<PAGE>
As filed with the Securities and Exchange Commission on September 3, 1996
---
File No. 333-1083
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
Pre-Effective Amendment No. 1 to the
Registration Statement Under
the Securities Act of 1933
VALLEY FORGE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 6312 23-6200031
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
CNA Plaza, 43 South
Chicago, Illinois 60685
(312) 822-6597
(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
Corporate Secretary Copy to:
Continental Assurance Company Stephen E. Roth, Esq.
CNA Plaza, 43 South Sutherland, Asbill & Brennan
Chicago, Illinois 60685 1275 Pennsylvania Avenue, N.W.
(312) 822-6597 Washington, DC 20004-2404
(Name, address, including zip code,
and telephone number, including area
code, of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: |X|
<TABLE>
<CAPTION>
============================ ========== ================ ================ ==============
Title of Each Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Price Aggregate Registration
to be Registered Registered Per Unit Offering Price Fee
============================ ========== ================ ================= =============
<S> <C> <C> <C> <C>
Flexible Premium Deferred * * $50,000,000.00 $17,241.38
Variable Annuity Contract
(Guaranteed Interest Option)
============================ ========== ================ ================== ============
</TABLE>
<PAGE>
* The proposed maximum aggregate offering price is estimated solely for
determining the registration fee. The amount to be registered and the
proposed maximum offering price per unit are not applicable since the
securities are not issued in predetermined amounts or units.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), shall
determine.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Regulation S-K, Item 501(b)
ITEM OF FORM S-1 PROSPECTUS CAPTION
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus............ Outside Front Cover
2. Inside Front and Outside Back Cover
Pages of Prospectus............................... Summary; Table of
Contents
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges................ Outside Front Cover;
Summary;Definitions;
Description of
the Contract
4. Use of Proceeds .................................. Additional
Information About
Valley Forge Life
Insurance Company
-- Investments
5. Determination of Offering Price................... Not Applicable
6. Dilution ......................................... Not Applicable
7. Selling Security Holders ......................... Not Applicable
8. Plan of Distribution.............................. Other Information --
Distribution of the
Contracts
9. Description of Securities to be Registered........ Summary; Description
of the Contract;
Contract Charges and
Fees; Selecting an
Annuity Payment
Option; Other
Information
10. Interests of Named Experts and Counsel............ Legal Matters;
Experts
11. Information with Respect to the Registrant........ The Company, The
Variable Account,
The Funds, and The
Guaranteed Interest
Option; Additional
Information About
Valley Forge Life
Insurance Company
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.... Item 14 of Part II
<PAGE>
PROSPECTUS
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
issued by
VALLEY FORGE LIFE INSURANCE COMPANY AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY SEPARATE ACCOUNT
This prospectus describes a flexible premium deferred variable annuity contract
(the "Contract") issued by Valley Forge Life Insurance Company (the "Company").
The Contract may be sold to or used in connection with retirement plans,
including plans that qualify for special federal income tax treatment under the
Internal Revenue Code.
The Owner of a Contract may allocate Net Purchase Payments and Contract Values
to one or more of the Subaccounts of Valley Forge Life Insurance Company
Variable Annuity Separate Account (the "Variable Account"), or to the Guaranteed
Interest Option for one or more Guarantee Periods, or to both. Assets of each of
the 18 Subaccounts of the Variable Account are invested in a corresponding
investment portfolio (each, a "Fund") of Insurance Series, Variable Insurance
Products Fund, Variable Insurance Products Fund II, The Alger American Fund, MFS
Variable Insurance Trust, SoGen Variable Funds, Inc., and Van Eck Worldwide
Insurance Trust. The Guaranteed Interest Option guarantees a minimum fixed rate
of interest for specified periods of time, currently 1 year, 3 years, 5 years, 7
years, and 10 years.
The Contract Value will vary daily as a function of the investment performance
of the Subaccounts and any interest credited under the Guaranteed Interest
Option. The Company does not guarantee any minimum Variable Contract Value for
amounts allocated to the Variable Account. Annuity Payments and other values
provided by this Contract, when based on the Guaranteed Interest Option, are
subject to a Market Value Adjustment, the operation of which may result in
upward or downward adjustments in amounts withdrawn, surrendered, transferred,
paid on a Death Benefit, or applied to purchase Annuity Payments.
This prospectus sets forth the information regarding the Contract, the Variable
Account, and the Guaranteed Interest Option that a prospective investor should
know before purchasing a Contract. The prospectuses for the Funds, which provide
information regarding investment objectives and policies of each of the Funds,
should be read in conjunction with this prospectus. A Statement of Additional
Information having the same date as this prospectus and providing additional
information about the Contract and the Variable Account has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. To
obtain a free copy of this document, call or write the Service Center.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR EACH OF THE FUNDS.
AN INVESTMENT IN A CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, NOR IS THE CONTRACT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE
CONTRACT INVOLVES CERTAIN RISKS, INCLUDING THE RISK OF LOSS OF PURCHASE PAYMENTS
(PRINCIPAL).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
SEPTEMBER __, 1996
<PAGE>
TABLE OF CONTENTS
DEFINITIONS.................................................................
FEE TABLE...................................................................
SUMMARY.....................................................................
General Description................................................
Purchasing a Contract..............................................
Cancelling the Contract............................................
Transfers..........................................................
Withdrawals........................................................
Surrenders.........................................................
Charges and Fees...................................................
CONDENSED FINANCIAL INFORMATION.............................................
THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS, AND
THE GUARANTEED INTEREST OPTION..............................................
The Company........................................................
The Variable Account...............................................
The Funds..........................................................
The Guaranteed Interest Option.....................................
DESCRIPTION OF THE CONTRACT.................................................
Purchasing a Contract..............................................
Cancelling the Contract............................................
Crediting and Allocating Purchase Payments.........................
Variable Contract Value............................................
Transfers..........................................................
Withdrawals........................................................
Surrenders.........................................................
Death Benefits.....................................................
Payments by the Company............................................
Telephone Transaction Privileges...................................
CONTRACT CHARGES AND FEES...................................................
Surrender Charge (Contingent Deferred Sales Charge)................
Annual Administration Fee..........................................
Transfer Processing Fee............................................
Taxes on Purchase Payments.........................................
Mortality and Expense Risk Charge..................................
Administration Charge..............................................
Fund Expenses......................................................
Possible Charge for the Company's Taxes............................
<PAGE>
SELECTING AN ANNUITY PAYMENT OPTION.........................................
Annuity Date.......................................................
Annuity Payment Dates..............................................
Election and Changes of Annuity Payment Options....................
Annuity Payments...................................................
Annuity Payment Options............................................
ADDITIONAL CONTRACT INFORMATION.............................................
Ownership..........................................................
Changing the Owner or Beneficiary..................................
Misstatement of Age or Sex.........................................
Change of Contract Terms...........................................
Reports to Owners..................................................
Miscellaneous......................................................
YIELDS AND TOTAL RETURNS....................................................
FEDERAL TAX CONSIDERATIONS..................................................
Introduction.......................................................
Tax Status of the Contract.........................................
Taxation of Annuities..............................................
Transfers, Assignments or Exchanges of a Contract..................
Withholding........................................................
Multiple Contracts.................................................
Taxation of Qualified Plans........................................
Other Tax Consequences.............................................
OTHER INFORMATION...........................................................
Distribution of the Contracts......................................
Administrative Services............................................
Voting Privileges..................................................
Legal Proceedings..................................................
Company Holidays...................................................
Legal Matters......................................................
Experts............................................................
ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE COMPANY ...........
History and Business...............................................
Selected Financial Data............................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................
Liquidity and Capital Resources....................................
Investments........................................................
Employees..........................................................
Property...........................................................
State Regulation...................................................
Directors and Executive Officers...................................
<PAGE>
Executive Compensation.............................................
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE COMPANY.................
STATEMENT OF ADDITIONAL INFORMATION.........................................
APPENDIX A ................................................................
APPENDIX B.................................................................
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
<PAGE>
DEFINITIONS
ACCUMULATION UNIT: A unit of measure used to calculate Variable Contract Value.
ADJUSTED CONTRACT VALUE: The Contract Value plus or minus any applicable Market
Value Adjustment less purchase payment tax charges not previously deducted less
the annual administration fee.
AGE: The Age of any person on the birthday nearest the date for which Age is
determined.
ANNUITANT: The person or persons whose life (or lives) determines the Annuity
Payments payable under the Contract and whose death determines the death
benefit. With regard to joint and survivorship Annuity Payment Options, the
maximum number of joint Annuitants is two and provisions referring to the death
of an Annuitant mean the death of the last surviving Annuitant. Provisions
relating to an action by the Annuitant mean, in the case of joint Annuitants,
both Annuitants acting jointly.
ANNUITY DATE: The date on which Surrender Value or Adjusted Contract Value is
applied to purchase Annuity Units or a Fixed Annuity.
ANNUITY PAYMENT: One of several periodic payments made by the Company to the
Payee under an Annuity Payment Option.
ANNUITY PAYMENT DATE: The date each month, quarter, semi-annual period, or
year as of which the Company computes Annuity Payments. The Annuity Payment
Date(s) is shown on the Contract.
ANNUITY PAYMENT OPTION: The form of Annuity Payments selected by the Owner
under the Contract. The Annuity Payment Option is shown on the Contract.
ANNUITY UNIT: A unit of measure used to calculate Variable Annuity Payments.
BENCHMARK RATE OF RETURN: An annual rate of return shown on the Contract and
used by the Company to determine the degree of fluctuation in the amount of
Variable Annuity Payments in response to fluctuations in the net investment
return of selected Subaccounts by assuming (among other things) that the assets
in the Variable Account supporting the Contract will have a net annual
investment return over the anticipated Annuity Payment period equal to that rate
of return.
BENEFICIARY: The person(s) to whom the death benefit will be paid on the death
of the Owner or Annuitant prior to the Annuity Date.
CANCELLATION PERIOD: The period described on the cover page of the Contract
during which the Owner may return the Contract for a refund.
THE CODE: The Internal Revenue Code of 1986, as amended.
THE COMPANY: Valley Forge Life Insurance Company.
CONTINGENT ANNUITANT: The person designated by the Owner in the application who
becomes the Annuitant in the event that the Annuitant dies before the Annuity
Date while the Owner is still alive.
<PAGE>
CONTINGENT BENEFICIARY: The person(s) to whom the death benefit will be paid if
the Beneficiary (or Beneficiaries) is not living.
CONTRACT ANNIVERSARY: The same date in each Contract Year as the Contract
Effective Date.
CONTRACT EFFECTIVE DATE: The date on which the Company issues the Contract and
upon which the Contract becomes effective. The Contract Effective Date is shown
on the Contract and is used to determine Contract Years and Contract
Anniversaries.
CONTRACT YEAR: A twelve-month period beginning on the Contract Effective Date
or on a Contract Anniversary.
CONTRACT VALUE: The total amount invested under the Contract. It is the sum of
Variable Contract Value and the Guaranteed Interest Option Value.
DUE PROOF OF DEATH: Proof of death satisfactory to the Company. Due Proof of
Death may consist of the following if acceptable to the Company:
(a) a certified copy of the death record;
(b) a certified copy of a court decree reciting a finding of
death; or
(c) any other proof satisfactory to the Company.
FIXED ANNUITY PAYMENT: An Annuity Payment that is supported by the General
Account and does not vary in amount as a function of the investment return of
the Variable Account from one Annuity Payment Date to the next.
FUND: Any open-end management investment company or investment portfolio
thereof or unit investment trust or series thereof, in which a Subaccount
invests.
GENERAL ACCOUNT: The assets of the Company other than those allocated to the
Variable Account or any other separate account of the Company.
GIO ACCOUNT: Valley Forge Life Insurance Company Guaranteed Interest Option
Separate Account.
GUARANTEE AMOUNT: Before the Annuity Date, the amount equal to that part of any
Net Purchase Payment allocated to or any amount transferred to the Guaranteed
Interest Option for a designated Guarantee Period with a particular expiration
date (including interest thereon) less any withdrawals (including any applicable
surrender charges and any applicable purchase payment tax charge) or transfers
therefrom.
GUARANTEE PERIOD: A specific number of years for which the Company agrees to
credit a particular effective annual rate of interest.
GUARANTEED INTEREST OPTION: An investment option under the Contract supported
by the GIO Account. It is not part of nor dependent upon the investment
performance of the Variable Account.
GUARANTEED INTEREST OPTION VALUE: The sum of all Guarantee Amounts.
GUARANTEED INTEREST RATE: Unless a Market Value Adjustment is made, an
effective annual rate of interest that the Company will pay on a Guarantee
Amount.
HOME OFFICE: The Company's office at 401 Penn Street, Reading, PA 19601.
<PAGE>
MARKET VALUE ADJUSTMENT: A positive or negative adjustment made to any portion
of a Guarantee Amount upon the surrender, withdrawal, transfer or application to
an Annuity Payment Option of such portion of the Guarantee Amount prior to 30
days before the expiration of the Guarantee Period applicable to that Guarantee
Amount.
NET ASSET VALUE PER SHARE: The value per share of any Fund on any Valuation Day.
The method of computing the Net Asset Value Per Share is described in the
prospectus for the Fund.
NET PURCHASE PAYMENT: A purchase payment less any purchase payment tax charge
deducted from the purchase payment.
NON-QUALIFIED CONTRACT: A Contract that is not a "qualified contract."
OWNER: The person or persons who owns (or own) the Contract and who is (are)
entitled to exercise all rights and privileges provided in the Contract. The
maximum number of joint Owners is two. Provisions relating to action by the
Owner mean, in the case of joint Owners, both Owners acting jointly. In the
context of a Contract issued on a group basis, Owners refers to holders of
certificates under a group Contract.
PAYEE: The person entitled to receive Annuity Payments under the Contract.
QUALIFIED CONTRACT: A Contract that is issued in connection with a retirement
plan that qualifies for special federal income tax treatment under Sections 401,
408 or 457 of the Code.
SEC: The U.S. Securities and Exchange Commission.
SERVICE CENTER: The offices of the Company's administrative agent at 95 Bridge
Street (or P.O. Box 310), Haddam, Connecticut 06438.
SUBACCOUNT: A subdivision of the Variable Account, the assets of which are
invested in a corresponding Fund.
SUBACCOUNT VALUE: Before the Annuity Date, the amount equal to that part of any
Net Purchase Payment allocated to the Subaccount and any amount transferred to
that Subaccount, adjusted by interest income, dividends, net capital gains or
losses, realized or unrealized, and decreased by withdrawals (including any
applicable surrender charges and any applicable purchase payment tax charge) and
any amounts transferred out of that Subaccount.
SURRENDER VALUE: The Adjusted Contract Value less any applicable surrender
charges.
VALUATION DAY: For each Subaccount, each day on which the New York Stock
Exchange is open for business except for certain holidays listed in the
prospectus and days that a Subaccount's corresponding Fund does not value its
shares.
VALUATION PERIOD: The period that starts at the close of regular trading on the
New York Stock Exchange on any Valuation Day and ends at the close of regular
trading on the next succeeding Valuation Day.
VARIABLE ACCOUNT: Valley Forge Life Insurance Company Variable Annuity Separate
Account.
VARIABLE CONTRACT VALUE: The sum of all Subaccount Values.
VARIABLE ANNUITY PAYMENT: An Annuity Payment that may vary in amount from one
Annuity Payment Date to the next as a function of the investment experience of
one or more Subaccounts selected by the Owner to support such payments.
WRITTEN NOTICE: A notice or request submitted in writing in a form satisfactory
to the Company that is signed by the Owner and received at the Service Center.
<PAGE>
<TABLE>
<CAPTION>
FEE TABLE
<S> <C>
Contract Owner Transaction Expenses
Sales load imposed on purchase payments........................................................... 0%
Maximum Surrender Charge (as a percentage of purchase payments surrendered or withdrawn) ......... 7%
Transfer Processing Fee (each, after first 12 in a Contract Year) ................................ $25
Annual Administration Fee (waived if Contract Value exceeds $50,000) $30
Variable Account Annual Expenses
(as a percentage of net assets)
Mortality and Expense Risk Charge ............................................................... 1.25%
Administration Charge............................................................................ 0.15%
-----
Total Variable Account Expenses.................................................................. 1.40%
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND EXPENSES
(as a percentage of Fund average net assets)
Management
(Advisory) Other Total Annual
Fees Expenses Expenses
<S> <C> <C> <C>
Insurance Series:
Federated High Income Bond Fund II 0.0% [1] 0.80% 0.80%
Federated Prime Money Fund II 0.0% [2] 0.80% 0.80%
Federated Utility Fund II 0.0% [3] 0.85% 0.85%
Variable Insurance Products Fund and
Variable Insurance Products Fund II:
VIP Equity-Income Portfolio 0.51% 0.10% 0.61%
VIP II Asset Manager Portfolio 0.71% 0.08% 0.79% [4]
VIP II Contrafund Portfolio 0.61% 0.11% 0.72% [4]
VIP II Index 500 Portfolio 0.00% 0.28% 0.28% [5]
The Alger American Fund:
Alger American Growth Portfolio 0.75% 0.10% 0.85%
Alger American MidCap Growth Portfolio 0.80% 0.10% 0.90%
Alger American Small Capitalization Portfolio 0.85% 0.07% 0.92%
MFS Variable Insurance Trust:
MFS Emerging Growth Series 0.75% 0.25% 1.00% [6]
MFS Growth With Income Series 0.75% 0.25% 1.00% [6]
<PAGE>
MFS Limited Maturity Series 0.55% 0.45% 1.00% [7]
MFS Research Series 0.75% 0.25% 1.00% [6]
MFS Total Return Series 0.75% 0.25% 1.00% [6]
SoGen Variable Funds, Inc.:
SoGen Overseas Portfolio 0.75% 0.60% 1.35%
Van Eck Worldwide Insurance Trust:
Emerging Markets Fund 0.00% [8] 0.00% [8] 0.00% [8]
Gold and Natural Resources Fund 1.00% 0.21% 1.21%
<FN>
[1]Voluntary waiver of management fee (0.60% maximum)
[2]Voluntary waiver of management fee (0.50% maximum)
[3]Voluntary waiver of management fee (0.75% maximum)
[4]Brokerage commissions used to reduce expenses (otherwise total operating
expenses were 0.81% for Asset Mangager and 0.73% for Contrafund)
[5]Voluntary reduction of fund expenses (otherwise management fee, other
expenses, and total expenses were 0.28%, 0.19% and 0.47% respectively)
[6]Adviser has agreed to bear expenses (otherwise other ecpenses and total
expenses were 1.00% and 1.55%, respectively)
[7]Adviser has agreed to bear expenses (otherwise other expenses and total
expenses were 1.00% and 1.55% respectively)
[8]Start up period, no experience to report (2.00% maximum, 1.50% estimate)
</FN>
</TABLE>
Taxes on purchase payments, currently ranging generally from 0% to 3.5% of
purchase payments, may be applicable, depending upon the laws of various
jurisdictions.
The above tables are intended to assist the Owner in understanding the costs and
expenses that he or she will bear directly or indirectly. The table reflects the
anticipated expenses of the Variable Account and reflect the actual expenses for
each Fund for the year ended December 31, 1995. Expenses for these Funds are
estimates and are not based on past experience. For a more complete description
of the various costs and expenses, see "CONTRACT CHARGES AND FEES" and the
prospectuses for each Fund.
<PAGE>
Examples
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 purchase payment, assuming a 5%
annual rate of return on assets:
Federated High Income Bond Fund II $96 $139
Federated Prime Money Fund II $96 $139
Federated Utility Fund II $96 $141
VIP Equity-Income Subaccount $94 $133
VIP II Asset Manager Subaccount $96 $139
VIP II Contrafund Subaccount $95 $136
VIP II Index 500 Subaccount $91 $123
Alger American Growth Subaccount $96 $141
Alger American MidCap Growth Subaccount $97 $142
Alger American Small Capitalization Subaccount $97 $143
MFS Emerging Growth Subaccount $98 $145
MFS Growth With Income Subaccount $98 $145
MFS Limited Maturity Subaccount $98 $145
MFS Research Subaccount $98 $145
MFS Total Return Subaccount $98 $145
SoGen Overseas Subaccount $102 $156
Emerging Markets Subaccount $103 $161
Gold and Natural Resources Subaccount $100 $152
================================================================================
If you do not surrender your Contract or if you annuitize, you would pay the
following expenses on a $1,000 purchase payment, assuming a 5% annual rate of
return on assets:
One Year Three Years
Federated High Income Bond Fund II $26 $79
Federated Prime Money Fund II $26 $79
Federated Utility Fund II $26 $81
VIP Equity-Income Subaccount $24 $73
VIP II Asset Manager Subaccount $26 $79
VIP II Contrafund Subaccount $25 $76
VIP II Index 500 Subaccount $21 $63
Alger American Growth Subaccount $26 $81
Alger American MidCap Growth Subaccount $27 $82
Alger American Small Capitalization Subaccount $27 $83
MFS Emerging Growth Subaccount $28 $85
MFS Growth With Income Subaccount $28 $85
MFS Limited Maturity Subaccount $28 $85
MFS Research Subaccount $28 $85
MFS Total Return Subaccount $28 $85
SoGen Overseas Subaccount $32 $96
Emerging Markets Subaccount $33 $101
Gold and Natural Resources Subaccount $30 $92
================================================================================
The examples provided above assume that no transfer processing fees or purchase
payment taxes have been assessed. The examples also assume that the annual
administration fee is $30 and that the Contract Value per Contract is $10,000,
which translates the annual administration fee into an assumed .30% charge for
purposes of the examples based on a $1,000 investment.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE 5% ANNUAL
RETURN ASSUMED IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS THAN THE ASSUMED
RATE.
<PAGE>
SUMMARY
GENERAL DESCRIPTION
This prospectus has been designed to provide prospective Owners with the
information necessary to decide whether or not to purchase a Contract. This
summary provides a concise description of the more significant aspects of the
Contract. Further detail is provided in this prospectus, the related Statement
of Additional Information, the Contract, and the prospectuses of the Funds. For
further information, contact the Service Center.
In many jurisdictions, the Contract is issued directly to individuals. In
certain jurisdictions, however, the Contract is only available as a group
contract. Group Contracts are issued to or on behalf of groups such as employers
for their employees. Individuals who are part of groups for which a Contract is
issued receive a certificate that recites substantially all of the provisions of
the Group Contract. Throughout this prospectus, the term "Contract" refers to
individual Contracts, Group Contracts and certificates for Group Contracts.
Owners may allocate all or a portion of Net Purchase Payments or transfer
Contract Value among several Subaccounts of the Variable Account. The Contract
also offers a Guaranteed Interest Option under which Owners may allocate all or
a portion of Net Purchase Payments and transfer Contract Value among several
Guarantee Periods selected by the Owner. The Company currently offers Guarantee
Periods with durations of 1, 3, 5, 7, and 10 years. If the amount allocated or
transferred remains in a Guarantee Period until the expiration date of a
Guarantee Period, its value will be equal to the amount originally allocated or
transferred, multiplied on an annually compounded basis, by its Guaranteed
Interest Rate. Any surrender, withdrawal, transfer, or annuitization made prior
to 30 days before the expiration of a Guarantee Period will be subject to a
Market Value Adjustment that may increase or decrease the Guarantee Amount (or
portion thereof) being surrendered, withdrawn, transferred, or annuitized.
Depending on the size of the Market Value Adjustment, such an adjustment may
reduce the Guarantee Amount (or portion thereof) to less than the Net Purchase
Payment allocated to or Contract Value transferred to a Guarantee Period. (See
"THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS, AND THE GUARANTEED INTEREST
OPTION -- The Guaranteed Interest Option - Market Value Adjustment.")
The Company makes no promise that the Contract Value will increase. Depending on
the investment experience of the Subaccounts and interest credited to various
Guarantee Amounts, the Contract Value, Adjusted Contract Value, Surrender Value
and the death benefit may increase or decrease on any Valuation Day. Owners bear
the investment risk for amounts invested in the Subaccounts and for Guarantee
Amounts surrendered, withdrawn, transferred or applied to an Annuity Payment
Option before the 30-day period prior to the expiration of a Guarantee Period.
The Contract also offers a choice of Annuity Payment Options to which Owners may
apply the Adjusted Contract Value as of the Annuity Date. Beneficiaries may also
apply the death benefit to certain Annuity Payment Options. An Owner may change
the Annuity Date within certain limits.
PURCHASING A CONTRACT
The minimum initial purchase payment for a Contract is $2,000. The minimum
additional purchase payment the Company will accept is $100. The Company may
refuse to accept additional purchase payments at any time for any reason.
The initial Net Purchase Payment is allocated to each Subaccount or to Guarantee
Periods of the Guaranteed Interest Option, or to both, as specified on the
application, unless the Contract is issued in a state that requires the return
of purchase payments during the Cancellation Period. In those states, that
portion of an Owner's initial Net Purchase Payment allocated to a Subaccount is
allocated to the Prime Money Subaccount (the "Money Market Subaccount") for a
period equal to the number of days in the Cancellation Period. At the expiration
of this period, such portion of the Net Purchase Payment, as adjusted to reflect
the investment performance of the Money Market Subaccount during this period, is
then allocated to the Subaccounts based on the proportion that the Owner's
allocation percentage shown in the application bears to the Variable Contract
Value. (See "DESCRIPTION OF THE CONTRACT -- Cancelling the Contract.")
If an Owner elects to invest in a particular Subaccount or Guarantee Period, at
least 1% of the Net Purchase Payment must be allocated to that Subaccount or
Guarantee Period. All percentage allocations must be in whole numbers. In
addition, allocations to a Guarantee Period must be at least $500. The Company
allocates any additional Net Purchase Payments among the Subaccounts and the
Guarantee Periods in accordance with the allocation schedule in effect when such
Net Purchase Payment is received at the Service Center unless it is accompanied
by Written Notice directing a different allocation. (See "Crediting and
Allocating Purchase Payments.")
CANCELLING THE CONTRACT
At any time during the Cancellation Period, an Owner may cancel the Contract and
receive a refund equal to the Contract Value plus fees or charges deducted
except for the mortality and expense risk charge and the administration charge.
However, if required by state law, the Company will return the purchase payments
made. The Cancellation Period is a 10-day period of time beginning when the
Contract is received by an Owner. Some states may require that the Company
provide a longer Cancellation Period. (See "DESCRIPTION OF THE CONTRACT --
Cancelling the Contract.")
TRANSFERS
Prior to the Annuity Date, an Owner may transfer all or part of any Subaccount
Value to another available Subaccount(s) or to one or more Guarantee Periods, or
transfer all or part of any Guarantee Amount to any available Subaccount(s) or
other available Guarantee Periods, subject to certain restrictions. (See
"DESCRIPTION OF THE CONTRACT -- Transfers.")
WITHDRAWALS
Upon Written Notice prior to the Annuity Date, an Owner may, subject to certain
restrictions, withdraw part of the Surrender Value. Withdrawals of Surrender
Value may result in the Company deducting from the remaining Contract Value a
Market Value Adjustment, any applicable surrender charge and any applicable
purchase payment tax charge. (See "DESCRIPTION OF THE CONTRACT -- Withdrawals.")
A withdrawal may have adverse federal income tax consequences including the
possibility of being subject to a penalty tax. (See "FEDERAL TAX
CONSIDERATIONS.")
SURRENDERS
Upon Written Notice prior to the Annuity Date, an Owner may surrender the
Contract and receive its Surrender Value. An Owner may elect to have the
Surrender Value paid in a single sum or under an Annuity Payment Option. (See
"DESCRIPTION OF THE CONTRACT -- Surrenders.") Surrenders may have adverse
federal income tax consequences including the possibility of being subject to a
penalty tax. (See "FEDERAL TAX CONSIDERATIONS.")
CHARGES AND FEES
The following charges and fees are assessed under the Contracts:
Surrender Charge. If a purchase payment is withdrawn or surrendered (or received
by a Payee as part of a lump sum payment) within five full calendar years since
the date the purchase payment was received, the Company assesses a surrender
charge. During the first five Contract Years, the Company also assesses a
surrender charge if a purchase payement is applied, as part of Contract Value,
to an Annuity Payment Option. The surrender charge is 7% of the purchase payment
if surrendered or withdrawn within two full years after the purchase payment was
received and reduces by 1% each year for the next three years and is 0% after
five full years following receipt of the purchase payment. No surrender charge
is assessed upon the withdrawal or surrender (or payment) of Contract Value in
excess of aggregate purchase payments (less prior withdrawals of purchase
payments). For purposes of determining the surrender charge, it is assumed that
purchase payments are surrendered or withdrawn before any Contract Value in
excess of purchase payments (less prior withdrawals of purchase payments) and
purchase payments are considered withdrawn on a first-in-first-out basis. (See
"Surrender Charge (Contingent Deferred Sales Charge).")
Administration Charge. The Company makes a daily charge of 0.000411%
(approximately equivalent to an effective annual rate of 0.15%) of the Variable
Account's net assets to cover a portion of the Company's Contract administration
costs. (See "Administration Charge.")
Mortality and Expense Risk Charge. The Company makes a daily charge of
0.003446% (approximately equivalent to an effective annual rate of 1.25%) of the
Variable Account's net assets to compensate the Company for assuming certain
mortality and expense risks. (See "Mortality and Expense Risk Charge.")
Annual Administration Fee. The Company deducts an annual administration fee of
$30 per Contract Year if an Owner's Contract Value is less than $50,000 at
the time of deduction. (See "Annual Administration Fee.")
Transfer Processing Fee. A $25 charge is assessed by the Company for each
transfer in excess of 12 during a Contract Year. (See "Transfer Processing
Fee.")
Taxes on Purchase Payments. Generally, taxes on purchase payments, if any, are
incurred as of the Annuity Date, and a charge for taxes on purchase payments is
deducted from the Contract Value as of that date. These taxes generally range
from 0% to 3.5% of purchase payments. (See "Taxes on Purchase Payments.")
Expenses of the Funds. The investment experience of each Subaccount reflects
that of the Fund whose shares it holds. The investment experience of each Fund,
in turn, reflects its fees and other operating expenses. Please read the
prospectus for each of the Funds for details.
CONDENSED FINANCIAL INFORMATION
There is no condensed financial information included for the Variable Account
because, as of the date of this prospectus, the Variable Account had not yet
commenced operations. The audited financial statements of the Company (as well
as the auditors' reports thereon) appear elsewhere herein.
<PAGE>
THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS, AND
THE GUARANTEED INTEREST OPTION
THE COMPANY
The Company is a life insurance company organized under the laws of the State of
Pennsylvania in 1956 and is authorized to transact business in the District of
Columbia, Puerto Rico, Guam and all states except New York. The Company's home
office is located at 401 Penn St., Reading, Pennsylvania 19601, and its
executive office is located at CNA Plaza, Chicago, Illinois 60685. The Company
is a wholly-owned subsidiary of Continental Assurance Company ("CAC"), a life
insurance company which, as of December 31, 1995, had consolidated assets of
approximately $13.1 billion. Subject to a reinsurance pooling agreement (a type
of reinsurance arrangement) with CAC, the Company assumes all insurance risks
under the Contracts, and the Company's assets, which as of December 31, 1995
exceeded $627.0 million, support the benefits under the Contracts. See
"ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE COMPANY" for more
detail regarding the Company.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of the Company established
under Pennsylvania law on October 18, 1995. The Company owns the assets of the
Variable Account. These assets are held separate from the Company's General
Account and its other separate accounts. That portion of the Variable Account's
assets that is equal to the reserves and other Contract liabilities of the
Variable Account is not chargeable with liabilities arising out of any other
business the Company may conduct. If the assets exceed the required reserves and
other contract liabilities, the Company may transfer the excess to the Company's
General Account. The Variable Account's assets will at all times, equal or
exceed the sum of the Subaccount Values of all Contracts funded by the Variable
Account.
The Variable Account is registered with the SEC under the Investment Company Act
of 1940 (the "1940 Act") as a unit investment trust and meets the definition of
a "separate account" under the federal securities laws. Such registration does
not involve any supervision by the SEC of the management of the Variable Account
or the Company. The Variable Account also is governed by the laws of
Pennsylvania, the Company's state of domicile, and may also be governed by laws
of other states in which the Company does business.
The Variable Account has 18 Subaccounts, each of which invests in shares of a
corresponding Fund. Income, gains and losses, realized or unrealized, from
assets allocated to a Subaccount are credited to or charged against that
Subaccount without regard to other income, gains or losses of the Company.
Changes to the Variable Account. Where permitted by applicable law, the Company
may make the following changes to the Variable Account:
1. Any changes required by the 1940 Act or other applicable law
or regulation;
2. combine separate accounts, including the Variable Account;
3. add new subaccounts to or remove existing Subaccounts from the
Variable Account or combine Subaccounts;
4. make Subaccounts (including new Subaccounts) available to such
classes of Contracts as the Company may determine;
5. add new Funds or remove existing Funds;
6. substitute new Funds for any existing Fund if shares of the
Fund are no longer available for investment or if the Company
determines that investment in a Fund is no longer appropriate
in light of the purposes of the Variable Account;
7. deregister the Variable Account under the 1940 Act if such
registration is no longer required; and
8. operate the Variable Account as a management investment
company under the 1940 Act or as any other form permitted by
law.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. Owners will be notified of any changes.
THE FUNDS
Each Subaccount invests in a corresponding Fund. Each of the Funds is either an
open-end diversified management investment company or a separate investment
portfolio of such a company and is managed by a registered investment adviser.
The Funds as well as a brief description of their investment objectives are
provided below.
Insurance Series
----------------
Federated High Income Bond Fund II, Federated Prime Money Fund II and
Federated Utility Fund II Subaccounts each invest in shares of corresponding
Funds (i.e., investment portfolios) of Insurance Series ("IS"). IS issues
five "series" or classes of shares, each of which represents an interest in
a Fund of IS. Three of these series of shares are available as investment
options under the Contracts. The investment objectives of these Funds are set
forth below.
Federated High Income Bond Fund II. This Fund invests primarily in
lower-rated fixed-income securities that seek to achieve high current
income.
Federated Prime Money Fund II. This Fund invests in money market
instruments maturing in thirteen months or less to achieve
current income consistent with stability of principal and liquidity.
Federated Utility Fund II. This Fund invests in equity and debt
securities of utility companies to achieve high current income and
moderate capital appreciation.
IS is advised by Federated Advisers.
Variable Insurance Products Fund and Variable Insurance Products Fund II
------------------------------------------------------------------------
The Equity-Income Subaccount invests in shares of a corresponding Fund
(i.e., investment portfolios) of Variable Insurance Products Fund ("VIP Fund").
VIP Fund issues five "series" or classes of shares, each of which represents an
interest in a Fund of VIP Fund. One of these series of shares is available as an
investment option under the Contracts. Asset Manager, Contrafund, and Index 500
Subaccounts each invest in shares of corresponding Funds (i.e., investment
portfolios) of Variable Insurance Products Fund II ("VIP Fund II"). VIP Fund II
issues five "series" or classes of shares, each of which represents an interest
in a Fund of VIP Fund II. Three of these series of shares are available as
investment options under the Contracts. The investment objectives of these Funds
are set forth below.
Asset Manager Portfolio. This Fund seeks high total return with reduced
risk over the long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term fixed-income instruments.
Contrafund Portfolio. This Fund seeks capital appreciation over the
long-term by investing in companies that are undervalued or
out-of-favor.
Equity-Income Portfolio. This Fund seeks current income by investing
primarily in income producing equity securities. In choosing these
securities, the Fund also considers the potential for capital
appreciation.
Index 500 Portfolio. This Fund seeks investment results that correspond
to the total return of common stocks publicly traded in the United
States, as represented by the Standard & Poor's 500 Composite Index of
500 Common Stocks.
VIP Fund and VIP Fund II are each advised by Fidelity Management &
Research Company.
The Alger American Fund
-----------------------
Alger American Growth, Alger American MidCap Growth and Alger American
Small Capitalization Subaccounts each invest in shares of corresponding Funds
(i.e., investment portfolios) of The Alger American Fund ("AAF"). AAF issues 6
"series" or classes of shares, each of which represents an interest in a Fund of
AAF. Three of these series of shares are available as investment options under
the Contracts. The investment objectives of these Funds are set forth below.
Alger American Growth Portfolio. This Fund seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio
of equity securities, primarily of companies with total market
capitalization of $ 1 billion or greater.
Alger American MidCap Growth Portfolio. This Fund seeks long-term
capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total
market capitalization between $750 million and $3.5 billion.
Alger American Small Capitalization Portfolio. This Fund seeks
long-term capital appreciation by investing in a diversified, actively
managed portfolio of equity securities, primarily of companies with
total market capitalization of less than $1 billion.
AAF is advised by Fred Alger Management, Inc.
MFS Variable Insurance Trust
----------------------------
The MFS Emerging Growth, MFS Growth with Income, MFS Limited Maturity,
MFS Research and MFS Total Return Subaccounts each invest in shares of
corresponding Funds (i.e., investment portfolios) of MFS Variable Insurance
Trust ("MFSVIT"). MFSVIT issues 12 "series" or classes of shares, each of which
represents an interest in a Fund of MFSVIT. Five of these series of shares are
available as investment options under the Contracts. The investment objectives
of these Funds are set forth below.
MFS Emerging Growth Series. This Fund seeks to obtain long-term growth
of capital by investing primarily in common stocks of small and
medium-sized companies that are early in their life cycle but which
have the potential to become major enterprises.
MFS Growth With Income Series. This Fund seeks to provide reasonable
current income and long-term growth of capital and income.
MFS Limited Maturity Series. This Fund seeks to provide as high a level
of current income as is believed to be consistent with prudent
investment risk, with capital protection as a secondary objective.
MFS Research Series. This Fund seeks to provide long-term growth of
capital and future income.
MFS Total Return Series. This Fund seeks primarily to provide
above-average income consistent with prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital
and income.
MFSVIT is advised by Massachusetts Financial Services Company.
SoGen Variable Funds, Inc.
-------------------------
The SoGen Overseas Subaccount invests in shares of a corresponding Fund
(i.e., investment portfolio) of SoGen Variable Funds, Inc. ("SGVF"). SGVF issues
1 "series" or classes of shares, each of which represents an interest in a
Fund of SGVF. One of these series of shares is available as an investment option
under the Contracts. The investment objective of this Fund is set forth below.
SoGen Overseas Portfolio. This Fund seeks long-term growth of capital
by investing primarily in securities of small and medium size non-U.S.
companies.
SGVF is advised by Societe Generale Asset Management Corp.
Van Eck Worldwide Insurance Trust
---------------------------------
The Emerging Market and Gold and Natural Resources Subaccounts each
invest in shares of corresponding Funds (i.e., investment portfolios) of Van Eck
Worldwide Insurance Trust ("VEWIT"). VEWIT issues 5 "series" or classes of
shares, each of which represents an interest in a Fund of VEWIT. Two of these
series of shares are available as investment options under the Contracts. The
investment objectives of these Funds are set forth below.
Emerging Markets Fund. This Fund seeks capital appreciation by
investing primarily in equity securities in emerging markets around the
world.
Gold and Natural Resources Fund. This Fund seeks long-term capital
appreciation by investing in equity and debt securities of companies
engaged in the exploration, development, production and distribution of
gold and other natural resources such as strategic and other metals,
minerals, forest products, oil, natural gas and coal.
VEWIT is advised by Van Eck Associates Corporation.
NO ONE CAN ASSURE THAT ANY FUND WILL ACHIEVE ITS STATED OBJECTIVES AND
POLICIES.
More detailed information concerning the investment objectives, policies and
restrictions of the Funds, the expenses of the Funds, the risks attendant to
investing in the Funds and other aspects of their operations can be found in the
current prospectus for each Fund which accompanies this prospectus and the
current statement of additional information for the Funds. The Funds'
prospectuses should be read carefully before any decision is made concerning the
allocation of Net Purchase Payments or transfers among the Subaccounts.
Please note that not all of the Funds described in the prospectuses for the
Funds are available with the Contract. Moreover, the Company cannot guarantee
that each Fund will always be available for its variable annuity contracts, but
in the unlikely event that a Fund is not available, the Company will take
reasonable steps to secure the availability of a comparable fund. Shares of each
Fund are purchased and redeemed at net asset value, without a sales charge.
The Company has entered into agreements with the investment advisers of several
of the Funds pursuant to which each such investment adviser pays the Company a
servicing fee based upon an annual percentage of the average aggregate net
assets invested by the Company on behalf of the Variable Account. These
agreements reflect administrative services provided to the Funds by the Company.
Payments of such amounts by an adviser do not increase the fees paid by the
Funds or their shareholders.
Shares of the Funds are sold to separate accounts of insurance companies that
are not affiliated with the Company or each other, a practice known as "shared
funding." They are also sold to separate accounts to serve as the underlying
investment for both variable annuity contracts and variable life insurance
contracts, a practice known as "mixed funding." As a result, there is a
possibility that a material conflict may arise between the interests of Owners,
whose Contract Values are allocated to the Variable Account, and of owners of
other contracts whose contract values are allocated to one or more other
separate accounts investing in any one of the Funds. Shares of some of the Funds
may also be sold directly to certain qualified pension and retirement plans
qualifying under Section 401 of the Code. As a result, there is a possibility
that a material conflict may arise between the interests of Owners or owners of
other contracts (including contracts issued by other companies), and such
retirement plans or participants in such retirement plans. In the event of any
such material conflicts, the Company will consider what action may be
appropriate, including removing the Fund from the Variable Account or replacing
the Fund with another Fund. There are certain risks associated with mixed and
shared funding and with the sale of shares to qualified pension and retirement
plans, as disclosed in each Fund's prospectus.
THE GUARANTEED INTEREST OPTION
The Guaranteed Interest Option is an investment option available under the
Contract and is supported by the Company's General Account and the GIO Account
(described below). All or a portion of an Owner's Net Purchase Payments may be
allocated to and transfers of Contract Value may be made to Guarantee Periods
under the Guaranteed Interest Option. Through the Guaranteed Interest Option,
the Company offers specified effective annual rates of interest (Guaranteed
Interest Rates) that are credited daily and available for specified periods of
time selected by an Owner (Guarantee Periods). Although the Guaranteed Interest
Rate may differ among Guarantee Periods, it will never be less than the
effective annual rate shown in the Contract.
Interests issued by the Company in connection with the Guaranteed Interest
Option have been registered under the Securities Act of 1933, but neither the
Guaranteed Interest Option, the GIO Account, nor the General Account has been
registered as an investment company under the 1940 Act. Accordingly, neither the
Guaranteed Interest Option, the GIO Account, nor the General Account, nor any
interest therein are generally subject to regulation under the 1940 Act.
Initial Guarantee Periods begin on the date as of which a Net Purchase Payment
is allocated to or a portion of Contract Value is transferred to the Guarantee
Period, and end when the number of years in the Guarantee Period elected
(measured from the end of the calendar month in which the amount was allocated
or transferred to the Guarantee Period) has elapsed. The last day of the
Guarantee Period is the expiration date for that Guarantee Period. Subsequent
Guarantee Periods begin on the first day following the expiration date of a
previous Guarantee Period.
Allocations of Net Purchase Payments and transfers of Contract Value to the
Guaranteed Interest Option may have different applicable Guaranteed Interest
Rates depending on the timing of such allocations or transfers. However, the
applicable Guaranteed Interest Rate does not change during a Guarantee Period.
If the allocated or transferred amount remains in the Guaranteed Interest Option
until the end of the applicable Guarantee Period, its value will be equal to the
amount originally allocated or transferred, multiplied, on an annually
compounded basis, by its Guaranteed Interest Rate. If a Guarantee Amount is
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option
prior to 30 days before the expiration of the Guarantee Period, the Guaranteed
Interest Rate for that Guarantee Period is subject to a Market Value Adjustment,
as described below, the application of which may result in the payment of an
amount less than the amount originally allocated or transferred to the Guarantee
Period.
The Company will notify Owners in writing at least 30 days prior to the
expiration date of any Guarantee Period about the then currently available
Guarantee Periods and the Guaranteed Interest Rates applicable to such Guarantee
Periods. A new Guarantee Period of the same duration as the previous Guarantee
Period will commence automatically on the first day following the expiring
Guarantee Period unless the Company receives Written Notice prior to the start
of the new Guarantee Period of the Owner's election of a different Guarantee
Period from among those being offered by the Company at that time, or
instructions to transfer all or a portion of the expiring Guarantee Amount to a
Subaccount. If the Company does not receive such Written Notice and is not
offering a Guarantee Period of the same duration as the expiring Guarantee
Period or if the duration of the expiring Guarantee Period would, if renewed,
extend beyond the Annuity Date, then a new Guarantee Period of one year will
commence automatically on the first day following the expiring Guarantee Period.
The minimum Guarantee Amount is $500.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods that differ from those available when an Owner's
Contract was issued. The Company also reserves the right, at any time, to stop
accepting Net Purchase Payment allocations or transfers of Contract Value to a
particular Guarantee Period. Since the specific Guarantee Periods available may
change periodically, please contact the Service Center to determine the
Guarantee Periods currently being offered.
GIO Account. The assets in the GIO Account are used to support the values and
benefits under the Guaranteed Interest Option of the Contract and similar
contracts. The Company owns the assets in the GIO Account and holds such assets
separately from other Company assets and from the General Account. The portion
of the assets of the GIO Account equal to the reserves and other contract
liabilities of the GIO Account are not chargeable with liabilities that arise
from any other business that the Company conducts. The Company may transfer to
the General Account any assets of the GIO Account that are in excess of such
reserves and other liabilities.
Under Pennsylvania insurance law, the Company is required to maintain assets in
the GIO Account at least equal to the reserves and other contract liabilities of
the GIO Account. In the unlikely event of liquidation of the Company, if the
Company cannot satisfy all of its insurance obligations, Owners with Guaranteed
Interest Option Value will have a priority claim against assets of the GIO
Account equal to its liabilities, and a claim against the Company's general
account for any remaining Company liabilities. Thus, the GIO Account represents
a pool of assets that provides an additional measure of assurance that Owners
allocating Net Purchase Payments and Contract Value to the Guaranteed Interest
Option will receive full payment of benefits attributable to Guaranteed Interest
Option.
Owners allocating Net Purchase Payments and/or Contract Value to the Guaranteed
Interest Option do not participate in the investment performance of assets of
the GIO Account, and this performance does not determine the Guaranteed Interest
Option Value or benefits relating thereto. The Guaranteed Interest Option
provides values and benefits based only upon the Net Purchase Payments and
Contract Values allocated thereto, the Guaranteed Interest Rate credited on such
amounts, and any charges or Market Value Adjustments imposed on such amounts in
accordance with the terms of the Contract.
Market Value Adjustment. A Market Value Adjustment reflects the relationship
between: (i) the current Guaranteed Interest Rate that the Company is crediting
for a Guarantee Period equal to the time remaining in the Guarantee Period from
which the Guarantee Amount is requested to be surrendered, withdrawn,
transferred or annuitized; and (ii) the Guaranteed Interest Rate being applied
to the Guarantee Period from which the Guarantee Amount will be surrendered,
withdrawn, transferred or annuitized. Any surrender, withdrawal, transfer or
application to an Annuity Payment Option of a Guarantee Amount is subject to a
Market Value Adjustment that may be positive or negative, unless the effective
date of the surrender, withdrawal, transfer or application is within 30 days
prior to the end of a Guarantee Period. The Market Value Adjustment will be
applied after the deduction of any applicable annual administration fee or
transfer processing fee, and before the deduction of any applicable surrender
charge or charge for taxes on purchase payments (also referred to as a "premium
tax" charge).
Generally, if the Guaranteed Interest Rate for the selected Guarantee Period is
lower than the Guaranteed Interest Rate currently being offered for new
Guarantee Periods of a duration equal to the balance of the selected Guarantee
Period as of the date that the Market Value Adjustment is applied, then the
application of the Market Value Adjustment will result in the payment, upon
surrender, withdrawal, transfer or application of amounts to an Annuity Payment
Option, of an amount less than the Guarantee Amount (or portion thereof) being
surrendered, withdrawn, transferred or applied to an Annuity Payment Option, or
may even result in the payment of an amount less than the Net Purchase Payment
allocated to or the portion of Contract Value transferred to the Guarantee
Period. Similarly, if the Guaranteed Interest Rate for the selected Guarantee
Period is higher than the Guaranteed Interest Rate currently being offered for
new Guarantee Periods of a duration equal to the balance of the selected
Guarantee Period as of the date that the Market Value Adjustment is applied,
then the application of the Market Value Adjustment will result in the payment,
upon surrender, withdrawal, transfer or application of amounts to an Annuity
Payment Option, of an amount greater than the Guarantee Amount (or portion
thereof) being surrendered, withdrawn, transferred or applied to an Annuity
Payment Option.
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option,
by the Market Value Adjustment Factor. The Market Value Adjustment Factor is
calculated as follows:
Market Value Adjustment = Amount multiplied by
[[(1+a)/(1+b)]^n/12 -1]
where:
"Amount" is the amount being surrendered, withdrawn, transferred or
applied to an Annuity Payment Option less any applicable
annual administration fees or transfer processing fees;
"a" is the Guaranteed Interest Rate currently being credited to the
"Amount";
"b" is the Guaranteed Interest Rate that is currently being offered for a
Guarantee Period of duration equal to the time remaining to the
expiration of the Guarantee Period for the Guarantee Amount from which
the "Amount" is taken. Where the time remaining to the expiration of
the Guarantee Period is not 1, 3, 5, 7, or 10 years, "b" is the rate
found by linear interpolation of the rate for the Guarantee Period
having the duration closest to the time remaining or, if the time
remaining is less than 1 year, "b" is the rate for a 1 year period; and
"n" is the number of complete months remaining before the expiration of the
Guarantee Period for the Guarantee Amount from which the "Amount" is
taken.
Examples of computing the Market Value Adjustment are set forth in Appendix A.
DESCRIPTION OF THE CONTRACT
PURCHASING A CONTRACT
A prospective Owner may purchase a Contract by submitting an application through
a licensed agent of the Company who is also a representative of a broker-dealer
having a selling agreement with CNA Investor Services, Inc. ("CNA/ISI"), the
principal underwriter for the Contracts. The maximum Age for Owners on the
Contract Effective Date is 85. An initial purchase payment must be delivered to
the Service Center along with the Owner's application. The minimum initial
purchase payment is $2,000. The minimum additional purchase payment the Company
will accept is $100. Unless the Company gives its prior approval, it will not
accept an initial purchase payment in excess of $500,000 and reserves the right
to not accept any purchase payment for any reason. The Company will send Owners
a confirmation notice upon receipt and acceptance of the Owner's purchase
payment.
CANCELLING THE CONTRACT
Owners may cancel the Contract during the Cancellation Period, which is the
10-day period after an Owner receives the Contract. Some states may require a
longer Cancellation Period. To cancel the Contract, the Owner must mail or
deliver the Contract to the Service Center or to the agent who sold it. The
Company will refund the Contract Value plus any fees or charges deducted except
for the mortality and expense risk charge and the administration charge. If the
Owner purchased a Contract in a state that requires the return of purchase
payments during the Cancellation Period and the Owner chooses to exercise the
cancellation right, the Company will return the purchase payments.
CREDITING AND ALLOCATING PURCHASE PAYMENTS
If the application for a Contract is properly completed and is accompanied by
all the information necessary to process it, including payment of the initial
purchase payment, the initial Net Purchase Payment will be allocated, as
designated by the Owner, to one or more of the Subaccounts or to one or more
Guarantee Periods within two business days of receipt of such Net Purchase
Payment by the Company at the Service Center. If the application is not properly
completed, the Company reserves the right to retain the Net Purchase Payment for
up to five business days while it attempts to complete the application. If the
application cannot be made complete within five business days, the applicant
will be informed of the reasons for the delay and the initial purchase payment
will be returned immediately unless the applicant specifically consents to the
Company retaining the initial purchase payment until the application is made
complete. The initial Net Purchase Payment will then be credited within two
business days after receipt of a properly completed application. The Company
will credit additional Net Purchase Payments that are accepted by the Company as
of the end of the Valuation Period during which the Payment was received at the
Service Center.
The initial Net Purchase Payment is allocated among the Subaccounts and
Guarantee Periods as specified on the application, unless the Contract is issued
in a state that requires the return of purchase payments during the Cancellation
Period. In those states, any portion of the initial Net Purchase Payment
allocated to the Guaranteed Interest Option will be allocated to that option
upon receipt; and any portion of the initial Net Purchase Payment allocated to
the Subaccounts will be allocated to the Money Market Subaccount for a period
equal to the number of days in the Cancellation Period. At the expiration of
this period, such portion of the Net Purchase Payment, as adjusted to reflect
the investment performance of the Money Market Subaccount during this period, is
then allocated to the Subaccounts as described above.
Owners may allocate Net Purchase Payments among any or all Subaccounts or
Guarantee Periods available. If an Owner elects to invest in a particular
Subaccount or Guarantee Period, at least 1% of the Net Purchase Payment must be
allocated to that Subaccount or Guarantee Period. All percentage allocations
must be in whole numbers. The minimum amount that may be allocated to any
Guarantee Period is $500. The Company allocates any additional Net Purchase
Payments among the Subaccounts and the Guaranteed Interest Option in accordance
with the allocation schedule in effect when such Net Purchase Payment is
received at the Service Center unless it is accompanied by Written Notice
directing a different allocation.
<PAGE>
VARIABLE CONTRACT VALUE
Subaccount Value. The Variable Contract Value is the sum of all Subaccount
Values and therefore reflects the investment experience of the Subaccounts to
which it is allocated. The Subaccount Value for any Subaccount as of the
Contract Effective Date is equal to the amount of the initial Net Purchase
Payment allocated to that Subaccount. On subsequent Valuation Days prior to the
Annuity Date, the Subaccount Value is equal to that part of any Net Purchase
Payment allocated to the Subaccount and any amount transferred to that
Subaccount, adjusted by interest income, dividends, net capital gains or losses,
realized or unrealized, and decreased by withdrawals (including any applicable
surrender charges and any applicable purchase payment tax charge) and any
amounts transferred out of that Subaccount.
Accumulation Units. Net Purchase Payments allocated to a Subaccount or amounts
of Contract Value transferred to a Subaccount are converted into Accumulation
Units. For any Contract, the number of Accumulation Units credited to a
Subaccount is determined by dividing the dollar amount directed to the
Subaccount by the value of the Accumulation Unit for that Subaccount for the
Valuation Day on which the Net Purchase Payment or transferred amount is
invested in the Subaccount. Therefore, Net Purchase Payments allocated to or
amounts transferred to a Subaccount under a Contract increase the number of
Accumulation Units of that Subaccount credited to the Contract.
Decreases in Subaccount Value under a Contract are effected by the cancellation
of Accumulation Units of a Subaccount. Therefore, surrenders, withdrawals,
transfers out of a Subaccount, payment of a death benefit, the application of
Variable Contract Value to an Annuity Payment Option on the Annuity Date, and
the deduction of the annual administration fee all result in the cancellation of
an appropriate number of Accumulation Units of one or more Subaccounts.
Accumulation Units are cancelled as of the end of the Valuation Period in which
the Company received Written Notice regarding the event.
The Accumulation Unit value for each Subaccount was arbitrarily set initially at
$10 when the Subaccount began operations. Thereafter, the Accumulation Unit
value at the end of every Valuation Day equals the Accumulation Unit value at
the end of the preceding Valuation Day multiplied by the Net Investment Factor
(described below). The Subaccount Value for a Contract is determined on any day
by multiplying the number of Accumulation Units attributable to the Contract in
that Subaccount by the Accumulation Unit value for that Subaccount.
The Net Investment Factor. The Net Investment Factor is an index applied to
measure the investment performance of a Subaccount from one Valuation Period to
the next. For each Subaccount, the Net Investment Factor reflects the investment
experience of the Fund in which that Subaccount invests and the charges assessed
against that Subaccount for a Valuation Period. The Net Investment Factor is
calculated by dividing (1) by (2) and subtracting (3) from the result, where:
(1) is the result of:
a. the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the current
Valuation Period; plus
b. the per share amount of any dividend or capital gain
distributions made by the Fund held in the
Subaccount, if the "ex-dividend" date occurs during
the current Valuation Period; plus or minus
c. a per share charge or credit for any taxes reserved
for, which is determined by the Company to have
resulted from the operations of the Subaccount.
(2) is the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the last prior Valuation
Period.
<PAGE>
(3) is a daily factor representing the mortality and expense risk
charge and the administration charge deducted from the
Subaccount, adjusted for the number of days in the Valuation
Period.
TRANSFERS
General. Prior to the Annuity Date and after the Cancellation Period, by Written
Notice, an Owner may transfer all or part of any Subaccount Value to another
Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, or transfer all or part of any Guarantee Amount to any
Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, subject to the following restrictions. The minimum transfer
amount is $500 or the entire Subaccount Value or Guarantee Amount, if less. The
minimum Subaccount Value or Guarantee Amount that may remain following a
transfer is $500. A transfer request that would reduce any Subaccount Value or
Guarantee Amount below $500 is treated as a transfer request for the entire
Subaccount Value or Guarantee Amount. Only four transfers may be made per
Contract Year from all or part of any Guarantee Amount. The first 12 transfers
during each Contract Year are free. The Company assesses a transfer processing
fee of $25 for each transfer in excess of 12 during a Contract Year. The
transfer processing fee is deducted from the amount being transferred. Each
Written Notice of transfer is considered one transfer regardless of how many
Subaccounts or Guarantee Periods are affected by the transfer.
Dollar-Cost Averaging Facility. If elected in the application or at any time
thereafter prior to the Annuity Date by Written Notice, an Owner may
systematically transfer (on a monthly, quarterly, semi-annual or annual basis)
specified dollar amounts from the Money Market Subaccount to other Subaccounts.
This is known as the "dollar-cost averaging" method of investment. The
fixed-dollar amount purchases more Accumulation Units of a Subaccount when their
value is lower and fewer units when their value is higher. Over time, the cost
per unit averages out to be less than if all purchases of Units had been made at
the highest value and greater than if all purchases had been made at the lowest
value. The dollar-cost averaging method of investment reduces the risk of making
purchases only when the price of Accumulation Units is high. It does not assure
a profit or protect against a loss in declining markets.
Owners may only elect use the dollar-cost averaging facility if their Money
Market Subaccount Value is at least $1,000 at the time of the election. The
minimum transfer amount under the facility is $100 per month (or the
equivalent). If dollar-cost averaging transfers are to be made to more than one
Subaccount, then the Owner must indicate the dollar amount of the transfer to be
made to each. At least $50.00 must be designated to each Subaccount.
Transfers under the dollar-cost averaging facility are made as of the same
calendar day each month. If this calendar day is not a Valuation Day, transfers
are made as of the next Valuation Day. Once elected, transfers under the
dollar-cost averaging facility continue until the Money Market Subaccount Value
is depleted, the Annuity Date occurs or until the Owner cancels the election by
Written Notice at least seven days in advance of the next transfer date.
Alternatively, Owners may specify in advance a date for transfers under the
facility to cease. There is no additional charge for using the dollar-cost
averaging facility. Transfers under the facility do not count towards the 12
transfers permitted without a transfer processing fee in any Contract Year. The
Company reserves the right to discontinue offering the dollar-cost averaging
facility at any time and for any reason or to change its features.
Automatic Subaccount Value Rebalancing. If elected in the application or
requested by Written Notice at any time thereafter prior to the Annuity Date, an
Owner may instruct the Company to automatically transfer (on a quarterly,
semi-annual or annual basis) Variable Contract Value between and among specified
Subaccounts in order to achieve a particular percentage allocation of Variable
Contract Value among such Subaccounts ("automatic Subaccount Value
rebalancing"). Such percentage allocations must be in whole numbers. Once
elected, automatic Subaccount Value rebalancing begins on the first Valuation
Day of the next calendar quarter or other period (or, if later, the next
calendar quarter or other period after the expiration of the Cancellation
Period).
Owners may stop automatic Subaccount Value rebalancing at any time by Written
Notice at least seven calendar days before the first Valuation Day in a new
period. Owners may specify allocations between and among as many Subaccounts as
are available at the time automatic Subaccount Value rebalancing is elected.
Once automatic Subaccount Value rebalancing has been elected, any subsequent
allocation instructions that differ from the then-current rebalancing allocation
instructions are treated as a request to change the automatic Subaccount Value
rebalancing allocation. Owners may change automatic Subaccount Value rebalancing
allocations at any time. Allocation changes will take effect as of the Valuation
Day that instructions are received at the Service Center. Once automatic
Subaccount Value rebalancing is in effect, an Owner may only transfer Subaccount
Value among or between Subaccounts by changing the automatic Subaccount Value
rebalancing allocation instructions. Changes to automatic Subaccount Value
rebalancing must be made by Written Notice.
There is no additional charge for automatic Subaccount Value rebalancing and
rebalancing transfers do not count as one the 12 transfers available without a
transfer processing fee during any Contract Year. If automatic Subaccount Value
rebalancing is elected at the same time as the dollar-cost averaging facility or
when the dollar-cost averaging facility is being utilized, automatic Subaccount
Value rebalancing will be postponed until the first Valuation Day in the
calendar quarter or other period following the termination of dollar-cost
averaging facility. The Company reserves the right to discontinue offering
automatic Subaccount Value rebalancing at any time for any reason or to change
its features.
WITHDRAWALS
General. Prior to the Annuity Date and after the Cancellation Period, an Owner
may withdraw part of the Surrender Value, subject to certain limitations. Each
withdrawal must be requested by Written Notice. The minimum withdrawal amount is
$500. The maximum withdrawal is the amount that would leave a minimum Surrender
Value of $1,000. A withdrawal request that would reduce any Subaccount Value or
Guarantee Amount below $500 will be treated as a request for a withdrawal of all
of that Subaccount Value or Guarantee Amount.
The Company withdraws the amount requested from the Contract Value as of the day
that the Company receives an Owner's Written Notice, and sends the Owner that
amount. The Company will then deduct any applicable surrender charge and any
applicable purchase payment tax charge from the remaining Contract Value. If the
withdrawal is requested from a Guarantee Amount, the Company deducts any
applicable Market Value Adjustment from, or adds any applicable Market Value
Adjustment to, remaining Contract Value. A deduction of a Market Value
Adjustment from Contract Value may result in the payment of an amount which,
when added to any remaining Guarantee Amount and amounts previously withdrawn or
transferred, is less than the amount allocated or transferred to a Guarantee
Period to create that Guarantee Amount.
A Written Notice of withdrawal must specify the amount to be withdrawn from each
Subaccount or Guarantee Amount. If the Written Notice does not specify this
information, or if any Subaccount Value or Guarantee Amount is inadequate to
comply with the request, the Company will make the withdrawal based on the
proportion that each Subaccount Value and each Guarantee Amount bears to the
Contract Value as of the day of the withdrawal.
Systematic Withdrawals. If elected in the application or requested at any time
thereafter prior to the Annuity Date by Written Notice, an Owner may elect to
receive periodic withdrawals under the Company's systematic withdrawal plan.
Under the systematic withdrawal plan, the Company will make withdrawals (on a
monthly, quarterly, semi-annual or annual basis) from Subaccounts specified by
the Owner. Systematic withdrawals must be at least $100 each and may only be
made from Variable Contract Value. Withdrawals under the systematic withdrawal
plan may only be made from Subaccounts having $1,000 or more of Subaccount Value
at the time of election. The systematic withdrawal plan is not available to
Owners using the dollar-cost averaging facility or automatic Subaccount Value
rebalancing.
The Company makes systematic withdrawals on the following basis: (1) as a
specified dollar amount, or (2) as a specified whole percent of Subaccount
Value.
Participation in the systematic withdrawal plan terminates on the earliest of
the following events: (1) the Subaccount Value from which withdrawals are being
made becomes zero, (2) a termination date specified by the Owner is reached, or
(3) the Owner requests that his or her participation in the plan cease.
Systematic withdrawals being made in order to meet the required minimum
distribution under the Code or to make substantially equal payments as required
under the Code will continue even though a surrender charge is deducted.
Tax Consequences of Withdrawals. Consult your tax adviser regarding the tax
consequences associated with making withdrawals. A withdrawal made before the
taxpayer reaches Age 59 1/2, including systematic withdrawals, may result in
imposition of a penalty tax of 10% of the taxable portion withdrawn. See
"FEDERAL TAX CONSIDERATIONS" for more details.
SURRENDERS
An Owner may surrender the Contract for its Surrender Value at any time prior to
the Annuity Date. A Contract's Surrender Value fluctuates daily as a function of
the investment experience of the Subaccounts in which an Owner is invested. The
Company does not guarantee any minimum Surrender Value for amounts invested in
the Subaccounts. Likewise, the Company does not guarantee any minimum Surrender
Value for Guarantee Amounts surrendered, withdrawn, transferred or applied to an
Annuity Payment Option before the 30-day period prior to the expiration of a
Guarantee Period.
An Owner may elect to have the Surrender Value paid in a single sum or under an
Annuity Payment Option. The Surrender Value will be determined as of the date
the Company receives the Written Notice for surrender and the Contract at the
Service Center.
Consult your tax adviser regarding the tax consequences of a Surrender. A
Surrender made before age 59 1/2 may result in the imposition of a penalty tax
of 10% of the taxable portion of the Surrender Value. See "FEDERAL TAX
CONSIDERATIONS" for more details.
DEATH BENEFITS
Death Benefits on or After the Annuity Date. If an Owner dies on or after the
Annuity Date, any surviving joint Owner becomes the sole Owner. If there is no
surviving Owner, any successor Owner becomes the new Owner. If there is no
surviving or successor Owner, the Payee becomes the new Owner. If an Annuitant
or an Owner dies on or after the Annuity Date, the remaining undistributed
portion, if any, of the Contract Value will be distributed at least as rapidly
as under the method of distribution being used as of the date of such death.
Under some Annuity Payment Options, there will be no death benefit.
Death Benefits When the Owner Dies Before the Annuity Date. If any Owner dies
prior to the Annuity Date, any surviving joint Owner becomes the new sole Owner.
If there is no surviving joint Owner, any successor Owner becomes the new Owner
and if there is no successor Owner the Annuitant becomes the new Owner unless
the deceased Owner was also the Annuitant. If the sole deceased Owner was also
the Annuitant, then the provisions relating to the death of the Annuitant
(described below) will govern unless the deceased Owner was one of two joint
Annuitants, in which event the surviving Annuitant becomes the new Owner.
<PAGE>
The following options are available to new Owners:
1. to receive the Adjusted Contract Value in a single lump sum
within five years of the deceased Owner's death; or
2. elect to receive the Adjusted Contract Value paid out under an
Annuity Payment Option provided that: (a) Annuity Payments
begin within one year of the deceased Owner's death, and (b)
Annuity Payments are made in substantially equal installments
over the life of the new Owner or over a period not greater
than the life expectancy of the new Owner; or
3. if the new Owner is the spouse of the deceased Owner, he or
she may by Written Notice within one year of the Owner's
death, elect to continue the Contract as the new Owner. If the
spouse so elects, all of his or her rights as a Beneficiary
cease and if the deceased Owner was also the sole Annuitant
and appointed no Contingent Annuitant, he or she will become
the Annuitant. The spouse will be deemed to have made the
election to continue the Contract if he or she makes no
election before the expiration of the one year period or if he
or she makes any purchase payments under the Contract.
With regard to new Owners who are not the spouse of the deceased Owner: (a) 1
and 2 apply even if the Annuitant or Contingent Annuitant is alive at the time
of the deceased Owner's death, (b) if the new Owner is not a natural person,
only option 1 is available, (c) if no election is made within one year of the
deceased Owner's death, option 1 is deemed to have been elected.
Adjusted Contract Value is computed as of the date that the Company receives Due
Proof of Death of the Owner. Payments under this provision are in full
settlement of all of the Company's liability under the Contract.
Death Benefits When the Annuitant Dies Before the Annuity Date. If the Annuitant
dies before the Annuity Date while the Owner is still living, any Contingent
Annuitant will become the Annuitant. If the Annuitant dies before the Annuity
Date and no Contingent Annuitant has been named, the Company will pay the death
benefit described below to the Beneficiary. If there is no surviving
Beneficiary, the Company will pay the death benefit to any Contingent
Beneficiary. If there is no surviving Contingent Beneficiary, the Company will
immediately pay the death benefit to the Owner's estate in a lump sum.
If the Annuitant who is also an Owner dies or if the Annuitant dies and the
Owner is not a natural person, a Beneficiary (or a Contingent Beneficiary):
1. will receive the death benefit in a single lump sum within 5
years of the deceased Annuitant's death; or
2. may elect to receive the death benefit paid out under an
Annuity Payment Option provided that: (a) Annuity Payments
begin within 1 year of the deceased Annuitant's death, and (b)
Annuity Payments are made in substantially equal installments
over the life of the Beneficiary or over a period not greater
than the life expectancy of the Beneficiary; or
3. if the Beneficiary is the spouse of the deceased Annuitant, he
or she may by Written Notice within one year of the
Annuitant's death, elect to continue the Contract as the new
Owner. If the spouse so elects, all his or her rights as a
Beneficiary cease and if the deceased Annuitant was also the
sole Annuitant and appointed no Contingent Annuitant, he or
she will become the Annuitant. The spouse will be deemed to
have made the election to continue the Contract if he or she
makes no election before the expiration of the one year period
or if he or she makes any purchase payments under the
Contract.
<PAGE>
The Death Benefit. If the Annuitant is Age 75 or younger, the death benefit is
an amount equal to the greatest of:
1. aggregate purchase payments made less any withdrawals
(including the applicable surrender charges, purchase payment
tax charge and Market Value Adjustments) as of the date that
the Company receives Due Proof of Death of the Annuitant; or
2. the Contract Value as of the date that the Company receives
Due Proof of Death of the Annuitant; or
3. the minimum death benefit described below;
less any applicable purchase payment tax charge on the date that the death
benefit is paid.
The minimum death benefit is the death benefit floor amount as of the date of
the Annuitant's death (a) adjusted, for each withdrawal made since the most
recent reset of the death benefit floor amount, multiplying that amount by the
product of all ratios of the Contract Value immediately after a withdrawal to
the Contract Value immediately before such withdrawal (b) plus any purchase
payments made since the most recent reset of the death benefit floor amount.
The death benefit floor amount is the largest Contract Value attained on any
prior death benefit floor computation anniversary. Death benefit floor
computation anniversaries are the 5th Contract Anniversary and each subsequent
5th Contract Anniversary (i.e., the 10th Contract Anniversary, the 15th Contract
Anniversary, etc.) prior to the Annuitant's Age 76. Therefore, the death benefit
floor amount is reset when, on a death benefit floor computation anniversary,
Contract Value exceeds the current death benefit floor amount.
If the Annuitant is Age 76 or older, the death benefit is an amount equal to the
greater of 1 or 2 above.
Examples of the computation of the death benefit are shown in Appendix B.
PAYMENTS BY THE COMPANY
The Company generally makes payments of withdrawals, surrenders, death benefits,
or any Annuity Payments within seven days of receipt of all applicable Written
Notices and/or Due Proofs of Death. However, the Company may postpone such
payments for any of the following reasons:
1. when the New York Stock Exchange ("NYSE") is closed for
trading other than customary holiday or weekend closing, or
trading on the NYSE is restricted, as determined by the SEC;or
2. when the SEC by order permits a postponement for the
protection of Owners; or
3. when the SEC determines that an emergency exists that would
make the disposal of securities held in the Variable Account
or the determination of their value not reasonably practicable.
If a recent check or draft has been submitted, the Company has the right to
defer payment of surrenders, withdrawals, death benefits, or Annuity Payments
until the check or draft has been honored.
The Company may defer payment of any withdrawal, surrender, or transfer of
Guaranteed Interest Option Value up to six months after it receives an Owner's
Written Notice. The Company pays interest on the amount of any payment that is
deferred.
TELEPHONE TRANSACTION PRIVILEGES
If an Owner has elected this privilege in a form provided by the Company, an
Owner may make transfers or change allocation instructions by telephoning the
Service Center. A telephone authorization form received by the Company at the
Service Center is valid until it is rescinded or revoked by Written Notice or
until a subsequently dated form signed by the Owner is received at the Service
Center. The Company will send Owners a written confirmation of all transfers and
allocation changes made pursuant to telephone instructions.
The Service Center requires a form of personal identification prior to acting on
instructions received by telephone and also may tape record instructions
received by phone. If the Company follows these procedures, it is not liable for
any losses due to unauthorized or fraudulent transactions. The Company reserves
the right to suspend telephone transaction privileges at any time for any
reason.
CONTRACT CHARGES AND FEES
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
General. No sales charge is deducted from purchase payments at the time that
such payments are made. However, within certain time limits described below, a
surrender charge is deducted upon any withdrawal or surrender. A surrender
charge is assessed on Cash Value applied to an Annuity Payment Option during the
first five Contract Years. No surrender charge is assessed on Contract Value
applied to an Annuity Payment Option after the fifth Contract Year. If on the
Annuity Date, however, the Payee elects (or the Owner previously elected) to
receive a lump sum, this sum will equal the Surrender Value on such date.
In the event that surrender charges are not sufficient to cover sales expenses,
such expenses will be borne by the Company. Conversely, if the revenue from such
charges exceeds such expenses, the excess of revenues from such charges over
expenses will be retained by the Company. The Company does not currently believe
that the surrender charges deducted will cover the expected costs of
distributing the Contracts. Any shortfall will be made up from the Company's
general assets, which may include amounts derived from the mortality and expense
risk charge.
Charge for Surrender or Withdrawals. The surrender charge is equal to the
percentage of each purchase payment surrendered or withdrawn (or applied to an
Annuity Payment Option during the first five Contract Years) as shown in the
table below. The surrender charge is separately calculated and applied to each
purchase payment at the time that the purchase payment is surrendered or
withdrawn. No surrender charge applies to the Contract Value in excess of
aggregate purchase payments (less prior withdrawals of the payments). The
surrender charge is calculated using the assumption that purchase payments are
surrendered or withdrawn before Contract Value in excess of aggregate purchase
payments (less prior withdrawals of purchase payments) and that purchase
payments are withdrawn on a first-in-first-out basis.
Number of Full Years Elapsed Between Surrender Charge as a Percentage
Date of Receipt of Purchase Payment and of Purchase Payment
Date of Surrender of Withdrawal Withdrawn or Surrendered
0 7%
1 7%
2 6%
3 5%
4 4%
5+ 0%
Withdrawals. With regard to all withdrawals, the Company withdraws the amount
requested from the Contract Value as of the day that it receives the Written
Notice regarding the withdrawal and sends the Owner that amount. The Company
then deducts any surrender charge and any applicable purchase payment tax charge
from the remaining Contract Value. If the withdrawal is requested from a
Guarantee Amount, the Company deducts any applicable Market Value Adjustment
from, or adds any applicable Market Value Adjustment to, remaining Contract
Value. For the purpose of computing the surrender charge, the deduction of the
Market Value Adjustment, purchase payment tax charge and surrender charge is
considered to be made from Contract Value in excess of aggregate purchase
payments (less prior withdrawals of purchase payments).
Amounts Not Subject to a Surrender Charge. Each Contract Year after the first
Contract Year, an Owner may withdraw an amount equal to 15% of the aggregate
purchase payments less prior withdrawals of purchase payments as of the first
Valuation Day of that Contract Year without incurring a surrender charge. The
Company reserves the right to limit the number of such "free" withdrawals in any
Contract Year.
Waiver of Surrender Charge. The Company will waive the surrender charge in the
event that the Owner: (1) enters an "eligible nursing home," as defined in the
Contract, for a period of at least 90 days, (2) is diagnosed as having a
"terminal medical condition," as defined in the Contract, or (3) is less than
age 65 and sustains a "permanent and total disability," as defined in the
Contract. The Company reserves the right to require written proof of terminal
medical condition or permanent and total disability satisfactory to it and to
require an examination by a licensed physician of its choice. The surrender
charge waiver is not available in all states due to applicable insurance laws in
effect in various states.
ANNUAL ADMINISTRATION FEE
An annual administration fee is deducted as of each Contract Anniversary for the
prior Contract Year. The Company also deducts this fee for the current Contract
Year when determining the Surrender Value prior to the end of a Contract Year
and on the Annuity Date. If Contract Value is $50,000 or less at the time of the
fee deduction, then the annual administration fee is $30. The fee is zero for
Contracts where the Contract Value exceeds $50,000 at the time the fee would be
deducted. This fee is to cover a portion of the Company's administrative
expenses related to the Contracts. The Company does not expect to make a profit
from this fee.
The annual administration fee is assessed against Subaccount Values and
Guarantee Amounts based on the proportion that each bears to the Contract Value.
Where the fee is deducted from Subaccount Values, the Company will cancel an
appropriate number of Accumulation Units. Where the fee is obtained from a
Guarantee Amount, the Company will reduce the Guarantee Amount by the amount of
the fee.
TRANSFER PROCESSING FEE
Prior to the Annuity Date, the Company permits 12 free transfers per Contract
Year among and between the Subaccounts and the Guarantee Periods. For each
additional transfer, the Company charges $25 at the time each such transfer is
processed. The fee is deducted from the amount being transferred. The Company
does not expect to make a profit from this fee.
TAXES ON PURCHASE PAYMENTS
Certain states and municipalities impose a tax on the Company in connection with
the receipt of annuity considerations. This tax can range from 0% to 3.5% of
such considerations and generally varies based on the Annuitant's state of
residence. Taxes on annuity considerations are generally incurred by the Company
as of the Annuity Date based on the Contract Value on that date, and the Company
deducts the charge for taxes on annuity considerations from the Contract Value
as of the Annuity Date. Some jurisdictions impose a tax on annuity
considerations at the time such considerations are made. In those jurisdictions,
the Company's current practice is to pay the tax on annuity considerations and
then deduct the charge for these taxes from the Contract Value upon surrender,
payment of the death benefit, or upon the Annuity Date. The Company reserves the
right to deduct any state and local taxes on annuity considerations from the
Contract Value at the time such tax is due.
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a daily charge from the assets of the Variable Account to
compensate it for mortality and expense risks that it assumes under the
Contract. The daily charge is at the rate of 0.003446% (approximately equivalent
to an effective annual rate of 1.25%) of the net assets of the Variable Account.
Approximately .70% of this annual charge is for the assumption of mortality risk
and .55% is for the assumption of expense risk. If the mortality and expense
risk charge is insufficient to cover the actual cost of the mortality and
expense risks undertaken by the Company, the Company will bear the shortfall.
Conversely, if the charge proves more than sufficient, the excess will be profit
to the Company and will be available for any proper purpose including, among
other things, payment of expenses incurred in selling the Contracts.
The mortality risk that the Company assumes is the risk that Annuitants, as a
group, will live for a longer period of time than the Company estimated when it
established the guaranteed Annuity Payment rates in the Contract. Because of
these guarantees, each Payee is assured that his or her longevity will not have
an adverse effect on the Annuity Payments that he or she receives under Annuity
Payment Options based on life contingencies. The Company also assumes a
mortality risk because the Contracts guarantee a death benefit if the Annuitant
dies before the Annuity Date. The expense risk that the Company assumes is the
risk that administration charge, annual administration fee and the transfer
processing fee may be insufficient to cover the actual expenses of administering
the Contracts.
ADMINISTRATION CHARGE
The Company deducts a daily administration charge from the assets of the
Variable Account to compensate it for a portion of the expenses it incurs in
administering the Contracts. The daily charge is at a rate of 0.000411%
(approximately equivalent to an effective annual rate of 0.15%) of the net
assets of the Variable Account. The Company does not expect to make a profit
from this charge.
FUND EXPENSES
The investment performance of each Fund reflects the management fee that it pays
to its investment manager or adviser as well as other operating expenses that it
incurs. Investment management fees are generally daily fees computed as a
percent of a Fund's average daily net assets at an annual rate. Please read the
prospectus for each Fund for complete details.
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
At the present time, the Company makes no charge to the Variable Account for any
federal, state, or local taxes that the Company incurs which may be attributable
to the Variable Account or the Contracts. The Company, however, reserves the
right in the future to make a charge for any such tax or other economic burden
resulting from the application of the tax laws that it determines to be properly
attributable to the Subaccounts or to the Contracts.
SELECTING AN ANNUITY PAYMENT OPTION
ANNUITY DATE
The Owner selects the Annuity Date in the application. For Non-Qualified
Contracts, the Annuity Date must be no later than the later of the Contract
Anniversary following the Annuitant's Age 85 or 10 years after the Contract
Effective Date. For Qualified Contracts, the Annuity Date must be no later than
April 1 of the calendar year following the calendar year in which the Owner
attains age 70 1/2. An Owner may change the Annuity Date by Written Notice,
subject to the following limitations:
1. Written Notice is received at least 30 days before the current
Annuity Date; and
2. the requested new Annuity Date must be at least 30 days after
the Company receives Written Notice.
<PAGE>
ANNUITY PAYMENT DATES
The Company computes the first Annuity Payment as of the Annuity Date and makes
the first Annuity Payment as of the initial Annuity Payment Date selected by the
Owner. The initial Annuity Payment Date is the Annuity Date unless the Annuity
Date is the 29th, 30th, or 31st day of a calendar month, in which event, the
Owner must select a different date. All subsequent Annuity Payments are computed
and payable as of Annuity Payment Dates. These dates will be the same day of the
month as the initial Annuity Payment Date. Monthly Annuity Payments will be
computed and payable as of the same day each month as the initial Annuity
Payment Date. Quarterly Annuity Payments will be computed and payable as of the
same day in the third, sixth, ninth, and twelfth month following the initial
Annuity Payment Date and on the same days of such months in each successive
Contract Year. Semi-annual Annuity Payment Dates will be computed and payable as
of the same day in the sixth and twelfth month following the initial Annuity
Payment Date and on the same days of such months in each successive Contract
Year. Annual Annuity Payments will be computed and payable as of the same day in
each Contract Year as the initial Annuity Payment Date. The frequency of Annuity
Payments selected is shown in the Contract. In the event that the Owner does not
select a payment frequency, payments will be made monthly.
ELECTION AND CHANGES OF ANNUITY PAYMENT OPTIONS
On the Annuity Date, the Surrender Value or Adjusted Contract Value is applied
under an Annuity Payment Option, unless the Owner elects to receive the
Surrender Value in a lump sum. If the Annuity Date falls during the first five
Contract Years, Surrender Value is applied under an Annuity Payment Option. If
the Annuity Date falls after the fifth Contract Anniversary, Adjusted Contract
Value is applied under an Annuity Payment Option. The Annuity Payment Option
specifies the type of annuity to be paid and determines how long the annuity
will be paid, the frequency, and the amount of each payment. The Owner may elect
or change the Annuity Payment Option by Written Notice at any time prior to the
Annuity Date. The Owner may elect to apply any portion of the Surrender Value or
Adjusted Contract Value to provide either Variable Annuity Payments or Fixed
Annuity Payments or a combination of both. If Variable Annuity Payments are
selected, the Owner must also select the Subaccounts to which Surrender Value or
Adjusted Contract Value will be applied. If no selection has been made by the
Annuity Date, Surrender Value or Adjusted Contract Value from any Guaranteed
Interest Option Value will be applied to purchase Fixed Annuity Payments and
Surrender Value or Adjusted Contract Value from each Subaccount Value will be
applied to purchase Variable Annuity Payments from that Subaccount. If no
Annuity Payment Option has been selected by the Annuity Date, Surrender Value or
Adjusted Contract Value will be applied under Annuity Payment Option 5 (Life
Annuity with Period Certain) with a designated period of 10 years. Any death
benefit applied to purchase Annuity Payments is allocated among the Subaccounts
and/or the Guaranteed Interest Option as instructed by the Beneficiary unless
the Owner previously made the foregoing elections.
ANNUITY PAYMENTS
Fixed Annuity Payments. Fixed Annuity Payments are periodic payments from the
Company to the designated Payee, the amount of which is fixed and guaranteed by
the Company. The dollar amount of each Fixed Annuity Payment depends on the form
and duration of the Annuity Payment Option chosen, the Age of the Annuitant, the
sex of the Annuitant (if applicable), the amount of Adjusted Contract Value
applied to purchase the Fixed Annuity Payments and, for Annuity Payment Options
3-6, the applicable annuity purchase rates. The annuity purchase rates in the
Contract are based on a Guaranteed Interest Rate of not less than 3.0%. The
Company may, in its sole discretion, make Fixed Annuity Payments in an amount
based on a higher interest rate. If Fixed Annuity Payments are computed based on
an interest rate in excess of the minimum Guaranteed Interest Rate, then, for
the period of the higher rate, the dollar amount of such Fixed Annuity Payments
will be greater than the dollar amount based on 3.0%. The Company guarantees
that any higher rate will be in effect for at least 12 months.
Except for Annuity Payment Options 1 and 2, the dollar amount of the first Fixed
Annuity Payment is determined by dividing the dollar amount of Adjusted Contract
Value being applied to purchase Fixed Annuity Payments by $1,000 and multiplying
the result by the annuity purchase rate in the Contract for the selected Annuity
Payment Option. Subsequent Fixed Annuity Payments are of the same dollar amount
unless the Company makes payments based on an interest rate different from that
used to compute the first payment.
Variable Annuity Payments. Variable Annuity Payments are periodic payments from
the Company to the designated Payee, the amount of which varies from one Annuity
Payment Date to the next as a function of the net investment experience of the
Subaccounts selected by the Owner or Payee to support such payments. The dollar
amount of the first Variable Annuity Payment is determined in the same manner as
that of a Fixed Annuity Payment. Therefore, provided that the interest rate on
which Fixed Annuity Payments are based equals the Benchmark Rate of Return on
which Variable Annuity Payments are based, for any particular amount of Adjusted
Contract Value applied to a particular Annuity Payment Option, the dollar amount
of the first Variable Annuity Payment would be the same as the dollar amount of
each Fixed Annuity Payment. Variable Annuity Payments after the first Payment
are similar to Fixed Annuity Payments except that the amount of each Payment
varies to reflect the net investment experience of the Subaccounts selected by
the Owner or Payee.
The dollar amount of the initial Variable Annuity Payment attributable to each
Subaccount is determined by dividing the dollar amount of the Adjusted Contract
Value to be allocated to that Subaccount on the Annuity Date by $1,000 and
multiplying the result by the annuity purchase rate in the Contract for the
selected Annuity Payment Option. The dollar value of the total initial Variable
Annuity Payment is the sum of the initial Variable Annuity Payments attributable
to each Subaccount.
The number of Annuity Units attributable to a Subaccount is derived by dividing
the initial Variable Annuity Payment attributable to that Subaccount by the
Annuity Unit Value for that Subaccount for the Valuation Period ending on the
Annuity Date or during which the Annuity Date falls if the Valuation Period does
not end on such date. The number of Annuity Units attributable to each
Subaccount under a Contract remains fixed unless there is an exchange of Annuity
Units.
The dollar amount of each subsequent Variable Annuity Payment attributable to
each Subaccount is determined by multiplying the number of Annuity Units of that
Subaccount credited under the Contract by the Annuity Unit Value (described
below) for that Subaccount for the Valuation Period ending on the Annuity
Payment Date, or during which the Annuity Payment Date falls if the Valuation
Period does not end on such date. The dollar value of each subsequent Variable
Annuity Payment is the sum of the subsequent Variable Annuity Payments
attributable to each Subaccount.
The Annuity Unit Value of each Subaccount for any Valuation Period is equal to
(a) multiplied by (b) divided by (c) where:
(a) is the Net Investment Factor for the Valuation Period for
which the Annuity Unit Value is being calculated;
(b) is the Annuity Unit Value for the preceding Valuation Period;
and
(c) is a daily Benchmark Rate of Return factor (for the 3%
benchmark rate of return) adjusted for the number of days in
the Valuation Period.
The Benchmark Rate of Return factor is equal to one plus 3%, or 1.03. The annual
factor can be translated into a daily factor of 1.00008098.
If the net investment return of the Subaccount for an Annuity Payment period is
equal to the pro-rated portion of the 3% Benchmark Rate of Return, the Variable
Annuity Payment attributable to that Subaccount for that period will equal the
Payment for the prior period. To the extent that such net investment return
exceeds an annualized rate of return of 3% for a Payment period, the Payment for
that period will be greater than the Payment for the prior period and to the
extent that such return for a period falls short of an annualized rate of 3%,
the Payment for that period will be less than the Payment for the prior period.
Exchange of Annuity Units. By Written Notice at any time after the Annuity Date,
the Payee may exchange the dollar value of a designated number of Annuity Units
of a particular Subaccount for an equivalent dollar amount of Annuity Units of
another Subaccount. On the date of the exchange, the dollar amount of a Variable
Annuity Payment generated from the Annuity Units of either Subaccount would be
the same. Exchanges of Annuity Units are treated as transfers for the purpose of
computing any transfer processing fee.
ANNUITY PAYMENT OPTIONS
OPTION 1. INTEREST PAYMENTS. The Company holds the Adjusted Contract Value as
principal and pays interest to the Payee. The interest rate is 3% per year
compounded annually. The Company pays interest every 1 year, 6 months, 3 months
or 1 month, as specified at the time this option is selected. At the death of
the Payee, the value of the remaining payments are paid in a lump sum to the
Payee's estate. Only Fixed Annuity Payments are available under Annuity Payment
Option 1.
OPTION 2. PAYMENTS OF A SPECIFIED AMOUNT. The Company pays the Adjusted Contract
Value in equal payments every 1 year, 6 months, 3 months or 1 month. The amount
and frequency of the payments is specified at the time this option is selected.
After each payment, interest is added to the remaining amount applied under this
option that has not yet been paid. The interest rate is 3% per year compounded
annually. Payments are made to the Payee until the amount applied under this
option, including interest, is exhausted. The total of the payments made each
year must be at least 5% of the amount applied under this option. If the Payee
dies before the amount applied is exhausted, the Company pays the value of the
remaining payments in a lump sum to the Payee's estate. Only Fixed Annuity
Payments are available under Annuity Payment Option 2.
ADDITIONAL INTEREST EARNINGS. The Company may pay interest at rates in excess
of the rates guaranteed in Annuity Payment Options 1 and 2.
OPTION 3. PAYMENTS FOR A SPECIFIED PERIOD. The Company pays the lump sum in
equal payments for the number of years specified when the option is selected.
Payments are made every 1 year, 6 months, 3 months or 1 month, as specified when
the option is selected. If the Payee dies before the expiration of the specified
number of years, the Company pays the commuted value of the remaining payments
in a lump sum to the Payee's estate.
OPTION 4. LIFE ANNUITY. The Company makes monthly payments to the Payee for as
long as the Annuitant lives. UNDER THIS OPTION, A PAYEE COULD RECEIVE ONLY ONE
PAYMENT IF THE ANNUITANT DIES AFTER THE FIRST PAYMENT, TWO PAYMENTS IF THE
ANNUITANT DIES AFTER THE SECOND PAYMENT, ETC.
OPTION 5. LIFE ANNUITY WITH PERIOD CERTAIN. The Company makes monthly payments
to the Payee for as long as the Annuitant lives. At the time this option is
selected, a period certain of 5, 10, 15, or 20 years must also be selected. If
the Annuitant dies before the specified period certain ends, the payments to the
Payee will continue until the end of the specified period. The amount of the
monthly payments therefore depends on the period certain selected.
OPTION 6. JOINT LIFE AND SURVIVORSHIP ANNUITY. The Company makes monthly
payments to the Payee while both Annuitants are living. After the death of
either Annuitant, payments continue to the Payee for as long as the other
Annuitant lives. UNDER THIS OPTION, THE PAYEE COULD RECEIVE ONLY ONE PAYMENT IF
BOTH ANNUITANTS DIE AFTER THE FIRST PAYMENT, TWO PAYMENTS IF BOTH ANNUITANTS DIE
AFTER THE SECOND PAYMENT, ETC.
<PAGE>
ADDITIONAL CONTRACT INFORMATION
OWNERSHIP
The Contract belongs to the Owner. An Owner may exercise all of the rights and
options described in the Contract.
Subject to more specific provisions elsewhere herein, an Owner's rights include
the right to: (1) select or change a successor Owner, (2) select or change any
Beneficiary or Contingent Beneficiary, (3) select or change the Payee prior to
the Annuity Date, (4) select or change the Annuity Payment Option, (5) allocate
Net Purchase Payments among and between the Subaccounts and Guarantee Periods,
(6) transfer Contract Value among and between the Subaccounts and Guarantee
Periods, and (7) select or change the Subaccounts on which Variable Annuity
Payments are based.
The rights of Owners of Qualified Contracts may be restricted by the terms of a
related employee benefit plan. For example, such plans may require an Owner of a
Qualified Contract to obtain the consent of his or her spouse before exercising
certain ownership rights or may restrict withdrawals. See "FEDERAL TAX
CONSIDERATIONS" for more details.
Selection of an Annuitant or Payee who is not the Owner may have tax
consequences. See "FEDERAL TAX CONSIDERATIONS" for more details.
CHANGING THE OWNER OR BENEFICIARY
Prior to the Annuity Date and after the Cancellation Period, an Owner may
transfer ownership of the Contract subject to the Company's published rules at
the time of the change. A new Owner must be less than Age 76.
At any time before a death benefit is paid, the Owner may name a new Beneficiary
by Written Notice unless an irrevocable Beneficiary has previously been named.
When an irrevocable Beneficiary has been designated, the Owner must provide the
irrevocable Beneficiary's written consent to the Company before a new
Beneficiary is designated.
These changes take effect as of the day the Written Notice is received at the
Service Center and the Company is not liable for any payments made under the
Contract prior to the effectiveness of any change. For possible tax consequences
of these changes, see "FEDERAL TAX CONSIDERATIONS."
MISSTATEMENT OF AGE OR SEX
If an Age or sex of the Annuitant given in the application is misstated, the
Company will adjust the benefits it pays under the Contract to the amount that
would have been payable at the correct Age or sex. If the Company made any
underpayments because of any such misstatement, it shall pay the amount of such
underpayment plus interest at an annual effective rate of 3%, immediately to the
Payee or Beneficiary in one sum. If the Company makes any overpayments because
of a misstatement of Age or sex, it shall deduct from current or future payments
due under the Contract, the amount of such overpayment plus interest at an
annual effective rate of 3%.
CHANGE OF CONTRACT TERMS
Upon notice to the Owner, the Company may modify the Contract to:
1. conform the Contract or the operations of the Company or of
the Variable Account to the requirements of any law (or
regulation issued by a government agency) to which the
Contract, the Company or the Variable Account is subject;
2. assure continued qualification of the Contract as an annuity
contract or a Qualified Contract under the Code;
3. reflect a change (as permitted in the Contract) in the
operation of the Variable Account; or
4. provide additional Subaccounts and/or Guarantee Periods.
In the event of any such modification, the Company will make appropriate
endorsements to the Contract.
Only one of the Company's officers may modify the Contract or waive any of the
Company's rights or requirements under the Contract. Any modification or waiver
must be in writing. No agent may bind the Company by making any promise not
contained in the Contract.
REPORTS TO OWNERS
Prior to the Annuity Date, the Company will send each Owner a report at least
annually, or more often as required by law, indicating: the number of
Accumulation or Annuity Units credited to the Contract and the dollar value of
such units; the Contract Value, Adjusted Contract Value and Surrender Value; any
purchase payments, withdrawals, or surrenders made, death benefits paid and
charges deducted since the last report; the current interest rate applicable to
each Guarantee Amount; and any other information required by law.
The reports, which will be mailed to Owners at their last known address, will
include any information that may be required by the SEC or the insurance
supervisory official of the jurisdiction in which the Contract is delivered.
The Company will also send any other reports, notices or documents required by
law to be furnished to Owners.
MISCELLANEOUS
Non-Participating. The Contract does not participate in the surplus or profits
of the Company and the Company does not pay dividends on the Contract.
Protection of Proceeds. To the extent permitted by law, no benefits payable
under the Contract to a Beneficiary or Payee are subject to the claims of an
Owner's or a Beneficiary's creditors.
Discharge of Liability. Any payments made by the Company under any Annuity
Payment Option or in connection with the payment of any withdrawal, surrender or
death benefit, shall discharge the Company's liability to the extent of each
such payment.
Proof of Age and Survival. The Company reserves the right to require proof of
the Annuitant's Age prior to the Annuity Date. In addition, for life contingent
Annuity Options, the Company reserves the right to require proof of the
Annuitant's survival before any Annuity Payment Date.
Contract Application. The Company issues the Contract in consideration of the
Owner's application and payment of the initial purchase payment. The entire
Contract is made up of the Contract, any attached endorsements or riders, and
the application. In the absence of fraud, the Company considers statements made
in the application to be representations and not warranties. The Company will
not use any statement in defense of a claim or to void the Contract unless it is
contained in the application. The Company will not contest the Contract.
YIELDS AND TOTAL RETURNS
From time to time, the Company may advertise or include in sales literature
certain performance related information for the Subaccounts, including yields
and average annual total returns. Certain Funds have been in existence prior to
the commencement of the offering of the Contracts. The Company may advertise or
include in sales literature the performance of the Subaccounts that invest in
these Funds for these prior periods. The performance information of any period
prior to the commencement of the offering of the Contracts is calculated as if
the Contract had been offered during those periods, using current charges and
expenses.
Performance information discussed herein is based on historic results and does
not indicate or project future performance. For a description of the methods
used to determine yield and total return for the Subaccounts, see the Statement
of Additional Information.
Effective yields and total returns for the Subaccounts are based on the
investment performance of the corresponding Funds. The performance of a Fund in
part reflects its expenses. See the prospectuses for the Funds for Fund expense
information.
The yield of the Money Market Subaccount refers to the annualized income
generated by an investment in the Subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-day
period is generated each seven-day period over a 52-week period and is shown as
a percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Subaccount is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Subaccount other than the Money Market Subaccount refers to the
annualized income generated by an investment in the Subaccount over a specified
30-day or one-month period. The yield is calculated by assuming that the income
generated by the investment during that 30-day or one-month period is generated
each period over a 12-month period and is shown as a percentage of the
investment.
The total return of a Subaccount refers to return quotations assuming an
investment under a Contract has been held in the Subaccount for various periods
of time including, but not limited to, a period measured from the date the
Subaccount commenced operations. Average annual total return refers to total
return quotations that are annualized based on an average return over various
periods of time.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which total return quotations are provided. Average
annual total return information shows the average annual percentage change in
the value of an investment in the Subaccount from the beginning date of the
measuring period to the end of that period. This standardized version of average
annual total return reflects all historical investment results, less all charges
and deductions applied against the Subaccount (including any surrender charge
that would apply if an Owner terminated the Contract at the end of each period
indicated, but excluding any deductions for premium taxes). When a Subaccount,
other than the Money Market Subaccount, has been in operation for one, five and
ten years respectively, the standard version average annual total return for
these periods will be provided.
In addition to the standard version described above, total return performance
information computed on two different non-standard bases may be used in
advertisements or sales literature. Average annual total return information may
be presented, computed on the same basis as described above, except deductions
will not include the surrender charge. In addition, the Company may from time to
time disclose cumulative total return for Contracts funded by Subaccounts.
From time to time, yields, standard average annual total returns, and
non-standard total returns for the Funds may be disclosed, including such
disclosures for periods prior to the date the Variable Account commenced
operations.
Non-standard performance data will only be disclosed if the standard performance
data for the required periods is also disclosed. For additional information
regarding the calculation of other performance data, please refer to the
Statement of Additional Information.
In advertising and sales literature, the performance of each Subaccount may be
compared with the performance of other variable annuity issuers in general or to
the performance of particular types of variable annuities investing in mutual
funds, or investment portfolios of mutual funds with investment objectives
similar to the Subaccount. Lipper Analytical Services, Inc. ("Lipper"), Variable
Annuity Research Data Service ("VARDS") and Morningstar, Inc. ("Morningstar")
are independent services which monitor and rank the performance of variable
annuity issuers in each of the major categories of investment objectives on an
industry-wide basis.
Lipper's and Morningstar's rankings include variable life insurance issuers as
well as variable annuity issuers. VARDS rankings compare only variable annuity
issuers. The performance analyses prepared by Lipper, VARDS and Morningstar each
rank such issuers on the basis of total return, assuming reinvestment of
distributions, but do not take sales charges, redemption fees, or certain
expense deductions at the separate account level into consideration. In
addition, VARDS prepares risk rankings, which consider the effects of market
risk on total return performance. This type of ranking provides data as to which
funds provide the highest total return within various categories of funds
defined by the degree of risk inherent in their investment objectives.
Advertising and sales literature may also compare the performance of each
Subaccount to the Standard & Poor's Index of 500 Common Stocks, a widely used
measure of stock performance. This unmanaged index assumes the reinvestment of
dividends but does not reflect any "deduction" for the expense of operating or
managing an investment portfolio. Other independent ranking services and indices
may also be used as a source of performance comparison.
The Company may also report other information including the effect of
tax-deferred compounding on a Subaccount's investment returns, or returns in
general, which may be illustrated by tables, graphs or charts.
FEDERAL TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION IS GENERAL AND
IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
This discussion is not intended to address the tax consequences resulting from
all of the situations in which a person may be entitled to or may receive a
distribution under the Contract issued by the Company. Any person concerned
about these tax implications should consult a competent tax adviser before
initiating any transaction. This discussion is based upon the Company's
understanding of the present federal income tax laws, as they are currently
interpreted by the Internal Revenue Service ("IRS"). No representation is made
as to the likelihood of the continuation of the present federal income tax laws
or of the current interpretation by the IRS. Moreover, no attempt has been made
to consider any applicable state or other tax laws.
The Contract may be purchased on a non-qualified basis or purchased and used in
connection with plans qualifying for favorable tax treatment. The Qualified
Contract is designed for use by individuals whose purchase payments are
comprised solely of proceeds from and/or contributions under retirement plans
that are intended to qualify as plans entitled to special income tax treatment
under sections 401(a), 408, or 457 of the Code. The ultimate effect of federal
income taxes on the amounts held under a Contract, or Annuity Payments, and on
the economic benefit to the Owner, the Annuitant, or the Beneficiary depends on
the type of retirement plan, on the tax and employment status of the individual
concerned, and on the Company's tax status. In addition, certain requirements
must be satisfied in purchasing a Qualified Contract with proceeds from a
tax-qualified plan and receiving distributions from a Qualified Contract in
order to continue receiving favorable tax treatment. Therefore, purchasers of
Qualified Contracts should seek competent legal and tax advice regarding the
suitability of a Contract for their situation, the applicable requirements, and
the tax treatment of the rights and benefits of a Contract. The following
discussion assumes that Qualified Contracts are purchased with proceeds from
and/or contributions under retirement plans that qualify for the intended
special federal income tax treatment.
TAX STATUS OF THE CONTRACT
Diversification Requirements. Section 817(h) of the Code provides that separate
account investments underlying a contract must be "adequately diversified" in
accordance with Treasury Department regulations in order for the contract to
qualify as an annuity contract under Section 72 of the Code. The Variable
Account, through each underlying Fund, intends to comply with the
diversification requirements prescribed in regulations under Section 817(h) of
the Code, which affect how the assets in the various Subaccounts may be
invested. Although the Company does not have direct control over the Funds in
which the Variable Account invests, the Comapny believes that each Fund will
meet the diversification requirements, and therefore, the Contract will be
treated as an annuity contract under the Code.
In certain circumstances, owners of variable annuity contracts may be considered
the owners, for federal income tax purposes, of the assets of the separate
account used to support their contracts. In those circumstances, income and
gains from the separate account assets would be includible in the variable
annuity contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
Department has also announced, in connection with the issuance of regulations
concerning investment diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
contract owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also states that guidance would
be issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no such
guidance has been issued.
The ownership rights under the Contracts are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the Owner of a Contract has the choice of several Subaccounts in which
to allocate Net Purchase Payments and Contract Values, and may be able to
transfer among Subaccounts more frequently than in such rulings. These
differences could result in an Owner being treated as the owner of the assets of
the Variable Account. In addition, the Company does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Company therefore reserves the
right to modify the Contract as necessary to attempt to prevent the Owner from
being considered the owner of the Variable Account's assets.
Required Distributions. In order to be treated as an annuity contract for
federal income tax purposes, section 72(s) of the Code requires any
Non-Qualified Contract to provide that: (a) if any Owner dies on or after the
Annuity Date but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest will be distributed at least
as rapidly as under the method of distribution being used as of the date of that
Owner's death; and (b) if any Owner dies prior to the Annuity Date, the entire
interest in the Contract will be distributed within five years after the date of
the Owner's death. These requirements will be considered satisfied as to any
portion of the Owner's interest that is payable to or for the benefit of a
"designated beneficiary," and that is distributed over the life of such
beneficiary or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of that
Owner's death. The Owner's "designated beneficiary" is the person designated by
such Owner as a beneficiary and to whom ownership of the contract passes by
reason of death and must be a natural person. However, if the Owner's
"designated beneficiary" is the surviving spouse of the Owner, the Contract may
be continued with the surviving spouse as the new Owner.
Non-Qualified Contracts contain provisions that are intended to comply with the
requirements of section 72(s) of the Code, although no regulations interpreting
these requirements have yet been issued. The Company intends to review such
provisions and modify them if necessary to assure that they comply with the
requirements of Code section 72(s) when clarified by regulation or otherwise.
Other rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes.
TAXATION OF ANNUITIES
In General. Section 72 of the Code governs taxation of annuities in general. The
Company believes that an Owner who is a natural person is not taxed on increases
in Contract Value until distribution occurs by withdrawing all or part of the
Contract Value (e.g., withdrawals and surrenders) or as Annuity Payments under
the Annuity Payment Option elected. For this purpose, the assignment, pledge, or
agreement to assign or pledge any portion of the Contract Value (and in the case
of a Qualified Contract, any portion of an interest in the qualified plan)
generally will be treated as a distribution. The taxable portion of a
distribution (in the form of a single sum payment or payment option) is taxable
as ordinary income.
The owner of any annuity contract who is not a natural person generally must
include in income any increase in the excess of the contract value over the
"investment in the contract" during the taxable year. There are some exceptions
to this rule, and a prospective Owner that is not a natural person may wish to
discuss these with a competent tax adviser.
The following discussion generally applies to Contracts owned by natural
persons.
Withdrawals. In the case of a withdrawal from a Qualified Contract, under
section 72(e) of the Code, a ratable portion of the amount received is taxable,
generally based on the ratio of the "investment in the contract" to the
participant's total accrued benefit or balance under the retirement plan. The
"investment in the contract" generally equals the portion, if any, of any
purchase payments paid by or on behalf of the individual under a Contract that
was not excluded from the individual's gross income. For Contracts issued in
connection with qualified plans, the "investment in the contract" can be zero.
Special tax rules may be available for certain distributions from Qualified
Contracts.
In the case of a withdrawal from a Non-Qualified Contract, under section 72(e),
any amounts received are generally first treated as taxable income to the extent
that the Contract Value immediately before the withdrawal exceeds the
"investment in the contract" at that time. Any additional amount withdrawn is
not taxable.
In the case of a surrender under a Qualified or Non-Qualified Contract, the
amount received generally will be taxable only to the extent it exceeds the
"investment in the contract."
Section 1035 of the Code generally provides that no gain or loss shall be
recognized on the exchange of one annuity contract for another. If the
surrendered contract was issued prior to August 14, 1982, the tax rules formerly
provided that the surrender was taxable only to the extent the amount received
exceeds the owner's investment in the contract will continue to apply to amounts
allocable to investments in that contract prior to August 14, 1982. In contrast,
contracts issued after January 19, 1985 in a Code section 1035 exchange are
treated as new contracts for purposes of the penalty and distribution-at-death
rules. Special rules and procedures apply to section 1035 transactions.
Prospective Owners wishing to take advantage of section 1035 should consult
their tax adviser.
Annuity Payments. Although tax consequences may vary depending on the payment
option elected under an annuity contract, under Code section 72(b), generally
(prior to recovery of the investment in the contract) gross income does not
include that part of any amount received as an annuity under an annuity contract
that bears the same ratio to such amount as the investment in the contract bears
to the expected return at the annuity starting date. For variable annuity
payments, the taxable portion is generally determined by an equation that
establishes a specific dollar amount of each payment that is not taxed. The
dollar amount is determined by dividing the "investment in the contract" by the
total number of expected periodic payments. However, the entire distribution
will be taxable once the recipient has recovered the dollar amount of his or her
"investment in the contract." For fixed annuity payments, in general, there is
no tax on the portion of each payment that represents the same ratio that the
"investment in the contract" bears to the total expected value of the annuity
payments for the term of the payments; however, the remainder of each annuity
payment is taxable until the recovery of the investment in the contract, and
thereafter the full amount or each annuity payment is taxable. If death occurs
before full recovery of the investment in the contract, the unrecovered amount
may be deducted on the annuitant's final tax return.
Taxation of Death Benefit Proceeds. Amounts may be distributed from a Contract
because of the death of an Owner. Generally, such amounts are includible in the
income of the recipient as follows: (i) if distributed in a lump sum, they are
taxed in the same manner as a full surrender of the Contract or (ii) if
distributed under an Annuity Payment Option, they are taxed in the same way as
Annuity Payments.
Penalty Tax on Certain Withdrawals. In the case of a distribution pursuant to a
Non-Qualified Contract, there may be imposed a federal penalty tax equal to 10%
of the amount treated as taxable income. In general, however, there is no
penalty on distributions:
1. made on or after the taxpayer reaches age 59 1/2;
2. made on or after the death of the holder (or if the holder is
not an individual, the death of the primary annuitant);
3. attributable to the taxpayer's becoming disabled;
4. a part of a series of substantially equal periodic payments
(not less frequently than annually)for the life (or life
expectancy) of the taxpayer or the joint lives (or joint life
expectancies) of the taxpayer and his or her designated
beneficiary;
5. made under certain annuities issued in connection with
structured settlement agreements; and
6. made under an annuity contract that is purchased with a single
purchase payment when the annuity date is no later than a year
from purchase of the annuity and substantially equal periodic
payments are made, not less frequently than annually, during
the annuity payment period.
Other tax penalties may apply to certain distributions under a Qualified
Contract.
Possible Changes in Taxation. In past years, legislation has been proposed that
would have adversely modified the federal taxation of certain annuities. For
example, one such proposal would have changed the tax treatment of non-qualified
annuities that did not have "substantial life contingencies" by taxing income as
it is credited to the annuity. Although as of the date of this prospectus
Congress is not considering any legislation regarding taxation of annuities,
there is always the possibility that the tax treatment of annuities could change
by legislation or other means (such as IRS regulations, revenue rulings,
judicial decisions, etc.). Moreover, it is also possible that any change could
be retroactive (that is, effective prior to the date of the change).
<PAGE>
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer of ownership of a Contract, the designation of an Annuitant, Payee or
other Beneficiary who is not also the Owner, the selection of certain Annuity
Dates or the exchange of a Contract may result in certain tax consequences to
the Owner that are not discussed herein. An Owner contemplating any such
transfer, assignment, or exchange of a Contract should contact a competent tax
adviser with respect to the potential tax effects of such a transaction.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Effective January 1, 1993, distributions from certain qualified
plans are generally subject to mandatory withholding. Certain states also
require withholding of state income tax whenever federal income tax is withheld.
MULTIPLE CONTRACTS
All non-qualified deferred annuity contracts that are issued by the Company (or
its affiliates) to the same owner during any calendar year are treated as one
annuity contract for purposes of determining the amount includible in gross
income under section 72(e) of the Code. The effects of this rule are not yet
clear; however, it could affect the time when income is taxable and the amount
that might be subject to the 10% penalty tax described above. In addition, the
Treasury Department has specific authority to issue regulations that prevent the
avoidance of section 72(e) of the Code through the serial purchase of annuity
contracts or otherwise. There may also be other situations in which the Treasury
Department may conclude that it would be appropriate to aggregate two or more
annuity contracts purchased by the same owner. Accordingly, a Contract Owner
should consult a competent tax adviser before purchasing more than one annuity
contract.
TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans. The
tax rules applicable to participants in these qualified plans vary according to
the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; aggregate distributions in excess of a specified
annual amount; and in other specified circumstances. Therefore, no attempt is
made to provide more than general information about the use of the Contracts
with the various types of qualified retirement plans. Owners, Annuitants, and
Beneficiaries are cautioned that the rights of any person to any benefits under
these qualified retirement plans may be subject to the terms and conditions of
the plans themselves, regardless of the terms and conditions of the Contract,
but the Company shall not be bound by the terms and conditions of such plans to
the extent such terms contradict the Contract, unless the Company consents to be
bound. Brief descriptions follow of the various types of qualified retirement
plans in connection with a Contract. The Company will amend the Contract as
necessary to conform it to the requirements of such plan.
Corporate Pension and Profit Sharing Plans and H.R. 10 Plans. Section 401(a) of
the Code permits corporate employers to establish various types of retirement
plans for employees, and permits self-employed individuals to establish these
plans for themselves and their employees. Such retirement plans may permit the
purchase of the Contract to provide benefits under the plans. Employers
intending to use the Contract with such plans should seek competent advice.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." These IRAs are subject to limits on
the amount that may be contributed, the persons who may be eligible, and on the
time when distributions may commence. Also, distributions from certain other
types of qualified retirement plans may be "rolled over" on a tax-deferred basis
into an IRA. Sales of the Contract for use with IRAs may be subject to special
requirements of the IRS. Employers may establish Simplified Employee Pension
(SEP) Plans to provide IRA contributions on behalf of their employees.
Deferred Compensation Plans. Section 457 of the Code provides for certain
deferred compensation plans. These plans may be offered with respect to service
for state governments, local governments, political subdivisions, agencies,
instrumentalities, certain affiliates of such entities, and tax exempt
organizations. The plans may permit participants to specify the form of
investment for their deferred compensation account. All investments are owned by
the sponsoring employer and are subject to the claims of the general creditors
of the employer.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the federal tax consequences under
these Contracts are not exhaustive, and special rules are provided with respect
to other tax situations not discussed in the prospectus. Further, the federal
income tax consequences discussed herein reflect the Company's understanding of
current law and the law may change. Federal estate and state and local estate,
inheritance and other tax consequences of ownership or receipt of distributions
under a Contract depend on the individual circumstances of each Owner or
recipient of the distribution. A competent tax adviser should be consulted for
further information.
OTHER INFORMATION
DISTRIBUTION OF THE CONTRACTS
CNA/ISI, which is located at CNA Plaza, Chicago, Illinois 60685, is principal
underwriter and distributor of the Contracts. CNA/ISI is an affiliate of the
Company, is registered with the SEC as a broker-dealer, and is a member of the
National Association of Securities Dealers, Inc. ("NASD"). The Company pays
CNA/ISI for acting as principal underwriter under a distribution agreement. The
Contract are offered on a continuous basis and the Company does not anticipate
discontinuing the offer.
Applications for Contracts are solicited by agents who are licensed by
applicable state insurance authorities to sell the Company's insurance contracts
and who are also registered representatives of a broker-dealer having a selling
agreement with CNA/ISI. Such broker-dealers will generally receive commissions
based on a percent of purchase payments made (up to a maximum of 7%). The
writing agent will receive a percentage of these commissions from the respective
broker-dealer, depending on the practice of that broker-dealer. Owners do not
pay these commissions.
ADMINISTRATIVE SERVICES
Financial Administration Services, Inc. administers the Contract on behalf of
the Company at the Service Center. In this capacity, Financial Administration
Services, Inc. is responsible for the following: processing purchase payments,
Annuity Payments, death benefits, surrenders, withdrawals, and transfers;
preparing confirmation notices and periodic reports; calculating mortality and
expense risk charges; calculating Accumulation and Annuity Unit Values;
distributing voting materials and tax reports; and generally assisting Owners.
VOTING PRIVILEGES
In accordance with current interpretations of applicable law, the Company votes
Fund shares held in the Variable Account at regular and special shareholder
meetings of the Funds in accordance with instructions received from persons
having voting interests in the corresponding Subaccounts. If, however, the 1940
Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or the Company otherwise determines that
it is allowed to vote the shares in its own right, it may elect to do so.
The number of votes that an Owner or Annuitant has the right to instruct are
calculated separately for each Subaccount, and may include fractional votes.
Prior to the Annuity Date, the Owner holds a voting interest in each Subaccount
to which Variable Contract Value is allocated. After the Annuity Date, the Payee
has a voting interest in each Subaccount from which Variable Annuity Payments
are made.
For each Owner, the number of votes attributable to a Subaccount will be
determined by dividing the Owner's Subaccount Value by the Net Asset Value Per
Share of the Fund in which that Subaccount invests. For each Payee, the number
of votes attributable to a Subaccount is determined by dividing the liability
for future Variable Annuity Payments to be paid from that Subaccount by the Net
Asset Value Per Share of the Fund in which that Subaccount invests. This
liability for future payments is calculated on the basis of the mortality
assumptions, the selected Benchmark Rate of Return and the Annuity Unit Value of
that Subaccount on the date that the number of votes is determined. As Variable
Annuity Payments are made to the Payee, the liability for future payments
decreases as does the number of votes.
The number of votes available to an Owner or Payee are determined as of the date
coinciding with the date established by the Fund for determining shareholders
eligible to vote at the relevant meeting of the Fund's shareholders. Voting
instructions are solicited by written communication prior to such meeting in
accordance with procedures established for the Fund. Each Owner or Payee having
a voting interest in a Subaccount will receive proxy materials and reports
relating to any meeting of shareholders of the Funds in which that Subaccount
invests.
Fund shares as to which no timely instructions are received and shares held by
the Company in a Subaccount as to which no Owner or Payee has a beneficial
interest are voted in proportion to the voting instructions that are received
with respect to all Contracts participating in that Subaccount. Voting
instructions to abstain on any item to be voted upon are applied to reduce the
total number of votes eligible to be cast on a matter. Under the 1940 Act,
certain actions affecting the Variable Account may require Contract Owner
approval. In that case, an Owner will be entitled to vote in proportion to his
Variable Contract Value.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or to
which the assets of the Variable Account are subject. The Company, as an
insurance company, is ordinarily involved in litigation. The Company does not
believe that any current litigation is material to its ability to meet its
obligations under the Contract or to the Variable Account nor does the Company
expect to incur significant losses from such actions.
COMPANY HOLIDAYS
The Company is closed on the following days in 1996: New Year's Day, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, the day after Thanksgiving
Day, and Christmas Day.
LEGAL MATTERS
All matters relating to Pennsylvania law pertaining to the Contracts, including
the validity of the Contracts and the Company's authority to issue the
Contracts, have been passed upon by Lynne Gugenheim, Esquire, Vice President and
Associate General Counsel of the Company. Sutherland, Asbill & Brennan of
Washington, D.C. has provided advice on certain matters relating to the federal
securities laws.
EXPERTS
The balance sheets of the Company as of December 31, 1995 and 1994, and the
related statements of income, stockholder's equity, and cash flows for the years
ended December 31, 1995, 1994 and 1993, which are included in the prospectus,
have been audited by Deloitte & Touche LLP, independent auditors, as set forth
in their report therein, and are included therein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
<PAGE>
ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE COMPANY
HISTORY AND BUSINESS
Valley Forge Life Insurance Company was incorporated under the laws of the state
of Pennsylvania on August 9, 1956 and began its operations on December 1, 1956.
The Company markets a full range of life and accident and health insurance
products either directly or through its pooling agreement with CAC, including
group medical and life, universal life, traditional life, and annuities.
Formation of the Company was sponsored by American Casualty Company of Reading,
Pennsylvania, which owned 50% of the 44,000 outstanding shares of the Company.
The remaining 50% interest was held by the Valley Forge Insurance Company, a
wholly owned subsidiary of American Casualty Company.
In late 1963, control of the parent companies was acquired by Continental
Casualty Company of Chicago, Illinois. In 1967, all outstanding shares of
Continental Casualty Company were exchanged for stock of CNA Financial
Corporation, the parent company of the CNA insurance companies. On December 30,
1983, all outstanding shares of the Company were acquired by Continental
Assurance Company, a life insurance company subsidiary of CNA Financial
Corporation. Controlling interest of CNA Financial Corporation is held by Loews
Corporation, a publicly held company whose shares are traded on the New York
Stock Exchange.
Effective December 31, 1985, pursuant to a Reinsurance Pooling Agreement, the
Company began ceding all of its business to its parent, Continental Assurance
Company. This business is then pooled with the business of Continental Assurance
Company, excluding Continental Assurance Company's participating contracts and
separate accounts, and 10% of the combined net pool retroceded to the Company.
This agreement was amended effective July 1, 1996, for the purpose of also
excluding the separate accounts of the Company.
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto included in this
prospectus.
(000)
Selected Financial Data
For the Periods Ended
----------------------------------------------
December 31
--------------------------------------------
1995 1994 1993 1992 1991
Net Investment Income $ 31,494 $ 22,759 $ 16,144 $ 19,627 $ 25,815
Net Operating Income
(Excluding Realized Gains/Losses) $ 13,551 $ 10,408 $ 4,655 $ 6,425 $ 4,291
Net Income $ 22,510 $ 7,482 $ 7,107 $ 7,119 $ 10,142
Total Assets $624,820 $552,836 $475,892 $443,577 $402,535
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management discussion and analysis should be read in conjunction
with the financial statements and related notes.
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA.
VFL and Assurance, have an intercompany pooling agreement to share their
combined underwriting results inclusive of Assurance's participating policies
and Separate Account business. Under this pooling agreement, VFL cedes 100% of
its net business before pooling to Assurance and in turn receives 10% of the
combined results. Assurance retains 90% of the combined results. See Note 8 of
the Financial Statements for the effects of reinsurance on VFL's premium
revenues.
VFL markets a variety of individual and group insurance products, either
directly or through its pooling agreement with Assurance. The individual
insurance products currently being marketed consist primarily of term, universal
life, and individual annuity products. Group insurance products include life,
accident and health consisting primarily of major medical and hospitalization,
and pension products.
All aspects of the insurance business are highly competitive. The combined
operations of VFL and Assurance compete with a large number of stock and mutual
life insurance companies for both producers and customers and Assurance and VFL
and must continuously allocate resources to refine and improve insurance
products and services. There are approximately 1,800 companies selling life
insurance (including health insurance and pension products) in the United
States. The combined companies of VFL and Assurance rank as the twenty-second
largest life insurance organization based on 1995 consolidated statutory premium
volume.
The operations and assets and liabilities of VFL and its parent, Assurance, are
managed to a large extent on a combined basis. The discussion in the following
five paragraphs is based on the combined results, excluding participating
policies and separate account business which relate solely to Assurance.
In 1994, CNA formed the Life Operations Department to increase substantially its
presence and profitability in the individual life marketplace. The department is
continuing to experience strong growth in the individual life business, which
markets term, universal and annuities products. The department has introduced
new term and permanent life products, as well as annuities. All new products
have been very well received in the marketplace, as 1995 applications for new
policies increased to more than 169,000 from 67,000 in 1994, a 152% increase.
Sales volume as measured by first year paid premium and deposits increased to
$276 million in 1995 from $69 million in 1994, a 300% increase. In 1994, the
department began distributing its products through managing general agencies in
addition to its traditional distribution channel of property/casualty
independent agents. Managing general agents produced almost half of the first
year premium in 1995.
Another notable accomplishment in 1995 was the conversion of all processing from
main frame computer system to a more efficient PC-based processing systems,
thus substantially reducing operating expenses.
CNA is a prominent player in group life and health insurance. It offers a range
of products, including medical and hospitalization coverages, group life and
pension products sold to businesses, groups and associations.
In the medical and hospitalization market, Assurance's $2 billion Federal
Employees Health Benefits Program (FEHBP) continues to compete effectively.
Assurance has undertaken a number of initiatives to enhance service, manage
health care utilization demand and quality, and strengthen Assurance's networks
of physicians, hospitals and other providers.
In the market for private employer medical benefits, Assurance launched a niche
strategy of developing risk- and profit-sharing partnerships with health care
providers for point-of-service managed care products in selected geographic
markets. Looking ahead, Assurance will also promote full-service medical savings
account products. These strategies are expected to enhance future operating
results.
Results of Operations:
The following chart summarizes key components of the Valley Forge Life Insurance
Company (VFL) operating results for each of the last three years and the first
half of 1996 and 1995.
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
June 30 June 30 December 31 December 31 December 31
For the Period Ended 1996 1995 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
Operating Summary
(excluding realized investment gains/losses):
Revenues:
Individual
Accident and health $ 75 $ 1,540 $ 3,197 $ 3,191 $ 2,995
Life and annuity 26,737 19,270 45,171 34,500 28,760
----------- ------- ---------- ---------- -----------
Total Individual 26,812 20,810 48,368 37,691 31,755
Group
Accident and health 124,290 107,751 218,969 211,120 198,300
Life and annuity 9,119 14,334 29,316 14,169 10,790
----------- -------- ---------- ---------- -----------
Total Group 133,409 122,085 248,285 225,289 209,090
- -------------------------------------------------------------------------------------------------------------------
Total Premiums 160,221 142,895 296,653 262,980 240,845
Net investment income 13,369 15,434 31,494 22,759 16,144
Other 2,499 1,913 4,818 4,789 3,435
- -------------------------------------------------------------------------------------------------------------------
Total revenues 176,089 160,242 332,965 290,528 260,424
Benefits and expenses 167,376 149,201 312,038 274,439 253,355
- -------------------------------------------------------------------------------------------------------------------
Income before income tax 8,713 11,041 20,927 16,089 7,069
Income tax expense (3,055) (3,889) (7,376) (5,681) (2,414)
===================================================================================================================
Net operating income
(excluding realized investment gains/losses) $ 5,658 $ 7,152 $ 13,551 $ 10,408 $ 4,655
===================================================================================================================
Supplemental Financial Data:
Net operating income:
Individual $ 2,742 $ 3,030 $ 5,597 $ 3,119 $ 885
Group 2,916 4,122 7,954 7,289 3,770
- -------------------------------------------------------------------------------------------------------------------
Net operating income 5,658 7,152 13,551 10,408 4,655
Net realized investment gains (losses): 2,434 8,169 8,959 (2,926) 2,452
===================================================================================================================
Net income $ 8,092 $ 15,321 $ 22,510 $ 7,482 $ 7,107
===================================================================================================================
</TABLE>
<PAGE>
VFL's revenues for the year ended December 31, 1995, excluding net realized
investment gains, were $333.0 million or up 14.6% from year end 1994 and up
27.9% from 1993. Total life individual premium income for 1995 was $48.4
million, up 28.3% from the $37.7 million earned in 1994 and up 52.3% from 1993.
The increase in 1995 is due primarily to increased sales of new term and
permanent life products as previously discussed. Premium revenue as defined by
generally accepted accounting principles, and disclosed in the above exhibit,
does not include deposits on annuity contracts or premiums on universal life
policies.
VFL's total group premium income was $248.3 million, up 10.2% from the $225.3
million earned in 1994 and up 18.7% from 1993's $209.1 million. Group accident
and health premium income included in total group premium income, is primarily
from the contract with FEHBP. Group accident and health premium income was
$219.0 million for 1995 a 3.7% increase from 1994's premium of $211.1 million,
and a 10.6% increase from 1993's premium of $198.3 million . Group life and
annuity premium income, included in total group premium income above, exhibited
strong growth rising 31.3% to $14.2 million in 1994 from $10.8 million in 1993
and up 106.9% from $14.2 million in 1994 to $29.3 million in 1995. This growth
is attributable to strong positive cash flow from the growth in new business.
VFL's investment income increased substantially from $16.1 million in 1993 to
$22.8 million in 1994 and $31.5 million in 1995 due to strong positive cash flow
from the growth in new business and higher yielding investments resulting from a
shift of VFL's investment portfolio during 1994 to longer term securities.
VFL's net operating income excluding net realized investment gains/losses was
$13.6 million for 1995, compared to $10.4 million and $4.7 million for 1994 and
1993, respectively. The individual business segment reported net operating
income of $5.6 million for 1995, compared to $3.1 million and $0.9 million for
1994 and 1993, respectively. The group business segment reported net operating
income of $8.0 million for 1995, compared to $7.3 million for 1994 and $3.8
million for 1993. Profits for the individual business segment increased due to
increased investment income, improved mortality experience and increased
interest rate spreads on interest sensitive products.
Net realized investment gains, net of tax, amounted to $9.0 million in 1995,
compared to net realized investment losses of $2.9 million in 1994 and net
realized investment gains of $2.5 million in 1993. Net realized investment gains
for 1995 were primarily realized on sales of fixed maturities such sales being
in the ordinary course of portfolio management.
Six Months Results of Operations
VFL revenues, excluding realized investment gains, for the six months ended
June 30, 1996 were $176.1 million, up 9.9% when compared to $162.4 million for
the similar period of 1995. Total life individual premium income for the first
half of 1996 was $26.8 million, up 28.8% from the $20.8 million earned in the
first half of 1995. This growth is due to continued sales and market acceptance
of new life and annuity products first offered in late 1994. Offsetting this
increase somewhat is the discontinuation of the company's individual disability
insurance business, through assumption of reinsurance with an unaffiliated
insurance company. Total group premium was $133.4 million, up 9.3% from the
$122.1 million earned in the comparable 1995 period. This increase is primarily
attributable to FEHBP.
Investment income decreased 13.4% to $13.4 million in the first quarter of 1996,
as compared to $15.4 million for the same period a year ago. The decline was due
to a increase in lower yielding short-term securities as proceeds from sales of
fixed maturities were invested in short term securities.
Pretax operating income for VFL, excluding net realized investment gains/losses,
was $8.7 million for the first six months of 1996, down 21.1% compared to the
$11.0 million recognized for the same period in 1995.
VFL's net income excluding net realized investment gains/losses was $5.7 million
for the first six months of 1996, compared to $7.2 million for the same period
in 1995. The individual segment reported net operating income of $2.7 million
for the first half of 1996 a decrease of 9.5%, compared to $3.0 million in the
comparable period a year ago. This decrease is a result of very favorable
mortality experienced in the individual life business in the first half of 1995,
as well as reduced investment income results in 1996. The group segment reported
net operating income for the first six months of 1996 of $2.9 million, a decline
of 29.3% compared to the $4.1 million earned in the first half of 1995. The
decline was due to the decreased investment income as well as unfavorable
mortality experience in group life cases and lower administrative fees in group
pension cases.
Net realized investment gains for the first six months of 1996 were $2.4
million, compared to net realized investment gains of $8.2 million for the
comparable period in 1995, both reflective of the interest rate environments
during the respective periods.
Financial Condition:
<TABLE>
<CAPTION>
FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------
Stockholder's
Statutory Assets Equity
Surplus
(In thousands of dollars, except per share data)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 1996 $ 126,508 $ 687,795 $ 187,938
December 1995 129,912 624,820 195,472
December 1994 122,267 552,836 156,196
December 1993 117,650 475,892 153,249
December 1992 115,660 443,577 144,873
December 1991 111,382 402,535 137,857
- ---------------------------------------------------------------------------------------------------
</TABLE>
Assets totaled $625 million at the end of 1995, an increase of 13.0% over 1994
and 31.3% over 1993. VFL's cash and invested assets of $504 million increased by
$64 million, or 14.6%, over the 1994 level of $440 million, and increased $29
million over the 1993 level of $475 million.
VFL's stockholder's equity was $195 million at December 31, 1995, compared to
$156 million and $153 million at December 31, 1994 and 1993, respectively. The
increase in stockholder's equity in 1995 is due to a $16.8 million increase in
net unrealized investment gains and net income of $22.5 million. The increase in
stockholder's equity in 1994 was primarily due to net income of $7.5 million
which was partially offset by $4.5 million of net unrealized investment losses.
The decrease in stockholder's equity of $7.5 million at June 30, 1996 compared
to December 31, 1995 is due to a decrease in net unrealized gains of $15.6
million, offset by net income of $8.1 million. The change in net unrealized net
unrealized gains/losses is attributable, in large part, to increases in interest
rates which have an adverse effect on bond prices.
Statutory surplus of VFL has grown steadily from $111 million at December 31,
1991 to $127 million at June 30, 1996. The decrease in surplus for the six
months ended June 30, 1996 is due to a net statutory loss which is primarily
attributable to the substantial acquisition costs related to the new sales of of
individual life and annuity products. Such costs are immediately charged to
income for statutory reporting purposes; under generally accepted accounting
principles, such costs are capitalized and amortized to income over the duration
of these policies.
<PAGE>
The National Association of Insurance Commissioners (NAIC) has developed
industry minimum Risk-Based Capital (RBC) requirements. The RBC formulas are
designed to identify an insurer's minimum capital requirements based upon the
inherent risks (e.g., asset default, credit and underwriting) of its operations.
In addition to the minimum capital requirements, the RBC formula and related
regulations identify various levels of capital adequacy and corresponding
actions that the state insurance departments should initiate. The level of
capital adequacy below which insurance departments would take action is defined
as the Company Action Level. As of December 31, 1995, VFL has capital in excess
of the Company Action Level.
The NAIC also maintains the Insurance Regulatory Information System ("IRIS),
which assists the state insurance departments in overseeing the financial
condition of both life and property/casualty insurers through application of a
number of financial ratios. These ratios have a range of results characterized
as "usual" by the NAIC. The NAIC IRIS user guide regarding these ratios states
that "Falling outside the usual range is not considered a failing
result"...and... "in some years it may not be unusual for financially sound
companies to have several ratios with results outside the usual range."
Management believes that IRIS ratio test results should be reviewed carefully in
conjunction with all other financial information. VFL had one IRIS ratio for
1995 with an unusual value, surplus relief. The unusual value relates to the
substantial commissions on new individual business ceded to Assurance under the
pooling agreement.
Investments:
The following table summarizes VFL's investments with fixed maturities and short
term investments shown at amortized cost and all other investments shown at cost
for each of the last three years and for the first quarter of 1996. Fixed
maturities and equity securities are considered available for sale and are shown
at market value in the financial statements, the effect of which is shown in
"Investments at Market Value" in the table below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS -
June 30 December 31
----------------- -----------------------------------------------------------
For the period ended 1996 % 1995 % 1994 % 1993 %
- --------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:
Fixed maturities
(at amortized cost):
U.S. Treasuries and
Agencies $ 114,889 21.7 $ 186,083 42.1 $ 69,148 15.6 $ 23,631 6.4
Asset Backed 68,119 12.9 84,785 19.2 219,470 49.6 6,378 1.7
Other Debt Securities 94,177 17.8 76,533 17.4 67,381 15.2 64,167 17.2
-------- ---- ---------- ---- --------- ---- -------- ----
Total Fixed maturities 277,185 52.4 347,401 78.7 355,999 80.4 94,176 25.3
Equity securities:
Common stocks 1,074 0.2 1,074 0.2 1,074 0.2 981 0.3
Policy loans 59,979 11.3 56,008 12.7 47,001 10.6 40,942 11.0
Short-term investments 191,482 36.1 37,184 8.4 39,067 8.8 235,948 63.4
- -----------------------------------------------------------------------------------------------------------
Investments $ 529,720 100.0% $ 441,667 100.0% $ 443,141 100.0 $ 372,047 100.0%
============================================================================================================
Investments at Market Value $ 526,663 $ 462,650 $438,330 $ 374,214
============================================================================================================
</TABLE>
As mentioned previously, the operations and assets and liabilities of VFL and
Assurance are, to a large extent, managed on a combined basis. The investment
portfolio is managed to maximize after-tax investment return while minimizing
credit risks with investments concentrated in high quality securities to support
its insurance underwriting operations. The investment portfolios segregated for
the purpose of supporting policy liabilities for universal life, annuities and
other interest sensitive products are held by Assurance.
VFL has the capacity to hold its fixed maturity portfolio to maturity. However,
securities may be sold as part of VFL's asset/liability strategies or to take
advantage of investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, or other similar factors.
Accordingly, the fixed maturity securities are classified as available-for-sale.
Footnote 3 to the financial statements is incorporated herein by reference and
provides market value information for fixed maturity and equity securities.
The investment portfolio consists primarily of high quality marketable fixed
maturities at December 31, 1995, 98% of which are rated as investment grade.
At December 31, 1995, 76% of the fixed maturity portfolio was invested in U.S.
government and government agencies securities, 6% in other AAA rated securities,
and 11% in AA and A rated securities.
Included in VFL's fixed maturity securities at December 31, 1995 are $85 million
of asset-backed securities, consisting of approximately 23% in U.S. government
agency issued pass-through certificates, 70% in collateralized mortgage
obligations (CMO's), and 7% in corporate asset-backed obligations. The majority
of CMO's held are U.S. government agency issues, which are actively traded in
liquid markets and are priced by broker-dealers.
VFL limits the risks associated with interest rate fluctuations and prepayments
by concentrating its CMO investments in planned amortization classes with
relatively short principal repayment windows. VFL avoids investments in complex
mortgage derivatives without readily ascertainable market prices. At December
31, 1995, the fair value of asset-backed securities was in excess of the
amortized cost by approximately $3 million compared with unrealized losses of $8
million at December 31, 1994. VFL has not invested in derivative financial
instruments during the last three years. Nor does it have any investments in
mortgage loans or real estate.
VFL's investments in fixed maturities are carried at a fair value of $368
million, compared with $351 million at December 31, 1995 and 1994, respectively.
At December 31, 1995, net unrealized gains on fixed maturity securities amounted
to approximately $20 million. This compares with net unrealized losses of $5
million at December 31, 1994. The gross unrealized gains and losses for the
fixed maturity securities portfolio at December 31, 1995, were $20.4 million and
$25 thousand, respectively, compared to $5.6 million and $10.7 million,
respectively, at December 31, 1994 and $3.0 million and $1.2 million,
respectively, at December 31, 1993. Such fluctuations from year-to-year are
primarily due to change in interest rates.
<PAGE>
The following table summarizes the unrealized net gains and losses from fixed
maturity and equity securities for the last three years and for the first
half of 1996.
NET UNREALIZED APPRECIATION (DEPRECIATION)
FIXED MATURITY AND EQUITY SECURITIES
- -------------------------------------------------------------------------------
June 30, December 31,
---------------- ------------------------------
For the period ended 1996 1995 1994 1993
- -------------------------------------------------------------------------------
(In thousands of dollars)
Fixed Maturities $ (3,808) $ 20,361 $ (5,044) $ 1,847
Equity securities 751 622 233 319
- -------------------------------------------------------------------------------
Liquidity and Capital Resources:
The liquidity requirements of VFL have been met primarily by funds generated
from operations. VFL's principal operating cash flow sources are premiums and
investment income. The primary operating cash flow uses are payments for claims,
policy benefits and operating expenses.
For the year ended December 31, 1995, VFL's operating activities generated net
positive cash flows of approximately $21 million, compared with $75 million in
1994 and $23 million in 1993. VFL believes that future liquidity needs will be
met primarily by cash generated from operations. Net cash flows from operations
are invested in marketable securities.
VFL's insurance ratings are pooled ratings with Assurance. VFL/Assurance has
received the following ratings as of June 30, 1996: A.M. Best, A; Standard and
Poor's, AA; and Duff and Phelps, AA such ratings are subject to regular review
and change.
Standards adopted during 1995
Disclosures of Certain Significant Risks and Uncertainties
In December 1994, the AICPA issued SOP 94-6, "Disclosure of Certain Significant
Risks and Uncertainties." This SOP requires reporting entities to include in
their financial statements disclosures about the nature of their operations and
the use of estimates in the preparation of financial statements. Additional
disclosures are required for certain significant estimates utilized in the
financial statements and current vulnerability due to certain concentrations if
specific criteria are met. This Statement is effective for financial statements
issued for fiscal years ending after December 15, 1995. The adoption of this
Statement had no impact on the results of operations of VFL.
Accounting by Creditors for Impairment of a Loan
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) 114, "Accounting by Creditors for
Impairment of a Loan." This Statement addresses the accounting by creditors for
impairment of certain loans. It also requires that applicable loans be treated
as impaired when it is probable that a creditor will be unable to collect all
amounts (both principal and interest) contractually due. This Statement applies
to financial statements for fiscal years beginning after December 15, 1994. In
October 1994, the FASB issued SFAS 118, "Accounting by Creditors for Impairment
of a Loan -- Income Recognition and Disclosures" which amends SFAS 114 to allow
a creditor to use existing methods for recognizing interest income on an
impaired loan. It also amends the disclosure requirements to require information
about the recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. The adoption of
these Statements did not have a significant impact on VFL.
Standards Adopted in 1996
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of In March 1995, the FASB issued SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
This Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used for long-lived assets and certain identifiable intangibles
to be disposed of. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by the entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This Statement is effective
for 1996 financial statements, although earlier adoption is permissible. This
Statement had no significant impact on the results of operations for VFL.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation". This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. The requirements of this
Statementis effective for 1996 financial statements. This Statement had no
impact on the financial statements of VFL as the Company has no compensation
which qualifies.
<PAGE>
EMPLOYEES
As of December 31, 1995, the Company had no employees as it has contracted with
CCC for services performed by CCC employees.
PROPERTIES
The Company reimburses CCC for its proportionate share of office facilities. The
Company neither owns nor directly leases any office space.
CERTAIN AGREEMENTS
The Company is party to The Intercompany Pooling Agreement with Continental
Assurance Company (Assurance) which is discussed above and in Notes to the
Company's Financial Statements included in this Prospectus. Such disclosure in
Note 1, Significant Accounting Policies; Note 8, Reinsurance; and Note 9,
Related Parties is specifically incorporated herein by reference. In addition,
the Company is party to the CNA Intercompany Expense Agreement whereby expenses
incurred by CNA Financial Corporation and each of its subsidiaries are allocated
to the appropriate company. All acquisition and underwriting expenses allocated
to the Company are further subject to the Intercompany Pooling Agreement, so
that acquisition and underwriting expenses recognized by the Company
approximates ten percent of the combined acquisition and underwriting expenses
of the Company and Assurance. Pursuant to the foregoing agreements, the Company
recorded amortization of deferred acquisition costs and other operating expenses
totaling $41 million, $37 million, and $32 million for 1995, 1994 and 1993,
respectively. Disclosure regarding expenses pursuant to the CNA Intercompany
Expense Agreement in Note 9 in Notes to the Company's Financial Statements is
also specifically incorporated herein by reference.
STATE REGULATION
The Company is subject to the laws of the Commonwealth of Pennsylvania governing
insurance companies and to the regulations of the Pennsylvania Department of
Insurance (the "Insurance Department"). A detailed financial statement in the
prescribed form (the "Statement") is filed with the Insurance Department each
year covering the Company's operations for the preceding year and its financial
condition as of the end of that year. Regulation by the Insurance Department
includes periodic examination to determine contract liabilities and reserves so
that the Insurance Department may certify that these items are correct. The
Company's books and accounts are subject to review by the Insurance Department
at all times. A full examination of the Company's operations is conducted
periodically by the Insurance Department and under the auspices of the NAIC.
<PAGE>
In addition, the Company is subject to regulation under the insurance laws of
all jurisdictions in which it operates. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect to
various matters, including licensing to transact business, overseeing trade
practices, licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. The Company is required to file the Statement with
supervisory agencies in each of the jurisdictions in which it does business, and
its operations and accounts are subject to examination by these agencies at
regular intervals.
The NAIC has adopted several regulatory initiatives designed to improve the
surveillance and financial analysis regarding the solvency of insurance
companies in general. These initiatives include the development and
implementation of a risk-based capital formula for determining adequate levels
of capital and surplus. Insurance companies are required to calculate their
risk-based capital in accordance with this formula and to include the results in
their Statement. It is anticipated that these standards will have no significant
effect upon the Company.
Further, many states regulate affiliated groups of insurers, such as the Company
and its affiliates, under insurance holding company legislation. Under such
laws, inter-company transfers of assets and dividend payments from insurance
subsidiaries may be subject to prior notice or approval, depending on the size
of the transfers and payments in relation to the financial positions of the
companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for contract owner losses
incurred by other insurance companies that have become insolvent. Most of these
laws provide that an assessment may be excused or deferred if it would threaten
an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of the Company are subject to
various federal securities laws and regulations. In addition, current and
proposed federal measures that may significantly affect the insurance business
include regulation of insurance company solvency, employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance products and its impact on the relative desirability of
various personal investment vehicles.
DIRECTORS AND EXECUTIVE OFFICERS
The name, age, positions and offices, term as director, and business experience
during the past five years for the Company's directors and executive officers
are listed in the following table.
Each director is elected to serve until the annual meeting of stockholders or
until his or her successor is elected and shall have qualified. Some directors
have held various executive positions with insurance company affiliates of the
Company.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
|-------------------------------------------------------------------------------------------------------------------|
| Officers of the Company |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
| Name and |Age| Position(s) Held | Principal Occupation(s) |
| Address | | with the Company | During Past Five Years |
| | | | |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Dennis H. Chookaszian |53 |Director, Chairman|Chairman of the Board and Chief Executive Officer of the CNA |
|CNA Plaza | |of the Board and |Insurance Companies since September 1992. From November 1990 to |
|Chicago, IL 60685 | |Chief Executive |September 1992, Mr. Chookaszian was President and Chief Operating |
| | |Officer |Officer of the CNA Insurance Companies. Prior thereto, he was Vice |
| | | |President and Controller Mr. Chookaszian has served as a Director |
| | | |since 1990.
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Phillip L. Engel |56 |Director, |President of the CNA Insurance Companies since September 1992. From |
|CNA Plaza | |President |November 1990 until September 1992 he was Executive Vice President |
|Chicago, IL 60685 | | |of the CNA Insurance Companies. Prior thereto, Mr. Engel had been a |
| | | |Vice President of the CNA Insurance Companies since 1977. |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|William J. Adamson, Jr.|43 |Senior Vice |Senior Vice President of the CNA Insurance Companies since November |
|200 S. Wacker Drive | |President |1995; Group Vice President of the CNA Insurance Companies from |
|Chicago, IL | | |April 1993 through October 1995; Vice President of the CNA |
| | | |Insurance Companies from May 1987 through April 1993. |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|James P. Flood |45 |Senior Vice |Senior Vice President of the CNA Insurance Companies since April |
|CNA Plaza | |President |1995; Senior Vice President of the Continental Insurance Company |
|Chicago, IL 60685 | | |from October 1992 through May 1995; Vice President of the |
|August 1991 | | |Continental Insurance Company from August 1991 through May 1995. |
|through May 1995. | | | |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Michael C. Garner |44 |Senior Vice |Senior Vice President of the CNA Insurance Companies since September|
|CNA Plaza | |President |1993. Partner of Coopers and Lybrand from October 1989 through |
|Chicago, IL 60685 | | |September 1993. |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Bernard L. Hengesbaugh |49 |Senior Vice |Senior Vice President of the CNA Insurance Companies since November |
|CNA Plaza | |President |1990. |
|Chicago, IL 60685 | | | |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Peter E. Jokiel |49 |Director, Senior |Senior Vice President and Chief Financial Officer of the CNA |
|CNA Plaza | |Vice President |Insurance Companies since November 1990. |
|Chicago, IL 60685 | |and Chief | |
| | |Financial Officer | |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Jack Kettler |52 |Senior Vice |Senior Vice President of the CNA Insurance Companies since May 1994;|
|CNA Plaza | |President |Senior Vice President of Midland Mutual Life Insurance Company from |
|Chicago, IL 60685 | | |January 1989 through May 1994. |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Donald M. Lowry |66 |Director, Senior |Senior Vice President, Secretary and General Counsel of the CNA |
|CNA Plaza | |Vice President, |Insurance Companies since August 1992; Senior Vice President and |
|Chicago, IL 60685 | |Secretary and |General Counsel of the CNA Insurance Companies from November 1990 |
| | |General Counsel |to August 1992. |
|-----------------------|---|------------------|--------------------------------------------------------------------|
<PAGE>
|--------------------------------------------------------------------------------------------------------------------|
| Officers of the Company |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
| Name and |Age| Position(s) Held | Principal Occupation(s) |
| Address | | with the Company | During Past Five Years |
| | | | |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|Carolyn L. Murphy |51 |Senior Vice |Senior Vice President of the CNA Insurance Companies since November |
|CNA Plaza | |President |1990. |
|Chicago, IL 60685 | | | |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|William H. Sharkey, Jr.|48 |Director, Senior |Senior Vice President of the CNA Insurance Companies since January |
|CNA Plaza | |Vice President |1994; Senior Vice President of Cigna Healthcare from October 1970 |
|Chicago, IL 60685 | | |through February 1994. |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|Wayne R. Smith III |50 |Senior Vice |Senior Vice President of the CNA Insurance Companies since May |
|CNA Plaza | |President |1994; Group Vice President of the CNA Insurance Companies from August|
|Chicago, IL 60685 | | |1993 through May 1994; Senior Vice President of the Computer Power |
| | | |Group from August 1991 through August 1993. |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|Adrian M. Tocklin |45 |Senior Vice |Senior Vice President of the CNA Insurance Companies since May 1995; |
|CNA Plaza | |President |President of the Continental Insurance Company from June 1994 |
|Chicago, IL 60685 | | |through May 1995; Executive Vice President of the Continental |
| | | |Insurance Company from August 1991 through August 1994. |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|Jae L. Wittlich |54 |Senior Vice |Senior Vice President of the CNA Insurance Companies since November |
|CNA Plaza | |President |1990. |
|Chicago, IL 60685 | | | |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|David W. Wroe |49 |Senior Vice |Senior Vice President of the CNA Insurance Companies since June |
|CNA Plaza | |President |1996; President of Agency Management Systems from August 1991 |
|Chicago, IL 60685 | | |through June 1996. |
|-----------------------|---|------------------|---------------------------------------------------------------------|
</TABLE>
<PAGE>
<TABLE>
The following table includes compensation paid by the CNA Financial
Corporation and its subsidiaries for services rendered in all capacities for the
years indicated for the Chief Executive Officer and the next four most highly
compensated Executive Officers as of December 31, 1995. These officers also
serve as executive officers of Valley Forge Life Insurance Company (VFL);
therefore, an applicable portion of their compensation (4.45%) is charged to
VFL.
Summary Compensation Table
Annual Compensation
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Name and Principal Position Year Salary Bonus All Other
Compensation (f)
- -------------------------------------------------------------------------------------------------------------
Dennis H. Chookaszian 1995 1,593,027 -- 66,587
Chairman of the Board 1994 1,242,091 -- 51,939
Chief Executive Officer 1993 1,132,716 350,000 (d)(e) 51,984
CNA Insurance Companies
Philip L. Engel 1995 962,587 -- 40,429
President 1994 825,539 -- 34,661
CNA Insurance Companies 1993 760,171 90,000 (d) 36,397
Carolyn L. Murphy 1995 562,307 206,000(a) 23,100
Senior Vice President 1994 558,333 173,000(b) 23,380
CNA Insurance Companies 1993 528,333 180,000(d) 22,190
Jack Kettler 1995 486,752 317,000(a)(c) 287,850(g)
Senior Vice President 1994 266,309 100,000(c) 118,452(g)
CNA Insurance Companies 1993 n/a n/a n/a
Bernard L. Hengesbaugh 1995 500.082 142,000(a) 19,950
Senior Vice President 1994 460,578 -- 18,900
CNA Insurance Companies 1993 415,000 248,281(d) 17,430
<FN>
(a) Represents amounts earned for the year 1995 (paid in March of 1996),
under the Annual Incentive Plan for Officers as hereinafter described.
(b) Represents amounts earned for the year 1994 (paid in March of 1995),
under the Annual Incentive Plan for Officers as hereinafter described.
(c) Represents employee signing bonus of $100,000 paid in 1995 and 1994.
(d) Represents amounts awarded under the Long Term Award Plan. The Long Term
Award Program was instituted in 1990 to provide cash awards to key
executives in recognition of individual performance and contribution to
long term results. Awards were made on a discretionary basis and were
approved by the Chairman and Chief Executive Officer of the CNA Insurance
Companies. The amounts shown include both the 1992 and 1993 awards granted
in April 1993 and December 1993, respectively. The awards granted to
Messrs. Chookaszian and Engel of $100,000 and $90,000, respectively,
recognized services rendered prior to October 1, 1992. These and all
previously awarded but unpaid amounts were paid in 1993 when the Plan was
terminated.
(e) Includes a $250,000 bonus paid to Mr. Chookaszian in 1993.
(f) Represents amounts contributed or accrued for fiscal 1995, 1994 and 1993
for the named officers under the Company's savings plan and related
supplemental savings plan.
<PAGE>
(g) Includes $267,900 and $106,604 of relocation expenses paid in 1995 and
1994, respectively.
</FN>
</TABLE>
Employment Contracts
Valley Forge Life Insurance Company (the Company) is a wholly-owned subsidiary
of Continental assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA. All employees of the CNA Insurance Companies
are employed by Casualty, with the exception of Dennis H. Chookaszian and Philip
L. Engel who are employees of CNA.
CNA is party to employment agreements (the "Agreements") with each of
Dennis H. Chookaszian and Philip L. Engel. The Agreements are for a three-year
term at an annual Base Salary of $950,000 for Mr. Chookaszian and $800,000 for
Mr. Engel. The Agreements provide for the adoption by the Board of an Incentive
Compensation Plan which will provide Mr. Chookaszian and Mr. Engel with an
opportunity to earn a bonus based on performance and attainment of specified
corporate goals. In all other respect, the agreements contain substantially the
same terms as the prior agreements as approved by the Board in February of 1992.
A brief summary of the Plan as adopted by the CNA Board is set forth herein.
Each of the Agreements requires CNA to provide long-term disability
coverage and permits the employee to participate in other benefit programs
offered by the Company to its employees. In the event of death or disability,
the employee is entitled to be paid the Base Salary to the end of the month in
which such death or disability occurs and a prorated amount based on assumed
attainment of the incentive compensation in effect at the time. Any incentive
compensation paid is included in the computation of pensionable earnings under
the Company's retirement plans. The employee may participate in the Qualified
and Supplemental Savings Plan established by CNA wherein CNA pays a matching
percentage of 70% of the first 6% of the employee's contributions. This matching
amount is also included in the computation of pensionable earnings.
CNA may terminate each Agreement without cause at any time, in which
event CNA is required to continue to make payments to the employee for a period
of three years from the date of termination at a fixed rate based on Base Salary
and the incentive compensation in effect at the time of such termination. Each
Agreement contemplates negotiation of a renewal for an additional three year
period at the expiration of its term on December 31, 1998 and provides that if
the parties have not reached an agreement before March 31, 1999 at a Base Salary
and opportunity for incentive compensation of not less than the amount of Base
Salary and incentive compensation provided for the year 1998 at substantially
the same terms as the expiring agreement, then the employment shall be
considered terminated by CNA and the employee shall be entitled to termination
pay for a period of three years based on the combined Base Salary and the
assumed incentive compensation for 1998. If a renewal is not negotiated before
December 31, 1998, the Executives shall become employees-at-will for a three
month period at an actual salary representing the combined Base Salary and
assumed Incentive Compensation for the year 1998.
The Incentive Compensation Committee of CNA has granted Mr. Chookaszian
and Mr. Engel, subject to shareholder approval of the Incentive Compensation
Plan, allocations under the Incentive Compensation Plan entitling each of them
to awards thereunder of a maximum of $1,450,000 for Mr. Chookaszian and $400,000
for Mr. Engel for the year 1996. A maximum of $1,650,000 for 1997 and $1,850,000
for 1998 has been granted to Mr. Chookaszian and maximums of $500,000 and
$600,000 for the years 1997 and 1998 respectively have been granted to Mr.
Engel. The actual awards to Messrs. Chookaszian and Engel would be subject to
the attainment of specific performance goals in relation to after-tax income
CNA, excluding realized investment gains and losses.
Retirement Plans
Casualty provides funded, tax qualified, non-contributory retirement
plans for all salaried employees, including executive officers (the "Retirement
Plans") and an unfunded, non-qualified, non-contributory benefits equalization
plan (the "Supplemental Retirement Plan") which provides for the accrual and
payment of benefits which are not available under tax qualified plans such as
the Retirement Plans. The following description of the Retirement Plans gives
effect to benefits provided under the Supplemental Retirement Plan.
The Retirement Plans provide for retirement benefits based upon
average final compensation (i.e., based upon the highest average sixty
consecutive months compensation and years of credited service with Casualty).
Compensation under the Retirement Plans consists of salary paid by Casualty and
its subsidiaries included under "Salary" and "Bonus" in the Summary Compensation
Table above. The following table shows estimated annual benefits payable upon
retirement under the Retirement Plans for various compensation levels and years
of credited service, based upon normal retirement in 1995 and a straight life
annuity form of benefit. In addition to a straight life annuity, the Plans also
allow the participant to elect payment to be made in a Joint and Contingent (or
Survivor) Annuitant form where the Contingent (or Survivor) Annuitant would
receive payment at 50%, 66 2/3% or 100% of the participant's benefit amount.
<TABLE>
<CAPTION>
Pension Plan Table
Normal Retirement in 1995
Estimated Annual Pension For
Representative Years of Credited Service
Average Annual 15 20 25 30 35
Compensation
<S> <C> <C> <C> <C> <C>
$400,000 $116,855 $155,807 $194,758 $207,044 $219,330
$500,000 $146,855 $195,807 $244,758 $260,378 $275,997
$600,000 $176,855 $235,807 $294,758 $313,711 $332,664
$700,000 $206,855 $275,807 $344,758 $367,045 $389,331
$800,000 $236,855 $315,807 $394,758 $420,378 $445,998
$900,000 $266,855 $355,807 $444,758 $473,712 $502,665
$1,000,000 $296,855 $395,807 $494,758 $527,045 $559,332
$1,100,000 $326,855 $435,807 $544,758 $580,379 $615,999
$1,200,000 $356,855 $475,807 $594,758 $633,712 $672,666
$1,300,000 $386,855 $515,807 $644,758 $687,046 $729,333
</TABLE>
The amounts in the table reflect deductions for estimated Social
Security payments.
Mr. Chookaszian, Mr. Engel, Ms. Murphy, Mr. Hengesbaugh, and Mr.
Kettler have 20, 30, 18, 16 and 2 years of credited service, respectively.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Valley Forge Life Insurance Company
We have audited the accompanying balance sheets of Valley Forge Life Insurance
Company (a wholly-owned subsidiary of Continental Assurance Company, which is a
wholly-owned subsidiary of Continental Casualty Company, an affiliate of CNA
Financial Corporation, an affiliate of Loews Corporation) as of December 31,
1995 and 1994 and the related statements of operations, stockholder's equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Valley Forge Life Insurance Company as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for certain investments in debt and equity securities in
1993.
Deloitte & Touche LLP
Chicago, Illinois
June 21, 1996
<PAGE>
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE COMPANY
The following financial statements are those of Valley Forge Life Insurance
Company and not those of the Separate Account. They are included in this
Statement of Additional Information for the purpose of informing investors as to
the financial position and operations of the Company.
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------------------
March 31 December 31
--------------------------
1996 1995 1994
(In thousands of dollars) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Investments-Note 3:
Fixed maturities available-for-sale (cost: $277,185, $347,401 and $ 273,377 $ 367,762 $ 350,955
$355,999).............................................................
Equity securities available-for-sale (cost: $1,074, $1,074 and $1,074).. 1,825 1,696 1,307
Policy loans............................................................ 59,979 56,008 47,001
Short-term investments.................................................. 191,482 37,184 39,067
-------- -------- --------
Total investments................................................. 526,663 462,650 438,330
Cash...................................................................... 4,260 42,103 1,926
Insurance receivables:
Reinsurance receivables................................................. 9,316 5,688 4,280
Premium and other insurance receivables................................. 61,311 53,741 55,373
Less allowance for doubtful accounts.................................... (301) (175) -
Deferred acquisition costs................................................ 62,051 50,600 41,333
Accrued investment income................................................. 4,036 4,687 4,756
Receivables for securities sold........................................... 12,008 - -
Federal income taxes recoverable-Note 7................................... 3,702 575 547
Deferred income taxes-Note 7.............................................. 3,573 - 6,290
Other assets.............................................................. 1,176 4,951 1
=====================================================================================================================
Total assets $ 687,795 $ 624,820 $ 552,836
=====================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------------------
March 31 December 31
--------------------------
1996 1995 1994
(In thousands of dollars) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liabilities and Stockholder's Equity
Liabilities:
Insurance reserves-Note 8:
Future policy benefits.................................................. $ 290,740 $ 266,600 $ 229,702
Claims.................................................................. 57,987 59,423 55,636
Policyholders' funds.................................................... 36,299 34,574 30,596
Deferred income taxes..................................................... - 3,191 -
Remittances and items not allocated....................................... 30,896 51,219 22,100
Payable to affiliates-Note 9.............................................. 62,166 - 50,371
Other liabilities......................................................... 21,769 14,341 8,235
------- ------- -------
Total liabilities................................................. 499,857 429,348 396,640
------- ------- -------
Stockholder's equity-Note 4:
Common stock ($50 par value; Authorized-200,000 shares; Issued-50,000 2,500 2,500 2,500
shares).....................................................................
Additional paid-in capital................................................ 39,150 39,150 39,150
Retained earnings......................................................... 148,273 140,181 117,671
Net unrealized investment gains (losses), net of taxes-Note 3............. (1,985) 13,641 (3,125)
------- -------- --------
Total stockholder's equity........................................ 187,938 195,472 156,196
=====================================================================================================================
Total liabilities and stockholder's equity $ 687,795 $ 624,820 $ 552,836
=====================================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
(In thousands of dollars)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums-Note 8........................................... $296,653 $262,980 $240,845
Net investment income-Note 3.............................. 31,494 22,759 16,144
Realized investment gains (losses)-Note 3................. 13,783 (4,502) 3,773
Other..................................................... 4,818 4,789 3,435
-------- ------- -------
346,748 286,026 264,197
------- ------- -------
Benefits and expenses:
Insurance claims and policyholders' benefits-Note 8....... 270,936 237,334 221,092
Amortization of deferred acquisition costs................ 6,066 4,874 2,794
Other operating expenses-Note 9........................... 35,036 32,231 29,469
------- -------- -------
312,038 274,439 253,355
------- ------- -------
Income before income tax.......................... 34,710 11,587 10,842
Income tax expense-Note 7................................... 12,200 4,105 3,735
=====================================================================================================
Net income $ 22,510 $ 7,482 $ 7,107
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
Six Months Ended March 31 1996 1995
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Premiums-Note 8............................................................ $160,221 $142,895
Net investment income-Note 3............................................... 13,369 15,434
Realized investment gains (losses)-Note 3.................................. 3,745 12,568
Other...................................................................... 2,499 1,913
------- -------
179,834 172,810
Benefits and expenses:
Insurance claims and policyholders' benefits-Note 8........................ 147,263 130,355
Amortization of deferred acquisition costs................................. 330 1,600
Other operating expenses-Note 9............................................ 19,783 17,246
------- -------
167,376 149,201
------- -------
Income before income tax........................................... 12,458 23,609
Income tax expense-Note 7.................................................... 4,366 8,288
=========================================================================================================
Net income $ 8,092 $ 15,321
=========================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
----------------------------------------- ----------- ------------- -------------- ---------------- ------------
Net
Additional Unrealized
Common Paid-in Retained Investment
(In thousands of dollars) Stock Capital Earnings Gains (Losses) Total
----------------------------------------- ----------- ------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992.............. $2,500 $39,150 $103,082 $ 141 $144,873
Net income............................ - - 7,107 - 7,107
Net unrealized investment gains, net of - - - 68 68
taxes-Note 3......................
Adjustment resulting from change in
accounting for debt securities-Note 2. - - - 1,201 1,201
------------ ------------- -------------- --------------- -----------
Balance, December 31, 1993 2,500 39,150 110,189 1,410 153,249
Net income............................ - - 7,482 - 7,482
Net unrealized investment losses, net of
taxes-Note 3........................ - - - (4,535) (4,535)
------------ ------------- --------------- -------------- ------------
Balance, December 31, 1994 2,500 39,150 117,671 (3,125) 156,196
Net income............................ - - 22,510 - 22,510
Net unrealized investment gains, net of
taxes-Note 3...................... - - - 16,766 16,766
------------ ------------- ---------------- ------------- -----------
Balance, December 31, 1995 $2,500 $39,150 $140,181 $ 13,641 $ 195,472
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------
Six Months Ended March 31, 1996 and 1995 Net
Additional Unrealized
Common Paid-in Retained Investment
(In thousands of dollars) Stock Capital Earnings Gains (Losses) Total
- ----------------------------------------- ----------- ------------ --------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $2,500 $39,150 $117,671 $ (3,125) $156,196
Net income............................ - - 15,321 - 15,321
Net unrealized investment gains, net
of taxes-Note 3................... - - - 8,244 8,244
- ----------------------------------------- ----------- ------------ --------------- ------------- ---------------
Balance, June 30, 1995 $2,500 $39,150 $132,992 $5,119 $179,761
========================================= =========== ============ =============== ============== ==============
Balance, December 31, 1995 $2,500 $39,150 $140,181 $ 13,641 $195,472
Net income............................ - - 8,092 - 8,092
Net unrealized investment gains, net
of taxes-Note 3................... - - - (15,626) (15,626)
- ----------------------------------------- ----------- ------------ -------------- -------------- --------------
Balance, June 30, 1996 $2,500 $39,150 $148,273 $ (1,985) $187,938
================================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
(In thousands of dollars)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 22,510 $ 7,482 $ 7,107
-------- ------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Pre-tax realized investment (gains) losses..................... (13,783) 4,502 (3,773)
Amortization of bond (discount) premium........................ (3,921) (886) 51
Changes in:
Insurance receivables...................................... 399 (6,951) (1,693)
Deferred acquisition costs................................. (9,267) (1,112) (3,250)
Accrued investment income.................................. 69 (1,606) 992
Federal income taxes recoverable........................... (28) (1,356) (5)
Deferred income taxes...................................... 453 (172) (804)
Insurance reserves......................................... 44,663 30,734 21,430
Other, net................................................. (20,095) 44,080 2,550
-------- ------- -------
Total adjustments................................. (1,510) 67,233 15,498
-------- ------- -------
Net cash provided by operating activities......... 21,000 74,715 22,605
-------- ------- -------
Cash flows from investing activities:
Purchases of fixed maturities....................................... (361,579) (863,023) (95,982)
Proceeds from fixed maturities:
Sales............................................................ 336,731 408,505 88,622
Maturities, calls and redemptions................................ 51,046 189,355 12,828
Purchases of equity securities...................................... - (93) -
Proceeds from sale of equity securities............................. - - 336
Change in short-term investments.................................... 1,986 196,605 (21,344)
Change in policy loans.............................................. (9,007) (6,058) (5,541)
--------- -------- ---------
Net cash provided by (used in) investing activities 19,177 (74,709) (21,081)
--------- -------- ---------
Net increase in cash.............................. 40,177 6 1,524
Cash at beginning of year.............................................. 1,926 1,920 396
================================================================================================================
Cash at end of year $ 42,103 $ 1,926 $ 1,920
================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Federal income taxes.............................................. $ 6,531 $ 5,426 $ 3,847
================================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
Six Months Ended March 31 1996 1995
(In thousands of dollars)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 8,092 $ 15,321
------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Pre-tax realized investment gains............................. (3,745) (12,568)
Amortization of bond discount.................................. (2,017) (2,154)
Changes in:
Insurance receivables...................................... (11,073) (2,798)
Deferred acquisition costs................................. (11,451) (4,116)
Accrued investment income.................................. 650 116
Federal income taxes....................................... (3,127) 4,197
Deferred income taxes...................................... 1,650 200
Insurance reserves......................................... 24,427 21,005
Other, net................................................. 53,048 (2,460)
------ ------
Total adjustments................................. 48,362 1,472
----- ------
Net cash provided by operating activities......... 56,454 16,793
------ ------
Cash flows from investing activities:
Purchases of fixed maturities....................................... (301,008) (236,040)
Proceeds from fixed maturities:
Sales............................................................ 358,199 243,117
Maturities, calls and redemptions................................ 6,127 22,754
Change in short-term investments.................................... (153,644) (41,705)
Change in securities sold under repurchase agreements............... - -
Change in policy loans.............................................. (3,971) (3,587)
------- --------
Net cash used in investing activities............. (94,297) (15,461)
------- --------
Net increase (decrease) in cash................... (37,843) 1,332
Cash at beginning of period............................................ 42,103 1,926
==========================================================================================================
Cash at end of period $ 4,260 $ 3,258
==========================================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Federal income taxes.............................................. $ 7,216 $ 3,852
=========================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA.
VFL and Assurance have an intercompany pooling agreement to share their
combined underwriting results, exclusive of Assurance's participating policies
and Separate Account business. Under this pooling agreement, VFL cedes 100% of
its net business before pooling to Assurance and in turn receives 10% of the
combined results. Assurance retains 90% of the combined results.
VFL markets a variety of individual and group insurance products, either
directly or through its pooling agreement with Assurance. The individual
insurance products currently being marketed consist primarily of term, universal
life and individual annuity products. Group insurance products include life,
accident and health consisting primarily of medical and hospitalization, and
pension products.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. In the opinion of VFL's management, these statements include all
adjustments, consisting of normal recurring accruals, which are necessary for
the fair presentation of the financial position, results of operations and cash
flows in the accompanying financial statements.
Insurance
Premium revenue-Revenues on universal life-type contracts are comprised of
contract charges and fees which are recognized over the coverage period.
Accident and health insurance premiums are earned ratably over the terms of the
policies after provision for estimated adjustments on retrospectively rated
policies and deductions for ceded insurance. Other life insurance premiums are
recognized as revenue when due, after deductions for ceded insurance.
Claim reserves-Claim reserves include provisions for reported claims in the
course of settlement and estimates of unreported losses based upon past
experience.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 1. - (Continued):
Future policy benefit reserves-Reserves for traditional life insurance
products are computed based upon net level premium methods using actuarial
assumptions as to interest rates, mortality, morbidity, withdrawals and
expenses. Actuarial assumptions include a margin for adverse deviation, and
generally vary by plan, age at issue and policy duration. Interest rates range
from 3.0% to 10.5%, and mortality, morbidity and withdrawal assumptions reflect
VFL and industry experience prevailing at the time of issue. Expense estimates
include the estimated effects of inflation and expenses beyond the premium
paying period. Reserves for universal life-type contracts are established using
the retrospective deposit method. Under this method, liabilities are equal to
the account balances that accrue to the benefit of the policyholders. Interest
crediting rates ranged from 5.9% to 7.3% for the three years ended December 31,
1995 and from 5.7% to 5.9% for the six-month period ended June 30, 1996.
Reinsurance-In addition to the pooling agreement with Assurance, VFL also
assumes and cedes insurance with other insurers and reinsurers and members of
various reinsurance pools and associations. VFL utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of risk
and minimize exposures on larger risks. The reinsurance coverages are tailored
to the specific risk characteristics of each product line with VFL's retained
amount varying by type of coverage. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability.
Deferred acquisition costs-Costs of acquiring insurance business which vary
with and are primarily related to the production of such business are deferred.
Such costs include commissions and certain underwriting and policy issuance
costs. Acquisition costs are capitalized and amortized based on assumptions
consistent with those used for computing policy benefit reserves. Acquisition
costs on ordinary life business are amortized over their assumed premium paying
periods. Universal life and annuity acquisition costs are amortized in
proportion to the present value of the estimated gross profits over the
products' assumed durations, which are regularly evaluated and adjusted as
appropriate. To the extent that unrealized gains or losses on available-for-sale
securities would result in an adjustment of deferred policy acquisition costs
had those gains or losses actually been realized, the related unamortized
deferred policy acquisition costs are recorded as an adjustment of the
unrealized gains or losses included in stockholder's equity.
Valuation of investments-VFL believes it has the ability to hold all fixed
maturity securities until they mature. However, securities may be sold to take
advantage of investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, as part of VFL's asset/liability
strategy, or other similar factors. As a result, VFL considers its fixed
maturity securities (bonds and redeemable preferred stocks) as
available-for-sale and VFL also classifies its equity securities as
available-for-sale, and as such, are carried at fair value. Unrealized holding
gains and losses are reflected as a separate component of stockholder's equity,
net of deferred income taxes. The amortized cost of fixed maturity securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion are included in investment income.
Policy loans are carried at unpaid balances. Short-term investments, which
have an original maturity of one year or less, are carried at amortized cost
which approximates market value. The Company has no real estate, mortgage loans
or investments in derivative securities.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 1. - (Continued):
Investment gains and losses - All securities transactions are recorded on
the trade date. Realized investment gains and losses are determined on the basis
of the cost of the specific securities sold. Unrealized investment gains and
losses on fixed maturity and equity securities are reflected as part of
stockholder's equity, net of applicable deferred income taxes and deferred
acquisition costs. Investments are written down to estimated fair values and
losses are charged to income when a decline in value is considered to be other
than temporary.
Securities sold under agreements to repurchase - VFL has a securities
lending program where securities are loaned to third parties, primarily major
brokerage firms. Borrowers of these securities must maintain a deposit of 100%
of the fair value of the securities if the collateral is cash, or 102% if the
collateral is securities. Cash deposits from these transactions have been
invested in short-term investments (primarily commercial paper). VFL continues
to receive the interest on the loaned debt securities, as beneficial owner and,
accordingly, the loaned debt securities are included in fixed maturity
securities. VFL had no securities on loan at December 31, 1995 or 1994, or
at June 30, 1996.
Income Taxes
The provision for income taxes includes deferred taxes, resulting from
temporary differences between the financial statement and tax return bases of
assets and liabilities which are accounted for under the liability method. Such
temporary differences primarily relate to life insurance reserves, net
unrealized investment gains/losses and deferred acquisition costs.
Interim Financial Data (Unaudited)
The accompanying Financial Statements for the six-month period ended June
30, 1996 and 1995 have been prepared in conformity with generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of VFL's management, these statements include all adjustments,
consisting of normal recurring accruals, which are necessary for the fair
presentation of the financial position, results of operations and cash flows in
the accompanying financial statements.
NOTE 2. CHANGES IN ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES:
Effective December 31, 1993, VFL adopted Statement of Financial Accounting
Standards 115, "Accounting for Certain Investments in Debt and Equity
Securities." This Statement requires that investments in debt and equity
securities classified as available-for-sale be carried at fair value.
(Previously, fixed maturity securities classified as available-for-sale were
carried at the lower of aggregate amortized cost or market value). The effect at
December 31, 1993 of adopting this Statement was to increase stockholder's
equity by $1.2 million (net of $.6 million in deferred taxes). The adoption of
this Statement did not impact net income.
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. INVESTMENTS:
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income Six Months Ended
Year Ended December 31 June 30
----------------------------------------- ---------------------------
(In thousands of dollars)
1995 1994 1993 1996 1995
- -------------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Fixed maturities........................... $21,599 $16,591 $ 6,520 $10,805 $ 9,852
Equity securities.......................... 64 64 64 32 32
Policy loans............................... 3,925 2,979 2,498 1,355 1,620
Short-term investments..................... 6,037 3,658 7,240 1,294 3,943
Security repurchase transactions-income.... 135 63 - - 136
Other...................................... 2 (381) 2 - 1
-------- ------------ ---------- ----------- ------------
31,762 22,974 16,324 13,486 15,584
Investment expense......................... 268 215 180 117 150
===================================================================================================================
Net investment income $31,494 $22,759 $16,144 $13,369 $15,434
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Analysis of Investment Gains (Losses) Six Months Ended
Year Ended December 31 June 30
----------------------------------- ----------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- ------------------------------------------------------- --------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Realized investment gains (losses):: (Unaudited)
Fixed maturities.................................. $13,674 $(4,306) $3,313 $3,745 $ 12,521
Equity securities................................. - - 332 - -
Other............................................. 109 (196) 128 - 47
--------- --------- -------- ------- ---------
13,783 (4,502) 3,773 3,745 12,568
Income tax (expense) benefit...................... (4,824) 1,576 (1,321) (1,311) (4,399)
--------- --------- --------- ------- --------
Net realized investment gains (losses)........ 8,959 (2,926) 2,452 2,434 8,169
--------- --------- ---------- ------- --------
Change in net unrealized investment gains (losses):
Fixed maturities.................................. 25,405 (6,892) - (24,169) 12,551
Equity securities................................. 389 (85) 106 129 132
-------- --------- ---------- -------- ---------
25,794 (6,977) 106 (24,040) 12,683
Income tax (expense) benefit...................... (9,028) 2,442 (38) 8,414 (4,439)
-------- --------- ---------- --------- ---------
Change in net unrealized investment gains
(losses)..................................... 16,766 (4,535) 68 (15,626) 8,244
Change in accounting for adoption of SFAS 115-
Note 2...................................... - - 1,201 - -
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized investment
gains (losses) $25,725 $(7,461) $3,721 $(13,192) $16,413
===================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Summary of Gross Realized Investment Gains (Losses)
for Fixed Maturities and Equity Securities
December 31 1995 1994 1993
--------------------------- ---------------------- ------------------------
Fixed Equity Fixed Equity Fixed Equity
(In thousands of dollars) Maturities Securities Maturities Securities Maturities Securities
- ----------------------------- ----------- --------------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales $ 336,731 $ - $ 408,505 $ - $ 88,622 $ 336
===========================================================================================================
Gross realized gains......... 18,185 - 1,559 - 3,355 332
Gross realized losses........ (4,511) - (5,865) - (42) -
- -----------------------------------------------------------------------------------------------------------
Net realized gains (losses) $ 13,674 $ - $ (4,306) $ - $ 3,313 $ 332
===========================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. - (Continued):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Summary of Gross Realized Investment Gains (Losses)
for Fixed Maturities and Equity Securities
June 30 1996 1995
(Unaudited) (Unaudited)
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
Fixed Equity Fixed Equity
(In thousands of dollars) Maturities Securities Maturities Securities
- -------------------------------- ------------- ------------- -------------------- ------------
Proceeds from sales $ 358,199 $ - $ 243,117 $ -
================================ =========== =============== ================ ================
Gross realized gains............ 6,626 - 16,805 -
Gross realized losses........... (2,881) - (4,284) -
- -------------------------------- ------------ -------------- ----------------- ---------------
Net realized gains $ 3,745 $ - $ 12,521 $ -
================================ =========== =============== ================= ===============
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Analysis of Net Unrealized Investment Gains (Losses)
Included in Stockholder's Equity
December 31 1995 1994
-------------------------------- ---------------------------------
(In thousands of dollars) Gains Losses Net Gains Losses Net
- ------------------------------------------- -------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities.......................... $20,386 $(25) $ 20,361 $5,624 $(10,668) $ (5,044)
Equity securities......................... 622 - 622 233 - 233
---------- --------- ----------- --------- ----------- -----------
$21,008 $(25) 20,983 $5,857 $(10,668) (4,811)
======= ===== ====== =========
Deferred income tax benefit (expense)..... (7,342) 1,686
=================================================================================================================
Net unrealized investment gains (losses) $ 13,641 $ (3,125)
=================================================================================================================
</TABLE>
<PAGE>
- ------------------------------------------------------------------------------
Analysis of Net Unrealized Investment Gains (Losses)
Included in Stockholder's Equity
June 30 1996
(Unaudited)
---------------------------------------
(In thousands of dollars) Gains Losses Net
- -------------------------------------- ----------- ------------ --------------
Fixed maturities...................... $3,296 $(7,104) $ (3,808)
Equity securities..................... 751 - 751
---------- ----------- --------------
$4,047 $(7,104) (3,057)
====== ========
Deferred income tax benefit........... 1,072
==============================================================================
Net unrealized investment losses $ (1,985)
==============================================================================
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. - (Continued):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Summary of Investments in Fixed Maturities
and Equity Securities Available-for-Sale Amortized Unrealized Unrealized Market
(In thousands of dollars) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995
United States Treasury securities and obligations of
government agencies.................................. $186,083 $12,526 $ 1 $198,608
Asset-backed securities................................. 84,785 2,545 8 87,322
States, municipalities and tax exempt political 279 14 - 293
subdivisions............................................
Corporate securities.................................... 50,523 2,508 6 53,025
Other debt securities................................... 25,731 2,793 10 28,514
-------- ------- --- --------
Total fixed maturities............................... 347,401 20,386 25 367,762
Equity securities....................................... 1,074 622 - 1,696
===============================================================================================================
Total $348,475 $21,008 $ 25 $369,458
===============================================================================================================
December 31, 1994
United States Treasury securities and obligations of
government agencies.................................. $ 69,148 $ 3,770 $ 1,182 $ 71,736
Asset-backed securities................................. 219,470 136 7,898 211,708
States, municipalities and tax exempt political 277 20 2 295
subdivisions............................................
Corporate securities.................................... 38,223 227 1,016 37,434
Other debt securities................................... 28,881 1,471 570 29,782
-------- ------ -------- ---------
Total fixed maturities............................... 355,999 5,624 10,668 350,955
Equity securities....................................... 1,074 233 - 1,307
===============================================================================================================
Total $357,073 $ 5,857 $ 10,668 $352,262
===============================================================================================================
June 30, 1996 (Unaudited)
United States Treasury securities and obligations of
government agencies.................................. $114,889 $37 $ 4,791 $110,135
Asset-backed securities................................. 68,119 457 1,348 67,228
States, municipalities and tax exempt political
subdivisions............................................ 30 - - 30
Corporate securities.................................... 71,672 1,747 783 72,636
Other debt securities................................... 22,475 1,055 182 23,348
-------- ------- ------ --------
Total fixed maturities............................... 277,185 3,296 7,104 273,377
Equity securities....................................... 1,074 751 - 1,825
==============================================================================================================
Total $275,259 $4,047 $ 7,104 $275,202
==============================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. - (Continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Summary of Investments in Fixed Maturities December 31 June 30
by Contractual Maturity ------------------------------------------- -------------------------
1995 1994 1996
-------------------- --------------------- -------------------------
Amortized Market Amortized Market Amortized Market
(In thousands of dollars) Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
Due in one year or less.................... $ 7,470 $ 7,666 $ 22,725 $ 22,391 $ 9,789 $ 9,861
Due after one year through five years...... 135,160 136,297 33,291 32,382 120,918 118,066
Due after five years through ten years..... 35,869 37,538 14,054 12,803 29,576 29,483
Due after ten years........................ 84,117 98,939 66,459 71,671 48,783 48,739
Asset-backed securities not due at a single
maturity date.............................. 84,785 87,322 219,470 211,708 68,119 67,228
==================================================================================================================
Total $347,401 $ 367,762 $ 355,999 $ 350,955 $ 277,185 $ 273,377
==================================================================================================================
</TABLE>
Actual maturities may differ from contractual maturities because securities
may be called or prepaid with or without call or prepayment penalties.
There are no investments that have not produced income for the year ended
December 31, 1995 or for the six months ended June 30, 1996. There are no
investments in a single issuer, other than the U.S. government, that when
aggregated exceed 10% of stockholder's equity.
NOTE 4. STATUTORY CAPITAL AND SURPLUS:
Statutory capital and surplus and net income for VFL are determined in
accordance with accounting practices prescribed by the Pennsylvania Insurance
Department. Prescribed statutory accounting practices are set forth in a variety
of publications of the National Association of Insurance Commissioners as well
as state laws, regulations, and general administrative rules. The Company has no
material permitted accounting practices. Statutory net income was $8.9 million,
$5.2 million and $2.5 million for the years ended December 31, 1995, 1994 and
1993, respectively, and $2.0 million and $3.5 million for the unaudited
six-month periods ended June 30, 1996 and 1995, respectively. Statutory capital
and surplus for VFL was $129.9 million and $122.3 million at December 31, 1995
and 1994, respectively, and $126.5 million (unaudited) at June 30, 1996.
The payment of dividends by VFL to Assurance without prior approval of the
Pennsylvania Insurance Department is limited to formula amounts. As of December
31, 1995 and June 30, 1996, approximately $13.0 million was not subject to prior
Insurance Department approval.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair values are disclosed for all financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values may be
based on estimates using present value or other valuation techniques. These
techniques are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. Potential taxes and other
transaction costs have not been considered in estimating fair value. The
estimates presented herein are subjective in nature and are not necessarily
indicative of the amounts VFL could realize in the current market exchange. Any
difference would not be expected to be material.
All nonfinancial instruments such as deferred acquisition costs, deferred
income taxes and insurance reserves, are excluded from fair value disclosure.
Thus, the total fair value amounts cannot be aggregated to determine the
underlying economic value of VFL.
The carrying amounts and estimated fair values of certain of VFL's financial
instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
December 31 1995 1994
------------------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands of dollars) Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Investments:
Fixed maturities available-for-sale........ $367,762 $367,762 $350,955 $350,955
Equity securities available-for-sale....... 1,696 1,696 1,307 1,307
Policy loans............................... 56,008 52,648 47,001 41,361
Financial Liabilities
Premium deposits and annuity contracts....... 68,578 64,565 42,982 42,122
- -----------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used by VFL in estimating its
fair value disclosures for financial instruments:
The carrying amounts reported in the balance sheet approximate
fair value for cash, short-term investments, premium and other
insurance receivables, accrued investment income, and certain other
assets and other liabilities because of their short-term nature. As
such, these financial instruments are not shown in the above table.
Fixed maturity securities and equity securities are based on
quoted market prices, where available. For securities not actively
traded, fair values are estimated using values obtained from
independent pricing services or quoted market prices of comparable
instruments.
The fair values for policy loans are estimated using discounted
cash flow analyses at interest rates currently offered for similar
loans to borrowers with comparable credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 6. BENEFIT PLANS:
Pension Plan
CNA has several noncontributory pension plans covering all full-time
employees age 21 or over who have completed at least one year of service. VFL is
included in the CNA Employees' Retirement Plan. Plan benefits are based on years
of credited service and the employee's highest sixty consecutive months of
compensation.
CNA's funding policy is to make contributions in accordance with applicable
governmental regulatory requirements. The assets of the plan are invested
primarily in U.S. government securities with the balance in short-term
investments, common stocks and other fixed income securities.
Effective January 1, 1996, the retirement plans redefined compensation to
include base pay, overtime and bonuses. This amendment generated an unrecognized
prior service cost of $20.2 million for CNA.
In 1994, the plan adopted the rule of 65. This change allows Plan
participants to receive early retirement benefits if their combined years and
months of age and service with CNA equals a minimum of 65. This amendment
generated an unrecognized prior service cost of $1.6 million for CNA.
Net periodic pension cost allocated to VFL was $1.7 million, $1.1 million
and $.7 million for the years ended December 31, 1995, 1994 and 1993,
respectively, and $1.4 million (unaudited) and $.9 million (unaudited) for the
six-month periods ended June 30, 1996 and 1995, respectively.
The following table sets forth the Plans' funded status and amounts
recognized in CNA's consolidated financial statements at December 31, 1995, 1994
and 1993.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1995* 1994 1993
December 31 Overfunded Underfunded Overfunded Overfunded
(In thousands of dollars) Plans Plans Plans Plans
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested........................................................ $ 508,506 $ 628,564 $ 376,377 $ 401,481
Nonvested..................................................... 31,180 11,292 39,152 41,585
--------- ---------- ---------- -----------
Accumulated benefit obligation............................. $ 539,686 $ 639,856 $ 415,529 $ 443,066
========= ========== ========== ===========
Projected benefit obligation................................... $ 808,289 $ 771,018 $ 651,418 $ 617,764
Plan assets at fair value...................................... 629,673 496,264 495,492 465,279
------- ------- ------- -------
Plan assets less than projected benefit obligation.......... (178,616) (274,754) (155,926) (152,485)
Unrecognized net asset at January 1, 1986 being recognized over (12,176) - (17,253) (22,330)
12 years..
Unrecognized prior service costs............................... 38,584 86,903 20,773 21,553
Unrecognized net loss.......................................... 172,269 5,825 174,039 160,825
------- --------- ------- -------
Net pension asset (liability)............................... $ 20,061 $ (182,026) $ 21,633 $ 7,563
======== ========= ======= =======
Net periodic pension cost:
Service cost - benefits attributed to employee service during $ 33,020 $ 10,694 $ 32,354 $ 27,527
the year.......................................................
Interest cost on projected benefit obligation................ 52,783 31,033 44,666 40,640
Actual return on plan assets................................. (115,363) (43,432) 11,579 (25,609)
Net amortization and deferral................................ 73,312 18,650 (43,265) (13,967)
====================================================================================================================
Net periodic pension cost $ 43,752 $ 16,945 $ 45,334 $ 28,591
====================================================================================================================
<FN>
*The 1995 data includes The Continental Corporation Retirement Plans which are
underfunded. CNA acquired The Continental Corporation on May 10, 1995.
</FN>
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 6. - (Continued):
Actuarial assumptions are set forth in the following table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Assumptions
December 31 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate.............................................. 7.25% 8.50% 7.25% 8.25%
Rate of increase in compensation levels *.................. 2.75 4.00 4.50 5.25
Expected long-term rate of return on plan assets........... 7.50 8.75 7.50 9.00
- --------------------------------------------------------------------------------------------------
<FN>
* Excludes age/service related merit and productivity increases.
</FN>
</TABLE>
The funded status is determined using assumptions at the end of the year.
Pension cost is determined using assumptions at the beginning of the year.
Postretirement Health Care and Life Insurance Benefits
CNA provides certain health and dental care benefits for eligible retirees,
through age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired persons. CNA funds benefit costs principally
on the basis of current benefit payments.
As described previously, in 1994, the Plan adopted the Rule of 65. For the
postretirement plan, this amendment generated an unrecognized prior service cost
of $11.2 million for CNA.
Net periodic postretirement benefit cost allocated to VFL was $.7 million,
$.6 million and $.4 million for the years ended December 31, 1995, 1994 and
1993, respectively, and $.5 million (unaudited) and $.3 million (unaudited) for
the six-month periods ended June 30, 1996 and 1995, respectively.
<PAGE>
The following table sets forth the amounts recognized in CNA's consolidated
financial statements at December 31, 1995, 1994 and 1993.
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
December 31
(In thousands of dollars) 1995* 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................................... $ 185,507 $ 27,088 $ 26,245
Fully eligible, active plan participants..................... 59,173 53,684 24,097
Other active plan participants.............................. 62,540 41,106 70,804
------ ------ ------
Total accumulated postretirement benefit obligation......... 307,220 121,878 121,146
Unrecognized prior service cost.............................. - (11,177) -
Unrecognized net gain (loss).................................. 7,380 19,702 (5,291)
-------- -------- ---------
Accrued postretirement benefit cost......................... $ 314,600 $ 130,403 $ 115,855
======== ========== =========
Net periodic postretirement benefit cost:
Service cost/benefits attributed to employee service during
the year.................................................... $ 5,969 $ 8,603 $ 5,625
Interest cost on accumulated post retirement benefit
obligation.................................................. 17,506 10,342 7,742
Amortization.................................................. (941) 655 (104)
===================================================================================================================
Net periodic postretirement benefit cost $ 22,534 $ 19,600 $ 13,263
===================================================================================================================
<FN>
*The 1995 data includes postretirement benefit obligations for The Continental
Corporation retirees.
</FN>
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 6. - (Continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Assumptions
December 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumptions used in determining net periodic benefit cost:
Discount rate................................................................. 8.50% 7.25% 8.25%
Rate of increase in compensation levels *..................................... 4.00 4.50 5.25
Assumptions used in determining the projected benefit obligation (liability):
Discount rate................................................................. 7.25% 8.50% 7.25%
Rate of increase in compensation levels *..................................... 2.75 4.00 4.50
- ------------------------------------------------------------------------------------------------------------------
<FN>
* Excludes age/service related merit and productivity increases.
</FN>
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 13% in 1995, declining 1% per year to an
ultimate rate of 5% in 2002. The health care cost trend rate assumption has a
significant effect on the amount of the benefit obligation and periodic cost
reported. An increase in the assumed health care cost trend rate of 1% in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1995 by $17.5 million and the aggregate net periodic postretirement
benefit cost for 1995 by $1.9 million.
Savings Plan
VFL is included in the CNA Employees' Savings Plan which is a contributory
plan which allows employees to make a regular contribution of up to 6% of their
salaries. VFL contributes an additional amount equal to 70% of the employee's
regular contribution. Employees may also make an additional contribution of up
to 10% of their salaries for which there is no additional contribution by CNA.
VFL contributions to the plan were $.7 million, $.5 million and $.5 million for
the years ended December 31, 1995, 1994 and 1993, respectively, and $.5 million
(unaudited) and $.4 million (unaudited)for the six months ended June 30, 1996
and 1995, respectively.
NOTE 7. INCOME TAXES:
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included in the consolidated
Federal income tax return with CNA and its eligible subsidiaries (CNA Tax
Group), which in turn is consolidated in the Loews Federal income tax return.
The Federal income tax provision of VFL is computed as if VFL were filing its
own separate return.
VFL maintains a special tax memorandum account designated as the
"Shareholder's Surplus Account." Dividends from this account may be distributed
to the shareholder without resulting in any additional tax. At December 31,
1995, the amount in the Shareholder's Surplus Account was $95 million. Another
tax memorandum account, defined as the "Policyholders' Surplus Account," totaled
$5 million at December 31, 1995. No further additions to this account are
allowed. Amounts accumulated in the Policyholders' Surplus Account are subject
to income tax if distributed to the shareholder. VFL has not provided for such a
tax as VFL has no plans for such a distribution.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 7. - (Continued):
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
VFL's deferred tax assets and liabilities as of December 31, 1995 and 1994 and
March 31, 1996 are shown in the table below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Components of Deferred Tax Assets and Liabilities
December 31, June 30,
--------------------------
(In thousands of dollars) 1995 1994 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Unaudited)
Life insurance reserve differences................. $ 15,900 $ 13,372 $ 17,013
Deferred acquisition costs......................... (14,382) (11,978) (18,040)
Investment valuation............................... 2,518 2,450 3,051
Unrealized investment (gains) losses............... (7,342) 1,686 1,072
Receivables........................................ 661 (524) (1,382)
Other, net......................................... (546) 1,284 1,859
==================================================================================================
Net deferred tax assets (liabilities) $ (3,191) $ 6,290 $ 3,573
==================================================================================================
</TABLE>
At December 31, 1995, gross deferred tax assets and liabilities amounted to
$20.1 million and $23.3 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1994, amounted to $19.2 million and $12.9 million,
respectively. At June 30, 1996, gross deferred tax assets and liabilities
amounted to $24.4 million (unaudited) and $20.8 million (unaudited),
respectively.
VFL has not established a valuation reserve at December 31, 1995 as it
believes that all deferred tax assets are fully realizable. VFL has a past
history of profitability and anticipates future taxable income sufficient to
support its deferred tax balances at December 31, 1995, including but not
limited to the reversal of existing temporary differences and the implementation
of tax planning strategies, if needed.
<PAGE>
<TABLE>
<CAPTION>
Significant components of VFL's income tax provision are as follows:
- --------------------------------------------------------------------------------------------------------------
Provision for Income Tax (Expense) Benefit Six Months Ended
Year Ended December 31 June 30
---------------------------------- --------------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Current tax (expense) benefit on:
Ordinary income............................ $ (7,417) $ (5,603) $(3,213) $ (1,396) $ (3,681)
Realized investment gains/losses........... (4,330) 1,326 (1,326) (1,320) (4,407)
---------- -------- ---------- ---------- -----------
Total current tax expense............ (11,747) (4,277) (4,539) (2,716) (8,088)
--------- --------- ---------- ---------- -----------
Deferred tax (expense) benefit on:
Ordinary income (loss)..................... 41 (78) 799 (1,660) (208)
Realized investment gains/losses........... (494) 250 5 10 8
---------- --------- ----------- ---------- -----------
Total deferred tax (expense) benefit. (453) 172 804 (1,650) (200)
==============================================================================================================
Total income tax expense $ (12,200) $ (4,105) $ (3,735) $(4,366) $(8,288)
==============================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 7. - (Continued):
A reconciliation of the expected income tax resulting from the use of
statutory tax rates to the effective income tax follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Reconciliation of Expected and Effective Taxes Six Months Ended
Year Ended December 31 June 30
------------------------------ ---------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Expected tax expense on ordinary income at statutory rates. $ (7,325) $(5,623) $(2,474) $(3,049) $(3,864)
State income tax deduction................................. 27 23 22 9 14
State income taxes......................................... (78) (66) (63) (25) (39)
Effect of 1% change in tax rate on January 1, 1993
deferred tax - - 102 - -
balance.................................................
Other items, net........................................... - (15) (1) 9 -
--------- --------- --------- --------- ---------
Income tax expense on ordinary income................... (7,376) (5,681) (2,414) (3,056) (3,889)
Income tax (expense) benefit on realized investment
gains/losses at statutory rates............................ (4,824) 1,576 (1,321) (1,310) (4,399)
====================================================================================================================
Income tax expense $(12,200) $(4,105) $(3,735) $(4,366) $(8,288)
====================================================================================================================
</TABLE>
<PAGE>
NOTE 8. REINSURANCE:
The effects of reinsurance on premium revenues are shown in the following
schedule:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Premiums Assumed/Net
-------------------------------------------------
(In millions of dollars) Direct Assumed Ceded Net %
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31
1995
Life................................. $ 316,011 $ 75,053 $ 316,577 $ 74,487 101%
Accident and Health.................. 422 222,166 422 222,166 100
--------- ---------- -------- ---------
Total............................ $ 316,433 $ 297,219 $ 316,999 $ 296,653 100
========= ========== ======== =========
1994
Life................................. $ 187,834 $ 49,998 $ 189,163 $ 48,669 103
Accident and Health.................. 468 214,311 468 214,311 100
--------- --------- --------- ----------
Total............................ $ 188,302 $ 264,309 $ 189,631 $ 262,980 101
======= ========= ========= ==========
1993
Life................................. $ 171,624 $ 41,083 $ 173,157 $ 39,550 104
Accident and Health.................. 525 201,295 525 201,295 100
--------- ----------- ---------- -----------
Total........................... $ 172,149 $ 242,378 $ 173,682 $ 240,845 101
========= =========== =========== ===========
Six Months Ended June 30 (Unaudited)
1996
Life................................. $ 246,899 $ 36,649 $ 247,692 $ 35,856 102
Accident and Health.................. 399 124,365 399 124,365 100
--------- ---------- ---------- ----------
Total........................... $ 247,298 $161,014 $ 248,091 $ 160,221 100
======= ========== ========== ===========
1995
Life................................. $ 137,843 $ 34,976 $ 139,215 $ 33,604 104
Accident and Health.................. 225 109,291 225 109,291 100
---------- ---------- ---------- -----------
Total........................... $ 138,068 $ 144,267 $ 139,440 $ 142,895 101
========== ========== ========== ===========
=============================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 8. - (Continued):
In the table above, the majority of Life premium revenue is from long
duration type contracts, while the Accident and Health premium revenue is
generally short duration.
Transactions with Assurance, as part of the pooling agreement, are
reflected in the above table. Premium revenues ceded to non-affiliated companies
were $9.9 million, $7.5 million and $6.5 million for the years ended December
31, 1995, 1994 and 1993, respectively, and $10.5 million (unaudited) and $4.9
million (unaudited) for the six-month periods ended June 30, 1996 and 1995,
respectively. Additionally, insurance claims and policyholders' benefits
recoveries from non-affiliated companies were $6.1 million, $3.0 million and
$4.2 million for the years ended December 31, 1995, 1994 and 1993, respectively,
and $4.7 million (unaudited) and $.9 million (unaudited) for the six-month
periods ended June 30, 1996 and 1995, respectively.
The insurance reserves included in the accompanying balance sheet are
stated at the net amount of VFL's participation pursuant to the intercompany
pooling. Insurance reserves related only to VFL's direct and assumed
(non-affiliate) business were $1,067.8 million and $916.0 million at December
31, 1995 and 1994, respectively, and $1,180.6 million (unaudited) at June 30,
1996.
The impact of reinsurance, including transactions with Assurance, on life
insurance in force is shown in the following schedule:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Life Insurance in Force Assumed/Net
-------------------------------------------------------------
(In millions of dollars) Direct Assumed Ceded Net %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31
1995............................. $57,138 $16,996 $58,442 $15,692 108.3%
1994............................. 22,933 13,215 24,112 12,036 109.8
1993............................. 18,043 11,835 19,338 10,540 112.3
Six Months Ended June 30 (Unaudited)
1996............................. 82,466 19,792 83,770 18,488 107.1
1995............................. 35,521 14,799 36,704 13,616 108.7
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The ceding of insurance does not discharge primary liability of the original
insurer. VFL places reinsurance with other carriers only after careful review of
the nature of the contract and a thorough assessment of the reinsurers' credit
quality and claim settlement performance.
<PAGE>
NOTE 9. RELATED PARTIES:
As discussed in Note 1, VFL is party to a pooling agreement with its
parent, Assurance. In addition, the Company is party to the CNA Intercompany
Expense Agreement whereby expenses incurred by CNA and each of its subsidiaries
are allocated to the appropriate company. All acquisition and underwriting
expenses allocated to the Company are further subject to the Intercompany
Pooling Agreement, so that acquisition and underwriting expenses recognized by
the Company approximates ten percent of the combined acquisition and
underwriting expenses of the Company and Assurance. Expenses of VFL exclude
$5.5, $4.1 and $3.8 million of general and administrative expenses incurred by
VFL and allocated to CNA for the years ended December 31, 1995, 1994 and 1993,
respectively, and $6.0 and $2.7 million for the unaudited six-month periods
ended June 30, 1996 and 1995. VFL had a $4.9 million affiliated receivable
included in other assets at December 31, 1995, a $50.4 million affiliated
payable at December 31, 1994 and a $62.2 million (unaudited) affiliated payable
at June 30, 1996 for net cash settlements related to pooling and general expense
reimbursements to Casualty in the normal course of operations.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 10. LEGAL:
VFL is party to litigation arising in the ordinary course of business. The
outcome of this litigation will not, in the opinion of management, materially
affect the results of operations or equity of VFL.
NOTE 11. BUSINESS SEGMENTS:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Six Month Period
Year Ended December 31 Ended June 30
-------------------------------------------- -----------------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Revenues
Individual........................... $ 69,577 $ 52,812 $ 42,721 $ 33,431 $ 30,628
Group................................ 263,388 237,716 217,703 142,658 129,614
Realized gains (losses).............. 13,783 (4,502) 3,773 3,745 12,568
---------- ---------- --------- ---------- ---------
Total........................ $ 346,748 $ 286,026 $ 264,197 $ 179,834 $ 172,810
========= ========= ========= ========= ========
Income Before Income Tax
Individual........................... $ 8,611 $ 4,794 $ 1,318 $ 4,199 $ 4,660
Group................................ 12,316 11,295 5,751 4,514 6,381
Realized gains (losses).............. 13,783 (4,502) 3,773 3,745 12,568
---------- --------- ---------- ---------- ----------
Total........................ $ 34,710 $ 11,587 $ 10,842 $ 12,458 $ 23,609
========== ======== ========= ========== =========
Net Income
Individual........................... $ 5,597 $ 3,119 $ 885 $ 2,742 $ 3,030
Group................................ 7,954 7,289 3,770 2,916 4,122
Realized gains (losses).............. 8,959 (2,926) 2,452 2,434 8,169
---------- ---------- ---------- ---------- ----------
Total........................ $ 22,510 $ 7,482 $ 7,107 $ 8,092 $ 15,321
========= ========== ========= ========== =========
Assets
Individual........................... $ 307,582 $ 307,884 $ 272,948 $ 313,218 $ 310,840
Group................................ 317,238 244,952 202,944 374,577 291,432
---------- ----------- ------------ ---------- ---------
Total........................ $ 624,820 $ 552,836 $ 475,892 $ 687,795 $ 602,272
========== =========== ============ ========== =========
</TABLE>
Assets and investment income are allocated to business segments based on
cash flows after attribution of separately identifiable assets. Income taxes
have been allocated on the basis of taxable operating income of the respective
segments.
Group revenues include $187.0 million, $179.4 million and $165.9 million
for the years ended December 31, 1995, 1994 and 1993, respectively, and $52.2
million and $46.5 million for the unaudited six-month periods ended June 30,
1996 and 1995, respectively, under contracts covering U.S. government employees
and their dependents.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available which contains more details
concerning subjects discussed in this prospectus. The following is the Table of
Contents for that Statement of Additional Information.
PERFORMANCE INFORMATION.....................................................
Money Market Subaccount Yields*.....................................
Other Subaccount Yields*............................................
Average Annual Total Returns*.......................................
Other Total Returns*................................................
Effect of the Annual Administration Fee on Performance Data*........
VARIABLE ANNUITY PAYMENTS...................................................
Annuity Unit Value*.................................................
Illustration of Calculation of Annuity Unit Value*..................
Illustration of Variable Annuity Payments*..........................
VALUATION DAYS*..............................................................
OTHER INFORMATION*...........................................................
FINANCIAL STATEMENTS*........................................................
*Incorporated herein by reference to Form N-4EL (File 333-0187)filed on
February 20, 1996.
Issued by:
Valley Forge Life Insurance Company
CNA Plaza
Attn: Secretary 43S
Chicago, Illinois 60685
Distributed by:
CNA Investor Services, Inc.
CNA Plaza 34S
Chicago, Illinois 60685
Service Center:
Financial Administration Services, Inc.
95 Bridge Street
Haddam, Connecticut 06438
<PAGE>
APPENDIX A
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option, by
the Market Value Adjustment Factor. The Market Value Adjustment factor is
calculated as follows:
Market Value Adjustment = Amount multiplied by
[[(1+a)/(1+b)]^n/12 -1]
where:
"Amount" is the amount being surrendered, withdrawn, transferred or
applied to an Annuity Payment Option less any applicable
annual administration fees or transfer processing fees;
"a" is the Guaranteed Interest Rate currently being credited to the
"Amount"; and
"b" is the Guaranteed Interest Rate that is currently being offered for a
Guarantee Period of duration equal to the time remaining to the
expiration of the Guarantee Period for the Guarantee Amount from which
the "Amount" is taken. Where the time remaining to the expiration of
the Guarantee Period is not 1, 3, 5, 7, or 10 years, "b" is the rate
found by linear interpolation of the rate for the Guarantee Period
having the duration closest to the time remaining or, if the time
remaining is less than 1 year, "b" is the rate for a 1 year period; and
"n" is the number of complete months remaining before the expiration of the
Guarantee Period for the Guarantee Amount from which the "Amount" is
taken.
As an example of calculating "b" by linear interpolation, if the time remaining
to the expiration of the Guarantee Period is 4.5 years, the interpolated
Guaranteed Interest Rate is equal to the sum of one-fourth of the three-year
Guaranteed Interest Rate and three-fourths of the five-year Guaranteed Interest
Rate. If the three-year Guaranteed Interest Rate is 4.5% and the five-year
Guaranteed Interest Rate is 5%, the interpolated Guaranteed Interest Rate equals
4.875% -- that is, 4.5% multiplied by 0.25 plus 5% multiplied by 0.75.
The Market Value Adjustment is computed as in the following examples:
1. Assume that the Owner selects a 7 year Guarantee Period and that the Company
is crediting a 4.5% effective annual interest rate on the amount allocated or
transferred to such Guarantee Period. Assume also that 55 months into the 7-year
Period (seven months into the fifth year), the Owner withdraws $7,500.
If at the time of the withdrawal the Company is offering a 2.5%
effective annual rate of interest on Guarantee Periods of 3 years and a 2.0%
effective annual rate of interest on Guarantee Periods of 1 year, then:
i = 0.04500
j = 0.02354 = (0.025 * 17/24) + (0.02 * 7/24) = linear interpolation
between the 3 year rate and the 1 year rate
The MVA factor = [(1.04500)/(1.02354)]^(29/12)-1= 0.05142
MVA = $7,500.00 * 0.05142 = $385.65
Amount received = $7,500 + $385.65 = $7,885.65
<PAGE>
If at the time of the withdrawal the Company is offering a 5.75%
effective annual rate of interest on Guarantee Periods of 3 years and a 6.5%
effective annual rate of interest on Guarantee Periods of 1 year, then:
i = 0.04500
j = 0.05969 = (0.0575 * 17/24) + (0.065 * 7/24) = linear interpolation
between the 3 year rate and the 1 year rate
The MVA factor = [(1.04500)/(1.05969)]^(29/12)-1= 0.03317
MVA = $7,500.00 * -0.03317 = -$248.78
Amount received = $7,500 - $248.78 = $7,251.22
<PAGE>
APPENDIX B
DEATH BENEFIT EXAMPLES
Assume that an Owner makes purchase payments on the first day of certain
Contract Years as shown in the table below. Assume also that the Owner withdraws
$7,500 during the seventh month of Contract Year five and $5,000 at the
beginning of Contract Years thirteen and fifteen. Assume that the Annuitant is
younger than age 76 for all twenty years. All "beginning of year death benefits"
are computed as of the first day of the Contract Year except for the figure for
Contract Year 5 which is computed as of the seventh month of that year (i.e., as
of the time of the $7,500 withdrawal).
Explanations:
The Death Benefit at the beginning of Contract Years 1 through 4 is
determined from the Contract Value at the end of the prior Contract
Year plus the purchase payment made at the beginning of the year for
which the computation is being made.
The Death Benefit at the end of month 7 of Contract Year 5 is
determined from the prior year's Contract Value plus the purchase
payment made at the beginning of that year, minus the $7,500 withdrawn
in the seventh month minus a $318.75 surrender charge assessed in
connection with the withdrawal.
The Death Benefit at the beginning of Contract Years 6 through 10 is
determined from the Contract Value at the end of the prior Contract
Year plus the purchase payment made at the beginning of the Year for
which the computation is being made. Since the first day of Contract
Year 6 is a minimum death benefit floor computation anniversary, a new
death benefit floor amount is set at $8,506.
The Death Benefit at the beginning of Contract Year 11 is determined
solely from the prior Year's Contract Value. Since this is a minimum
death benefit floor computation anniversary, a new death benefit floor
amount is set at $42,610.
The Death Benefit at the beginning of Contract Year 12 is determined
from the minimum death benefit which is the most recently reset death
benefit floor amount of $42,610. This is so because the Contract Value
declined and no purchase payments or withdrawals occured since the
prior reset of the death benefit floor amount.
The Death Benefit at the beginning of Contract Year 13 is determined
from the minimum death benefit which is the most recently reset death
benefit floor amount of $42,610 adjusted for the $5,000 withdrawal. The
$36,762 results from $42,610 being multiplied by $31,432/$36,432.
The Death Benefit at the beginning of Contract Year 14 is the minimum
death benefit which is the most recently reset death benefit floor
amount adjusted for the $5,000 withdrawal made since that floor amount
was set, or $36,762.
The Death Benefit at the beginning of Contract Year 15 is the minimum
death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for both $5,000 withdrawals made since that
floor amount was set. The $28,372 results from $42,610 being multiplied
by $31,432/$36,432, and this result multiplied by $16,908/$21,908.
The Death Benefit at the beginning of Contract Year 16 is the minimum
death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for both $5,000 withdrawals made since that
floor amount was set. The $28,372 results from $42,610 being multiplied
by $31,432/$36,432, and this result multiplied by $16,908/$21,908. Even
though this is a death benefit floor computation anniversary, the death
benefit floor amount is not reset since the Contract Value has not
exceeded its previous high of $42,610 occurring in Contract Year 10. No
purchase payments or withdrawals were made.
<PAGE>
The Death Benefit at the beginning of Contract Year 17 through 20 is
the minimum death benefit which is the most recently reset death
benefit floor amount of $42,610 adjusted for both $5,000 withdrawals
made since that floor amount was set and adjusted further for the
$10,000 purchase payment made on the first day of Contract Year 17.
<TABLE>
<CAPTION>
|================|=============|===============|=================|===============|===============|===============|
|Beginning of |Purchase | Withdrawals | Accumulated Net | End of Year | End of Year | Beginning of |
|Contract Year |Payments | | Purchase | Accumulation | Contract Value| Year Death |
| | | | Payments | Unit Value | | Benefit |
<S> <C> <C> <C> <C> <C> <C>
|================|=============|===============|=================|===============|===============|===============|
| 1 | $ 2,000 | $ 0 | $ 2,000 | 10.50000 | $ 2,100| $ 2,000 |
|================|-------------|---------------|-----------------|---------------|---------------|===============|
| 2 | $ 2,000 | $ 0 | $ 4,000 | 11.23500 | $ 4,387| $ 4,100 |
|================|-------------|---------------|-----------------|---------------|---------------|===============|
| 3 | $ 2,500 | $ 0 | $ 6,500 | 12.13380 | $ 7,438| $ 6,887 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 4 | $ 3,000 | $ 0 | $ 9,500 | 13.34718 | $11,482| $10,438 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 5 | $ 4,000 | $ 7,500 | $ 6,000 | 14.81537 | $ 8,506| $ 7,663 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 6 | $ 5,000 | $ 0 | $11,000 | 16.59321 | $15,127| $13,506 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 7 | $ 5,000 | $ 0 | $16,000 | 18.25254 | $22,139| $20,127 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 8 | $ 5,000 | $ 0 | $21,000 | 19.71274 | $29,310| $27,139 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 9 | $ 5,000 | $ 0 | $26,000 | 20.89550 | $36,369| $34,310 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 10 | $ 5,000 | $ 0 | $31,000 | 21.52237 | $42,610| $41,369 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 11 | $ 0 | $ 0 | $31,000 | 20.44625 | $40,480| $42,610 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 12 | $ 0 | $ 0 | $31,000 | 18.40162 | $36,432| $42,610 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 13 | $ 0 | $ 5,000 | $26,000 | 15.64138 | $26,717| $36,762 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 14 | $ 0 | $ 0 | $26,000 | 12.82593 | $21,908| $36,762 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 15 | $ 0 | $ 5,000 | $21,000 | 13.46723 | $17,753| $28,372 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 16 | $ 0 | $ 0 | $21,000 | 14.14059 | $18,641| $28,372 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 17 | $10,000 | $ 0 | $31,000 | 14.14059 | $28,641| $38,372 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 18 | $ 0 | $ 0 | $31,000 | 13.43356 | $27,209| $38,372 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 19 | $ 0 | $ 0 | $31,000 | 13.43356 | $27,209| $38,372 |
|================|=============|===============|=================|===============|===============| ==============|
| 20 | $ 0 | $ 0 | $31,000 | 13.97090 | $28,297| $38,372 |
|================|=============|===============|=================|===============|===============| ==============|
</TABLE>
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Securities and Exchange Commission
Registration Fees (Approximate) $ 20,000
Printing and engraving $ 75,000
Accounting fees and expenses $ 65,000
Legal fees and expenses $150,000
Miscellaneous $ 15,000
Total Expenses (Approximate) $325,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant has no officers, directors or employees. The depositor
and the registrant do not indemnify the officers, directors or
employees of the depositor. CNA-Financial Corporation, ("CNAFC") a
parent of the depositor, indemnifies the depositor's officers,
directors and employees in their capacity as such. Most of the
depositor's officers, directors and employees are also officers,
directors and/or employees of CNAFC.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of CNAFC) by reason of the
fact that he is or was a director, officer, employee or agent of CNAFC,
or was serving at the request of CNAFC as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of CNAFC, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit
by or in the right of CNAFC to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or
agent of CNAFC, or was serving at the request of CNAFC as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of CNAFC. No indemnification is made,
however, in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to CNAFC unless and only to
the extent that a court determines that, despite the adjudication of
liability but in view of all of the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such
expenses which the court deems proper.
To the extent that any person referred to above is successful on the
merits or otherwise in defense of any action, suit or proceeding
referred to above, or in defense of any claim, issue or matter therein,
CNAFC will indemnify such person against expenses (including attorney's
fees) actually and reasonably incurred by him in connection therewith.
CNAFC may advance to such a person, expenses incurred in defending a
civil or criminal action, suit or proceeding as authorized by CNAFC's
board of directors upon receipt of an undertaking by (or on behalf of)
such person to repay the amount advanced unless it is ultimately
determined that he is entitled to be indemnified.
Indemnification and advancement of expenses described above (unless
pursuant to a court order) is only made as authorized in the specific
case upon a determination that such indemnification or advancement of
expenses is proper in the circumstances because he has met the
applicable standard of conduct. Such determination must be made by a
majority vote of a quorum of CNAFC's board of directors who are not
parties to the action, suit or proceeding or by independent legal
counsel in a written opinion or by CNAFC's stockholders.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable
<PAGE>
ITEM 16. EXHIBITS
1. Form of Underwriting Agreement between Valley Forge
Life Insurance Company (the "Company") and CNA
Investor Services, Inc.****
3(i). Articles of Incorporation of Valley Forge Life
Insurance Company.*
(ii). By-Laws of Valley Forge Life Insurance Company.*
4. (a) Form of Flexible Premium Deferred Variable
Annuity Contract.**
(b) Form of Qualified Plan Endorsement.**
(c) Form of IRA Endorsement.**
(d) Form of Nursing Home Confinement, Terminal
Medical Condition, Total Disability
Endorsement.**
(e) Policy Application.*****
5. Opinion regarding legality.
10. (a) Form of Participation Agreement between the
Company and Insurance Series.***
(b) Form of Participation Agreement between the
Company and Variable Insurance Products
Fund.***
(c) Form of Participation Agreement between the
Company and The Alger American Fund.***
(d) Form of Participation Agreement between the
Company and MFS Variable Insurance
Trust.***
(e) Form of Participation Agreement between the
Company and SoGen Variable Funds, Inc.***
(f) Form of Participation Agreement between
the Company and Van Eck Worldwide Insurance
Trust.***
(g) CNA Inter-Company Expense Agreement
(h) Amendment to the CNA Inter-Company Expense
Agreement
(i) Reinsurance Pooling Agreement
(j) Amendment to the Reinsurance Pooling
Agreement
23. (a) Consent of Sutherland, Asbill & Brennan
(b) Consent of Deloitte & Touche LLP.
27. Financial Data Schedule.
_____________________
* Incorporated herein by reference to exhibit number 6 to the Form N-4EL
Registration Statement filed with the Securities and Exchange
Commission on February 20, 1996 (File 333-1087).
** Incorporated herein by reference to exhibit number 4 to the Form N-4EL
Registration Statement filed with the Securities and Exchange
Commission on February 20, 1996 (File 333-1087).
*** Incorporated herein by reference to exhibit number 8 to the Form N-4EL/A
Registration Statement filed with the Securities and Exchange
Commission on August 30, 1996 (File 333-1087).
**** Incorporated herein by reference to exhibit number 3 to the Form
N-4EL/A Registration Statement filed with the Securities and
Exhange Commission on August 30, 1996 (File 333-1087).
***** Incorporated herein by reference to exhibit number 5 to the Form N-4EL
Registration Statement filed with the Securities and Exchange
Commission on February 20, 1996 (File 333-1087).
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)
(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused pre-effective amendment no. 1 to this registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Chicago, State of Illinois, on this 4th day of September, 1996.
VALLEY FORGE LIFE INSURANCE COMPANY
(Registrant)
S/DONALD M. LOWRY S/PETER E. JOKIEL
Attest: ________________ By: ____________________________
Donald M. Lowry Peter E. Jokiel
Senior Vice President, Senior Vice President,
Secretary and General Chief Financial Officer,
Counsel Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
_____________________________ _________________________________ _________________
S/DENNIS H. CHOOKAZIAN
_____________________________ Chairman of the Board, September 4, 1996
Dennis H. Chookaszian Chief Executive Officer, Director
S/PHILIP L. ENGEL
_____________________________ President, Director September 4, 1996
Philip L. Engel
S/WILLIAM J. ADAMSON JR.
_____________________________ Senior Vice President September 4, 1996
William J. Adamson Jr.
S/JAMES P. FLOOD
_____________________________ Senior Vice President September 4, 1996
James P. Flood
S/MICHAEL C. GARNER
_____________________________ Senior Vice President September 4, 1996
Michael C. Garner
S/BERNARD L. HENGESBAUGH
_____________________________ Senior Vice President September 4, 1996
Bernard L. Hengesbaugh
S/PETER E. JOKIEL
_____________________________ Senior Vice President,
Peter E. Jokiel Chief Financial Officer, Director September 4, 1996
S/JACK KETTLER
_____________________________ Senior Vice President September 4, 1996
Jack Kettler
<PAGE>
SIGNATURES CONTINUED
S/DONALD M. LOWRY
_____________________________ Senior Vice President, September 4, 1996
Donald M. Lowry General Counsel & Secretary
Director
S/CAROLYN L. MURPHY
_____________________________ Senior Vice President September 4, 1996
Carolyn L. Murphy
S/DONALD C. RYCROFT
_____________________________ Senior Vice President, September 4, 1996
Donald C. Rycroft Treasurer, Director
S/WILLIAM H. SHARKEY, JR.
_____________________________ Senior Vice President, September 4, 1996
William H. Sharkey, Jr. Director
S/WAYNE R. SMITH, III
_____________________________ Senior Vice President September 4, 1996
Wayne R. Smith, III
S/ADRIAN M. TOCKLIN
_____________________________ Senior Vice President September 4, 1996
Adrian M. Tocklin
S/JAE L. WITTLICH
_____________________________ Senior Vice President September 4, 1996
Jae L. Wittlich
S/DAVID W. WROE
_____________________________ Senior Vice President September 4, 1996
David W. Wroe
</TABLE>
Exhibit 5
CNA INSURANCE COMPANIES
CNA PLAZA
CHICAGO, ILLINOIS 60685
September 4, 1996
Board of Directors
Valley Forge Life Insurance Company
CNA Plaza, 43S
Chicago, IL 60685
Gentlemen:
I have acted as counsel to Valley Forge Life Insurance Company (the "Company"),
a Pennsylvania insurance company, Valley Forge Life Insurance Company Variable
Annuity Separate Account (the "Variable Annuity Account") and the Valley Forge
Life Insurance Company Guaranteed Interest Option Separate Account (the
"Guaranteed Interest Account") in connection with the registration under the
Securities Act of 1933 of a variable annuity contract with a fixed interest
option (the "Contracts").
In rendering this opinion, I have assumed the genuineness of all signatures of
all documents I have examined, the authority of such signatories to execute the
same, the truthfulness and accuracy of representations made to me, the
authenticity of all original documents of which copies were furnished to me, and
the conformity to original documents of all documents submitted to me as
certified, conformed or photostatic copies. I have made such examinations of law
and documents as are in my judgment are necessary or appropriate.
Based upon the foregoing, I am of the opinion that:
1. The Company was organized in accordance with the laws of the State of
Pennsylvania and is a duly authorized stock life insurance company under the
laws of Pennsylvania and the laws of those states in which the Company is
admitted to do business;
2. The Variable Annuity Account and the Guaranteed Interest Account have been
duly created and are validly existing as separate accounts pursuant to Section
40-37-109 of the Pennsylvania Unconsolidated Statutes;
3. The Company is authorized to issue the Contracts in those states in which it
is admitted and upon compliance with applicable local law;
4. The Contracts, when issued in accordance with the prospectus contained in the
aforesaid registration statement and upon compliance with applicable local law,
will be legal and binding obligations of the Company in accordance with their
terms.
I hereby consent to the filing of this opinion as an exhibit to the aforesaid
registration statement and to the reference to me under the caption "Legal
Matters" in the prospectus contained in said registration statement.
Sincerely,
S/LYNNE GUGENHEIM
Lynne Gugenheim
Vice President and
Associate General Counsel
Exhibit 10G
CNA INTER-COMPANY EXPENSE AGREEMENT
This Agreement made this lst day of January, 1977 by and between the following
affiliated companies, all of which are hereinafter individually and collectively
called Affiliates: Continental Casualty Company, an Illinois corporation,
Continental Assurance Company, an Illinois corporation, American Casualty
Company of Reading, Pa., a Pennsylvania corporation, National Fire Insurance
Company of Hartford, a Connecticut corporation, Transportation Insurance
Company,an Illinois corporation, Mid-States Insurance Company, an Illinois
corporation, Transcontinental Insurance Company, a New York corporation, Valley
Forge Insurance Company, a Pennsylvania corporation and CNA Casualty o f
California, a California corporation, Valley Forge Life Insurance Company, a
Pennsylvania corporation, Mid-States Life Insurance Company of America, a
Florida corporation, CNA Assurance Company, a Canadian corporation, Canadian
Premier Life Insurance Company, a Canadian corporation, Columbia Casualty
Company, an Illinois corporation, CNA Casualty of Puerto Rico, a Puerto Rico cor
poration, CNA Financial Corporation, a Delaware corporation, CNA Investor
Services, Inc., an Illinois corporation, CNA Realty Corp., a Delaware
corporation, CNA Reinsurance of London, Limited, a coporation of Great Britain,
CNA Adniinistrative Services, Inc., an Illinois corporation, ACCO, Inc., a
Pennsylvania corporation, ACCO Realty Company, a Pennsylvania corporation,
Modern American Corporation, a,New Jersey corporation, General Finance
Corporation, a Delaware corporation, CNA Actuarial Consultants, Inc., a
Delaware corporation, Tensco, Inc., a Delaware corporation.
WHEREAS, each Affiliate, herein called Billing Affiliate, may operate certain
units or departments which perform the services for or provide services to other
Affiliates, herein called Receiving Affiliate, by reason of which the Billing
Affiliate incurs and pays in the first instance certain expenses which in whole
or in pa-rt should be borne by the Receiving Affiliate(s), and
WHEREAS, the parties wish to determine, apportion and make settlement of such
expenses; NOW, THEREFORE, in consideration of the premises, the parties mutually
agree as follows:
1. The senior financial officer of each Affiliate is responsible for
establishing equitable coding for expenses paid and reasonable allocation bases
for the cost of services performed for the Receiving Affiliates within each
department which performs such services in accordance with prudent and generally
accepted accounting principles.
2. Each accounting period the Billing Affiliate will bill each Receiving
Affiliate for such charges and the Receiving Affiliates will promptly pay these
charges.
3. The individual in each Affiliate who is responsible for reviewing these
charges of the allocation bases may ask the senior financial officer of the
Billing Affiliate to review the coding and departmental allocation bases. Survey
data for establishment of allocation bases shall remain part of the accounting
records of the Billing Affiliate.
4. Any Affiliate may request a redetermination of the reasonableness of an
allocation base or expense paid, and, if agreed to by the Billing Affiliate,
receive credit for retroactive adjustment of expenses within any calendar year.
5. If the parties cannot agree on the expenses or allocations referred to in
Paragraph I or on an adjustment referred to in Paragraph 4, the items on which
agreement cannot be reached shall be submitted to the Controller or other
financial or executive officer of the parties in question for final
determination.
6. This Agreement shall become effective January 1, 1977, shall supersede all
prior agreements between any of the parties pertaining to the subject matter of
this Agreement, and shall continue in effect until canceled.
7. This Agreement may be canceled by any party as of the first day of any month
by giving each other party thirty (30) days' prior written notice of such
cancellation.
8. This Agreement may be executed simultaneously in several counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument. IN WITNESS WHEREOF, the parties hereto have duly
executed this Agreement the day and year indicated.
C0NTINENTAL CASUALTY COMPANY
Date: By
----------------------------------
CONTINENTAL ASSURANCE COMPANY
Date: By
----------------------------------
AMERICAN CASUALTY COMPANY OF
READING, PA.
Date: By
----------------------------------
NATIONAL FIRE INSURANCE COMPANY OF
HARTFORD
Date: By
----------------------------------
TRANSPORTATION INSURANCE COMPANY
Date: By
----------------------------------
MID-STATES INSURANCE COMPANY
Date: By
----------------------------------
TRANSCONTINENTAL INSURANCE COMPANY
Date: By
----------------------------------
VALLEY FORGE INSURANCE COMPANY
Date: By
----------------------------------
CNA CASUALTY OF CALIFORNIA
Date: By
----------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
Date: By
----------------------------------
MID-STATES LIFE INSURANCE COMPANY OF
AMERICA
Date: By
----------------------------------
CNA ASSURANCE COMPANY
Date: By
----------------------------------
CANADIAN PREMIER LIFE INSURANCE
COMPANY
Date: By
----------------------------------
COLUMBIA CASUALTY COMPANY
Date: By
----------------------------------
CNA CASUALTY OF PUERTO RICO
Date: By
----------------------------------
CNA FINANCIAL CORPORATION
Date: By
----------------------------------
CNA INVESTOR SERVICES, INC.
Date: By
----------------------------------
CNA REALTY CORP.
Date: By
----------------------------------
CNA REINSURANCE OF LONDON, LIMITED
Date: By
----------------------------------
CNA ADMINISTRATIVE SERVICES, INC.
Date: By
----------------------------------
ACCO, INC.
Date: By
----------------------------------
ACCO REALTY COMPANY
Date: By
----------------------------------
<PAGE>
MODERN AMERICA CORPORATION
Date: By
----------------------------------
GENERAL FINANCE CORPORATION
Date: By
----------------------------------
CNA ACTUARIAL CONSULTANTS, INC.
Date: By
----------------------------------
TENSCO, INC.
Date: By
----------------------------------
Exhibit 10H
AMENDMENT TO CNA INTER-COMPANY EXPENSE AGREEMENT
This Amendment To CNA Inter-Company Expense Agreement is made as of the ____ day
of October, 1994.
WHEREAS, the CNA Inter-Company Expense Agreement dated January 1, 1977 as
amended as of January 1, 1981 (collectively the "Agreement") was made by and
between various "Affiliates" (as that term is used in the Agreement) as listed
in the Agreement; and
WHEREAS, it is necessary to delete certain of the Affiliates and add new
entities as parties to the Agreement.
NOW, THEREFORE, in consideration of the premises, the parties mutually agree as
follows:
1. The following entities are hereby deleted as parties to the Agreement and
will not be included as Affiliates for the purposes specified therein:
Acco, Inc. a Pennsylvania corporation
ACCO Realty Corporation, a Pennsylvania corporation
Canadian Premier Life Insurance Company, a Canadian corporation
CNA Actuarial Consultants, Inc., a Delaware corporation
CNA Administrative Services, Inc., an Illinois corporation
CNA Assurance Company, a Canadian corporation
CNA Casualty of Puerto Rico, a Puerto Rico corporation
CNA Lloyd's of Texas
CNA Realty Corp., a Delaware corporation
CNA Reinsurance of London, Ltd.
General Finance Corporation, a Delaware corporation
Mid-States Insurance Company, an Illinois corporation
Mid-States Life Insurance Company of America, a Florida corporation
Modern America Corporation, a New Jersey corporation
Tensco, Inc., a Delaware corporation
2. The following parties are added as parties to the Agreement and will be
included Affiliates for the purposes specified therein:
Claims Administration Corp., a Maryland corporation
CNA Automation, Inc., an Illinois corporation
CNA Bermuda Services, Ltd., a Bermuda corporation
CNA Casualty of Illinois, an Illinois insurance company
CNA Reinsurance Company, an Illinois insurance company
CNA Services, Inc., an Illinois corporation
Galway Insurance Company, a California insurance company
Transcontinental Technical Services, Inc., an Illinois corporation
Viaticus, Inc., a Delaware corporation
3. Except as modified herein, all other terms, conditions and covenants of the
Agreement remain unmodified and in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment To CNA
Inter-Company Expense Agreement as of the day and year first above written.
American Casualty Company
of Reading, Pennsylvania
CNA Casualty of California
CNA Casualty of Illinois
CNA Financial Corporation
CNA Reinsurance Company
Continental Assurance Company
Continental Casualty Company
Galway Insurance Company
National Fire Insurance Company of Hartford
Transcontinental Insurance Company
Transportation Insurance Company
Valley Forge Insurance Company
Valley Forge Life Insurance Company
Attested By:
- -------------------------- ------------------------------------------------
Assistant Secretary Senior Vice President
and Chief Financial Officer
Attested By: Columbia Casualty Company
- --------------------------- ------------------------------------------------
Assistant Secretary Vice President and Chief Financial Officer
Attested by: Viaticus, Inc.
- -------------------------- -----------------------------------------------
Assistant Secretary President
Attested By: CNA Bermuda Services, Ltd.
- -------------------------- -----------------------------------------------
Secretary President
<PAGE>
Attested By: CNA Services, Inc.
- -------------------------- -----------------------------------------------
Assistant Secretary Vice President
Attested By: CNA Investor Services, Inc.
- -------------------------- -----------------------------------------------
Assistant Secretary President, Chief Executive Officer and
Treasurer
Attested By: CNA Automation, Inc.
- -------------------------- -----------------------------------------------
Assistant Secretary Vice President
Attested By: Claims Administration Corp.
- --------------------------- ----------------------------------------------
Assistant Secretary President
Attested By: Transcontinental Technical Services, Inc.
- --------------------------- ----------------------------------------------
Assistant Secretary President
Exhibit 10I
VALLEY FORGE LIFE INSURANCE COMPANY/
CONTINENTAL ASSURANCE COMPANY
REINSURANCE POOLING AGREEMENT
This Agreement, effective December 31, 1985 ("the Effective Date"), by and
between Valley Forge Life Insurance Company of Reading, Pennsylvania
(hereinafter "Valley") and Continental Assurance Company, Chicago, Illinois
(hereinafter "Continental").
Whereas, the parties hereto desire to enter into a Reinsurance Pooling Agreement
whereby certain insurance liabilities hereinafter identified resulting from all
life and health insurance business previously written by the parties and to be
written by them thereafter shall be pooled in order to obtain a more economical
operation and more uniform results.
Now, therefore, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties agree as follows:
Article I - Cession by Valley
- -----------------------------
Valley shall cede to Continental 100% of the reserves, net of any reinsurance,
and 100% of the underwriting assets on all life and health insurance business
currently in force in Valley on the Effective Date, and 100% of the written
premium, expenses and claims thereafter (hereinafter "Net Valley Business").
Article II - Creation of Pool and Retrocession
- ----------------------------------------------
Continental having reinsured 100% of the Net Valley Business, as set forth in
Article I, shall add thereto 100% of its life and accident and health business,
net of reinsurance, currently in force and to be written by it after the
Effective Date, specifically excluding'therefrom all of its separate account and
participating business, which combined business shall constitute the CNA Life
Insurance Pool (hereinafter "the Pool"). Continental shall concurrent with the
cession by Valley retrocede to Valley 10% of the combined business in the Pool
as its participation.
Article III - Assets and Liabilities at Inception
- -------------------------------------------------
Valley will cede and Continental will assume 100% of its insurance reserves and
liabilities and its underwriting assets at the inception of this agreement.
Continental will combine these with its insurance reserves and liabilities and
its underwriting assets and will retrocede 10% of the pooled assets and
liabilities to Valley.
<PAGE>
-2-
Article IV - Original Conditions
- --------------------------------
This Agreement shall be subject in all respects to the same terms, rates,
conditions, modifications, alterations, and cancellations of the respective
policies of insurance of the parties hereto, the intent of this Agreement being
that the parties should follow each other's fortune.
Article V - Errors and Omissions
- --------------------------------
The parties hereto shall not be prejudiced in any way by inadvertent errors or
omissions, provided that such errors or omissions are corrected immediately upon
discovery.
Article VI - Termination
- ------------------------
This Agreement may be terminated at any time by any of the parties by giving to
the other at least ninety (90) days prior notice by registered mail. In the
event of termination of this Agreement as provided above, each of the parties
shall continue to participate in all liability coming within the terms of this
Agreement during the termination notice period. Upon termination, Valley shall
recapture in its own name all in-force business ceded hereunder to Continental,
and Continental shall recapture its in-force business retroceded from the Pool
to Valley.
Article VII - Delegation of Authority
- -------------------------------------
Both parties agree that all expenses connected with the insurance business of
the parties hereto, including all expenses incurred in connection with the
agencies of each of the companies such as commission to agents, taxes on
premiums, fees for licensing.. advertising, and other expenses incurred in the
conduct of the insurance business of the parties hereto shall be the liability
of each, but may be paid by either on behalf of the other.
Both parties agree that either may settle and pay all losses and loss expenses
of whatsoever name and nature on behalf of the other within the scope of this
Agreement, and each shall be unconditionally bound by all settlements so made.
In no case and under no pretext shall either refuse to pay their respective
percentage of a loss after the other has paid or decided to pay the same.
Article VIII - Payments
- -----------------------
Continental shall furnish Valley, on business covered hereunder, as soon as
practicable after the end of each calendar quarter, an account to which shall be
credited net premiums written, less net expenses paid, less rate credits and
retrospective
<PAGE>
-3-
returns based on experience paid, and less net losses paid during the quarter in
question and shall remit accordingly.
Article IX - Accounts and Reports
- ---------------------------------
In lieu of the parties hereto furnishing each other with bordereaux showing the
particulars of all transactions hereunder, they shall furnish each other, as
soon as practicable after the close of each calendar quarter, statistical data
sufficient for the completion of Annual Statements.
Article X - Access to Records
- -----------------------------
The parties hereto agree that they may, upon request, inspect each other's books
and all records and documents insofar as they may include or affect the business
ceded under this Agreement.
Article XI - Insolvency
- -----------------------
In consideration of the continuing and reciprocal benefits that accrue hereunder
to the assuming reinsurers, the assuming reinsurers hereby agree that, as to all
reinsurance made, ceded, renewed, or otherwise becoming effective under this
Agreement, the reinsurance shall be payable by the assuming reinsurer on the
basis of the liability of the ceding insurer under contract or contracts
reinsured without diminution because of the insolvency of the ceding insurer.
Payments made by the assuming reinsurer shall Le made directly to the ceding
insurer or its conservator, liquidator, receiver, or statutory successor, except
(a) where the Agreement specifically provides another payee of such reinsurance
in the event of the insolvency of the ceding insurer, and (b) where the assuming
reinsurer with the consent of the direct insured or insureds has assumed such
policy obligations of the ceding insurer as direct obligations of the assuming
reinsurer to the payees under such policies and in substitution for the
obligations of the ceding insurer to such payees. The portion of any risk or
obligation assumed by the reinsurers when such portion is ascertained, shall be
payable on demand of the ceding insurer, at the same time as the ceding insurer
shall pay its net retained portion of such risk or obligation, with reasonable
provision for verification before payment. In the event of the insolvency of the
ceding insurer, the conservator f liquidator, receiver, or statutory successor
of such ceding insurer shall give written notice to the assuming reinsurer of
the pendency of a claim against the insolvent ceding insurer on the policy or
bond reinsured within a reasonable time after such claim is filed in the
insolvency proceeding; that during the pendency of such'claim the assuming
reinsurer may investigate such claim and interpose, at its own expenses, in the
proceeding where such claim
<PAGE>
-4-
is to be adjudicated, any defense or defenses which it may deem available to the
ceding insurer or its conservator, liquidator, receiver, or statutory successor;
that the expense thus incurred by the assuming reinsurer shall be chargeable,
subject to court approval, against the insolvent ceding insurer as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the ceding insurer solely as a result of the defense
undertaken by the assuming reinsurers
The reinsurance shall be payable, in the event of the insolvency of the ceding
insurer, to its conservator, liquidator, receiver, or statutory successor
immediately on demand, with reasonable provision for verification, on the basis
of the claim or claims allowed against the insolvent ceding insurer by any court
of competent jurisdiction or any justice or judge thereof, or by any
conservator, liquidator, receiver, or statutory successor of the company having
authority to determine and allow such claim, without diminution because of such
insolvency or because such conservator, liquidator, receiver, or statutory
successor has failed to pay all or a portion of any claim.
In Witness Whereof, the parties hereto have caused this Agreement to be executed
by their respective officers this 31st day of December 1985
Valley Forge Life Insurance Company
By:
----------------------------------
Title: Vice President
Continental Assurance Company
By:
----------------------------------
Title: Vice President
Exhibit 10J
ADDENDUM NO. 1
TO
REINSURANCE POOLING AGREEMENT
This Addendum No. 1 amends, effective July 1, 1996, the Reinsurance Pooling
Agreement with inception date of December 31, 1985, between Valley Forge Life
Insurance Company (hereafter called "Valley") on the one part, and Continental
Assurance Company (hereafter called "Continental") on the other part.
Whereas, the parties hereto desire to modify the business excluded from the
Cession by Valley as described in Article I.
As such, Article I is amended to read as follows:
Valley shall cede to Continental 100% of the reserves, net of any reinsurance,
and 100% of the underwriting assets on all life and health insurance business
currently in force in Valley on the Effective Date, and 100% of the written
premium, expenses and claims thereafter, specifically excluding therefrom all of
its separate account business, (hereinafter "Net Valley Business").
In witness whereof, the parties hereto have caused this Addendum No. 1 to the
Reinsurance Agreement to be executed by their respective officers this 1st day
of July, 1996.
(SEAL)
Continental Assurance Company
(Name of Registrant)
BY S/PATRICIA L. KUBERA
Patricia L. Kubera
Group Vice President and Controller
Attest:
S/MARY A. RIBIKAWSKIS
Mary A. Ribikawskis
Assistant Secretary
ADDENDUM NO. 1 (continued)
(SEAL)
Valley Forge Life Insurance Company
(Name of Registrant)
BY S/PATRICIA L. KUBERA
Patricia L. Kubera
Group Vice President and Controller
Attest:
S/MARY A. RIBIKAWSKIS
Mary A. Ribikawskis
Assistant Secretary
Exhibit 23A
(Sutherland, Asbill & Brennan Letterhead)
August 29, 1996
Board of Directors
Valley Forge Life Insurance Company
CNA Plaza
Chicago, IL 60685
Directors:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the prospectus filed as part of the Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-1 filed by Valley Forge Life Insurance
Company (Reg. File No. 333-1083) with the Securities and Exchange Commision. In
giving this consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
Sutherland, Asbill & Brennan
By: /S/ KIMBERLY J. SMITH
-----------------------
Kimberly J. Smith
Exhibit 23B
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. 1 to Registration
Statement No. 33-01083 on Form S-1 of our report dated June 21, 1996
accompanying the financial statements of Valley Forge Life Insurance Company,
appearing in the Prospectus, which is part of such Registration Statement, and
to the reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Chicago, Illinois
September 4, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001007008
<NAME> VALLEY FORGE LIFE INSURANCE CO.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 42,103 4,260
<SECURITIES> 462,650 526,663
<RECEIVABLES> 59,429 70,627
<ALLOWANCES> 175 300
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 624,820 687,795
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
<COMMON> 2,500 2,500
0 0
0 0
<OTHER-SE> 192,972 185,438
<TOTAL-LIABILITY-AND-EQUITY> 624,820 687,795
<SALES> 0 0
<TOTAL-REVENUES> 346,748 179,834
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 312,038 167,376
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 34,710 12,458
<INCOME-TAX> 12,200 4,366
<INCOME-CONTINUING> 22,510 8,092
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 22,510 8,092
<EPS-PRIMARY> 450.20 161.84
<EPS-DILUTED> 450.20 161.84
</TABLE>
