- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 30, 1997
Commission File Number 333-1087
--------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-6200031
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CNA Plaza
Chicago, Illinois 60685
(Address of principal executive offices) (Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
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 periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No _
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 1, 1997
------------------------------ -------------------------------
Common Stock, Par value $50.00 50,000
The registrant meets the conditions set forth in General Instruction
H(1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the
reduced disclosure format.
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Page 1 of 17
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------- --------
CONDENSED FINANCIAL STATEMENTS:
BALANCE SHEET
SEPTEMBER 30, 1997 (Unaudited) AND DECEMBER 31, 1996........... 3
CONDENSED STATEMENT OF OPERATIONS (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996.................................... 4
STATEMENT OF STOCKHOLDER'S EQUITY (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996.......... 5
STATEMENT OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996.......... 6
NOTES TO CONDENSED FINANCIAL
STATEMENTS (Unaudited) SEPTEMBER 30, 1997...................... 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 9
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................... 15
SIGNATURES......................................................... 16
EXHIBIT 27 FINANCIAL DATA SCHEDULE............................... 17
2
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
- -------------------------------------------------------------------------------------------------
September 30 December 31
1997 1996
(Unaudited)
- -------------------------------------------------------------------------------------------------
(In thousands of dollars)
ASSETS:
Investments:
<S> <C> <C>
Fixed maturities available-for-sale (cost: $287,174 and $321,432) $ 290,133 $ 321,066
Equity securities available-for-sale (cost: $981 and $1,073) 2,451 2,959
Policy loans 65,866 60,267
Short-term investments 24,410 42,757
---------- ----------
Total investments 382,860 427,049
Cash 5,483 24,759
Insurance receivables:
Reinsurance receivables 1,476,633 1,320,583
Premium and other insurance receivables 50,680 27,884
Less allowance for doubtful accounts (357) (378)
Deferred acquisition costs 93,764 74,589
Accrued investment income 6,337 4,945
Deferred income taxes - 312
Due from affiliates 157,883 67,499
Other assets 2,923 54
Separate Account business 4,058 -
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,180,264 $1,947,296
=================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits $1,803,766 $1,621,504
Claims 83,772 60,568
Policyholders' funds 35,414 38,145
Federal income taxes payable 5,961 3,824
Deferred income taxes 3,835 -
Other liabilities 33,437 23,715
Separate Account business 4,058 -
----------- -----------
TOTAL LIABILITIES 1,970,243 1,747,756
----------- -----------
Stockholder's Equity:
Common stock ($50 par value; Authorized-200,000 shares;
Issued-50,000 shares) 2,500 2,500
Additional paid-in capital 39,150 39,150
Retained earnings 165,490 156,900
Net unrealized investment gains 2,881 990
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 210,021 199,540
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,180,264 $1,947,296
=================================================================================================
<FN>
See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
- ------------------------------------------------------------------------------------------
Third Quarter Nine Months
PERIOD ENDED SEPTEMBER 30 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------
(In thousands of dollars)
Revenues:
<S> <C> <C> <C> <C>
Premiums $82,622 $82,417 $247,397 $242,638
Net investment income 7,676 8,283 22,937 21,652
Realized investment gains (losses) 1,282 (621) 1,149 3,124
Other 2,151 1,900 4,902 4,399
-------- -------- --------- ---------
93,731 91,979 276,385 271,813
-------- -------- --------- ---------
Benefits and expenses:
Insurance claims and policyholders' benefits 78,528 76,985 233,364 224,248
Amortization of deferred acquisition costs and
other operating expenses 9,161 10,091 29,595 30,204
-------- -------- --------- ---------
87,689 87,076 262,959 254,452
-------- -------- --------- ---------
Income before income tax 6,042 4,903 13,426 17,361
Income tax expense 2,188 1,757 4,836 6,123
- ------------------------------------------------------------------------------------------
NET INCOME $ 3,854 $ 3,146 $ 8,590 $ 11,238
==========================================================================================
<FN>
See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
(Unaudited)
- ---------------------------------------------------------------------------------------------
NET
ADDITIONAL UNREALIZED
NINE MONTHS ENDED COMMON PAID-IN RETAINED INVESTMENT
SEPTEMBER 30, 1997 AND 1996 STOCK CAPITAL EARNINGS GAINS (LOSSES) TOTAL
- ---------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $2,500 $39,150 $140,181 $13,641 $195,472
Net income - - 11,238 - 11,238
Change in net unrealized gains/
(losses) - - - (15,561) (15,561)
- ---------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 $2,500 $39,150 $151,419 $(1,920) $191,149
=============================================================================================
Balance, December 31, 1996 $2,500 $39,150 $156,900 $ 990 $199,540
Net income - - 8,590 - 8,590
Change in net unrealized gains/
(losses) - - - 1,891 1,891
- ---------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 $2,500 $39,150 $165,490 $ 2,881 $210,021
=============================================================================================
<FN>
See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
- -------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 1997 1996
- -------------------------------------------------------------------------------------------------------
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 8,590 $ 11,238
------- --------
Adjustments to reconcile net income to net cash flows from
operating activities:
Net realized investment gains, pre-tax (1,149) (3,124)
Amortization of bond discount (4,676) (3,880)
Changes in:
Insurance receivables, net (178,867) (186,324)
Deferred acquisition costs (19,175) (16,405)
Accrued investment income (1,392) (2,698)
Federal income taxes payable 2,137 (1,239)
Deferred income taxes 3,129 4,320
Insurance reserves 127,464 77,467
Due from affiliates (90,384) 41,521
Other, net 6,852 6,305
-------- ---------
Total adjustments (156,061) (84,057)
-------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES (147,471) (72,819)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities (170,107) (476,469)
Proceeds from fixed maturities:
Sales 186,958 450,490
Maturities, calls and redemptions 19,659 35,618
Proceeds from sale of equity maturities - 23
Change in short-term investments 22,013 (41,768)
Change in policy loans (5,599) (5,272)
--------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES 52,924 (37,378)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for investment contracts credited to policyholder account balances 84,121 71,268
Return of policyholder account balances in investment contracts (8,850) (2,395)
--------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 75,271 68,873
--------- ----------
NET CASH FLOWS (19,276) (41,324)
Cash at beginning of period 24,759 42,103
- --------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 5,483 $ 779
========================================================================================================
Supplemental disclosures of cash flow information:
Cash received (paid) for federal income taxes $ 506 $ (3,229)
========================================================================================================
<FN>
See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
6
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
NOTE 1. BASIS OF PRESENTATION:
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term, universal life, and
other life insurance policies and individual annuities. Group insurance products
include life, pension and accident and health, consisting primarily of major
medical and hospitalization.
Pursuant to a Reinsurance Pooling Agreement, amended July 1, 1996, VFL cedes
all of its business, excluding its separate accounts, to its parent, Assurance.
This business is then pooled with the business of Assurance, which excludes
Assurance's participating contracts and separate accounts, and 10% of the
combined net pool is retroceded to VFL.
In mid-October, VFL purchased investments in derivative financial
instruments with a notional value of approximately $50.0 million and a book
value of approximately $0.6 million. These instruments are in the form of
interest rate caps to offset the effects of a potential increase in interest
rates.
The operating results for the interim periods are not necessarily indicative
of the results to be expected for the full year. These statements should be read
in conjunction with the financial statements and notes thereto included in VFL's
Form 10-K for the year ended December 31, 1996, filed with the Securities and
Exchange Commission on March 31, 1997, and the information shown below.
The accompanying condensed financial statements have been prepared in
conformity with generally accepted accounting principles. Certain amounts
applicable to prior years have been reclassified to conform to classifications
followed in 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of VFL's management, these statements include all adjustments,
consisting of normal recurring accruals, which are necessary for the fair
presentation of the financial position, results of operations and cash flows in
the accompanying condensed financial statements.
7
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONCLUDED
NOTE 2. REINSURANCE:
VFL assumes and cedes insurance with other insurers and reinsurers. VFL
utilizes reinsurance arrangements to limit its maximum loss, to provide greater
diversification of risk and to minimize exposures on larger risks. The
reinsurance coverages are tailored to the specific risk characteristics of each
product line with VFL's retained amount varying by type of coverage.
The ceding of insurance does not discharge primary liability of the original
insurer. VFL places reinsurance with other carriers only after careful review of
the nature of the contract and a thorough assessment of the reinsurers' credit
quality and claim settlement performance. Further, for carriers that are not
authorized reinsurers in its states of domicile, VFL receives collateral,
primarily in the form of bank letters of credit.
The effects of reinsurance on premium revenues are shown in the following
schedule:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PREMIUMS ASSUMED/NET
----------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 DIRECT ASSUMED CEDED NET %
- ---------------------------------------------------------------------------------------------------
(In thousands of dollars)
1997
<S> <C> <C> <C> <C> <C>
Life $411,979 $ 59,680 $413,443 $ 58,216 103%
Accident and Health 1,908 189,181 1,908 189,181 100
- ---------------------------------------------------------------------------------------------------
TOTAL PREMIUMS $413,887 $248,861 $415,351 $247,397 101%
===================================================================================================
1996
Life $300,096 $ 53,296 $300,371 $ 53,021 101%
Accident and Health 664 189,617 664 189,617 100
- ---------------------------------------------------------------------------------------------------
TOTAL PREMIUMS $300,760 $242,913 $301,035 $242,638 100%
===================================================================================================
</TABLE>
In the table above, the majority of life premium revenue is from long
duration type contracts, while the accident and health earned premiums are from
short duration contracts.
Transactions with Assurance, as part of the pooling agreement (see Note 1),
are reflected in the above table. Premium revenues ceded to non-affiliated
companies were $77.7 million for the nine month period ended September 30, 1997
and $25.0 million for the same period in 1996. Additionally, insurance claims
and policyholders' benefits recoveries from non-affiliated companies were $10.6
million for the period ended September 30, 1997 and $6.2 million for the period
ended September 30, 1996.
Reinsurance receivables reflected on the balance sheet are recoverables from
reinsurers related to insurance reserves. Balances due from Assurance pursuant
to the pooling agreement comprise approximately 99% of these balances at both
September 30, 1997 and 1996.
NOTE 3. LEGAL PROCEEDINGS:
VFL is party to litigation in the ordinary course of business. The outcome
of this litigation will not, in the opinion of management, materially affect
the results of operations or equity of VFL.
8
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
condensed financial statements and notes thereto found on pages 3 to 8, which
contain additional information helpful in evaluating operating results and
financial condition.
The operations, assets and liabilities of VFL and its parent, Assurance, are
managed, to a large extent, on a combined basis. Pursuant to a Reinsurance
Pooling Agreement, amended July 1, 1996, VFL cedes all of its business,
excluding its separate accounts, to its parent, Assurance. This business is then
pooled with the business of Assurance, which excludes Assurance's participating
contracts and separate accounts, and 10% of the combined net pool is retroceded
to VFL.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term, universal life, and
other life insurance policies and individual annuities. Group insurance products
include life, pension and accident and health, consisting primarily of major
medical and hospitalization.
Products developed in 1996 included a portfolio of variable products and new
universal life products which are being marketed in 1997. These products offer
policyholders the option of allocating payments to one or more variable accounts
or to a guaranteed income account or both. Payments allocated to the variable
accounts will be invested in corresponding investment portfolios where the
investment risk is borne by the policyholder while payments allocated to the
guaranteed income account will earn a guaranteed minimum rate of interest for a
specified period of time for annuity contracts and one year for life products.
9
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS:
The following table summarizes key components of VFL's operating results for
the nine months and quarters ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
THIRD QUARTER NINE MONTHS
PERIOD ENDED SEPTEMBER 30 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------
(In thousands of dollars)
RESULTS OF OPERATIONS
Revenues:
<S> <C> <C> <C> <C>
Group premium $68,551 $69,240 $204,046 $202,649
Individual premium 14,071 13,177 43,351 39,989
------- ------- -------- --------
Total premiums 82,622 82,417 247,397 242,638
Net investment income 7,676 8,283 22,937 21,652
Other 2,151 1,900 4,902 4,399
------- ------- -------- --------
Total revenues 92,449 92,600 275,236 268,689
Benefits and expenses 87,689 87,076 262,959 254,452
------- ------- -------- --------
Operating income before income tax 4,760 5,524 12,277 14,237
Income tax expense 1,766 1,974 4,434 5,029
------- ------- -------- --------
Net operating income 2,994 3,550 7,843 9,208
Net realized investment gains (losses) 860 (404) 747 2,030
------- ------- -------- --------
Net income $ 3,854 $ 3,146 $ 8,590 $ 11,238
========================================================================================================
</TABLE>
VFL's revenues, excluding net realized investment gains/losses, increased 2%
to $275.2 million for the first nine months of 1997, from $268.7 million for the
same period in 1996. Premiums were $247.4 million for the nine months ended
September 30, 1997, compared to $242.6 million for the same period in 1996. For
the nine month period of 1997, individual premiums increased by 8% to $43.4
million, compared to $40.0 million for the same period in 1996. This increase is
primarily due to the continued growth in sales of the Viaterm product of
approximately $4.6 million. Group premiums were up 1% to $204.0 million for the
first nine months of 1997, compared to $202.6 million for the same period in
1996. The growth is due, in part, to a $2.2 million increase in premiums in a
U.S. Government employees accident and health program and a $4.4 million
increase in group medical premiums. Also contributing to the growth is a $1.5
million increase in disability and accident premium. The increase in group
premiums is offset by a drop in group reinsurance premium of $6.7 million.
Premiums for the third quarter ended September 30, 1997 were $82.6 million,
compared to $82.4 million for the same period in 1996. Individual premiums
increased by 7% to $14.1 million for the three months ended September 30, 1997,
compared to $13.2 million for the same period in 1996. The growth in Viaterm
sales accounts for most of this change. For the three months ended September 30,
1997, group premium decreased 1% to $68.6 million from $69.2 million for the
same period in 1996. The primary reason for this decrease was a decline in
reinsurance business.
10
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
VFL's investment income for the nine months ended September 30, 1997 was
$22.9 million, an approximate increase of $1.2 million or 6% from the same
period a year earlier when investment income was $21.7 million. The increase can
be attributed to slightly higher yields in VFL's investment portfolio for the
first nine months of 1997. Investment income for the three months ended
September 30, 1997 was $7.7 million, down 7% from $8.3 million for the same
period in 1996. This decline is mainly due to a decrease in holdings within
VFL's investment portfolio during the third quarter, in spite of slightly higher
yields. VFL's net operating income, excluding net realized investment
gains/losses, was $7.8 million and $3.0 million for the nine and three months
ended September 30, 1997, respectively, compared to $9.2 million and $3.6
million for the same periods in 1996.
Net realized investment gains, net of tax, were $747 thousand and $860
thousand for the nine and three months ended September 30, 1997, respectively,
compared to net realized investment gains of $2.0 million and net realized
investment losses of $404 thousand for the same periods last year. Net income
for the nine and three months ended September 30, 1997 was $8.6 million and $3.9
million, respectively, compared to $11.2 million and $3.1 million for the same
periods in 1996.
FINANCIAL CONDITION:
Assets increased approximately $233.0 million from December 31, 1996 to
$2,180.3 million as of September 30, 1997. VFL's cash and invested assets
decreased by $63.5 million from December 31, 1996 to $388.3 million.
During the first nine months of 1997, VFL's stockholder's equity increased
by $10.5 million, or 5%, to approximately $210.0 million. The increase in
stockholder's equity in 1997 is due to net income of approximately $8.6 million
and approximately $1.9 million in net unrealized investment gains.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
FINANCIAL POSITION SEPTEMBER 30 DECEMBER 31
1997 1996
- ---------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Assets $2,180,264 $1,947,296
Stockholder's equity 210,021 199,540
Net unrealized investment gains included in stockholder's equity 2,881 990
- ---------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
INVESTMENTS:
The following table summarizes VFL's investments shown at cost or amortized
cost at September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS SEPTEMBER 30 DECEMBER 31
1997 % 1996 %
- --------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities and
obligations of government agencies $100,431 26.5% $117,213 27.5%
Asset backed securities 93,319 24.7 113,376 26.6
Other debt securities 93,424 24.7 90,843 21.4
- --------------------------------------------------------------------------------------------
Total fixed maturities 287,174 75.9 321,432 75.5
Common stocks 981 0.3 1,073 0.3
Policy loans 65,866 17.4 60,267 14.2
Short-term investments 24,410 6.4 42,757 10.0
- --------------------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST $378,431 100.0% $425,529 100.0%
============================================================================================
INVESTMENTS AT CARRYING VALUE* $382,860 $427,049
============================================================================================
<FN>
* As reported in the Balance Sheet
</FN>
</TABLE>
Operations, assets and liabilities of VFL and Assurance are, to a large
extent, managed on a combined basis. The investment portfolio is managed to
maximize after-tax investment return, while minimizing credit risks, with
investments concentrated in high quality securities to support VFL's insurance
underwriting operations. The investment portfolios held by Assurance are
segregated for the purpose of supporting policy liabilities for universal life,
annuities and other interest sensitive products.
VFL has the capacity to hold its fixed maturity portfolio to maturity.
However, securities may be sold as part of VFL's asset/liability strategies or
to take advantage of investment opportunities generated by changing interest
rates, tax and credit considerations or other similar factors. Accordingly, the
fixed maturities are classified as available-for-sale.
12
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The following table summarizes the ratings of VFL's fixed maturity portfolio
at carrying value (market):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
SEPTEMBER 30 % DECEMBER 31 %
1997 1996
- ----------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
U.S. government and affiliated securities $101,329 34.9% $115,926 36.1%
Other AAA rated 98,124 33.8 127,910 39.8
AA and A rated 40,589 14.0 33,913 10.6
BBB rated 30,432 10.5 38,272 11.9
Below investment grade 19,659 6.8 5,045 1.6
- -----------------------------------------------------------------------------------------
TOTAL $290,133 100.0% $321,066 100.0%
=========================================================================================
</TABLE>
Included in VFL's fixed maturities at September 30, 1997 are $93.9 million
of asset-backed securities, consisting of approximately 10% in U.S. government
agency issued pass-through certificates, 88% in collateralized mortgage
obligations (CMOs) and 2% in corporate asset-backed obligations. The majority of
CMOs held are U.S. government agency issues, which are actively traded in liquid
markets and are priced by broker-dealers.
VFL limits the risks associated with interest rate fluctuations and
prepayments by concentrating its CMO investments in planned amortization classes
with relatively short principal repayment windows. The fair value of
asset-backed securities was more than the amortized cost by $628 thousand at
September 30, 1997. The fair value of asset-backed securities was less than the
amortized cost by $125 thousand at December 31, 1996.
At September 30, 1997, net unrealized gains on fixed maturities amounted to
approximately $3.0 million. This compares with net unrealized losses of
approximately $365 thousand at December 31, 1996. The gross unrealized gains and
losses for the fixed maturities portfolio at September 30, 1997, were $4.3
million and $1.3 million, respectively, compared to $3.2 million and $3.6
million, respectively, at December 31, 1996.
VFL's investments in equity securities are carried at a fair value of $2.5
million and $3.0 million at September 30, 1997 and December 31, 1996,
respectively. At September 30, 1997, net unrealized gains on equity securities
amounted to approximately $1.5 million. This compares with net unrealized gains
of approximately $1.9 million at December 31, 1996. There were no unrealized
losses on equity securities at September 30, 1997 and December 31, 1996.
VFL does not have any investments in real estate or direct mortgage loans.
In mid-October, VFL purchased investments in derivative financial instruments
with a notional value of approximately $50.0 million and a book value of
approximately $0.6 million. These instruments are in the form of interest rate
caps to offset the effects of a potential increase in interest rates.
LIQUIDITY AND CAPITAL RESOURCES:
The liquidity requirements of VFL have been met primarily by funds generated
from operations. VFL's principal operating cash flow sources are premiums and
investment income. The primary operating cash flow uses are payments for claims,
policy benefits and operating expenses.
13
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONCLUDED
For the first nine months of 1997, VFL's operating activities generated net
negative cash flows of approximately $147.5 million, compared with net negative
cash flows of $72.8 million for the same period in 1996. Negative cash flows in
1997 are primarily the result of an increase in affiliate receivable and
insurance receivable balances. VFL believes that future liquidity needs will be
met primarily by cash generated from operations. Net cash flows from operations
are generally invested in marketable securities.
ACCOUNTING STANDARDS:
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. This Statement
has been amended and is now effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 or
1997, depending on the type of transaction. This Statement is not expected to
have a significant impact on VFL.
In January 1997, the Securities and Exchange Commission approved amendments
to Regulation S-X, Regulation S-K, Regulation S-B and various forms to clarify
and expand existing disclosure requirements with respect to derivative financial
instruments and derivative commodity instruments. The new rules require enhanced
descriptions in the footnotes to the financial statements of accounting policies
for derivative financial instruments and derivative commodity instruments. They
also require disclosure outside the financial statements of qualitative and
quantitative information about market risk related to derivative financial
instruments, other financial instruments and derivative commodity instruments.
These amendments are effective for year end 1997 financial statements and will
not have a significant impact on VFL.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes accounting standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
Statement is effective for fiscal years beginning after December 15, 1997. This
Statement is not expected to result in a significant change in VFL's
disclosures.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
interim and annual financial statements. It requires that those enterprises
report a measure of segment profit or loss, certain specific revenue and expense
items and segment assets, and that the enterprises reconcile the total of those
amounts to the general-purpose financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This Statement is effective for financial statements for
periods beginning after December 15, 1997. This Statement will redefine VFL's
business segment disclosure.
14
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Description of Exhibit
Exhibit Page
Number Number
------- ------
(27) Financial Data Schedule 27 17
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K for the three months ended
September 30, 1997.
15
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
PART II OTHER INFORMATION - CONCLUDED
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.
Valley Forge Life Insurance Company
By /S/W. JAMES MACGINNITIE
-----------------------
W. James MacGinnitie
Director, Senior Vice President
and Chief Financial Officer
Date: November 14, 1997
16
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<NAME> VALLEY FORGE LIFE INSURANCE COMPANY
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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247,397
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17
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