As Filed with the Securities and Exchange Commission on September 5, 1996
Registration No. 333-01949
811-7569
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-6EL24
PRE-EFFECTIVE AMENDMENT NO. 2
TO REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE
LIFE SEPARATE ACCOUNT
(Exact name of trust)
VALLEY FORGE LIFE INSURANCE COMPANY
(Name of depositor)
CNA Plaza, 43 South
Chicago, Illinois 60685
(Complete address of depositor's principal executive offices)
Corporate Secretary
Continental Assurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
(Name and complete address of agent for service)
Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, DC 20004-2404
Approximate date of proposed public offering:
As soon as practicable after the effective date of this Registration Statement
Securities Being Offered: Individual Flexible Premium Variable Life Insurance
Policies.
Pursuant to Rule 24f-2 of the Investment Company Act of 1940, the
Registrant has elected to register an indefinite amount of the securities being
offered. The $500 registration fee pursuant to Rule 24f-2 was paid with the
initial filing on March 25, 1996.
The Registrant hereby amends this Registration Statement on such dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
* All other items required by this registration statement are incorporated
herein by reference to the registrant's Pre-effective Amendment #1 to the filing
of Form S6 on September 4, 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management discussion and analysis should be read in conjunction
with the financial statements and related notes.
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA.
VFL and Assurance, have an intercompany pooling agreement to share their
combined underwriting results inclusive of Assurance's participating policies
and Separate Account business. Under this pooling agreement, VFL cedes 100% of
its net business before pooling to Assurance and in turn receives 10% of the
combined results. Assurance retains 90% of the combined results. See Note 8 of
the Financial Statements for the effects of reinsurance on VFL's premium
revenues.
VFL markets a variety of individual and group insurance products, either
directly or through its pooling agreement with Assurance. The individual
insurance products currently being marketed consist primarily of term, universal
life, and individual annuity products. Group insurance products include life,
accident and health consisting primarily of major medical and hospitalization,
and pension products.
All aspects of the insurance business are highly competitive. The combined
operations of VFL and Assurance compete with a large number of stock and mutual
life insurance companies for both producers and customers and Assurance and VFL
and must continuously allocate resources to refine and improve insurance
products and services. There are approximately 1,800 companies selling life
insurance (including health insurance and pension products) in the United
States. The combined companies of VFL and Assurance rank as the twenty-second
largest life insurance organization based on 1995 consolidated statutory premium
volume.
The operations and assets and liabilities of VFL and its parent, Assurance, are
managed to a large extent on a combined basis. The discussion in the following
five paragraphs is based on the combined results, excluding participating
policies and separate account business which relate solely to Assurance.
In 1994, CNA formed the Life Operations Department to increase substantially its
presence and profitability in the individual life marketplace. The department is
continuing to experience strong growth in the individual life business, which
markets term, universal and annuities products. The department has introduced
new term and permanent life products, as well as annuities. All new products
have been very well received in the marketplace, as 1995 applications for new
policies increased to more than 169,000 from 67,000 in 1994, a 152% increase.
Sales volume as measured by first year paid premium and deposits increased to
$276 million in 1995 from $69 million in 1994, a 300% increase. In 1994, the
department began distributing its products through managing general agencies in
addition to its traditional distribution channel of property/casualty
independent agents. Managing general agents produced almost half of the first
year premium in 1995.
Another notable accomplishment in 1995 was the conversion of all processing from
main frame computer system to a more efficient PC-based processing systems,
thus substantially reducing operating expenses.
CNA is a prominent player in group life and health insurance. It offers a range
of products, including medical and hospitalization coverages, group life and
pension products sold to businesses, groups and associations.
In the medical and hospitalization market, Assurance's $2 billion Federal
Employees Health Benefits Program (FEHBP) continues to compete effectively.
Assurance has undertaken a number of initiatives to enhance service, manage
health care utilization demand and quality, and strengthen Assurance's networks
of physicians, hospitals and other providers.
In the market for private employer medical benefits, Assurance launched a niche
strategy of developing risk- and profit-sharing partnerships with health care
providers for point-of-service managed care products in selected geographic
markets. Looking ahead, Assurance will also promote full-service medical savings
account products. These strategies are expected to enhance future operating
results.
Results of Operations:
The following chart summarizes key components of the Valley Forge Life Insurance
Company (VFL) operating results for each of the last three years and the first
half of 1996 and 1995.
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
June 30 June 30 December 31 December 31 December 31
For the Period Ended 1996 1995 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
Operating Summary
(excluding realized investment gains/losses):
Revenues:
Individual
Accident and health $ 75 $ 1,540 $ 3,197 $ 3,191 $ 2,995
Life and annuity 26,737 19,270 45,171 34,500 28,760
----------- ------- ---------- ---------- -----------
Total Individual 26,812 20,810 48,368 37,691 31,755
Group
Accident and health 124,290 107,751 218,969 211,120 198,300
Life and annuity 9,119 14,334 29,316 14,169 10,790
----------- -------- ---------- ---------- -----------
Total Group 133,409 122,085 248,285 225,289 209,090
- -------------------------------------------------------------------------------------------------------------------
Total Premiums 160,221 142,895 296,653 262,980 240,845
Net investment income 13,369 15,434 31,494 22,759 16,144
Other 2,499 1,913 4,818 4,789 3,435
- -------------------------------------------------------------------------------------------------------------------
Total revenues 176,089 160,242 332,965 290,528 260,424
Benefits and expenses 167,376 149,201 312,038 274,439 253,355
- -------------------------------------------------------------------------------------------------------------------
Income before income tax 8,713 11,041 20,927 16,089 7,069
Income tax expense (3,055) (3,889) (7,376) (5,681) (2,414)
===================================================================================================================
Net operating income
(excluding realized investment gains/losses) $ 5,658 $ 7,152 $ 13,551 $ 10,408 $ 4,655
===================================================================================================================
Supplemental Financial Data:
Net operating income:
Individual $ 2,742 $ 3,030 $ 5,597 $ 3,119 $ 885
Group 2,916 4,122 7,954 7,289 3,770
- -------------------------------------------------------------------------------------------------------------------
Net operating income 5,658 7,152 13,551 10,408 4,655
Net realized investment gains (losses): 2,434 8,169 8,959 (2,926) 2,452
===================================================================================================================
Net income $ 8,092 $ 15,321 $ 22,510 $ 7,482 $ 7,107
===================================================================================================================
</TABLE>
<PAGE>
VFL's revenues for the year ended December 31, 1995, excluding net realized
investment gains, were $333.0 million or up 14.6% from year end 1994 and up
27.9% from 1993. Total life individual premium income for 1995 was $48.4
million, up 28.3% from the $37.7 million earned in 1994 and up 52.3% from 1993.
The increase in 1995 is due primarily to increased sales of new term and
permanent life products as previously discussed. Premium revenue as defined by
generally accepted accounting principles, and disclosed in the above exhibit,
does not include deposits on annuity contracts or premiums on universal life
policies.
VFL's total group premium income was $248.3 million, up 10.2% from the $225.3
million earned in 1994 and up 18.7% from 1993's $209.1 million. Group accident
and health premium income included in total group premium income, is primarily
from the contract with FEHBP. Group accident and health premium income was
$219.0 million for 1995 a 3.7% increase from 1994's premium of $211.1 million,
and a 10.6% increase from 1993's premium of $198.3 million . Group life and
annuity premium income, included in total group premium income above, exhibited
strong growth rising 31.3% to $14.2 million in 1994 from $10.8 million in 1993
and up 106.9% from $14.2 million in 1994 to $29.3 million in 1995. This growth
is attributable to strong positive cash flow from the growth in new business.
VFL's investment income increased substantially from $16.1 million in 1993 to
$22.8 million in 1994 and $31.5 million in 1995 due to strong positive cash flow
from the growth in new business and higher yielding investments resulting from a
shift of VFL's investment portfolio during 1994 to longer term securities.
VFL's net operating income excluding net realized investment gains/losses was
$13.6 million for 1995, compared to $10.4 million and $4.7 million for 1994 and
1993, respectively. The individual business segment reported net operating
income of $5.6 million for 1995, compared to $3.1 million and $0.9 million for
1994 and 1993, respectively. The group business segment reported net operating
income of $8.0 million for 1995, compared to $7.3 million for 1994 and $3.8
million for 1993. Profits for the individual business segment increased due to
increased investment income, improved mortality experience and increased
interest rate spreads on interest sensitive products.
Net realized investment gains, net of tax, amounted to $9.0 million in 1995,
compared to net realized investment losses of $2.9 million in 1994 and net
realized investment gains of $2.5 million in 1993. Net realized investment gains
for 1995 were primarily realized on sales of fixed maturities such sales being
in the ordinary course of portfolio management.
Six Months Results of Operations
VFL revenues, excluding realized investment gains, for the six months ended
June 30, 1996 were $176.1 million, up 9.9% when compared to $162.4 million for
the similar period of 1995. Total life individual premium income for the first
half of 1996 was $26.8 million, up 28.8% from the $20.8 million earned in the
first half of 1995. This growth is due to continued sales and market acceptance
of new life and annuity products first offered in late 1994. Offsetting this
increase somewhat is the discontinuation of the company's individual disability
insurance business, through assumption of reinsurance with an unaffiliated
insurance company. Total group premium was $133.4 million, up 9.3% from the
$122.1 million earned in the comparable 1995 period. This increase is primarily
attributable to FEHBP.
Investment income decreased 13.4% to $13.4 million in the first quarter of 1996,
as compared to $15.4 million for the same period a year ago. The decline was due
to a increase in lower yielding short-term securities as proceeds from sales of
fixed maturities were invested in short term securities.
Pretax operating income for VFL, excluding net realized investment gains/losses,
was $8.7 million for the first six months of 1996, down 21.1% compared to the
$11.0 million recognized for the same period in 1995.
VFL's net income excluding net realized investment gains/losses was $5.7 million
for the first six months of 1996, compared to $7.2 million for the same period
in 1995. The individual segment reported net operating income of $2.7 million
for the first half of 1996 a decrease of 9.5%, compared to $3.0 million in the
comparable period a year ago. This decrease is a result of very favorable
mortality experienced in the individual life business in the first half of 1995,
as well as reduced investment income results in 1996. The group segment reported
net operating income for the first six months of 1996 of $2.9 million, a decline
of 29.3% compared to the $4.1 million earned in the first half of 1995. The
decline was due to the decreased investment income as well as unfavorable
mortality experience in group life cases and lower administrative fees in group
pension cases.
Net realized investment gains for the first six months of 1996 were $2.4
million, compared to net realized investment gains of $8.2 million for the
comparable period in 1995, both reflective of the interest rate environments
during the respective periods.
Financial Condition:
<TABLE>
<CAPTION>
FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------
Stockholder's
Statutory Assets Equity
Surplus
(In thousands of dollars, except per share data)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 1996 $ 126,508 $ 687,795 $ 187,938
December 1995 129,912 624,820 195,472
December 1994 122,267 552,836 156,196
December 1993 117,650 475,892 153,249
December 1992 115,660 443,577 144,873
December 1991 111,382 402,535 137,857
- ---------------------------------------------------------------------------------------------------
</TABLE>
Assets totaled $625 million at the end of 1995, an increase of 13.0% over 1994
and 31.3% over 1993. VFL's cash and invested assets of $504 million increased by
$64 million, or 14.6%, over the 1994 level of $440 million, and increased $29
million over the 1993 level of $475 million.
VFL's stockholder's equity was $195 million at December 31, 1995, compared to
$156 million and $153 million at December 31, 1994 and 1993, respectively. The
increase in stockholder's equity in 1995 is due to a $16.8 million increase in
net unrealized investment gains and net income of $22.5 million. The increase in
stockholder's equity in 1994 was primarily due to net income of $7.5 million
which was partially offset by $4.5 million of net unrealized investment losses.
The decrease in stockholder's equity of $7.5 million at June 30, 1996 compared
to December 31, 1995 is due to a decrease in net unrealized gains of $15.6
million, offset by net income of $8.1 million. The change in net unrealized net
unrealized gains/losses is attributable, in large part, to increases in interest
rates which have an adverse effect on bond prices.
Statutory surplus of VFL has grown steadily from $111 million at December 31,
1991 to $127 million at June 30, 1996. The decrease in surplus for the six
months ended June 30, 1996 is due to a net statutory loss which is primarily
attributable to the substantial acquisition costs related to the new sales of of
individual life and annuity products. Such costs are immediately charged to
income for statutory reporting purposes; under generally accepted accounting
principles, such costs are capitalized and amortized to income over the duration
of these policies.
<PAGE>
The National Association of Insurance Commissioners (NAIC) has developed
industry minimum Risk-Based Capital (RBC) 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, 1995, VFL has capital in excess
of the Company Action Level.
The NAIC also maintains the Insurance Regulatory Information System ("IRIS),
which assists the state insurance departments in overseeing the financial
condition of both life and property/casualty insurers through application of a
number of financial ratios. These ratios have a range of results characterized
as "usual" by the NAIC. The NAIC IRIS user guide regarding these ratios states
that "Falling outside the usual range is not considered a failing
result"...and... "in some years it may not be unusual for financially sound
companies to have several ratios with results outside the usual range."
Management believes that IRIS ratio test results should be reviewed carefully in
conjunction with all other financial information. VFL had one IRIS ratio for
1995 with an unusual value, surplus relief. The unusual value relates to the
substantial commissions on new individual business ceded to Assurance under the
pooling agreement.
Investments:
The following table summarizes VFL's investments with fixed maturities and short
term investments shown at amortized cost and all other investments shown at cost
for each of the last three years and for the first quarter of 1996. Fixed
maturities and equity securities are considered available for sale and are shown
at market value in the financial statements, the effect of which is shown in
"Investments at Market Value" in the table below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS -
June 30 December 31
----------------- -----------------------------------------------------------
For the period ended 1996 % 1995 % 1994 % 1993 %
- --------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:
Fixed maturities
(at amortized cost):
U.S. Treasuries and
Agencies $ 114,889 21.7 $ 186,083 42.1 $ 69,148 15.6 $ 23,631 6.4
Asset Backed 68,119 12.9 84,785 19.2 219,470 49.6 6,378 1.7
Other Debt Securities 94,177 17.8 76,533 17.4 67,381 15.2 64,167 17.2
-------- ---- ---------- ---- --------- ---- -------- ----
Total Fixed maturities 277,185 52.4 347,401 78.7 355,999 80.4 94,176 25.3
Equity securities:
Common stocks 1,074 0.2 1,074 0.2 1,074 0.2 981 0.3
Policy loans 59,979 11.3 56,008 12.7 47,001 10.6 40,942 11.0
Short-term investments 191,482 36.1 37,184 8.4 39,067 8.8 235,948 63.4
- -----------------------------------------------------------------------------------------------------------
Investments $ 529,720 100.0% $ 441,667 100.0% $ 443,141 100.0 $ 372,047 100.0%
============================================================================================================
Investments at Market Value $ 526,663 $ 462,650 $438,330 $ 374,214
============================================================================================================
</TABLE>
As mentioned previously, the operations and assets and liabilities of VFL and
Assurance are, to a large extent, managed on a combined basis. The investment
portfolio is managed to maximize after-tax investment return while minimizing
credit risks with investments concentrated in high quality securities to support
its insurance underwriting operations. The investment portfolios segregated for
the purpose of supporting policy liabilities for universal life, annuities and
other interest sensitive products are held by Assurance.
VFL has the capacity to hold its fixed maturity portfolio to maturity. However,
securities may be sold as part of VFL's asset/liability strategies or to take
advantage of investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, or other similar factors.
Accordingly, the fixed maturity securities are classified as available-for-sale.
Footnote 3 to the financial statements is incorporated herein by reference and
provides market value information for fixed maturity and equity securities.
The investment portfolio consists primarily of high quality marketable fixed
maturities at December 31, 1995, 98% of which are rated as investment grade.
At December 31, 1995, 76% of the fixed maturity portfolio was invested in U.S.
government and government agencies securities, 6% in other AAA rated securities,
and 11% in AA and A rated securities.
Included in VFL's fixed maturity securities at December 31, 1995 are $85 million
of asset-backed securities, consisting of approximately 23% in U.S. government
agency issued pass-through certificates, 70% in collateralized mortgage
obligations (CMO's), and 7% in corporate asset-backed obligations. The majority
of CMO's held are U.S. government agency issues, which are actively traded in
liquid markets and are priced by broker-dealers.
VFL limits the risks associated with interest rate fluctuations and prepayments
by concentrating its CMO investments in planned amortization classes with
relatively short principal repayment windows. VFL avoids investments in complex
mortgage derivatives without readily ascertainable market prices. At December
31, 1995, the fair value of asset-backed securities was in excess of the
amortized cost by approximately $3 million compared with unrealized losses of $8
million at December 31, 1994. VFL has not invested in derivative financial
instruments during the last three years. Nor does it have any investments in
mortgage loans or real estate.
VFL's investments in fixed maturities are carried at a fair value of $368
million, compared with $351 million at December 31, 1995 and 1994, respectively.
At December 31, 1995, net unrealized gains on fixed maturity securities amounted
to approximately $20 million. This compares with net unrealized losses of $5
million at December 31, 1994. The gross unrealized gains and losses for the
fixed maturity securities portfolio at December 31, 1995, were $20.4 million and
$25 thousand, respectively, compared to $5.6 million and $10.7 million,
respectively, at December 31, 1994 and $3.0 million and $1.2 million,
respectively, at December 31, 1993. Such fluctuations from year-to-year are
primarily due to change in interest rates.
<PAGE>
The following table summarizes the unrealized net gains and losses from fixed
maturity and equity securities for the last three years and for the first
half of 1996.
NET UNREALIZED APPRECIATION (DEPRECIATION)
FIXED MATURITY AND EQUITY SECURITIES
- -------------------------------------------------------------------------------
June 30, December 31,
---------------- ------------------------------
For the period ended 1996 1995 1994 1993
- -------------------------------------------------------------------------------
(In thousands of dollars)
Fixed Maturities $ (3,808) $ 20,361 $ (5,044) $ 1,847
Equity securities 751 622 233 319
- -------------------------------------------------------------------------------
Liquidity and Capital Resources:
The liquidity requirements of VFL have been met primarily by funds generated
from operations. VFL's principal operating cash flow sources are premiums and
investment income. The primary operating cash flow uses are payments for claims,
policy benefits and operating expenses.
For the year ended December 31, 1995, VFL's operating activities generated net
positive cash flows of approximately $21 million, compared with $75 million in
1994 and $23 million in 1993. VFL believes that future liquidity needs will be
met primarily by cash generated from operations. Net cash flows from operations
are invested in marketable securities.
VFL's insurance ratings are pooled ratings with Assurance. VFL/Assurance has
received the following ratings as of June 30, 1996: A.M. Best, A; Standard and
Poor's, AA; and Duff and Phelps, AA such ratings are subject to regular review
and change.
Standards adopted during 1995
Disclosures of Certain Significant Risks and Uncertainties
In December 1994, the AICPA issued SOP 94-6, "Disclosure of Certain Significant
Risks and Uncertainties." This SOP requires reporting entities to include in
their financial statements disclosures about the nature of their operations and
the use of estimates in the preparation of financial statements. Additional
disclosures are required for certain significant estimates utilized in the
financial statements and current vulnerability due to certain concentrations if
specific criteria are met. This Statement is effective for financial statements
issued for fiscal years ending after December 15, 1995. The adoption of this
Statement had no impact on the results of operations of VFL.
Accounting by Creditors for Impairment of a Loan
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) 114, "Accounting by Creditors for
Impairment of a Loan." This Statement addresses the accounting by creditors for
impairment of certain loans. It also requires that applicable loans be treated
as impaired when it is probable that a creditor will be unable to collect all
amounts (both principal and interest) contractually due. This Statement applies
to financial statements for fiscal years beginning after December 15, 1994. In
October 1994, the FASB issued SFAS 118, "Accounting by Creditors for Impairment
of a Loan -- Income Recognition and Disclosures" which amends SFAS 114 to allow
a creditor to use existing methods for recognizing interest income on an
impaired loan. It also amends the disclosure requirements to require information
about the recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. The adoption of
these Statements did not have a significant impact on VFL.
Standards Adopted in 1996
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of In March 1995, the FASB issued SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
This Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used for long-lived assets and certain identifiable intangibles
to be disposed of. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by the entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This Statement is effective
for 1996 financial statements, although earlier adoption is permissible. This
Statement had no significant impact on the results of operations for VFL.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation". This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. The requirements of this
Statementis effective for 1996 financial statements. This Statement had no
impact on the financial statements of VFL as the Company has no compensation
which qualifies.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Valley Forge Life Insurance Company
We have audited the accompanying balance sheets of Valley Forge Life Insurance
Company (a wholly-owned subsidiary of Continental Assurance Company, which is a
wholly-owned subsidiary of Continental Casualty Company, an affiliate of CNA
Financial Corporation, an affiliate of Loews Corporation) as of December 31,
1995 and 1994 and the related statements of operations, stockholder's equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements 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, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for certain investments in debt and equity securities in
1993.
Deloitte & Touche LLP
Chicago, Illinois
June 21, 1996
<PAGE>
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE COMPANY
The following financial statements are those of Valley Forge Life Insurance
Company and not those of the Separate Account. They are included in this
Statement of Additional Information for the purpose of informing investors as to
the financial position and operations of the Company.
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------------------
March 31 December 31
--------------------------
1996 1995 1994
(In thousands of dollars) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Investments-Note 3:
Fixed maturities available-for-sale (cost: $277,185, $347,401 and $ 273,377 $ 367,762 $ 350,955
$355,999).............................................................
Equity securities available-for-sale (cost: $1,074, $1,074 and $1,074).. 1,825 1,696 1,307
Policy loans............................................................ 59,979 56,008 47,001
Short-term investments.................................................. 191,482 37,184 39,067
-------- -------- --------
Total investments................................................. 526,663 462,650 438,330
Cash...................................................................... 4,260 42,103 1,926
Insurance receivables:
Reinsurance receivables................................................. 9,316 5,688 4,280
Premium and other insurance receivables................................. 61,311 53,741 55,373
Less allowance for doubtful accounts.................................... (301) (175) -
Deferred acquisition costs................................................ 62,051 50,600 41,333
Accrued investment income................................................. 4,036 4,687 4,756
Receivables for securities sold........................................... 12,008 - -
Federal income taxes recoverable-Note 7................................... 3,702 575 547
Deferred income taxes-Note 7.............................................. 3,573 - 6,290
Other assets.............................................................. 1,176 4,951 1
=====================================================================================================================
Total assets $ 687,795 $ 624,820 $ 552,836
=====================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------------------
March 31 December 31
--------------------------
1996 1995 1994
(In thousands of dollars) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liabilities and Stockholder's Equity
Liabilities:
Insurance reserves-Note 8:
Future policy benefits.................................................. $ 290,740 $ 266,600 $ 229,702
Claims.................................................................. 57,987 59,423 55,636
Policyholders' funds.................................................... 36,299 34,574 30,596
Deferred income taxes..................................................... - 3,191 -
Remittances and items not allocated....................................... 30,896 51,219 22,100
Payable to affiliates-Note 9.............................................. 62,166 - 50,371
Other liabilities......................................................... 21,769 14,341 8,235
------- ------- -------
Total liabilities................................................. 499,857 429,348 396,640
------- ------- -------
Stockholder's equity-Note 4:
Common stock ($50 par value; Authorized-200,000 shares; Issued-50,000 2,500 2,500 2,500
shares).....................................................................
Additional paid-in capital................................................ 39,150 39,150 39,150
Retained earnings......................................................... 148,273 140,181 117,671
Net unrealized investment gains (losses), net of taxes-Note 3............. (1,985) 13,641 (3,125)
------- -------- --------
Total stockholder's equity........................................ 187,938 195,472 156,196
=====================================================================================================================
Total liabilities and stockholder's equity $ 687,795 $ 624,820 $ 552,836
=====================================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
(In thousands of dollars)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums-Note 8........................................... $296,653 $262,980 $240,845
Net investment income-Note 3.............................. 31,494 22,759 16,144
Realized investment gains (losses)-Note 3................. 13,783 (4,502) 3,773
Other..................................................... 4,818 4,789 3,435
-------- ------- -------
346,748 286,026 264,197
------- ------- -------
Benefits and expenses:
Insurance claims and policyholders' benefits-Note 8....... 270,936 237,334 221,092
Amortization of deferred acquisition costs................ 6,066 4,874 2,794
Other operating expenses-Note 9........................... 35,036 32,231 29,469
------- -------- -------
312,038 274,439 253,355
------- ------- -------
Income before income tax.......................... 34,710 11,587 10,842
Income tax expense-Note 7................................... 12,200 4,105 3,735
=====================================================================================================
Net income $ 22,510 $ 7,482 $ 7,107
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
Six Months Ended March 31 1996 1995
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Premiums-Note 8............................................................ $160,221 $142,895
Net investment income-Note 3............................................... 13,369 15,434
Realized investment gains (losses)-Note 3.................................. 3,745 12,568
Other...................................................................... 2,499 1,913
------- -------
179,834 172,810
Benefits and expenses:
Insurance claims and policyholders' benefits-Note 8........................ 147,263 130,355
Amortization of deferred acquisition costs................................. 330 1,600
Other operating expenses-Note 9............................................ 19,783 17,246
------- -------
167,376 149,201
------- -------
Income before income tax........................................... 12,458 23,609
Income tax expense-Note 7.................................................... 4,366 8,288
=========================================================================================================
Net income $ 8,092 $ 15,321
=========================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
----------------------------------------- ----------- ------------- -------------- ---------------- ------------
Net
Additional Unrealized
Common Paid-in Retained Investment
(In thousands of dollars) Stock Capital Earnings Gains (Losses) Total
----------------------------------------- ----------- ------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992.............. $2,500 $39,150 $103,082 $ 141 $144,873
Net income............................ - - 7,107 - 7,107
Net unrealized investment gains, net of - - - 68 68
taxes-Note 3......................
Adjustment resulting from change in
accounting for debt securities-Note 2. - - - 1,201 1,201
------------ ------------- -------------- --------------- -----------
Balance, December 31, 1993 2,500 39,150 110,189 1,410 153,249
Net income............................ - - 7,482 - 7,482
Net unrealized investment losses, net of
taxes-Note 3........................ - - - (4,535) (4,535)
------------ ------------- --------------- -------------- ------------
Balance, December 31, 1994 2,500 39,150 117,671 (3,125) 156,196
Net income............................ - - 22,510 - 22,510
Net unrealized investment gains, net of
taxes-Note 3...................... - - - 16,766 16,766
------------ ------------- ---------------- ------------- -----------
Balance, December 31, 1995 $2,500 $39,150 $140,181 $ 13,641 $ 195,472
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------
Six Months Ended March 31, 1996 and 1995 Net
Additional Unrealized
Common Paid-in Retained Investment
(In thousands of dollars) Stock Capital Earnings Gains (Losses) Total
- ----------------------------------------- ----------- ------------ --------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $2,500 $39,150 $117,671 $ (3,125) $156,196
Net income............................ - - 15,321 - 15,321
Net unrealized investment gains, net
of taxes-Note 3................... - - - 8,244 8,244
- ----------------------------------------- ----------- ------------ --------------- ------------- ---------------
Balance, June 30, 1995 $2,500 $39,150 $132,992 $5,119 $179,761
========================================= =========== ============ =============== ============== ==============
Balance, December 31, 1995 $2,500 $39,150 $140,181 $ 13,641 $195,472
Net income............................ - - 8,092 - 8,092
Net unrealized investment gains, net
of taxes-Note 3................... - - - (15,626) (15,626)
- ----------------------------------------- ----------- ------------ -------------- -------------- --------------
Balance, June 30, 1996 $2,500 $39,150 $148,273 $ (1,985) $187,938
================================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
(In thousands of dollars)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 22,510 $ 7,482 $ 7,107
-------- ------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Pre-tax realized investment (gains) losses..................... (13,783) 4,502 (3,773)
Amortization of bond (discount) premium........................ (3,921) (886) 51
Changes in:
Insurance receivables...................................... 399 (6,951) (1,693)
Deferred acquisition costs................................. (9,267) (1,112) (3,250)
Accrued investment income.................................. 69 (1,606) 992
Federal income taxes recoverable........................... (28) (1,356) (5)
Deferred income taxes...................................... 453 (172) (804)
Insurance reserves......................................... 44,663 30,734 21,430
Other, net................................................. (20,095) 44,080 2,550
-------- ------- -------
Total adjustments................................. (1,510) 67,233 15,498
-------- ------- -------
Net cash provided by operating activities......... 21,000 74,715 22,605
-------- ------- -------
Cash flows from investing activities:
Purchases of fixed maturities....................................... (361,579) (863,023) (95,982)
Proceeds from fixed maturities:
Sales............................................................ 336,731 408,505 88,622
Maturities, calls and redemptions................................ 51,046 189,355 12,828
Purchases of equity securities...................................... - (93) -
Proceeds from sale of equity securities............................. - - 336
Change in short-term investments.................................... 1,986 196,605 (21,344)
Change in policy loans.............................................. (9,007) (6,058) (5,541)
--------- -------- ---------
Net cash provided by (used in) investing activities 19,177 (74,709) (21,081)
--------- -------- ---------
Net increase in cash.............................. 40,177 6 1,524
Cash at beginning of year.............................................. 1,926 1,920 396
================================================================================================================
Cash at end of year $ 42,103 $ 1,926 $ 1,920
================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Federal income taxes.............................................. $ 6,531 $ 5,426 $ 3,847
================================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
Six Months Ended March 31 1996 1995
(In thousands of dollars)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 8,092 $ 15,321
------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Pre-tax realized investment gains............................. (3,745) (12,568)
Amortization of bond discount.................................. (2,017) (2,154)
Changes in:
Insurance receivables...................................... (11,073) (2,798)
Deferred acquisition costs................................. (11,451) (4,116)
Accrued investment income.................................. 650 116
Federal income taxes....................................... (3,127) 4,197
Deferred income taxes...................................... 1,650 200
Insurance reserves......................................... 24,427 21,005
Other, net................................................. 53,048 (2,460)
------ ------
Total adjustments................................. 48,362 1,472
----- ------
Net cash provided by operating activities......... 56,454 16,793
------ ------
Cash flows from investing activities:
Purchases of fixed maturities....................................... (301,008) (236,040)
Proceeds from fixed maturities:
Sales............................................................ 358,199 243,117
Maturities, calls and redemptions................................ 6,127 22,754
Change in short-term investments.................................... (153,644) (41,705)
Change in securities sold under repurchase agreements............... - -
Change in policy loans.............................................. (3,971) (3,587)
------- --------
Net cash used in investing activities............. (94,297) (15,461)
------- --------
Net increase (decrease) in cash................... (37,843) 1,332
Cash at beginning of period............................................ 42,103 1,926
==========================================================================================================
Cash at end of period $ 4,260 $ 3,258
==========================================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Federal income taxes.............................................. $ 7,216 $ 3,852
=========================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA.
VFL and Assurance have an intercompany pooling agreement to share their
combined underwriting results, exclusive of Assurance's participating policies
and Separate Account business. Under this pooling agreement, VFL cedes 100% of
its net business before pooling to Assurance and in turn receives 10% of the
combined results. Assurance retains 90% of the combined results.
VFL markets a variety of individual and group insurance products, either
directly or through its pooling agreement with Assurance. The individual
insurance products currently being marketed consist primarily of term, universal
life and individual annuity products. Group insurance products include life,
accident and health consisting primarily of medical and hospitalization, and
pension products.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. In the opinion of VFL's management, these statements include all
adjustments, consisting of normal recurring accruals, which are necessary for
the fair presentation of the financial position, results of operations and cash
flows in the accompanying financial statements.
Insurance
Premium revenue-Revenues on universal life-type contracts are comprised of
contract charges and fees which are recognized over the coverage period.
Accident and health insurance premiums are earned ratably over the terms of the
policies after provision for estimated adjustments on retrospectively rated
policies and deductions for ceded insurance. Other life insurance premiums are
recognized as revenue when due, after deductions for ceded insurance.
Claim reserves-Claim reserves include provisions for reported claims in the
course of settlement and estimates of unreported losses based upon past
experience.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 1. - (Continued):
Future policy benefit reserves-Reserves for traditional life insurance
products are computed based upon net level premium methods using actuarial
assumptions as to interest rates, mortality, morbidity, withdrawals and
expenses. Actuarial assumptions include a margin for adverse deviation, and
generally vary by plan, age at issue and policy duration. Interest rates range
from 3.0% to 10.5%, and mortality, morbidity and withdrawal assumptions reflect
VFL and industry experience prevailing at the time of issue. Expense estimates
include the estimated effects of inflation and expenses beyond the premium
paying period. Reserves for universal life-type contracts are established using
the retrospective deposit method. Under this method, liabilities are equal to
the account balances that accrue to the benefit of the policyholders. Interest
crediting rates ranged from 5.9% to 7.3% for the three years ended December 31,
1995 and from 5.7% to 5.9% for the six-month period ended June 30, 1996.
Reinsurance-In addition to the pooling agreement with Assurance, VFL also
assumes and cedes insurance with other insurers and reinsurers and members of
various reinsurance pools and associations. VFL utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of risk
and minimize exposures on larger risks. The reinsurance coverages are tailored
to the specific risk characteristics of each product line with VFL's retained
amount varying by type of coverage. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability.
Deferred acquisition costs-Costs of acquiring insurance business which vary
with and are primarily related to the production of such business are deferred.
Such costs include commissions and certain underwriting and policy issuance
costs. Acquisition costs are capitalized and amortized based on assumptions
consistent with those used for computing policy benefit reserves. Acquisition
costs on ordinary life business are amortized over their assumed premium paying
periods. Universal life and annuity acquisition costs are amortized in
proportion to the present value of the estimated gross profits over the
products' assumed durations, which are regularly evaluated and adjusted as
appropriate. To the extent that unrealized gains or losses on available-for-sale
securities would result in an adjustment of deferred policy acquisition costs
had those gains or losses actually been realized, the related unamortized
deferred policy acquisition costs are recorded as an adjustment of the
unrealized gains or losses included in stockholder's equity.
Valuation of investments-VFL believes it has the ability to hold all fixed
maturity securities until they mature. However, securities may be sold to take
advantage of investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, as part of VFL's asset/liability
strategy, or other similar factors. As a result, VFL considers its fixed
maturity securities (bonds and redeemable preferred stocks) as
available-for-sale and VFL also classifies its equity securities as
available-for-sale, and as such, are carried at fair value. Unrealized holding
gains and losses are reflected as a separate component of stockholder's equity,
net of deferred income taxes. The amortized cost of fixed maturity securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion are included in investment income.
Policy loans are carried at unpaid balances. Short-term investments, which
have an original maturity of one year or less, are carried at amortized cost
which approximates market value. The Company has no real estate, mortgage loans
or investments in derivative securities.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 1. - (Continued):
Investment gains and losses - All securities transactions are recorded on
the trade date. Realized investment gains and losses are determined on the basis
of the cost of the specific securities sold. Unrealized investment gains and
losses on fixed maturity and equity securities are reflected as part of
stockholder's equity, net of applicable deferred income taxes and deferred
acquisition costs. 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 agreements to repurchase - VFL has a securities
lending program where securities are loaned to third parties, primarily major
brokerage firms. Borrowers of these securities must maintain a deposit of 100%
of the fair value of the securities if the collateral is cash, or 102% if the
collateral is securities. Cash deposits from these transactions have been
invested in short-term investments (primarily commercial paper). VFL continues
to receive the interest on the loaned debt securities, as beneficial owner and,
accordingly, the loaned debt securities are included in fixed maturity
securities. VFL had no securities on loan at December 31, 1995 or 1994, or
at June 30, 1996.
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 which are accounted for under the liability method. Such
temporary differences primarily relate to life insurance reserves, net
unrealized investment gains/losses and deferred acquisition costs.
Interim Financial Data (Unaudited)
The accompanying Financial Statements for the six-month period ended June
30, 1996 and 1995 have been prepared in conformity with generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of VFL's management, these statements include all adjustments,
consisting of normal recurring accruals, which are necessary for the fair
presentation of the financial position, results of operations and cash flows in
the accompanying financial statements.
NOTE 2. CHANGES IN ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES:
Effective December 31, 1993, VFL adopted Statement of Financial Accounting
Standards 115, "Accounting for Certain Investments in Debt and Equity
Securities." This Statement requires that investments in debt and equity
securities classified as available-for-sale be carried at fair value.
(Previously, fixed maturity securities classified as available-for-sale were
carried at the lower of aggregate amortized cost or market value). The effect at
December 31, 1993 of adopting this Statement was to increase stockholder's
equity by $1.2 million (net of $.6 million in deferred taxes). The adoption of
this Statement did not impact net income.
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. INVESTMENTS:
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income Six Months Ended
Year Ended December 31 June 30
----------------------------------------- ---------------------------
(In thousands of dollars)
1995 1994 1993 1996 1995
- -------------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Fixed maturities........................... $21,599 $16,591 $ 6,520 $10,805 $ 9,852
Equity securities.......................... 64 64 64 32 32
Policy loans............................... 3,925 2,979 2,498 1,355 1,620
Short-term investments..................... 6,037 3,658 7,240 1,294 3,943
Security repurchase transactions-income.... 135 63 - - 136
Other...................................... 2 (381) 2 - 1
-------- ------------ ---------- ----------- ------------
31,762 22,974 16,324 13,486 15,584
Investment expense......................... 268 215 180 117 150
===================================================================================================================
Net investment income $31,494 $22,759 $16,144 $13,369 $15,434
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Analysis of Investment Gains (Losses) Six Months Ended
Year Ended December 31 June 30
----------------------------------- ----------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- ------------------------------------------------------- --------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Realized investment gains (losses):: (Unaudited)
Fixed maturities.................................. $13,674 $(4,306) $3,313 $3,745 $ 12,521
Equity securities................................. - - 332 - -
Other............................................. 109 (196) 128 - 47
--------- --------- -------- ------- ---------
13,783 (4,502) 3,773 3,745 12,568
Income tax (expense) benefit...................... (4,824) 1,576 (1,321) (1,311) (4,399)
--------- --------- --------- ------- --------
Net realized investment gains (losses)........ 8,959 (2,926) 2,452 2,434 8,169
--------- --------- ---------- ------- --------
Change in net unrealized investment gains (losses):
Fixed maturities.................................. 25,405 (6,892) - (24,169) 12,551
Equity securities................................. 389 (85) 106 129 132
-------- --------- ---------- -------- ---------
25,794 (6,977) 106 (24,040) 12,683
Income tax (expense) benefit...................... (9,028) 2,442 (38) 8,414 (4,439)
-------- --------- ---------- --------- ---------
Change in net unrealized investment gains
(losses)..................................... 16,766 (4,535) 68 (15,626) 8,244
Change in accounting for adoption of SFAS 115-
Note 2...................................... - - 1,201 - -
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized investment
gains (losses) $25,725 $(7,461) $3,721 $(13,192) $16,413
===================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Summary of Gross Realized Investment Gains (Losses)
for Fixed Maturities and Equity Securities
December 31 1995 1994 1993
--------------------------- ---------------------- ------------------------
Fixed Equity Fixed Equity Fixed Equity
(In thousands of dollars) Maturities Securities Maturities Securities Maturities Securities
- ----------------------------- ----------- --------------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales $ 336,731 $ - $ 408,505 $ - $ 88,622 $ 336
===========================================================================================================
Gross realized gains......... 18,185 - 1,559 - 3,355 332
Gross realized losses........ (4,511) - (5,865) - (42) -
- -----------------------------------------------------------------------------------------------------------
Net realized gains (losses) $ 13,674 $ - $ (4,306) $ - $ 3,313 $ 332
===========================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. - (Continued):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Summary of Gross Realized Investment Gains (Losses)
for Fixed Maturities and Equity Securities
June 30 1996 1995
(Unaudited) (Unaudited)
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
Fixed Equity Fixed Equity
(In thousands of dollars) Maturities Securities Maturities Securities
- -------------------------------- ------------- ------------- -------------------- ------------
Proceeds from sales $ 358,199 $ - $ 243,117 $ -
================================ =========== =============== ================ ================
Gross realized gains............ 6,626 - 16,805 -
Gross realized losses........... (2,881) - (4,284) -
- -------------------------------- ------------ -------------- ----------------- ---------------
Net realized gains $ 3,745 $ - $ 12,521 $ -
================================ =========== =============== ================= ===============
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Analysis of Net Unrealized Investment Gains (Losses)
Included in Stockholder's Equity
December 31 1995 1994
-------------------------------- ---------------------------------
(In thousands of dollars) Gains Losses Net Gains Losses Net
- ------------------------------------------- -------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities.......................... $20,386 $(25) $ 20,361 $5,624 $(10,668) $ (5,044)
Equity securities......................... 622 - 622 233 - 233
---------- --------- ----------- --------- ----------- -----------
$21,008 $(25) 20,983 $5,857 $(10,668) (4,811)
======= ===== ====== =========
Deferred income tax benefit (expense)..... (7,342) 1,686
=================================================================================================================
Net unrealized investment gains (losses) $ 13,641 $ (3,125)
=================================================================================================================
</TABLE>
<PAGE>
- ------------------------------------------------------------------------------
Analysis of Net Unrealized Investment Gains (Losses)
Included in Stockholder's Equity
June 30 1996
(Unaudited)
---------------------------------------
(In thousands of dollars) Gains Losses Net
- -------------------------------------- ----------- ------------ --------------
Fixed maturities...................... $3,296 $(7,104) $ (3,808)
Equity securities..................... 751 - 751
---------- ----------- --------------
$4,047 $(7,104) (3,057)
====== ========
Deferred income tax benefit........... 1,072
==============================================================================
Net unrealized investment losses $ (1,985)
==============================================================================
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. - (Continued):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Summary of Investments in Fixed Maturities
and Equity Securities Available-for-Sale Amortized Unrealized Unrealized Market
(In thousands of dollars) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995
United States Treasury securities and obligations of
government agencies.................................. $186,083 $12,526 $ 1 $198,608
Asset-backed securities................................. 84,785 2,545 8 87,322
States, municipalities and tax exempt political 279 14 - 293
subdivisions............................................
Corporate securities.................................... 50,523 2,508 6 53,025
Other debt securities................................... 25,731 2,793 10 28,514
-------- ------- --- --------
Total fixed maturities............................... 347,401 20,386 25 367,762
Equity securities....................................... 1,074 622 - 1,696
===============================================================================================================
Total $348,475 $21,008 $ 25 $369,458
===============================================================================================================
December 31, 1994
United States Treasury securities and obligations of
government agencies.................................. $ 69,148 $ 3,770 $ 1,182 $ 71,736
Asset-backed securities................................. 219,470 136 7,898 211,708
States, municipalities and tax exempt political 277 20 2 295
subdivisions............................................
Corporate securities.................................... 38,223 227 1,016 37,434
Other debt securities................................... 28,881 1,471 570 29,782
-------- ------ -------- ---------
Total fixed maturities............................... 355,999 5,624 10,668 350,955
Equity securities....................................... 1,074 233 - 1,307
===============================================================================================================
Total $357,073 $ 5,857 $ 10,668 $352,262
===============================================================================================================
June 30, 1996 (Unaudited)
United States Treasury securities and obligations of
government agencies.................................. $114,889 $37 $ 4,791 $110,135
Asset-backed securities................................. 68,119 457 1,348 67,228
States, municipalities and tax exempt political
subdivisions............................................ 30 - - 30
Corporate securities.................................... 71,672 1,747 783 72,636
Other debt securities................................... 22,475 1,055 182 23,348
-------- ------- ------ --------
Total fixed maturities............................... 277,185 3,296 7,104 273,377
Equity securities....................................... 1,074 751 - 1,825
==============================================================================================================
Total $275,259 $4,047 $ 7,104 $275,202
==============================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. - (Continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Summary of Investments in Fixed Maturities December 31 June 30
by Contractual Maturity ------------------------------------------- -------------------------
1995 1994 1996
-------------------- --------------------- -------------------------
Amortized Market Amortized Market Amortized Market
(In thousands of dollars) Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
Due in one year or less.................... $ 7,470 $ 7,666 $ 22,725 $ 22,391 $ 9,789 $ 9,861
Due after one year through five years...... 135,160 136,297 33,291 32,382 120,918 118,066
Due after five years through ten years..... 35,869 37,538 14,054 12,803 29,576 29,483
Due after ten years........................ 84,117 98,939 66,459 71,671 48,783 48,739
Asset-backed securities not due at a single
maturity date.............................. 84,785 87,322 219,470 211,708 68,119 67,228
==================================================================================================================
Total $347,401 $ 367,762 $ 355,999 $ 350,955 $ 277,185 $ 273,377
==================================================================================================================
</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 that have not produced income for the year ended
December 31, 1995 or for the six months ended June 30, 1996. There are no
investments in a single issuer, other than the U.S. government, that when
aggregated exceed 10% of stockholder's equity.
NOTE 4. STATUTORY CAPITAL AND SURPLUS:
Statutory capital and surplus and net income for VFL are determined in
accordance with accounting practices prescribed by the Pennsylvania Insurance
Department. Prescribed statutory accounting practices are set forth in a variety
of publications of the National Association of Insurance Commissioners as well
as state laws, regulations, and general administrative rules. The Company has no
material permitted accounting practices. Statutory net income was $8.9 million,
$5.2 million and $2.5 million for the years ended December 31, 1995, 1994 and
1993, respectively, and $2.0 million and $3.5 million for the unaudited
six-month periods ended June 30, 1996 and 1995, respectively. Statutory capital
and surplus for VFL was $129.9 million and $122.3 million at December 31, 1995
and 1994, respectively, and $126.5 million (unaudited) at June 30, 1996.
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, 1995 and June 30, 1996, approximately $13.0 million was not subject to prior
Insurance Department approval.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair values are disclosed for all financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values may be
based on estimates using present value or other valuation techniques. These
techniques are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. Potential taxes and other
transaction costs have not been considered in estimating fair value. The
estimates presented herein are subjective in nature and are not necessarily
indicative of the amounts VFL could realize in the current market exchange. Any
difference would not be expected to be material.
All nonfinancial instruments such as deferred acquisition costs, 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 and estimated fair values of certain of VFL's financial
instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
December 31 1995 1994
------------------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands of dollars) Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Investments:
Fixed maturities available-for-sale........ $367,762 $367,762 $350,955 $350,955
Equity securities available-for-sale....... 1,696 1,696 1,307 1,307
Policy loans............................... 56,008 52,648 47,001 41,361
Financial Liabilities
Premium deposits and annuity contracts....... 68,578 64,565 42,982 42,122
- -----------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used by VFL in estimating its
fair value disclosures for financial instruments:
The carrying amounts reported in the balance sheet approximate
fair value for cash, short-term investments, premium and other
insurance receivables, accrued investment income, and certain other
assets and other liabilities because of their short-term nature. As
such, these financial instruments are not shown in the above table.
Fixed maturity securities and equity securities are based on
quoted market prices, where available. For securities not actively
traded, fair values are estimated using values obtained from
independent pricing services or quoted market prices of comparable
instruments.
The fair values for policy loans are estimated using discounted
cash flow analyses at interest rates currently offered for similar
loans to borrowers with comparable credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 6. BENEFIT PLANS:
Pension Plan
CNA has several noncontributory pension plans covering all full-time
employees age 21 or over who have completed at least one year of service. VFL is
included in the CNA Employees' Retirement Plan. Plan benefits are based on years
of credited service and the employee's highest sixty consecutive months of
compensation.
CNA's funding policy is to make contributions in accordance with applicable
governmental regulatory requirements. The assets of the plan are invested
primarily in U.S. government securities with the balance in short-term
investments, common stocks and other fixed income securities.
Effective January 1, 1996, the retirement plans redefined compensation to
include base pay, overtime and bonuses. This amendment generated an unrecognized
prior service cost of $20.2 million for CNA.
In 1994, the plan adopted the rule of 65. This change allows Plan
participants to receive early retirement benefits if their combined years and
months of age and service with CNA equals a minimum of 65. This amendment
generated an unrecognized prior service cost of $1.6 million for CNA.
Net periodic pension cost allocated to VFL was $1.7 million, $1.1 million
and $.7 million for the years ended December 31, 1995, 1994 and 1993,
respectively, and $1.4 million (unaudited) and $.9 million (unaudited) for the
six-month periods ended June 30, 1996 and 1995, respectively.
The following table sets forth the Plans' funded status and amounts
recognized in CNA's consolidated financial statements at December 31, 1995, 1994
and 1993.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1995* 1994 1993
December 31 Overfunded Underfunded Overfunded Overfunded
(In thousands of dollars) Plans Plans Plans Plans
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested........................................................ $ 508,506 $ 628,564 $ 376,377 $ 401,481
Nonvested..................................................... 31,180 11,292 39,152 41,585
--------- ---------- ---------- -----------
Accumulated benefit obligation............................. $ 539,686 $ 639,856 $ 415,529 $ 443,066
========= ========== ========== ===========
Projected benefit obligation................................... $ 808,289 $ 771,018 $ 651,418 $ 617,764
Plan assets at fair value...................................... 629,673 496,264 495,492 465,279
------- ------- ------- -------
Plan assets less than projected benefit obligation.......... (178,616) (274,754) (155,926) (152,485)
Unrecognized net asset at January 1, 1986 being recognized over (12,176) - (17,253) (22,330)
12 years..
Unrecognized prior service costs............................... 38,584 86,903 20,773 21,553
Unrecognized net loss.......................................... 172,269 5,825 174,039 160,825
------- --------- ------- -------
Net pension asset (liability)............................... $ 20,061 $ (182,026) $ 21,633 $ 7,563
======== ========= ======= =======
Net periodic pension cost:
Service cost - benefits attributed to employee service during $ 33,020 $ 10,694 $ 32,354 $ 27,527
the year.......................................................
Interest cost on projected benefit obligation................ 52,783 31,033 44,666 40,640
Actual return on plan assets................................. (115,363) (43,432) 11,579 (25,609)
Net amortization and deferral................................ 73,312 18,650 (43,265) (13,967)
====================================================================================================================
Net periodic pension cost $ 43,752 $ 16,945 $ 45,334 $ 28,591
====================================================================================================================
<FN>
*The 1995 data includes The Continental Corporation Retirement Plans which are
underfunded. CNA acquired The Continental Corporation on May 10, 1995.
</FN>
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 6. - (Continued):
Actuarial assumptions are set forth in the following table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Assumptions
December 31 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate.............................................. 7.25% 8.50% 7.25% 8.25%
Rate of increase in compensation levels *.................. 2.75 4.00 4.50 5.25
Expected long-term rate of return on plan assets........... 7.50 8.75 7.50 9.00
- --------------------------------------------------------------------------------------------------
<FN>
* Excludes age/service related merit and productivity increases.
</FN>
</TABLE>
The funded status is determined using assumptions at the end of the year.
Pension cost is determined using assumptions at the beginning of the year.
Postretirement Health Care and Life Insurance Benefits
CNA provides certain health and dental care benefits for eligible retirees,
through age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired persons. CNA funds benefit costs principally
on the basis of current benefit payments.
As described previously, in 1994, the Plan adopted the Rule of 65. For the
postretirement plan, this amendment generated an unrecognized prior service cost
of $11.2 million for CNA.
Net periodic postretirement benefit cost allocated to VFL was $.7 million,
$.6 million and $.4 million for the years ended December 31, 1995, 1994 and
1993, respectively, and $.5 million (unaudited) and $.3 million (unaudited) for
the six-month periods ended June 30, 1996 and 1995, respectively.
<PAGE>
The following table sets forth the amounts recognized in CNA's consolidated
financial statements at December 31, 1995, 1994 and 1993.
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
December 31
(In thousands of dollars) 1995* 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................................... $ 185,507 $ 27,088 $ 26,245
Fully eligible, active plan participants..................... 59,173 53,684 24,097
Other active plan participants.............................. 62,540 41,106 70,804
------ ------ ------
Total accumulated postretirement benefit obligation......... 307,220 121,878 121,146
Unrecognized prior service cost.............................. - (11,177) -
Unrecognized net gain (loss).................................. 7,380 19,702 (5,291)
-------- -------- ---------
Accrued postretirement benefit cost......................... $ 314,600 $ 130,403 $ 115,855
======== ========== =========
Net periodic postretirement benefit cost:
Service cost/benefits attributed to employee service during
the year.................................................... $ 5,969 $ 8,603 $ 5,625
Interest cost on accumulated post retirement benefit
obligation.................................................. 17,506 10,342 7,742
Amortization.................................................. (941) 655 (104)
===================================================================================================================
Net periodic postretirement benefit cost $ 22,534 $ 19,600 $ 13,263
===================================================================================================================
<FN>
*The 1995 data includes postretirement benefit obligations for The Continental
Corporation retirees.
</FN>
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 6. - (Continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Assumptions
December 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumptions used in determining net periodic benefit cost:
Discount rate................................................................. 8.50% 7.25% 8.25%
Rate of increase in compensation levels *..................................... 4.00 4.50 5.25
Assumptions used in determining the projected benefit obligation (liability):
Discount rate................................................................. 7.25% 8.50% 7.25%
Rate of increase in compensation levels *..................................... 2.75 4.00 4.50
- ------------------------------------------------------------------------------------------------------------------
<FN>
* Excludes age/service related merit and productivity increases.
</FN>
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 13% in 1995, declining 1% per year to an
ultimate rate of 5% in 2002. The health care cost trend rate assumption has a
significant effect on the amount of the benefit obligation and periodic cost
reported. An increase in the assumed health care cost trend rate of 1% in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1995 by $17.5 million and the aggregate net periodic postretirement
benefit cost for 1995 by $1.9 million.
Savings Plan
VFL is included in the CNA Employees' Savings Plan which is a contributory
plan which allows employees to make a regular contribution of up to 6% of their
salaries. VFL contributes an additional amount equal to 70% of the employee's
regular contribution. Employees may also make an additional contribution of up
to 10% of their salaries for which there is no additional contribution by CNA.
VFL contributions to the plan were $.7 million, $.5 million and $.5 million for
the years ended December 31, 1995, 1994 and 1993, respectively, and $.5 million
(unaudited) and $.4 million (unaudited)for the six months ended June 30, 1996
and 1995, respectively.
NOTE 7. INCOME TAXES:
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included in the consolidated
Federal income tax return with CNA and its eligible subsidiaries (CNA Tax
Group), which in turn is consolidated in the Loews Federal income tax return.
The Federal income tax provision of VFL is computed as if VFL were filing its
own separate return.
VFL maintains a special tax memorandum account designated as the
"Shareholder's Surplus Account." Dividends from this account may be distributed
to the shareholder without resulting in any additional tax. At December 31,
1995, the amount in the Shareholder's Surplus Account was $95 million. Another
tax memorandum account, defined as the "Policyholders' Surplus Account," totaled
$5 million at December 31, 1995. No further additions to this account are
allowed. Amounts accumulated in the Policyholders' Surplus Account are subject
to income tax if distributed to the shareholder. VFL has not provided for such a
tax as VFL has no plans for such a distribution.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 7. - (Continued):
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
VFL's deferred tax assets and liabilities as of December 31, 1995 and 1994 and
March 31, 1996 are shown in the table below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Components of Deferred Tax Assets and Liabilities
December 31, June 30,
--------------------------
(In thousands of dollars) 1995 1994 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Unaudited)
Life insurance reserve differences................. $ 15,900 $ 13,372 $ 17,013
Deferred acquisition costs......................... (14,382) (11,978) (18,040)
Investment valuation............................... 2,518 2,450 3,051
Unrealized investment (gains) losses............... (7,342) 1,686 1,072
Receivables........................................ 661 (524) (1,382)
Other, net......................................... (546) 1,284 1,859
==================================================================================================
Net deferred tax assets (liabilities) $ (3,191) $ 6,290 $ 3,573
==================================================================================================
</TABLE>
At December 31, 1995, gross deferred tax assets and liabilities amounted to
$20.1 million and $23.3 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1994, amounted to $19.2 million and $12.9 million,
respectively. At June 30, 1996, gross deferred tax assets and liabilities
amounted to $24.4 million (unaudited) and $20.8 million (unaudited),
respectively.
VFL has not established a valuation reserve at December 31, 1995 as it
believes that all deferred tax assets are fully realizable. VFL has a past
history of profitability and anticipates future taxable income sufficient to
support its deferred tax balances at December 31, 1995, including but not
limited to the reversal of existing temporary differences and the implementation
of tax planning strategies, if needed.
<PAGE>
<TABLE>
<CAPTION>
Significant components of VFL's income tax provision are as follows:
- --------------------------------------------------------------------------------------------------------------
Provision for Income Tax (Expense) Benefit Six Months Ended
Year Ended December 31 June 30
---------------------------------- --------------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Current tax (expense) benefit on:
Ordinary income............................ $ (7,417) $ (5,603) $(3,213) $ (1,396) $ (3,681)
Realized investment gains/losses........... (4,330) 1,326 (1,326) (1,320) (4,407)
---------- -------- ---------- ---------- -----------
Total current tax expense............ (11,747) (4,277) (4,539) (2,716) (8,088)
--------- --------- ---------- ---------- -----------
Deferred tax (expense) benefit on:
Ordinary income (loss)..................... 41 (78) 799 (1,660) (208)
Realized investment gains/losses........... (494) 250 5 10 8
---------- --------- ----------- ---------- -----------
Total deferred tax (expense) benefit. (453) 172 804 (1,650) (200)
==============================================================================================================
Total income tax expense $ (12,200) $ (4,105) $ (3,735) $(4,366) $(8,288)
==============================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 7. - (Continued):
A reconciliation of the expected income tax resulting from the use of
statutory tax rates to the effective income tax follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Reconciliation of Expected and Effective Taxes Six Months Ended
Year Ended December 31 June 30
------------------------------ ---------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Expected tax expense on ordinary income at statutory rates. $ (7,325) $(5,623) $(2,474) $(3,049) $(3,864)
State income tax deduction................................. 27 23 22 9 14
State income taxes......................................... (78) (66) (63) (25) (39)
Effect of 1% change in tax rate on January 1, 1993
deferred tax - - 102 - -
balance.................................................
Other items, net........................................... - (15) (1) 9 -
--------- --------- --------- --------- ---------
Income tax expense on ordinary income................... (7,376) (5,681) (2,414) (3,056) (3,889)
Income tax (expense) benefit on realized investment
gains/losses at statutory rates............................ (4,824) 1,576 (1,321) (1,310) (4,399)
====================================================================================================================
Income tax expense $(12,200) $(4,105) $(3,735) $(4,366) $(8,288)
====================================================================================================================
</TABLE>
<PAGE>
NOTE 8. REINSURANCE:
The effects of reinsurance on premium revenues are shown in the following
schedule:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Premiums Assumed/Net
-------------------------------------------------
(In millions of dollars) Direct Assumed Ceded Net %
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31
1995
Life................................. $ 316,011 $ 75,053 $ 316,577 $ 74,487 101%
Accident and Health.................. 422 222,166 422 222,166 100
--------- ---------- -------- ---------
Total............................ $ 316,433 $ 297,219 $ 316,999 $ 296,653 100
========= ========== ======== =========
1994
Life................................. $ 187,834 $ 49,998 $ 189,163 $ 48,669 103
Accident and Health.................. 468 214,311 468 214,311 100
--------- --------- --------- ----------
Total............................ $ 188,302 $ 264,309 $ 189,631 $ 262,980 101
======= ========= ========= ==========
1993
Life................................. $ 171,624 $ 41,083 $ 173,157 $ 39,550 104
Accident and Health.................. 525 201,295 525 201,295 100
--------- ----------- ---------- -----------
Total........................... $ 172,149 $ 242,378 $ 173,682 $ 240,845 101
========= =========== =========== ===========
Six Months Ended June 30 (Unaudited)
1996
Life................................. $ 246,899 $ 36,649 $ 247,692 $ 35,856 102
Accident and Health.................. 399 124,365 399 124,365 100
--------- ---------- ---------- ----------
Total........................... $ 247,298 $161,014 $ 248,091 $ 160,221 100
======= ========== ========== ===========
1995
Life................................. $ 137,843 $ 34,976 $ 139,215 $ 33,604 104
Accident and Health.................. 225 109,291 225 109,291 100
---------- ---------- ---------- -----------
Total........................... $ 138,068 $ 144,267 $ 139,440 $ 142,895 101
========== ========== ========== ===========
=============================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 8. - (Continued):
In the table above, the majority of Life premium revenue is from long
duration type contracts, while the Accident and Health premium revenue is
generally short duration.
Transactions with Assurance, as part of the pooling agreement, are
reflected in the above table. Premium revenues ceded to non-affiliated companies
were $9.9 million, $7.5 million and $6.5 million for the years ended December
31, 1995, 1994 and 1993, respectively, and $10.5 million (unaudited) and $4.9
million (unaudited) for the six-month periods ended June 30, 1996 and 1995,
respectively. Additionally, insurance claims and policyholders' benefits
recoveries from non-affiliated companies were $6.1 million, $3.0 million and
$4.2 million for the years ended December 31, 1995, 1994 and 1993, respectively,
and $4.7 million (unaudited) and $.9 million (unaudited) for the six-month
periods ended June 30, 1996 and 1995, respectively.
The insurance reserves included in the accompanying balance sheet are
stated at the net amount of VFL's participation pursuant to the intercompany
pooling. Insurance reserves related only to VFL's direct and assumed
(non-affiliate) business were $1,067.8 million and $916.0 million at December
31, 1995 and 1994, respectively, and $1,180.6 million (unaudited) at June 30,
1996.
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
-------------------------------------------------------------
(In millions of dollars) Direct Assumed Ceded Net %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31
1995............................. $57,138 $16,996 $58,442 $15,692 108.3%
1994............................. 22,933 13,215 24,112 12,036 109.8
1993............................. 18,043 11,835 19,338 10,540 112.3
Six Months Ended June 30 (Unaudited)
1996............................. 82,466 19,792 83,770 18,488 107.1
1995............................. 35,521 14,799 36,704 13,616 108.7
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
NOTE 9. RELATED PARTIES:
As discussed in Note 1, VFL is party to a pooling agreement with its
parent, Assurance. In addition, the Company is party to the CNA Intercompany
Expense Agreement whereby expenses incurred by CNA and each of its subsidiaries
are allocated to the appropriate company. All acquisition and underwriting
expenses allocated to the Company are further subject to the Intercompany
Pooling Agreement, so that acquisition and underwriting expenses recognized by
the Company approximates ten percent of the combined acquisition and
underwriting expenses of the Company and Assurance. Expenses of VFL exclude
$5.5, $4.1 and $3.8 million of general and administrative expenses incurred by
VFL and allocated to CNA for the years ended December 31, 1995, 1994 and 1993,
respectively, and $6.0 and $2.7 million for the unaudited six-month periods
ended June 30, 1996 and 1995. VFL had a $4.9 million affiliated receivable
included in other assets at December 31, 1995, a $50.4 million affiliated
payable at December 31, 1994 and a $62.2 million (unaudited) affiliated payable
at June 30, 1996 for net cash settlements related to pooling and general expense
reimbursements to Casualty in the normal course of operations.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 10. LEGAL:
VFL is party to litigation arising in the ordinary course of business. The
outcome of this litigation will not, in the opinion of management, materially
affect the results of operations or equity of VFL.
NOTE 11. BUSINESS SEGMENTS:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Six Month Period
Year Ended December 31 Ended June 30
-------------------------------------------- -----------------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Revenues
Individual........................... $ 69,577 $ 52,812 $ 42,721 $ 33,431 $ 30,628
Group................................ 263,388 237,716 217,703 142,658 129,614
Realized gains (losses).............. 13,783 (4,502) 3,773 3,745 12,568
---------- ---------- --------- ---------- ---------
Total........................ $ 346,748 $ 286,026 $ 264,197 $ 179,834 $ 172,810
========= ========= ========= ========= ========
Income Before Income Tax
Individual........................... $ 8,611 $ 4,794 $ 1,318 $ 4,199 $ 4,660
Group................................ 12,316 11,295 5,751 4,514 6,381
Realized gains (losses).............. 13,783 (4,502) 3,773 3,745 12,568
---------- --------- ---------- ---------- ----------
Total........................ $ 34,710 $ 11,587 $ 10,842 $ 12,458 $ 23,609
========== ======== ========= ========== =========
Net Income
Individual........................... $ 5,597 $ 3,119 $ 885 $ 2,742 $ 3,030
Group................................ 7,954 7,289 3,770 2,916 4,122
Realized gains (losses).............. 8,959 (2,926) 2,452 2,434 8,169
---------- ---------- ---------- ---------- ----------
Total........................ $ 22,510 $ 7,482 $ 7,107 $ 8,092 $ 15,321
========= ========== ========= ========== =========
Assets
Individual........................... $ 307,582 $ 307,884 $ 272,948 $ 313,218 $ 310,840
Group................................ 317,238 244,952 202,944 374,577 291,432
---------- ----------- ------------ ---------- ---------
Total........................ $ 624,820 $ 552,836 $ 475,892 $ 687,795 $ 602,272
========== =========== ============ ========== =========
</TABLE>
Assets and investment income are allocated to business segments based on
cash flows after attribution of separately identifiable assets. Income taxes
have been allocated on the basis of taxable operating income of the respective
segments.
Group revenues include $187.0 million, $179.4 million and $165.9 million
for the years ended December 31, 1995, 1994 and 1993, respectively, and $52.2
million and $46.5 million for the unaudited six-month periods ended June 30,
1996 and 1995, respectively, under contracts covering U.S. government employees
and their dependents.
<PAGE>
* All other items required by this registration statement are incorporated
herein by reference to the registrant's Pre-effective Amendment #1 to the filing
of Form S6 on September 4, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the registrant, Valley Forge Life Insurance Company
Variable Life Separate Account, has duly caused this registration statement to
be signed on its behalf by the undersigned thereunto duly authorized, and its
seal to be hereunto affixed and attested, all in the City of Chicago, State of
Illinois, on this 5th day of September, 1996.
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE
LIFE SEPARATE ACCOUNT
(Registrant)
VALLEY FORGE LIFE INSURANCE COMPANY
(Depositor)
S/MARY A. RIBIKAWSKIS By: S/PETER E. JOKIEL
Attest: _____________________ ____________________________
Mary A. Ribikawskis Peter E. Jokiel
Assistant Secretary Senior Vice President,
Chief Financial Officer,
Director
Pursuant to the requirements of the Securities Act of 1933, Valley Forge Life
Insurance Company has duly caused this registration statement to be signed on
its behalf by the undersigned persons in their capacities with Valley Forge
Insurance Company therunto authorized, and its seal to be herunto affixed and
attested, all in the City of Chicago, State of Illinois, this 5th day of
September, 1996.
S/MARY A. RIBIKAWSKIS By: S/PETER E. JOKIEL
Attest: _______________________ ___________________________
Mary A. Ribikawskis Peter E. Jokiel
Assistant Secretary Senior Vice President,
Chief Financial Officer,
Director
Pursuant to the requirements of the Securities Act of 1933, Valley Forge
Life Insurance Company has duly caused this registration statement to be signed
on its behalf by the undersigned persons in their capacities with Valley Forge
Life Insurance Company thereunto authorized, and its seal to be hereunto affixed
and attested, all in the City of Chicago, State of Illinois, this 5th day of
September, 1996.
<TABLE>
<CAPTION>
PRINCIPAL OFFICERS
<S> <C> <C>
Signature Title Date
_____________________________ ________________________________ __________________
S/DENNIS H. CHOOKASZIAN
_____________________________ Chairman of the Board, September 5, 1996
Dennis H. Chookaszian Chief Executive Officer
Director
<PAGE>
S/PHILIP L. ENGEL
_____________________________ President, Director September 5, 1996
Philip L. Engel
S/JAMES P. FLOOD
_____________________________ Senior Vice President September 5, 1996
James P. Flood
S/PETER E. JOKIEL
_____________________________ Senior Vice President,
Peter E. Jokiel Chief Financial Officer, Director September 5, 1996
S/DONALD M. LOWRY
____________________________ Senior Vice President, September 5, 1996
Donald M. Lowry General Counsel, Secretary,
Director
S/WILLIAM H. SHARKEY, JR.
____________________________ Senior Vice President, September 5, 1996
William H. Sharkey, Jr. Director
S/WILLIAM J. ADAMSON, JR.
_____________________________ Senior Vice President September 5, 1996
William J. Adamson, Jr.
S/BRUCE B. BRODIE
_____________________________ Senior Vice President September 5, 1996
Bruce B. Brodie
S/MICHAEL C. GARNER
_____________________________ Senior Vice President September 5, 1996
Michael C. Garner
S/BERNARD L. HENGESBAUGH
_____________________________ Senior Vice President September 5, 1996
Bernard L. Hengesbaugh
S/JACK KETTLER
_____________________________ Senior Vice President September 5, 1996
Jack Kettler
S/CAROLYN L. MURPHY
_____________________________ Senior Vice President September 5, 1996
Carolyn L. Murphy
S/WAYNE R. SMITH, III
_____________________________ Senior Vice President, September 5, 1996
Wayne R. Smith, III
S/ADRIAN M. TOCKLIN
_____________________________ Senior Vice President, September 5, 1996
Adrian M. Tocklin
S/JAE L. WITTLICH
_____________________________ Senior Vice President, September 5, 1996
Jae L. Wittlich
</TABLE>
<PAGE>
* All other exhibits required by this registration statement are incorporated
herein by reference to the registrant's Pre-effective Amendment #1 to the filing
of Form S6 on September 4, 1996.
Exhibit 7A
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. 2 to Registration
Statement No. 333-01949 on Form S-6 of Valley Forge Life Insurance Company
Variable Life Separate Account of our report dated June 21, 1996 appearing in
the Prospectus, which is part of this Registration Statement, on the financial
statements of Valley Forge Life Insurance Company as of December 31, 1995 and
1994, and for each of the three years then ended. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Chicago, Illinois
September 5, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001007010
<NAME> VALLEY FORGE LIFE INSURANCE CO.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 42,103 4,260
<SECURITIES> 462,650 526,663
<RECEIVABLES> 59,429 70,627
<ALLOWANCES> 175 300
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 624,820 687,795
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
<COMMON> 2,500 2,500
0 0
0 0
<OTHER-SE> 192,972 185,438
<TOTAL-LIABILITY-AND-EQUITY> 624,820 687,795
<SALES> 0 0
<TOTAL-REVENUES> 346,748 179,834
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 312,038 167,376
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 34,710 12,458
<INCOME-TAX> 12,200 4,366
<INCOME-CONTINUING> 22,510 8,092
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 22,510 8,092
<EPS-PRIMARY> 450.20 161.84
<EPS-DILUTED> 450.20 161.84
</TABLE>
