The following is a summary of certain financial data of First Fortis. This summary has been derived in part from the financial statements of First Fortis included elsewhere in this prospectus. You should read the following along with these financial statements.
The Company's life insurance premium increased from December 31, 2001 to December 31, 2002 principally due to additional premium levels associated with the merger. Life premiums are composed of group life and credit life business representing 73% and 27%, respectively of premium for the year ended December 31, 2002; and 88% and 12% respectively of premium for the year ended December 31, 2001. Accident and health premiums increased during 2002 as compared to 2001 primarily due to the merger as well as a 10% increase in dental premium. Offsetting this is a decrease in disability premium due to slower sales and decreases in persistency.
The Company continues to match investment portfolio composition to liquidity needs and capital requirements. Changes in interest rates during 2002 and 2001 resulted in recognition of realized gains and losses upon sales of securities. The Company realized losses of $1,077 and $ 541 in 2002 and 2001, respectively.
The total Company ratio of benefits to premium decreased in 2002 to 64% from 68% in 2001 primarily due to lower benefit to premium ratios on the merged credit business. Group life benefit to premium ratios decreased to 58% at December 31, 2002 from 63% at December 31, 2001 due to the Company's review of reserve estimates at 12/31/2002. The loss ratio increased from 72% in 2001 to 93% in 2002 as a result of increased incidence and decreased terminations.
Interest rate risk is the Company's primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the profitability of insurance products and market value of investments. The yield realized on new investments generally increases or decreases in direct relationship with interest rate changes. The market value of the Company's fixed maturity and mortgage loan portfolios generally increases when interest rates decrease and decreases when interest rates increase.
The National Association of Insurance Commissioners has implemented risk-based capital standards to determine the capital requirements of a life insurance company based upon the risks inherent in its operations. These standards require the computation of a risk-based capital amount which is then compared to a company's actual total adjusted capital. Based upon current calculation using these risk-based capital standards, the Company's percentage of total adjusted capital is in excess of ratios which would require regulatory attention.
The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of December 31, 2002 and the reported amounts of revenues and expenses for the year ended December 31, 2002.
The Company regularly reviews its fixed maturities and equity securities portfolio to evaluate the necessity of recording impairment loss for other-than-temporary declines in the fair value of investments. A number of criteria are considered during this process including, but not limited to, violations of financial covenants, public securities trading at a substantial discount to par as a result of credit concerns, securities with a market value less than carrying value for an extended period of time and other subjective factors relating to the issuer. Other than temporary impairments are recorded at the end of each quarter based on the fair value of the security at the reporting date.
Income taxes have been provided using the liability method. Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and the tax bases and are measured using the currently enacted tax rates.
To effect the Sale as it relates to the Company, The Hartford reinsured the Insurance Contracts on a 100% coinsurance basis (or a 100% modified coinsurance basis for some of the block) and agreed to administer the Insurance Contracts going forward. The Company received in connection with the Sale aggregate cash consideration of approximately $15 million from The Hartford. The reinsurance transaction resulted in a gain of $10 million which was deferred and will be amortized into income at the rate that earnings from the business sold would have been expected to emerge.
The Company is subject to the laws and regulations established by the New York State Insurance Department governing insurance business conducted in New York State. Periodic audits are conducted by the New York Insurance Department related to the Company's compliance with these laws and regulations. To date, there have been no adverse findings regarding the Company's operations.