<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended June 30, 1997 Commission File Number 333-1087
--------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-6200031
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CNA Plaza
Chicago, Illinois 60685
Address of principal executive offices) (Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No _
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 1, 1997
----------------------------------- -----------------------------
Common Stock, Par value $50.00 50,000
The registrant meets the conditions set forth in General Instruction
H(1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the
reduced disclosure format.
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Page 1 of 18
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
CONDENSED FINANCIAL STATEMENTS:
BALANCE SHEET
JUNE 30, 1997 (Unaudited) AND DECEMBER 31, 1996...................... 3
CONDENSED STATEMENT OF OPERATIONS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996............ 4
STATEMENT OF STOCKHOLDER'S EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996...................... 5
STATEMENT OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996...................... 6
NOTES TO CONDENSED FINANCIAL
STATEMENTS (Unaudited) JUNE 30, 1997................................. 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. 9
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 16
SIGNATURES.............................................................. 17
EXHIBIT 27 FINANCIAL DATA SCHEDULE..................................... 18
2
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------
JUNE 30 DECEMBER 31
1997 1996
(Unaudited)
- -----------------------------------------------------------------------------------------------------------
(In thousands of dollars)
ASSETS:
Investments:
<S> <C> <C>
Fixed maturities available-for-sale (cost: $318,411 and $321,432) $ 317,352 $ 321,066
Equity securities available-for-sale (cost: $981 and $1,073) 3,206 2,959
Policy loans 65,169 60,267
Short-term investments 151,179 42,757
---------- ----------
Total investments 536,906 427,049
Cash 5,122 24,759
Insurance receivables:
Reinsurance receivables 1,441,019 1,320,583
Premium and other insurance receivables 15,298 27,884
Less allowance for doubtful accounts (372) (378)
Deferred acquisition costs 87,115 74,589
Accrued investment income 4,462 4,945
Receivables for securities sold 350 -
Deferred income taxes - 312
Due from affiliates 20,632 67,499
Other assets 1,359 54
Separate Account business 1,612 -
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,113,503 $1,947,296
===========================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits $1,757,140 $1,621,504
Claims 73,132 60,568
Policyholders' funds 34,933 38,145
Payables for securities purchased 9,320 -
Federal income taxes payable 4,747 3,824
Deferred income taxes 1,195 -
Other liabilities 27,378 23,715
Separate Account business 1,612 -
---------- ----------
TOTAL LIABILITIES 1,909,457 1,747,756
---------- ----------
Stockholder's Equity:
Common stock ($50 par value; Authorized-200,000 shares;
Issued-50,000 shares) 2,500 2,500
Additional paid-in capital 39,150 39,150
Retained earnings 161,636 156,900
Net unrealized investment gains 760 990
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 204,046 199,540
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,113,503 $1,947,296
===========================================================================================================
<FN>
See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------------------------------
SECOND QUARTER SIX MONTHS
PERIOD ENDED JUNE 30 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Revenues:
<S> <C> <C> <C> <C>
Premiums $78,692 $82,938 $164,775 $160,221
Net investment income 7,956 6,109 15,261 13,369
Realized investment gains (losses) (162) (1,250) (133) 3,745
Other 1,476 1,249 2,751 2,499
------- ------- -------- --------
87,962 89,046 182,654 179,834
------- ------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits 73,080 76,246 154,836 147,263
Amortization of deferred acquisition costs and
other operating expenses 11,624 10,074 20,434 20,113
------- ------- -------- --------
84,704 86,320 175,270 167,376
------- ------- -------- --------
Income before income tax 3,258 2,726 7,384 12,458
Income tax expense 1,184 933 2,648 4,366
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 2,074 $ 1,793 $ 4,736 $ 8,092
========================================================================================================
<FN>
See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
(Unaudited)
- ----------------------------------------------------------------------------------------------
NET
ADDITIONAL UNREALIZED
SIX MONTHS ENDED COMMON PAID-IN RETAINED INVESTMENT
JUNE 30, 1997 AND 1996 STOCK CAPITAL EARNINGS GAINS (LOSSES) TOTAL
- ----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $2,500 $39,150 $140,181 $13,641 $195,472
Net income - - 8,092 - 8,092
Change in net unrealized gains/
(losses) - - - (15,626) (15,626)
- -----------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 $2,500 $39,150 $148,273 $(1,985) $187,938
===============================================================================================
Balance, December 31, 1996 $2,500 $39,150 $156,900 $ 990 $199,540
Net income - - 4,736 - 4,736
Change in net unrealized gains/
(losses) - - - (230) (230)
- -----------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 $2,500 $39,150 $161,636 $ 760 $204,046
===============================================================================================
<FN>
See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
- -----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30 1997 1996
- -----------------------------------------------------------------------------------------------------------
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 4,736 $ 8,092
-------- --------
Adjustments to reconcile net income to net cash flows from operating
activities:
Net realized investment (gains) losses, pre-tax 133 (3,745)
Amortization of bond discount (3,073) (2,017)
Changes in:
Insurance receivables, net (107,856) (140,642)
Deferred acquisition costs (12,526) (11,451)
Accrued investment income 483 651
Federal income taxes payable 923 (3,127)
Deferred income taxes 1,631 1,650
Insurance reserves 144,988 137,211
Due from affiliates 46,867 67,102
Other, net 2,358 2,730
-------- --------
Total adjustments 73,928 48,362
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES 78,664 56,454
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities (142,791) (301,008)
Proceeds from fixed maturities:
Sales 135,382 346,192
Maturities, calls and redemptions 12,735 18,134
Change in short-term investments (98,725) (153,644)
Change in policy loans (4,902) (3,971)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES (98,301) (94,297)
-------- --------
NET CASH FLOWS (19,637) (37,843)
Cash at beginning of period 24,759 42,103
- ----------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 5,122 $ 4,260
==========================================================================================================
Supplemental disclosures of cash flow information: Cash (paid) received:
Federal income taxes $ 506 $ (7,216)
==========================================================================================================
<FN>
See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
6
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION:
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of
the outstanding common stock of CNA.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term, universal life, and
other life insurance policies and individual annuities. Group insurance products
include life, pension and accident and health, consisting primarily of major
medical and hospitalization.
Pursuant to a Reinsurance Pooling Agreement, amended July 1, 1996, VFL has
ceded all of its business, excluding its separate accounts, to its parent,
Assurance. This business is then pooled with the business of Assurance, which
excludes Assurance's participating contracts and separate accounts, and 10% of
the combined net pool is retroceded to VFL.
The operating results for the interim periods are not necessarily indicative
of the results to be expected for the full year. These statements should be read
in conjunction with the financial statements and notes thereto included in VFL's
Form 10-K for the year ended December 31, 1996, filed with the Commission on
March 31, 1997, and the information shown below.
The accompanying condensed financial statements have been prepared in
conformity with generally accepted accounting principles. Certain amounts
applicable to prior years have been reclassified to conform to classifications
followed in 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of VFL's management, these statements include all adjustments,
consisting of normal recurring accruals, which are necessary for the fair
presentation of the financial position, results of operations and cash flows in
the accompanying condensed financial statements.
NOTE 2. REINSURANCE:
VFL assumes and cedes insurance with other insurers and reinsurers. VFL
utilizes reinsurance arrangements to limit its maximum loss to provide greater
diversification of risk and to minimize exposures on larger risks. The
reinsurance coverages are tailored to the specific risk characteristics of each
product line with VFL's retained amount varying by type of coverage.
7
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONCLUDED
The ceding of insurance does not discharge primary liability of the original
insurer. VFL places reinsurance with other carriers only after careful review of
the nature of the contract and a thorough assessment of the reinsurers' credit
quality and claim settlement performance. Further, for carriers that are not
authorized reinsurers in its states of domicile, VFL receives collateral,
primarily in the form of bank letters of credit.
The effects of reinsurance on premium revenues are shown in the following
schedule:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
PREMIUMS ASSUMED/NET
---------------------------------------------------
SIX MONTHS ENDED JUNE 30 DIRECT ASSUMED CEDED NET %
- ---------------------------------------------------------------------------------------------------------
(In thousands of dollars)
1997
<S> <C> <C> <C> <C> <C>
Life $ 267,120 $ 40,342 $268,265 $ 39,197 103%
Accident and Health 1,271 125,578 1,271 125,578 100
- ---------------------------------------------------------------------------------------------------------
TOTAL PREMIUMS $ 268,391 $165,920 $269,536 $164,775 101%
=========================================================================================================
1996
Life $ 246,899 $ 36,649 $247,692 $ 35,856 102%
Accident and Health 399 124,365 399 124,365 100
- ---------------------------------------------------------------------------------------------------------
TOTAL PREMIUMS $ 247,298 $161,014 $248,091 $160,221 100%
=========================================================================================================
</TABLE>
In the table above, the majority of life premium revenue is from long
duration type contracts, while the accident and health premiums earned are from
short duration contracts.
Transactions with Assurance, as part of the pooling agreement (see Note 1),
are reflected in the above table. Premium revenues ceded to non-affiliated
companies were $47.8 million for the six month period ended June 30, 1997 and
$10.5 million for the same period in 1996. Additionally, insurance claims and
policyholders' benefits recoveries from non-affiliated companies were $1.5
million for the period ended June 30, 1997 and $4.7 million for the period ended
June 30, 1996.
Reinsurance receivables reflected on the balance sheet are recoverables from
reinsurers related to insurance reserves. Balances due from Assurance pursuant
to the pooling agreement comprise approximately 99% of these balances at both
June 30, 1997 and 1996.
NOTE 3. LEGAL PROCEEDINGS:
VFL is party to litigation in the ordinary course of business. The outcome of
this litigation will not, in the opinion of management, materially affect the
results of operations or equity of VFL.
8
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
condensed financial statements and notes thereto found on pages 3 to 8, which
contain additional information helpful in evaluating operating results and
financial condition.
The operations, assets and liabilities of VFL and its parent, Assurance, are
managed, to a large extent, on a combined basis. Pursuant to a Reinsurance
Pooling Agreement, amended July 1, 1996, VFL has ceded all of its business,
excluding its separate accounts, to its parent, Assurance. This business is then
pooled with the business of Assurance, which excludes Assurance's participating
contracts and separate accounts, and 10% of the combined net pool is
retroceded to VFL.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term, universal life, and
other life insurance policies and individual annuities. Group insurance products
include life, pension and accident and health, consisting primarily of major
medical and hospitalization.
Products developed in 1996 included a portfolio of variable products and new
universal life products which are being marketed in 1997. These products offer
policyholders the option of allocating payments to one or more variable accounts
or to a guaranteed income account or both. Payments allocated to the variable
accounts will be invested in corresponding investment portfolios where the
investment risk is borne by the policyholder while payments allocated to the
guaranteed income account will earn a minimum guaranteed rate of interest for a
specified period of time for annuity contracts and one year for life products.
9
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS:
The following table summarizes key components of VFL's operating results for
the six months and quarters ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
SECOND QUARTER SIX MONTHS
PERIOD ENDED JUNE 30 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------
(In thousands of dollars)
OPERATING SUMMARY
(excluding realized investment gains/losses):
Revenues:
<S> <C> <C> <C> <C>
Individual premium $13,671 $15,680 $ 29,280 $ 26,812
Group premium 65,021 67,258 135,495 133,409
------- ------- -------- --------
Total premiums 78,692 82,938 164,775 160,221
Net investment income 7,956 6,109 15,261 13,369
Other 1,476 1,249 2,751 2,499
------- ------- -------- --------
Total revenues 88,124 90,296 182,787 176,089
Total benefits and expenses 84,704 86,320 175,270 167,376
------- ------- -------- --------
Operating income before income tax 3,420 3,976 7,517 8,713
Income tax expense (1,214) (1,369) (2,668) (3,055)
------- ------- -------- --------
Net operating income 2,206 2,607 4,849 5,658
Net realized investment gains (losses) (132) (814) (113) 2,434
------- ------- -------- --------
Net income $ 2,074 $ 1,793 $ 4,736 $ 8,092
==================================================================================================
</TABLE>
VFL's revenues, excluding net realized investment gains/losses, increased 4%
to $182.8 million for the first six months of 1997, from $176.1 million for the
same period in 1996. Premiums were $164.8 million for the six months ended June
30, 1997, compared to $160.2 million for the same period in 1996. For the six
month period of 1997, individual premiums increased by 9% to $29.3 million,
compared to $26.8 million for the same period in 1996. This increase is
primarily due to the continued growth in sales of the Viaterm product of
approximately $2.7 million. Group premiums were up 2% to $135.5 million for the
first six months of 1997, compared to $133.4 million for the same period for
1996. The growth is due, in part, to a $3.7 million increase in premiums in the
Federal Employees Health Benefits Program, due to strong enrollment through the
first six months of 1997. Also contributing to the growth in group premiums is a
$1.1 million increase in Disability and Accident premium. The increase in group
premiums is offset by a drop in group reinsurance premium of $2.8 million.
Premiums for the second quarter ended June 30, 1997 were $78.7 million,
compared to $82.9 million for the same period in 1996. Individual premiums
decreased by 12% to $13.7 million for the three months ended June 30, 1997,
compared to $15.7 million for the same period in 1996. The growth in Viaterm
sales were more than offset by a reduction in sales of individual annuities for
the second quarter of 1997. For the three months ended June 30, 1997, group
premium decreased 3% to $65.0 million from $67.3 million for the same period in
1996. The primary reasons for this decrease were a decline in annuity and
reinsurance businesses.
10
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
VFL's investment income for the six months ended June 30, 1997 was $15.3
million, a $1.9 million or 14% increase from the same period a year earlier when
investment income was $13.4 million. The increase can be attributed to a larger
asset base generated from increased operating cash flows. VFL's net operating
income, excluding net realized investment gains/losses, was $4.8 million and
$2.2 million for the six and three months ended June 30, 1997, respectively,
compared to $5.7 million and $2.6 million for the same periods in 1996. Net
operating income, excluding realized investment gains/losses, for the first six
months of 1997 was less than that for the same period for 1996, in spite of
increased revenues. This is due to group health losses resulting from
unfavorable morbidity experience in 1997.
Net realized investment losses, net of tax, were $113 thousand and $132
thousand for the six and three months ended June 30, 1997, respectively,
compared to net realized investment gains of $2.4 million and net realized
investment losses of $814 thousand for the same periods last year. Net income
for the six and three months ended June 30, 1997 was $4.7 million and $2.1
million, respectively, compared to $8.1 million and $1.8 million for the same
periods in 1996.
FINANCIAL CONDITION:
Assets increased approximately $166.2 million from December 31, 1996 to
$2,113.5 million as of June 30, 1997. VFL's cash and invested assets increased
by $90.2 million from December 31, 1996 to $542.0 million.
During the first six months of 1997, VFL's stockholder's equity increased by
$4.5 million, or 2%, to approximately $204.0 million. The increase in
stockholder's equity in 1997 is due to net income of approximately $4.7 million
being offset by approximately $0.2 million in net unrealized investment losses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
FINANCIAL POSITION JUNE 30 DECEMBER 31
1997 1996
- --------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Assets $2,113,503 $1,947,296
Stockholder's equity 204,046 199,540
Net unrealized investment gains included in stockholder's equity 760 990
- --------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
INVESTMENTS:
The following table summarizes VFL's investments shown at cost or amortized
cost at June 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS JUNE 30 DECEMBER 31
1997 % 1996 %
- --------------------------------------------------------------------------------------------
(In thousands of dollars)
Fixed maturity securities:
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of government agencies $119,267 22.3% $117,213 27.5%
Asset backed securities 104,779 19.6 113,376 26.6
Other debt securities 94,365 17.6 90,843 21.4
- --------------------------------------------------------------------------------------------
Total fixed maturity securities 318,411 59.5 321,432 75.5
Common stocks 981 0.2 1,073 0.3
Policy loans 65,169 12.2 60,267 14.2
Short-term investments 151,179 28.1 42,757 10.0
- --------------------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST $535,740 100.0% $425,529 100.0%
============================================================================================
INVESTMENTS AT CARRYING VALUE* $536,906 $427,049
============================================================================================
<FN>
* As reported in the Balance Sheet
</FN>
</TABLE>
Operations, assets and liabilities of VFL and Assurance are, to a large
extent, managed on a combined basis. The investment portfolio is managed to
maximize after-tax investment return, while minimizing credit risks, with
investments concentrated in high quality securities to support VFL's insurance
underwriting operations. The investment portfolios held by Assurance are
segregated for the purpose of supporting policy liabilities for universal life,
annuities and other interest sensitive products.
VFL has the capacity to hold its fixed maturity portfolio to maturity.
However, securities may be sold as part of VFL's asset/liability strategies or
to take advantage of investment opportunities generated by changing interest
rates, tax and credit considerations or other similar factors. Accordingly, the
fixed maturity securities are classified as available-for-sale.
12
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The following table summarizes the ratings of VFL's fixed maturity portfolio
at carrying value (market).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
JUNE 30 % DECEMBER 31 %
1997 1996
- ----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
U.S. government and affiliated securities $116,631 36.8% $115,926 36.1%
Other AAA rated 111,358 35.1 127,910 39.8
AA and A rated 40,047 12.6 33,913 10.6
BBB rated 29,265 9.2 38,272 11.9
Below investment grade 20,051 6.3 5,045 1.6
- ----------------------------------------------------------------------------------------------
TOTAL $317,352 100.0% $321,066 100.0%
==============================================================================================
</TABLE>
Included in VFL's fixed maturity securities at June 30, 1997 are $104.7
million of asset-backed securities, consisting of approximately 5% in U.S.
government agency issued pass-through certificates, 93% in collateralized
mortgage obligations (CMOs) and 2% in corporate asset-backed obligations. The
majority of CMOs held are U.S. government agency issues, which are actively
traded in liquid markets and are priced by broker-dealers.
VFL limits the risks associated with interest rate fluctuations and
prepayments by concentrating its CMO investments in planned amortization classes
with relatively short principal repayment windows. The fair value of
asset-backed securities was less than the amortized cost by $117 thousand and
$125 thousand at June 30, 1997 and December 31, 1996, respectively. VFL has not
invested in derivative financial instruments nor does it have any investments
in mortgage loans or real estate.
At June 30, 1997, net unrealized losses on fixed maturity securities
amounted to approximately $1.1 million. This compares with net unrealized losses
of approximately $365 thousand at December 31, 1996. The gross unrealized gains
and losses for the fixed maturity securities portfolio at June 30, 1997, were
$2.6 million and $3.7 million, respectively, compared to $3.2 million and $3.6
million, respectively, at December 31, 1996.
VFL's investments in equity securities are carried at a fair value of $3.2
million and $3.0 million at June 30, 1997 and December 31, 1996, respectively.
At June 30, 1997, net unrealized gains on equity securities amounted to
approximately $2.2 million. This compares with net unrealized gains of
approximately $1.9 million at December 31, 1996. There were no unrealized losses
on equity securities at June 30, 1997 and December 31, 1996.
13
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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 first six months of 1997, VFL's operating activities generated net
positive cash flows of approximately $78.7 million, compared with net positive
cash flows of $56.5 million for the same period in 1996. Positive cash flows in
1997 are primarily the result of the settlement of certain receivables from
affiliates and higher revenues generated by the increase in premium volume. VFL
believes that future liquidity needs will be met primarily by cash generated
from operations. Net cash flows from operations are invested in marketable
securities.
ACCOUNTING STANDARDS:
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. This Statement
has been amended and is now effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 or
1997, depending on the type of transaction. This Statement will not have a
significant impact on VFL.
In January 1997, the Securities and Exchange Commission approved amendments
to Regulation S-X, Regulation S-K, Regulation S-B and various forms to clarify
and expand existing disclosure requirements with respect to derivative financial
instruments and derivative commodity instruments. The new rules would require
enhanced descriptions in the footnotes to the financial statements of accounting
policies for derivative financial instruments and derivative commodity
instruments. They would also require disclosure outside the financial statements
of qualitative and quantitative information about market risk related to
derivative financial instruments, other financial instruments and derivative
commodity instruments. The requirement of these amendments are effective for
year end 1997 financial statements. These amendments will not have a significant
impact on VFL.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income,"
which establishes accounting standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This Statement requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
Statement is effective for fiscal years beginning after December 15, 1997. This
Statement is not expected to result in a significant change on VFL's
disclosures.
14
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONCLUDED
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
interim and annual financial statements. It requires that those enterprises
report a measure of segment profit or loss, certain specific revenue and expense
items, and segment assets, and that the enterprises reconcile the total of those
amounts to the general-purpose financial statements. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. This Statement is effective for financial statements for
periods beginning after December 15, 1997. This Statement will redefine VFL's
business segment disclosure.
15
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Description of Exhibit
Exhibit Page
Number Number
------- ------
(27) Financial Data Schedule 27 18
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K for the three months ended
June 30,1997.
16
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
PART II OTHER INFORMATION - concluded
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Valley Forge Life Insurance Company
By S/PATRICIA L. KUBERA
--------------------
Patricia L. Kubera
Director, Group Vice President
and Controller
(Principal Accounting Officer)
Date: August 14, 1997
17
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