047 1,610,547 59,224 Alliance Variable Product Series: Money Market 277,309,836 267,800,970 277,309,836 267,800,970 International 6,931,865 7,035,341 113,161,466 114,619,502 Premier Growth 1,715,690 1,530,908 44,442,119 38,957,251 SAFECO Resource Series: Growth 1,515,642 1,412,953 38,859,385 37,036,558 Equity 184,338 165,126 5,124,882 4,456,822 Federated Insurance Series: U.S. Government Securities II 820,671 746,374 8,905,396 8,074,854 High Income Bond Fund II 1,126,285 1,022,148 12,186,466 11,127,120 Utility II 479,568 523,631 6,847,132 7,410,506 American Leaders II 1,344,922 1,430,779 26,630,270 28,235,656 Lexington Funds, Inc.: Natural Resources Trust 126,536 155,785 1,803,493 2,321,670 Emerging Markets 200,566 261,939 1,660,324 2,220,131 MFS Variable Insurance Trust: Emerging Growth 1,634,214 1,576,261 29,099,913 27,298,816 High Income 494,434 245,098 5,823,056 2,923,331 World Government 135,626 116,366 1,431,215 1,215,758 Montgomery Variable Funds: Emerging Markets 454,651 469,946 3,569,185 3,929,685 Growth 63,835 140,023 986,435 2,017,062 Strong Variable Insurance Funds: Discovery II 675,218 656,764 8,763,127 8,532,369 International II 1,257,834 1,256,817 11,443,866 11,463,870
23 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 (CONTINUED) SHARES ---------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS -------------------------------------------------------------------- American Century Investments: VP Balanced 407,610 317,069 $ 3,273,769 $ 2,598,449 VP Growth 2,372,711 2,372,936 22,197,131 22,241,817 Van Eck Worldwide Insurance Trust: Worldwide Bond Fund 305,599 259,118 3,626,200 3,028,455 Worldwide Hard Assets Fund 328,539 372,387 4,259,973 5,164,336 Neuberger & Berman, Inc.: AMT Limited Maturity Bond 110,676 85,614 1,514,107 1,178,182 AMT Partners 73,345 56,959 1,450,417 1,142,691 INVESCO, Inc.: Health & Sciences 396,457 288,098 5,237,262 3,693,243 Industrial Income 59,410 50,171 1,080,973 910,791 Technology 377,427 305,735 4,731,507 3,821,594
YEAR ENDED DECEMBER 31, 1997 SHARES ---------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS -------------------------------------------------------------------- Fortis Series Fund, Inc.: Growth Stock 335,736 1,531,197 $ 11,342,305 $ 33,582,166 U.S. Government Securities 1,516,213 3,606,464 15,759,952 38,875,792 Money Market 4,699,565 5,310,661 52,053,237 58,055,261 Asset Allocation 4,812,001 1,449,334 85,708,909 20,712,037 Diversified Income 865,982 1,255,212 10,021,255 14,754,885 Global Growth 995,381 999,116 19,063,321 14,002,309 Aggressive Growth 1,136,613 420,068 14,370,430 5,293,083 Growth & Income 3,670,172 288,495 62,736,960 3,830,940 High Yield 1,365,421 386,498 14,109,736 3,900,480 Global Asset Allocation 869,773 147,998 11,606,897 1,767,225 Global Bond 309,549 239,582 3,509,720 2,659,542 International Stock 1,405,870 168,466 18,885,558 1,950,457 Value 2,474,886 56,145 31,968,488 655,579 S & P 500 6,117,672 1,766,129 83,742,146 23,018,029 Blue Chip Stock 3,219,587 67,752 43,071,094 783,215 Norwest Select Fund: ValuGrowth 552,655 28,517 9,232,829 371,949 Intermediate Bond 353,877 70,931 3,926,794 777,355 Small Company Stock 451,498 19,700 6,525,255 250,763 Income Equity 2,067,474 24,292 26,161,070 270,651
24 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SHARES ---------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS -------------------------------------------------------------------- Scudder Variable Life Investment Fund: International 201,696 21,882 $ 2,857,809 $ 262,389 Alliance Variable Product Series: Money Market 168,743,834 167,088,962 168,547,660 167,088,962 International 4,259,167 4,102,363 65,500,592 63,168,574 Premier Growth 659,976 579,278 13,006,674 11,247,113 SAFECO Resource Series: Growth 558,931 408,849 14,101,796 10,055,588 Equity 200,558 150,645 4,792,045 3,530,435 Federated Insurance Series: U.S. Government Securities II 189,579 169,330 1,961,440 1,748,802 High Income Bond Fund II 717,728 571,130 7,540,725 5,903,485 Utility II 654,493 555,782 8,390,554 6,982,730 American Leaders II 1,176,026 1,045,781 20,921,188 18,310,100 Lexington Funds, Inc.: Natural Resources Trust 514,330 491,272 7,713,365 7,275,632 Emerging Markets 1,022,290 957,013 10,873,974 10,313,690 MFS Variable Insurance Trust: Emerging Growth 3,384,527 3,280,119 50,385,870 48,378,986 High Income 180,043 161,398 2,109,055 1,853,381 World Government 415,944 409,351 4,226,984 4,160,922 Montgomery Variable Funds: Emerging Markets 610,961 569,631 7,352,428 6,876,431 Growth 360,865 307,287 4,800,574 3,948,716 Strong Variable Insurance Funds: Discovery II 122,063 110,861 1,491,187 1,333,274 Government Securities II 19,685 26,896 196,687 266,265 Advantage II 4,923 35,492 47,433 349,958 International II 1,239,125 1,235,541 13,922,448 13,938,538 American Century Investments: VP Balanced 1,182,715 1,128,948 9,344,884 8,891,395 VP Growth 566,923 559,107 5,763,621 5,684,603
25 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SHARES ---------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS -------------------------------------------------------------------- Van Eck Worldwide Insurance Trust: Worldwide Bond Fund 227,792 205,747 $ 2,439,111 $ 2,197,529 Worldwide Hard Assets Fund 807,446 751,425 13,195,479 12,267,207 Neuberger & Berman, Inc.: AMT Limited Maturity Bond 226,730 202,921 3,132,473 2,797,879 AMT Partners 62,683 34,016 1,237,645 664,119 INVESCO, Inc.: Health & Sciences 63,755 49,852 665,738 515,849 Industrial Income 30,556 10,750 536,052 184,983 Technology 114,405 99,648 1,293,756 1,119,404
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, 1998:
COST OF SHARES SHARES ---------------------------------------- Fortis Series Fund, Inc.: Global Asset Allocation 295,866 $ 3,157,156 Global Bond 518,788 5,284,827 Blue Chip Stock 341,964 3,476,065 Mid Cap Stock 415,011 4,149,550 Large Cap Growth 415,001 4,150,216 Small Cap Value 415,035 4,144,455
26 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 4. ORGANIZATIONAL EXPENSES AND OTHER CHARGES ORGANIZATION EXPENSES Fortis Benefits assumes all organizational expenses of the Account. ADMINISTRATION CHARGE A $35 annual contract administrative charge is deducted each contract year from the value of each Opportunity Variable Annuity and Masters Variable Annuity and $30 for each EmPower Variable Annuity, Norwest Passage Variable Annuity and Value Advantage Plus Variable 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 Norwest Passage Variable Annuity and $100,000 for the EmPower Variable Annuity. In addition, Fortis Benefits assesses each subaccount of the Opportunity Variable Annuity and Masters Variable Annuity a daily charge for administrative expense at annual rate of 0.10% of the net assets. For the EmPower Variable Annuity and Norwest Passage Variable Annuity the daily charge is assessed at an annual rate of 0.15%. MORTALITY AND EXPENSE RISK CHARGE Fortis Benefits assesses each subaccount of the Opportunity Variable Annuity, Masters Variable Annuity and Norwest 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 mortality and expense risk charge is assessed at an annual rate of 1.10%. For the Value Advantage Plus Variable Annuity the mortality and expense risk charge is assessed at an annual rate of 0.45%. 27 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 5. SURRENDER AND PREMIUM TAX CHARGES FREE SURRENDERS The following amounts can be withdrawn from the contract without a surrender charge: - Any purchase payments received more than five years prior to the surrender date for Opportunity Variable Annuity and seven years for Masters Variable Annuity and have not been previously surrendered. - 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 and seven years prior to the surrender date for Masters Variable Annuity. - For Masters Variable Annuity any earnings that have not been previously surrendered. - For EmPower Variable Annuity and Value Advantage Plus Variable Annuity there is no surrender charge. AMOUNT OF SURRENDER CHARGE Surrender charges apply only if the amount being withdrawn exceeds the sum of the amounts listed above 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% during the first five years on the Opportunity Variable Annuity and Norwest Passage Variable Annuity contracts with a sliding scale down to zero by the end of the fifth year, and is set at 7% during the first seven years of the Masters Variable Annuity contracts, with a sliding scale down to zero by the end of the seventh year. 28 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 5. SURRENDER AND PREMIUM TAX CHARGES (CONTINUED) PREMIUM TAXES Where premium taxes or similar assessments are imposed by states or other jurisdiction upon receipt of purchase payments, Fortis Benefits pays such taxes on behalf of the contract owner and then 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 jurisdiction 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. Surrender and premium tax charges are included in redemptions and are paid directly to Fortis Benefits. The surrender and premium tax charges collected by Fortis Benefits were $4,332,105 and $3,567,880 in 1998 and 1997, 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 $17,790,513 and $14,415,172 in 1998 and 1997, respectively. 29 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 8. YEAR 2000 ISSUE (UNAUDITED) The Year 2000 issue is the result of computer programs having been written using two digits rather than four to define a year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than 2000. This could result in the failure of major systems or miscalculations, which could have a material impact on the operations of the Account. The Account has no computer systems of its own but is dependent upon the systems of Fortis Benefits Insurance Company, Fortis Advisers and certain other third parties. A comprehensive review of Fortis Benefits' and Fortis Advisers' computer systems and business processes has been conducted to identify the major systems that could be affected by the Year 2000 issue. Steps are being taken to resolve any potential problems including modification to existing software and the purchase of new software. These measures are scheduled to be completed and tested on a timely basis. Fortis Benefits' and Fortis Advisers' goal is to complete internal remediation and testing of each system by mid 1999. The costs related to the Year 2000 issue are not expected to have a material impact on Fortis Benefits' and Fortis Advisers' results of operations or financial condition. This expectation is subject to uncertainties that could cause actual results to differ materially. Factors that could influence the total costs to be incurred by Fortis Benefits and Fortis Advisers in connection with the Year 2000 issue include the ability of Fortis Benefits and Fortis Advisers to successfully identify systems containing two-digit year codes, the nature and amount of programming required to fix the affected programs, the related labor and consulting costs for such remediation, and the ability of third parties that interface with Fortis Benefits and Fortis Advisers to successfully address their Year 2000 issues. Fortis Benefits and Fortis Advisers are evaluating the Year 2000 readiness of advisors and other third parties whose system failures could have an impact on Fortis Benefits' and Fortis Advisers' operations. The potential materiality of any such impact is not entirely known at this time. Fortis Benefits and Fortis Advisers are closely monitoring these entities to avoid any unforeseen circumstances. 30 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 8. YEAR 2000 ISSUE (UNAUDITED) (CONTINUED) Fortis Benefits' and Fortis Advisers' Year 2000 project includes establishing Year 2000 contingency plans for all key business units. These plans are being developed and are expected to be substantially complete by the end of the first quarter of 1999. These plans will continue to be refined throughout 1999 as additional information related to potential Year 2000 exposure is gathered. 31 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 $ 3,000.00 Accounting fees and expenses $ 1,500.00 Legal fees and expenses $ 3,000.00
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 Fortis Investors, 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 Fortis Investors, Inc. are also officers, directors and controlling persons of Fortis Benefits. Pursuant to the Principal Underwriter and Servicing Agreement, Fortis Investors 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. Item 16. Exhibits 1. (a) 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); (b) 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). 4. (a) Form of Combination Fixed and Variable Annuity Contract to be issued where all owners are less than 61 years old at time of purchase (incorporated by reference from Form N-4 Registration Statement of Fortis Benefits filed on October 2, 1998, File 333-65233; (b) Form of Combination Fixed and Variable Annuity Contract to be issued where one or more owners are 61 years old, or older, at time of purchase (incorporated by reference from Form N-4 Registration Statement of Fortis Benefits filed on October 2, 1998, File 333-65233; (c) Form of IRA Endorsement (incorporated by reference from Pre-Effective Amendment No. 1 to the From N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on March 28, 1991, File No. 33-37577); (d) 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). 5. Opinion and consent of David A. Peterson, Esq., Assistant General Counsel of Fortis Benefits Insurance Company, as to the legality of the securities being registered - filed as a part of Amendment No. 1 to this Form S-2 Registration Statement filed December 18, 1998. 10(a). Fortis, Inc. Executive Incentive Compensation Plan (incorporated by reference from Amendment No. 1 to Form S-1 Registration Statement of Fortis Benefits filed on March 28, 1991, File No. 33-37576). 23. Consent of Ernst & Young LLP - filed herewith. 24. Power of Attorney for Messrs. Freedman, and 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). 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. SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, 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 19th day of April, 1999. FORTIS BENEFITS INSURANCE COMPANY (Registrant) By: _/s/__________________________________ Robert Brian Pollock, President As required by the Securities Act of 1933 and the Investment Company Act of 1940, this Registration Statement has been signed by the following persons, in the capacities indicated, on April 19, 1999. Signature Title With Fortis Benefits - --------- -------------------------- *________________________________ Chairman of the Board Allen Royal Freedman *________________________________ Director J. Kerry Clayton ________________________________ Director Arie Aristide Fakkert ________________________________ Director Alan W. Feagin __/s/___________________________ Director Dean C. Kopperud __/s/___________________________ President and Director Robert Brian Pollock (Chief Executive Officer) __/s/___________________________ Senior Vice President, Controller, Michael John Peninger Treasurer and Director (Principal Accounting Officer and Principal Financial Officer) *By:__/s/________________________ Robert Brian Pollock Attorney-in-Fact EXHIBIT INDEX Item Number Description - ------ ----------- 23 Consent of Independent Auditors EX-23 2 EXHIBIT 23 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 19, 1999 on the financial statements of Fortis Benefits Insurance Company and our report dated March 19, 1999 on the financial statements of Fortis Benefits Insurance Company Variable Account D in Amendment No. 2 to the Registration Statement (Form S-2 No.333-65231) and related Prospectus and Statement of Additional Information of Fortis Benefits Insurance Company for the registration of flexible premium deferred combination variable and fixed annuity contracts. /s/ Ernst & Young LLP Minneapolis, Minnesota April 26, 1999 -----END PRIVACY-ENHANCED MESSAGE-----