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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
    FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
Commission file number 033-37576 FORTIS BENEFITS INSURANCE COMPANY (Exact name of registrant as specified in its charter) IOWA(State or Other Jurisdiction
of Incorporation or Organization)
    
    81-0170040(I.R.S. Employer
Identification No.)
 729 INSURANCE EXCHANGE BUILDING
DES MOINES, IOWA(Address of Principal Executive Offices)
    
    50309(Zip Code)
 Registrants telephone number, including area code: (651) 361-4000 Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes o No þ The aggregate market value of the voting and non-voting common equity held by non-affiliates
is not applicable as no public market exists for the voting stock of the registrant. As of March 4, 2005, there were 1,000,000 shares of common stock of the registrant
outstanding, all of which are owned by Assurant, Inc.




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THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTIONS I(1)(A) AND (B) OF FORM 10-K AND IS FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.




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FORTIS BENEFITS INSURANCE COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 TABLE OF CONTENTS Item
    
    
    
    PageNumber
    
    
    
    NumberPART I1.
    
    Business
    
    
    22.
    
    Properties
    
    
    53.
    
    Legal Proceedings
    
    
    54.
    
    Submission of Matters to a Vote of Security Holders
    
    
    5PART II5.
    
    Market for Registrant's Common Equity and Related Stockholder Matters
    
    
    56.
    
    Selected Financial Data
    
    
    57.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    67A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    88.
    
    Financial Statements and Supplementary Data
    
    
    109.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    109A.
    
    Controls and Procedures
    
    
    109B.
    
    Other Information
    
    
    11PART III10.
    
    Directors and Executive Officers of the Registrant
    
    
    1111.
    
    Executive Compensation
    
    
    1112.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    1113.
    
    Certain Relationships and Related Transactions
    
    
    1114.
    
    Principal Accountant Fees and Services
    
    
    11PART IV15.
    
    Exhibits and Financial Statement Schedules
    
    
    12Signatures
    
    
    15EX-3.6: RESTATED BY-LAWSEX-24.1: POWER OF ATTORNEYEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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FORWARD-LOOKING STATEMENTS Some of the statements under Business, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and elsewhere in this report may contain forward-looking
statements which reflect our current views with respect to, among other things, future events and
financial performance. You can identify these forward-looking statements by the use of
forward-looking words such as outlook, believes, expects, potential, continues, may,
will, should, seeks, approximately, predicts, intends, plans, estimates,
anticipates or the negative version of those words or other comparable words. Any
forward-looking statements contained in this report are based upon our historical performance and
on current plans, estimates and expectations. The inclusion of this forward looking information
should not be regarded as a representation by us or any other person that the future plans,
estimates or expectations contemplated by us will be achieved. Such forward-looking statements are
subject to various risks and uncertainties. Accordingly, there are or will be important factors
that could cause our actual results to differ materially from those indicated in this report. We
believe that these factors include but are not limited to those described under the subsection
entitled Risk Factors in Managements Discussion and Analysis of Financial Condition and Results
of Operations. These factors should not be construed as exhaustive and should be read in
conjunction with the other cautionary statements that are included in this report. We undertake no
obligation to publicly update or review any forward-looking statement, whether as a result of new
information, future developments or otherwise. If one or more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary materially from what we projected. Any
forward-looking statements you read in this report reflect our current views with respect to future
events and are subject to these and other risks, uncertainties and assumptions relating to our
operations, results of operations, financial condition, growth strategy and liquidity. 1




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PART I 
 Item 1.Business Fortis Benefits is a stock life insurance company formed in 1910 and organized under the laws
of the State of Iowa. It is an indirect wholly owned subsidiary of Assurant, Inc. (Assurant), which
owns and operates a number of companies that provide insurance products and related services in
North America and selected other markets. Assurant, a Delaware corporation, completed an initial
public offering of its common stock in February 2004, and its common stock now trades on The New
York Stock Exchange. Prior to the initial public offering, Fortis, Inc., a Nevada corporation, had
formed Assurant and merged into it on February 4, 2004. The merger was done in order to
redomesticate Fortis, Inc. from Nevada to Delaware and to change its name. As a result of the
merger, Assurant is the successor to the business operations and obligations of Fortis, Inc. Fortis
Benefits has been a wholly owned subsidiary of Fortis, Inc. since 1984. In this report, references to the Company, Fortis Benefits, we, us or our refer to
Fortis Benefits Insurance Company. Also, in this report, references to Assurant refer to Fortis,
Inc. and its subsidiaries prior to the merger described above, and Assurant, Inc. and its
subsidiaries after the consummation of the merger described above. 2




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Assurant organizes and manages their specialized businesses through four operating business
segments: Operating Business Segment
    
    Principal Products and Services
    
    Principal Distribution ChannelsAssurant SolutionsSpecialty
Property
    
     Creditor-placed homeowners
insurance (including tracking
services)
    
     Mortgage lenders and services Manufactured housing homeowners
insurance
    
     Manufactured housing lenders, dealers
and vertically integrated buildersConsumer
Protection
    
     Debt protection administration
 Credit insurance
    
     Financial institutions (including
credit card issuers) and retailers Warranties and extended service
contracts
    
     Consumer electronics and appliance
retailers
 Vehicle dealerships-Appliances-Automobiles and recreational
vehicles-Consumer electronics-Wireless devicesAssurant HealthIndividual Health
    
     Preferred Provider Organizations
(PPO)
 Short-term medical insurance
 Student medical insurance
    
     Independent agents
 National accounts
 InternetSmall Employer Group Health
    
     PPO
    
     Independent agentsAssurant Employee Benefits
    
     Group dental insurance
- Employer-paid
- Employee-paid
 Group disability insurance
 Group term life insurance
    
     Employee benefit advisors
 Brokers
 DRMS(1)Assurant PreNeed
    
     Pre-funded funeral insurance
    
     Service Corporation International (SCI)
 Independent funeral homes
 (1) DRMS refers to Disability Reinsurance Management Services, Inc., one of our wholly owned
subsidiaries that provides a turnkey facility to other insurers to write principally group
disability insurance. Fortis Benefits, which is licensed to sell life, health and annuity insurance in
the District of Columbia and in all states except New York, writes insurance products that are
marketed by each of Assurants business segments. We perform substantially all of the operations of
Assurant Employee Benefits. We market, sell and administer directly the group disability, group
life and certain of the group dental insurance products, and we manage other Assurant subsidiaries
that provide the prepaid dental products. We also issue many of the preneed life insurance policies
that are marketed, sold and administered by Assurant PreNeed, including in Canada where we are
licensed as a life insurer. With respect to Assurant Health, we issue only small group health
insurance policies that are sold through an independent agency, Rogers Benefit Group. With respect
to Assurant Solutions, we issue accidental death and dismemberment policies for which the segment
performs the selling, marketing, and administration functions. Of our total gross revenues
generated during 2004, approximately 62% were from the Assurant Employee Benefits segment, 3




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approximately 18% from the Assurant PreNeed segment, approximately 14% from the Assurant Health
segment, and approximately 4% from the Assurant Solutions segment. As an indirect wholly owned subsidiary of Assurant, Fortis Benefits does not have any publicly
issued equity or debt securities. We are, however, subject to certain filing requirements of the
Securities Exchange Act of 1934, as amended, because we have issued certain variable and market
value adjusted insurance contracts, which are required to be registered with the SEC as securities.
Effective April 1, 2001, Assurant exited this line of business and sold the business segment, then
referred to as Fortis Financial Group, to The Hartford Financial Services Group, Inc. and certain
of its subsidiaries (The Hartford). This sale was accomplished by means of reinsurance and modified
coinsurance. As a result, The Hartford is contractually responsible for servicing the insurance
contracts, including the payment of benefits, oversight of investment management, overall contract
administration and funding of reserves. If The Hartford fails to fulfill its obligations, however,
we will be obligated to perform the services and make the required payments and funding. Fortis Benefits was redomesticated to Iowa from Minnesota in 2004. RISK FACTORS Fortis Benefits is subject to risks associated with our business. These risks include, among
others:  
    Reliance on Relationships with Significant Clients, Distributors and Other
Parties. If our significant clients, distributors and other parties with which we do
business decline to renew or seek to terminate our relationships or contractual
arrangements, our results of operations and financial condition could be materially
adversely affected. We are also subject to the risk that these parties may face
financial difficulties, reputational issues or problems with respect to their own
products and services, which may lead to decreased sales of products and services.
    Failure to Attract and Retain Sales Representatives or Develop and Maintain
Distribution Sources. Our sales representatives interface with clients and third
party distributors. Our inability to attract and retain our sales representatives or
an interruption in, or changes to, our relationships with various third-party
distributors could impair our ability to compete and market our insurance products
and services and materially adversely affect our results of operations and financial
condition. In addition, our ability to market our products and services depends on
our ability to tailor our channels of distribution to comply with changes in the
regulatory environment.
    Effect of General Economic, Financial Market and Political Conditions. Our
results of operations and financial condition may be materially adversely affected
by general economic, financial market and political conditions, including:  
    insurance industry cycles;
    levels of employment;
    levels of inflation and movements of the financial markets;
    fluctuations in interest rates;
    monetary policy;
    demographics; and
    legislative and competitive factors.  
    Failure to Predict Accurately Benefits and Other Costs and Claims. We may be
unable to predict accurately benefits, claims and other costs or to manage such
costs through our loss limitation methods, which could have a material adverse
effect on our results of operations and financial condition if claims substantially
exceed our expectations. 4




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
    Changes in Regulation. Legislation or other regulatory reform that increases the
regulatory requirements imposed on us or that changes the way we are able to do
business may significantly harm our business or results of operations in the future. As of December 31, 2004, we had approximately 1,500 employees. 
 Item 2.Properties. Our principal office is in Kansas City, Missouri, where we lease approximately 297,000 square
feet of space in a building owned by our parent, Assurant. We also lease from an unrelated party
approximately 70,000 square feet of space in Birmingham, Alabama, which is used to house certain
employees of our dental benefits division. In addition, we have several regional claims and sales
offices throughout the United States. 
 Item 3.Legal Proceedings. We are regularly involved in litigation in the ordinary course of business, both as a
defendant and as a plaintiff. We may from time to time be subject to a variety of legal and
regulatory actions relating to our current and past business operations. While we cannot predict
the outcome of any pending or future litigation, examination or investigation and although no
assurances can be given, we do not believe that any pending matter will have a material adverse
effect on our financial condition or results of operations. 
 Item 4.Submission Of Matters To A Vote Of Security Holders. Not required under reduced disclosure format. 
 Part II 
 Item 5.Market For Registrants Common Equity and Related Stockholder Matters There is no public trading market for our common stock. As of March 4, 2005, we had 1,000,000
shares of common stock outstanding, all of which are owned directly by Interfinancial Inc., a
Georgia corporation that is a direct wholly owned subsidiary of Assurant, Inc. We paid $75
million, zero, and $60 million in dividends to our stockholder in 2004, 2003 and 2002,
respectively. 
 Item 6.Selected Financial Data. Not required under reduced disclosure format. 5




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Item 7.Managements Discussion And Analysis Of Financial Condition And Results Of Operations. The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and accompanying notes
which appear elsewhere in this report. It contains forward-looking statements that involve risks
and uncertainties. Please see Forward-Looking Statements for more information. Our actual
results could differ materially from those anticipated in these forward-looking statements as a
result of various factors, including those discussed below and elsewhere in this report. The table below presents information regarding our consolidated results of operations: For the Year EndedDecember 31,2004
    
    
    2003(in thousands)Revenues:Net earned premiums and other considerations
    
    $
    1,756,320
    
    
    $
    1,705,681Net investment income
    
    
    275,693
    
    
    
    259,804Net realized gains (losses) on investments
    
    
    8,371
    
    
    
    3,909Amortization of deferred gains on disposal of businesses
    
    
    43,299
    
    
    
    51,846Fees and other income
    
    
    13,033
    
    
    
    15,099Total revenues
    
    
    2,096,716
    
    
    
    2,036,339Benefits, losses and expenses:Policyholder benefits
    
    
    1,352,002
    
    
    
    1,284,723Selling, underwriting and general expenses(1)
    
    
    565,311
    
    
    
    554,874Total benefits, losses and expenses
    
    
    1,917,313
    
    
    
    1,839,597Income before income taxes
    
    
    179,403
    
    
    
    196,742Income taxes
    
    
    59,810
    
    
    
    66,613Net income
    
    $
    119,593
    
    
    $
    130,129
   (1)
    
    Includes amortization of DAC and VOBA and underwriting, general and administrative
expenses. Year Ended December 31, 2004 Compared to December 31, 2003 Total Revenues Total revenues increased by $60,377, or 3%, from $2,036,339 for the year ended December 31,
2003, to $2,096,716 for the year ended December 31, 2004. Net earned premiums and other considerations increased by $50,639, or 3%, from $1,705,681 for
the year ended December 31, 2003, to $1,756,320 for the year end December 31, 2004. The increase
was primarily due to increases of $39,424, $16,533, and $6,647 in our group disability, small
employer group health and preneed businesses, respectively, offset by a decrease of $7,416 in our
group dental business. The increase in group disability business was primarily driven by business
written through alternate distribution sources, as well as the transition of a block of business
from administrative fee only business to fully insured business. The increase in our small
employer group health business was primarily due to increases in premium rates. The increase in
our preneed business was primarily due to the change in mix of business from limited-pay to
single-pay sales. The decrease in our group dental business was primarily due to maintaining
pricing discipline in an increasingly competitive market, which has resulted in lower sales and
renewals. 6




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Net investment income increased by $15,889, or 6%, from $259,804 for the year ended December
31, 2003, to $275,693 for the year ended December 31, 2004. This increase was primarily due to
increases in invested assets, offset by a decrease in investment yields driven by the lower
interest rate environment. Net realized gains on investments increased by $4,462, or 114%, from $3,909 for the year ended
December 31, 2003, to $8,371 for the year ended December 31, 2004. Net realized gains on
investments are comprised of both other-than-temporary impairments and realized gains/(losses) on
the sales of securities. For the years ended December 31, 2003 and 2004, we had
other-than-temporary impairments on available for sale securities of $8,048 and $131, respectively. Amortization of deferred gain on disposal of business decreased by $8,547, or 16%, from
$51,846 for the year ended December 31, 2003, to $43,299 for the year ended December 31, 2004. The
decrease was consistent with the anticipated run-off of the business ceded to The Hartford in 2001
and John Hancock in 2000. Fees and other income decreased by $2,066, or 14%, from $15,099 for the year ended December
31, 2003, to $13,033 for the year ended December 31, 2004. The decrease is driven by lower
administrative services only sales. Total Benefits, Losses and Expenses Total benefits, losses and expenses increased by $77,716, or 4%, from $1,839,597 for the year
ended December 31, 2003, to $1,917,313 for the year ended December 31, 2004. Policyholder benefits increased by $67,279, or 5%, from $1,284,723 for the year ended December
31, 2003, to $1,352,002 for the year ended December 31, 2004. The increase was primarily due to a
net increase in our group disability, group life and group dental businesses of $29,263 and
increases in our small employer group health and preneed businesses of $17,262 and $8,902,
respectively. The increase in group disability, group life and group dental was primarily driven
by a reduction in reserves in 2003. During the third quarter of 2003, we completed actuarial
reserve adequacy studies for these products, which reflected that, in the aggregate, these reserves
were redundant by $17,678. Therefore, we reduced reserves by $17,678 in the third quarter of 2003
to reflect these estimates. Also contributing to the increase in 2004 was poor experience on a
single large disability case and deterioration in group dental experience, partially offset by
lower group disability incidence and improved group life mortality. The increase in small employer
group health was attributable to increases in membership as well as unfavorable loss experience
compared to prior year. The increase in preneed was primarily due to the crediting of policy growth
to a larger (by face amount) in force block of business as well as an increase in policyholder
reserves due to higher customer utilization of an early pay off feature that allows conversion from
limited pay to single-pay policies. These increases were partially offset by a reduction in growth
rates on the discretionary growth business. Selling, underwriting and general expenses increased by $10,437, or 2%, from $554,874 for the
year ended December 31, 2003, to $565,311 for the year ended December 31, 2004. The increase was
primarily due to increases of $10,420, $5,157 and $9,599 in our group disability, small employer
group health and preneed businesses, offset by decreases of $7,895 and $4,503 in our consumer
protection and group dental businesses. The increase in our group disability expenses was due to
growth in disability business sold through an alternative distribution source. The increase in our
small employer group health business was attributable to increased commission expense on first year
business. The increase in our preneed business was primarily due to higher amortized commissions
and expenses incurred as a result of the change in mix of business to more single-pay sales. The
decrease in our consumer protection business is primarily due to a decrease in the experience based
commission on a single client. The decrease in our group dental business is primarily due to
non-recurring expenses incurred during 2003 as well as focused expense management in 2004. 7




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Net Income Net income decreased by $10,536, or 8%, from $130,129 for the year ended December 31, 2003, to
$119,593 for the year ended December 31 2004. Income taxes decreased by $6,803, or 10%, from $66,613 for the year ended December 31, 2003,
to $59,810 for the year ended December 31, 2004. This decrease is consistent with the decrease in
pre-tax income. 
 Item 7A.Quantitative And Qualitative Disclosures About Market Risk As a provider of insurance products, effective risk management is fundamental to our ability
to protect both our customers and our stockholders interests. We are exposed to potential loss
from various market risks, in particular interest rate risk and credit risk, as well as inflation
risk. Interest rate risk is the possibility the fair value of liabilities will change more or less
than the market value of investments in response to changes in interest rates, including changes in
the slope or shape of the yield curve and changes in spreads due to credit risks and other factors. Credit risk is the possibility that counterparties may not be able to meet payment obligations
when they become due. We assume counterparty credit risk in many forms. A counterparty is any
person or entity from which cash or other forms of consideration are expected to extinguish a
liability or obligation to us. Primarily, our credit risk exposure is concentrated in our fixed
income investment portfolio and, to a lesser extent, in our reinsurance recoverables. Inflation risk is the possibility that a change in domestic price levels produces an adverse
effect on earnings. This typically happens when only one of invested assets or liabilities is
indexed to inflation. Foreign exchange risk is the possibility that changes in exchange rates produce an adverse
effect on earnings and equity when measured in domestic currency. This risk is largest when assets
backing liabilities payable in one currency are invested in financial instruments of another
currency. Our general principle is to invest in assets that match the currency in which we expect
the liabilities to be paid. Interest Rate Risk Interest rate risk arises as we invest substantial funds in interest-sensitive fixed income
assets, such as fixed maturity investments, mortgage-backed and asset-backed securities and
commercial mortgage loans, primarily in the United States and Canada. There are two forms of
interest rate riskprice risk and reinvestment risk. Price risk occurs when fluctuations in
interest rates have a direct impact on the market valuation of these investments. As interest rates
rise, the market value of these investments falls, and conversely, as interest rates fall, the
market value of these investments rises. Reinvestment risk occurs when fluctuations in interest
rates have a direct impact on expected cash flows from mortgage-backed and asset-backed securities.
As interest rates fall, an increase in prepayments on these assets results in earlier than expected
receipt of cash flows forcing us to reinvest the proceeds in an unfavorable lower interest rate
environment, and conversely as interest rates rise, a decrease in prepayments on these assets
results in later than expected receipt of cash flows forcing us to forgo reinvesting in a favorable
higher interest rate environment. As of December 31, 2004, we held $3,604,365 of fixed maturity
securities at fair market value and $695,921 of commercial mortgages at amortized cost for a
combined total of 86% of total invested assets. As of December 31, 2003, we held $3,452,299 of
fixed maturity securities at fair market value and $634,615 of commercial mortgages at amortized
cost for a combined total of 85% of total invested assets. We expect to manage interest rate risk by selecting investments with characteristics such as
duration, yield, currency and liquidity tailored to the anticipated cash outflow characteristics of
our insurance and reinsurance liabilities. 8




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Our group long-term disability and group term life waiver of premium reserves are also
sensitive to interest rates. These reserves are discounted to the valuation date at the valuation
interest rate. The valuation interest rate is determined by taking into consideration actual and
expected earned rates on our asset portfolio, with adjustments for investment expenses and
provisions for adverse deviation. The interest rate sensitivity of our fixed maturity security assets is assessed using
hypothetical test scenarios that assume several positive and negative parallel shifts of the
underlying yield curves. We have assumed that both the United States and Canadian yield curves have
a 100% correlation and, therefore, move together. The individual securities are repriced under each
scenario using a valuation model. For investments such as mortgage-backed and asset-backed
securities, a prepayment model was used in conjunction with a valuation model. Our actual
experience may differ from the results noted below particularly due to assumptions utilized or if
events occur that were not included in the methodology. Credit Risk We have exposure to credit risk primarily as a holder of fixed income securities and by
entering into reinsurance cessions. Our risk management strategy and investment policy is to invest in debt instruments of high
credit quality issuers and to limit the amount of credit exposure with respect to any one issuer.
We attempt to limit our credit exposure by imposing fixed maturity portfolio limits on individual
issuers based upon credit quality. Currently our portfolio limits are 1.5% for issuers rated AA-and
above, 1% for issuers rated A- to A+, 0.75% for issuers rated BBB- to BBB+ and 0.38% for issuers
rated BB- to BB+. These portfolio limits are further reduced for certain issuers with whom we have
credit exposure on reinsurance agreements. We use the lower of Moodys or Standard & Poors ratings to determine an issuers rating. We are also exposed to the credit risk of our reinsurers. When we reinsure, we are still
liable to our insureds regardless of whether we get reimbursed by our reinsurer. As part of our
overall risk and capacity management strategy, we purchase reinsurance for certain risks that we
underwrite. For at least 50% of our $1,238,111 of reinsurance recoverables at December 31, 2004, we are
protected from the credit risk by using some type of risk mitigation mechanism such as a trust,
letter of credit or by withholding the assets in a modified coinsurance or co-funds-withheld
arrangement. For example, reserves of $870,764 and $290,993 as of December 31, 2004 relating to two
large coinsurance arrangements with The Hartford and John Hancock Life Insurance Company (John
Hancock), respectively, related to sales of businesses are secured by such mechanisms. If the value
of the assets in these trusts decreases, The Hartford and John Hancock, as the case may be, will be
required to put more assets in the trusts. We may be dependent on the financial condition of The
Hartford and John Hancock, whose A.M. Best ratings are currently A+ and A++, respectively. For
recoverables that are not protected by these mechanisms, we are dependent solely on the credit of
the reinsurer. Occasionally, the credit worthiness of the reinsurer becomes questionable. Inflation Risk Inflation risk arises as we invest substantial funds in nominal assets, which are not indexed
to the level of inflation, whereas the underlying liabilities are indexed to the level of
inflation. Approximately 19% of Assurant PreNeeds insurance policies with reserves of
approximately $348 million as of December 31, 2004 have death benefits that are guaranteed to grow
with the Consumer Price Index. In times of rapidly rising inflation the credited death benefit
growth on these liabilities increases relative to the investment income earned on the nominal
assets resulting in an adverse impact on earnings. We have partially mitigated this risk by
purchasing a contract with payments tied to the Consumer Price Index. See  Derivatives. In addition, we have inflation risk in our individual and small employer group health
insurance businesses to the extent that medical costs increase with inflation and we have not been
able to increase premiums to keep pace with inflation. 9




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Foreign Exchange Risk We are exposed to some foreign exchange risk arising from our international operations mainly
in Canada. Total invested assets denominated in currencies other than the U.S. dollar were less
than 8% of our total invested assets at December 31, 2004. Foreign exchange risk is mitigated by matching our liabilities under insurance policies that
are payable in foreign currencies with investments that are denominated in such currency. We have
not established any hedge to our foreign currency exchange rate exposure. Derivatives Derivatives are financial instruments whose values are derived from interest rates, foreign
exchange rates, financial indices or the prices of securities or commodities. Derivative financial
instruments may be exchange-traded or contracted in the over-the-counter market and include swaps,
futures, options and forward contracts. Under insurance statutes, our insurance companies may use derivative financial instruments to
hedge actual or anticipated changes in their assets or liabilities, to replicate cash market
instruments or for certain income-generating activities. These statutes generally prohibit the use
of derivatives for speculative purposes. We generally do not use derivative financial instruments. On August 1, 2003, we purchased a contract to partially hedge the inflation risk exposure
inherent in some of our pre-funded funeral insurance policies. 
 Item 8.Financial Statements And Supplementary Data. The consolidated financial statements and financial statement schedules in Part IV, Item 15(a)
1 and 2 of this report are incorporated by reference into this Item 8. 
 Item 9.Changes In And Disagreements With Accountants On Accounting And Financial Disclosure. There have been no changes in or disagreements with accountants on accounting and financial
disclosure. 
 Item 9A.Controls And Procedures. Under the supervision and with the participation of our Chief Executive Officer and our Chief
Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as
of December 31, 2004. Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer 10




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have concluded that our disclosure controls and procedures
were effective as of that date in providing a reasonable level of assurance that information we are
required to disclose in reports we file or furnish under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods in SEC rules and forms.
Further, our disclosure controls and procedures were effective in providing a reasonable level of
assurance that information required to be disclosed by us in such reports is accumulated and
communicated to our management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure. 
 Item 9B.Other Information. None. 
 PART III 
 Item 10.Directors And Executive Officers Of The Registrant. Not required under reduced disclosure format. 
 Item 11.Executive Compensation. Not required under reduced disclosure format. 
 Item 12.Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters. Not required under reduced disclosure format. 
 Item 13.Certain Relationships And Related Transactions. Not required under reduced disclosure format. 
 Item 14.Principal Accountant Fees And Services PricewaterhouseCoopers LLP has audited our financial statements for fiscal 2004. The following
table shows the aggregate fees billed to us by PricewaterhouseCoopers LLP for services rendered and
the percentage of those services that were approved by our Board of Directors during the fiscal
years ended December 31, 2004 and 2003. Fiscal Year Ended
    
    
    Fiscal Year EndedDecember 31, 2004
    
    
    December 31, 2003Description of Fees (in thousands)
    
    Amount
    
    
    Percentage
    
    
    Amount
    
    
    PercentageAudit Fees
    
    $   414
    
    
    
    100
    %
    
    
    $
    162
    
    
    
    100
    %Audit Related Fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 In March 2004, the Board of Directors of the Company adopted written procedures for
pre-approval of services by the independent auditors, including procedures relating to the Boards
power to:  
    Retain and terminate independent auditors and approve all audit engagement fees and
terms;
    Inform each registered public accounting firm performing work for the Company that such
shall report directly to the Board of Directors;
    Directly oversee the work of any registered public accounting firm employed by the
Company, including the resolution of any disagreement between management and the auditor
regarding financial reporting, for the purpose of preparing or issuing an audit report or
related work; and 11




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##### Table of Contents




    Approve in advance any significant audit or non-audit engagement or relationship between
the Company and the independent auditors, other than prohibited non-auditing services. Prohibited nonauditing services are services that Congress, the SEC or the Public Company
Accounting Oversight Board prohibits through regulation. Notwithstanding the foregoing,
pre-approval is not necessary for minor audit services if: (i) the aggregate amount of all such
non-audit services provided to the Company constitutes not more than 5% of the total amount of
revenues paid by the Company to its auditor during the fiscal year in which the non-audit services
are provided; (ii) such services were not recognized by the Company at the time of the engagement
to be non-audit services; and (iii) such services are promptly brought to the attention of
the Board of Directors and approved prior to the completion of the audit by the Board of Directors
or by one or more members of the Board of Directors who are members of the Board to whom authority
to grant such approvals has been delegated by the Board of Directors. The Board of Directors may
delegate to one or more of its members the authority to approve in advance all significant audit or
non-audit services to be provided by the independent auditors so long as it is presented to the
full Board of Directors at a later time. 
 PART IV 
 Item 15.Exhibits and Financial Statement Schedules (a)1. Financial Statements The following financial statements of Fortis Benefits Insurance Company, incorporated by
reference into Item 8, are attached hereto: PageConsolidated Financial Statements of Fortis Benefits Insurance Company.Report of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets of Fortis Benefits Insurance Company
at December 31, 2004 and 2003
    
    
    F-2Consolidated Statements of Operations of Fortis Benefits Insurance
Company for the Three Fiscal Years in the Period Ended
December 31, 2004
    
    
    F-4Consolidated Statements of Changes in Stockholders Equity of Fortis Benefits
Insurance Company for the Three Fiscal Years in the Period
Ended December 31, 2004
    
    
    F-5Consolidated Statements of Cash Flows of Fortis Benefits Insurance
Company for the Three Fiscal Years in the Period Ended
December 31, 2004
    
    
    F-6Notes to Consolidated Financial Statements of Fortis Benefits
Insurance Company
    
    
    F-8
 (a)2. Financial Statement Schedules The following financial statement schedules of Fortis Benefits Insurance Company are attached
hereto: All schedules are omitted because they are not applicable, not required, or
the information is
included in the financial statements or the notes thereto. 12




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##### Table of Contents



(a)3. Exhibits The following exhibits either (a) are filed with this report or (b) have previously been filed
with the SEC and are incorporated herein by reference to those prior filings. Exhibits are
available upon request at the investor relations section of our website, located at
www.assurant.com. 3.1
    
    Articles of Incorporation of Fortis Benefits Insurance Company (incorporated by reference
from the Registrants Registration Statement on Form S-6 and Variable Account C filed on March
17, 1986, File No. 33-03919).3.2
    
    By-laws of Fortis Benefits Insurance Company (incorporated by reference from the Registrants
Registration Statement on Form S-6 and Variable Account C filed on March 17, 1986, File No.
33-03919).3.3
    
    Amendments to Articles of Incorporation and By-laws of Fortis Benefits Insurance Company
dated November 21, 1991 (incorporated by reference from the Registrants Post-Effective
Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on
March 2, 1992, File No. 33-37577).3.4
    
    Amendment to By-laws of Fortis Benefits Insurance Company dated May 1, 1999 (incorporated by
reference from Exhibit 3(d) to the Registrants Form 10-K filed on March 30, 2001, File No.
33-63799).3.5
    
    Restated Articles of Incorporation
of Fortis Benefits Insurance Company dated September 29, 2004
(incorporated by reference from Exhibit 3.1 to Registrants
Form 10-Q filed November 12, 2004, File No. 33-37576).3.6
    
    Restated By-laws of Fortis Benefits
Insurance Company dated September 30, 2004.4.1
    
    Form of Combination Fixed and Variable Group Annuity Contract (incorporated by reference from
Registrants Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and
Variable Account D filed on March 2, 1992, File No. 33-37577).4.2
    
    Form of Certificate to be used in connection with Form of Combination Fixed and Variable
Group Annuity Contract filed as Exhibit 4.1 to this report (incorporated by reference from
Registrants Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and
Variable Account D filed on March 2, 1992, File No. 33-37577).4.3
    
    Form of Application to be used in connection with Form of Certificate filed as Exhibit 4.2 to
this report (incorporated by reference from Registrants Post-Effective Amendment No. 1 to the
Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No.
33-37577).4.4
    
    Form of IRA Endorsement (incorporated by reference from Registrants Post-Effective Amendment
No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992,
File No. 33-37577).4.5
    
    Form of Section 403(b) Annuity Endorsement (incorporated by reference from Registrants
Post-Effective Amendment No. 3 to the Registration Statement on Form N-4 and Variable Account
D filed on March 1, 1990, File No. 33-19421).4.6
    
    Annuity Contract Exchange Form (incorporated by reference from Registrants Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on
April 19, 1988, File No. 33-19421).10.1
    
    Stock Option Plan (incorporated by reference from Exhibit 10.2 to Assurant, Inc.s
Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally
filed on October 24, 2003).
 13




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##### Table of Contents



10.2
    
    Assurant 2004 Long-Term Incentive Plan (incorporated by reference from Exhibit 10.3 to
Assurant, Inc.s Registration Statement on Form S-1/A (File No. 333-109984) and amendments
thereto, originally filed on January 13, 2004).10.3
    
    Supplemental Executive Retirement Plan, as amended (incorporated by reference from Exhibit
10.4 to Assurant, Inc.s Registration Statement on Form S-1 (File No. 333-109984) and
amendments thereto, originally filed on October 24, 2003).10.4
    
    Executive Pension and 401(k) Plan (incorporated by reference from Exhibit 10.5 to Assurant,
Inc.s Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto,
originally filed on October 24, 2003).10.5
    
    Assurant Directors Compensation Plan (incorporated by reference from Exhibit 10.12 to
Assurant, Inc.s Registration Statement on Form S-1/A (File No. 333-109984) and amendments
thereto, originally filed on January 13, 2004).10.6
    
    Assurant 2004 Employee Stock Purchase Plan (incorporated by reference from Exhibit 10.13 to
Assurant, Inc.s Registration Statement on Form S-1/A (File No. 333-109984) and amendments
thereto, originally filed on January 13, 2004).10.7
    
    Assurant Executive Management Incentive Plan (incorporated by reference from Exhibit 10.16 to
Assurant, Inc.s Registration Statement on Form S-1 (File No. 333-109984) and amendments
thereto, originally filed on October 24, 2003).10.8
    
    Assurant Appreciation Incentive Rights Plan (incorporated by reference from Exhibit 10.17 to
Assurant, Inc.s Registration Statement on Form S-1 (File No. 333-109984) and amendments
thereto, originally filed on October 24, 2003).10.9
    
    Investment Plan (incorporated by reference from Exhibit 10.18 to Assurant, Inc.s
Registration Statement on Form S-1 (File No. 333-109984) and amendments thereto, originally
filed on October 24, 2003).10.10
    
    Assurant Deferred Compensation Plan (incorporated by reference from Exhibit 10.17 to
Assurant, Inc.s Form 10-K filed March 31, 2005)10.11
    
    Amendment No. 1 To the Amended and Restated 2004 Employee Stock Purchase Agreement
(incorporated by reference from Exhibit 10.27 to Assurant, Inc.s Form 10-K filed March 31,
2005)10.12
    
    Amendment No 1. To the Executive Pension and 401K Plan (incorporated by reference from
Exhibit 10.28 to Assurant, Inc.s Form 10-K filed March 31, 2005)10.13
    
    Amendment No. 2 To the Supplemental Executive Retirement Plan (incorporated by reference
from Exhibit 10.29 to Assurant, Inc.s Form 10-K filed March 31, 2005)24.1
    
    Power of Attorney.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.32.1
    
    Certification of Chief Executive Officer of Fortis Benefits Insurance Company pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer of Fortis Benefits Insurance Company pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 14




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized on March 29, 2005. FORTIS BENEFITS INSURANCE COMPANYBy:
    
    /s/ Robert B. PollockName:
    
    Robert B. PollockTitle:
    
    President and Chief
Executive OfficerBy:
    
    /s/ Ranell JacobsonName:
    
    Ranell JacobsonTitle:
    
    Treasurer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the capacities indicated on
March 29, 2005. Signature
    
    Title*

J. Kerry Clayton
    
    Chairman of the Board/s/ Robert B. Pollock

Robert B. Pollock
    
    President and Chief Executive Officer
(Principal Executive Officer)/s/ Ranell Jacobson

Ranell Jacobson
    
    Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)*

Alan W. Feagin
    
    Director*

Michael J. Peninger
    
    Director*

Lesley G. Silvester
    
    Director
 *By:
    
    /s/ Douglas R. LoweDouglas R. LoweAttorney-in-Fact
   15




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholder of
Fortis Benefits Insurance Company: In our opinion, the
accompanying consolidated balance sheets and the related consolidated
statements of operations, changes in stockholders equity and
cash flows present fairly, in all material respects, the financial
position of Fortis Benefits Insurance Company and its subsidiaries
(the Company), an indirect wholly owned subsidiary of Assurant, Inc.
at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the
period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. These
financial statements are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these statements in accordance with standards of the Public Company
Accounting Oversight Board (United States), which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion. /s/
PricewaterhouseCoopers LLP March 31, 2005
Minneapolis, Minnesota F-1




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##### Table of Contents



Fortis Benefits Insurance Company
Consolidated Balance Sheets
At December 31, 2004 and 2003  December 31,2004
    
    
    2003(in thousands except share data)AssetsInvestments:Fixed maturities available for sale, at fair value (amortized
cost  $3,356,668 in 2004 and $3,227,043 in 2003)
    
    $
    3,604,365
    
    
    $
    3,452,299Equity securities available for sale, at fair value
(cost  $241,101 in 2004 and $199,287 in 2003)
    
    
    248,722
    
    
    
    208,149Commercial mortgage loans on real estate at amortized cost
    
    
    695,921
    
    
    
    634,615Policy loans
    
    
    9,956
    
    
    
    10,678Short-term investments
    
    
    47,989
    
    
    
    71,057Collateral
held under securities lending
    
    
    332,276
    
    
    
    379,898Other investments
    
    
    45,171
    
    
    
    51,831Total investments
    
    
    4,984,400
    
    
    
    4,808,527Cash and cash equivalents
    
    
    43,362
    
    
    
    29,176Premiums and accounts receivable, less allowances for
doubtful accounts (2004 - $8,717; 2003 - $11,072)
    
    
    78,669
    
    
    
    65,605Reinsurance recoverables
    
    
    1,238,111
    
    
    
    1,210,299Due from affiliates
    
    
    5,967
    
    
    
    Accrued investment income
    
    
    51,933
    
    
    
    49,756Deferred acquisition costs
    
    
    116,060
    
    
    
    103,606Property and equipment, at cost less accumulated depreciation
    
    
    1,507
    
    
    
    2,566Deferred income taxes, net
    
    
    20,515
    
    
    
    54,249Goodwill
    
    
    156,104
    
    
    
    156,985Value of business acquired
    
    
    39,413
    
    
    
    45,710Other assets
    
    
    38,708
    
    
    
    41,710Assets held in separate accounts
    
    
    3,435,089
    
    
    
    3,516,070Total assets
    
    $
    10,209,838
    
    
    $
    10,084,259
 See the accompanying notes to the consolidated financial statements F-2




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##### Table of Contents



Fortis Benefits Insurance Company
Consolidated Balance Sheets
At December 31, 2004 and 2003  December 31,2004
    
    
    2003(in thousands except share data)LiabilitiesFuture policy benefits and expenses
    
    $
    3,028,030
    
    
    $
    2,869,324Unearned premiums
    
    
    46,228
    
    
    
    50,002Claims and benefits payable
    
    
    1,884,608
    
    
    
    1,810,847Commissions payable
    
    
    19,721
    
    
    
    15,918Reinsurance balances payable
    
    
    6,727
    
    
    
    5,138Funds held under reinsurance
    
    
    93
    
    
    
    100Deferred gain on disposal of businesses
    
    
    206,182
    
    
    
    249,481Obligation
under securities lending
    
    
    332,276
    
    
    
    379,898Due to affiliates
    
    
    
    
    
    
    3,478Accounts payable and other liabilities
    
    
    159,798
    
    
    
    141,309Tax payable
    
    
    7,987
    
    
    
    22,112Liabilities related to separate accounts
    
    
    3,435,089
    
    
    
    3,516,070Total liabilities
    
    
    9,126,739
    
    
    
    9,063,677Stockholders equityCommon stock, par value $5 per share, 1,000,000
shares authorized, issued, and outstanding
    
    $
    5,000
    
    
    $
    5,000Additional paid-in capital
    
    
    516,570
    
    
    
    516,570Retained earnings
    
    
    388,854
    
    
    
    342,610Accumulated other comprehensive income
    
    
    172,675
    
    
    
    156,402Total stockholders equity
    
    
    1,083,099
    
    
    
    1,020,582Total liabilities and stockholders equity
    
    $
    10,209,838
    
    
    $
    10,084,259
 See the accompanying notes to the consolidated financial statements F-3




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##### Table of Contents



Fortis Benefits Insurance Company
Consolidated Statements of Operations
Years Ended December 31, 2004, 2003 and 2002  Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)RevenuesNet earned premiums and other considerations
    
    $
    1,756,320
    
    
    $
    1,705,681
    
    
    $
    1,686,364Net investment income
    
    
    275,693
    
    
    
    259,804
    
    
    
    258,590Net realized gain (loss) on investments
    
    
    8,371
    
    
    
    3,909
    
    
    
    (45,801
    )Amortization of deferred gain on disposal of businesses
    
    
    43,299
    
    
    
    51,846
    
    
    
    60,186Fees and other income
    
    
    13,033
    
    
    
    15,099
    
    
    
    13,099Total revenues
    
    
    2,096,716
    
    
    
    2,036,339
    
    
    
    1,972,438Benefits, losses and expensesPolicyholder benefits
    
    
    1,352,002
    
    
    
    1,284,723
    
    
    
    1,304,765Amortization of deferred acquisition costs and
value of business acquired
    
    
    75,011
    
    
    
    60,096
    
    
    
    58,293Underwriting, general and administrative expenses
    
    
    490,300
    
    
    
    494,778
    
    
    
    464,507Total benefits, losses and expenses
    
    
    1,917,313
    
    
    
    1,839,597
    
    
    
    1,827,565Income before income taxes
    
    
    179,403
    
    
    
    196,742
    
    
    
    144,873Income taxes
    
    
    59,810
    
    
    
    66,613
    
    
    
    44,225Net income
    
    $
    119,593
    
    
    $
    130,129
    
    
    $
    100,648
 See the accompanying notes to the consolidated financial statements F-4




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##### Table of Contents



Fortis Benefits Insurance Company
Consolidated Statements of Changes in Stockholders Equity
Years Ended December 31, 2004, 2003 and 2002  AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-in
    
    
    Retained
    
    
    ComprehensiveStock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Total(in thousands)Balance, January 1, 2002
    
    $
    5,000
    
    
    $
    516,570
    
    
    $
    170,811
    
    
    $
    28,414
    
    
    $
    720,795Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (60,000
    )
    
    
    
    
    
    
    (60,000
    )Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    100,648
    
    
    
    
    
    
    
    100,648Net change in unrealized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,696
    
    
    
    74,696Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,913
    )
    
    
    (1,913
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,431Balance, December 31, 2002
    
    
    5,000
    
    
    
    516,570
    
    
    
    211,459
    
    
    
    101,197
    
    
    
    834,226Other
    
    
    
    
    
    
    
    
    
    
    1,022
    
    
    
    
    
    
    
    1,022Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    130,129
    
    
    
    
    
    
    
    130,129Net change in unrealized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,016
    
    
    
    50,016Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,189
    
    
    
    5,189Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185,334Balance, December 31, 2003
    
    
    5,000
    
    
    
    516,570
    
    
    
    342,610
    
    
    
    156,402
    
    
    
    1,020,582Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (75,000
    )
    
    
    
    
    
    
    (75,000
    )Other
    
    
    
    
    
    
    
    
    
    
    1,674
    
    
    
    
    
    
    
    1,674Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    119,593
    
    
    
    
    
    
    
    119,593Net change in unrealized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,489
    
    
    
    13,489Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    (23
    )
    
    
    2,784
    
    
    
    2,761Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137,517Balance, December 31, 2004
    
    $
    5,000
    
    
    $
    516,570
    
    
    $
    388,854
    
    
    $
    172,675
    
    
    $
    1,083,099
 See the accompanying notes to the consolidated financial statements F-5




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##### Table of Contents



Fortis Benefits Insurance Company
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002  Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Operating activitiesNet income
    
    $
    119,593
    
    
    $
    130,129
    
    
    $
    100,648Adjustments to reconcile net income to net cash
provided by operating activities:Change in reinsurance recoverable
    
    
    (27,812
    )
    
    
    (59,107
    )
    
    
    (24,284
    )Change in premiums and accounts receivables
    
    
    (19,078
    )
    
    
    865
    
    
    
    39,124Depreciation and amortization
    
    
    1,033
    
    
    
    1,125
    
    
    
    1,253Change in deferred acquisition costs and value of
businesses acquired
    
    
    (3,095
    )
    
    
    (9,031
    )
    
    
    (15,322
    )Change in accrued investment income
    
    
    (2,017
    )
    
    
    (3,828
    )
    
    
    5,429Change in insurance policy reserves and expenses
    
    
    211,093
    
    
    
    222,012
    
    
    
    165,188Change in accounts payable and other liabilities
    
    
    14,761
    
    
    
    (36,088
    )
    
    
    (4,919
    )Change in commissions payable
    
    
    3,636
    
    
    
    (11,427
    )
    
    
    5,854Change in reinsurance balances payable
    
    
    1,589
    
    
    
    4,510
    
    
    
    (4,875
    )Change in funds held under reinsurance
    
    
    (7
    )
    
    
    16
    
    
    
    (12
    )Amortization of deferred gain on disposal of businesses
    
    
    (43,299
    )
    
    
    (51,846
    )
    
    
    (60,186
    )Change in income taxes
    
    
    11,413
    
    
    
    72,719
    
    
    
    (56,016
    )Net realized
(gains)/losses on investments
    
    
    (8,371
    )
    
    
    (3,909
    )
    
    
    45,801Other
    
    
    4,372
    
    
    
    393
    
    
    
    1,106Net cash provided by operating activities
    
    
    263,811
    
    
    
    256,533
    
    
    
    198,789Investing activitiesSales of:Fixed maturities available for sale
    
    
    584,290
    
    
    
    564,972
    
    
    
    1,510,883Equity securities available for sale
    
    
    38,126
    
    
    
    54,519
    
    
    
    1,733,693Other invested assets
    
    
    24,981
    
    
    
    24,322
    
    
    
    3,688Maturities, prepayments, and scheduled redemption of:Fixed maturities available for sale
    
    
    176,520
    
    
    
    307,594
    
    
    
    280,859Purchase of:Fixed maturities available for sale
    
    
    (865,381
    )
    
    
    (1,189,996
    )
    
    
    (1,997,147
    )Equity securities available for sale
    
    
    (79,441
    )
    
    
    (145,931
    )
    
    
    (1,723,664
    )Other invested assets
    
    
    (18,318
    )
    
    
    (13,885
    )
    
    
    (1,188
    )Change in commercial mortgage loans on real estate
    
    
    (59,273
    )
    
    
    (52,475
    )
    
    
    76,810Change in short term investments
    
    
    23,068
    
    
    
    174,167
    
    
    
    (11,573
    )Change in collateral held under securities lending
    
    
    47,622
    
    
    
    (72,350
    )
    
    
    (120,806
    )Change in policy loans
    
    
    803
    
    
    
    (219
    )
    
    
    (365
    )Net cash (used in) investing activities
    
    $
    (127,003
    )
    
    $
    (349,282
    )
    
    $
    (248,810
    )
 See the accompanying notes to the consolidated financial statements F-6




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Fortis Benefits Insurance Company
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002  2004
    
    
    2003
    
    
    2002(in thousands)Financing activitiesDividends paid
    
    $
    (75,000
    )
    
    $
    
    
    
    $
    (60,000
    )Change in obligation under securities lending
    
    
    (47,622
    )
    
    
    72,350
    
    
    
    120,806Net cash
provided by (used in) financing activities
    
    
    (122,622
    )
    
    
    72,350
    
    
    
    60,806Change in
cash and cash equivalents
    
    
    14,186
    
    
    
    (20,399
    )
    
    
    10,785Cash and cash equivalents at beginning of period
    
    
    29,176
    
    
    
    49,575
    
    
    
    38,790Cash and cash equivalents at end of period
    
    $
    43,362
    
    
    $
    29,176
    
    
    $
    49,575Supplemental information:Income taxes paid
    
    $
    48,447
    
    
    $
    7,702
    
    
    $
    112,791
 Years Ended December 31,2004
    
    
    2003
    
    
    2002Supplemental schedule of non-cash investing activities:Non cash activities:Foreign currency translation
    
    $
    2,784
    
    
    $
    5,189
    
    
    $
    (1,913
    )Assumptions of Protective DBD in 2002:Non-cash assets assumed:Goodwill and intangibles
    
    $
    
    
    
    $
    
    
    
    $
    (3,796
    )Other assets
    
    
    
    
    
    
    
    
    
    
    1,435Federal income tax recoverable
    
    
    
    
    
    
    
    
    
    
    (2,044
    )Total assets assumed
    
    $
    
    
    
    $
    
    
    
    $
    (4,405
    )Non-cash liabilities assumed:Claim liabilities and dividends payable
    
    $
    
    
    
    $
    
    
    
    $
    208Accrued expenses and other liabilities
    
    
    
    
    
    
    
    
    
    
    (2,500
    )Total liabilities assumed
    
    $
    
    
    
    $
    
    
    
    $
    (2,292
    )
 See the accompanying notes to the consolidated financial statements F-7




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Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  1. Nature of Operations Fortis Benefits Insurance Company (the Company) is a provider of life and health insurance
products. On January 1, 2004, the Company was an indirect wholly owned subsidiary of Fortis, Inc.,
which itself was an indirect, wholly owned subsidiary of Fortis N.V. of the Netherlands and Fortis
SA/NV of Belgium (collectively, Fortis) through their affiliates, including their wholly owned
subsidiary, Fortis Insurance N.V. On February 5, 2004, Fortis sold approximately 65% of its ownership interest in Assurant, Inc. via
an initial public offering (the IPO) and retained approximately 35% of its ownership (50,199,130
shares). In connection with the IPO, Fortis, Inc. was merged into Assurant, Inc., a Delaware
corporation, which was formed solely for the purpose of the redomestication of Fortis, Inc. After
the merger, Assurant, Inc. became the successor to the business, operations and obligations of
Fortis, Inc. Assurant, Inc. is traded on the New York Stock Exchange under the symbol AIZ. On January 21, 2005, Fortis owned approximately 36% (50,199,130 shares) of the Assurant, Inc. based
on the number of shares outstanding that day and sold 27,200,000 of those shares in a secondary
offering to the public. Assurant, Inc. did not receive any of the proceeds from the sale of shares
of common stock by Fortis. Fortis received all net proceeds from the sale. Fortis concurrently sold
exchangeable bonds, due January 26, 2008, that are mandatorily exchangeable for their remaining
22,999,130 shares of Assurant, Inc. Fortis may elect, prior to the maturity date of the bonds, a
cash settlement alternative and pay the bondholders an amount of cash equal to the applicable
market value of Assurant, Inc.s common stock. The exchangeable bonds and the shares of the
Assurant, Inc.s common stock into which they are exchangeable have not been and will not be
registered under the Securities Act of 1933 and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements. The Company was redomesticated to Iowa from Minnesota in 2004. The Company distributes its
products in all states except New York. The Companys revenues are derived principally from group
employee benefits products and from individual, group health and pre-need products. The Company
offers insurance products, including life insurance policies, annuity contracts, and group life,
accident and health insurance policies. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). The preparation of
financial statements in conformity with GAAP requires management to make estimates when recording
transactions resulting from business operations based on information currently available. The most
significant items on the Companys balance sheet that involve accounting estimates and actuarial
determinations are the value of business acquired (VOBA), goodwill, reinsurance recoverables,
valuation of investments, deferred acquisition costs (DAC), liabilities for future policy
benefits and expenses, taxes, and claims and benefits payable. The accounting estimates and
actuarial determinations are sensitive to market conditions, investment yields, mortality,
morbidity, commissions and other acquisition expenses, and terminations by policyholders. As
additional information becomes available or F-8




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Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  actual amounts are determinable, the recorded estimates
will be revised and reflected in operating results. Although some variability is inherent in these
estimates, the Company believes the amounts provided are reasonable and adequate. Dollar amounts are presented in U.S. dollars and all amounts are in thousands except for number of
shares and securities. Principles of Consolidation The consolidated financial statements include the accounts of the Company and all of its wholly
owned subsidiaries. All significant inter-company transactions and balances are eliminated in
consolidation. Comprehensive Income Comprehensive income is comprised of net income and other comprehensive income, which includes
foreign currency translation, unrealized gains and losses on securities classified as available for
sale, less deferred income taxes. Reclassifications Certain prior period amounts have been reclassified to conform to the 2004 presentation. Cash and Cash Equivalents The Company considers cash on hand, all operating cash and working capital cash to be cash
equivalents. These amounts are carried principally at cost, which approximates fair value. Cash
balances are reviewed at the end of each reporting period to determine if negative cash balances
exist. If negative cash balances do exist, the cash accounts are netted with other positive cash
accounts of the same bank providing the right of offset exists between the accounts. If the right
of offset does not exist, the negative cash balances are reclassified to accounts payable. Investments The Companys investment strategy is developed based on many factors including appropriate
insurance asset and liability management, rate of return, maturity, credit risk, tax considerations
and regulatory requirements. Fixed maturities and equity securities are classified as available-for-sale and reported at fair
value. If the fair value is higher than the amortized cost for debt securities or the purchase
cost for equity securities, the excess is an unrealized gain; and if lower than cost, the
difference is an unrealized loss. The net unrealized gains and participating policyholder
dividends, losses, less deferred income taxes are reported as included in accumulated other
comprehensive income and, accordingly, have no effect on net income. Commercial mortgage loans on real estate are reported at unpaid balances, adjusted for amortization
of premium or discount, less allowance for losses. The change in the allowance for losses is
recorded as realized gains and losses on investments. F-9




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Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  Policy loans are reported at unpaid principal balances, which do not exceed the cash surrender
value of the underlying policies. Short-term investments include all investment cash and short maturity investments. These amounts
are carried principally at cost, which approximates fair value. Other investments consist of investments in joint ventures and partnerships. The joint ventures and
partnerships are valued according to the equity method of accounting. Any changes in the fair
value are recorded as net realized gains and losses in the statement of operations. The Company regularly monitors its investment portfolio to determine that investments that may be
other than temporarily impaired are identified in a timely fashion and properly valued, and that
any impairments are charged against earnings in the proper period. The Companys methodology to
identify potential impairments requires professional judgment. Changes in individual security values are monitored on a regular basis in order to identify
potential credit problems. In addition, securities whose market price is equal to 85% or less of
their original purchase price are added to the impairment
watch list, which is discussed at monthly meetings attended by members of the Companys investment,
accounting and finance departments. Any security whose price decrease is deemed
other-than-temporary is written down to its then current market level with the amount of the
writedown reflected as a realized loss in the Statement of Operations for that period. Assessment
factors include, but are not limited to, the financial condition and rating of the issuer, any
collateral held and the length of time the market value of the security has been below cost. Inherently, there are risks and uncertainties involved in making these judgments. Changes in
circumstances and critical assumptions such as a continued weak economy, a more pronounced economic
downturn or unforeseen events which affect one or more companies, industry sectors or countries
could result in additional write downs in future periods for impairments that are deemed to be
other-than-temporary. 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 net of investment expenses. The Company anticipates prepayments of principal in the calculation of the effective yield for
mortgage-backed securities and structured securities. The majority of the Companys
mortgage-backed securities and structured securities are of high credit quality. Therefore, the
retrospective method is used to adjust the effective yield. Derivative Instrument In August 2003, the Company began to utilize derivative instruments in managing the PreNeed
segments exposure to inflation risk. The derivative instrument, a Consumer Price Index Cap (the
CPI CAP), limits the inflation risk on certain policies to a maximum of 5% and has a notional
amount of $454,000 amortizing to zero over 20 years. The CPI CAP does not qualify under GAAP as an
effective hedge; therefore, it is marked-to-market on a quarterly basis and the accumulated gain or
loss is recognized in the F-10




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Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  results of operations in fees and other income. As of December 31, 2004,
the CPI CAP included in other assets amounted to $9,850 and the income recorded in the results of
operations totaled $1,050. Reinsurance Reinsurance recoverables include amounts related to paid benefits and estimated amounts related to
unpaid policy and contract claims, future policyholder benefits and policyholder contract deposits.
The cost of reinsurance is accounted for over the terms of the underlying reinsured policies using
assumptions consistent with those used to account for the policies. Amounts recoverable from
reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or
future policy benefits reserves and are reported in the consolidated balance sheets. The cost of
reinsurance related to long-duration contracts is accounted for over the life of the underlying
reinsured policies. The ceding of insurance does not discharge the Companys primary liability to
insureds. An estimated allowance for doubtful accounts is recorded on the basis of periodic
evaluations of balances due from reinsurers, reinsurer solvency, managements experience, and
current economic conditions. Deferred Acquisition Costs The costs of acquiring new business that vary with and are primarily related to the production of
new business are deferred to the extent that such costs are deemed recoverable from future premiums
or gross profits. Acquisition costs primarily consist of commissions, policy issuance expenses,
premium taxes and certain direct marketing expenses. A premium deficiency is recognized by a charge to the statement of operations as a reduction of DAC
to the extent that future policy premiums, including anticipation of interest income, are not
adequate to recover all DAC and related claims, benefits and expenses. If the premium deficiency
is greater than unamortized DAC, a liability will be accrued for the excess deficiency. Short Duration Contracts Acquisition costs relating to group term life, group disability and group dental consist primarily
of new business underwriting, field sales support, commissions to agents and brokers, and
compensation to sales representatives. These acquisition costs are front-end loaded; thus they are
deferred and amortized over the estimated terms of the underlying contracts. Acquisition costs on individual medical contracts issued in most jurisdictions after 2002 and small
group medical consist primarily of commissions to agents and brokers and compensation to
representatives. These contracts are considered short duration because the terms of the contract
are not fixed at issue and they are not guaranteed renewable. As a result, these costs are not
deferred but rather they are recorded in the consolidated Statement of Operations in the period in
which they are incurred. Long Duration Contracts Acquisition costs for pre-funded funeral life insurance policies and life insurance policies no
longer offered are deferred and amortized in proportion to anticipated premiums over the
premium-paying period. These acquisition costs relate primarily to commissions and marketing
allowances. F-11




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  For pre-funded funeral investment type annuities and universal life and investment-type annuities
no longer offered, DAC is amortized in proportion to the present value of estimated gross margins
or profits from investment, mortality, expense margins and surrender charges over the estimated
life of the policy or contract. The assumptions used for the estimates are consistent with those
used in computing the policy or contract liabilities. Acquisition costs relating to individual medical contracts issued prior to 2003 and currently in a
limited number of jurisdictions are deferred and amortized over the estimated average terms of the
underlying contracts. These acquisition costs relate to commissions and policy issuance expenses.
Commissions represent the majority of deferred costs and result from commission schedules that pay
significantly higher rates in the first year. The majority of deferred policy issuance expenses
are the costs of separately underwriting each individual medical contract. Acquisition costs on the Fortis Financial Group (FFG) and Long-Term Care (LTC) disposed
businesses were written off when the businesses were sold. Property and Equipment Property and equipment are reported at cost less accumulated depreciation. Depreciation is
calculated on a straight-line basis over estimated useful lives with a maximum of 39.5 years for
buildings, 7 years for furniture and 5 years for equipment. Expenditures for maintenance and
repairs are charged to income as incurred. Expenditures for improvements are capitalized and
depreciated over the remaining useful life of the asset. Depreciation expense was $1,033, $1,125,
and $1,253 for the years ended December 31, 2004, 2003 and 2002, respectively. Goodwill Goodwill represents the excess of acquisition costs over the net fair values of identifiable assets
acquired and liabilities assumed in a business combination. The Company adopted Statement of
Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other Intangible Assets, as of
January 1, 2002. Pursuant to FAS 142, goodwill is deemed to have an indefinite life and should not
be amortized, but rather tested at least annually for impairment. The goodwill impairment test has
two steps. The first identifies potential impairments by comparing the fair value of a reporting
unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the
carrying amount, goodwill is not impaired and the second step is not required. If the carrying
value exceeds the fair value, the second step calculates the possible impairment loss by comparing
the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than
the carrying amount, a write down is recorded. Prior to the adoption of FAS 142, goodwill was
amortized over 20 years. Upon the adoption of FAS 142, the Company ceased amortizing goodwill. The
measurement of fair value was determined based on a valuation report prepared by an independent
valuation firm. The valuation was based on an evaluation of ranges of future discounted earnings,
public company trading multiples and acquisitions of similar companies. Certain key assumptions
considered include forecasted trends in revenues, operating expenses and effective tax rates. The
Company performs a goodwill impairment test annually and has not recognized an impairment charge
since
adoption. The Company performed a January 1, 2005 impairment test during the three months ended
March 31, 2005 and concluded that goodwill was not further impaired. F-12




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  Value of Businesses Acquired VOBA is the identifiable intangible asset representing the value of the insurance businesses
acquired. The amount is determined using best estimates for mortality, lapse, maintenance expenses
and investment returns at date of purchase. The amount determined represents the purchase price
paid to the seller for producing the business. Similar to the amortization of DAC, the
amortization of VOBA is over the premium payment period for traditional life insurance policies and
a small block of limited payment policies. For the remaining limited payment policies, pre-funded
funeral life insurance policies, all universal life policies and annuities, the amortization of
VOBA is over the expected life time of the policies. VOBA is tested for recoverability annually. If it is determined that future policy premiums and
investment income or gross profits are not adequate to cover related losses or loss expenses, then
VOBA is charged to current earnings. Separate Accounts Assets and liabilities associated with separate accounts relate to premium 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.
Revenues and expenses related to the separate account assets and liabilities, to the extent of
benefits paid or provided to the separate account policyholders, are excluded from the amounts
reported in the accompanying consolidated statements of operations. Prior to April 2, 2001, FFG
had issued variable insurance products registered as securities under
the Securities Act of 1933. These products featured fixed premiums, a
minimum death benefit, and policyholder returns linked to an
underlying portfolio of securities. The variable insurance products
issued by FFG have been 100% reinsured with The Hartford Financial
Services Group Inc. (The Hartford). The balance of
reserve ceded for the variable insurance products issued by FFG was
$870,764 and $890,592 as of December 31, 2004 and 2003,
respectively. Income Taxes The Company reports its taxable income in a consolidated federal income tax return along with other
affiliated subsidiaries of Assurant, Inc. 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. Current federal income taxes are charged to operations based upon amounts estimated to be payable
or recoverable as a result of taxable operations for the current year. Deferred income taxes are
recognized for temporary differences between the financial reporting basis and income tax basis of
assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods
in which we expect the temporary differences to reverse. The Company is required to establish a
valuation allowance for any portion of the deferred tax assets 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. Other Assets Other assets include prepaid items and intangible assets. Identifiable intangible assets with
finite lives, including costs capitalized relating to developing software for internal use, are
amortized on a straight-line basis over their estimated useful lives. The Company tests the
intangible assets for impairment whenever circumstances warrant, but at least annually. If
impairment exists, then excess of
the unamortized balance over the fair value of the intangible assets will be charged to earnings at
that time. F-13




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  Foreign Currency Translation For those foreign affiliates where the foreign currency is the functional currency, unrealized
foreign exchange gains (losses) net of income taxes have been reflected in Stockholders Equity
under the caption Accumulated other comprehensive income. Premiums Short Duration Contracts The Companys short duration contracts are those on which the Company recognizes revenue on a
pro-rata basis over the contract term. The Companys short duration contracts primarily include
group term life, group disability, medical and dental, and individual medical contracts after 2002
in most jurisdictions. Long Duration Contracts Currently, the Companys long duration contracts being sold are pre-funded funeral life insurance
and investment type annuities. For pre-funded funeral life insurance policies, revenues are
recognized when due from policyholders. For pre-funded funeral investment-type annuity contracts,
revenues consist of charges assessed against policy balances. For individual medical contracts sold prior to 2003, individual medical contracts currently sold in
a limited number of jurisdictions and traditional life insurance contracts previously sold but no
longer offered, revenue is recognized when due from policyholders. Premiums for LTC insurance and traditional life insurance contracts within FFG are recognized as
revenue when due from the policyholder. For universal life insurance and investment-type annuity
contracts within FFG, revenues consist of charges assessed against policy balances. For the FFG
and LTC businesses previously sold, all revenue is ceded to Hartford Life and Annuity Insurance
Company (the Hartford) and John Hancock Life Insurance Company (John Hancock), respectively. Reinsurance Assumed Reinsurance premiums assumed are calculated based upon payments received from ceding companies
together with accrual estimates, which are based on both payments received and in force policy
information received from ceding companies. Any subsequent differences arising on such estimates
are recorded in the period in which they are determined. Fee Income The Company primarily derives income from fees received from providing administrative services. Fee
income is earned when services are performed. Reserves Reserves are established according to GAAP, using generally accepted actuarial methods and are
based on a number of factors. These factors include experience derived from historical claim
payments and
actuarial assumptions to arrive at loss development factors. Such assumptions and other factors
include trends, the incidence of incurred claims, the extent to which all claims have been
reported, and internal F-14




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  claims processing charges. The process used in computing reserves cannot be
exact, particularly for liability coverages, since actual claim costs are dependent upon such
complex factors as inflation, changes in doctrines of legal liabilities and damage awards. The
methods of making such estimates and establishing the related liabilities are periodically reviewed
and updated. Short Duration Contracts For short duration contracts, claims and benefits payable reserves are recorded when insured events
occur. The liability is based on the expected ultimate cost of settling the claims. The claims
and benefits payable reserves include (1) case basis reserves for known but unpaid claims as of the
balance sheet date; (2) incurred but not reported (IBNR) reserves for claims where the insured
event has occurred but has not been reported to the Company as of the balance sheet date; and (3)
loss adjustment expense reserves for the expected handling costs of settling the claims. For group disability, the case reserves and the IBNR are recorded at an amount equal to the net
present value of the expected claims future payments. Group long-term disability and group term
life waiver of premiums reserves are discounted to the valuation date at the valuation interest
rate. The valuation interest rate is reviewed quarterly by taking into consideration actual and
expected earned rates on our asset portfolio, with adjustments for investment expenses and
provisions for adverse deviation. Group long-term disability and group term life reserve adequacy
studies are performed annually, and morbidity and mortality assumptions are adjusted where
appropriate. Unearned premium reserves are maintained for the portion of the premiums on short duration
contracts that is related to the unexpired period of the policies. Long Duration Contracts Future policy benefits and expense reserves on LTC, life insurance policies that are no longer
offered, individual medical polices issued prior to 2003 or issued in a limited number of
jurisdictions and the traditional life insurance contracts within FFG are recorded at the present
value of future benefits to be paid to policyholders and related expenses less the present value of
the future net premiums. These amounts are estimated and include assumptions as to the expected
investment yield, inflation, mortality, morbidity and withdrawal rates as well as other assumptions
that are based on the Companys experience. These assumptions reflect anticipated trends and
include provisions for possible unfavorable deviations. Future policy benefits and expense reserves for pre-funded funeral investment-type annuities,
universal life insurance policies and investment-type annuity contracts no longer offered, and the
variable life insurance and investment-type annuity contracts in FFG consist of policy account
balances before applicable surrender charges and certain deferred policy initiation fees that are
being recognized in income over the terms of the policies. 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 pre-funded funeral investment-type
annuities ranged from 2.5% to 5.5% in 2004, 2003 and 2002. Future policy benefits and expense reserves for pre-funded funeral life insurance contracts are
recorded as the present value of future benefits to policyholders and related expenses less the
present value of future net premiums. Reserve assumptions are selected using best estimates for
expected investment yield, F-15




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  inflation, mortality and withdrawal rates. These assumptions reflect
current trends, are based on Company experience and include provision for possible unfavorable
deviation. An unearned revenue reserve is also recorded for these contracts which represents the
balance of the excess of gross premiums over net premiums that is still to be recognized in future
years income in a constant relationship to insurance in force. Changes in the estimated liabilities are charged or credited to operations as the estimates are
revised. Guaranty Fund Assessments There are a number of insurance companies that are currently under regulatory supervision. This
may result in future assessments to the Company 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. Recent Accounting Pronouncements In April 2003, the FASB issued FAS 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities (FAS 149). This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities under FAS 133,
Accounting for Derivative Instruments and Hedging Activities. This Statement is effective
prospectively for contracts entered into or modified after June 30, 2003 and prospectively for
hedging relationships designated after June 30, 2003. The adoption of this standard did not have a
material impact on the Companys financial position or results of operations. On July 7, 2003, the Accounting Standards Executive Committee (AcSEC) of the American Institute
of Certified Public Accountants (AICPA) issued Statement of Position 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long Duration Contracts and for
Separate Accounts(SOP 03-1). SOP 03-1 provides guidance on a number of topics unique to
insurance enterprises, including separate account presentation, interest in separate accounts,
gains and losses on the transfer of assets from the general account to a separate account,
liability valuation, returns based on a contractually referenced pool of assets or index,
accounting for contracts that contain death or other insurance benefit features, accounting for
reinsurance and other similar contracts, accounting for annuitization benefits and sales
inducements to contract holders. SOP 03-1 was effective for the Companys financial statements on
January 1, 2004. The adoption of this statement did not have a material impact on the Companys
financial position or the results of operations. In December 2003, the FASB issued FAS 132 (Revised 2003), Employers Disclosure about Pensions and
Other Postretirement Benefits(FAS 132  Revised 2003). This statement revises employers
disclosure about pension plans and other postretirement benefit plans. This statement does not
change the measurement or recognition of those plans required by FAS No. 87, Employers Accounting
for Pensions, No. 88, Employers Accounting for Settlement and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers Accounting for Postretirement
Benefits Other Than
Pensions. This statement retains the disclosure requirements contained in FAS 132, Employers
Disclosure about Pensions and Other Postretirement Benefits, which it replaces. It requires
additional disclosure to that found in FAS 132 about the assets, obligations, cash flows, and net
periodic benefit cost F-16




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  of defined benefit pension plans and other defined benefit postretirement
plans and was effective for fiscal year ending after December 15, 2003. The Companys Parent fully
adopted this statement. In March 2004, the Emerging Issues Task Force (EITF) reached a final consensus on Issue 03-1, The
Meaning of Other Than Temporary Impairment and Its Application to Certain Investments(EITF
03-1). EITF 03-1 provides guidance on the disclosure requirements for other than temporary
impairments of debt and marketable equity investments that are accounted for under Financial
Accounting Standard 115 (FAS 115). EITF 03-1 also provides guidance for evaluating whether an
investment is other than temporarily impaired. The adoption of EITF 03-1 required the Company to
include certain quantitative and qualitative disclosures for debt and marketable equity securities
classified as available-for-sale or held-to-maturity under FAS 115 that are impaired at the balance
sheet date but for which an other than temporary impairment has not been recognized. The
disclosures were effective for financial statements for fiscal years ending after December 15,
2003. The Company adopted the disclosure requirements of EITF 03-1 at December 31, 2003. The
guidance for evaluating whether an investment is other than temporarily impaired is effective for
reporting periods beginning after June 15, 2004; however, the Financial Accounting Standards Board
(FASB) has issued two new proposed Staff Positions. EITF 03-1a, which would defer the June 15,
2004 effective date of the requirement to record impairment losses caused by the effect of
increases in interest rates or sector spreads on debt securities subject to paragraph 16 of EITF
03-1 until further guidance is provided and EITF 03-1b, which would exclude minor impairments from
the requirement. Both Staff Positions are still in the comment period phase. The Company is
continuing to evaluate the impact of adoption of this issue given the fact that portions of the
issue are still in the comment period. The Company currently follows the guidance on other than
temporary impairments provided by Staff Accounting Bulletin (SAB) 59, Accounting for Noncurrent
Marketable Equity Securities. In May 2004, the FASB issued FASB Staff Position (FSP) FAS 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(FAS 106-2), which provides guidance on accounting for the effects of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduces (1) a prescription
drug benefit under Medicare and (2) a federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The FASB
concluded that the subsidy should be treated as an actuarial gain pursuant to FAS 106, Employers
Accounting for Postretirement Benefits Other Than Pensions. FAS 106-2 is effective for the first
interim period or annual period beginning after June 15, 2004. Since the effects of the Act were
not considered a significant event, the effects of the Act were incorporated in the next
measurement of plan assets and obligations, December 31, 2004. The Company believes that it will be
entitled to the subsidy. Therefore, the Company adopted FAS 106-2 as of December 31, 2004. The
adoption of FAS 106-2 did not have a material effect on either the Companys accumulated
postretirement benefit obligation or its financial position or results of operations. F-17




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)   3.
    Investments The amortized cost and fair value of fixed maturities and equity securities at December 31, 2004
were as follows: Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturitiesBonds:United States Government and government
agencies and authorities
    
    $
    397,679
    
    
    $
    12,531
    
    
    $
    (1,200
    )
    
    $
    409,010States, municipalities and political subdivisions
    
    
    21,442
    
    
    
    1,432
    
    
    
    (1
    )
    
    
    22,873Foreign governments
    
    
    181,537
    
    
    
    11,967
    
    
    
    (8
    )
    
    
    193,496Public utilities
    
    
    453,889
    
    
    
    38,756
    
    
    
    (291
    )
    
    
    492,354All other corporate bonds
    
    
    2,302,121
    
    
    
    187,522
    
    
    
    (3,011
    )
    
    
    2,486,632Total fixed maturities
    
    $
    3,356,668
    
    
    $
    252,208
    
    
    $
    (4,511
    )
    
    $
    3,604,365Equity securitiesNon-redeemable preferred stocks:Non-sinking fund preferred stocks
    
    $
    241,101
    
    
    $
    8,081
    
    
    $
    (460
    )
    
    $
    248,722Total equity securities
    
    $
    241,101
    
    
    $
    8,081
    
    
    $
    (460
    )
    
    $
    248,722
 The amortized cost and fair value of fixed maturities and equity securities at December 31, 2003
were as follows: Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturitiesBonds:United States Government and government
agencies and authorities
    
    $
    564,124
    
    
    $
    15,429
    
    
    $
    (1,374
    )
    
    $
    578,179States, municipalities and political subdivisions
    
    
    30,089
    
    
    
    999
    
    
    
    
    
    
    
    31,088Foreign governments
    
    
    90,068
    
    
    
    7,796
    
    
    
    (90
    )
    
    
    97,774Public utilities
    
    
    396,447
    
    
    
    33,930
    
    
    
    (195
    )
    
    
    430,182All other corporate bonds
    
    
    2,146,315
    
    
    
    172,407
    
    
    
    (3,646
    )
    
    
    2,315,076Total fixed maturities
    
    $
    3,227,043
    
    
    $
    230,561
    
    
    $
    (5,305
    )
    
    $
    3,452,299Equity securitiesCommon stocks:Banks, trusts and insurance companies
    
    $
    
    
    
    $
    32
    
    
    $
    
    
    
    $
    32Non-redeemable preferred stocks:Non-sinking fund preferred stocks
    
    
    199,287
    
    
    
    8,934
    
    
    
    (104
    )
    
    
    208,117Total equity securities
    
    $
    199,287
    
    
    $
    8,966
    
    
    $
    (104
    )
    
    $
    208,149
 F-18




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  The amortized cost and fair value of fixed maturities at December 31, 2004 by contractual maturity
are shown below. Expected maturities may differ from contractual maturities because issuers of the
securities may have the right to call or prepay obligations with or without call or prepayment
penalties. Amortized Cost
    
    
    Fair ValueDue in one year or less
    
    $
    93,764
    
    
    $
    95,589Due after one year through five years
    
    
    378,611
    
    
    
    404,872Due after five years through ten years
    
    
    1,042,275
    
    
    
    1,104,188Due after ten years
    
    
    1,373,511
    
    
    
    1,524,040Total
    
    
    2,888,161
    
    
    
    3,128,689Mortgage and asset backed securities
    
    
    468,507
    
    
    
    475,676Total
    
    $
    3,356,668
    
    
    $
    3,604,365
 Gross gains of $16,151, $20,718 and $69,152 and gross losses of $6,871, $7,783 and $76,629 were
realized on sales of fixed maturities and equity securities in 2004, 2003 and 2002, respectively. Major categories of net investment income were as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Fixed maturities
    
    $
    207,711
    
    
    $
    195,500
    
    
    $
    200,458Equity securities
    
    
    16,117
    
    
    
    12,097
    
    
    
    10,364Commercial mortgage loans on real estate
    
    
    55,329
    
    
    
    49,940
    
    
    
    52,392Policy loans
    
    
    574
    
    
    
    588
    
    
    
    575Short-term investments
    
    
    714
    
    
    
    1,363
    
    
    
    728Other investments
    
    
    4,805
    
    
    
    8,592
    
    
    
    1,932Cash and cash equivalents
    
    
    264
    
    
    
    198
    
    
    
    21Investment expenses
    
    
    (9,821
    )
    
    
    (8,474
    )
    
    
    (7,880
    )Net investment income
    
    $
    275,693
    
    
    $
    259,804
    
    
    $
    258,590
 The net realized gains (losses) recorded in income for 2004, 2003 and 2002 are summarized as
follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Fixed maturities
    
    $
    8,651
    
    
    $
    5,014
    
    
    $
    (50,698
    )Equity securities
    
    
    498
    
    
    
    (127
    )
    
    
    3,981Total marketable securities
    
    
    9,149
    
    
    
    4,887
    
    
    
    (46,717
    )Real estate
    
    
    (130
    )
    
    
    
    
    
    
    917Other
    
    
    (648
    )
    
    
    (978
    )
    
    
    (1
    )Total
    
    $
    8,371
    
    
    $
    3,909
    
    
    $
    (45,801
    )
 F-19




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  The Company recorded $131, $8,048 and $39,240 of pre-tax realized losses in 2004, 2003 and 2002,
respectively, associated with other-than-temporary declines in value of available for sale
securities. The investment category and duration of the Companys gross unrealized losses on fixed maturities
and equity securities at December 31, 2004 were as follows: Less than 12 months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesFixed maturitiesBonds:United States Government and government
agencies and authorities
    
    $
    25,493
    
    
    $
    (553
    )
    
    $
    19,646
    
    
    $
    (647
    )
    
    $
    45,139
    
    
    $
    (1,200
    )States, municipalities and political subdivisions
    
    
    1,095
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    1,095
    
    
    
    (1
    )Foreign governments
    
    
    2,111
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    2,111
    
    
    
    (8
    )Public utilities
    
    
    35,647
    
    
    
    (291
    )
    
    
    
    
    
    
    
    
    
    
    35,647
    
    
    
    (291
    )All other corporate bonds
    
    
    185,309
    
    
    
    (2,426
    )
    
    
    17,422
    
    
    
    (585
    )
    
    
    202,731
    
    
    
    (3,011
    )Total fixed maturities
    
    $
    249,655
    
    
    $
    (3,279
    )
    
    $
    37,068
    
    
    $
    (1,232
    )
    
    $
    286,723
    
    
    $
    (4,511
    )Equity securitiesNon-redeemable preferred stocks:Non-sinking fund preferred stocks
    
    
    29,961
    
    
    
    (457
    )
    
    
    140
    
    
    
    (3
    )
    
    
    30,101
    
    
    
    (460
    )Total equity securities
    
    $
    29,961
    
    
    $
    (457
    )
    
    $
    140
    
    
    $
    (3
    )
    
    $
    30,101
    
    
    $
    (460
    )
 The total unrealized loss represents less than 2% of the aggregate fair value of the related
securities. Approximately 75% of these securities in an unrealized loss position have been in a
continuous loss position for less than twelve months. The total unrealized losses on securities
that were in a continuous unrealized loss position for longer than six months but less than 12
months were approximately $2,254, with no security with a book value greater than $1,000 having a
market value below 94% of book value. As part of the Companys ongoing monitoring process, the Company regularly reviews its investment
portfolio to ensure that investments that may be other than temporarily impaired are identified on
a timely basis and that any impairment is charged against earnings in the proper period. The
Company has reviewed these securities and concluded that there were no additional other than
temporary impairments as of December 31, 2004. Due to issuers continued satisfaction of the
securities obligations in accordance with their contractual terms and their continued expectations
to do so, as well as the Companys evaluation of the fundamentals of the issuers financial
condition, the Company believes that the securities in an unrealized loss status are not impaired
and intends to hold them until recovery. The Company has made commercial mortgage loans, collateralized by the underlying real estate, on
properties located throughout the United States. At December 31, 2004, approximately 52.5% of the
outstanding principal balance of commercial mortgage loans was concentrated in the states of
California, New York, Pennsylvania and Florida. Although the Company has a diversified loan
portfolio, an economic downturn could have an adverse impact on the ability of its debtors to repay
their loans. The outstanding balance of commercial mortgage loans range in size from $43 to $12,962
at December 31, 2004. The mortgage loan balance is net of an allowance for losses of $12,820 and
$13,287 at December 31, 2004 and 2003, respectively. The Company had fixed maturities carried at $293,587 and $188,785 at December 31, 2004 and 2003,
respectively, on deposit with various governmental authorities as required by law. F-20




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  Security Lending The Company engages in a securities lending program where bonds issued by the United States
Government, Government agencies, and U.S. Corporations, are loaned to selected broker/dealers. The
company receives cash collateral in an amount that is in excess of the market value of securities
loaned. The Company monitors the fair value of securities loaned and the collateral received, with
additional collateral obtained as necessary. At December 31, 2004 and 2003, securities with a fair
value of $319,227 and $376,234 respectively, were on loan to select
brokers and are included in the Companys available for sale
investments. At December 31, 2004 and
2003, collateral with a fair value of $332,276 and $379,898,
respectively, is included in the Companys assets with an
offsetting liability. The Company had a revision on the
classification in the 2003 balance sheet to reflect the collateral
held under securities lending. 4. Income Taxes The Company and its subsidiary are subject to U.S. tax and is part of a U.S. consolidated federal
income tax return with its parent, Assurant, Inc. Information about current and deferred tax expense follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Current expense:Federal
    
    $
    35,219
    
    
    $
    20,400
    
    
    $
    20,320Foreign
    
    
    494
    
    
    
    2,821
    
    
    
    485Total current expense
    
    
    35,713
    
    
    
    23,221
    
    
    
    20,805Deferred expense (benefit):Federal
    
    
    24,712
    
    
    
    43,914
    
    
    
    23,420Foreign
    
    
    (615
    )
    
    
    (522
    )
    
    
    Total deferred expense (benefit)
    
    
    24,097
    
    
    
    43,392
    
    
    
    23,420Total income tax expense
    
    $
    59,810
    
    
    $
    66,613
    
    
    $
    44,225
 International operations of the Company are subject to
income taxes imposed by the jurisdiction in which they operate. F-21




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  A reconciliation of the federal income tax rate to the Companys effective income tax rate follows: December 31,2004
    
    
    2003
    
    
    2002Federal income tax rate:
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Reconciling items:Dividends received deduction
    
    
    (2.7
    )
    
    
    (1.5
    )
    
    
    (0.5
    )Permanent nondeductible expenses
    
    
    0.2
    
    
    
    0.4
    
    
    
    (0.2
    )Adjustment for deferred liabilities
    
    
    (0.5
    )
    
    
    (0.9
    )
    
    
    Change in reserve for prior year taxes
    
    
    1.7
    
    
    
    
    
    
    
    Goodwill
    
    
    
    
    
    
    0.5
    
    
    
    Other
    
    
    (0.4
    )
    
    
    0.4
    
    
    
    (3.8
    )Effective income tax rate:
    
    
    33.3
    %
    
    
    33.9
    %
    
    
    30.5
    %
 The tax effects of temporary differences that result in significant deferred tax assets and
deferred tax liabilities are as follows: December 31,2004
    
    
    2003Deferred tax assets:Policyholder and separate account reserves
    
    $
    24,044
    
    
    $
    18,974Accrued liabilities
    
    
    12,631
    
    
    
    13,067Investment adjustments
    
    
    2,130
    
    
    
    1,614Deferred acquisition costs
    
    
    17,014
    
    
    
    12,606Deferred gains on reinsurance
    
    
    73,685
    
    
    
    89,252Other
    
    
    
    
    
    
    12,913Gross deferred tax assets
    
    
    129,504
    
    
    
    148,426Deferred tax liabilities:Unrealized gains on fixed maturities and equities
    
    
    90,245
    
    
    
    81,936Other Liabilities
    
    
    18,744
    
    
    
    12,241Gross deferred tax liabilities
    
    
    108,989
    
    
    
    94,177Net deferred income tax asset
    
    $
    20,515
    
    
    $
    54,249
 Under pre-1984 life insurance company income tax laws, a portion of a life insurance companys
gain from operations was not subject to current income taxation but was accumulated, for tax
purposes, in a memorandum account designated as policyholders surplus account. Amounts in this
account only become taxable upon the occurrence of certain events. The approximate amount in this
account was $12,145 at December 31, 2004 and 2003. The Company anticipates designating dividends
in the amount of $12,145 over the next two years to be taken from the policyholders surplus
account. In accordance with the JOBs Act, there will be no federal income tax on these amounts. At December 31, 2004, the Company and its subsidiaries had capital loss carryforwards for U.S.
federal income tax purposes. Capital loss carryforwards total $14,634 and will all expire in 2007
if unused. F-22




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)   5.
    Stockholders Equity The Board of Directors of the Company has authorized 1,000,000 shares of common stock with a par
value of $5 per share. All the shares are issued and outstanding as of December 31, 2004, 2003, and
2002. All the outstanding shares at December 31, 2004 are owned by Assurant, Inc. (see Note 1).
The Company paid dividends of $75,000, $0 and $60,000 at December 31, 2004, 2003 and 2002,
respectively. The maximum amount of dividends which can be paid by the State of Iowa insurance companies to
shareholders without prior approval of the Insurance Commissioner is subject to restrictions
relating to statutory surplus (see Note 6).  6.
    Statutory Information Statutory-basis financial statements are prepared in accordance with accounting practices
prescribed or permitted by the Iowa Department of Commerce. The principal differences between statutory accounting principles (SAP) and GAAP are: 1) policy
acquisition costs are expensed as incurred under SAP, but are deferred and amortized under GAAP; 2)
the value of business acquired is not capitalized under SAP but is under GAAP; 3) amounts collected
from holders of universal life-type and annuity products are recognized as premiums when collected
under SAP, but are initially recorded as contract deposits under GAAP, with cost of insurance
recognized as revenue when assessed and other contract charges recognized over the periods for
which services are provided; 4) the classification and carrying amounts of investments in certain
securities are different under SAP than under GAAP; 5) the criteria for providing asset valuation
allowances, and the methodologies used to determine the amounts thereof, are different under SAP
than under GAAP; 6) the timing of establishing certain reserves, and the methodologies used to
determine the amounts thereof, are different under SAP than under GAAP; and 7) certain assets are
not admitted for purposes of determining surplus under SAP. The Companys statutory net income and capital and surplus are as follows: Years Ended and atDecember 31,2004
    
    
    2003
    
    
    2002(Unaudited)Statutory Net Income
    
    $
    123,810
    
    
    $
    121,896
    
    
    $
    111,378Statutory Capital and Surplus
    
    $
    584,177
    
    
    $
    560,896
    
    
    $
    503,324
 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. Dividend distributions to the parent are restricted as to the amount by state regulatory
requirements. A dividend is extraordinary when combined with all other dividends and distributions
made with in the preceding 12 months exceeds the greater of 10% of the insurers surplus as regards
to policyholders on December 31 of the next preceding year, or the net gain from operations. In
2004, the Company declared F-23




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  and paid dividends of $75,000, all of which were ordinary. In 2003, the Company declared no
dividends. In 2002, the Company declared and paid dividends of $60,000, all of which were
ordinary. The Company has the ability, under state regulatory requirements, to dividend up to
$120,280 to its parent in 2005 without permission from Iowa regulators.  7.
    Reinsurance In the ordinary course of business, the Company is involved in both the assumption and cession of
reinsurance with non-affiliated companies. The following table provides details of the reinsurance
recoverables balance for the years ended December 31: 2004
    
    
    2003Ceded future policy holder benefits and expense
    
    $
    1,155,253
    
    
    $
    1,132,484Ceded unearned premium
    
    
    19,336
    
    
    
    19,898Ceded claims and benefits payable
    
    
    43,566
    
    
    
    40,459Ceded paid losses
    
    
    19,956
    
    
    
    17,458Total
    
    $
    1,238,111
    
    
    $
    1,210,299
 The effect of reinsurance on premiums earned and benefits incurred was as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Long
    
    
    Short
    
    
    
    
    
    
    Long
    
    
    Short
    
    
    
    
    
    
    Long
    
    
    ShortDuration
    
    
    Duration
    
    
    Total
    
    
    Duration
    
    
    Duration
    
    
    Total
    
    
    Duration
    
    
    Duration
    
    
    TotalGross earnedPremiums and other
considerations
    
    $
    512,103
    
    
    $
    1,367,271
    
    
    $
    1,879,374
    
    
    $
    523,173
    
    
    $
    1,293,519
    
    
    $
    1,816,692
    
    
    $
    630,036
    
    
    $
    1,185,372
    
    
    $
    1,815,408Premiums assumed
    
    
    18,383
    
    
    
    160,827
    
    
    
    179,210
    
    
    
    23,335
    
    
    
    194,222
    
    
    
    217,557
    
    
    
    30,431
    
    
    
    249,311
    
    
    
    279,742Premiums ceded
    
    
    (278,496
    )
    
    
    (23,768
    )
    
    
    (302,264
    )
    
    
    (304,638
    )
    
    
    (23,930
    )
    
    
    (328,568
    )
    
    
    (384,547
    )
    
    
    (24,239
    )
    
    
    (408,786
    )Net earned premiums
and other
considerations
    
    $
    251,990
    
    
    $
    1,504,330
    
    
    $
    1,756,320
    
    
    $
    241,870
    
    
    $
    1,463,811
    
    
    $
    1,705,681
    
    
    $
    275,920
    
    
    $
    1,410,444
    
    
    $
    1,686,364Gross policyholderBenefits
    
    $
    771,003
    
    
    $
    935,634
    
    
    $
    1,706,637
    
    
    $
    843,127
    
    
    $
    869,393
    
    
    $
    1,712,520
    
    
    $
    960,342
    
    
    $
    860,953
    
    
    $
    1,821,295Benefits assumed
    
    
    43,067
    
    
    
    151,705
    
    
    
    194,772
    
    
    
    48,478
    
    
    
    173,261
    
    
    
    221,739
    
    
    
    49,893
    
    
    
    187,781
    
    
    
    237,674Benefits ceded
    
    
    (545,646
    )
    
    
    (3,761
    )
    
    
    (549,407
    )
    
    
    (635,745
    )
    
    
    (13,791
    )
    
    
    (649,536
    )
    
    
    (741,424
    )
    
    
    (12,780
    )
    
    
    (754,204
    )Net policyholder
benefits
    
    $
    268,424
    
    
    $
    1,083,578
    
    
    $
    1,352,002
    
    
    $
    255,860
    
    
    $
    1,028,863
    
    
    $
    1,284,723
    
    
    $
    268,811
    
    
    $
    1,035,954
    
    
    $
    1,304,765
 The Company had $108,097 and $112,027 of assets held in trusts as of December 31, 2004 and 2003,
respectively, for the benefit of others related to certain reinsurance arrangements. The Company utilizes ceded reinsurance for loss protection and capital management, business
divestitures, client risk and profit sharing. F-24




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  Loss Protection and Capital Management As part of the Companys overall risk and capacity management strategy, the Company purchases
reinsurance for certain risks underwritten by the Company, including significant individual or
catastrophic claims, and to free up capital to enable the Company to write additional business. Under indemnity reinsurance transactions in which the Company is the ceding insurer, the Company
remains liable for policy claims if the assuming company fails to meet its obligations. To limit
this risk, the Company has control procedures in place to evaluate the financial condition of
reinsurers and to monitor the concentration of credit risk to minimize this exposure. The
selection of reinsurance companies is based on criteria related to solvency and reliability and, to
a lesser degree, diversification as well as on developing strong relationships with the Companys
reinsurance partners for the sharing of risks. Business Divestitures The Company has used reinsurance to exit certain businesses. Assets backing ceded liabilities
related to this business are held in trust for the benefit of the Company and the separate accounts
relating to FFG are still reflected as separate accounts in the Companys balance sheet. In 2001, the Company entered into a reinsurance agreement with the Hartford for the sale of its FFG
division. The reinsurance recoverable from the Hartford was $870,764 and $890,592 as of December
31, 2004 and 2003, respectively. The Company would be responsible to administer this business in
the event of a default by the reinsurer. In addition, under the reinsurance agreement, the
Hartford is obligated to contribute funds to increase the value of the separate account assets
relating to modified guaranteed annuity business sold if such value declines below the value of the
associated liabilities. If the Hartford fails to fulfill these obligations, the Company will be
obligated to make these payments. In 2000, the Company divested its LTC operations to John Hancock. Reinsurance recoverable from John
Hancock was $290,993 and $239,621 as of December 31, 2004 and 2003, respectively. F-25




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)   8.
    Reserves The following table provides reserve information by major lines of business as of: December 31, 2004
    
    
    December 31, 2003Future Policy
    
    
    
    
    
    
    Claims and
    
    
    Future Policy
    
    
    
    
    
    
    Claims andBenefits and
    
    
    Unearned
    
    
    Benefits
    
    
    Benefits and
    
    
    Unearned
    
    
    BenefitsExpenses
    
    
    Premiums
    
    
    Payable
    
    
    Expenses
    
    
    Premiums
    
    
    PayableLong Duration Contracts:Pre-funded funeral life
insurance policies and
investment-type annuity
contracts
    
    $
    1,614,342
    
    
    $
    1,984
    
    
    $
    6,628
    
    
    $
    1,471,865
    
    
    $
    2,042
    
    
    $
    5,792Life insurance no longer
offered
    
    
    297,082
    
    
    
    731
    
    
    
    933
    
    
    
    304,773
    
    
    
    715
    
    
    
    1,788FFG and LTC disposed
businesses
    
    
    1,112,101
    
    
    
    19,087
    
    
    
    30,568
    
    
    
    1,088,799
    
    
    
    19,257
    
    
    
    22,159All other
    
    
    4,505
    
    
    
    122
    
    
    
    2,430
    
    
    
    3,887
    
    
    
    521
    
    
    
    3,819Short Duration Contracts:Group term life
    
    
    
    
    
    
    8,995
    
    
    
    369,435
    
    
    
    
    
    
    
    12,375
    
    
    
    368,873Group disability
    
    
    
    
    
    
    3,714
    
    
    
    1,378,853
    
    
    
    
    
    
    
    3,830
    
    
    
    1,313,014Medical
    
    
    
    
    
    
    8,437
    
    
    
    43,967
    
    
    
    
    
    
    
    11,219
    
    
    
    38,108Dental
    
    
    
    
    
    
    3,088
    
    
    
    31,794
    
    
    
    
    
    
    
    
    
    
    
    34,881Other
    
    
    
    
    
    
    70
    
    
    
    20,000
    
    
    
    
    
    
    
    43
    
    
    
    22,413Total
    
    $
    3,028,030
    
    
    $
    46,228
    
    
    $
    1,884,608
    
    
    $
    2,869,324
    
    
    $
    50,002
    
    
    $
    1,810,847
 The Companys short duration group disability category includes short and long term disability
products. Claims and benefits payable for long-term disability have been discounted at 5.25%. The
December 31, 2004 and 2003 liabilities include $1,367,434 and $1,301,790, respectively of such
reserves. The amount of discounts deducted from outstanding reserves as of December 31, 2004 and
2003 are $432,483 and $419,983, respectively.  9.
    Fair Value Disclosures Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial
Instruments(FAS 107) requires disclosure of fair value information about financial instruments,
as defined therein, for which it is practicable to estimate such fair value. These financial
instruments may or may not be recognized in the consolidated balance sheets. In the measurement of
the fair value of certain financial instruments, if quoted market prices were not available other
valuation techniques were utilized. These derived fair value estimates are significantly affected
by the assumptions used. Additionally, FAS 107 excludes certain financial instruments including
those related to insurance contracts. In estimating the fair value of the financial instruments presented, the Company used the following
methods and assumptions: Cash, cash equivalents and short-term investments: the carrying amount reported approximates fair
value because of the short maturity of the instruments. F-26




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  Fixed maturity securities: the fair value for fixed maturity securities is 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. Equity securities: fair value of equity securities and non-sinking fund preferred stocks is based
upon quoted market prices. Commercial mortgage loans and policy loans: the fair values of mortgage loans are estimated using
discounted cash flow analyses, based on 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 amounts of policy loans are reported in the balance
sheets at amortized cost, which approximates fair value. Other investments: the fair values of joint ventures are calculated based on fair market value
appraisals. The carrying amounts of the remaining other investments approximate fair value. Policy reserves under investment products: the fair values for the Companys policy reserves under
the investment products are determined using cash surrender value. Collateral and obligations
under securities lending: the fair values of securities lending
assets and liabilities are based on quoted market prices. Separate account assets and liabilities: separate account assets and liabilities are reported at
their estimated fair values in the balance sheet. Other assets:a derivative instrument, the CPI CAP, is recorded in other assets. The fair value
of this derivative is based upon quoted market prices. December 31, 2004
    
    
    December 31, 2003Carrying Value
    
    
    Fair Value
    
    
    Carrying Value
    
    
    Fair ValueFinancial assetsCash and cash equivalents
    
    $
    43,362
    
    
    $
    43,362
    
    
    $
    29,176
    
    
    $
    29,176Fixed maturities
    
    
    3,604,365
    
    
    
    3,604,365
    
    
    
    3,452,299
    
    
    
    3,452,299Equity securities
    
    
    248,722
    
    
    
    248,722
    
    
    
    208,149
    
    
    
    208,149Commercial mortgage loans on real estate
    
    
    695,921
    
    
    
    779,111
    
    
    
    634,615
    
    
    
    694,890Policy loans
    
    
    9,956
    
    
    
    9,956
    
    
    
    10,678
    
    
    
    10,678Short-term investments
    
    
    47,989
    
    
    
    47,989
    
    
    
    71,057
    
    
    
    71,057Collateral
held under securities lending
    
    
    332,276
    
    
    
    332,276
    
    
    
    379,898
    
    
    
    379,898Other investments
    
    
    45,171
    
    
    
    45,171
    
    
    
    51,831
    
    
    
    51,831Other assets
    
    
    9,850
    
    
    
    9,850
    
    
    
    8,800
    
    
    
    8,800Assets held in separate accounts
    
    
    3,435,089
    
    
    
    3,435,089
    
    
    
    3,516,070
    
    
    
    3,516,070Financial liabilitiesPolicy reserves under investment products
(Individual and group annuities, subject to
discretionary withdrawal)
    
    $
    595,799
    
    
    $
    588,190
    
    
    $
    564,540
    
    
    $
    556,524Obligations
under securities lending
    
    
    332,276
    
    
    
    332,276
    
    
    
    379,898
    
    
    
    379,898Liabilities related to separate accounts
    
    
    3,435,089
    
    
    
    3,435,089
    
    
    
    3,516,070
    
    
    
    3,516,070
 The fair value of the Companys liabilities for insurance contracts other than investment-type
contracts are not required to be disclosed. However, the fair values of liabilities under all
insurance contracts are taken into consideration in the Companys overall management of interest
rate risk, such that the F-27




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)  Companys exposure to changing interest rates is minimized through the matching of investment
maturities with amounts due under insurance contracts.  10.
    Retirement and Other Employee Benefits The Company is an indirect wholly-owned subsidiary of Assurant, Inc., which sponsors a defined
benefit pension plan and certain other post retirement benefits covering employees and certain
agents who meet eligibility requirements as to age and length of service. Plan assets of the
defined benefit plans are not specifically identified by each participating subsidiary. Therefore,
a breakdown of plan assets is not reflected in these financial statements. The Company has no
legal obligation for benefits under these plans. The benefits are based on years of service and
career compensation. Assurants pension plan 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 $9,523, $6,329 and $3,640 for 2004, 2003 and 2002, respectively. The Company participates in a contributory profit sharing plan, sponsored by Assurant, 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. For employees hired on or before December 31, 2000, the first
3% of an employees contribution is matched 200% by the Company. The second 2% is matched 50% by
the Company. For employees hired after December 31, 2000, the first 3% of an employees
contribution is matched 100% by the Company. The second 2% is matched 50% by the Company. The
amount expensed was approximately $4,902, $5,214 and $5,344 for 2004, 2003 and 2002, respectively. With respect to retirement benefits, the Company participates in other health care and life
insurance benefit plans (postretirement benefits) for retired employees, sponsored by Assurant.
Health care benefits, either through a Assurant 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 10 years or
more service. Life insurance, on a retiree pay all basis, is available to those who retire on or
after January 1, 1993. There were no net postretirement benefit costs allocated to the Company for the years ended
December 31, 2004, 2003 and 2002. The Company made contributions to the postretirement benefit
plans of approximately $4,024, $1,961 and $2,275 in 2004, 2003 and 2002, respectively, as claims
were incurred. During 2004, 2003 and 2002 the Company incurred expenses related to retirement
benefits of $4,356, $2,247 and $1,223, respectively. F-28




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)   12.
    Deferred Policy Acquisition Costs Information about deferred policy acquisition costs follows: December 31,2004
    
    
    2003
    
    
    2002Beginning Balance
    
    $
    103,606
    
    
    $
    77,737
    
    
    $
    47,093Costs deferred
    
    
    78,106
    
    
    
    74,048
    
    
    
    73,616Amortization
    
    
    (68,508
    )
    
    
    (52,630
    )
    
    
    (43,033
    )Foreign currency translation
    
    
    2,856
    
    
    
    4,451
    
    
    
    61Ending Balance
    
    $
    116,060
    
    
    $
    103,606
    
    
    $
    77,737
  13.
    Goodwill and Value of Business Acquired Information about goodwill and value of business acquired (VOBA) follows: Goodwill for the Year Ended
    
    
    VOBA for the Year EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Beginning Balance
    
    $
    156,985
    
    
    $
    156,006
    
    
    $
    147,972
    
    
    $
    45,710
    
    
    $
    52,643
    
    
    $
    61,312Amortization, net of
interest accrued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,503
    )
    
    
    (7,466
    )
    
    
    (8,694
    )Foreign Currency
Translation and
Other
    
    
    (881
    )
    
    
    979
    
    
    
    8,034
    
    
    
    206
    
    
    
    533
    
    
    
    25Ending Balance
    
    $
    156,104
    
    
    $
    156,985
    
    
    $
    156,006
    
    
    $
    39,413
    
    
    $
    45,710
    
    
    $
    52,643
 As of December 31, 2004, the majority of the outstanding balance of VOBA is in the Companys
PreNeed segment. VOBA in this segment assumes an interest rate ranging from 6.5% to 7.5%. At December 31, 2004 the estimated amortization of VOBA for the next five years is as follows: Year
    
    Amount2005
    
    
    5,2402006
    
    
    4,4792007
    
    
    3,7872008
    
    
    2,9932009
    
    
    2,219
 F-29




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)   14.
    Other Comprehensive Income The Companys components of other comprehensive income (loss) net of tax at December 31 are as
follows: Foreign CurrencyTranslation
    
    
    Unrealized Gains on
    
    
    Accumulated OtherAdjustment
    
    
    Securities
    
    
    Comprehensive IncomeBalance at December 31, 2001
    
    $
    657
    
    
    $
    27,757
    
    
    $
    28,414Activity in 2002
    
    
    (1,913
    )
    
    
    74,696
    
    
    
    72,783Balance at December 31, 2002
    
    
    (1,256
    )
    
    
    102,453
    
    
    
    101,197Activity in 2003
    
    
    5,189
    
    
    
    50,016
    
    
    
    55,205Balance at December 31, 2003
    
    
    3,933
    
    
    
    152,469
    
    
    
    156,402Activity in 2004
    
    
    2,784
    
    
    
    13,489
    
    
    
    16,273Balance at December 31, 2004
    
    $
    6,717
    
    
    $
    165,958
    
    
    $
    172,675
  15.
    Related Party Transactions The Company receives various services from Assurant and its affiliates. These services include
assistance in benefit plan administration, corporate insurance, accounting, tax, auditing,
investment, information technology and other administrative functions. The fees paid to Assurant,
Inc. for these services for years ended December 31, 2004, 2003 and 2002, were $18,735, $15,518 and
$15,406, respectively. Information technology expenses were $11,725, $11,048 and $8,711 for years
ended December 31, 2004, 2003 and 2002, 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. The Company assumes pre-funded funeral business from its affiliate, United Family Life Insurance
Company (UFL). The Company has assumed premium from UFL of $15,136, $19,332 and $25,048 in 2004,
2003 and 2002, respectively. The Company assumed $600,447 and $632,716 of reserves in 2004 and
2003, respectively, from UFL. The Company assumes group disability business from its affiliate, First Fortis Life Insurance
Company (First Fortis). The Company has assumed $6,526, $5,847 and $6,705 of premium from First
Fortis in 2004, 2003 and 2002, respectively. The Company has assumed $23,533 and $22,096 of
reserves in 2004 and 2003, respectively, from First Fortis. F-30




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##### Table of Contents



Fortis Benefits Insurance Company
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands except share data)   16.
    Commitments and Contingencies The Company and its subsidiaries lease office space and equipment under operating lease
arrangements. Certain facility leases contain escalation clauses based on increases in the lessors
operating expenses. At December 31, 2004, the aggregate future minimum lease payment under
operating lease agreements that have initial or non-cancelable terms in excess of one year are: 2005
    
    
    9,7412006
    
    
    8,1542007
    
    
    6,6212008
    
    
    5,6192009
    
    
    4,235Thereafter
    
    
    7,715Total minimum future lease payments
    
    $
    42,085
 Rent expense was $11,147, $10,373 and $10,262 for 2004, 2003 and 2002 respectively. The Company is regularly involved in litigation in the ordinary course of business, both as a
defendant and as a plaintiff. The Company may from time to time be subject to a variety of legal
and regulatory actions relating to the Companys current and past business operations. While the
Company cannot predict the outcome of any pending or future litigation, examination or
investigation, the Company does not believe that any pending matter will have a material adverse
effect on the Companys business, financial condition or results of operations. F-31