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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 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)
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 27, 1998, 50,000 shares of Common Stock (all held by the parent,
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 I (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 1 of 47
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VALLEY FORGE LIFE INSURANCE COMPANY
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1997
Item Page
Number PART I Number
------ ------
1 Business....................................................... 3
2 Properties..................................................... 5
3 Legal Proceedings.............................................. 5
4 Submission of Matters to a Vote of Security Holders............ 5
PART II
5 Market for Registrant's Common Stock and
Related Stockholder Matters.................................. 7
6 Selected Financial Data........................................ 7
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 8
8 Financial Statements and Supplementary Data.................... 17
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 40
PART III
10 Directors and Executive Officers of the Registrant............. 40
11 Executive Compensation......................................... 40
12 Security Ownership of Certain Beneficial Owners and Management. 40
13 Certain Relationships and Related Transactions................. 40
PART IV
14 Financial Statements, Schedules, Exhibits
and Reports on Form 8-K..................................... 41
2
<PAGE>
PART I
ITEM 1. BUSINESS
Valley Forge Life Insurance Company (VFL) 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
(CNAF). Loews Corporation owns approximately 84% of the outstanding common stock
of CNAF.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term and universal life
insurance policies and individual annuities. Group insurance products include
life, pension and accident and health, consisting primarily of major medical and
hospitalization. A new portfolio of variable products, including annuity and
universal life products, was 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 are invested in corresponding investment portfolios where the
investment risk is borne by the policyholder while payments allocated to the
guaranteed income account earn a minimum guaranteed rate of interest for a
specified period of time for annuity contracts and one year for life products.
The operations, assets and liabilities of VFL and its parent, Assurance, are
managed, to a large extent, on a combined basis. Pursuant to a Reinsurance
Pooling Agreement, amended July 1, 1996, VFL cedes all of its business,
excluding its separate account business, to its parent, Assurance. This business
is then pooled with the business of Assurance, which excludes Assurance's
participating contracts and separate account business, and 10% of the combined
pool is assumed by VFL.
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. VFL also faces competition from financial institutions that
market mutual funds as an alternative for investors. 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 1,700 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 1996 consolidated net written premiums.
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
3
<PAGE>
REGULATION - (CONTINUED)
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.
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 regulate for solvency more closely, 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,
1997, VFL has capital in excess of the Company Action Level.
4
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CERTAIN AGREEMENTS
VFL is party to the Reinsurance Pooling Agreement with Assurance which was
previously mentioned and is also discussed 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 CNAF and each of its subsidiaries
are allocated to the appropriate company. All acquisition and underwriting
expenses allocated to VFL are further subject to the Reinsurance Pooling
Agreement with Assurance, 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, 1997, 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.
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 I (2) (c) of Form 10-K.
5
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DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
POSITION AND
OFFICES HELD WITH
NAME REGISTRANT AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
Dennis H. Chairman of the 54 Chairman of the Board and Chief Executive
Chookaszian Board and Chief Officer of CNA since September 1992. Prior
Executive Officer thereto, Mr. Chookaszian was President
and Chief Operating Officer of CNA. Mr.
Chookaszian has served as a Director of
the Registrant since April 1978.
Philip L. President and 57 President of CNA since September 1992.
Engel Director Prior thereto, Mr. Engel was Executive Vice
President of CNA. Mr. Engel has served
as a Director of Registrant since
September 1992.
Michael C. Senior Vice 45 Senior Vice President of CNA since
Garner President and September 1993. Prior thereto, Mr. Garner
Director was a partner of Coopers & Lybrand LLP.
Mr. Garner has served as a Director of the
Registrant since October 1996.
Bernard L. Executive Vice 51 Executive Vice President and Chief
Hengesbaugh President and Operating Officer of CNA since February
Chief Operating 1998. Prior thereto, Mr. Hengesbaugh was
Officer Senior Vice President of CNA since
November 1990.
Peter E. Senior Vice and 50 Senior Vice President of CNA since November
Jokiel President 1990. Chief Financial Officer of CNA from
November 1990 through October 1997. Mr.
Jokiel served as a Director of the
Registrant from July 1992 through October
1997.
Jonathan D. Senior Vice 42 Senior Vice President and General Counsel
Kantor President, of CNA since April 1997. Group Vice
Secretary, General President of CNA since April 1994. Prior
Counsel and thereto, Mr. Kantor was a partner at the
Director law firm of Shea & Gould.* Mr. Kantor
has served as a Director of the Registrant
since April 1997.
Patricia L. Group Vice 42 Group Vice President and Controller of CNA
Kubera President, since January 1993. Prior thereto, Ms.
Controller and Kubera was Assistant Vice President of CNA.
Director Ms. Kubera has served as a Director of
the Registrant since November 1994.
W. James Senior Vice 59 Senior Vice President and Chief Financial
MacGinnitie President, Chief Officer of CNA since October 1997. From
Financial Officer 1994 through 1997, Mr. MacGinnitie was a
and Director partner at Ernst & Young. Prior thereto,
with Mr. MacGinnitie was a principal
Tillinghast. Mr. MacGinnitie has
served as a Director of the Registrant
since October 1997.
William H. Senior Vice 49 Senior Vice President of CNA since January
Sharkey,Jr. President and 1994. Prior thereto, Mr. Sharkey was
Director 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.
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
*Shea & Gould declared bankruptcy in 1995.
6
<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) Assurance owns all of the common stock of VFL.
(c) VFL has declared no cash dividends on its common stock in 1996, 1997
or 1998 through the date of filing this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
OMITTED PURSUANT TO GENERAL INSTRUCTION I (2) (A) OF FORM 10-K.
7
<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 (CNAF). Loews Corporation owns approximately 84% of
the outstanding common stock of CNAF.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term and universal life
insurance policies and individual annuities. Group insurance products include
life, accident and health, consisting primarily of major medical and
hospitalization and pension products. A new portfolio of variable products,
including annuity and universal life products was 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 are invested in corresponding investment portfolios
where the investment risk is borne by the policyholder while payments allocated
to the guaranteed income account earn a minimum guaranteed rate of interest for
a specified period of time for annuity contracts and one year for life products.
The operations, assets and liabilities of VFL and its parent, Assurance, are
managed, to a large extent, on a combined basis. Pursuant to a Reinsurance
Pooling Agreement, amended July 1, 1996, VFL cedes all of its business,
excluding its separate account business, to its parent, Assurance. This business
is then pooled with the business of Assurance, which excludes Assurance's
participating contracts and separate account business, and 10% of the combined
pool is assumed by VFL.
8
<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 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
(In thousands of dollars)
Operating Revenues (excluding realized investment gains/losses):
Revenues:
<S> <C> <C> <C>
Group premium $273,939 $272,914 $248,285
Individual premium 58,233 52,572 48,368
-------- -------- --------
Total premiums 332,172 325,486 296,653
-------- -------- --------
Net investment income 29,913 29,312 31,494
Other 6,872 8,217 4,818
-------- -------- --------
Total revenues 368,957 363,015 332,965
Benefits and expenses 352,530 342,039 312,038
-------- -------- --------
Operating income before income tax 16,427 20,976 20,927
Income tax expense (5,827) (7,358) (7,376)
-------- -------- --------
Net operating income
(excluding realized investment gains/losses) $ 10,600 $ 13,618 $ 13,551
======== ======== ========
Supplemental Financial Data:
Net operating income:
Group $ 4,255 $ 5,409 $ 7,954
Individual 6,345 8,209 5,597
-------- -------- --------
Net operating income 10,600 13,618 13,551
Net realized investment gains 2,730 3,101 8,959
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NET INCOME $ 13,330 $ 16,719 $ 22,510
=====================================================================================================
</TABLE>
VFL's revenues, excluding net realized investment gains/losses, increased
1.6% to $369.0 million for 1997 as compared to $363.0 million for 1996 and up
10.8% from $333.0 million for 1995. Premiums for 1997 increased 2.1% to $332.2
million as compared to $325.5 million for 1996 and up 12.0% from 1995 premiums
of $296.7 million. This increase is primarily due to the continued growth in
individual sales of ViaTerm, a term life insurance product, of $5.5 million.
Group premiums were up slightly for 1997 to $273.9 million as compared to $272.9
million for 1996. Increases in group accident and health premiums were offset by
decreases in group annuities and reinsurance premiums.
VFL's investment income increased from $29.3 million in 1996 to $29.9
million in 1997. Both years were lower than 1995's investment income of $31.5
million. The increase in 1997 can be attributed to a larger asset base of VFL's
investment portfolio, offset by a slightly lower average yield on VFL's
portfolio in 1997, as compared to 1996. The decrease in 1996 was mainly due to
negative cash flow experienced in 1996 resulting in a reduction in the total
investment portfolio.
9
<PAGE>
FINANCIAL CONDITION
Assets totaled $2,368.4 million at December 31, 1997, an increase of 19.6%
over 1996. VFL's cash and invested assets of $570.5 million increased by $118.7
million, or 26.3%, over the 1996 level of $451.8 million.
VFL's stockholder's equity was $216.3 million at December 31, 1997, compared
to approximately $199.5 million and $195.5 million at December 31, 1996 and
1995, respectively. The increase in stockholder's equity in 1997 is due to net
income of $13.3 million and a $3.4 million increase in net unrealized investment
gains. The increase in stockholder's equity in 1996 was primarily due to net
income of $16.7 million offset by $12.7 million decrease in net unrealized
investment gains.
<TABLE>
<CAPTION>
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STOCKHOLDER'S
ASSETS EQUITY
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(In thousands of dollars)
<S> <C> <C>
December 31, 1997 $2,368,426 $216,260
December 31, 1996 1,980,802 199,540
December 31, 1995 1,641,438 195,472
December 31, 1994 1,447,122 156,196
December 31, 1993 1,258,039 153,249
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</TABLE>
INVESTMENTS
The following table summarizes VFL's investments shown at cost or amortized
cost and carrying value for each of the last two years:
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENTS
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December 31 1997 % 1996 %
- -----------------------------------------------------------------------------------
(In thousands of dollars)
Fixed maturities:
U.S. Treasury Securities and
<S> <C> <C> <C> <C>
obligations of government agencies $299,066 55.4% $117,213 27.5%
Asset backed securities 68,612 12.7 113,376 26.6
Other debt securities 98,589 18.3 90,843 21.4
-------- ------ -------- ------
Total fixed maturities 466,267 86.4 321,432 75.5
Common stocks 981 0.2 1,073 0.3
Policy loans 66,971 12.4 60,267 14.2
Other invested assets 579 0.1 - -
Short-term investments 4,597 0.9 42,757 10.0
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INVESTMENTS AT AMORTIZED COST $539,395 100.0% $425,529 100.0%
===================================================================================
INVESTMENTS AT CARRYING VALUE* $545,968 $427,049
===================================================================================
<FN>
* As reported in the Balance Sheet
</FN>
</TABLE>
10
<PAGE>
INVESTMENTS - (CONTINUED)
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 insurance
underwriting operations. The investment portfolios are segregated for the
purpose of supporting policy liabilities for universal life, annuities and other
interest sensitive products.
VFL's investments in fixed maturities are carried at a fair value of $471.7
million at December 31, 1997, compared with $321.1 million at December 31, 1996.
At December 31, 1997, net unrealized gains on fixed maturities amounted to
approximately $5.4 million. This compares with net unrealized losses of
approximately $.4 million at December 31, 1996. The gross unrealized gains and
losses for the fixed maturities portfolio at December 31, 1997 were $6.2 million
and $.8 million, respectively, compared to $3.2 million and $3.6 million,
respectively, at December 31, 1996. 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 $2.3
million at December 31, 1997, compared with $3.0 million at December 31, 1996.
At December 31, 1997, net unrealized gains on equity securities amounted to
approximately $1.3 million. This compares with net unrealized gains of
approximately $1.9 million at December 31, 1996. There were no unrealized losses
on equity securities as of December 31, 1997 and 1996.
VFL has the capacity to hold its fixed maturity portfolio to maturity.
However, securities may be sold as part of VFL's asset/liability management
strategies or to take advantage of investment opportunities generated by
changing interest rates, tax and credit considerations, or other similar
factors. Accordingly, the fixed maturities are classified as available-for-sale.
See Note 2 of the Financial Statements for further information.
The following table summarizes the ratings of VFL's fixed maturity portfolio
at carrying value (market):
<TABLE>
<CAPTION>
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December 31 1997 % 1996 %
- ------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
U.S. government and affiliated securities $300,676 63.8% $115,926 36.1%
Other AAA rated 75,531 16.0 127,910 39.8
AA and A rated 61,404 13.0 33,913 10.6
BBB rated 27,292 5.8 38,272 11.9
Below investment grade 6,804 1.4 5,045 1.6
- ------------------------------------------------------------------------------------------------------
TOTAL $471,707 100.0% $321,066 100.0%
======================================================================================================
</TABLE>
11
<PAGE>
INVESTMENTS - (CONTINUED)
Included in VFL's fixed maturities at December 31, 1997, are $68.7 million
of asset-backed securities, consisting of approximately 65.0% in collateralized
mortgage obligations (CMOs), 28.2% in corporate asset-backed obligations, 6.4%
in corporate mortgage-backed pass-through certificates and 0.4% in U.S.
government and agency issued pass-through certificates. The majority of CMOs
held are actively traded in liquid markets and are priced by broker-dealers.
CMOs are subject to prepayment risk that tends to vary with changes in
interest rates. During periods of declining interest rates, CMOs generally
prepay faster as the underlying mortgages are prepaid and refinanced by the
borrowers in order to take advantage of the lower rates. Conversely, during
periods of rising interest rates, prepayments are generally slow. 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, 1997, net
unrealized gains on CMOs amounted to approximately $.1 million, compared with
unrealized losses of approximately $.1 million at December 31, 1996. VFL avoids
investments in complex mortgage derivatives and does not have any investments in
mortgage loans or real estate.
VFL invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk. See Notes 1 and 3 of VFL's
Financial Statements for further information regarding derivatives.
High yield securities are bonds rated below investment grade by bond rating
agencies, and other unrated securities which, in the opinion of management, are
below investment grade (below BBB). High yield securities generally involve a
greater degree of risk than that of investment grade securities. Returns are
expected to compensate for the added risk. The risk is also considered in the
interest rate assumptions in the underlying insurance products. VFL's
concentration in high yield bonds was approximately 0.3% of total assets as of
December 31, 1997 and 1996.
RISKS AND UNCERTAINTIES
The following section discusses risks and uncertainties to which VFL is
subject.
Credit Risk
Credit risk arises from the potential inability of counterparties to perform
on an obligation in accordance with the terms of the contract. VFL is exposed to
credit risk in its capacity as counterparty in financial and insurance
contracts, reinsurance arrangements and as a holder of securities. VFL accepts
risk whenever a counterparty is obligated to perform under a contract. As a
holder of securities, VFL is exposed to default by the issuer or to the
possibility of market price deterioration. As a purchaser of reinsurance, VFL
has exposure that a reinsurer may not be able to reimburse VFL under the terms
of the reinsurance agreement. VFL has established policies and procedures to
manage credit risk, including collateral requirements and master "netting
arrangements."
12
<PAGE>
RISK AND UNCERTAINTIES - (CONTINUED)
Legal/Regulatory Risk
Legal/regulatory risk is the risk that changes in the legal or regulatory
environment in which VFL operates will create additional expenses not
anticipated by VFL in pricing its products. Regulatory initiatives, tax law
changes, new legal theories or insurance company insolvencies, through guaranty
fund assessments may create costs for the insurer beyond those currently
recorded in the financial statements. VFL mitigates this risk by offering a wide
range of products and by operating throughout the United States, thus reducing
its exposure to any single product or region, and also by employing underwriting
practices which identify and minimize the adverse impact of this risk.
Impact of Year 2000 on VFL
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates after the year 1999. Such malfunctions
could lead to business delays and disruptions. VFL is in the process of
replacing many of its legacy systems and is upgrading its systems to accommodate
business for the year 2000 and beyond. VFL believes that it is on schedule to
resolve the year 2000 issue in a timely manner. VFL's cost to upgrade and
replace its systems will be included as part of the total cost incurred by CNAF
to replace and upgrade its systems. Based upon current assessments, CNAF
estimates its incremental cost will be approximately $50 million. VFL will be
allocated its proportionate share of this cost upon completion of the upgrade;
however, a reasonable estimate of this cost is not currently available. Due to
the interdependent nature of computer systems, VFL may be adversely impacted
depending upon whether it or other entities not affiliated with VFL (vendors and
business partners) address this issue successfully. To mitigate this impact, VFL
is communicating with its vendors and business partners to coordinate the year
2000 conversion. At this time, management is unable to determine whether the
adverse impact, if any, in connection with the foregoing circumstances would be
material to VFL.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of VFL have been met by funds generated from
operating, investing and financing activities. VFL's principal operating cash
flow sources are premiums, investment income, receipts for investment contracts
sold and sales and maturities of investments. The primary operating cash flow
uses are payments for claims, policy benefits, payments on matured policyholder
contracts and operating expenses.
For the year ended December 31, 1997, VFL's operating activities generated
net positive cash flows of $20.5 million, compared with net negative cash flows
of $136.8 million in 1996 and $18.9 million in 1995. The net positive cash flows
from operations in 1997 are due, in large part, to the settlement of certain
receivables from affiliates and higher revenues generated by the increase in
premium volume. The deterioration in cash flow in 1996 was caused by significant
acquisition and other first-year expenses related to the large volume of new
business generated by VFL, as well as the delayed settlement of receivables from
affiliates.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)
VFL believes that future liquidity needs will be met primarily by cash
generated from operations. Net cash flows from operations are primarily invested
in marketable securities. Investment strategies employed by VFL consider the
cash flow requirements of the insurance products sold and the tax attributes of
the various types of marketable investments.
VFL's insurance ratings are pooled ratings with Assurance. The table below
reflects insurance ratings for VFL/Assurance as of December 31, 1997:
--------|--------------------|-------------------------------------|
| | Financial Strength | Claims Paying Ability |
| |--------------------|--------------------|----------------|
| | A.M Best | Standard & Poor's | Duff & Phelps |
|-------|--------------------|--------------------|----------------|
| |
| RATING A AA- AA |
|------------------------------------------------------------------|
ACCOUNTING STANDARDS
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. This Statement
has been amended and is now effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 or
1997, depending on the type of transaction. This Statement is not expected to
have a significant impact on VFL.
Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes accounting standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
Statement is effective for fiscal years beginning after December 15, 1997. This
Statement is not expected to result in a significant change in VFL's
disclosures.
14
<PAGE>
ACCOUNTING STANDARDS - (CONTINUED)
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
interim and annual financial statements. It requires that those enterprises
report a measure of segment profit or loss, certain specific revenue and expense
items and segment assets, and that the enterprises reconcile the total of those
amounts to the general-purpose financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This Statement is effective for financial statements for
periods beginning after December 15, 1997. VFL is currently evaluating the
effect of this Statement on its business segment disclosure.
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments
In December 1997, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position (SOP)
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," which provides guidance on accounting by entities that are subject
to insurance-related assessments. It requires that entities recognize
liabilities for insurance-related assessments when all of the following criteria
have been met: an assessment has been imposed or a probable assessment will be
imposed; the event obligating an entity to pay an imposed or probable assessment
has occurred on or before the date of the financial statements; and the amount
of the assessment can be reasonably estimated. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. VFL is
currently evaluating the effects of this SOP on its accounting for
insurance-related assessments.
Employers' Disclosures about Pensions and Other Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardizes disclosure
requirements for pension and other postretirement benefits to the extent
practicable, and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis. The Statement also suggests combined formats for presentation of
pension and other postretirement benefit disclosures. The Statement changes
disclosure only and does not address measurement or recognition. It is effective
for fiscal years beginning after December 15, 1997. VFL has no employees,
however, expenses are allocated to VFL for services provided by Casualty
employees. VFL is currently evaluating the effects of this Statement on its
benefit plan disclosures.
15
<PAGE>
ACCOUNTING STANDARDS - (CONTINUED)
FORWARD-LOOKING STATEMENTS
When included in management's discussion and analysis, 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. See discussions elsewhere in
this report on how these risks may affect VFL. 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, 1997 and 1996....................................19
Statement of Operations, three years ended December 31, 1997.................20
Statement of Stockholder's Equity, three years ended December 31, 1997.......21
Statement of Cash Flows, three years ended December 31, 1997.................22
Notes to Financial Statements................................................23
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
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, 1997 and 1996, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedules listed in 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 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 18, 1998
18
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------
December 31 1997 1996
- -----------------------------------------------------------------------------------------------------------
(In thousands of dollars)
ASSETS:
Investments:
<S> <C> <C>
Fixed maturities available-for-sale (cost: $466,267 and $321,432) $ 471,707 $ 321,066
Equity securities available-for-sale (cost: $981 and $1,073) 2,260 2,959
Policy loans 66,971 60,267
Other invested assets 433 -
Short-term investments 4,597 42,757
--------- ---------
TOTAL INVESTMENTS 545,968 427,049
Cash 24,565 24,759
Receivables:
Reinsurance receivables 1,586,471 1,320,583
Premium and other insurance receivables 65,196 61,390
Less allowance for doubtful accounts (285) (378)
Deferred acquisition costs 95,354 74,589
Accrued investment income 5,245 4,945
Receivables for securities sold 744 -
Deferred income taxes - 312
Due from affiliates 35,999 67,499
Other 228 54
Separate Account business 8,941 -
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,368,426 $1,980,802
===========================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits $1,906,899 $1,621,504
Claims 81,242 60,568
Policyholders' funds 39,928 38,145
Payables for securities purchased 497 -
Federal income taxes payable 5,975 3,824
Deferred income taxes 4,098 -
Commissions and other payables 19,787 22,004
Other 84,799 35,217
Separate Account business 8,941 -
---------- ----------
TOTAL LIABILITIES 2,152,166 1,781,262
---------- ----------
Commitments and contingent liabilities-Note 7 and 9
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 170,230 156,900
Net unrealized investment gains 4,380 990
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 216,260 199,540
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,368,426 $1,980,802
===========================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Revenues:
<S> <C> <C> <C>
Premiums $332,172 $325,486 $296,653
Net investment income 29,913 29,312 31,494
Realized investment gains 4,200 4,771 13,783
Other 6,872 8,217 4,818
-------- -------- --------
373,157 367,786 346,748
-------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits 307,207 304,840 270,936
Amortization of deferred acquisition costs 11,818 1,177 6,066
Other operating expenses 33,505 36,022 35,036
-------- -------- --------
352,530 342,039 312,038
-------- -------- --------
Income before income tax 20,627 25,747 34,710
Income tax expense 7,297 9,028 12,200
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 13,330 $ 16,719 $ 22,510
================================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</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, January 1, 1995 $2,500 $39,150 $117,671 $(3,125) $156,196
Net income - - 22,510 - 22,510
Change in net unrealized gains/
(losses) - - - 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) - - - (12,651) (12,651)
- -----------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,500 39,150 156,900 990 199,540
Net income - - 13,330 - 13,330
Change in net unrealized gains/
(losses) - - - 3,390 3,390
- -----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $2,500 $39,150 $170,230 $ 4,380 $216,260
===============================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 13,330 $ 16,719 $ 22,510
-------- -------- --------
Adjustments to reconcile net income to net cash flows
from operating activities:
Net realized investment gains, pre-tax (4,200) (4,771) (13,783)
Amortization of bond discount (2,438) (4,922) (3,921)
Changes in:
Insurance receivables, net (269,787) (254,549) (151,415)
Deferred acquisition costs (20,765) (23,989) (9,267)
Accrued investment income (300) (258) 69
Due from affiliates 31,500 (62,563) (55,308)
Federal income taxes 2,151 4,399 (28)
Deferred income taxes 2,581 3,309 453
Insurance reserves 221,252 198,239 156,530
Commissions and other payables (2,217) 9,368 5,594
Other, net 49,429 (17,744) 29,619
--------- -------- ---------
Total adjustments 7,206 (153,481) (41,457)
--------- -------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES 20,536 (136,762) (18,947)
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities (464,361) (535,263) (361,579)
Proceeds from fixed maturities:
Sales 278,459 530,828 336,731
Maturities, calls and redemptions 45,442 36,726 51,046
Purchases of equity securities (1,334) (728) -
Proceeds from sales of equity securities 2,447 1,306 -
Change in short-term investments 39,301 (2,851) 1,901
Change in policy loans (6,704) (4,259) (9,007)
Change in other invested assets (580) - -
Other, net - 72 85
--------- -------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES (107,330) 25,831 19,177
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for investment contracts credited to policyholder
account balances 111,478 98,091 40,398
Return of policyholder account balances in investment contracts (24,878) (4,504) (451)
--------- -------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES 86,600 93,587 39,947
--------- -------- --------
NET CASH FLOWS (194) (17,344) 40,177
Cash at beginning of period 24,759 42,103 1,926
- -------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 24,565 $ 24,759 $ 42,103
===================================================================================================================
Supplemental disclosures of cash flow information:
Federal income taxes paid $ 2,488 $ 1,965 $ 6,531
===================================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</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 (CNAF). Loews Corporation owns approximately 84% of
the outstanding common stock of CNAF.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term and universal life
insurance policies and individual annuities. Group insurance products include
life, pension and accident and health, consisting primarily of major medical and
hospitalization.
The operations, assets and liabilities of VFL and its parent, Assurance, are
managed, to a large extent, on a combined basis. Pursuant to a Reinsurance
Pooling Agreement, amended July 1, 1996, VFL cedes all of its business,
excluding its separate account business, to its parent, Assurance. This business
is then pooled with the business of Assurance, which excludes Assurance's
participating contracts and separate account business, and 10% of the combined
pool is assumed by VFL.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). Certain amounts applicable to
prior years have been reclassified to conform to classifications followed in
1997.
The preparation of financial statements in conformity with 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.
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.
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 (whole and term life products) are computed based upon the net level
premium method 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 assumptions include the estimated effects of inflation and expenses
beyond the premium paying period. Reserves for universal life-type contracts are
equal to the account balances that accrue to the benefit of the policyholders.
Interest crediting rates ranged from 4.9% to 7.3% for the three years ended
December 31, 1997.
Claim reserves- Claim reserves include provisions for reported claims in the
course of settlement and estimates of unreported losses based upon past
experience.
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. VFL's reinsurance includes quota share,
yearly renewable term and facultative programs. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim liability.
Deferred acquisition costs- Life acquisition costs are capitalized and
amortized based on assumptions consistent with those used for computing policy
benefit reserves. Acquisition costs on traditional 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 $3.0 million for the year ended December 31, 1996.
INVESTMENTS
Valuation of investments- VFL classifies its fixed maturities and its equity
securities as available-for-sale, and as such, they are carried at fair value.
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization and accretion are
included in investment income.
24
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1. - (CONTINUED)
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 or mortgage loans.
VFL accounts for its derivative securities under the fair value method.
Under this method the derivative securities are recorded at fair value at the
reporting date with changes in fair value reflected in realized investment gains
and losses. VFL's derivatives are made up of interest rate caps and purchased
options and are classified as other invested assets.
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 maturities and equity securities are reflected as part of stockholder's
equity, net of applicable deferred income taxes. 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 in which securities are loaned to third parties, primarily major
brokerage firms. Borrowers of these securities must deposit 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 are 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 within fixed maturities. The liabilities for
securities sold subject to repurchase agreements are recorded at their
contractual repurchase amounts. VFL had no securities on loan at December 31,
1997 or 1996.
Separate Account business- VFL writes certain annuity contracts and
universal life policies. The supporting assets and liabilities of these
contracts and policies are legally segregated and reflected as assets and
liabilities of Separate Account business. Substantially all assets of the
Separate Account business are carried at fair value. Separate account
liabilities are principally obligations due to contractholders and are carried
at contract values.
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. 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 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
(In thousands of dollars)
Fixed maturities:
<S> <C> <C> <C>
Taxable bonds $20,669 $21,597 $21,576
Tax exempt bonds 1 12 23
Equity securities 72 59 64
Policy loans 4,264 3,669 3,925
Short-term investments 4,885 4,197 6,037
Security repurchase transactions - - 135
Other 200 - 2
------- -------- -------
30,091 29,534 31,762
Investment expense 178 222 268
- ------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $29,913 $29,312 $31,494
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT GAINS (LOSSES)
- ------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Realized investment gains (losses):
<S> <C> <C> <C>
Fixed maturities $3,333 $ 4,123 $13,674
Equity securities 1,021 578 -
Other (154) 70 109
------- ------- -------
4,200 4,771 13,783
Income tax expense (1,470) (1,670) (4,824)
------- ------- -------
Net realized investment gains 2,730 3,101 8,959
------- ------- -------
Change in net unrealized investment gains (losses):
Fixed maturities 5,806 (20,726) 25,405
Equity securities (607) 1,263 389
Other, principally Separate Account business 20 - -
------- ------- -------
5,219 (19,463) 25,794
Income tax (expense) benefit (1,829) 6,812 (9,028)
------- ------- -------
Change in net unrealized investment gains (losses) 3,390 (12,651) 16,766
- ------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) $6,120 $(9,550) $25,725
======================================================================================================
</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
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------
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> <C>
Proceeds from sales $278,459 $2,447 $530,828 $1,306 $336,731 $ -
======== ====== ======== ====== ======== =======
Gross realized gains $ 4,793 $1,113 $ 7,927 $ 578 $ 18,185 -
Gross realized losses (1,460) (92) (3,804) - (4,511) -
- ------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS
ON SALES $ 3,333 $1,021 $ 4,123 $ 578 $ 13,674 $ -
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------------------------------------------
1997 1996
----------------------------- -----------------------------------
December 31 GAINS LOSSES NET Gains Losses Net
- --------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities $6,227 $(787) $5,440 $3,226 $(3,592) $ (366)
Equity securities 1,279 - 1,279 1,886 - 1,886
Other, principally Separate Account business 20 - 20 - - -
------------------- ------ ------------------ ------
$7,526 $(787) 6,739 $5,112 $(3,592) 1,520
=================== ==================
Deferred income tax expense (2,359) (530)
- --------------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS $4,380 $ 990
====================================================================================================================
</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, 1997 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
United States Treasury securities and obligations of
<S> <C> <C> <C> <C>
government agencies $299,066 $2,073 $ 711 $300,428
Asset-backed securities 68,612 147 74 68,685
Corporate securities 72,431 2,384 2 74,813
Other debt securities 26,158 1,623 - 27,781
-------- ------ ----- --------
Total fixed maturities 466,267 6,227 787 471,707
Equity securities 981 1,279 - 2,260
- --------------------------------------------------------------------------------------------------------------
TOTAL $467,248 $7,506 $ 787 $473,967
==============================================================================================================
December 31, 1996
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 political subdivisions-tax-exempt 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
==============================================================================================================
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED
MATURITIES BY CONTRACTUAL MATURITY
- ------------------------------------------------------------------------------------------------------------
1997 1996
-------------------------- ----------------------
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 $ 2,249 $ 2,255 $ 3,299 $ 3,305
Due after one year through five years 302,053 301,749 118,507 116,223
Due after five years through ten years 54,663 56,502 47,998 48,866
Due after ten years 38,690 42,516 38,252 39,421
Asset-backed securities not due at a single
maturity date 68,612 68,685 113,376 113,251
- ------------------------------------------------------------------------------------------------------------
TOTAL $466,267 $471,707 $321,432 $321,066
============================================================================================================
</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, 1997 and 1996. There are no
investments in a single issuer, other than the U.S. government, that when
aggregated exceed 10% of stockholder's equity.
28
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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 a 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, receivables for securities sold, payables for
securities purchased and certain other assets and other liabilities because of
their short-term nature. Accordingly, these financial instruments are not
listed in the table below.
The carrying amounts and estimated fair values of VFL's other financial
instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996
-----------------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
December 31 AMOUNT FAIR VALUE Amount Fair Value
- -------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
FINANCIAL ASSETS
Investments:
<S> <C> <C> <C> <C>
Fixed maturities $471,707 $471,707 $321,066 $321,066
Equity securities 2,260 2,260 2,959 2,959
Policy loans 66,971 63,756 60,267 56,169
Other invested assets 433 433 - -
Separate Account business:
Fixed maturities 3,198 3,198 - -
Equity securities 5,233 5,233 - -
Other 305 305 - -
FINANCIAL LIABILITIES
Premium deposits and annuity contracts 266,093 247,567 167,049 153,676
=============================================================================================================
</TABLE>
29
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 3. - (CONTINUED)
The following methods and assumptions were used by VFL in estimating the
fair value amounts for financial instruments:
Fixed maturities 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, costs to settle, 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.
Valuation techniques to determine fair value of other Separate
Account business assets consist of discounted cash flows and quoted
market prices of (a) the investments or (b) comparable instruments. The
fair value of other Separate Account business liabilities approximates
their carrying value.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
VFL invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk. Financial instruments used for
such purposes may include interest rate caps, put and call options, commitments
to purchase securities, futures and forwards. VFL also uses derivatives to
mitigate the risk associated with certain guaranteed annuity contracts by
purchasing certain options in a notional amount equal to the original customer
deposit. VFL generally does not hold or issue these instruments for trading
purposes.
Derivative financial instruments consist of interest rate caps in the
general account and purchased options in the Separate Accounts at December 31,
1997. The gross notional principal or contractual amounts of derivative
financial instruments in the general account at December 31, 1997 totaled $50
million. The gross notional principal or contractual amounts of derivative
financial instruments in the Separate Accounts totaled $1.5 million at December
31, 1997. VFL had no derivative financial instrument holdings at December 31,
1996. The contract or notional amounts are used to calculate the exchange of
contractual payments under the agreements and are not representative of the
potential for gain or loss on these agreements.
The fair values associated with derivative financial instruments are
generally affected by interest rates, equity stock prices and foreign exchange
rates. The credit exposure associated with these instruments is generally
limited to the unrealized fair value of the instruments and will vary based the
credit worthiness of the counterparties. The risk of default depends on the
creditworthiness of the counterparty to the instrument. Although VFL is exposed
to the aforementioned credit risk, it does not expect any counterparty to fail
to perform as contracted based on the creditworthiness of the counterparties.
Due to the nature of the derivative securities, VFL does not require collateral.
30
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 3. - (CONTINUED)
The fair value of derivatives generally reflects the estimated amounts that
VFL would receive or pay upon termination of the contracts at the reporting
date. Dealer quotes are available for substantially all of VFL's derivatives.
For securities not actively traded, fair values are estimated using values
obtained from independent pricing services, costs to settle, or quoted market
prices of comparable instruments. The fair value of derivative financial
instruments in the general account and Separate Accounts at December 31, 1997
totaled $.4 million and $.3 million, respectively. Net realized losses on
derivative financial instruments held in the general account totaled $.1 million
for the year ended December 31, 1997, while net realized losses on derivatives
in the Separate Accounts were negligible for the same period.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time.
An interest rate cap consists of a guarantee given by the issuer to the
purchaser in exchange for the payment of a premium. This guarantee states that
if interest rates rise above a specified rate, the issuer will pay to the
purchaser the difference between the then current market rate and the specified
rate on the notional principal amount. The notional principal amount is not
actually borrowed or repaid.
NOTE 4. STATUTORY CAPITAL AND SURPLUS:
Statutory capital and surplus and net income for VFL are determined in
accordance with accounting practices prescribed or permitted 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 statutory net losses of $1.0
million and $2.7 million for the years ended December 31, 1997 and 1996, and net
income of $8.9 million for the year ended December 31, 1995. The statutory net
losses for 1997 and 1996 were primarily due to the immediate expensing of
acquisition costs which were substantial as a result of the increase in sales of
individual life and annuity products. Under GAAP, such costs are capitalized and
amortized to income over the duration of these contracts. Statutory capital and
surplus for VFL was $125.3 million and $124.3 million at December 31, 1997 and
1996, 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, 1997 and 1996, approximately $12.5 million and $12.4 million, respectively,
was not subject to prior Insurance Department approval.
31
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 5. BENEFIT PLANS:
VFL has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of
CNAF, all Casualty employees are covered by CNAF's Benefit Plans. The plans
are discussed below.
PENSION PLAN
CNAF has noncontributory pension plans covering all full-time employees age
21 or over who have completed at least one year of service. Casualty is included
in the CNA Employees' Retirement Plan and VFL is allocated their proportionate
share of these expenses. While the benefits for the plans vary, they are
generally based on years of credited service and the employee's highest sixty
consecutive months of compensation.
CNAF's funding policy is to make contributions in accordance with applicable
governmental regulatory requirements. The assets of the plans are invested
primarily in U.S. government securities with the balance in short-term
investments, common stocks and other fixed income securities.
The funded status is determined using assumptions at the end of the year.
Underfunded plans are those plans for which the accumulated benefit obligation
is in excess of plan assets. Overfunded plans are those plans for which plan
assets exceed the accumulated benefit obligations. Pension cost is determined
using assumptions at the beginning of the year.
The net pension cost allocated to VFL was $4.0 million, $3.6 million
and $1.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
The following table sets forth the plans' funded status and amounts
recognized in CNAF's consolidated financial statements at December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
ACCUMULATED BENEFIT OBLIGATION
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ------------------------- -------------------------
UNDERFUNDED Overfunded Underfunded Overfunded Underfunded
December 31 PLANS Plans Plans Plans Plans
- ----------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Actuarial present value of accumulated
plan benefits:
<S> <C> <C> <C> <C> <C>
Vested $1,339,708 $517,221 $622,548 $491,052 $646,017
Nonvested 76,992 37,718 32,369 28,346 14,126
- -----------------------------------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION $1,416,700 $554,939 $654,917 $519,398 $660,143
=================================================================================================================
</TABLE>
32
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 5. - (CONTINUED)
<TABLE>
<CAPTION>
NET PENSION ASSET (LIABILITY)
- ------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ------------------------ ------------------------
UNDERFUNDED Overfunded Underfunded Overfunded Underfunded
December 31 PLANS Plans Plans Plans Plans
- ------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Projected benefit obligation $1,779,799 $777,755 $788,333 $769,999 $809,308
Plan assets at fair value 1,312,592 701,854 503,623 629,673 496,264
---------- -------- -------- -------- --------
Plan assets less than projected benefit
obligation (467,207) (75,901) (284,710) (140,326) (313,044)
Unrecognized net asset at January 1, 1986,
being recognized over 12 years (2,124) (7,099) - (12,176) -
Unrecognized prior service costs 88,006 19,077 77,747 21,445 104,042
Unrecognized net gain (loss) 218,204 122,173 (11,793) 164,585 13,508
- -------------------------------------------------------------------------------------------------------------------
NET PENSION (LIABILITY) ASSET $ (163,121) 58,250 $(218,756) $ 33,528 $(195,494)
===================================================================================================================
<CAPTION>
NET PERIODIC PENSION COST
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ------------------------- ---------------------------
UNDERFUNDED Overfunded Underfunded Overfunded Underfunded
December 31 PLANS Plans Plans Plans Plans
- --------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net periodic pension cost:
Service cost-benefits attributed to
<S> <C> <C> <C> <C> <C>
employee service during the year $ 54,321 $36,489 $18,825 $ 32,118 $11,596
Interest cost on projected
benefit obligation 118,668 53,549 56,771 51,056 32,760
Actual return on plan assets (102,950) (31,106) (29,013) (115,363) (43,432)
Net amortization and deferral 17,370 (16,059) (5,982) 72,415 19,547
- --------------------------------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST $ 87,409 $42,873 $40,601 $ 40,226 $20,471
====================================================================================================================
</TABLE>
Actuarial assumptions are set forth in the following table:
<TABLE>
<CAPTION>
ASSUMPTIONS
- -----------------------------------------------------------------------------------------------------
December 31 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.25% 7.50% 7.25% 8.50%
Rate of increase in compensation levels* 2.75 2.75 2.75 4.00
Expected long-term rate of return on plan assets 7.50 7.75-8.50 7.50-8.50 8.75
- -----------------------------------------------------------------------------------------------------
<FN>
* Excludes age/service related merit and productivity increases.
</FN>
</TABLE>
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
CNAF 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. CNAF funds benefit costs principally
on the basis of current benefit payments.
The net postretirement benefit cost allocated to VFL was $2.1 million,
$1.3 million and $.7 million for the years ended December 31, 1997, 1996 and
1995, respectively.
33
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 5. - (CONTINUED)
The following table sets forth the amounts recognized in CNAF's consolidated
financial statements at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
ACCRUED POSTRETIREMENT BENEFIT COST
- -------------------------------------------------------------------------------------------------
December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------
(In thousands of dollars)
Accumulated postretirement benefit obligation:
<S> <C> <C> <C>
Retirees $201,985 $171,950 $185,507
Fully eligible, active plan participants 72,818 89,009 59,173
Other active plan participants 87,207 88,191 62,540
-------- -------- --------
Total accumulated postretirement benefit obligation 362,010 349,150 307,220
Plan assets at fair value (509) - -
Unrecognized prior service cost (203) (70) -
Unrecognized net (loss) gain (8,197) (12,215) 7,380
- --------------------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST $353,101 $336,865 $314,600
==================================================================================================
NET PERIODIC POSTRETIREMENT BENEFIT COST
- ----------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995*
- ----------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net periodic postretirement benefit cost:
Service cost/benefits attributed to employee service
<S> <C> <C> <C>
during the year $10,156 $11,935 $ 5,969
Interest cost on accumulated post retirement benefit obligation 25,135 24,146 17,506
Expected return on assets (25) - -
Amortization (322) 374 (941)
- ----------------------------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $34,944 $36,455 $22,534
==========================================================================================================
<FN>
* The 1995 data includes for The Continental Corporation Retirement Plans from acquisition date.
</FN>
<CAPTION>
ASSUMPTIONS
- ------------------------------------------------------------------------------------------
December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------
Discount rate:
<S> <C> <C> <C>
Assumptions used in determining net periodic benefit cost 7.50% 7.25% 8.50%
Assumptions used in determining the projected benefit
obligation (liability) 7.25% 7.50% 7.25%
- ------------------------------------------------------------------------------------------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9% in 1997, declining 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 CNAF's accumulated postretirement benefit obligation as of December 31,
1997 by $23.9 million and the aggregate net periodic postretirement benefit cost
for 1997 by $2.9 million.
34
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 5. - (CONTINUED)
SAVINGS PLAN
Casualty 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. VFL is allocated its proportionate share of CNA Employees'
Savings Plan expenses. CNAF 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 CNAF. CNAF contributions allocated to and expensed by VFL for
the Savings Plan were $.2 million, $1.0 million and $.7 million for the years
ended December 31, 1997, 1996 and 1995, 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 CNAF and its eligible subsidiaries (CNA Tax
Group), which in turn is included in the consolidated Federal income tax return
of Loews and its eligible subsidiaries. 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. The amount in the
Shareholder's Surplus Account was $121.8 million and $100.0 million at December
31, 1997 and 1996, respectively. Another tax memorandum account, defined as the
"Policyholders' Surplus Account," totaled $5.4 million at both December 31, 1997
and 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 stockholder. VFL has not provided for such a tax as VFL has no plans for
such a distribution.
Significant components of VFL's deferred tax assets and liabilities
as of December 31, 1997 and 1996 are shown in the table below:
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------
December 31 1997 1996
- ---------------------------------------------------------------------------
(In thousands of dollars)
Insurance reserves $24,961 $17,166
Deferred acquisition costs (33,374) (22,078)
Investment valuation 6,129 5,411
Net unrealized gains (2,359) (530)
Receivables (2,486) (646)
Other, net 3,031 989
- ---------------------------------------------------------------------------
NET DEFERRED TAX (LIABILITIES) ASSETS $(4,098) $ 312
===========================================================================
35
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 6. - (CONTINUED)
At December 31, 1997, gross deferred tax assets and liabilities amounted to
$35.1 million and $39.2 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1996, amounted to $24.9 million and $24.6 million,
respectively. VFL has not established a valuation reserve at December 31, 1996
as it believes that all deferred tax assets are fully realizable.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ---------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Current tax expense $4,716 $5,719 $11,747
Deferred tax expense 2,581 3,309 453
===========================================================================
TOTAL INCOME TAX EXPENSE $7,297 $9,028 $12,200
===========================================================================
</TABLE>
The components of total income tax expense are allocated between operating
income and realized capital gains and losses in the following table.
- ------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ------------------------------------------------------------------------
(In thousands of dollars)
Income tax expense on:
Operating income $5,827 $7,358 $ 7,376
Realized investment gains 1,470 1,670 4,824
========================================================================
TOTAL INCOME TAX EXPENSE $7,297 $9,028 $12,200
========================================================================
A reconciliation of the statutory federal income tax rate on income is as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
% OF % of % of
PRETAX Pretax Pretax
Year Ended December 31 1997 INCOME 1996 Income 1995 Income
- ------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Income taxes at statutory rates $7,219 35.0 $9,011 35.0 $12,149 35.0
Other 78 0.4 17 0.1 51 0.2
- ------------------------------------------------------------------------------------------------------------
INCOME TAX AT EFFECTIVE RATES $7,297 35.4 $9,028 35.1 $12,200 35.2
============================================================================================================
</TABLE>
36
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 7. REINSURANCE:
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 VFL's state of domicile, VFL receives collateral,
primarily in the form of bank letters of credit. Such collateral totaled
approximately $0.1 million at both December 31, 1997 and 1996.
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health earned
premiums are from short duration contracts. 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)
1997
<S> <C> <C> <C> <C> <C>
Life $564,891 $ 81,502 $567,217 $ 79,176 103%
Accident and Health 2,776 252,996 2,776 252,996 100
-------- -------- -------- -------- ----
TOTAL PREMIUMS $567,667 $334,498 $569,993 $332,172 101%
======== ======== ======== ======== ====
1996
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%
===========================================================================================
</TABLE>
Transactions with Assurance, as part of the pooling agreement described in
Note 1, are reflected in the above table. Premium revenues ceded to
non-affiliated companies were $116.2 million, $43.0 million and $9.9 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Additionally,
insurance claims and policyholder benefits are net of reinsurance recoveries
from non-affiliated companies of $77.8 million, $7.0 million and $6.1 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
Reinsurance receivables reflected on the balance sheet are recoverables from
reinsurers related to insurance reserves. These balances, which were
approximately $1.6 billion and $1.3 billion at December 31, 1997 and 1996,
respectively, are principally due from Assurance pursuant the Reinsurance
Pooling Agreement
37
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 7. - (CONTINUED)
The impact of reinsurance, including transactions with Assurance, on life
insurance in force is shown in the following schedule:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Life Insurance in Force Assumed/Net
-----------------------------------------------------
Direct Assumed Ceded Net %
- ----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997 $166,308 $25,557 $168,353 $23,512 108.7%
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
===============================================================================================
</TABLE>
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 CNAF and each of its subsidiaries are allocated to
the appropriate company. All acquisition and underwriting expenses allocated to
VFL are further subject to the Reinsurance Pooling Agreement with Assurance, 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 $45.3 million,
$37.2 million and $41.1 million for 1997, 1996 and 1995, respectively. Expenses
of VFL exclude $9.9 million, $12.3 million and $5.5 million of general and
administrative expenses incurred by VFL and allocated to CNAF for the years
ended December 31, 1997, 1996 and 1995, respectively. VFL had a $36.0 million
and $67.5 million affiliated receivable at December 31, 1997 and 1996,
respectively, 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 or payables.
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.
38
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONCLUDED
NOTE 10. BUSINESS SEGMENTS:
- --------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands of dollars)
REVENUES
Individual $ 72,204 $ 70,208 $ 69,577
Group 296,753 292,807 263,388
Realized gains 4,200 4,771 13,783
---------- ---------- ----------
Total $ 373,157 $ 367,786 $ 346,748
========== ========== ==========
INCOME BEFORE INCOME TAX
Individual $ 9,952 $ 12,752 $ 8,611
Group 6,475 8,224 12,316
Realized gains 4,200 4,771 13,783
---------- ---------- ----------
Total $ 20,627 $ 25,747 $ 34,710
========== ========== ==========
NET INCOME
Individual $ 6,345 $ 8,209 $ 5,597
Group 4,255 5,409 7,954
Realized gains 2,730 3,101 8,959
---------- ---------- ----------
Total $ 13,330 $ 16,719 $ 22,510
========== ========== ==========
ASSETS
Individual $1,824,854 $1,522,900 $1,360,942
Group 543,572 457,902 280,496
- --------------------------------------------------------------------------------
TOTAL $2,368,426 $1,980,802 $1,641,438
================================================================================
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
insurance segments.
Group revenues include $211.5 million, $210.1 million and $187.0
million for the years ended December 31, 1997, 1996 and 1995, respectively,
under contracts covering U.S. government employees and their dependents (FEHBP).
39
<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
SEE PAGE 6 FOR LIST OF DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION
OMITTED PURSUANT TO GENERAL INSTRUCTION I (2) (C) OF FORM 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
OMITTED PURSUANT TO GENERAL INSTRUCTION I (2) (C) OF FORM 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OMITTED PURSUANT TO GENERAL INSTRUCTION I (2) (C) OF FORM 10-K.
40
<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.............44
Schedule V Valuation and Qualifying Accounts and Reserves..45
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).
41
<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).
10 (a) Form of Participation Agreement between VFL 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 VFL 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).
42
<PAGE>
(A) (3) EXHIBITS - (CONTINUED)
10 (c) Form of Participation Agreement between VFL 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 VFL 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 VFL 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 VFL 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
1997.
43
<PAGE>
SCHEDULE III
VALLEY FORGE LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
GROSS INSURANCE RESERVES
------------------------
CLAIM
DEFERRED AND FUTURE POLICY- NET NET
ACQUISITION CLAIM POLICY HOLDERS' PREMIUM INVESTMENT
(In thousands of dollars) COSTS EXPENSE BENEFITS FUNDS REVENUE INCOME
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Individual........ $90,862.6 $27,391.0 $1,856,175.5 $ 570.2 $ 58,232.9 $11,349.2
Group............. 4,491.3 53,850.5 50,723.9 39,358.1 273,939.3 18,563.9
========= ========= ============ ========= ========== =========
Total 95,353.9 81,241.5 1,906,899.4 39,928.3 332,172.2 29,913.1
========== ========= ============ ========= ========== ==========
December 31, 1996
Individual........ $71,268.6 $10,411.5 $1,580,738.3 $ 548.0 $ 49,226.4 $13,123.6
Group............. 3,320.1 50,156.3 40,765.6 37,596.9 276,260.0 16,188.6
========= ========= ============ ========= ========== =========
Total 74,588.7 60,567.8 1,621,503.9 38,144.9 325,486.4 29,312.2
========== ========= ============ ========= ========== =========
December 31, 1995
Individual........ $50,420.8 $14,118.6 $1,297,743.3 $ 676.4 $ 49,435.0 $18,918.0
Group............. 178.8 45,304.8 36,649.8 33,897.9 247,218.0 12,576.3
========= ========= ============ ========= ========== =========
Total 50,599.6 59,423.4 1,334,393.1 34,574.3 296,653.0 31,494.3
========= ========= ============ ========= ========== =========
<CAPTION>
----------------------------------------------------------------------------------------
GROSS INSURANCE RESERVES
------------------------
AMORTIZATION
INSURANCE OF
CLAIMS AND DEFERRED OTHER
POLICYHOLDERS' ACQUISITION OPERATING
(In thousands of dollars) BENEFITS COSTS EXPENSES
- ----------------------------------------------------------------------------------------
December 31, 1997
<S> <C> <C> <C>
Individual....... $106,720.7 $11,922.6 $ 6,190.5
Group............ 200,486.7 (104.8) 27,314.9
========== ========= =========
Total 307,207.4 11,817.8 33,505.4
========== ========= =========
December 31, 1996
Individual........ $ 84,559.1 $ 1,124.7 $ 9,158.9
Group............. 220,280.8 52.4 26,863.7
========== ========= =========
Total 304,839.9 1,177.1 36,022.6
========== ========= =========
December 31, 1995
Individual......... $ 60,208.5 $ 6,044.9 $11,563.1
Group.............. 210,727.7 21.2 23,472.8
========== ========= =========
Total 270,936.2 6,066.1 35,035.9
========== ========= =========
</TABLE>
44
<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, 1997 Deducted from assets:
Allowance for doubtful accounts:
<S> <C> <C> <C> <C> <C>
Insurance receivables....................... $377.8 $245.6 $ - $338.7 $284.7
===== ===== ======= ===== =====
YEAR ENDED DECEMBER 31, 1996 Deducted from assets:
Allowance for doubtful accounts:
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
====== ====== ======= ===== =====
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<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/W. JAMES MACGINNITIE
-----------------------
W. James MacGinnitie
Director, Senior Vice President
and Chief Financial Officer
Date: March 28, 1998
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, 1998.
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/JONATHAN D. KANTOR Director
- ---------------------
Jonathan D. Kantor
/S/PATRICIA L. KUBERA Director
- ---------------------
Patricia L. Kubera
/S/W. JAMES MACGINNITIE Chief Financial Officer
- ----------------------- and Director
W. James MacGinnitie
/S/WILLIAM H. SHARKEY, JR. Director
- -------------------------
William H. Sharkey, Jr.
46
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 471,707
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,260
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 545,968
<CASH> 24,565
<RECOVER-REINSURE> 1,586,471
<DEFERRED-ACQUISITION> 95,354
<TOTAL-ASSETS> 2,368,426
<POLICY-LOSSES> 1,988,141
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 39,928
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 213,760
<TOTAL-LIABILITY-AND-EQUITY> 2,368,426
332,172
<INVESTMENT-INCOME> 29,913
<INVESTMENT-GAINS> 4,200
<OTHER-INCOME> 6,872
<BENEFITS> 307,207
<UNDERWRITING-AMORTIZATION> 11,818
<UNDERWRITING-OTHER> 33,505
<INCOME-PRETAX> 20,627
<INCOME-TAX> 7,297
<INCOME-CONTINUING> 13,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,330
<EPS-PRIMARY> 266.60
<EPS-DILUTED> 266.60
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
47
</FN>
</TABLE>
