SEC Info  
   Home     Search     My Interests     Help     Sign In     Please Sign In  

Valley Forge Life Insurance Co · 10-Q · For 3/31/98

Filed On 5/15/98   ·   Accession Number 1007008-98-2   ·   SEC File 333-01083

Previous ‘10-Q’:  ‘10-Q’ on 11/14/97 for 9/30/97   ·   Next:  ‘10-Q’ on 8/14/98 for 6/30/98   ·   Latest:  ‘10-Q’ on 11/14/01 for 9/30/01

  in   Show  and 
Help... Wildcards:  ? (any letter),  * (many).  Logic:  for Docs:  & (and),  | (or);  for Text:  | (anywhere),  "(&)" (near).
 
  As Of                Filer                Filing    For/On/As Docs:Size

 5/15/98  Valley Forge Life Insurance Co    10-Q        3/31/98    2:43K

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        First Quarter 10-Q 1998                               18     78K 
 2: EX-27       Article 7 FDS for 10-Q                                 2±     8K 


10-Q   —   First Quarter 10-Q 1998
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
17Item 6. Exhibits and Reports on Form 8-K
18Signatures
10-Q1st Page of 18TOCTopPreviousNextBottomJust 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. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 COMMISSION FILE NUMBER 333-1087 -------------------------- VALLEY FORGE LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-6200031 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) CNA PLAZA CHICAGO, ILLINOIS 60685 (Address of principal executive offices (Zip Code) (312) 822-5000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No _ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT MAY 1, 1998 ------------------------------ -------------------------- Common Stock, Par value $50.00 50,000 THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1) (A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Page 1 of 19
10-Q2nd Page of 18TOC1stPreviousNextBottomJust 2nd
VALLEY FORGE LIFE INSURANCE COMPANY INDEX PART I. FINANCIAL INFORMATION PAGE NO. ------ --------------------- -------- CONDENSED FINANCIAL STATEMENTS: BALANCE SHEET MARCH 31, 1998 (Unaudited) AND DECEMBER 31, 1997.......... 3 STATEMENT OF OPERATIONS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997........ 4 STATEMENT OF STOCKHOLDER'S EQUITY (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997........ 5 STATEMENT OF CASH FLOWS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997........ 6 NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 1998..................... 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 10 PART II. OTHER INFORMATION ------- ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 17 SIGNATURES .......................................................... 18 EXHIBIT 27 FINANCIAL DATA SCHEDULE................................... 19 2
10-Q3rd Page of 18TOC1stPreviousNextBottomJust 3rd
[Enlarge/Download Table] VALLEY FORGE LIFE INSURANCE COMPANY BALANCE SHEET ------------------------------------------------------------------------------------------------------ MARCH 31 DECEMBER 31 1998 1997 (Unaudited) ------------------------------------------------------------------------------------------------------ (In thousands of dollars) ASSETS: Investments: Fixed maturities available-for-sale (cost: $473,493 and $466,267) $ 478,275 $ 471,707 Equity securities available-for-sale (cost: $981 and $981) 2,515 2,260 Policy loans 68,808 66,971 Other invested assets 180 433 Short-term investments 38,891 4,597 --------- ---------- TOTAL INVESTMENTS 588,669 545,968 Cash 4,328 24,565 Receivables: Reinsurance 1,876,871 1,586,471 Premium and other insurance 71,681 65,196 Less allowance for doubtful accounts (208) (285) Deferred acquisition costs 99,264 95,354 Accrued investment income 9,531 5,245 Receivables for securities sold 1,970 744 Due from affiliates - 35,999 Other 1,055 228 Separate Account business 22,907 8,941 ---------------------------------------------------------------------------------------------------- TOTAL ASSETS $2,676,068 $2,368,426 ==================================================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY: Liabilities: Insurance reserves: Future policy benefits $2,203,067 $1,906,899 Claims 92,743 81,242 Policyholders' funds 39,868 39,928 Payables for securities purchased 3,259 497 Federal income taxes payable 9,657 5,975 Deferred income taxes 2,418 4,098 Due to affiliates 3,117 - Commissions and other payables 30,213 19,787 Other 49,037 84,799 Separate Account business 22,907 8,941 ---------- ---------- TOTAL LIABILITIES 2,456,286 2,152,166 ---------- ---------- Stockholder's Equity Common stock ($50 par value; Authorized-200,000 shares; Issued-50,000 shares) 2,500 2,500 Additional paid-in capital 39,150 39,150 Retained earnings 174,149 170,230 Accumulated other comprehensive income 3,983 4,380 ---------- ---------- TOTAL STOCKHOLDER'S EQUITY 219,782 216,260 ---------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,676,068 $2,368,426 ==================================================================================================== <FN> See accompanying Notes to Condensed Financial Statements (Unaudited). </FN> 3
10-Q4th Page of 18TOC1stPreviousNextBottomJust 4th
[Enlarge/Download Table] VALLEY FORGE LIFE INSURANCE COMPANY STATEMENT OF OPERATIONS (Unaudited) -------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31 1998 1997 -------------------------------------------------------------------------------------- (In thousands of dollars) Revenues: Premiums $81,555 $86,083 Net investment income 8,591 7,305 Realized investment gains 1,993 29 Other 1,561 1,275 ------- ------- 93,700 94,692 ------- ------- Benefits and expenses: Insurance claims and policyholders' benefits 75,153 81,756 Amortization of deferred acquisition costs 2,552 1,531 Other operating expenses 9,858 7,279 ------- ------- 87,563 90,566 ------- ------- Income before income tax 6,137 4,126 Income tax expense 2,218 1,464 -------------------------------------------------------------------------------------- NET INCOME $ 3,919 $ 2,662 ====================================================================================== <FN> See accompanying Notes to Condensed Financial Statements (Unaudited). </FN> 4
10-Q5th Page of 18TOC1stPreviousNextBottomJust 5th
[Enlarge/Download Table] VALLEY FORGE LIFE INSURANCE COMPANY STATEMENT OF STOCKHOLDER'S EQUITY (Unaudited) ------------------------------------------------------------------------------------------------------------------ Accumulated Additional Comprehensive Other Total Three Months Ended Common Paid-in Income Retained Comprehensive Stockholder's March 31, 1998 and 1997 Stock Capital (Loss) Earnings Income (Loss) Equity ------------------------------------------------------------------------------------------------------------------ (In thousands of dollars) Balance, January 1, 1997 $2,500 $39,150 $156,900 $ 990 $199,540 Comprehensive income: Net income - - $2,662 2,662 - 2,662 Other comprehensive income (loss): Unrealized investment losses net of reclassification adjustment and taxes - - (4,929) - (4,929) (4,929) ------- Total comprehensive income $(2,267) ======= -------------------------------------------------------------- ------------------------------------ Balance, March 31, 1997 $2,500 $39,150 $159,562 $(3,939) $197,273 ============================================================== ==================================== Balance, December 31, 1997 $2,500 $39,150 $170,230 $4,380 $216,260 Comprehensive income: Net income - - $3,919 3,919 - 3,919 Other comprehensive income (loss): Unrealized investment losses net of reclassification adjustment and taxes - - (397) - (397) (397) ------- Total comprehensive income $3,522 ======= -------------------------------------------------------------- ----------------------------------- Balance, March 31, 1998 $2,500 $39,150 $174,149 $3,983 $219,782 ============================================================== =================================== <FN> See accompanying Notes to Condensed Financial Statements (Unaudited). </FN> 5
10-Q6th Page of 18TOC1stPreviousNextBottomJust 6th
[Enlarge/Download Table] VALLEY FORGE LIFE INSURANCE COMPANY STATEMENT OF CASH FLOWS (Unaudited) ----------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31 1998 1997 ----------------------------------------------------------------------------------------------------------------------- (In thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,919 $ 2,662 -------- -------- Adjustments to reconcile net income to net cash flows from operating activities: Net realized investment gains, pre-tax (1,993) (29) Amortization of bond discount (160) (1,178) Changes in: Insurance receivables, net (296,962) (94,536) Deferred acquisition costs (4,036) (6,383) Accrued investment income (4,286) (1,732) Due from affiliates 39,116 40,896 Federal income taxes 3,682 2,437 Deferred income taxes (1,534) 1,665 Insurance reserves 299,265 57,931 Commissions and other payables 10,426 6,298 Other, net (36,604) 6,530 -------- --------- Total adjustments 6,914 11,899 -------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES 10,833 14,561 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of fixed maturities (124,149) (36,839) Proceeds from fixed maturities: Sales 95,940 39,435 Maturities, calls and redemptions 24,926 6,636 Change in short-term investments (34,294) (69,461) Change in policy loans (1,837) (2,021) -------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES (39,414) (62,250) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Receipts from investment contracts credited to policyholder account balances 13,813 27,366 Return of policyholder account balances on investment contracts (5,469) (2,690) -------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES 8,344 24,676 -------- --------- NET CASH FLOWS (20,237) (23,013) Cash at beginning of period 24,565 24,759 --------------------------------------------------------------------------------------------------------------------- CASH AT END OF PERIOD $ 4,328 $ 1,746 ===================================================================================================================== Supplemental disclosures of cash flow information: Federal income taxes paid $ - $ - ===================================================================================================================== <FN> See accompanying Notes to Condensed Financial Statements (Unaudited). </FN> 6
10-Q7th Page of 18TOC1stPreviousNextBottomJust 7th
VALLEY FORGE LIFE INSURANCE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS MARCH 31, 1998 (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). Loews Corporation owns approximately 84% of the outstanding common stock of CNAF. VFL sells a variety of individual and group insurance products. The individual insurance products consist primarily of term, universal life, annuity, variable annuity and variable universal life. Group insurance products include life, accident and health consisting primarily of major medical and hospitalization, variable annuities and pension products, such as guaranteed investment contracts and annuities. The operations, assets and liabilities of VFL and its parent, Assurance, are managed, to a large extent, on a combined basis. Pursuant to a Reinsurance Pooling Agreement, VFL cedes all of its business, excluding its separate account business, to its parent, Assurance. This business is then pooled with the business of Assurance, which excludes Assurance's participating contracts and separate account business, and 10% of the combined pool is assumed by VFL. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the financial statements and notes thereto included in VFL's Form 10-K for the year ended December 31, 1997, filed with the Securities and Exchange Commission on March 31, 1998. The accompanying condensed financial statements have been prepared in conformity with generally accepted accounting principles. Certain amounts applicable to prior years have been reclassified to conform to classifications followed in 1998. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of VFL's management, these statements include all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial position, results of operations and cash flows in the accompanying condensed financial statements. 7
10-Q8th Page of 18TOC1stPreviousNextBottomJust 8th
VALLEY FORGE LIFE INSURANCE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED NOTE 2. REINSURANCE: VFL 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, to provide greater diversification of risk and to minimize exposures on larger risks. The reinsurance coverages are tailored to the specific risk characteristics of each product line with VFL's retained amount varying by type of coverage. VFL's reinsurance includes quota share, yearly renewable term and facultative programs. Amounts recoverable from reinsurers are estimated in a manner consistent with the future policy benefits reserves. The ceding of insurance does not discharge the primary liability of the original insurer. VFL places reinsurance with other carriers only after careful review of the nature of the contract and a thorough assessment of the reinsurers' credit quality and claim settlement performance. Further, for carriers that are not authorized reinsurers in VFL's state of domicile, VFL receives collateral, primarily in the form of bank letters of credit. In the table below, the majority of life premium revenue is from long duration type contracts, while the majority of accident and health earned premiums is from short duration contracts. The effects of reinsurance on premium revenues are shown in the following schedule: [Enlarge/Download Table] ----------------------------------------------------------------------------------------------------------- PREMIUMS ASSUMED/NET --------------------------------------------------------- THREE MONTHS ENDED MARCH 31 DIRECT ASSUMED CEDED NET % ------------------------------------------------------------------------------------------------------------ (In thousands of dollars) 1998 Life $165,569 $21,371 $165,791 $21,149 101% Accident and Health 749 60,406 749 60,406 100 ------------------------------------------------------------------------------------------------------------ TOTAL PREMIUMS $166,318 $81,777 $166,540 $81,555 100% ============================================================================================================ 1997 Life $127,691 $21,951 $128,736 $20,906 105% Accident and Health 705 65,177 705 65,177 100 ------------------------------------------------------------------------------------------------------------ TOTAL PREMIUMS $128,396 $87,128 $129,441 $86,083 101% ============================================================================================================ Transactions with Assurance, as part of the pooling agreement described in Note 1, are reflected in the above table. Premium revenues ceded to non-affiliated companies were $45.2 million for the first quarter in 1998, and $20.2 million for the first quarter in 1997, respectively. Additionally, insurance claims and policyholders' benefits are net of reinsurance recoveries from non-affiliated companies of $34.1 million for the first quarter of 1998, and $0 million for the same period in 1997. Reinsurance receivables reflected on the balance sheet are recoverables from reinsurers related to insurance reserves. These balances, which were approximately $1.9 billion and $1.4 billion at March 31, 1998 and 1997, respectively, are principally due from Assurance pursuant the Reinsurance Pooling Agreement. NOTE 3. LEGAL PROCEEDINGS: VFL is party to litigation in the ordinary course of business. The outcome of this litigation will not, in the opinion of management, materially affect the results of operations or equity of VFL. 8
10-Q9th Page of 18TOC1stPreviousNextBottomJust 9th
VALLEY FORGE LIFE INSURANCE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS - CONCLUDED NOTE 4. OTHER COMPREHENSIVE INCOME: VFL adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which established standards for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is comprised of all changes to stockholder's equity, including net income, except those changes resulting from investments by owners and distributions to owners. The change in the components of other comprehensive income (loss) are reported net of income tax as shown below: [Enlarge/Download Table] -------------------------------------------------------------------------------------------------------------- PERIOD ENDED MARCH 31, 1998 PRE-TAX TAX (EXPENSE) NET AMOUNT BENEFIT AMOUNT -------------------------------------------------------------------------------------------------------------- (In thousands of dollars) Net unrealized gains (losses) on investment securities: Net unrealized holding gains (losses) arising during the period $1,856 $ (650) $1,206 Reclassification adjustment for (gains) losses included in net income (2,466) 863 (1,603) ============================================================================================================== TOTAL OTHER COMPREHENSIVE INCOME $ (610) $ 213 $ (397) ============================================================================================================== -------------------------------------------------------------------------------------------------------------- PERIOD ENDED MARCH 31, 1997 PRE-TAX TAX (EXPENSE) NET AMOUNT BENEFIT AMOUNT -------------------------------------------------------------------------------------------------------------- (In thousands of dollars) Net unrealized gains (losses) on investment securities: Net unrealized holding gains (losses) arising during the period $(6,634) $2,322 $(4,312) Reclassification adjustment for (gains) losses included in net income (949) 332 (617) ============================================================================================================== TOTAL OTHER COMPREHENSIVE INCOME $(7,583) $2,654 $(4,929) ============================================================================================================== 9
10-Q10th Page of 18TOC1stPreviousNextBottomJust 10th
VALLEY FORGE LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the condensed financial statements and notes thereto found on pages 3 to 9, which contain additional information helpful in evaluating operating results and financial condition. VFL sells a variety of individual and group insurance products. The individual insurance products consist primarily of term, universal life, annuity, variable annuity and variable universal life. Group insurance products include life, accident and health consisting primarily of major medical and hospitalization, variable annuities and pension products, such as guaranteed investment contracts and annuities. The operations, assets and liabilities of VFL and its parent, Assurance, are managed, to a large extent, on a combined basis. Pursuant to a Reinsurance Pooling Agreement, VFL cedes all of its business, excluding its separate account business, to its parent, Assurance. This business is then pooled with the business of Assurance, which excludes Assurance's participating contracts and separate account business, and 10% of the combined pool is assumed by VFL. 10
10-Q11th Page of 18TOC1stPreviousNextBottomJust 11th
VALLEY FORGE LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -CONTINUED RESULTS OF OPERATIONS: The following table summarizes key components of VFL's operating results for the three months ended March 31, 1998 and 1997. [Enlarge/Download Table] ------------------------------------------------------------------------------------------------ THREE MONTHS ENDED MARCH 31 1998 1997 ------------------------------------------------------------------------------------------------ (In thousands of dollars) OPERATING SUMMARY (excluding realized investment gains/losses): Revenues: Individual premium $16,451 $15,609 Group premium 65,104 70,474 ------- --------- Total premiums 81,555 86,083 Net investment income 8,591 7,305 Other 1,561 1,275 ------- --------- Total revenues 91,707 94,663 Benefits and expenses 87,563 90,566 ------- --------- Operating income before income tax 4,144 4,097 Income tax expense (1,520) (1,454) ------- --------- Net operating income (excluding realized investment gains/losses) $ 2,624 $ 2,643 ======= ========= SUPPLEMENTAL FINANCIAL DATA: Net operating income: Individual $ 1,942 $ 1,591 Group 682 1,052 ------- --------- Net operating income 2,624 2,643 Net realized investment gains 1,295 19 ------- --------- ================================================================================================= NET INCOME $ 3,919 $ 2,662 ================================================================================================= VFL's revenues, excluding net realized investment gains/losses, were $91.7 million for the first three months of 1998, compared to $94.7 million for the same period in 1997. Premiums were $81.6 million for the three months ended March 31, 1998, compared to $86.1 million for the same period in 1997. For the three month period of 1998, individual premiums increased by 5% to $16.5 million, compared to $15.6 million for the same period in 1997. This increase is primarily due to a slight increase in sales of ViaTerm, a term life insurance product. Individual annuity premiums continue to decrease as marketing efforts have shifted to more profitable products. Group premiums were $65.1 million for the first three months of 1998, compared to $70.5 million for the same period in 1997. Decreases primarily in group health premiums and Federal Employee Health Benefit Plan (FEHBP) premiums contributed to the change in group premiums. The decrease in FEHBP premiums is due to improved claim experience upon which premiums are based during the first three months of 1998, as compared to the same period in 1997. VFL's investment income for the three months ended March 31, 1998 was $8.6 million, an approximate increase of $1.3 million or 18% from the same period for 1997 when investment income was $7.3 million. The increase is attributable to a larger asset base of VFL's investment portfolio generated from increased cash flows from premium growth in 1997. The increase was offset by a slightly lower average yield on VFL's portfolio during 1998, as compared to 1997. 11
10-Q12th Page of 18TOC1stPreviousNextBottomJust 12th
VALLEY FORGE LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -CONTINUED Higher losses in group business during the first three months of 1998 as compared to the same period in 1997 offset the increase in net investment income and led to relatively no change in pre-tax operating income between the first quarter of 1998 and the same period for 1997. FINANCIAL CONDITION: Assets increased approximately $307.6 million from December 31, 1997 to $2,676.1 million as of March 31, 1998. VFL's cash and invested assets increased by $22.5 million from December 31, 1997 to $593.0 million. During the first three months of 1998, VFL's stockholder's equity increased by $3.5 million, or 2%, to approximately $219.8 million. The increase in stockholder's equity in 1998 is due to net income of approximately $3.9 million and approximately $0.4 million of losses in accumulated other comprehensive income. [Enlarge/Download Table] -------------------------------------------------------------------------------------------------------- FINANCIAL POSITION MARCH 31 DECEMBER 31 1998 1997 -------------------------------------------------------------------------------------------------------- (In thousands of dollars) Assets $2,676,068 $2,368,426 Stockholder's Equity 219,782 216,260 Accumulated Other Comprehensive Income (Included in Stockholder's Equity) 3,983 4,380 -------------------------------------------------------------------------------------------------------- INVESTMENTS: The following table summarizes VFL's investments shown at cost or amortized cost and carrying value at March 31, 1998 and December 31, 1997: [Enlarge/Download Table] --------------------------------------------------------------------------------------------------- DISTRIBUTION OF INVESTMENTS MARCH 31 DECEMBER 31 1998 % 1997 % --------------------------------------------------------------------------------------------------- (In thousands of dollars) Fixed maturity securities: U.S. Treasury Securities and obligations of government agencies $309,332 53.1% $299,066 55.4% Asset backed securities 66,893 11.5 68,612 12.7 Corporate debt securities 73,121 12.6 51,355 9.5 Other debt securities 24,147 4.1 47,234 8.8 --------------------------------------------------------------------------------------------------- Total fixed maturity securities 473,493 81.3 466,267 86.4 Common stocks 981 0.2 981 0.2 Policy loans 68,808 11.8 66,971 12.4 Other invested assets 545 0.1 579 0.1 Short-term investments 38,891 6.6 4,597 0.9 --------------------------------------------------------------------------------------------------- INVESTMENTS AT AMORTIZED COST $582,718 100.0% $539,395 100.0% =================================================================================================== INVESTMENTS AT CARRYING VALUE* $588,669 $545,968 =================================================================================================== <FN> * As reported in the Balance Sheet </FN> 12
10-Q13th Page of 18TOC1stPreviousNextBottomJust 13th
VALLEY FORGE LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -CONTINUED The operations, assets and liabilities of VFL and Assurance are, to a large extent, managed on a combined basis. The investment portfolio is managed to maximize after-tax investment return, while minimizing credit risks, with investments concentrated in high quality securities to support insurance underwriting operations. The investment portfolios are segregated for the purpose of supporting policy liabilities for universal life, annuities and other interest sensitive products. VFL's investments in fixed maturity securities are carried at a fair value of $478.3 million at March 31, 1998, compared with $471.7 million at December 31, 1997. At March 31, 1998, net unrealized gains on fixed maturity securities amounted to approximately $4.8 million. This compares with net unrealized gains of approximately $5.4 million at December 31, 1997. The gross unrealized gains and losses for the fixed maturities portfolio at March 31, 1998 were $6.1 million and $1.3 million, respectively, compared to $6.2 million and $0.8 million, respectively, at December 31, 1997. VFL's investments in equity securities are carried at a fair value of $2.5 million and $2.3 million at March 31, 1998 and December 31, 1997, respectively. At March 31, 1998, unrealized gains on equity securities amounted to approximately $1.5 million. This compares with unrealized gains of approximately $1.3 million at December 31, 1997. There were no unrealized losses on equity securities at March 31, 1998 and December 31, 1997. VFL has the capacity to hold its fixed maturity portfolio to maturity. However, securities may be sold as part of VFL's asset/liability management strategies or to take advantage of investment opportunities generated by changing interest rates, tax and credit considerations or other similar factors. Accordingly, the fixed maturity securities are classified as available-for-sale. The following table summarizes the ratings of VFL's fixed maturity portfolio at carrying value (market): [Enlarge/Download Table] ------------------------------------------------------------------------------------------------- MARCH 31 % DECEMBER 31 % 1998 1997 ------------------------------------------------------------------------------------------------- (In thousands of dollars) U.S. government and affiliated securities $310,141 64.8% $300,676 63.8% Other AAA rated 73,807 15.4 75,531 16.0 AA and A rated 66,274 13.9 61,404 13.0 BBB rated 24,927 5.2 27,292 5.8 Below investment grade 3,126 0.7 6,804 1.4 ------------------------------------------------------------------------------------------------- TOTAL $478,275 100.0% $471,707 100.0% ================================================================================================= Included in VFL's fixed maturity securities at March 31, 1998 are $67.5 million of asset-backed securities, consisting of approximately 43.5% in corporate mortgage-backed pass-through certificates, 34.0% in collateralized mortgage obligations (CMOs), 22.1% in corporate asset-backed obligations and 0.4% in U.S. government agency issued pass-through certificates. The majority of CMOs held are U.S. government agency issues, which are actively traded in liquid markets and are priced by broker-dealers. 13
10-Q14th Page of 18TOC1stPreviousNextBottomJust 14th
VALLEY FORGE LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -CONTINUED CMOs are subject to prepayment risk that tends to vary with changes in interest rates. During periods of declining interest rates, CMOs generally prepay faster as the underlying mortgages are prepaid and refinanced by the borrowers in order to take advantage of the lower rates. Conversely, during periods of rising interest rates, prepayments are generally slow. VFL limits the risks associated with interest rate fluctuations and prepayments by concentrating its CMO investments in planned amortization classes with relatively short principal repayment windows. The fair value of asset-backed securities was more than the amortized cost by $0.6 million and $0.1 million at March 31, 1998 and December 31, 1997, respectively. VFL avoids investments in complex mortgage derivatives and does not have any investments in mortgage loans or real estate. VFL invests from time to time in derivative financial instruments primarily to reduce its exposure to market risk. VFL also uses derivatives to mitigate the risk associated with certain guaranteed annuity contracts by purchasing certain options in a notional amount equal to the original customer deposit. VFL's derivatives are classified as other invested assets and VFL generally does not hold or issue these instruments for trading purposes. Derivative financial instruments consist of interest rate caps in the general account and purchased options in the Separate Accounts at March 31, 1998. The gross notional or contractual amounts of derivative financial instruments in the general account totaled $50.0 million at both March 31, 1998 and December 31, 1997. The gross notional principal or contractual amounts of derivative financial instruments in the Separate Accounts totaled $1.6 million and $1.5 million at March 31, 1998 and December 31, 1997, respectively. The fair value of derivative financial instruments in the general account and Separate Accounts at March 31, 1998 totaled $0.2 million and $0.4 million, respectively. The fair value of derivative financial instruments in the general account and Separate Accounts at December 31, 1997 totaled $0.4 million and $0.3 million, respectively. Net realized losses on derivative financial instruments held in the general account totaled $0.2 million for the period ended March 31, 1998, while net realized gains/losses on derivatives in the Separate Accounts were $0 million for the same period. There were no investments in derivative securities at March 31, 1997. High yield securities are bonds rated below investment grade by bond rating agencies, and other unrated securities which, in the opinion of management, are below investment grade (below BBB). High yield securities generally involve a greater degree of risk than that of investment grade securities. Returns are expected to compensate for the added risk. The risk is also considered in the interest rate assumptions in the underlying insurance products. VFL's concentration in high yield bonds was approximately 0.1% and 0.3% of total assets as of March 31, 1998 and December 31, 1997, respectively. 14
10-Q15th Page of 18TOC1stPreviousNextBottomJust 15th
VALLEY FORGE LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -CONTINUED IMPACT OF YEAR 2000 ON VFL: The widespread use of computer programs, both in the United States and internationally, that rely on two digit date fields to perform computations and decision making functions may cause computer systems to malfunction when processing information involving dates beginning in 1999. Such malfunctions could lead to business delays and disruptions. All subsidiaries of CNAF, including VFL, utilize the same systems in conducting day-to-day operations. VFL is in the process of replacing many of its legacy systems and is upgrading its systems to accommodate business for the year 2000 and beyond. VFL believes that it will be able to resolve the year 2000 issue in a timely manner. VFL's cost to upgrade and replace its systems will be included as part of the total cost incurred by CNAF to replace and upgrade its systems. Based upon its current assessment, CNAF estimates that the total cost to replace and upgrade its systems to accommodate year 2000 processing will be approximately $60 to $70 million. VFL will be allocated its proportionate share of this cost upon completion of the upgrade; however, a reasonable estimate of this cost is not currently available. Due to the interdependent nature of computer systems, VFL may be adversely impacted depending upon whether it or other entities not affiliated with VFL (vendors and business partners) address this issue successfully. To mitigate this impact, CNAF is communicating with its vendors and business partners to coordinate year 2000 conversion. At this time, management is unable to determine whether the adverse impact, if any, in connection with the foregoing circumstances would be material to VFL. LIQUIDITY AND CAPITAL RESOURCES: The liquidity requirements of VFL have been met primarily by funds generated from operating, investing and financing activities. VFL's principal cash flow sources are premiums, investment income, receipts for investment contracts sold and sales and maturities of investment. The primary cash flow uses are payments for claims, policy benefits, payments on matured policyholder contracts and operating expenses. For the three months of 1998, VFL's operating activities generated net positive cash flows of approximately $10.8 million, compared with net positive cash flows of $14.6 million for the same period in 1997. Management believes that future liquidity needs will be met primarily by cash generated from operations. Net cash flows from operations are generally invested in marketable securities. Investment strategies employed by VFL consider the cash flow requirements of the insurance products sold and the tax attributes of the various types of marketable investments. 15
10-Q16th Page of 18TOC1stPreviousNextBottomJust 16th
VALLEY FORGE LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -CONCLUDED Accounting Standards: In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in interim and annual financial statements. It requires that those enterprises report a measure of segment profit or loss, certain specific revenue and expense items and segment assets, and that the enterprises reconcile the total of those amounts to the general-purpose financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This Statement is effective for financial statements for periods beginning after December 15, 1997. This Statement need not be applied to interim financial statements in the initial year of its application. This Statement will redefine VFL's business segment disclosure. In December 1997, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," which provides guidance on accounting by entities that are subject to insurance-related assessments. It requires that entities recognize liabilities for insurance-related assessments when all of the following criteria have been met: an assessment has been imposed or a probable assessment will be imposed; the event obligating an entity to pay an imposed or probable assessment has occurred on or before the date of the financial statements; and the amount of the assessment can be reasonably estimated. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. VFL is currently evaluating the effects of this SOP on its accounting for insurance-related assessments. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which standardizes disclosure requirements for pension and other postretirement benefits to the extent practicable, and requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis. The Statement also suggests combined formats for presentation of pension and other postretirement benefit disclosures. The Statement changes disclosure only and does not address measurement or recognition. It is effective for fiscal years beginning after December 15, 1997. VFL has no employees, however, expenses are allocated to VFL for services provided by Casualty employees. VFL is currently evaluating the effects of this Statement on its benefit plan disclosures. In March 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which provides guidance on accounting for costs of computer software developed or obtained for internal use and for determining whether computer software is for internal use. For purposes of this SOP, internal-use software is software acquired, internally developed or modified solely to meet the entity's internal needs for which no substantive plan exists or is being developed to market the software externally during the software's development or modification. Accounting treatment for costs associated with software developed or obtained for internal use, as defined by this SOP, is based upon a number of factors, including the point in time during the project that costs are incurred as well as the types of costs incurred. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. VFL is currently evaluating the effects of this SOP. 16
10-Q17th Page of 18TOC1stPreviousNextBottomJust 17th
VALLEY FORGE LIFE INSURANCE COMPANY PART II OTHER INFORMATION  ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: Description of Exhibit Exhibit Page Number Number (27) Financial Data Schedule 27 19 (b) REPORTS ON FORM 8-K: There were no reports on Form 8-K for the three months ended March 31,1998. 17
10-QLast Page of 18TOC1stPreviousNextBottomJust 18th
VALLEY FORGE LIFE INSURANCE COMPANY PART II OTHER INFORMATION - CONCLUDED  SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Valley Forge Life Insurance Company By /S/W. JAMES MACGINNITIE ------------------------------- W. James MacGinnitie Director, Senior Vice President and Chief Financial Officer Date: May 15, 1998 18

Dates Referenced Herein   and   Documents Incorporated By Reference

Referenced-On Page
This 10-Q Filing   Date First   Last      Other Filings
1/1/975
3/31/9721410-K, 10-Q
12/15/9716
12/31/9721410-K
For The Period Ended3/31/9811410-K
5/1/981
Filed On / Filed As Of5/15/9818
12/15/9816
 
TopList All Filings


Filing Submission 0001007008-98-000002   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Copyright © 2014 Fran Finnegan & Company.  All Rights Reserved.
AboutPrivacyRedactionsHelp — Mon, 24 Nov 12:11:21.0 GMT