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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE YEAR ENDED DECEMBER 31, 1996. 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)
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 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. [ x ]
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
As of March 3, 1997, 50,000 shares of Common Stock (all held by an
affiliate, Continental Assurance Company) were outstanding. There is no market
value for any such shares. See ITEM 5 of this Form 10-K.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)
(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
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<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1996
Item Page
Number PART I Number
- -------- ------
1 Business............................................... 3
2 Properties............................................. 6
3 Legal Proceedings...................................... 6
4 Submission of Matters to a Vote of Security Holders.... 6
PART II
5 Market for the Registrant's Common Stock and
Related Stockholder Matters.......................... 9
6 Selected Financial Data................................ 9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 10
8 Financial Statements and Supplementary Data............ 17
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............... 39
PART III
10 Directors and Executive Officers of the Registrant..... 39
11 Executive Compensation................................. 39
12 Security Ownership of Certain Beneficial Owners
and Management....................................... 39
13 Certain Relationships and Related Transactions......... 39
PART IV
14 Financial Statements, Schedules, Exhibits
and Reports on Form 8-K.............................. 40
<PAGE>
PART I
ITEM 1. BUSINESS
Valley Forge Life Insurance Company ("VFL" or "the Company") was
incorporated under the laws of the Commonwealth of Pennsylvania on August 9,
1956 and began its operations on December 1, 1956. 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.
Effective December 31, 1985, pursuant to a Reinsurance Pooling Agreement,
VFL began ceding all of its business to its parent, Assurance. This business is
then pooled with the business of Assurance, excluding 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.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term, universal life, and
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 expected to be 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.
COMPETITION
VFL is engaged in a business that is highly competitive due to the large
number of stock and mutual life insurance companies and other entities marketing
insurance products. The combined operations of VFL and Assurance compete for
both producers and customers and Assurance and VFL must continuously allocate
resources to refine and improve insurance products and services. There are
approximately 1,770 companies selling life insurance (including health insurance
and pension products) in the United States. The combined companies of VFL and
Assurance rank as the twenty-second largest life insurance organization based on
1995 consolidated net written premiums.
3
<PAGE>
REGULATION
VFL is subject to the laws of the Commonwealth of Pennsylvania governing
insurance companies and to the regulations of the Pennsylvania Department of
Insurance (the "Insurance Department"). Regulation by the Insurance Department
includes periodic examination to determine, among other items, contract
liabilities and reserves so that the Insurance Department may certify that these
items are correct. VFL's books and accounts are subject to review by the
Insurance Department at all times.
In addition, VFL is subject to regulation under the insurance laws of all
jurisdictions in which it operates. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect to
various matters, including licensing to transact business, overseeing trade
practices, licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted.
Further, many states regulate affiliated groups of insurers, such as VFL and
its affiliates, under insurance holding company legislation. Under such laws,
inter-company transfers of assets and dividend payments from insurance
subsidiaries may be subject to prior notice or approval, depending on the size
of the transfer payments in relation to the financial positions of the companies
involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed as a result of the insolvencies of other insurers. The
assessments are based on formulas, subject to prescribed limits, and are
intended to fund the benefits and continuation of coverage for policyholders of
the insolvent insurers. Most of these laws provide that an assessment may be
excused or deferred if it would threaten an insurer's own solvency.
Although the Federal government generally does not directly regulate the
business of insurance, Federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of VFL are subject to various
Federal securities laws and regulations. In addition, current and proposed
Federal measures that may significantly affect the insurance business include
regulation of insurance company solvency, employee benefit regulation, removal
of barriers preventing banks from engaging in the insurance business, tax law
changes affecting the taxation of insurance companies and the tax treatment of
insurance products and its impact on the relative desirability of various
personal investment vehicles.
After failing to enact the massive health reform introduced in 1994,
Congress passed a health insurance reform bill in August of 1996 and the
President signed it into law (P.L. 104-191) on August 21, 1996. The new law does
little for Americans without health insurance but it will protect those who have
health insurance from losing it. The 105th Congress is expected to consider
additional incremental health care reform as it attempts to provide greater
access and affordability to Americans. Among the bills that have been introduced
this year are measures that would allow small businesses to band together to
form association health plans to buy insurance; bar the use of clauses
restricting what doctors can tell patients about treatment options; restructure
the Medicare program; subsidize health insurance for uninsured children; and
limit or prohibit underwriting on the basis of genetic information. We cannot
predict if any of these proposals will be enacted or the extent to which they
may affect the insurance industry.
4
<PAGE>
REGULATION - (CONTINUED)
In recent years increased scrutiny of state regulated insurer solvency
requirements by certain members of the U.S. Congress resulted in the National
Association of Insurance Commissioners (NAIC) developing industry minimum
Risk-Based Capital (RBC) requirements, establishing a formal state accreditation
process designed to more closely regulate for solvency, minimizing the diversity
of approved statutory accounting and actuarial practices, and increasing the
annual statutory statement disclosure requirements.
The RBC formulas are designed to identify an insurer's minimum capital
requirements based upon the inherent risks (e.g., asset default, credit and
underwriting) of its operations. In addition to the minimum capital
requirements, the RBC formula and related regulations identify various levels of
capital adequacy and corresponding actions that the state insurance departments
should initiate. The level of capital adequacy below which insurance departments
would take action is defined as the Company Action Level. As of December 31,
1996, VFL has capital in excess of the Company Action Level.
CERTAIN AGREEMENTS
VFL is party to the Intercompany Pooling Agreement with Assurance which is
discussed above and in the Notes to VFL's Financial Statements included herein.
In addition, VFL is party to the CNA Intercompany Expense Agreement whereby
expenses incurred by CNA and each of its subsidiaries are allocated to the
appropriate company. All acquisition and underwriting expenses allocated to VFL
are further subject to the Intercompany Pooling Agreement, so that acquisition
and underwriting expenses recognized by VFL approximate ten percent of the
combined acquisition and underwriting expenses of VFL and Assurance. For
information regarding expenses pursuant to the CNA Intercompany Expense
Agreement see Note 8 of the Notes to Financial Statements.
REINSURANCE
Information as to VFL's reinsurance business is set forth in Note 7 of the
Financial Statements.
EMPLOYEE RELATIONS
At December 31, 1996, VFL had no employees as it has contracted with
Casualty for services provided by Casualty employees. Casualty has experienced
satisfactory labor relations and has never had work stoppages due to labor
disputes.
BUSINESS SEGMENTS
Information as to VFL's business segments is set forth in Note 10 of the
Financial Statements.
INVESTMENTS
Information as to VFL's investments is set forth in Note 2 of the Financial
Statements.
5
<PAGE>
ITEM 2. PROPERTIES
VFL does not own or directly lease any office space. VFL reimburses Casualty
for its proportionate share of office facilities.
ITEM 3. LEGAL PROCEEDINGS
Reference is hereby made to Note 9 of the Notes to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction J(2) (c) of Form 10-K.
6
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
POSITION AND
OFFICES HELD WITH
REGISTRANT PRINCIPAL OCCUPATION
NAME AGE DURING PAST FIVE YEARS
Dennis H. Chookaszian Chairman of the 53 Chairman of the Board and
Board and Chief Chief Executive Officer of
Executive Officer, the CNA Insurance Companies
CNA Insurance since September 1992. Prior
Companies and thereto, Mr. Chookaszian
Director was President and Chief
Operating Officer of the
CNA Insurance Companies.
Mr. Chookaszian has served
as a Director of the
Registrant since April
1978.
Philip L. Engel President, Director 56 President of the CNA
Insurance Companies since
September 1992. Prior
thereto, Mr. Engel was
Executive Vice President of
the CNA Insurance
Companies. Mr. Engel has
served as a Director of
Registrant since September
1992.
William J. Adamson, Senior Vice 44 Senior Vice President of
Jr. President the CNA Insurance Companies
since November 1995;
Group Vice President of the
CNA Insurance Companies
from April 1993
through October 1995. Prior
thereto, Mr. Adamson was
Vice President of the CNA
Insurance Companies
from May 1987 through April
1993.
James P. Flood Senior Vice 46 Senior Vice President of
President the CNA Insurance Companies
since May 1995; Senior Vice
President of The
Continental Insurance
Company from October 1992
through May 1995. Prior
thereto, Mr. Flood was Vice
President of The
Continental Insurance
Company from August 1991
through May 1995.
<PAGE>
Michael C. Garner Senior Vice 44 Senior Vice President of
President, Director the CNA Insurance Companies
since September 1993. Prior
thereto, Mr. Garner was a
partner of Coopers and
Lybrand LLP. Mr. Garner
has served as a Director of
the Registrant since
October 1996.
Bernard L. Senior Vice 50 Senior Vice President of
Hengesbaugh President the CNA Insurance Companies
since November 1990.
Peter E. Jokiel Senior Vice 49 Senior Vice President and
President, Chief Chief Financial Officer
Financial Officer, since November 1990. Mr.
Director Jokiel has served as a
Director of the Registrant
since July 1992.
Jonathan D. Kantor Senior Vice 41 Group Vice President of the
President* CNA Insurance Companies
since April 1994. Prior
thereto, partner at the law
firm of Shea & Gould. **
Donald M. Lowry Senior Vice 67 Senior Vice President,
President, Secretary and General
Secretary, General Counsel since August 1992.
Counsel Prior thereto, Mr. Lowry
was Senior Vice President
and General Counsel of the
CNA Insurance Companies.
Patricia L. Kubera Group Vice 41 Group Vice President and
President, Controller of the CNA
Controller, Insurance Companies since
Director January 1993.Prior thereto,
Ms. Kubera was Assistant
Vice President of the CNA
Insurance Companies. Ms.
Kubera has served as a
Director of the Registrant
since November 1994.
Carolyn L. Murphy Senior Vice 52 Senior Vice President of
President the CNA Insurance Companies
since November 1990.
William H. Sharkey, Senior Vice 48 Senior Vice President of
Jr. President, Director the CNA Insurance Companies
since January 1994. Prior
thereto, Mr. Sharkey was
Senior Vice President of
Cigna Healthcare from
October 1991 through
February 1994. Mr. Sharkey
has served as a Director of
the Registrant since
November 1994.
7
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED
POSITION AND
OFFICES HELD
WITH REGISTRANT PRINCIPAL OCCUPATION
NAME AGE DURING PAST FIVE YEARS
Adrian M. Tocklin Senior Vice 45 Senior Vice President of the
President CNA Insurance Companies since
May 1995; President of The
Continental Insurance Company
from June 1994 through May
1995; Executive Vice
President of The Continental
Insurance Company from August
1991 through June 1994.
Prior thereto, Ms. Tocklin
was Senior Vice President of
The Continental Insurance
Company.
Jae L. Wittlich Senior Vice 54 Senior Vice President of the
President CNA Insurance Companies since
November 1990.
David W. Wroe Senior Vice 50 Senior Vice President of the
President CNA Insurance Companies since
June 1996. Prior thereto,
Mr. Wroe was President of
Agency Management Systems
from August 1991 through
June 1996.
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
*Mr. Kantor will succeed Donald Lowry as Senior Vice President, Secretary and
General Counsel of the CNA Insurance Companies effective April 1, 1997.
**Shea & Gould declared bankruptcy in 1995.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) There is no established public trading market for VFL's common stock.
(b) CAC owns all of the common stock of VFL.
(c) VFL has declared no cash dividends on its common stock in 1995, 1996 or 1997
through the date of filing this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
OMITTED PURSUANT TO GENERAL INSTRUCTION J (2) (A) OF FORM 10-K.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed, to a large extent, on a combined basis. Effective December 31,
1985, pursuant to a Reinsurance Pooling Agreement, VFL began ceding all of its
business to its parent, Assurance. This business is then pooled with the
business of Assurance, excluding 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.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term, universal life, and
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 expected to be marketed in 1997. These
products will 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.
10
<PAGE>
RESULTS OF OPERATIONS:
The following table summarizes key components of VFL's operating results for
each of the last three years.
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------
(In thousands of dollars)
OPERATING SUMMARY
(excluding realized investment gains/losses):
Revenues:
<S> <C> <C> <C>
Individual premium $ 52,572 $ 48,368 $ 37,691
Group premium 272,914 248,285 225,289
- ----------------------------------------------------------------------------------------------
Total premiums 325,486 296,653 262,980
- ----------------------------------------------------------------------------------------------
Net investment income 29,312 31,494 22,759
Other 8,217 4,818 4,789
- ----------------------------------------------------------------------------------------------
Total revenues 363,015 332,965 290,528
Total benefits and expenses 342,039 312,038 274,439
- ----------------------------------------------------------------------------------------------
Operating income before income tax 20,976 20,927 16,089
Income tax expense (7,358) (7,376) (5,681)
- ----------------------------------------------------------------------------------------------
Net operating income
(excluding realized investment gains/losses) $ 13,618 $ 13,551 $ 10,408
==============================================================================================
SUPPLEMENTAL FINANCIAL DATA:
Net operating income:
Individual $ 8,209 $ 5,597 $ 3,119
Group 5,409 7,954 7,289
- ----------------------------------------------------------------------------------------------
Net operating income 13,618 13,551 10,408
Net realized investment gains (losses) 3,101 8,959 (2,926)
- ----------------------------------------------------------------------------------------------
Net income $ 16,719 $ 22,510 $ 7,482
==============================================================================================
</TABLE>
VFL's revenues, excluding net realized investment gains/losses, were up
9.0% to $363.0 million for 1996 as compared to $333.0 million for 1995 and up
25.0% from $290.5 million for 1994. Premiums for 1996 were up 9.7% to $325.5
million as compared to $296.7 million for 1995 and up 23.8% from 1994 premiums
of $263.0 million. The largest portion of this increase was due to the increase
in group premiums, reflecting the growth in the Federal Employees Health
Benefits Program. Individual premium increased primarily due to increased sales
of VFL's Viaterm life product that was first introduced in late 1994.
VFL's investment income increased from $22.8 million in 1994 to $31.5
million in 1995 and decreased to $29.3 million in 1996. The decrease in 1996 is
mainly due to the negative cash flow experienced in 1996 resulting in a
reduction in the total investment portfolio.
VFL's net operating income excluding net realized investment gains/losses
was $13.6 million for 1996, compared to $13.6 million and $10.4 million for 1995
and 1994, respectively.
Net realized investment gains, net of tax, amounted to $3.1 million in 1996,
compared to $9.0 million in 1995 and losses of $2.9 million in 1994. Net
realized investment gains for 1996 were primarily realized on sales of fixed
maturities.
11
<PAGE>
FINANCIAL CONDITION:
Assets totaled $1,947 million at December 31, 1996, an increase of 18.6%
over 1995 and 34.6% over 1994. VFL's cash and invested assets of $452 million
decreased by $53 million, or 10.5%, over the 1995 level of $505 million, and
increased $12 million over the 1994 level of $440 million.
VFL's stockholder's equity was approximately $200 million at December 31,
1996, compared to $195 million and $156 million at December 31, 1995 and 1994,
respectively. The increase in stockholder's equity in 1996 is due to net income
of $16.7 million offset by a $12.6 million decrease in net unrealized investment
gains. The increase in stockholder's equity in 1995 was primarily due to net
income of $22.5 million which was partially offset by $4.5 million of net
unrealized investment losses.
- --------------------------------------------------------------------------------
Statutory Stockholder's
Surplus Assets * Equity *
- --------------------------------------------------------------------------------
(In thousands of dollars)
December 31, 1996 $ 124,324 $ 1,947,296 $ 199,540
December 31, 1995 129,912 1,641,438 195,472
December 31, 1994 122,267 1,447,122 156,196
December 31, 1993 117,650 1,258,039 153,249
December 31, 1992 115,660 1,122,762 144,873
- --------------------------------------------------------------------------------
* In accordance with generally accepted accounting principles
INVESTMENTS:
The following table summarizes VFL's investments shown at cost or amortized
cost for each of the last two years.
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENTS
- -----------------------------------------------------------------------------------------------
December 31 1996 % 1995 %
- -----------------------------------------------------------------------------------------------
(In thousands of dollars)
Fixed maturites:
<S> <C> <C> <C> <C>
U.S. Treasuries and
government agencies $ 117,213 27.5% $ 186,083 42.1%
Asset backed 113,376 26.6 84,785 19.2
Other debt securities 90,843 21.4 76,533 17.4
- -----------------------------------------------------------------------------------------------
Total fixed maturites 321,432 75.5 347,401 78.7
Common stocks 1,073 0.3 1,074 0.2
Policy loans 60,267 14.2 56,008 12.7
Short-term investments 42,757 10.0 37,184 8.4
- -----------------------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST $ 425,529 100.0% $ 441,667 100.0%
===============================================================================================
INVESTMENTS AT CARRYING VALUE* $ 427,049 $ 462,650
===============================================================================================
* As reported in the Balance Sheet
</TABLE>
12
<PAGE>
INVESTMENTS - (CONTINUED):
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
its 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. Accordingly, the
fixed maturity securities are classified as available-for-sale. See Note 2 of
the Financial Statements for further information.
The investment portfolio consists primarily of high quality marketable fixed
maturities, approximately 98% of which are rated as investment grade at both
December 31, 1996 and 1995.
The following table summarizes the ratings of VFL's fixed maturity debt
portfolio at carrying value (market):
- --------------------------------------------------------------------------------
December 31 1996 % 1995 %
- --------------------------------------------------------------------------------
(In thousands of dollars)
U.S. government and
affiliated securities $115,926 36.1% $280,057 76.2%
Other AAA rated 127,910 39.8 22,007 6.0
AA and A rated 33,913 10.6 39,337 10.7
BBB rated 38,272 11.9 18,124 4.9
Below investment grade 5,045 1.6 8,237 2.2
- --------------------------------------------------------------------------------
Total $321,066 100% $367,762 100 %
================================================================================
Included in VFL's fixed maturity securities at December 31, 1996, are $113
million of asset-backed securities, consisting of approximately 5% in U.S.
government agency issued pass-through certificates, 89% in collateralized
mortgage obligations (CMOs), and 6% 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. At December 31, 1996, the
fair value of asset-backed securities was below the amortized cost by
approximately $.1 million compared with unrealized gains of approximately $2.5
million at December 31, 1995. VFL has not invested in derivative financial
instruments, including complex mortgage derivatives without readily
ascertainable market prices, during the last three years nor does it have any
investments in mortgage loans or real estate.
13
<PAGE>
INVESTMENTS - (CONTINUED):
VFL's investments in fixed maturities are carried at a fair value of $321.1
million at December 31, 1996, compared with $367.8 million at December 31, 1995.
At December 31, 1996, net unrealized losses on fixed maturity securities
amounted to approximately $.4 million. This compares with net unrealized gains
of approximately $20.4 million at December 31, 1995. The gross unrealized gains
and losses for the fixed maturity securities portfolio at December 31, 1996,
were $3.2 million and $3.6 million, respectively, compared to $20.4 million and
$25 thousand, respectively, at December 31, 1995. Such fluctuations from
year-to-year are primarily due to changes in interest rates.
VFL's investments in equity securities are carried at a fair value of $3.0
million at December 31, 1996, compared with $1.7 million at December 31, 1995.
At December 31, 1996, net unrealized gains on equity securities amounted to
approximately $1.9 million. This compares with net unrealized gains of
approximately $.6 million at December 31, 1995. There were no unrealized losses
on equity securities for the years ended December 31, 1996 and 1995.
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 year ended December 31, 1996, VFL's operating activities generated
net negative cash flows of approximately $43 million, compared with net positive
cash flows of $21 million in 1995 and $75 million in 1994. The deterioration in
cash flow in 1996 was caused by the significant acquisition and other first-year
expenses related to the large volume of new business, as well as the delayed
settlement of receivables from an affiliate. 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.
VFL's insurance ratings are pooled ratings with Assurance. The table below
reflects ratings for VFL/Assurance as of December 31, 1996:
|--------------------------------------------------------------|
| A.M Best Standard & Poor's Duff & Phelps |
|--------------------------------------------------------------|
| |
| RATING A AA AA |
|--------------------------------------------------------------|
14
<PAGE>
ACCOUNTING STANDARDS:
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
This Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used for long-lived assets and certain identifiable intangibles
to be disposed of. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by the entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This Statement is effective
for 1996 financial statements. This Statement did not have a significant impact
on VFL.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation". This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. The requirements of this
Statement is effective for 1996 financial statements. This Statement had no
impact on VFL or CNA as the Companies have no compensation which qualifies.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
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.
Accounting Disclosure Rules and Practices
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.
15
<PAGE>
FORWARD-LOOKING STATEMENTS:
When included in this report, the words "expects," "intends," "anticipates,"
"estimates," and analogous expressions are intended to identify forward-looking
statements. Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, among others, general economic
and business conditions, competition, changes in financial markets (credit,
currency, commodities and stocks) changes in foreign, political, social and
economic conditions, regulatory initiatives and compliance with governmental
regulations, judicial decisions and rulings, and various other matters, many of
which are beyond VFL's control. These forward-looking statements speak only as
of the date of this Report. VFL expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statement contained herein to reflect any change in VFL's expectations with
regard thereto or any change in events, conditions or circumstances on which any
statement is based.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report..................................................18
Balance Sheet, December 31, 1996 and 1995.....................................19
Statement of Operations, three years ended December 31, 1996..................20
Statement of Stockholder's Equity, three years ended December 31, 1996........21
Statement of Cash Flows, three years ended December 31, 1996..................22
Notes to Financial Statements.................................................23
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Valley Forge Life Insurance Company
We have audited the accompanying balance sheets of Valley Forge Life
Insurance Company (a wholly-owned subsidiary of Continental Assurance Company,
which is a wholly-owned subsidiary of Continental Casualty Company, a
wholly-owned subsidiary of CNA Financial Corporation, an affiliate of Loews
Corporation) as of December 31, 1996 and 1995 and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedules listed in the Index at Item 14. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Valley Forge Life Insurance Company as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
S/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
February 12, 1997
18
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
- ------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ------------------------------------------------------------------------------------------------------
(In thousands of dollars
Assets:
Investments-Note 2:
<S> <C> <C>
Fixed maturites available-for-sale (cost: $321,432 and $347,401) $ 321,066 $ 367,762
Equity securities available-for-sale (cost: $1,073 and $1,074) 2,959 1,696
Policy loans 60,267 56,008
Short-term investments 42,757 37,184
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 427,049 462,650
- ------------------------------------------------------------------------------------------------------
Cash 24,759 42,103
Insurance receivables:
Reinsurance receivables-Note 7 1,320,583 1,073,481
Premium and other insurance receivables 27,884 2,566
Less allowance for doubtful accounts (378) (175)
Deferred acquisition costs 74,589 50,600
Accrued investment income 4,945 4,687
Federal income taxes recoverable-Note 6 - 575
Deferred income taxes-Note 6 312 -
Due from affiliates 67,499 4,936
Other assets 54 15
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,947,296 $ 1,641,438
======================================================================================================
Liabilities and Stockholder's Equity:
Liabilities:
Insurance reserves-Note 7:
Future policy benefits $ 1,621,504 $ 1,334,393
Claims 60,568 59,423
Policyholders' funds 38,145 34,574
Federal income taxes payable-Note 6 3,824 -
Deferred income taxes-Note 6 - 3,191
Other liabilities 23,715 14,385
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,747,756 1,445,966
- ------------------------------------------------------------------------------------------------------
Stockholder's Equity-Note 3:
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 156,900 140,181
Net unrealized investment gains-Note 2 990 13,641
- ------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 199,540 195,472
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,947,296 $ 1,641,438
======================================================================================================
See accompanying Notes to Financial Statements.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
(In thousands of dollars)
Revenues:
<S> <C> <C> <C>
Premiums-Note 7 $ 325,486 $ 296,653 $ 262,980
Net investment income-Note 2 29,312 31,494 22,759
Realized investment gains (losses)-Note 2 4,771 13,783 (4,502)
Other 8,217 4,818 4,789
- -------------------------------------------------------------------------------------------------
367,786 346,748 286,026
- -------------------------------------------------------------------------------------------------
Benefits and expenses:
Insurance claims and policyholders' benefits-Note 7 304,840 270,936 237,334
Amortization of deferred acquisition costs 1,177 6,066 4,874
Other operating expenses-Note 8 36,022 35,036 32,231
- -------------------------------------------------------------------------------------------------
342,039 312,038 274,439
- -------------------------------------------------------------------------------------------------
Income before income tax 25,747 34,710 11,587
Income tax expense-Note 6 9,028 12,200 4,105
- -------------------------------------------------------------------------------------------------
NET INCOME $ 16,719 $ 22,510 $ 7,482
=================================================================================================
See accompanying Notes to Financial Statements.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
- -------------------------------------------------------------------------------------------------
Net
Additional Unrealized
Common Paid-in Retained Investment
Stock Capital Earnings Gains (Losses) Total
- -------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $2,500 $39,100 $110,189 $ 1,410 $153,249
Net income - - 7,482 - 7,482
Change in net unrealized gains/
(losses)-Note 2 - - - (4,535) (4,535)
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1994 2,500 39,150 117,671 (3,125) 156,196
Net income - - 22,510 - 22,510
Change in net unrealized gains/
(losses)-Note 2 - - - 16,766 16,766
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1995 2,500 39,150 140,181 13,641 195,472
Net income - - 16,719 - 16,719
Change in net unrealized gains/
(losses)-Note 2 - - - (12,651) (12,651)
- -------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $2,500 $39,150 $156,900 $ 990 $199,540
=================================================================================================
See accompanying Notes to Financial Statements.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 16,719 $ 22,510 $ 7,482
----------------------------------------
Adjustments to reconcile net income to net
cash flows from operating activities:
Pre-tax realized investment (gains) losses (4,771) (13,783) 4,502
Amortization of bond discount (4,922) (3,921) (886)
Changes in:
Insurance receivables (272,218) (121,933) (119,090)
Deferred acquisition costs (23,989) (9,267) (1,112)
Accrued investment income (258) 69 (1,606)
Federal income taxes recoverable 4,399 (28) (1,356)
Deferred income taxes 3,309 453 (172)
Insurance reserves 291,826 196,478 144,704
Due from affiliates (62,563) (55,308) 37,119
Other, net 9,293 5,730 5,130
- ----------------------------------------------------------------------------------------------------
Total adjustments (59,894) (1,510) 67,233
- ----------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES (43,175) 21,000 74,715
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturuties (535,263) (361,579) (863,023)
Proceeds from fixed maturities:
Sales 530,828 336,731 408,505
Maturities, calls and redemptions 36,726 51,046 189,355
Purchases of equity securities (728) - (93)
Proceeds from sale of equity securities 1,306 - -
Change in short-term investments (2,851) 1,901 196,581
Change in policy loans (4,259) (9,007) (6,058)
Other, net 72 85 24
- ----------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES 25,831 19,177 (74,709)
- ----------------------------------------------------------------------------------------------------
NET CASH FLOWS (17,344) 40,177 6
Cash at beginning of year 42,103 1,926 1,920
- ----------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 24,759 $ 42,103 $ 1,926
====================================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Federal income taxes $ 1,965 $ 6,531 $ 5,426
====================================================================================================
See accompanying Notes to Financial Statements.
</TABLE>
22
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
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
life insurance policies and individual annuities. Group insurance products
include life, accident and health, consisting primarily of major medical and
hospitalization and pension products.
Effective December 31, 1985, pursuant to a Reinsurance Pooling Agreement,
VFL began ceding all of its business to its parent, Assurance. This business is
then pooled with the business of Assurance, excluding 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 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 1996.
INSURANCE
Premium revenue-Revenues on universal life type contracts are comprised of
contract charges and fees which are recognized over the coverage period.
Accident and health insurance premiums are earned ratably over the terms of the
policies after provision for estimated adjustments on retrospectively rated
policies and deductions for ceded insurance. Other life insurance premiums are
recognized as revenue when due, after deductions for ceded insurance.
Claim reserves-Claim reserves include provisions for reported claims in the
course of settlement and estimates of unreported losses based upon past
experience.
23
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1. - (CONTINUED):
Future policy benefit reserves-Reserves for traditional life insurance
products are computed based upon net level premium methods using actuarial
assumptions as to interest rates, mortality, morbidity, withdrawals and
expenses. Actuarial assumptions include a margin for adverse deviation and
generally vary by plan, age at issue and policy duration. Interest rates range
from 3% to 11%, and mortality, morbidity and withdrawal assumptions reflect VFL
and industry experience prevailing at the time of issue. Expense estimates
include the estimated effects of inflation and expenses beyond the premium
paying period. Reserves for universal life-type contracts are established using
the retrospective deposit method. Under this method, liabilities are equal to
the account balances that accrue to the benefit of the policyholders. Interest
crediting rates ranged from 5.6% to 6.6% for the three years ended December 31,
1996.
Reinsurance-In addition to the pooling agreement with Assurance, VFL also
assumes and cedes insurance with other insurers and reinsurers and members of
various reinsurance pools and associations. VFL utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of risk
and 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. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability.
Deferred acquisition costs-Costs of acquiring insurance business which vary
with and are primarily related to the production of such business are deferred.
Such costs include commissions, premium taxes and certain underwriting and
policy issuance costs. Acquisition costs are capitalized and amortized based on
assumptions consistent with those used for computing policy benefit reserves.
Acquisition costs on ordinary life business are amortized over their assumed
premium paying periods. Universal life and annuity acquisition costs are
amortized in proportion to the present value of the estimated gross profits over
the products' assumed durations, which are regularly evaluated and adjusted as
appropriate. Based on 1996 evaluations, the assumed interest rate spreads were
adjusted, the effect of which was to reduce amortization by approximately $3
million.
INVESTMENTS
Valuation of investments-VFL classifies its fixed maturity securities
(bonds and redeemable preferred stocks) and its equity securities as
available-for-sale, and as such, they are carried at fair value. The amortized
cost of fixed maturity securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion are included
in investment income.
Policy loans are carried at unpaid balances. Short-term investments, which
have an original maturity of one year or less, are carried at amortized cost
which approximates market value. VFL has no real estate, mortgage loans or
investments in derivative securities.
24
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1. - (CONTINUED):
Investment gains and losses-All securities transactions are recorded on the
trade date. Realized investment gains and losses are determined on the basis of
the cost of the specific securities sold. Unrealized investment gains and losses
on fixed maturity and equity securities are reflected as part of stockholder's
equity, net of applicable deferred income taxes and participating policyholders'
interest. Investments are written down to estimated fair values and losses are
charged to income when a decline in value is considered to be other than
temporary.
Securities sold under repurchase agreements-VFL has a securities lending
program where securities are loaned to third parties, primarily major brokerage
firms. Borrowers of these securities must maintain a deposit of 100% of the fair
value of the securities if the collateral is cash, or 102% if the collateral is
securities. Cash deposits from these transactions have been invested in
short-term investments (primarily commercial paper). VFL continues to receive
the interest on the loaned debt securities, as beneficial owner and,
accordingly, the loaned debt securities are included in fixed maturity
securities. The liabilities for securities sold subject to repurchase agreements
are recorded at the contractual repurchase amounts. VFL had no securities on
loan at December 31, 1996 or 1995.
INCOME TAXES
The provision for income taxes includes deferred taxes, resulting from
temporary differences between the financial statement and tax return bases of
assets and liabilities under the liability method. Such temporary differences
primarily relate to insurance reserves, investment valuation differences, net
unrealized investment gains/losses and deferred acquisition costs.
25
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 2. INVESTMENTS:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
- -----------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
(In thousands of dollars)
Fixed maturities:
Bonds:
<S> <C> <C> <C>
Taxable $ 21,597 $ 21,576 $ 16,568
Tax exempt 12 23 23
Equity securities 59 64 64
Policy loans 3,669 3,925 2,979
Short-term investments 4,197 6,037 3,658
Security repurchase transactions - 135 63
Other - 2 (381)
- -----------------------------------------------------------------------------------------------------
29,534 31,762 22,974
Investment expense 222 268 215
- -----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 29,312 $ 31,494 $ 22,759
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT GAINS (LOSSES)
- ----------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
(In thousands of dollars)
Realized investment gains (losses):
<S> <C> <C> <C>
Fixed maturities $ 4,123 $ 13,674 $ (4,306)
Equity securities 578 - -
Other 70 109 (196)
----------------------------------
4,771 13,783 (4,502)
Income tax (expense) benefit (1,670) (4,824) 1,576
- ----------------------------------------------------------------------------------------------------
Net realized investment gains (losses) 3,101 8,959 (2,926)
- ----------------------------------------------------------------------------------------------------
Change in net unrealized investment gains (losses):
Fixed maturities (20,726) 25,405 (6,892)
Equity securities 1,263 389 (85)
----------------------------------
(19,463) 25,794 (6,977)
Income tax (expense) benefit 6,812 (9,028) 2,442
- ----------------------------------------------------------------------------------------------------
Change in net unrealized investment gains (losses) (12,651) 16,766 (4,535)
- ----------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) $ (9,550) $ 25,725 $ (7,461)
====================================================================================================
</TABLE>
26
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 2. - (CONTINUED):
<TABLE>
<CAPTION>
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
- -------------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------------
FIXED EQUITY Fixed Equity Fixed Equity
Year Ended December 31 MATURITIES SECURITIES Maturities Securities Maturities Securities
- -------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Proceeds from sales $530,828 $ 1,306 $ 336,731 $ - $ 408,505 -
=======================================================================================================
Gross realized gains $ 7,927 $ 578 18,185 - $ 1,559 -
Gross realized losses (3,804) - (4,511) - (5,865) -
- -------------------------------------------------------------------------------------------------------
NET REALIZED GAINS
(LOSSES) ON SALES $ 4,123 $ 578 $ 13,674 $ - $ (4,306) -
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------------------------------------
1996 1995
----------------------------------- ------------------------------
December 31 GAINS LOSSES NET Gains Losses Net
- --------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities $ 3,226 $ (3,592) $ (366) $ 20,386 $ (25) $ 20,361
Equity securities 1,886 - 1,886 622 - 622
--------------------------------------------------------------------
$ 5,112 $ (3,592) 1,520 $ 21,008 $ (25) 20,983
====================== =====================
Deferred income tax expense (530) (7,342)
- --------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS $ 990 $ 13,641
==============================================================================================================
</TABLE>
27
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 2. -(CONTINUED):
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
December 31, 1996 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
United States Treasury securities and
obligations of government agencies $ 117,213 $ 141 $ 2,486 $ 114,868
Asset-backed securities 113,376 641 767 113,251
States, municipalities and tax exempt
political subdivisions 30 - - 30
Corporate securities 55,196 988 335 55,849
Other debt securities 35,617 1,456 4 37,068
- ------------------------------------------------------------------------------------------------
Total fixed maturities 321,432 3,226 3,592 321,066
Equity securities 1,073 1,886 - 2,959
- ------------------------------------------------------------------------------------------------
TOTAL $ 322,505 $ 5,112 $ 3,592 $ 324,025
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
- -------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
United States Treasury securities and
obligations of government agencies $ 186,083 $ 12,526 $ 1 $ 198,608
Asset-backed securities 84,785 2,545 8 87,322
States, municipalities and tax exempt
political subdivisions 279 14 - 293
Corporate securities 50,523 2,508 6 53,025
Other debt securities 25,731 2,793 10 28,514
- -------------------------------------------------------------------------------------------------
Total fixed maturities 347,401 20,386 25 367,762
Equity securities 1,074 622 - 1,696
- -------------------------------------------------------------------------------------------------
Total $ 348,475 $ 21,008 $ 25 $ 369,458
=================================================================================================
</TABLE>
28
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 2. - (CONTINUED):
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED
MATURITIES BY CONTRACTUAL MATURITY
- ------------------------------------------------------------------------------------------------
1996 1995
-------------------------- ----------------------
AMORTIZED MARKET Amortized Market
December 31 COST VALUE Cost Value
- ------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Due in one year or less $ 3,299 $ 3,305 $ 7,470 $ 7,666
Due after one year through five years 118,507 116,223 135,160 136,297
Due after five years through ten years 47,998 48,866 35,869 37,538
Due after ten years 38,252 39,421 84,117 98,939
Asset-backed securities not due at a single
maturity date 113,376 113,251 84,785 87,322
- ------------------------------------------------------------------------------------------------
TOTAL $ 321,432 $ 321,066 $ 347,401 $ 367,762
================================================================================================
</TABLE>
Actual maturities may differ from contractual maturities because securities
may be called or prepaid with or without call or prepayment penalties.
There are no investments (other than equity securities) that have not
produced income for the years ended December 31, 1996 and 1995. There are no
investments in a single issuer, other than the U.S. government, that when
aggregated exceed 10% of stockholder's equity.
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair values are required to be disclosed for all financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values may be based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rates and estimates of future cash flows. Potential taxes
and other transaction costs have not been considered in estimating fair value.
The estimates presented herein are subjective in nature and are not necessarily
indicative of the amounts VFL could realize in the current market exchange. Any
difference would not be expected to be material.
All nonfinancial instruments such as deferred acquisition costs, reinsurance
receivables, deferred income taxes and insurance reserves, are excluded from
fair value disclosure. Thus, the total fair value amounts cannot be aggregated
to determine the underlying economic value of VFL.
The carrying amounts reported in the balance sheet approximate fair value
for cash, short-term investments, premium and other insurance receivables,
accrued investment income, and certain other assets and other liabilities
because of their short-term nature. Accordingly, these financial instruments are
not listed in the table below.
29
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 3. - (CONTINUED):
The carrying amounts and estimated fair values of VFL's other financial
instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1996 1995
---------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
December 31 AMOUNT FAIR VALUE Amount Fair Value
- ---------------------------------------------------------------------------------------------
(In thousands of dollars)
FINANCIAL ASSETS
Investments:
<S> <C> <C> <C> <C> <C>
Fixed maturities-Note 2 $ 321,066 $ 321,066 $ 367,762 $ 367,762
Equity securities-Note 2 2,959 2,959 1,696 1,696
Policy loans 60,267 56,169 56,008 52,648
FINANCIAL LIABILITIES
Premium deposits and annuity contracts 167,049 153,676 68,578 64,565
=============================================================================================
</TABLE>
The following methods and assumptions were used by VFL in estimating its
fair value amounts for financial instruments:
Fixed maturity securities and equity securities are based on quoted
market prices, where available. For securities not actively traded,
fair values are estimated using values obtained from independent
pricing services or quoted market prices of comparable instruments.
The fair values for policy loans are estimated using discounted cash
flow analyses at interest rates currently offered for similar loans to
borrowers with comparable credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
NOTE 4. STATUTORY CAPITAL AND SURPLUS:
Statutory capital and surplus and net income for VFL are determined in
accordance with accounting practices prescribed by the Pennsylvania Insurance
Department. Prescribed statutory accounting practices are set forth in a variety
of publications of the National Association of Insurance Commissioners as well
as state laws, regulations, and general administrative rules. VFL has no
material permitted accounting practices. VFL had a statutory net loss of $2.7
million, compared with net income of $8.9 million and $5.2 million for the years
ended December 31, 1996, 1995 and 1994, respectively. The statutory net loss for
1996 is primarily due to the increase in sales of individual life and annuity
products. Costs related to these sales are charged immediately to income for
statutory reporting purposes; under GAAP, such costs are capitalized and
amortized to income over the duration of these
30
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 4. - (CONTINUED):
contracts. Statutory capital and surplus for VFL was $124.3 million and $129.9
million at December 31, 1996 and 1995, respectively.
The payment of dividends by VFL to Assurance without prior approval of the
Pennsylvania Insurance Department is limited to formula amounts. As of December
31, 1996, approximately $12.4 million was not subject to prior Insurance
Department approval.
NOTE 5. BENEFIT PLANS:
PENSION PLAN
VFL has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of CNA,
all Casualty employees are covered by CNA's Benefit Plans. The plans are
discussed below.
CNA has several noncontributory pension plans covering all full-time
employees age 21 or over who have completed at least one year of service. VFL is
included in the CNA Employees' Retirement Plan. Plan benefits are based on years
of credited service and the employee's highest sixty consecutive months of
compensation.
CNA's funding policy is to make contributions in accordance with applicable
governmental regulatory requirements. The assets of the plan are invested
primarily in U.S. government securities with the balance in short-term
investments, common stocks and other fixed income securities.
Effective January 1, 1996, the retirement plans redefined compensation to
include base pay, overtime and bonuses. This amendment generated an unrecognized
prior service cost of $20.2 million for CNA.
The funded status is determined using assumptions at the end of the year.
Pension cost is determined using assumptions at the beginning of the year.
Net periodic pension cost allocated to VFL was $3.6 million, $1.7 million
and $1.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
31
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 5. - (CONTINUED):
The following table sets forth the Plans' funded status and amounts
recognized in CNA's consolidated financial statements at December 31, 1996, 1995
and 1994.
<TABLE>
<CAPTION>
ACCUMULATED BENEFIT OBLIGATION
- -------------------------------------------------------------------------------------------------------------------
December 31 1996* 1995* 1994
- -------------------------------------------------------------------------------------------------------------------
OVERFUNDED UNDERFUNDED Overfunded Underfunded Overfunded
PLANS PLANS Plans Plans Plans
- -------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Actuarial present value of accumulated plan benefits:
<S> <C> <C> <C> <C> <C>
Vested $517,221 $ 622,548 $ 491,052 $ 646,017 $ 376,377
Nonvested 37,718 32,369 28,346 14,126 39,152
- -------------------------------------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION $554,939 $ 654,917 $ 519,398 $ 660,143 $ 415,529
===================================================================================================================
* The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
NET PENSION ASSET (LIABILITY)
- ------------------------------------------------------------------------------------------------------------------
December 31 1996* 1995* 1994
- ------------------------------------------------------------------------------------------------------------------
OVERFUNDED UNDERFUNDED Overfunded Underfunded Overfunded
PLANS PLANS Plans Plans Plans
- ------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $777,755 $ 788,333 $ 769,999 $ 809,308 $ 651,418
Plan assets at fair value 701,854 503,623 629,673 496,264 495,492
- -------------------------------------------------------------------------------------------------------------------
Plan assets less than projected benefit obligation (75,901) (284,710) (140,326) (313,044) (155,926)
Unrecognized net asset at January 1, 1986,
being recognized over 12 years (7,099) - (12,176) - (17,253)
Unrecognized prior service costs 19,077 77,747 21,445 104,042 20,773
Unrecognized net loss 122,173 (11,793) 164,585 13,508 174,039
- -------------------------------------------------------------------------------------------------------------------
NET PENSION ASSET (LIABILITY) $ 58,250 $(218,756) $ 33,528 $(195,494) $ 21,633
===================================================================================================================
* The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NET PERIODIC PENSION COST
- ---------------------------------------------------------------------------------------------------------------
December 31 1996* 1995* 1994
- ---------------------------------------------------------------------------------------------------------------
OVERFUNDED UNDERFUNDED Overfunded Underfunded Overfunded
PLANS PLANS Plans Plans Plans
- ---------------------------------------------------------------------------------------------------------------
Net periodic pension cost:
<S> <C> <C> <C> <C> <C>
Service cost-benefits attributed to employee
service during the year $ 36,489 $18,825 $ 32,118 $ 11,596 $ 32,354
Interest cost on projected benefit obligation 53,549 56,771 51,056 32,760 44,666
- ---------------------------------------------------------------------------------------------------------------
Actual return on plan assets (31,106) (29,013) (115,363) (43,432) 11,579
Net amortization and deferral (16,059) (5,982) 72,415 19,547 (43,265)
- ---------------------------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST $ 42,873 $40,601 $ 40,226 $ 20,471 $ 45,334
===============================================================================================================
*The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
</TABLE>
<TABLE>
<CAPTION>
Actuarial assumptions are set forth in the following table.
ASSUMPTIONS
- ----------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.50% 7.25% 8.50% 7.25%
Rate of increase in compensation levels* 2.75 2.75 4.00 4.50
Expected long-term rate of return on plan assets 7.75-8.50 7.50-8.50 8.75 7.50
- ----------------------------------------------------------------------------------------------------------------
* Excludes age/service related merit and productivity increases.
</TABLE>
32
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 5. - (CONTINUED):
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
CNA provides certain health and dental care benefits for eligible retirees,
through age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired persons. CNA funds benefit costs principally
on the basis of current benefit payments.
Net periodic postretirement benefit cost allocated to VFL was $1.3 million,
$.7 million and $.6 million for the years ended December 31, 1996, 1995 and
1994, respectively.
The following table sets forth the amounts recognized in CNA's consolidated
financial statements at December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
ACCRUED POSTRETIREMENT BENEFIT COST
- -------------------------------------------------------------------------------------------------------------
December 31 1996* 1995* 1994
- -------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Accumulated postretirement benefit obligation:
<S> <C> <C> <C>
Retirees $171,950 $185,507 $ 27,088
Fully eligible, active plan participants 89,009 59,173 53,684
Other active plan paticipants 88,191 62,540 41,106
- -------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 349,150 307,220 121,878
Unrecognized prior service cost (70) - (11,177)
Unrecognized net gain (loss) (12,215) 7,380 19,702
- -------------------------------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST $336,865 $314,600 $130,403
=============================================================================================================
* The 1996 and 1995 data includes postretirement benefit obligations for The Continental Corporation retirees.
NET PERIODIC POSTRETIREMENT BENEFIT COST
- --------------------------------------------------------------------------------------------------------------
December 31 1996* 1995* 1994
- --------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost:
Service cost/benefits attributed to employee service
during the year $ 11,935 $ 5,969 $ 8,603
Interest cost on accumulated post retirement benefit obligation 24,146 17,506 10,342
Amortization 374 (941) 655
- --------------------------------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $ 36,455 $ 22,534 $ 19,600
==============================================================================================================
* The 1996 and 1995 data includes postretirement benefit obligations for The Continental Corporation retirees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ASSUMPTIONS
- -------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Assumptions used in determining net periodic benefit cost:
<S> <C> <C> <C>
Discount rate 7.25% 8.50% 7.25%
Assumptions used in determining the projected benefit
obligation (liability):
Discount rate 7.50% 7.25% 8.50%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 5. - (CONTINUED):
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 12% in 1996, declining 1% per year to an
ultimate rate of 5% in 2002. The health care cost trend rate assumption has a
significant effect on the amount of the benefit obligation and periodic cost
reported. An increase in the assumed health care cost trend rate of 1% in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1996 by $24.2 million and the aggregate net periodic postretirement
benefit cost for 1996 by $3.1 million.
SAVINGS PLAN
VFL is included in the CNA Employees' Savings Plan which is a contributory
plan that allows employees to make regular contributions of up to 6% of their
salary. CNA contributes an additional amount equal to 70% of the employee's
regular contribution. Employees may also make an additional contribution of up
to 10% of their salaries for which there is no additional contribution by CNA.
CNA contributions allocated to and expensed by VFL for the Savings Plan were
$1.0 million, $.7 million and $.5 million for the years ended December 31, 1996,
1995 and 1994, respectively.
NOTE 6. INCOME TAXES:
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included in the consolidated
Federal income tax return with CNA and its eligible subsidiaries (CNA Tax
Group), which in turn is consolidated in the Loews Federal income tax return.
The Federal income tax provision of VFL is computed as if VFL were filing its
own separate return.
VFL maintains a special tax memorandum account designated as the
"Shareholder's Surplus Account". Dividends from this account may be distributed
to the shareholder without resulting in any additional tax. At December 31,
1996, the amount in the Shareholder's Surplus Account was $100 million. Another
tax memorandum account, defined as the "Policyholders' Surplus Account," totaled
$5 million at December 31, 1996. No further additions to this account are
allowed. Amounts accumulated in the Policyholders' Surplus Account are subject
to income tax if distributed to the shareholder. VFL has not provided for such a
tax as VFL has no plans for such a distribution.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
VFL's deferred tax assets and liabilities as of December 31, 1996 and 1995 are
shown in the table below.
34
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 6. - (CONTINUED):
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
December 31 1996 1995
- ------------------------------------------------------------------------------
(In thousands of dollars)
Insurance reserves $ 17,166 $ 15,900
Deferred acquisition costs (22,078) (14,382)
Investment valuation 5,411 2,518
Net unrealized gains (530) (7,342)
Receivables (646) 661
Other, net 989 (546)
- ------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS (LIABILITIES) $ 312 $ (3,191)
==============================================================================
At December 31, 1996, gross deferred tax assets and liabilities amounted to
$24.9 million and $24.6 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1995, amounted to $20.1 million and $23.3 million,
respectively.
VFL has not established a valuation reserve at December 31, 1996 as it
believes that all deferred tax assets are fully realizable. VFL has had a
history of profitability and anticipates future taxable income sufficient to
support its deferred tax balances at December 31, 1996, including but not
limited to the reversal of existing temporary differences and the implementation
of tax planning strategies, if needed.
Significant components of VFL's income tax provision are as follows:
PROVISION FOR INCOME TAX
- ------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------
(In thousands of dollars)
Current tax (expense) benefit on:
Ordinary income $ (2,217) $ (7,417) $ (5,603)
Realized investment gains (losses) (3,502) (4,330) 1,326
- ------------------------------------------------------------------------------
Total current tax expense (5,719) (11,747) (4,277)
- ------------------------------------------------------------------------------
Deferred tax (expense) benefit on:
Ordinary income (loss) (5,141) 41 (78)
Realized investment gains (losses) 1,832 (494) 250
- ------------------------------------------------------------------------------
Total deferred tax (expense) benefit (3,309) (453) 172
- ------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ (9,028) $(12,200) $ (4,105)
==============================================================================
35
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 6. - (CONTINUED):
A reconciliation of the expected income tax resulting from the use of
statutory tax rates to the effective income tax expense follows:
<TABLE>
<CAPTION>
RECONCILIATION OF EXPECTED AND EFFECTIVE TAXES
- --------------------------------------------------------------------------------------------------------------
% OF % of % of
PRETAX Pretax Pretax
Year Ended December 31 1996 INCOME 1995 Income 1994 Income
- --------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense on ordinary income
at statutory rates $ (7,341) (35.0)% $ (7,325) (35.0)% $ (5,623) (35.0)%
State income taxes (54) (0.3) (51) (0.2) (43) (0.3)
Other items, net 37 0.2 - - (15) (0.1)
- --------------------------------------------------------------------------------------------------------------
Income tax expense on ordinary income (7,358) (35.1) (7,376) (35.2) (5,681) (35.4)
Income tax (expense) benefit on realized
investment gains/losses at statutory rates (1,670) (35.0)% (4,824) (35.0)% 1,576 (35.0)%
- --------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE $ (9,028) (35.1)% $(12,200) (35.1)% $ (4,105) (35.4)%
==============================================================================================================
</TABLE>
<PAGE>
NOTE 7. REINSURANCE:
The effects of reinsurance on premium revenues are shown in the following
schedule:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Premiums Assumed/Net
------------------------------------------------------
Year Ended December 31 Direct Assumed Ceded Net %
- --------------------------------------------------------------------------------------------
(In thousands of dollars)
1996
<S> <C> <C> <C> <C> <C>
Life $ 422,700 $ 72,718 $ 424,907 $ 70,511 103 %
Accident and Health 1,080 254,975 1,080 254,975 100
- --------------------------------------------------------------------------------------------
TOTAL PREMIUMS $ 423,780 $ 327,693 $ 425,987 $ 325,486 101 %
============================================================================================
1995
Life $ 316,011 $ 75,053 $ 316,577 $ 74,487 101 %
Accident and Health 422 222,166 422 222,166 100
- --------------------------------------------------------------------------------------------
Total premiums $ 316,433 $ 297,219 $ 316,999 $ 296,653 100 %
============================================================================================
1994
Life $ 187,834 $ 49,998 $ 189,163 $ 48,669 103 %
Accident and Health 468 214,311 468 214,311 100
- --------------------------------------------------------------------------------------------
Total premiums $ 188,302 $ 264,309 $ 189,631 $ 262,980 101 %
============================================================================================
</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.
36
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 7. - (CONTINUED):
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 $43.0 million, $9.9 million and $7.5 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Additionally, insurance claims
and policyholders' benefits recoveries from non-affiliated companies were $7.0
million, $6.1 million and $3.0 million for the years ended December 31, 1996,
1995 and 1994, respectively.
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 most of these balances which were
approximately $1.3 billion and $1.1 billion at December 31, 1996 and 1995,
respectively.
The impact of reinsurance, including transactions with Assurance, on life
insurance in force is shown in the following schedule:
- --------------------------------------------------------------------------------
Life Insurance in Force Assumed/Net
----------------------------------------
Direct Assumed Ceded Net %
- --------------------------------------------------------------------------------
(In thousands of dollars)
December 31, 1996 $ 108,126 $ 22,085 $ 109,873 $ 20,338 108.6%
December 31, 1995 57,138 16,996 58,442 15,692 108.3
December 31, 1994 22,933 13,215 24,112 12,036 109.8
================================================================================
NOTE 8. RELATED PARTIES:
As discussed in Note 1, VFL is party to a pooling agreement with its parent,
Assurance. In addition, VFL is party to the CNA Intercompany Expense Agreement
whereby expenses incurred by CNA and each of its subsidiaries are allocated to
the appropriate company. All acquisition and underwriting expenses allocated to
VFL are further subject to the Intercompany Pooling Agreement, so that
acquisition and underwriting expenses recognized by VFL approximate ten percent
of the combined acquisition and underwriting expenses of VFL and Assurance.
Pursuant to the foregoing agreements, VFL recorded amortization of deferred
acquisition costs and other operating expenses totaling $37 million, $41 million
and $37 million for 1996, 1995 and 1994, respectively. Expenses of VFL exclude
$12.3 million, $5.5 million and $4.1 million of general and administrative
expenses incurred by VFL and allocated to CNA for the years ended December 31,
1996, 1995 and 1994, respectively. VFL had a $67.5 million affiliated receivable
at December 31, 1996 and a $4.9 million affiliated receivable at December 31,
1995 for net cash settlements due from Assurance in the normal course of
operations related to pooling and general expense reimbursements. There are no
interest charges on intercompany receivables and payables.
37
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 9. LEGAL:
VFL is party to litigation arising 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.
NOTE 10. BUSINESS SEGMENTS:
- -----------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------
(In thousands of dollars)
REVENUES
Individual $ 70,208 $ 69,577 $ 52,812
Group 292,807 263,388 237,716
Realized gains (losses) 4,771 13,783 (4,502)
- -----------------------------------------------------------------------------
Total $ 367,786 $ 346,748 $ 286,026
=============================================================================
INCOME BEFORE INCOME TAX
Individual $ 12,752 $ 8,611 $ 4,794
Group 8,224 12,316 11,295
Realized gains (losses) 4,771 13,783 (4,502)
- -----------------------------------------------------------------------------
Total $ 25,747 $ 34,710 $ 11,587
=============================================================================
NET INCOME
Individual $ 8,209 $ 5,597 $ 3,119
Group 5,409 7,954 7,289
Realized gains (losses) 3,101 8,959 (2,926)
- -----------------------------------------------------------------------------
Total $ 16,719 $ 22,510 $ 7,482
=============================================================================
ASSETS
Individual $ 665,000 $ 786,918 $ 686,754
Group 1,282,296 854,520 760,368
- -----------------------------------------------------------------------------
Total $ 1,947,296 $1,641,438 $ 1,447,122
=============================================================================
Assets and investment income are allocated to business segments based on
cash flows after attribution of separately identifiable assets. Income taxes
have been allocated on the basis of taxable operating income of the respective
segments.
Group revenues include $210.1 million, $187.0 million and $179.4 million for
the years ended December 31, 1996, 1995 and 1994, respectively, under contracts
covering U.S. government employees and their dependents.
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OMITTED PURSUANT TO GENERAL INSTRUCTION J (2) (C) OF FORM 10-K.
ITEM 11. EXECUTIVE COMPENSATION
OMITTED PURSUANT TO GENERAL INSTRUCTION J (2) (C) OF FORM 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
OMITTED PURSUANT TO GENERAL INSTRUCTION J (2) (C) OF FORM 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OMITTED PURSUANT TO GENERAL INSTRUCTION J (2) (C) OF FORM 10-K.
39
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS.
A listing of all financial statements filed as part of this Annual
Report on Form 10-K is included on page 17 in ITEM 8.
(A) (2) FINANCIAL STATEMENT SCHEDULES. PAGE
----------------------------- ----
Schedule III Supplementary Insurance Information............. 43
Schedule V Valuation and Qualifying Accounts and Reserves.. 44
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information
is provided in the Financial Statements or notes thereto.
(A) (3) EXHIBITS.
3 (i) Articles of Incorporation are incorporated herein by reference
to exhibit number 6 to the Form N-4EL Registration Statement
filed with the Securities and Exchange Commission on February 20,
1996 (File No. 333-1087).
3 (ii) Bylaws are incorporated herein by reference to exhibit number
6 to the Form N-4EL Registration Statement filed with the
Securities and Exchange Commission on February 20, 1996 (File No.
333-1087).
4 (a) Form of Flexible Premium Deferred Variable Annuity
Contract is incorporated herein by reference to exhibit number 4
to the Form N-4EL Registration Statement filed with the
Securities and Exchange Commission on February 20, 1996 (File No.
333-1087).
4 (b) Form of Qualified Plan Endorsement to Flexible Premium Deferred
Variable Annuity Contract is incorporated herein by reference to
exhibit number 4 to the Form N-4EL Registration Statement filed
with the Securities and Exchange Commission on February 20, 1996
(File No. 333-1087).
4 (c) Form of IRA Endorsement to Flexible Premium Deferred Variable
Annuity Contract is incorporated herein by reference to exhibit
number 4 to the Form N-4EL Registration Statement filed with the
Securities and Exchange Commission on February 20, 1996 (File No.
333-1087).
4 (d) Form of Nursing Home Confinement, Terminal Medical Condition,
Total Disability Endorsement to Flexible Premium Deferred
Variable Annuity Contract is incorporated herein by reference to
exhibit number 4 to the Form N-4EL Registration Statement filed
with the Securities and Exchange Commission on February 20, 1996
(File No. 333-1087).
4 (e) Policy Application is incorporated herein by reference to exhibit
number 5 to the Form N-4EL Registration Statement filed with the
Securities and Exchange Commission on February 20, 1996 (File No.
333-1087).
4 (f) Form of Single Premium Deferred Modified Guaranteed Annuity
Certificate is incorporated herein by reference to exhibit number
4 to the Form S-1 Registration Statement filed with the
Securities and Exchange Commission on March 29, 1996 (File No.
333-2093).
40
<PAGE>
(A) (3) EXHIBITS - (CONTINUED):
4 (g) Form of Index Rider to Single Premium Deferred Modified
Guaranteed Annuity Certificate is incorporated herein by
reference to exhibit number 4 to the Form S-1 Registration
Statement filed with the Securities and Exchange Commission on
March 29, 1996 (File No. 333-2093).
4 (h) Form of Qualified Plan Rider to Single Premium Deferred
Modified Guaranteed Annuity Certificate is incorporated herein by
reference to exhibit number 4 to the Form S-1 Registration
Statement filed with the Securities and Exchange Commission on
March 29, 1996 (File No. 333-2093).
4 (i) Form of Individual Retirement Annuity Rider to Single Premium
Deferred Modified Guaranteed Annuity Certificate is incorporated
herein by reference to exhibit number 4 to the Form S-1
Registration Statement filed with the Securities and Exchange
Commission on March 29, 1996 (File No. 333-2093).
4 (j) Form of Nursing Home Confinement/Terminal Medical Condition
Rider to Single Premium Deferred Modified Guaranteed Annuity
Certificate is incorporated herein by reference to exhibit number
4 to the Form S-1 Registration Statement filed with the
Securities and Exchange Commission on March 29, 1996 (File No.
333-2093).
4 (k) Form of Group Contract and Individual Certificate to Single
Premium Deferred Modified Guaranteed Annuity Certificate is
incorporated herein by reference to exhibit number 4 filed with
Pre-Effective Amendment No. 1 to the Form S-1 Registration
Statement filed with the Securities and Exchange Commission on
October 17, 1996 (File No. 333-2093).
4 (l) Specimen of Individual Flexible Premium Variable and Fixed Life
Insurance Policy is incorporated herein by reference to the
initial filing of the Form S-6 Registration Statement filed with
the Securities and Exchange Commission on March 25, 1996 (File
No. 333-01949).
4 (m) Form of Waiver of Monthly Deduction Rider to Individual Flexible
Premium Variable and Fixed Life Insurance Policy is incorporated
herein by reference to the initial filing of the Form S-6
Registration Statement filed with the Securities and Exchange
Commission on March 25, 1996 (File No. 333-01949).
4 (n) Form of Term Insurance on Spouse Rider to Individual Flexible
Premium Variable and Fixed Life Insurance Policy is incorporated
herein by reference to the initial filing of the Form S-6
Registration Statement filed with the Securities and Exchange
Commission on March 25, 1996 (File No. 333-01949).
4 (o) Form of Term Insurance on Children Rider to Individual Flexible
Premium Variable and Fixed Life Insurance Policy is incorporated
herein by reference to the initial filing of the Form S-6
Registration Statement filed with the Securities and Exchange
Commission on March 25, 1996 (File No. 333-01949).
<PAGE>
10 (a) Form of Participation Agreement between the Company and Insurance
Series is incorporated herein by reference to exhibit number 8 to
the Form N-4EL/A Registration Statement filed with the Securities
and Exchange Commission on August 30, 1996 (File No. 333-1087).
10 (b) Form of Participation Agreement between the Company and
Variable Insurance Products Fund is incorporated herein by
reference to exhibit number 8 to the Form N-4EL/A Registration
Statement filed with the Securities and Exchange Commission on
August 30, 1996 (File No. 333-1087).
41
<PAGE>
(A) (3) EXHIBITS - (CONTINUED)
10 (c) Form of Participation Agreement between the Company and The
Alger American Fund is incorporated herein by reference to
exhibit number 8 to the Form N-4EL/A Registration Statement filed
with the Securities and Exchange Commission on August 30, 1996
(File No. 333-1087).
10 (d) Form of Participation Agreement between the Company and MFS
Variable Insurance Trust is incorporated herein by reference to
exhibit number 8 to the Form N-4EL/A Registration Statement filed
with the Securities and Exchange Commission on August 30, 1996
(File No. 333-1087).
10 (e) Form of Participation Agreement between the Company and SoGen
Variable Funds, Inc. is incorporated herein by reference to
exhibit number 8 to the Form N-4EL/A Registration Statement filed
with the Securities and Exchange Commission on August 30, 1996
(File No. 333-1087).
10 (f) Form of Participation Agreement between the Company and Van Eck
Worldwide Insurance Trust is incorporated herein by reference to
exhibit number 8 to the Form N-4EL/A Registration Statement filed
with the Securities and Exchange Commission on August 30, 1996
(File No. 333-1087).
10 (g) CNA Inter-Company Expense Agreement is incorporated herein by
reference to exhibit number 10G to the Form S-1/A Registration
Statement filed with the Securities and Exchange Commission on
September 3, 1996 (File No. 333-1083).
10 (h) Amendment to the CNA Inter-Company Expense Agreement is
incorporated herein by reference to exhibit number 10H to the
Form S-1/A Registration Statement filed with the Securities and
Exchange Commission on September 3, 1996 (File No. 333-1083).
10 (i) Reinsurance Pooling Agreement is incorporated herein by
reference to exhibit number 10I to the Form S-1/A Registration
Statement filed with the Securities and Exchange Commission on
September 3, 1996 (File No. 333-1083).
10 (j) Amendment to the Reinsurance Pooling Agreement is incorporated
herein by reference to exhibit number 10J to the Form S-1/A
Registration Statement filed with the Securities and Exchange
Commission on September 3, 1996 (File No. 333-1083).
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the fourth quarter
of 1996.
42
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
VALLEY FORGE LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
- ------------------------------ ------------------------------------------------------
GROSS INSURANCE RESERVES
----------------------------------------
CLAIM
DEFERRED AND FUTURE POLICY-
ACQUISITION CLAIM POLICY HOLDERS'
(In thousands of dollars) COSTS EXPENSE BENEFITS FUNDS
- -------------------------------------------------------------------------------------
DECEMBER 31, 1996
<S> <C> <C> <C> <C>
Individual............ $71,268.6 $10,411.5 $277,943.4 $ 548.0
Group................. 3,320.1 50,156.3 32,020.3 37,596.9
--------- --------- ---------- ----------
Total............... $74,588.7 $60,567.8 $309,963.7 $ 38,144.9
========= ========= ========== ==========
DECEMBER 31, 1995
Individual............ $50,420.8 $14,118.6 $242,076.0 $ 676.4
Group................. 178.8 45,304.8 24,524.2 33,897.9
-------- --------- ---------- ---------
Total............... $50,599.6 $59,423.4 $266,600.2 $ 34,574.3
======== ========= ========= =========
DECEMBER 31, 1994
Individual............ $41,025.0 $12,721.6 $214,144.2 $ 699.0
Group................. 308.4 42,914.7 15,557.9 29,897.4
-------- --------- ---------- ---------
Total............... $41,333.4 $55,636.3 $229,702.1 $30,596.4
======== ========= ========== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III - CONTINUED
- ---------------------------------------------------------------------------------------------------
AMORTIZATION
INSURANCE OF
NET NET CLAIMS AND DEFERRED OTHER
PREMIUM INVESTMENT POLICYHOLDERS' ACQUISITION OPERATING
REVENUE INCOME BENEFITS COSTS EXPENSES
(In thousands of dollars) ----------- ------------ ------------- -------------- -------------
- ------------------------------
DECEMBER 31, 1996
<S> <C> <C> <C> <C> <C>
Individual............ $ 49,226.4 $13,123.6 $ 84,559.1 $1,124.7 $42,834.7
Group................. 276,260.0 16,188.6 220,280.8 52.4 (6,812.1)
--------- --------- --------- --------- ---------
Total............... $325,486.4 $29,312.2 $304,839.9 $1,177.1 $36,022.6
========= ========= ========= ========= =========
DECEMBER 31, 1995
Individual............ $ 49,435.0 $18,918.0 $ 60,208.5 $6,044.9 $44,419.0
Group................. 247,218.0 12,576.3 210,727.7 21.2 (9,383.1)
--------- -------- --------- ---------- ---------
Total............... $296,653.0 $31,494.3 $270,936.2 $6,066.1 $35,035.9
========= ========= ========= ========= =========
DECEMBER 31, 1994
Individual............ $ 37,708.7 $13,323.2 $ 22,621.0 $4,837.9 $12,353.4
Group................. 225,270.8 9,435.4 214,712.9 36.6 19,877.6
--------- --------- --------- -------- ---------
Total............... $262,979.5 $22,758.6 $237,333.9 $4,874.5 $32,231.0
========= ========= ========= ======== =========
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE V
VALLEY FORGE LIFE INSURANCE COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- ----------------------------------------------------------------------------------------------------------------
BALANCE BALANCE
AT CHARGED TO CHARGED TO AT
BEGINNING COSTS AND OTHER END OF
(In thousands of dollars) OF PERIOD EXPENSES AMOUNTS DEDUCTIONS PERIOD
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Deducted from assets:
Allowance for doubtful accounts:
<S> <C> <C> <C> <C> <C>
Insurance receivables....................... $ 175.2 $ 211.7 $ - $ 9.1 $ 377.8
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1995
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables....................... $ - $ 228.7 $ - $ 53.5 $ 175.2
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1994
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables....................... $ - $ (13.4) $ - $ (13.4) $ -
======= ======== ======= ======== =======
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
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/DENNIS H. CHOOKASZIAN
-------------------------------------------
Dennis H. Chookaszian
Chairman of the Board and
Chief Executive Officer
By S/PETER E. JOKIEL
--------------------------------------------
Peter E. Jokiel
Director, Senior Vice President
and Chief Financial Officer
Date: March 28, 1997
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 the 28th day of March, 1997.
SIGNATURE TITLE
S/DENNIS H. CHOOKASZIAN Chairman of the Board and
- ------------------------ Chief Executive Officer
Dennis H. Chookaszian
S/PHILIP L. ENGEL Director
- ------------------------
Philip L. Engel
S/MICHAEL C. GARNER Director
- ------------------------
Michael C. Garner
S/PETER E. JOKIEL Chief Financial Officer
- ------------------------ and Director
Peter E. Jokiel
S/PATRICIA L. KUBERA Director
- ------------------------
Patricia L. Kubera
S/WILLIAM H. SHARKEY, JR. Director
- -------------------------
William H. Sharkey, Jr.
45
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001007008
<NAME> VALLEY FORGE LIFE INSURANCE COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 321,066
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,959
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 427,049
<CASH> 24,759
<RECOVER-REINSURE> 1,320,583
<DEFERRED-ACQUISITION> 74,589
<TOTAL-ASSETS> 1,947,296
<POLICY-LOSSES> 1,682,072
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 38,145
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 197,040
<TOTAL-LIABILITY-AND-EQUITY> 1,947,296
325,486
<INVESTMENT-INCOME> 29,312
<INVESTMENT-GAINS> 4,771
<OTHER-INCOME> 8,217
<BENEFITS> 304,840
<UNDERWRITING-AMORTIZATION> 1,177
<UNDERWRITING-OTHER> 36,022
<INCOME-PRETAX> 25,747
<INCOME-TAX> 9,028
<INCOME-CONTINUING> 16,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,719
<EPS-PRIMARY> 334.38
<EPS-DILUTED> 334.38
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
