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Valley Forge Life Insurance Co – ‘10-Q’ for 9/30/01

On: Wednesday, 11/14/01 · For: 9/30/01 · Accession #: 950137-1-504724 · File #: 812-10032

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/14/01  Valley Forge Life Insurance Co    10-Q        9/30/01    1:57K                                    Bowne Boc/FA

Quarterly Report — Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                      18    101K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) CHANGES IN SECURITIES AND USE OF PROCEEDS Omitted pursuant to General Instruction H (2) (b) of Form 10-Q DEFAULTS UPON SENIOR SECURITIES Omitted pursuant to General Instruction H (2) (b) of Form 10-Q Exhibits and Reports on Form 8-K Other Information SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted pursuant to General Instruction H (2) (b) of Form 10-Q
1	1st Page - Filing Submission
18	Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Omitted pursuant to General Instruction H (2) (b) of Form 10-Q
"	Item 3. DEFAULTS UPON SENIOR SECURITIES Omitted pursuant to General Instruction H (2) (b) of Form 10-Q
"	Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted pursuant to General Instruction H (2) (b) of Form 10-Q
"	Item 5. Other Information
"	Item 6. Exhibits and Reports on Form 8-K

10-Q 1st Page of 18 TOC ↑Top Previous Next ↓Bottom Just 1st
 
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

--------------------------

 FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 OF THE SECURITIES EXCHANGE ACT OF 1934.

                                                                [Download Table]
                                                                                  
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001  COMMISSION FILE NUMBER 333-1083

--------------------------

 VALLEY FORGE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)

   PENNSYLVANIA                                           23-6200031
(State or other jurisdiction of                              (I.R.S. Employer   
incorporation or organization)                             Identification No.)

CNA PLAZA                                               
CHICAGO, ILLINOIS                                          60685
(Address of principal executive offices)                         (Zip Code)     

(312) 822-5000

(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was  
required to file such reports), and (2) has been subject to such filing   
 requirements for the past 90 days. Yes  X      No
                                         ---     ---

Indicate the number of shares outstanding of each of the issuer's classes of    
common stock, as of the latest practicable date.                                

              CLASS                          OUTSTANDING AT NOVEMBER 5, 2001
    -----------------------                  -------------------------------
Common Stock, Par value $50.00                     50,000           

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1)(a)   
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED    
DISCLOSURE FORMAT.                                                              

--------------------------------------------------------------------------------
================================================================================

Page 1 of 18

10-Q 2nd Page of 18 TOC 1st Previous Next ↓Bottom Just 2nd
PART I.   FINANCIAL INFORMATION  (UNAUDITED)                            PAGE NO.
------    ---------------------                                         ------- 

CONDENSED FINANCIAL STATEMENTS:                                                 

STATEMENTS OF OPERATIONS (Unaudited)                                            
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000......  3

BALANCE SHEETS                                                                  
SEPTEMBER 30, 2001 (Unaudited) AND DECEMBER 31, 2000.................  4

STATEMENTS OF CASH FLOWS (Unaudited)                                            
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000................  5

NOTES TO CONDENSED FINANCIAL STATEMENTS                                         
 (Unaudited) SEPTEMBER 30, 2001......................................  6

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                               
 CONDITION AND RESULTS OF OPERATIONS................................. 14

PART II.  OTHER INFORMATION.............................................. 18    
--------  -----------------                                                     
SIGNATURES                                                                      
......................................................................... 18  

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 VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF OPERATIONS
 (UNAUDITED)

                                                        [Enlarge/Download Table]

----------------------------------------------------------------------------------------------------------------------------------- 
                                                                           THREE MONTHS                         NINE MONTHS         
                                                                           ------------                         -----------         
PERIOD ENDED SEPTEMBER 30                                            2001               2000              2001              2000    
----------------------------------------------------------------------------------------------------------------------------------- 
                                                                                                                                    
(In thousands of dollars)                                                                                                           
Revenues:                                                                                                                           
   Net earned premiums                                             $  12,886          $  67,535         $  35,241         $ 221,751 
   Net investment income                                              12,275             11,309            36,860            33,443 
   Realized investment gains (losses)                                  4,155                 87            11,855            (4,149)
   Other                                                                 678              1,512             6,489             5,914 
                                                                   ---------          ---------         ---------         --------- 
       Total revenues                                                 29,994             80,443            90,445           256,959 
                                                                   ---------          ---------         ---------         --------- 
Benefits and expenses:                                                                                                              
   Insurance claims and policyholders' benefits                       21,500             61,939            53,140           205,446 
   Other operating expenses                                            1,207              6,552             1,139            18,506 
   Amortization of deferred acquisition costs                          1,087              3,563             6,540            10,675 
                                                                   ---------          ---------         ---------         --------- 
       Total benefits and expenses                                    23,794             72,054            60,819           234,627 
                                                                   ---------          ---------         ---------         --------- 
   Income before income tax expense                                    6,200              8,389            29,626            22,332 
Income tax expense                                                     2,228              2,987            10,492             7,938 
---------------------------------------------------------------    ---------------------------------------------------------------- 
     NET INCOME                                                    $   3,972          $   5,402         $  19,134         $  14,394 
===============================================================    ================================================================ 

The accompanying Notes are an integral part of these Condensed Financial        
Statements (Unaudited).                                                         

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 VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED BALANCE SHEETS

                                                        [Enlarge/Download Table]

---------------------------------------------------------------------------------------------------------------------------
                                                                                          SEPTEMBER 30,       DECEMBER 31, 
                                                                                             2001                 2000     
                                                                                          (UNAUDITED)                      
---------------------------------------------------------------------------------------------------------------------------
                                                                                                                           
(In thousands of dollars, except share data)                                                                               
  ASSETS                                                                                                                   
     Investments:                                                                                                          
       Fixed maturities securities available-for-sale (cost: $509,663 and                $   506,129          $   557,866  
         $556,302)                                                                                                         
       Equity securities available-for-sale (cost: $14,187 and $9,994 )                       14,871               10,215  
       Policy loans                                                                           99,637               98,178  
       Other invested assets                                                                      67                   87  
       Short-term investments                                                                 39,806               62,429  
                                                                                         ------------         ------------ 
            TOTAL INVESTMENTS                                                                660,510              728,775  
     Cash                                                                                     26,551                9,319  
     Receivables:                                                                                                          
       Reinsurance ($2,150,750 and $2,128,409 from Assurance)                              3,008,063            2,770,755  
       Premium and other insurance                                                            27,785               67,163  
       Allowance for doubtful accounts                                                          (122)                 (28) 
     Deferred acquisition costs                                                              124,870              126,352  
     Accrued investment income                                                                12,758               12,551  
     Receivable for securities sold                                                           14,976                    -  
     Due from affiliates                                                                      19,330                    -  
     Other assets                                                                              8,114                6,280  
     Separate Account business                                                               552,841              532,017  
  -------------------------------------------------------------------------------------------------------------------------
            TOTAL ASSETS                                                                 $ 4,455,676          $ 4,253,184  
  -------------------------------------------------------------------------------------------------------------------------
   LIABILITIES AND STOCKHOLDER'S EQUITY                                                                                    
   Liabilities:                                                                                                            
     Insurance reserves:                                                                                                   
       Future policy benefits                                                            $ 3,195,833          $ 3,038,477  
       Claims and claim expense                                                              186,809              110,418  
       Policyholders' funds                                                                   34,366               40,338  
     Payable for securities purchased                                                         16,131                    -  
     Federal income taxes payable (to Assurance)                                              21,728                9,536  
     Deferred income taxes                                                                     5,102                9,040  
     Due to affiliates                                                                             -               84,042  
     Other liabilities                                                                       143,368              144,888  
     Separate Account business                                                               552,841              532,017  
  -------------------------------------------------------------------------------------------------------------------------
            TOTAL LIABILITIES                                                              4,156,178            3,968,756  
  -------------------------------------------------------------------------------------------------------------------------
  Commitments and contingent liabilities (Note 7)                                                                          
  Stockholder's Equity:                                                                                                    
     Common stock ($50 par value; authorized 200,000 shares;                                                               
         issued 50,000 shares)                                                                 2,500                2,500  
     Additional paid-in capital                                                               69,150               69,150  
     Retained earnings                                                                       230,521              211,388  
     Accumulated other comprehensive (loss) income                                            (2,673)               1,390  
  -------------------------------------------------------------------------------------------------------------------------
            TOTAL STOCKHOLDER'S EQUITY                                                       299,498              284,428  
  -------------------------------------------------------------------------------------------------------------------------
            TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                                   $ 4,455,676          $ 4,253,184  
  -------------------------------------------------------------------------------------------------------------------------

The accompanying Notes are an integral part of these Condensed Financial        
Statements (Unaudited).                                                         

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 VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
 (UNAUDITED)

                                                        [Enlarge/Download Table]

-------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,                                                       2001           2000    
-------------------------------------------------------------------------------------------------------------
                                                                                                             
(In thousands of dollars)                                                                                    
CASH FLOWS FROM OPERATING ACTIVITIES                                                                         
   Net income                                                                       $  19,134      $  14,394 
   Adjustments to reconcile net income to net cash                                                           
   provided by operating activities:                                                                         
    Net realized investment losses, pre-tax                                           (11,855)         4,149 
    Amortization of bond discount                                                      (1,894)        (2,650)
    Changes in:                                                                                              
       Receivables, net                                                              (197,836)      (208,034)
       Deferred acquisition costs                                                        (214)       (12,389)
       Accrued investment income                                                         (207)         1,095 
       Federal income taxes payable                                                    12,192          5,409 
       Insurance reserves                                                             244,813        220,240 
       Deferred income tax provision                                                   (3,938)         3,998 
       Due (to) from affiliates                                                      (103,372)        43,033 
       Other liabilities and other                                                     (1,072)        31,586 
                                                                                    ---------      --------- 
          Total adjustments                                                           (63,383)        86,437 
                                                                                    ---------      --------- 
          NET CASH FLOWS FROM OPERATING ACTIVITIES                                    (44,249)       100,831 
                                                                                    ---------      --------- 
CASH FLOWS USED BY INVESTING ACTIVITIES:                                                                     
    Purchase of fixed maturity securities                                            (770,071)      (479,527)
    Proceeds from fixed maturity securities                                                                  
        Sales                                                                         542,539        474,167 
        Maturities, calls and redemptions                                             287,729         52,524 
    Purchase of equity securities                                                      (4,194)        (9,994)
    Change in policy loans                                                             (1,459)        (4,506)
    Change in short-term investments                                                   23,955        (95,548)
    Change in other invested assets                                                        20           (107)
                                                                                    ---------      --------- 
          NET CASH FLOWS FROM INVESTING ACTIVITIES                                     78,519        (62,991)
                                                                                    ---------      --------- 
CASH FLOWS USED BY FINANCING ACTIVITIES:                                                                     
    Receipts for investment contracts credited to policyholder account balances         6,627          7,569 
    Return of policyholder account balances on investment contracts                   (23,665)       (36,096)
                                                                                    ---------      --------- 
          NET CASH FLOWS USED IN FINANCING ACTIVITIES                                 (17,038)       (28,527)
                                                                                    ---------      --------- 
          NET CASH FLOWS                                                               17,232          9,313 
Cash at beginning of period                                                             9,319          3,529 
-------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD                                                               $  26,551      $  12,842 
=============================================================================================================
Supplemental disclosures of cash flow information:                                                           
   Federal income tax refunds received                                              $       -      $  (1,924)
   Interest paid                                                                    $       -      $       - 
=============================================================================================================

The accompanying Notes are an integral part of these Condensed Financial        
Statements (Unaudited).                                                         

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 VALLEY FORGE LIFE INSURANCE COMPANY
 NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 (UNAUDITED)

NOTE 1.  BASIS OF PRESENTATION                                                  

   Valley Forge Life Insurance Company (VFL) is a wholly owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly owned          
subsidiary of Continental Casualty Company (Casualty) which is wholly owned by  
CNA Financial Corporation (CNAF). As of September 30, 2001, Loews Corporation   
owned approximately 89% of the outstanding common stock of CNAF.                

     VFL markets and underwrites insurance products designed to satisfy the life
insurance, health insurance and retirement needs of individuals and groups.     
Products available in individual policy form include annuities as well as term  
and universal life insurance. Products available in group policy form include   
life insurance, pension products and accident and health insurance. VFL also    
markets a portfolio of variable Separate Account products, consisting primarily 
of annuity and universal life products. These products offer policyholders the  
option of allocating payments to one or more variable investment portfolios or  
to a guaranteed income account or both. Cash receipts and deposits received for 
the variable Separate Accounts are invested in investment portfolios, as        
allocated by the contractholders, where the investment risk is borne by the     
contractholder. Cash receipts and deposits received for these products that are 
allocated to the guaranteed income account earn a minimum guaranteed rate of    
interest for a specified period of time.                                        

The operations and liabilities of VFL and its parent, Assurance, are  
managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as    
amended, VFL cedes all of its business, excluding its Separate Account business,
to its parent, Assurance. This ceded business is then pooled with the business  
of Assurance, which excludes Assurance's participating contracts and Separate   
Account business, and 10% of the combined pool is then assumed by VFL.          

     The accompanying condensed financial statements are unaudited and have been
prepared in conformity with accounting principles generally accepted in the     
United States of America (GAAP). Certain financial information that is normally 
included in annual financial statements, including financial statement          
footnotes, prepared in accordance with GAAP, but that is not required for       
interim reporting purposes, has been condensed or omitted. These statements     
should be read in conjunction with the financial statements and notes thereto   
included in VFL's Form 10-K filed with the Securities and Exchange Commission   
for the year ended December 31, 2000. In the opinion of management, these       
statements include all adjustments (consisting of normal recurring accruals)    
that are necessary for the fair presentation of the interim financial           
statements. The operating results for the interim periods are not necessarily   
indicative of the results to be expected for the full year.                     

  The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at   
the date of the financial statements and the reported amounts of revenues and   
expenses during the reporting period. Actual results could differ from those    
estimates.                                                                      

In the first quarter of 2001, VFL adopted the Financial Accounting    
Standards Board (FASB) Statement of Financial Accounting Standards No. 133,     
Accounting for Derivative Instruments and Hedging Activities and Statement of   
Financial Accounting Standards No. 138, Accounting for Certain Derivative       
Instruments and Certain Hedging Activities (collectively referred to as SFAS    
133). VFL's initial adoption of SFAS 133 did not have a significant impact on   
the equity or the results of operations of VFL. VFL already carried its         
investment and investment-related derivatives at fair value and the resulting   
changes in fair value were recognized through realized gains and losses. See    
Note 3 for a complete discussion of VFL's adoption of these accounting          
pronouncements.                                                                 

6 

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 VALLEY FORGE LIFE INSURANCE COMPANY
 NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 (UNAUDITED)-CONTINUED

NOTE 1. - (CONTINUED)                                                           

  On January 1, 2001, VFL adopted the Codification of Statutory Accounting
Principles (Codification) for preparing its statutory-basis financial           
statements. Codification, which is intended to standardize regulatory accounting
and reporting to state insurance departments, was effective January 1, 2001.    
However, statutory accounting principles will continue to be established by     
individual state laws and permitted practices. The states in which VFL's        
insurance subsidiaries conduct business required adoption of Codification (with 
certain modifications) for the preparation of statutory-basis financial         
statements effective January 1, 2001. VFL's adoption of Codification, as        
modified, resulted in a increase in statutory capital and surplus as of January 
1, 2001 of approximately $2.8 million, which primarily related to deferred tax  
assets, partially offset by insurance-related assessments and pension-related   
liabilities.                                                                    

On April 1, 2001 the Company adopted Emerging Issues Task Force (EITF)
Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and 
Retained Beneficial Interests in Securitized Financial Assets (EITF 99-20). EITF
99-20 establishes how a transferor that retains an interest in securitized      
financial assets or an enterprise that purchases a beneficial interest in       
securitized financial assets should account for interest income and impairment. 
This issue did not have a significant impact on the results of operations or    
equity of the Company.                                                          

In October 2001, the FASB issued Statement of Financial Accounting    
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived      
Assets (SFAS 144). SFAS 144 addresses accounting and reporting for the          
impairment or disposal of long-lived assets. This statement supersedes FASB     
Statement of Financial Accounting Standards No. 121, Accounting for the         
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The
provisions of this statement are effective for VFL beginning January 1, 2002.   
VFL is in the process of quantifying the impact this new standard will have on  
its operations and financial position.                                          

NOTE 2.  REINSURANCE                                                            

    The ceding of insurance does not discharge VFL of its primary liability to
its policyholders. Therefore, a credit exposure exists with respect to          
reinsurance ceded to the extent that any reinsurer is unable to meet the        
obligations assumed under reinsurance agreements. 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. For carriers that are not authorized reinsurers in VFL's state of  
domicile, VFL receives collateral, primarily in the form of bank letters of     
credit.                                                                         

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 VALLEY FORGE LIFE INSURANCE COMPANY
 NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 (UNAUDITED)-CONTINUED

NOTE 2. - (CONTINUED)                                                           

In the table below, the majority of life premium revenue is from long 
duration type contracts, while the majority of accident and health insurance    
premiums are from short duration contracts. The effects of reinsurance on       
premium revenues are shown in the following table:                              

                                                        [Enlarge/Download Table]

--------------------------------------------------------------------------------------------------------------------
                                                                     PREMIUMS                                       
                                              --------------------------------------------------------  ASSUMED/    
NINE MONTHS ENDED SEPTEMBER 30,                   DIRECT         ASSUMED         CEDED          NET       NET %     
--------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)                                                                                           
                                                                                                                    
   2001                                                                                                             
           LIFE                                  $ 507,708      $  70,385      $ 544,550     $  33,543     210%     
           ACCIDENT AND HEALTH                       9,341          1,698          9,341         1,698     100%     
--------------------------------------------------------------------------------------------------------------------
                TOTAL PREMIUMS                   $ 517,049      $  72,083      $ 553,891     $  35,241     204%     
--------------------------------------------------------------------------------------------------------------------
   2000                                                                                                             
           Life                                  $ 546,498      $  88,848      $ 575,053     $  60,293     147%     
           Accident and Health                       6,862        161,458          6,862       161,458     100%     
--------------------------------------------------------------------------------------------------------------------
                Total Premiums                   $ 553,360      $ 250,306      $ 581,915     $ 221,751     113%     
--------------------------------------------------------------------------------------------------------------------

   Transactions with Assurance, as part of the Reinsurance Pooling Agreement
described in Note 1, are reflected in the above table. Premium revenues ceded to
non-affiliated companies were $367.7 million for the nine months ended September
30, 2001, and $344.5 million for the same period in 2000. Additionally, benefits
and expenses for insurance claims and policyholder benefits are net of          
reinsurance recoveries of $548.6 million and $485.0 million for the nine months 
ended September 30, 2001 and 2000, of which $278.2 million and $242.1 million   
where from non-affiliated companies.                                            

Reinsurance receivables reflected on the balance sheets are amounts   
recoverable from reinsurers who have assumed a portion of VFL's insurance       
reserves. These balances are principally due from Assurance pursuant to the     
Reinsurance Pooling Agreement.                                                  

NOTE 3. DERIVATIVES                                                             

     As discussed in Note 1, effective in 2001, VFL accounts for derivatives and
hedging in accordance with SFAS 133. A derivative is typically defined as an    
instrument whose value is "derived" from an underlying instrument, index or     
rate, has a notional amount, and can be net settled. Examples of derivatives    
include, but are not limited to, the following types of investments: interest   
rate swaps, interest rate caps and floors, put and call options, warrants,      
swaptions, futures, forwards and commitments to purchase securities and         
combinations of the foregoing. Derivatives embedded within non-derivative       
instruments (such as call options embedded in convertible bonds) must be split  
from the host instrument and accounted for under SFAS 133 when the embedded     
derivative is not clearly and closely related to the host instrument. In        
addition, non-investment instruments, including certain types of insurance      
contracts that have historically not been considered derivatives can be         
derivatives or contain embedded derivatives under SFAS 133.                     

    SFAS 133 requires that all derivatives be recorded in the balance sheet at
fair value. If certain conditions are met, a derivative may be specifically     
designated as a hedge of exposures to changes in fair value, cash flows or      
foreign currency exchange rates. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the nature of any
hedge designation thereon. VFL's accounting for changes in the fair value of    
general account derivatives is as follows:                                      

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 VALLEY FORGE LIFE INSURANCE COMPANY
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2001 (UNAUDITED) -CONTINUED

NOTE 3. (CONTINUED)                                                             

NATURE OF HEDGE DESIGNATION      DERIVATIVE'S CHANGE IN FAIR VALUE REFLECTED IN:
-------------------------------  -----------------------------------------------
No hedge designation             Realized investment gains.                     

Fair  value                      Realized investment gains, along with the      
                             change in fair value of the hedged asset or
liability.    

Cash flow                        Other comprehensive income, with               
                              subsequent reclassification to earnings when
                            the hedged transaction, asset or liability
   impacts earnings.

Foreign currency                 Consistent with fair value or cash             
                             flows above, depending on the nature of the
       hedging relationship.

    Changes in the fair value of derivatives held in the separate accounts are
reflected in separate account earnings. Because separate account investments are
generally carried at fair value with changes therein reflected in separate      
account earnings, hedge accounting is generally not applicable to separate      
account derivatives.                                                            

USE OF DERIVATIVES                                                              

     VFL uses investment derivatives in the normal course of business, primarily
to reduce its exposure to market risk (principally interest rate risk, equity   
stock price risk and foreign currency risk) stemming from various assets and    
liabilities. VFL's principal objective under such market risk strategies is to  
achieve the desired reduction in economic risk, even if the position will not   
receive hedge accounting treatment. VFL may also use derivatives for purposes of
income enhancement, primarily via the sale of covered call options.             

     VFL's use of derivatives is limited by statutes and regulations promulgated
by the various regulatory bodies to which it is subject, and by its own         
derivative policy. The derivative policy has limits on which personnel are      
authorized to initiate derivative transactions. The policy prohibits the use of 
derivatives with maturity greater than eighteen months, unless the derivative is
matched with assets or liabilities having a longer maturity. The policy         
prohibits the use of derivatives containing greater than one-to-one leverage    
with respect to changes in the underlying price, rate or index. Also, the policy
prohibits the use of borrowed funds, including funds obtained through repurchase
transactions, to engage in derivative transactions.                             

  Credit exposure associated with non-performance by the counterparties to
derivative instruments is generally limited to the gross fair value of the asset
related to the instruments recognized in the condensed balance sheets. VFL      
mitigates the risk of non-performance by using multiple counterparties and by   
monitoring their creditworthiness. VFL generally requires collateral from its   
derivative investment counterparties depending on the amount of the exposure and
the credit rating of the counterparty.                                          

Risk Management Strategies Regarding Market Risk                                

    VFL has exposure to economic losses due to interest rate risk arising from
changes in the level of, or volatility of, interest rates. VFL attempts to      
mitigate its exposure to interest rate risk through active portfolio management,
which includes rebalancing its existing portfolios or assets and liabilities, as
well as changing the characteristics of investments to be purchased or sold in  
the future. In addition, various derivative financial instruments are used to   
modify the interest rate risk exposures of certain assets and liabilities. These
strategies include the use of interest rate swaps, interest rate caps and       
floors, options, futures, forwards, and commitments to purchase securities.     
These instruments are generally used to lock in interest rates or unrealized    
gains, to shorten or lengthen durations of fixed maturity securities or         
investment contracts, or to hedge (on an economic basis) interest rate risks    
associated with investments, variable rate debt and life insurance liabilities. 

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 VALLEY FORGE LIFE INSURANCE COMPANY
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED) -CONTINUED
SEPTEMBER 30, 2001

NOTE 3. - (CONTINUED)                                                           

   As of the adoption date and at September 30, 2001, none of VFL's holdings
of these types of instruments have been designated as hedges of specific assets 
or liabilities, and therefore do not currently qualify for hedge accounting     
under GAAP.                                                                     

     VFL is exposed to equity price risk as a result of its investment in equity
securities and equity derivatives. Equity price risk results from changes in the
level or volatility of equity prices, which affect the value of equity          
securities, or instruments which derive their value from such securities. VFL   
attempts to mitigate its exposure to such risks by limiting its investment in   
any one security or index. VFL may also manage this risk by utilizing           
instruments such as options, swaps, futures and collars to protect appreciation 
in securities held.                                                             

Foreign exchange rate risk arises from the possibility that changes in
foreign currency exchange rates will impact the value of financial instruments  
denominated in a foreign currency. VFL's foreign transactions are primarily     
denominated in Canadian Dollars. VFL manages this risk via asset/liability      
matching and through the use of foreign currency futures and/or forwards.       

     VFL's derivative holdings of approximately $67,444 consist of interest rate
caps as of September 30, 2001.                                                  

NOTE 4. COMPREHENSIVE INCOME                                                    

   Comprehensive income is comprised of all changes to stockholder's equity,
including net income, except those changes resulting from investments and       
distributions to the stockholder. The components of comprehensive income are    
shown below.                                                                    

                                                        [Enlarge/Download Table]

----------------------------------------------------------------------------------------------------------------------------
                                                                                  THREE MONTHS              NINE MONTHS     
                                                                              ---------------------     --------------------
PERIOD ENDED SEPTEMBER 30,                                                     2001         2000         2001        2000   
----------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)                                                                                                   
                                                                                                                            
Net income                                                                    $ 3,972      $ 5,402      $19,134     $14,394 
Other comprehensive income:                                                                                                 
   Change in unrealized gains (losses) on general account investments:                                                      
      Holding (losses) gains arising during the period                         (4,516)       4,278       (3,239)      2,915 
      Less: Unrealized gains (losses)  at beginning of period                                                               
                included in realized gains (losses) during the period             738       (2,156)       1,398      (9,085)
                                                                              --------     --------     --------    --------
   Net change in unrealized (losses) gains on general account                                                               
      investments                                                              (5,254)       6,434       (4,637)     12,000 
   Net change in unrealized (losses) gains on separate accounts and                                                         
      other                                                                      (974)       1,276       (1,615)     (1,027)
                                                                              --------     --------     --------    --------
   Other comprehensive (loss) income before income tax                         (6,228)       7,710       (6,252)     10,973 
Deferred income tax expense (benefit) related to other comprehensive                                                        
      income                                                                    2,180       (2,747)       2,189      (3,841)
                                                                              --------     --------     --------    --------
   Other comprehensive (loss) income, net of tax                               (4,048)       4,963       (4,063)      7,132 
----------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME                                                    $  (76)      $10,365      $15,071     $21,526 
============================================================================================================================

NOTE 5.  BUSINESS SEGMENTS                                                      

    VFL operates in one reportable segment, the business of which is to market
and underwrite insurance products designed to satisfy the life, health and      
retirement needs of individuals and groups. VFL products are distributed        
primarily in the United States. Premium revenues earned outside the United      
States are not significant.                                                     

10

10-Q 11th Page of 18 TOC 1st Previous Next ↓Bottom Just 11th
 VALLEY FORGE LIFE INSURANCE COMPANY
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED) -CONTINUED
SEPTEMBER 30, 2001

NOTE 5. -  (CONTINUED)                                                          

The operations and liabilities of VFL and its parent, Assurance, are  
managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as    
amended, VFL cedes all of its business, excluding its Separate Account business,
to Assurance which is then pooled with the business of Assurance, excluding     
Assurance's participating contracts and Separate Account business, and 10% of   
the combined pool is then assumed by VFL.                                       

The following presents premiums by product group for the period ended 
September 30, 2001 and 2000.                                                    

                                                        [Enlarge/Download Table]

  -------------------------------------------------------------------------------------------------------------
                                                      THREE MONTHS                        NINE MONTHS          
                                                      ------------                        -----------          
SEPTEMBER 30,                                     2001            2000                2001             2000    
-------------------------------------------------------------------------------------------------------------- 
(In thousands of dollars)                                                                                      
                                                                                                               
Life                                            $ 11,852        $ 21,571            $ 33,543         $ 60,293  
Accident and Health                                1,034          45,964               1,698          161,458  
-------------------------------------------------------------------------------------------------------------- 
          TOTAL                                 $ 12,886        $ 67,535            $ 35,241         $221,751  
============================================================================================================== 

  Through August 31, 2000, Assurance provided health insurance benefits to
postal and other federal employees under the Federal Employees Health Benefit   
Plan (FEHBP). Premiums under this contract between Assurance and FEHBP totaled  
$1.5 billion for the nine month period ended September 30, 2000, and the portion
of these premiums assumed by VFL under the Reinsurance Pooling Agreement totaled
$153.9 million for the nine month period ended September 30, 2000. Effective    
September 1, 2000, the FEHBP business was transferred to another insurance      
entity owned by CNA. All the assets and liabilities of this business were       
transferred through a novation agreement and VFL was relieved of any ongoing    
direct or contingent liability with respect to this business. See Note 6 to the 
Condensed Financial Statements, included herein.                                

NOTE 6. OTHER EVENTS                                                            

INDIVIDUAL LIFE REINSURANCE TRANSACTION                                         

     Effective December 31, 2000, VFL and Assurance completed a transaction with
Munich American Reassurance Company (MARC), whereby MARC acquired VFL and       
Assurance's individual life reinsurance business (Life Re) via a reinsurance    
agreement. VFL and Assurance will continue to accept and retrocede business on  
existing Life Re contracts until such time that VFL and Assurance and MARC are  
able to execute novations of each of Life Re's assumed and retro-ceded          
reinsurance contracts.                                                          

  MARC assumed approximately $294 million of liabilities (primarily future
policy benefits and claim reserves) and approximately $209 million in assets    
(primarily uncollected premium and deferred policy acquisition costs from       
Assurance). A portion of the Life Re business is conducted through VFL as part  
of the Reinsurance Pooling Agreement. VFL's share of the net gain from the      
reinsurance transaction, which is subject to certain post-closing adjustments,  
was recorded as deferred revenue and is being recognized in income as Life Re's 
assumed contracts are novated to MARC.                                          

FEDERAL EMPLOYEE HEALTH BENEFIT PLAN (FEHBP)                                    

    The Federal Employee Health Benefit Plan (FEHBP) business formerly written
by Assurance and assumed by VFL as part of the Reinsurance Pooling Agreement was
transferred to another insurance entity owned by Casualty effective September 1,
2000. All assets and liabilities of this business were transferred through a    
novation agreement, and VFL was relieved of any ongoing direct or contingent    
liability with respect to this business.                                        

11

10-Q 12th Page of 18 TOC 1st Previous Next ↓Bottom Just 12th
 VALLEY FORGE LIFE INSURANCE COMPANY
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (UNAUDITED)-CONTINUED
SEPTEMBER 30, 2001

NOTE 6.  (CONTINUED)                                                            

GROUP ACCIDENT & HEALTH TRANSACTION                                             

     VFL and Assurance along with Casualty (collectively, the "Insurers") have
entered into an indemnity reinsurance agreement (the "Agreement") with CNA Group
Life Assurance Company ("CNAGLAC"), a newly formed and wholly owned subsidiary  
of Casualty whereby most of the existing group life and health insurance        
business (excluding the FEHBP business which was transferred to another         
insurance subsidiary of CNAF via a novation agreement as discussed in Note 5,   
and some runoff group and life insurance lines of business that will remain with
the Insurers) of the Insurers will be transferred to CNAGLAC via a reinsurance  
agreement, effective January 1, 2001. The purpose of this transaction, along    
with the FEHBP transaction that was completed on September 1, 2000, is to move, 
over time, substantially all of the group life and health insurance business    
from VFL and Assurance to other insurance subsidiaries of CNAF. When CNAGLAC    
obtains the appropriate licenses to write group life and health insurance       
business, CNAGLAC will replace the group life and health insurance in force     
contracts of the Insurers, excluding the FEHBP business, with equivalent        
contracts issued directly by CNAGLAC.                                           

    The following table summarizes VFL's earned premiums, income (loss) before
income tax and total assets for FEHBP, Life Re and the Group Accident & Health  
business.                                                                       

                                                        [Enlarge/Download Table]

----------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30, 2000                   THREE MONTHS            NINE MONTHS         
----------------------------------------------------------------------------------------------
                                                                                              
(In thousands of dollars)                                                                     
FEDERAL EMPLOYEE HEALTH BENEFIT PLAN:                                                         
   Earned premiums                                  $ 37,605              $137,683            
   Income (loss) before income tax                       437                 1,364            

LIFE RE:                                                                                      
   Earned premiums                                  $  6,662              $ 17,234            
   Income before income tax                              667                 2,266            

GROUP ACCIDENT AND HEALTH:                                                                    
   Earned premiums                                  $ 12,716              $ 37,025            
   Income before income tax                              477                 1,761            
-------------------------------------------------------------------------------------------   
                                                                            DECEMBER 31,      
AS OF:                                                                         2000           
-----------------------------------------------------------------------------------------     

(In thousands of dollars)                                                                     
TOTAL ASSETS:                                                                                 
Federal Employee Health Benefit Plan (FEHBP)*                                 $   --          
Life Re                                                                       33,641          
Group Accident and Health                                                     56,851          
=====================================================================================         

* FEHBP business transferred September 1, 2000.                         

12

10-Q 13th Page of 18 TOC 1st Previous Next ↓Bottom Just 13th
 VALLEY FORGE LIFE INSURANCE COMPANY
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED) -CONTINUED

SEPTEMBER 30, 2001

NOTE 6. (CONTINUED)                                                             

RESULTS OF OPERATIONS FOR THE REMAINING BUSINESS (ON A PRO FORMA BASIS)         

        The transfer or sale of the three business lines to other entities had
a significant impact on the results of operations of VFL. The following schedule
highlights the results of operations for VFL on a pro forma basis for three and 
nine months ended September 30, 2001 and 2000.                                  

                                                        [Enlarge/Download Table]

--------------------------------------------------------------------------------------------------------------------------
                                                                          THREE MONTHS                  NINE MONTHS       
PRO FORMA FOR PERIOD ENDED SEPTEMBER 30,                               2001           2000           2001          2000   
--------------------------------------------------------------------------------------------------------------------------
                                                                                                                          

(In thousands of dollars)                                                                                                 
Operating revenues (excluding realized investment gains (losses))                                                         
     Net earned premiums                                               $ 12,850      $ 10,552       $ 35,137     $ 29,809 
     Net investment income                                               12,484         9,803         36,775       29,513 
     Other                                                                  780         1,517          6,480        5,843 
                                                                    ------------------------------------------------------
        Total operating revenues                                         26,114        21,872         78,392       65,165 
Benefits and expenses                                                    23,657        15,152         60,371       44,076 
                                                                    ------------------------------------------------------
    Operating income before income tax expense                            2,457         6,720         18,021       21,089 
Income tax expense                                                        (919)       (2,738)        (6,409)      (7,719) 
                                                                    ------------------------------------------------------
    Net operating income before realized investment gains (losses)        1,538         3,982         11,612       13,370 
Realized investment gains (losses), net of tax                            2,970         (424)          7,614      (2,878) 
--------------------------------------------------------------------------------------------------------------------------
        PRO FORMA NET INCOME - REMAINING BUSINESS UNITS                 $ 4,508       $ 3,558       $ 19,226      $10,492 
--------------------------------------------------------------------------------------------------------------------------

World Trade Center (WTC) Catastrophe                                            

         The WTC impact on the third quarter was estimated, for pre-tax, at $7.5
million, gross of reinsurance and $2.2 million net of reinsurance. The after tax
estimated impact is $4.9 million, gross of reinsurance and $1.4 million net of  
reinsurance. These estimates are subject to considerable uncertainty. Subsequent
developments on claims arising out of the WTC catastrophe could result in an    
increase in the total estimated claims, which could be material to the results  
of operations.                                                                  

NOTE 7.  LEGAL PROCEEDINGS                                                      

        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 financial position or results of operations of VFL.       

13

10-Q 14th Page of 18 TOC 1st Previous Next ↓Bottom Just 14th
 VALLEY FORGE LIFE INSURANCE COMPANY
 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2001

     The following discussion and analysis should be read in conjunction
  with the condensed financial statements (unaudited) and notes thereto found on
pages 3 to 13, which contain additional information helpful in evaluating   
operating results and financial condition.                                  

         VFL, along with its parent, Assurance, markets and underwrites products
 designed to satisfy the life insurance, health insurance and retirement needs
of individuals and groups. The individual products consist primarily of term
  and universal life insurance policies and individual annuities. Group products
include life insurance, pension products and accident and health insurance, 
consisting primarily of major medical and hospitalization insurance. VFL and
Assurance also market a portfolio of variable Separate Account products,    
consisting primarily of annuity and universal life products. These variable 
Separate Account products offer contractholders the option of allocating    
payments to one or more variable Separate Accounts or to a guaranteed income
  account or both. Cash receipts and deposits received for the variable Separate
Accounts are invested in investment portfolios, as allocated by the         
  contractholder, where the investment risk is borne by the contractholder. Cash
receipts and deposits received for these products that are allocated to the 
guaranteed income account earn a minimum guaranteed rate of interest for a  
  specified period of time for annuity contracts and one year for life products.

RESULTS OF OPERATIONS                                                           

  The following table summarizes key components of VFL's operating
results for the three and nine months ended September 30, 2001 and 2000.        

                                                        [Enlarge/Download Table]


----------------------------------------------------------------------------------------------------------------------------
                                                                            THREE MONTHS                NINE MONTHS         
PERIOD ENDED SEPTEMBER 30,                                                  2001          2000         2001          2000   
----------------------------------------------------------------------------------------------------------------------------
                                                                                                                            

(In thousands of dollars)                                                                                                   
   Revenues                                                                                                                 
   Net earned premiums                                                     $12,886       $67,535    $ 35,241       $221,751 
   Net investment income                                                    12,275        11,309      36,860         33,443 
   Other                                                                       678         1,512       6,489          5,914 
                                                                    --------------------------------------------------------
        Total operating revenues                                            25,839        80,356      78,590        261,108 
Benefits and expenses                                                       23,794        72,054      60,819        234,627 
                                                                    --------------------------------------------------------
  Operating income before income tax expense                                 2,045         8,302      17,771         26,481 
Income tax expense                                                           (774)       (2,956)     (6,343)        (9,390) 
                                                                    --------------------------------------------------------
     Net operating income before realized investment gains (losses)          1,271         5,346      11,428         17,091 
     Net realized investment gains (losses), net of tax                      2,701            56       7,706        (2,697) 
----------------------------------------------------------------------------------------------------------------------------
     NET INCOME                                                            $ 3,972       $ 5,402    $ 19,134        $14,394 
============================================================================================================================

   Operating income before income tax expense for the three and nine
months ended September 30, 2001 decreased by $6.3 million and $8.7 million, 
respectively. These decreases were primarily the result of decreases in     
 operating revenues of $54.5 million and $182.5 million for the three and nine
months ended September 30, 2001, respectively, which were only partially    
offset by decreases in benefits and expenses of $48.3 million and $173.8    
million for each of the corresponding periods. The changes in revenues and  
expenses were due to the impact of the business transferred, as discussed   
below, as well as the results of the remaining businesses which are further 
discussed in the sections that follow.                                      

         As discussed in Note 6 to the Condensed Financial Statements, effective
December 31, 2000, CNA completed a transaction with Munich American       
Reassurance Company (MARC), whereby MARC acquired CNA's individual life   
   reinsurance business (Life Re) via a reinsurance agreement. CNA will continue
to accept and retrocede business on existing Life Re contracts until such 
time that CNA and MARC are able to execute novations of each of Life Re's 
assumed and retro-ceded reinsurance contracts. A portion of the Life Re   
business is conducted through VFL as part of the Reinsurance Pooling      
Agreement.                                                                

14

10-Q 15th Page of 18 TOC 1st Previous Next ↓Bottom Just 15th
 VALLEY FORGE LIFE INSURANCE COMPANY
 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND RESULTS OF OPERATIONS - CONTINUED
SEPTEMBER 30, 2001

RESULTS OF OPERATIONS - (CONTINUED)                                             

    The Federal Employee Health Benefit Plan (FEHBP) business formerly
written by Assurance and assumed by VFL as part of the Reinsurance Pooling  
Agreement was transferred to another insurance entity owned by CNA effective
September 1, 2000. All assets and liabilities of this business were         
 transferred through a novation agreement, and VFL was relieved of any ongoing
direct or contingent liability with respect to this business.               

      VFL and Assurance along with Casualty (collectively, the "Insurers")
have entered into an indemnity reinsurance agreement (the "Agreement") with 
CNA Group Life Assurance Company (CNAGLAC), a newly formed and wholly-owned 
subsidiary of Casualty whereby most of the existing group life and health   
insurance business (excluding the FEHBP business which was transferred to   
another insurance subsidiary of CNA via a novation agreement as discussed in
Note 5 to the Condensed Financial Statements, and some runoff group and life
insurance lines of business that will remain with the Insurers) of the      
  Insurers will be transferred to CNAGLAC via a reinsurance agreement, effective
January 1, 2001.                                                            

        The following table summarizes VFL's earned premiums and income (loss)
before income tax for FEHBP, Life Re and the Group Accident and Health      
business.                                                                   

                                                        [Enlarge/Download Table]

     ---------------------------------------------------------------------------------------------------------------------
                                                           THREE MONTHS                          NINE MONTHS              
     PERIOD ENDED SEPTEMBER 30, 2000                                                                                      
     ---------------------------------------------------------------------------------------------------------------------
                                                                                                                          
        (In thousands of dollars)                                                                                         
        FEDERAL EMPLOYEE HEALTH BENEFIT PLAN:                                                                             
           Earned premiums                                    $ 37,605                             $ 137,683              
           Income (loss) before income tax                         437                                 1,364              

        LIFE RE:                                                                                                          
           Earned premiums                                      $6,662                              $ 17,234              
           Income before income tax                                668                                 2,267              

        GROUP ACCIDENT AND HEALTH:                                                                                        
           Earned premiums                                    $ 12,716                              $ 37,025              
           Income before income tax                                477                                 1,761              
---------------------------------------------------------------------------------------------------------------------     

      As a result of the impact that the foregoing transactions had on the
results of operations of VFL, the following analyzes the results of operations  
of the remaining businesses. The following schedule highlights the results of   
operations for VFL on a pro forma basis for three and six months ended September
30, 2001 and 2000 and the following discussions and analysis are based on the   
pro forma results of operations.                                                

                                                        [Enlarge/Download Table]

--------------------------------------------------------------------------------------------------------------------------
                                                                          THREE MONTHS                  NINE MONTHS       
PRO FORMA FOR PERIOD ENDED SEPTEMBER 30,                               2001           2000            2001         2000   
--------------------------------------------------------------------------------------------------------------------------
                                                                                                                          
(In thousands of dollars)                                                                                                 
Operating Revenues (excluding realized investment gains (losses))                                                         
     Net earned premiums                                               $ 12,850      $ 10,552       $ 35,137     $ 29,809 
     Net investment income                                               12,484         9,803         36,775       29,513 
     Other                                                                  780         1,517          6,480        5,843 
                                                                    ------------------------------------------------------
        Total operating revenues                                         26,114        21,872         78,392       65,165 
Benefits and expenses                                                    23,657        15,152         60,371       44,076 
                                                                    ------------------------------------------------------
    Operating income (loss) before income tax expense                     2,457         6,720         18,021       21,089 
Income tax expense                                                        (919)       (2,738)        (6,409)      (7,719) 
                                                                    ------------------------------------------------------
    Net operating income before realized investment gains (losses)        1,538         3,982         11,612       13,370 
     Realized investment gains (losses), net of tax                       2,970         (424)          7,614      (2,878) 
--------------------------------------------------------------------------------------------------------------------------
        PRO FORMA NET INCOME - REMAINING BUSINESS UNITS                 $ 4,508       $ 3,558       $ 19,226      $10,492 
--------------------------------------------------------------------------------------------------------------------------

15

10-Q 16th Page of 18 TOC 1st Previous Next ↓Bottom Just 16th
 VALLEY FORGE LIFE INSURANCE COMPANY
 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND RESULTS OF OPERATIONS - CONTINUED
SEPTEMBER 30, 2001

RESULTS OF OPERATIONS - (CONTINUED)                                             

    For the third quarter of 2001, operating income, before income tax
expense and realized investment results, decreased 75% or $6.3 million from the 
same quarter in 2000. The transfer of three businesses accounts for             
approximately $2.0 million of this decrease for the third quarter of 2001. The  
remaining change, which is in the core business, was principally the result of  
an increase in net earned premiums of approximately $2.3 million or 22% and an  
increase in net investment income of $2.7 million or 27%, which was more than   
offset by increased benefits and expenses of $8.5 million, or approximately 56%,
and a decrease in other revenues of $0.7 million or 49%.                        

       The increase in net earned premiums was primarily attributable to the
increase in renewal premium revenue from growing in-force term business.        
VFL's increase in net investment income for the three months ended September 30,
2001 as compared to the comparable period in 2000 was due to a higher average   
yield rate, primarily in fixed maturity securities and short-term investments.  
The increase in the yield was due primarily to the change in the composition of 
invested securities to relatively higher yield investment categories. The       
increase in benefits and expenses was mainly due to the impact of the WTC       
catastrophe and higher mortality experience in the term and Universal Life      
business. The WTC impact on the third quarter insurance claims expense was      
estimated at $7.5 million, gross of reinsurance and $2.2 million net of         
reinsurance. These expense increases were only partially offset by ceding       
commissions received on the transfer of the various businesses described in Note
6 to the Condensed Financial Statements. The decrease in other revenues was due 
primarily to a decrease in income from the Separate Accounts.                   

        For the nine months ended September 30, 2001, operating income, before
income tax expense and realized investment results, decreased $8.7 million or   
33% from the comparable period in 2000. The transfer of three businesses        
accounts for $5.6 million of the decrease. The remaining decrease, which is the 
core business, was the result of an increase in net earned premiums of          
approximately $5.3 million or 18%, increased net investment income of $7.3      
million or 25%, and an increase in other revenues of $0.6 million or 11%, which 
were more than offset by increased benefits and expenses of $16.3 million or    
37%.                                                                            

       The increase in net earned premiums was primarily attributable to the
increase in renewal premium revenue from growing in-force term business. VFL's  
increase in net investment income for the nine months ended September 30, 2001  
as compared to the comparable period in 2000 was due to a higher average yield  
rate, primarily in fixed maturity securities and short-term investments. The    
increase in the yield was due primarily to the change in the composition of     
invested securities to relatively higher yield investment categories. The       
average yield for the nine months ended September 30, 2001 was approximately    
7.4% as compared to 7.1% for the comparable period in 2000. The increase in     
benefits and expenses was mainly due to the combination of factors. The impact  
of the WTC catastrophe, and higher mortality experience in the term and         
Universal Life business. These expense increases were only partially offset by  
ceding commissions received on the transfer of the various businesses described 
in Note 6 to the Condensed Financial Statements. The increase in other revenues 
for the nine months ended September 30, 2001 as compared to the comparable      
period in 2000 was due primarily to an increase in income from separate accounts
as the result of increased service charges earned on policyholder accounts and  
increased surrender charges for interest sensitive products in the first quarter
of 2001.                                                                        

         Realized investment gains, net of taxes, increased $2.6 million for the
core business for the third quarter and $10.4 million for the nine months ended 
September 30, 2001 from the same period of 2000.                                

16

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 VALLEY FORGE LIFE INSURANCE COMPANY
 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND RESULTS OF OPERATIONS - CONTINUED
SEPTEMBER 30, 2001

ACCOUNTING PRONOUNCEMENTS                                                       

VFL has adopted SFAS 133 effective January 1, 2001. The transition  
adjustments resulting from adoption must be reported in net income or other     
comprehensive income, as appropriate, as the cumulative effect of a change in   
accounting principle. Adoption of SFAS 133 did not have a significant impact on 
the equity or results of operations of VFL. VFL already carries its investments 
and investment-related derivatives at fair value and the resulting changes in   
fair values are recognized through realized gains and losses. See Note 3 for a  
complete discussion of VFL's adoption of these accounting pronouncements.       

    On April 1, 2001 VFL adopted Emerging Issues Task Force (EITF) Issue No.
99-20, Recognition of Interest Income and Impairment on Purchased and Retained  
Beneficial Interests in Securitized Financial Assets (EITF 99-20). EITF 99-20   
establishes how a transferor that retains an interest in securitized financial  
assets or an enterprise that purchases a beneficial interest in securitized     
financial assets should account for interest income and impairment. This issue  
did not have a significant impact on the results of operations or equity of the 
Company.                                                                        

In October 2001, the FASB issued Statement of Financial Accounting  
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived      
Assets (SFAS 144). SFAS 144 addresses accounting and reporting for the          
impairment or disposal of long-lived assets. This statement supersedes FASB     
Statement of Financial Accounting Standards No. 121, Accounting for the         
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The
provisions of this statement are effective for VFL beginning January 1, 2002.   
VFL is in the process of quantifying the impact this new standard will have on  
its operations and financial position.                                          

CODIFICATION                                                                    

 On January 1, 2001, the Company adopted the Codification of Statutory
Accounting Principles (Codification) for preparing its statutory-basis financial
statements. Codification, which is intended to standardize regulatory accounting
and reporting to state insurance departments, was effective January 1, 2001.    
However, statutory accounting principles will continue to be established by     
individual state laws and permitted practices. The states in which VFL conducts 
business required adoption of Codification for the preparation of               
statutory-basis financial statements effective January 1, 2001. The Company's   
adoption of Codification resulted in an increase in statutory capital and       
surplus upon adoption of approximately $2.8 million as of January 1, 2001, which
primarily relates to deferred tax assets, partially offset by insurance-related 
assessments and pension-related liabilities.                                    

FORWARD LOOKING STATEMENTS                                                      

    The statements contained in this management discussion and analysis that
are not historical facts are forward-looking statements. When included in the   
management's discussion and analysis, the words "believes," "expects,"          
"intends," "anticipates," "estimates" and analogous expressions are intended to 
identify forward-looking statements. Such statements inherently are subject to a
variety of risks and uncertainties that could cause actual results to differ    
materially from those projected. Such risks and uncertainties include, among    
others, the impact of competitive products, policies and pricing; product and   
policy demand and market responses; development of claims and claim trends and  
the effect on loss reserves; the performance of reinsurance companies under     
reinsurance contracts with the Company; general economic and business           
conditions; changes in financial markets (interest rate, credit, currency,      
commodities and stocks); changes in foreign, political, social and economic     
conditions; regulatory initiatives and compliance with governmental regulations;
judicial decisions and rulings; the effect on the Company of changes in rating  
agency policies and practices; the results of financing efforts; changes in the 
Company's composition of operating segments; the actual closing of contemplated 
transactions; and agreements and various other matters and risks (many of which 
are beyond the Company's control) detailed in the Company's SEC filings. These  
forward-looking statements speak only as of the filing date of this document.   
The Company expressly disclaims any obligation or undertaking to release        
publicly any updates or revisions to any forward-looking statement contained    
herein to reflect any change in the Company's expectations with regard thereto  
or any change in events, conditions or circumstances on which any statement is  
based.                                                                          

17

10-Q Last Page of 18 TOC 1st Previous Next ↓Bottom Just 18th
 VALLEY FORGE LIFE INSURANCE COMPANY
SEPTEMBER 30, 2001
 PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS                                                       
        Information as to VFL's legal proceedings is set forth in PART I, Note
      7 to the Condensed Financial Statements on Page 13, included herein.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                               
 Omitted pursuant to General Instruction H (2) (b) of Form 10-Q.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                         
 Omitted pursuant to General Instruction H (2) (b) of Form 10-Q.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted pursuant    
to General Instruction H (2) (b) of Form 10-Q.                

ITEM 5. OTHER INFORMATION                                                       
None.                                                         

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                        

(a) EXHIBITS:      None.                                      

(b) REPORTS ON FORM 8-K:                                      
       There were no reports on Form 8-K for the nine months ended September
30, 2001.                                                     

SIGNATURES                                                                      

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange  
Act of 1934, the registrant has duly caused this report to be signed on its     
behalf by the undersigned duly authorized.                                      

Valley Forge Life Insurance Company                                             

By   ROBERT V. DEUTSCH                                                          
-----------------                                                     
Robert V. Deutsch                                                               
Director, Executive Vice President                                              
and Chief Financial Officer                                                     

Date: November 14, 2001                                                         

18

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘10-Q’ Filing	Date	First	Last	Other Filings

	1/1/02	7	17
Filed on:	11/14/01	18
	11/5/01	1
For Period End:	9/30/01	1	18
	4/1/01	7	17
	1/1/01	7	17
	12/31/00	2	14	10-K
	9/30/00	2	15	10-Q
	9/1/00	11	15
	8/31/00	11
				List all Filings

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Filing Submission 0000950137-01-504724 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Valley Forge Life Insurance Co – ‘10-Q’ for 9/30/01

On: Wednesday, 11/14/01 · For: 9/30/01 · Accession #: 950137-1-504724 · File #: 812-10032

Previous ‘10-Q’: ‘10-Q’ on 8/14/01 for 6/30/01 · Latest ‘10-Q’: This Filing

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Dates Referenced Herein and Documents Incorporated by Reference

Quarterly Report — Form 10-Q
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