- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 March 31,1997 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 May 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 1 of 17
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------ --------------------- -------
CONDENSED FINANCIAL STATEMENTS:
BALANCE SHEET
MARCH 31, 1997 (Unaudited) AND DECEMBER 31, 1996.................. 3
STATEMENT OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996................ 4
STATEMENT OF STOCKHOLDER'S EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996................ 5
STATEMENT OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996................ 6
NOTES TO CONDENSED FINANCIAL
STATEMENTS (Unaudited) MARCH 31, 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
- ------------------------------------------------------------------------------------------------------
MARCH 31 DECEMBER 31
1997 1996
(Unaudited)
- ------------------------------------------------------------------------------------------------------
(In thousands of dollars)
ASSETS:
Investments:
<S> <C> <C>
Fixed maturities available-for-sale (cost: $312,538 and $321,432) $ 304,363 $ 321,066
Equity securities available-for-sale (cost: $1,073 and $1,073) 3,186 2,959
Policy loans 62,288 60,267
Short-term investments 113,057 42,757
--------- ----------
Total investments 482,894 427,049
Cash 1,746 24,759
Insurance receivables:
Reinsurance receivables 1,390,300 1,320,583
Premium and other insurance receivables 52,702 27,884
Less allowance for doubtful accounts (377) (378)
Deferred acquisition costs 80,972 74,589
Accrued investment income 6,677 4,945
Receivables for securities sold 9,997 -
Deferred income taxes 1,301 312
Due from affiliates 26,603 67,499
Other assets 907 54
Separate account business 908 -
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,054,630 $1,947,296
======================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits $1,698,521 $1,621,504
Claims 72,186 60,568
Policyholders' funds 34,807 38,145
Payables for securities purchased 9,969 -
Federal income taxes payable 3,571 3,824
Other liabilities 37,395 23,715
Separate account business 908 -
---------- ----------
TOTAL LIABILITIES 1,857,357 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 159,562 156,900
Net unrealized investment gains/(losses) (3,939) 990
---------- ---------
TOTAL STOCKHOLDER'S EQUITY 197,273 199,540
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,054,630 $1,947,296
======================================================================================================
<FN>
See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Unaudited)
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1997 1996
- -------------------------------------------------------------------------------------------------
(In thousands of dollars)
Revenues:
<S> <C> <C>
Premiums $86,083 $77,283
Net investment income 7,305 7,260
Realized investment gains 29 4,995
Other 1,275 1,250
------- -------
94,692 90,788
------- -------
Benefits and expenses:
Insurance claims and policyholders' benefits 81,756 71,017
Amortization of deferred acquisition costs 1,531 213
Other operating expenses 7,279 9,826
------- -------
90,566 81,056
------- -------
Income before income tax 4,126 9,732
Income tax expense 1,464 3,433
- -------------------------------------------------------------------------------------------------
NET INCOME $ 2,662 $ 6,299
=================================================================================================
<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
THREE MONTHS ENDED COMMON PAID-IN RETAINED INVESTMENT
MARCH 31, 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 - - 6,299 - 6,299
Change in net unrealized gains/
(losses) - - - (14,864) (14,864)
- ----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 $2,500 $39,150 $146,480 $(1,223) $186,907
==============================================================================================
BALANCE, DECEMBER 31, 1996 $2,500 $39,150 $156,900 $ 990 $199,540
Net income - - 2,662 - 2,662
Change in net unrealized gains/
(losses) - - - (4,929) (4,929)
- ----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 $2,500 $39,150 $159,562 $(3,939) $197,273
==============================================================================================
<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)
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1997 1996
- -------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,662 $ 6,299
--------- --------
Adjustments to reconcile net income to net cash flows from
operating activities:
Net realized investment gains, pre-tax (29) (4,995)
Amortization of bond discount (1,178) 2,207)
Changes in:
Insurance receivables, net (94,536) (109,781)
Deferred acquisition costs (6,383) (5,219)
Accrued investment income (1,732) (2,584)
Federal income taxes payable (253) 5,422
Deferred income taxes 1,665 (839)
Insurance reserves 85,297 91,995
Due from affiliates 40,896 34,521
Other, net 12,828 756
---------- ---------
Total adjustments 36,575 7,069
---------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES 39,237 13,368
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities (36,839) (266,312)
Proceeds from fixed maturities:
Sales 39,435 294,103
Maturities, calls and redemptions 6,636 -
Change in short-term investments (69,461) (30,832)
Change in policy loans (2,021) (2,444)
---------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES (62,250) (5,485)
---------- ---------
Net cash flows (23,013) 7,883
Cash at beginning of period 24,759 42,103
- ------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 1,746 $ 49,986
================================================================================================
Supplemental disclosures of cash flow information:
Cash received:
Federal income taxes $ - $ 1,178
================================================================================================
<FN>
See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
6
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 1997
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, accident and health, consisting primarily of major medical and
hospitalization and pension products.
Since December 31, 1985, pursuant to a Reinsurance Pooling Agreement, VFL
has ceded all of its business 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. This agreement was amended effective July 1, 1996, for the purpose of
also excluding the separate accounts of VFL.
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 the
Company's Form 10-K for the year ended December 31, 1996, filed with the
Commission on March 31, 1997, and the information shown below.
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) 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. Certain
amounts applicable to prior years have been reclassified to conform to
classifications followed in 1997. In the opinion of the Company'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 (Unaudited) - concluded
NOTE 2. REINSURANCE:
The effects of reinsurance on premium revenues are shown in the following
schedule:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PREMIUMS ASSUMED/NET
-----------------------------------------------
THREE MONTHS ENDED MARCH 31 DIRECT ASSUMED CEDED NET %
- -----------------------------------------------------------------------------------------------------
(In thousands of dollars)
1997
<S> <C> <C> <C> <C> <C>
Life $127,691 $21,951 $128,736 $20,906 105 %
Accident and Health 705 65,177 705 65,177 100
- -----------------------------------------------------------------------------------------------------
TOTAL PREMIUMS $128,396 $87,128 $129,441 $86,083 101 %
=====================================================================================================
1996
Life $119,094 $15,403 $119,072 $15,425 100 %
Accident and Health 135 61,858 135 61,858 100
- -----------------------------------------------------------------------------------------------------
TOTAL PREMIUMS $119,229 $77,261 $119,207 $77,283 100 %
=====================================================================================================
</TABLE>
In the table above, the majority of Life premium revenue is from long
duration type contracts, while the Accident and Health premium revenue is
generally short duration.
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 $20.2 million for the first quarter in 1997, and $2.8 million for
the first quarter in 1996, respectively. Additionally, insurance claims and
policyholders' benefits recoveries from non-affiliated companies were immaterial
for the period ended March 31, 1997 and $8.2 million for the period ended March
31, 1996.
The ceding of insurance does not discharge primary liability of the original
insurer. VFL's placement of reinsurance with non-affiliated carriers entails
careful review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claim settlement performance.
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
March 31, 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. Since December 31, 1985,
pursuant to a Reinsurance Pooling Agreement, VFL has ceded all of its business
to its parent, Assurance. This business is then pooled with the business of
Assurance, which excludes Assurance's participating contracts and separate
accounts, where 10% of the combined net pool is retroceded to VFL. This
agreement was amended effective July 1, 1996, for the purpose of also excluding
the separate accounts of 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, accident and health, consisting primarily of major medical and
hospitalization and pension products.
Products developed in 1996 included a portfolio of variable products and new
universal life products which are being marketed in 1997. These products offer
investors 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 investor while payments allocated to the
guaranteed income account will earn a minimum guaranteed 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 three months ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1997 1996
- -----------------------------------------------------------------------------------------------
(In thousands of dollars)
OPERATING SUMMARY
(excluding realized investment gains/losses):
Revenues:
<S> <C> <C>
Individual premium $15,609 $11,132
Group premium 70,474 66,151
-------- -------
Total premiums 86,083 77,283
Net investment income 7,305 7,260
Other 1,275 1,250
-------- -------
Total revenues 94,663 85,793
Total benefits and expenses 90,566 81,056
-------- --------
Operating income before income tax 4,097 4,737
Income tax expense (1,454) (1,686)
-------- --------
Net operating income
(excluding realized investment gains/losses) $ 2,643 $ 3,051
======== ========
SUPPLEMENTAL FINANCIAL DATA:
Net operating income:
Individual $ 1,591 $ 1,368
Group 1,052 1,683
-------- -------
Net operating income 2,643 3,051
Net realized investment gains 19 3,248
-------- -------
Net income $ 2,662 $ 6,299
===============================================================================================
</TABLE>
VFL's revenues, excluding net realized investment gains/losses, increased
10% to $94.7 million for the first three months of 1997, compared to $85.8
million for the same period in 1996. Premiums for 1997 were up 11% to $86.1
million, compared to $77.3 million for 1996. For the first quarter of 1997,
individual premiums increased by 40% to $15.6 million, compared to $11.1 million
for the same period in 1996. This increase is primarily due to increased sales
of annuities and the Viaterm life product of $2.4 million and $1.4 million,
respectively. Group premiums were up 7% to $70.5 million for the first three
months of 1997, compared to $66.2 for the same period for 1996, reflecting the
growth in Group Markets and the Federal Employees Health Benefits Program. The
increase in group premiums for the first quarter of 1997 was tempered by a drop
in group annuity premium of $2.7 million.
10
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
VFL's investment income was $7.3 million for the three months ended March
31, 1997 and 1996. VFL's net operating income excluding net realized investment
gains/losses was $2.6 million, compared to $3.1 million, for the first three
months of 1997 and 1996, respectively. Net operating income, excluding realized
investment gains/losses, for the first three months of 1997 was less than that
for the same period for 1996, in spite of increased revenues. This was due to
group health losses resulting from unfavorable morbidity experience.
Net realized investment gains, net of tax, for the first quarter of 1997
were $19 thousand, compared to net realized investment gains for the first
quarter of 1996 of $3.2 million.
FINANCIAL CONDITION:
Assets increased approximately $107.3 million to $2,054.6 million as of
March 31, 1997. VFL's cash and invested assets increased by $32.8 million from
December 31, 1996 to $484.6 million.
During the first three months of 1997, VFL's stockholder's equity decreased
by $2.2 million to approximately $197.3 million. The decrease in stockholder's
equity in 1997 is due to net income of approximately $2.7 million being offset
by approximately $4.9 million in net unrealized investment losses.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
FINANCIAL POSITION MARCH 31 DECEMBER 31
1997 1996
- ----------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Assets $2,054,630 $1,947,296
Stockholder's Equity 197,273 199,540
Net Unrealized Investment Gains/(Losses) Included in Stockholder's Equity (3,939) 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 March 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS MARCH 31 DECEMBER 31
1997 % 1996 %
- -------------------------------------------------------------------------------------------
(In thousands of dollars)
Fixed maturity securities:
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of government agencies $129,699 26.5% $117,213 27.5%
Asset backed securities 95,751 19.6 113,376 26.6
Other debt securities 87,088 17.8 90,843 21.4
- -------------------------------------------------------------------------------------------
Total fixed maturity securities 312,538 63.9 321,432 75.5
Common stocks 1,073 0.2 1,073 0.3
Policy loans 62,288 12.7 60,267 14.2
Short-term investments 113,057 23.2 42,757 10.0
- -------------------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST $488,956 100.0% $425,529 100.0%
===========================================================================================
INVESTMENTS AT CARRYING VALUE* $482,894 $427,049
===========================================================================================
<FN>
* As reported in the Balance Sheet
</FN>
</TABLE>
As mentioned previously, the 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 segregated
for the purpose of supporting policy liabilities for universal life, annuities
and other interest sensitive products are held by Assurance.
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.
The investment portfolio consists primarily of high quality marketable fixed
maturities, approximately 97% and 98% of which are rated as investment grade at
March 31, 1997 and December 31, 1996, respectively.
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 debt
portfolio at carrying value (market).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
MARCH 31 % DECEMBER 31 %
1997 1996
- -----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
U.S. government and affiliated securities $126,299 41.5% $115,926 36.1%
Other AAA rated 105,298 34.6 127,910 39.8
AA and A rated 28,332 9.3 33,913 10.6
BBB rated 36,397 12.0 38,272 11.9
Below investment grade 8,037 2.6 5,045 1.6
- -----------------------------------------------------------------------------------------------
TOTAL $304,363 100.0% $321,066 100.0%
===============================================================================================
</TABLE>
Included in VFL's fixed maturity securities at March 31, 1997 are $93.2
million of asset-backed securities, consisting of approximately 5% in U.S.
government agency issued pass-through certificates, 92% in collateralized
mortgage obligations (CMOs) and 3% 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 less than the amortized cost by approximately $2.5
million and $0.1 million at March 31, 1997 and December 31, 1996, respectively.
VFL has not invested in derivative financial instruments nor does it have any
investments in mortgage loans or real estate.
At March 31, 1997, net unrealized losses on fixed maturity securities
amounted to approximately $8.2 million. This compares with net unrealized losses
of approximately $0.4 million at December 31, 1996. The gross unrealized gains
and losses for the fixed maturity securities portfolio at March 31, 1997, were
$1.4 million and $9.6 million, respectively, compared to $3.2 million and $3.6
million, respectively, at December 31, 1996. The increase in unrealized losses
is attributable, in large part, to increases in interest rates which have an
adverse affect on bond prices.
VFL's investments in equity securities are carried at a fair value of $3.2
million and $3.0 million at March 31, 1997 and December 31, 1996, respectively.
At March 31, 1997, net unrealized gains on equity securities amounted to
approximately $2.1 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 March 31, 1997 and December 31, 1996.
13
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - concluded
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.
For the quarter ended March 31, 1997, VFL's operating activities generated
net positive cash flows of approximately $39.2 million, compared with net
positive cash flows of $13.4 million for the same period in 1996. Positive cash
flows in 1997 are primarily the result of the settlement of certain receivables
from affiliates and higher revenues generated by the increase in premium volume.
VFL believes that future liquidity needs will be met primarily by cash generated
from operations. Net cash flows from operations are invested in marketable
securities.
ACCOUNTING STANDARDS:
In June 1996, the FASB issued SFAS 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 will not 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 would require
enhanced descriptions in the footnotes to the financial statements of accounting
policies for derivative financial instruments and derivative commodity
instruments. They would 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. The requirement of these amendments are effective for
1997 financial statements. These amendments will not have a significant impact
on VFL.
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
March 31, 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/PETER E. JOKIEL
-------------------------------
Peter E. Jokiel
Director, Senior Vice President
and Chief Financial Officer
Date: May 15, 1997
16
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001007008
<NAME> VALLEY FORGE LIFE INSURANCE COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 304,363
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,186
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 482,894
<CASH> 1,746
<RECOVER-REINSURE> 1,390,300
<DEFERRED-ACQUISITION> 80,972
<TOTAL-ASSETS> 2,054,630
<POLICY-LOSSES> 1,770,707
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 34,807
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 194,773
<TOTAL-LIABILITY-AND-EQUITY> 2,054,630
86,083
<INVESTMENT-INCOME> 7,305
<INVESTMENT-GAINS> 29
<OTHER-INCOME> 1,275
<BENEFITS> 81,756
<UNDERWRITING-AMORTIZATION> 1,531
<UNDERWRITING-OTHER> 7,279
<INCOME-PRETAX> 4,126
<INCOME-TAX> 1,464
<INCOME-CONTINUING> 2,662
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,662
<EPS-PRIMARY> 53.24
<EPS-DILUTED> 53.24
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
17
</FN>
</TABLE>
