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CNA CAPITAL SELECT
INDEX ANNUITY
PROSPECTUS
[GRAPHIC]
MAY 1, 1997
as revised on
June 23, 1997
Single Premium Modified Guaranteed Annuity
Issued by the Valley Forge Life Insurance Company
CNA
FOR ALL THE COMMITMENTS YOU MAKE(R)
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No person has been authorized to give any information or
to make representations other than those contained in
this prospectus and any authorized sales material.
This prospectus does not constitute an offer or a solicita-
tion of an offer to acquire any interest or participation in
the annuity contract offered in this prospectus in any juris-
diction to anyone to whom it is unlawful to make such an
offer or solicitation.
The principal underwriter of this product is CNA Investors
Services, Inc., a registered broker-dealer and member
of the National Association of Securities Dealers.
CNA Investor Services, Inc., is an affiliate of the CNA
Financial Corporation. CNA annuities are issued by the
Valley Forge Life Insurance Company, one of the CNA
Insurance Companies.
CNA is a registered service mark of the CNA Financial
Corporation. The policy form numbers for this product are:
V100-1136-A Series (individual policy), P4-119941-A
Series (group policy) and Q4-119942-A Series (individual
certificates). The CNA Capital Select Index Annuity is not
available in all states.
Mailing address:
CNA Insurance Companies
Equity-Based Product Team
P.O. Box 305139
Nashville TN 37230-5139
CNA
FOR ALL THE COMMITMENTS YOU MAKE(R)
AG-124057-A 3/97 Printed in USA
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PROSPECTUS
SINGLE PREMIUM DEFERRED MODIFIED GUARANTEED
ANNUITY CONTRACT
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY
This prospectus describes individual and group single premium deferred
modified guaranteed annuity contracts and individual certificates issued
thereunder (referred to as the "Contract") issued by Valley Forge Life Insurance
Company ("VFL" or 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 the Net Single Premium and
Accumulation Value to one or more Accounts available under the Contract.
Accounts include Interest Accounts, which provide Account Values based on the
crediting of specified Guaranteed Interest Rates; and may include Indexed
Accounts, which provide Account Values based on the crediting of interest rates
that in part reflect certain changes in a market index ("Index") specified in
the Contract (currently, The Standard and Poor's 500 Composite Stock Price Index
(the "S&P 500"(R))).
Accumulation Value will vary as a function of interest credited to the
Accounts. The Company guarantees minimum Account Values for amounts maintained
in the Accounts until the expiration of the applicable Guarantee Period. Account
Values surrendered, withdrawn, transferred, or applied to an Annuity Payment
Option prior to that time are subject to a Market Value Adjustment, the
operation of which may result in upward or downward adjustments in values.
This prospectus sets forth the information regarding the Contract and the
Accounts that a prospective investor should know before purchasing a Contract.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
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.
MAY 1, 1997
AS REVISED ON JUNE 23, 1997
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TABLE OF CONTENTS
<TABLE>
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 4
General Description....................................... 4
Purchasing a Contract..................................... 5
Canceling the Contract.................................... 5
Transfers................................................. 6
Withdrawals............................................... 6
Surrenders................................................ 6
Charges................................................... 6
Diagram of the Contract................................... 7
THE COMPANY AND THE ACCOUNTS................................ 7
The Company and the Separate Accounts..................... 7
Interest Accounts, Indexed Accounts, and Guarantee Periods
under the Contract..................................... 8
Market Value Adjustments.................................. 11
DESCRIPTION OF THE CONTRACT................................. 12
Purchasing a Contract..................................... 12
Canceling the Contract.................................... 12
Crediting and Allocating Net Single Premium............... 12
Transfers................................................. 13
Withdrawals............................................... 13
Surrenders................................................ 14
Death Benefits............................................ 14
Reference Value........................................... 16
Payments by the Company................................... 16
Telephone Transfer Privileges............................. 16
CONTRACT CHARGES AND FEES................................... 17
Surrender Charge (Contingent Deferred Sales Charge)....... 17
Premium Tax Charge........................................ 18
Rider Cost................................................ 19
SELECTING AN ANNUITY PAYMENT OPTION......................... 19
Annuity Date.............................................. 19
Annuity Payment Dates..................................... 19
Election and Changes of Annuity Payment Options........... 19
Annuity Payments.......................................... 19
Annuity Payment Options................................... 20
ADDITIONAL CONTRACT INFORMATION............................. 21
Ownership................................................. 21
Changing the Owner or Beneficiary......................... 21
Misstatement of Age or Sex................................ 21
Change of Contract Terms.................................. 21
Reports to Owners......................................... 22
Miscellaneous............................................. 22
FEDERAL TAX CONSIDERATIONS.................................. 23
Introduction.............................................. 23
Tax Status of the Contract................................ 23
Taxation of Annuities..................................... 24
Transfers, Assignments or Exchanges of a Contract......... 25
Withholding............................................... 25
Multiple Contracts........................................ 26
</TABLE>
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Taxation of Qualified Plans............................... 26
Other Tax Consequences.................................... 27
OTHER INFORMATION........................................... 27
Distribution of the Contracts............................. 27
Administrative Services................................... 27
Legal Proceedings......................................... 28
Legal Matters............................................. 28
Experts................................................... 28
ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE
COMPANY................................................... 28
History and Business...................................... 28
Selected Financial Data................................... 29
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 30
ADDITIONAL INFORMATION...................................... 34
INDEPENDENT AUDITORS' REPORT................................ 42
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE
COMPANY................................................... F-1
APPENDIX A.................................................. A-1
APPENDIX B.................................................. B-1
APPENDIX C.................................................. C-1
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.
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DEFINITIONS
ACCOUNT: An Interest Account or an Indexed Account available under the
Contract.
ACCOUNT VALUE: An amount on which the Company credits a specified and
guaranteed rate of interest (Interest Account Value), or for which the Company
credits interest based on a formula that takes into account certain changes in a
market index specified in the Contract (Indexed Account Value).
ACCUMULATION VALUE: Accumulation Value is the total amount invested under
the Contract (the sum of Interest Account Values and Indexed Account Values).
ADJUSTED ACCUMULATION VALUE: The Accumulation Value, plus or minus any
applicable Market Value Adjustment, less any Premium Tax Charges due and not
previously deducted.
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 the Annuity Value will be applied to
purchase an 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 makes Annuity Payments.
ANNUITY PAYMENT OPTION: The form of Annuity Payments selected by the Owner
under the Contract.
ANNUITY VALUE: At any time on or before the fifth Contract Anniversary, the
Annuity Value equals the Surrender Value. At any time after the fifth Contract
Anniversary up to and including the Annuity Date, the Annuity Value equals the
greater of the Adjusted Accumulation Value and the Adjusted Reference Value.
AVERAGING PERIOD: A period of time at the end of each Contract Year over
which values of the Index are averaged before calculation of any Index Increase.
BENEFICIARY: The person(s) to whom the death benefit will be paid on the
death of the Owner or Annuitant.
BUSINESS DAY: A day on which the New York Stock Exchange is open for
trading and the Company is open for business.
CANCELLATION PERIOD: The ten day period (or longer, if required by state
law), during which the Owner may return the Contract for a refund of the
Adjusted Accumulation Value (or in certain states, the Single Premium).
THE CODE: The Internal Revenue Code of 1986, as amended.
THE COMPANY OR VFL: Valley Forge Life Insurance Company.
CAP: The maximum percentage per year by which Account Value in an Indexed
Account may be increased. The Company will declare the Cap for an Indexed
Account at each Reset Date. The Cap will not change during a Guarantee Period.
CONTINGENT ANNUITANT: The person who becomes the Annuitant in the event
that the Annuitant dies before the Annuity Date while the Owner is still alive.
CONTINGENT BENEFICIARY: The person(s) to whom a death benefit will be paid
if the Beneficiary (or Beneficiaries) is not living.
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CONTRACT: The individual contract, or group contract and individual
certificate issued thereunder, together with any riders or endorsements and the
application.
CONTRACT ANNIVERSARY: The same date in each Contract Year as the Investment
Start Date.
CONTRACT YEAR: A twelve-month period beginning on the Investment Start Date
or on a Contract Anniversary.
EXCHANGE: The New York Stock Exchange.
FLOOR: The minimum percentage per year by which Account Value in an Indexed
Account may be increased. The Floor will never be less than 0%. The Company will
declare the Floor for an Indexed Account at each Reset Date. The Floor will not
change during a Guarantee Period.
GUARANTEE PERIOD: A specific number of years for which the Company agrees
to credit a specified Guaranteed Interest Rate to an Interest Account, or to
apply a specified Index Participation Rate, Cap, Floor and specified Averaging
Period to an Indexed Account.
GUARANTEED INTEREST RATE: An effective annual rate of interest that the
Company credits to an Interest Account. The applicable Guaranteed Interest Rate
will not change during a Guarantee Period.
HOME OFFICE: The Company's office at 401 Penn Street, Reading, PA 19601.
INDEX: Currently, The Standard and Poor's 500 Composite Stock Price
Index(R) In the future, Indexed Accounts that credit interest based on other
Indexes may be made available in the Company's sole discretion.
INDEXED ACCOUNT: An account for which the Company credits interest based on
a formula that takes into account certain changes in an Index.
INDEXED ACCOUNT VALUE: Account Value allocated to Indexed Accounts.
INDEX PARTICIPATION RATE: A percentage used to calculate the Index Increase
for an Indexed Account. The Index Participation Rate will not change during a
Guarantee Period.
INTEREST ACCOUNT: An account to which the Company credits a specified and
guaranteed rate of interest.
INTEREST ACCOUNT VALUE: Account Value allocated to Interest Accounts.
INVESTMENT START DATE: The Investment Start Date is shown in the Contract.
It is used to determine Contract Years and Contract Anniversaries.
ISSUE DATE: The date on which the Company issues the Contract.
MARKET VALUE ADJUSTMENT: A positive or negative adjustment made to any
portion of Account Value upon the surrender, withdrawal, transfer, or
application to an Annuity Payment Option of such portion of the Account Value.
NET ALLOCATION: The amount allocated to an Account at its most recent Reset
Date, less withdrawals and transfers from the Account since then (including any
surrender charges or Market Value Adjustments).
NET SINGLE PREMIUM: The Single Premium less any Premium Tax Charge deducted
from it.
NON-QUALIFIED CONTRACT: A Contract that is not a "qualified contract."
OWNER: The person who owns or persons who own the Contract and who is or
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, an Owner refers to the
participant under a group Contract.
PAYEE: The person entitled to receive Annuity Payments under the Contract.
PREMIUM TAX CHARGE: A charge for state premium taxes deducted either from
the Single Premium or from the Accumulation Value prior to surrender,
annuitization, or death of the Owner or Annuitant.
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QUALIFIED CONTRACT: A Contract that is issued in connection with a
retirement plan that qualifies for special federal income tax treatment under
Sections 401(a), 408, or 457 of the Code.
REFERENCE VALUE: A minimum guaranteed value used to calculate benefits
under the Contract.
RESET DATES: The date that an amount is first allocated to an Account is
the first Reset Date for that Account. The next Reset Date for that Account is
the first day of the next Guarantee Period applicable to that Account.
SEC: The United States Securities and Exchange Commission.
SEPARATE ACCOUNTS: The Valley Forge Life Insurance Company Indexed Separate
Account and the Valley Forge Life Insurance Company MVA Guaranteed Interest
Separate Account.
SERVICE CENTER: The offices of the Company's administrative agent at 1290
Silas Deane Highway, P.O. Box 290794, Wethersfield, Connecticut 06129-0794.
SINGLE PREMIUM: The payment made by an Owner to purchase the Contract.
SURRENDER VALUE: The greater of: (i) the Adjusted Accumulation Value less
any applicable surrender charges; or (ii) the Adjusted Reference Value.
WINDOW PERIOD: The last thirty calendar days of a Guarantee Period.
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.
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SUMMARY
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 and in the Contract. For
additional information, contact the Service Center.
In some jurisdictions, the Contract is issued directly to individuals. In
other jurisdictions, 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 both to
individual contracts and to group contracts and individual certificates issued
thereunder.
GENERAL DESCRIPTION
The Contract is a single premium deferred annuity, providing annuitization,
surrender, and death benefits. The amount of these benefits is determined
largely by the Accumulation Value under the Contract. Accumulation Value is the
sum of Account Values. Account Values may be based either on accumulation at a
stated, guaranteed rate of interest (Interest Accounts) or on a stated,
guaranteed percentage of increases (if any) in the Index, subject to certain
limits (Indexed Accounts). Multiple Guarantee Periods are available, and the
Owner can allocate the Net Single Premium among the Account types and Guarantee
Periods offered by the Company at the time of allocation.
If an Account is maintained for the duration of the applicable Guarantee
Period, the Owner's principal allocated to that Account is guaranteed in full by
the Company. However, withdrawals and surrenders from an Account before the end
of its Guarantee Period are subject to a Market Value Adjustment, which may be
positive or negative, and to a surrender charge. BECAUSE THE CONTRACT PROVIDES
ONLY LIMITED LIQUIDITY DURING A GUARANTEE PERIOD, IT IS NOT SUITABLE FOR SHORT-
TERM INVESTMENT.
From the Issue Date to the Investment Start Date, the Company will hold the
Net Single Premium and credit it with daily interest equivalent to an annual
rate of at least 3%. On the Investment Start Date, the Company will allocate the
Net Single Premium (together with interest) to the Accounts selected by the
Owner based on the Owner's allocation percentages. An Owner may allocate all or
a portion of the Net Single Premium or transfer Account Values, within limits,
among several Accounts.
The Contract offers Interest Accounts, under which an Owner may allocate
all or a portion of Net Single Premium and transfer Account Values among
Guarantee Periods selected by the Owner. In general, if amounts allocated to an
Interest Account remain in a Guarantee Period until its expiration date, its
value will be equal to the amount originally allocated, multiplied on an
annually compounded basis by the applicable Guaranteed Interest Rate.
Subject to state availability, the Contract may also offer Indexed
Accounts, under which an Owner may allocate all or a portion of the Net Single
Premium and transfer Account Values among Guarantee Periods selected by the
Owner. In general, if amounts allocated to an Indexed Account remain in a
Guarantee Period until its expiration date, its value will be equal to the
amount originally allocated plus interest that reflects in part certain positive
changes, if any, in the S&P 500(R)(1) (Index Increases). The S&P 500(R) can, of
course, increase or decrease daily; however, Indexed Account Value will remain
constant during a Contract Year.
- ---------------
1 The Contract is not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of the McGraw-Hill Companies, Inc. (S&P). S&P makes no
representation or warrant, express or implied, to the owners of the Contract
or any member of the public regarding the advisability of investing in
securities generally or in the Contract particularly or the ability of the S&P
500 Index to track general stock market performance. S&P's only relationship
to the Company is the licensing of certain trademarks and trade names of the
S&P and of the S&P 500 Index which is determined, composed and calculated by
S&P without regard to the Company or the Contract. S&P has no obligation to
take the needs of the Company or the owners of the Contract into consideration
in determining, composing or calculating the S&P 500 Index. S&P is not
responsible for and has not participated in the determination of the prices
and amount of the Contract or the timing of the issuance or sale of the
product or in the determination or calculation of the equation by which the
Contract is to be converted into cash. S&P has no obligation or liability in
connection with the administration, marketing or trading of the Contract.
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Index Increases (if any) are determined and credited to Indexed Account
Value at the end of each Contract Year during a Guarantee Period.
The investment risk and return characteristics for an Interest Account are
similar to those of a zero coupon bond or certificate of deposit; an Interest
Account, if maintained until its "maturity," or expiration, provides a fixed
rate of return over a stated period. Principal and credited interest are
guaranteed by the Company and are available without surrender charge or Market
Value Adjustment during the 30-day Window Period at the end of each Guarantee
Period. If Interest Account Value is withdrawn prematurely, or before the Window
Period at the end of the applicable Guarantee Period, then the effect of the
surrender charge and Market Value Adjustment may result in a loss of principal.
The investment risk and return characteristics for an Indexed Account are
expected to fall in between those typical of fixed annuities and those typical
of equity mutual funds or variable annuities. A fixed annuity guarantees
principal, and does not provide for direct participation in equity or other
markets. A variable annuity does not guarantee principal, and provides for 100%
participation in equity or other markets. Long-term returns under the Contract
may be higher than those offered by a typical fixed annuity, but year-to-year
growth under the Contract will be more volatile than under a fixed annuity as
the Index fluctuates. The principal guarantee under the Contract may make an
Indexed Account more suitable than direct equity investment for risk-averse
Owners. However, expected long-term returns of Indexed Accounts will be lower
than those for equity mutual funds or variable annuities.
Any surrender, withdrawal, transfer, or annuitization made prior to the
expiration date of the Guarantee Period will be subject to a Market Value
Adjustment that may increase or decrease the Account Value (or portion thereof)
being surrendered, withdrawn, transferred, or annuitized. Depending on the size
of the Market Value Adjustment, such an adjustment may reduce the Account Value
(or portion thereof) to less than the Net Single Premium allocated to or Account
Value transferred to a Guarantee Period. (See "THE COMPANY AND THE
ACCOUNTS--Market Value Adjustment.")
The Surrender Value may increase or decrease. OWNERS BEAR THE INVESTMENT
RISK FOR AMOUNTS SURRENDERED, WITHDRAWN, TRANSFERRED, OR APPLIED TO AN ANNUITY
PAYMENT OPTION OUTSIDE OF AN APPLICABLE WINDOW PERIOD. Surrender Value, Annuity
Value, and Death Benefits are subject to certain minimums based on the Reference
Value or Adjusted Reference Value of the Contract. (See "THE COMPANY AND THE
ACCOUNTS--Reference Value.")
The Contract also offers a choice of Annuity Payment Options to which
Owners may apply the Annuity Value as of the Annuity Date. The Annuity Date,
once established by the Owner, may not be changed. Beneficiaries may also apply
the Death Benefit to certain Annuity Payment Options.
PURCHASING A CONTRACT
The Contract permits the payment of a Single Premium. The minimum Single
Premium for a Contract is $5,000. The Company reserves the right to reject any
Contract application. On the Investment Start Date, the Net Single Premium is
allocated to one or more Accounts specified on the application.
Currently, the Investment Start Date will be the first or 15th calendar day
of the month (each, a "bi-monthly day"), whichever comes first, that next
follows the Company's receipt of the Single Premium, with the following
exception: if the Company receives the Single Premium on the last business day
immediately preceding a bi-monthly day that is not a Business Day, then the
Investment Start Date will be the second (next subsequent) bi-monthly day after
the Company receives the Single Premium (whether or not the next subsequent
bi-monthly day is a Business Day).
If the Investment Start Date falls on a day that is not a Business Day,
then the value of the Index on the Investment Start Date for all purposes under
the Contract (including the calculation of Index Increases) will be the value of
the Index at the close of the Business Day next preceding the Investment Start
Date. The Company reserves the right to specify different Investment Start Dates
under Contracts issued in the future.
CANCELING THE CONTRACT
At any time during the Cancellation Period, an Owner may cancel the
Contract and receive a refund of the Adjusted Accumulation Value (or, for some
states, the Single Premium). The Cancellation Period is a ten
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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--Canceling the Contract.")
TRANSFERS
On any Contract Anniversary, an Owner may transfer all or part of Interest
Account Value or Indexed Account Value to other Accounts then available.
Transfers are subject to certain restrictions, and transfers from an Indexed
Account are subject to additional limitations. A Market Value Adjustment will
apply unless Account Value is transferred during the applicable Window Period.
(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. (See "THE COMPANY
AND THE ACCOUNTS--Market Value Adjustment.") Withdrawals of Surrender Value may
reflect a positive or negative Market Value Adjustment. In addition, a surrender
charge and any Premium Tax Charge may apply. (See "DESCRIPTION OF THE
CONTRACT--Withdrawals" and "CONTRACT FEES AND CHARGES--Surrender Charge.")
Currently, there is no limit on the number of withdrawals that may be taken
during a Contract Year. After the first Contract Year, an Owner may withdraw an
amount up to the Free Withdrawal Amount as of the preceding Contract Anniversary
(10% of the amounts allocated to each of the Accounts as of their most recent
Reset Dates) without imposition of a surrender charge, although the Free
Withdrawal Amount will be subject to a Market Value Adjustment. The amount of
any withdrawal (in excess of the Free Withdrawal Amount) during a Contract Year
is subject to a surrender charge, unless taken during a Window Period.
Withdrawals are subject to tax and may also be subject to a 10% 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" and "CONTRACT FEES AND
CHARGES--Surrender Charge.") Surrenders are subject to tax and may also be
subject to a 10% penalty tax. (See "FEDERAL TAX CONSIDERATIONS.")
CHARGES
The following charges are assessed under the Contract:
SURRENDER CHARGE. No sales charge is deducted from the Single Premium at
the time that it is paid. However, a surrender charge is deducted upon any
withdrawal or surrender prior to the Annuity Date that is outside of a Window
Period. The surrender charge is generally equal to a percentage of the Net
Allocation for an Account. The surrender charge percentage varies depending upon
the type of Account and the duration of the Guarantee Period applicable to the
Account, but will not exceed a maximum of 8% during each Contract Year. During
each of the ten Contract Years preceding the Annuity Date, the surrender charge
percentage declines in ten equal increments on each Contract Anniversary to zero
on the Annuity Date. No surrender charge applies to Account Value in excess of
the Net Allocation. In addition, after the first Contract Year, the surrender
charge does not apply to the Free Withdrawal Amount as of the preceding Contract
Anniversary.
The Surrender Charge, along with the Market Value Adjustment, could result
in an Owner receiving less than the Net Single Premium amount upon surrender.
The Owner will not, however, receive less than the Contract's Adjusted Reference
Value upon surrender. Adjusted Reference Value is equal to 90% of the Single
Premium, adjusted for certain interest credits and previous withdrawals and
surrenders. (See "THE COMPANY AND THE ACCOUNTS--Reference Value" and
"DESCRIPTION OF THE CONTRACT--Surrenders.")
RIDER COST. The Contract's Reference Value will reflect charges for any
riders or endorsements, including (if allocations have been made to Indexed
Accounts) an annual charge of 0.85% of the value of the
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Indexed Account(s) with a five year Guarantee Period and 1.50% of the value of
the Indexed Account(s) with a seven year Guarantee Period. (See "THE COMPANY AND
THE ACCOUNTS--Reference Value.")
PREMIUM TAX CHARGE. Certain states and municipalities impose a tax on the
Company in connection with the receipt of annuity considerations. This tax can
range generally from 0% to 3.5% of such considerations and generally varies
based on the Annuitant's state of residence. The charge is deducted either from
the Single Premium or from Accumulation Value upon surrender, annuitization, or
death of the Owner or Annuitant. (See "CONTRACT CHARGES AND FEES.")
DIAGRAM OF THE CONTRACT
Set forth below is a diagram showing the relationship between the Net
Single Premium, Accumulation Value, Surrender Value, Annuity Value and Death
Benefits.
[LOGO]
THE COMPANY AND THE ACCOUNTS
THE COMPANY AND THE SEPARATE ACCOUNTS
The Company is a life insurance company organized under the laws of the
Commonwealth 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
("Assurance"), a life insurance company which, as of December 31, 1996, had
assets of approximately $13.9 billion. See "ADDITIONAL INFORMATION ABOUT VALLEY
FORGE LIFE INSURANCE COMPANY" for more detail regarding the Company.
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The Company has established two separate accounts in connection with the
Contracts (the Separate Accounts)--the Valley Forge Life Insurance Company MVA
Guaranteed Interest Separate Account and the Valley Forge Life Insurance Company
Indexed Separate Account. The Separate Accounts are subject to the laws of
Pennsylvania.
The VFL Indexed Separate Account was established by the Company with
respect to, and is used to support the benefits attributable to, the Indexed
Accounts. The VFL MVA Guaranteed Interest Separate Account was established by
the Company with respect to, and is used by the Company to support the benefits
attributable to, the Interest Accounts. Although the Company owns the assets of
the Separate Accounts, the assets of each Separate Account are held separately
from the Company's other assets and are not part of the Company's general
account. Pennsylvania insurance law provides that the portion of the assets of
each Separate Account equal to its reserves and other liabilities are not
chargeable with liabilities that arise from any other business that the Company
conducts. The Company has the right to transfer to its general account any
assets of a Separate Account that are in excess of its reserves and other
liabilities.
As part of its overall investment strategy, the Company intends to maintain
assets in the VFL MVA Guaranteed Interest Separate Account, and in the VFL
Indexed Separate Account, that reflect its obligations to Owners that have made
allocations to Interest Accounts and Indexed Accounts, respectively.
Accordingly, it is anticipated that assets of the VFL MVA Guaranteed Interest
Separate Account will likely consist of fixed income investments, and that
assets of the VFL Indexed Separate Account will likely consist of fixed income
investments, as well as call options or other hedging instruments that relate to
movements in the Index.
The Contracts have been registered under the Securities Act of 1933, but
neither of the Separate Accounts nor the Company's general account has been
registered as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). Accordingly, neither of the Separate Accounts nor the
general account, nor any interests therein, are generally subject to regulation
under the 1940 Act.
INTEREST ACCOUNTS, INDEXED ACCOUNTS, AND GUARANTEE PERIODS UNDER THE CONTRACT
The Net Single Premium may be allocated to, and transfers of Account Value
may be made to, the Accounts.
From the Issue Date to the Investment Start Date, the Company will hold the
Net Single Premium and credit it with daily interest equivalent to an annual
rate of at least 3%. On the Investment Start Date, the Company will allocate the
Net Single Premium (together with interest) to the Accounts selected by the
Owner based on the Owner's allocation percentages.
The assets in the VFL MVA Guaranteed Interest Separate Account and the VFL
Indexed Separate Account are used to support the benefits under the Interest
Accounts and the Indexed Accounts, respectively, of the Contract. Under
Pennsylvania insurance law, the Company is required to maintain assets in each
Separate Account at least equal to its reserves and other contract liabilities.
In the unlikely event of liquidation of the Company, if the Company cannot
satisfy all of its insurance obligations, (i) Owners with Interest Account Value
will have a priority claim against assets of the VFL MVA Guaranteed Interest
Separate Account equal to its liabilities, and a claim against the Company's
general account for any remaining Company liabilities; and (ii) Owners with
Indexed Account Value will have a priority claim against assets of the VFL
Indexed Separate Account equal to its liabilities, and a claim against the
Company's general account for any remaining Company liabilities. Thus, the
Separate Accounts represent pools of assets that provide an additional measure
of assurance that Owners will receive full payment of benefits under the
Contracts.
INTEREST ACCOUNTS. Through the Interest Accounts, the Company offers
specified effective annual rates of interest (Guaranteed Interest Rates) that
are determined as of the Issue Date or Reset Date, as applicable, credited daily
as of the Investment Start Date or Reset Date, as applicable, and are available
for specified periods of time selected by the Owner (Guarantee Periods). The
Company may make available Guarantee Periods of from one year to ten years in
duration. As of the date of this Prospectus, Guarantee Periods of one, three,
five, seven and ten years are available for Interest Accounts.
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<PAGE> 14
Although the Guaranteed Interest Rate may differ among Guarantee Periods,
it will never be less than 3%.
Interest Accounts provide values and benefits based upon the Net Single
Premium and Account 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. Owners allocating the
Net Single Premium and/or Account Value to Interest Accounts do not participate
in the investment performance of assets of the VFL MVA Guaranteed Interest
Separate Account, and this performance does not determine the Interest Account
Value or benefits relating thereto.
INDEXED ACCOUNTS. If approved in the Owner's state, one or more Indexed
Accounts may be available under the Contract. The Net Single Premium may be
allocated to, and transfers of Account Value may be made to, Indexed Accounts.
Through the Indexed Accounts, the Company offers interest in accordance
with a formula that reflects in part changes in the S&P 500(R)(2) The formula is
based on a set of factors (the Index Participation Rate, Cap, and Floor) that
are available for the Guarantee Period(s) selected by the Owner. As of the date
of this Prospectus, the Company offers five year and seven year Guarantee
Periods for Indexed Accounts. The rate at which the value of an Indexed Account
grows depends on certain changes in the Index on which it is based, as well as
its Cap, Floor, Index Participation Rates and specified Averaging Period. The
Index Participation Rate, Cap, Floor and specified Averaging Period may vary
among Guarantee Periods, and the Company reserves the right to establish new
Index Participation Rates, Caps and Floors on any Reset Date.
Indexed Accounts provide values and benefits based upon the Net Single
Premium and Account Values allocated thereto, the Index Increases (if any)
credited on such amounts, and any charges or Market Value Adjustments imposed on
such amounts in accordance with the terms of the Contract. Indexed Account Value
will reflect an annual Index Increase, calculated as described below, if the
Index increases during a Contract Year. Indexed Account Value is not determined
by, and does not reflect, the investment performance of the VFL Indexed Separate
Account, and does not correspond directly to increases or decreases in the
Index.
INDEX INCREASES. The Company will calculate the Index Increase, if any, for
an Indexed Account at each Contract Anniversary. The Index Increase equals the
Indexed Account Value multiplied by the Index Increase Percentage Factor. If the
Index Increase is greater than zero, the Company will increase the Indexed
Account Value by the Index Increase on the Contract Anniversary. In between
Contract Anniversaries, Indexed Account Value will remain constant (unless a
Death Benefit becomes payable); amounts surrendered, withdrawn, transferred, or
applied to an Annuity Payment Option may, however, be subject to a Surrender
Charge and/or a Market Value Adjustment. (See "DESCRIPTION OF THE
CONTRACT--Death Benefit" and "CONTRACT CHARGES AND FEES--Surrender Charge" and
"THE COMPANY AND THE ACCOUNTS--Market Value Adjustment.")
The Index Increase Percentage Factor will not be less than the Floor or
more than the Cap declared at the previous Reset Date. Within those bounds, the
Index Increase Percentage Factor equals (a) multiplied by (b) where:
(a) is the Average Index Increase Percentage for the Indexed Account
at the Contract Anniversary,
and
(b) is the Index Participation Rate for the Indexed Account declared
at the previous Reset Date.
- ---------------
2 S&P does not guarantee the accuracy and/or the completeness of the S&P Index
or any data included therein and S&P shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by licensee, owners of the product, or
any other person or entity from the use of the S&P 500 Index or any data
included therein. S&P makes no express or implied warranties, and expressly
disclaims all warranties of merchantability or fitness for a particular
purpose or use with respect to the S&P 500 Index or any data included therein.
without limiting any of the foregoing, in no event shall S&P have any
liability for any special, punitive, indirect, or consequential damages
(including lost profits), even if notified of the possibility of such damages.
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<PAGE> 15
AVERAGE INDEX INCREASE PERCENTAGE. The Average Index Increase Percentage
for an Indexed Account on any Contract Anniversary within a Guarantee Period
equals:
(B) - (A)
(A)
where
(a) is the value of the Index on the previous Contract Anniversary;
and
(b) is the arithmetic average of the values of the Index on each day
that the Exchange is open for business during the specified Averaging
Period ending on the Contract Anniversary.
Currently, an Owner may choose from between two specified Averaging
Periods: 90 days or 365 days. The specified Averaging Period is selected by the
Owner for each Indexed Account (i) in the Application, at the time a Contract is
purchased; and (ii) thirty days prior to the Reset Date for an Account, on a
form provided by the Company, if on the Reset Date Account Value will be
allocated to an Indexed Account. Once a specified Averaging Period is selected
for an Indexed Account, it cannot be changed until the next Reset Date.
GUARANTEE PERIODS. An Initial Guarantee Period begins on the date as of
which the Net Single Premium is allocated to, or an amount of Account Value is
transferred to, an Account. It ends when the number of years in the Guarantee
Period elected has elapsed. The last day of the Guarantee Period is the
expiration date for that Guarantee Period. A subsequent Guarantee Period begins
on the first day following the expiration date of a previous Guarantee Period
(the Reset Date).
Allocations of the Net Single Premium and transfers of Account Value to the
Accounts will have different applicable Guaranteed Interest Rates (for Interest
Accounts), or Index Participation Rates, Caps, Floors, and specified Averaging
Period (for Indexed Accounts), depending on the timing of such allocations or
transfers and the specified Averaging Period selected by the Owner. However,
once the allocation or transfer is made, the applicable Guaranteed Interest Rate
or Index Participation Rate, Cap, Floor and specified Averaging Period do not
change during the selected Guarantee Period.
If the allocated or transferred amount remains in the Account until the end
of the applicable Guarantee Period, at that time its value will be equal to the
amount originally allocated or transferred to the Account, either (i) multiplied
on an annually compounded basis by its Guaranteed Interest Rate (Interest
Accounts), or (ii) plus Index Increases, if any (Indexed Accounts). If Account
Value is surrendered, withdrawn, transferred, or applied to an Annuity Payment
Option prior to the expiration date of the applicable Guarantee Period, the
Account Value is subject to a Market Value Adjustment, which may result in the
payment of an amount less than the amount originally allocated or transferred to
that Account. (See "THE COMPANY AND THE ACCOUNTS--Market Value Adjustment.")
Surrenders and withdrawals are also subject to a surrender charge. (See
"CONTRACT FEES AND CHARGES--Surrender Charge.")
By Written Notice prior to the expiration date of a Guarantee Period
applicable to an Account, the Owner may:
- choose a different Guarantee Period, with an expiration date no later
than the Annuity Date, from among those the Company offers at that time;
- transfer all or a portion of the expiring Account Value to a new Account;
or
- transfer all or a portion of the expiring Account Value to an existing
Account for which the next Reset Date falls on the day immediately
following the expiration date for the expiring Account.
Transfers are subject to restrictions, and a Market Value Adjustment will
usually apply to the amount transferred. However, if the transfer occurs during
a Window Period for an Account (for example, upon the expiration of the
Guarantee Period), no Market Value Adjustment (or Surrender Charge) will apply
to the amount transferred. (See "DESCRIPTION OF THE CONTRACT--Transfers.")
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<PAGE> 16
Unless the Company receives Written Notice prior to the expiration date for
an Account, a new Guarantee Period will commence automatically on the first day
following the expiration date. The new Guarantee Period will be of the same
duration as the expiring Guarantee Period if the Company is still offering that
Guarantee Period and if the expiration date of the new Guarantee Period is no
later than the Annuity Date. Otherwise, the new Guarantee Period will be one
year. If the expiring Account is an Interest Account, it will continue to be an
Interest Account; if the expiring Account is an Indexed Account, it will
continue to be an Indexed Account, if the new Guarantee Period is one for which
we offer Indexed Accounts; otherwise, it will become an Interest Account.
The Company will notify an Owner in writing at least thirty days prior to
the expiration date of any Guarantee Period. The Company's notice to the Owner
of the expiration of a Guarantee Period will contain information about the
then-available Guarantee Periods, and the Guaranteed Interest Rates (for
Interest Accounts), and Index Participation Rates, Caps, Floors, and available
specified Averaging Periods (for Indexed Accounts) applicable to such Guarantee
Periods.
The Guarantee Periods being made available by the Company for Interest
Accounts and for Indexed Accounts will change from time to time. Contact the
Service Center for information regarding the Guarantee Periods being made
available by the Company for each type of Account at any time, and regarding the
current Guaranteed Interest Rates for available Interest Accounts, and current
Index Participation Rates, Caps, Floors and available specified Averaging
Periods for available Indexed Accounts.
TO THE EXTENT PERMITTED BY LAW, THE COMPANY RESERVES THE RIGHT AT ANY TIME TO
OFFER GUARANTEE PERIODS THAT DIFFER IN DURATION FROM THOSE AVAILABLE WHEN A
CONTRACT IS ISSUED. THE COMPANY ALSO RESERVES THE RIGHT, AT ANY TIME, TO STOP
ACCEPTING NET SINGLE PREMIUM ALLOCATIONS OR TRANSFERS OF ACCOUNT VALUE TO A
PARTICULAR GUARANTEE PERIOD.
MARKET VALUE ADJUSTMENTS
Any surrender, withdrawal, transfer, or application to an Annuity Payment
Option of Interest Account Value or Indexed Account Value 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 the Window Period.
The Market Value Adjustment will be applied before the deduction of any
applicable surrender charge or Premium Tax Charge.
The Market Value Adjustment reflects the relationship between the
Guaranteed Interest Rate for an Interest Account with the same Reset Date and
Guarantee Period as the Account from which Account Value is being taken (the
"Credited Rate"), and the Guaranteed Interest Rate that is currently being
offered for an Interest Account with a Guarantee Period of the same duration as
the time remaining until the expiration date of the Guarantee Period for the
Interest Account or Indexed Account from which Account Value is being taken (the
"Current Rate"). (If a Current Rate is not available because the Company is no
longer offering Guarantee Periods of the relevant duration, then the Company
will use a rate equal to the most recent Moody's Corporate Bond Yield
Average--Monthly Average Corporates as published by Moody's Investors Services,
Inc.)
Generally, if the Credited Rate is lower than the Current Rate, 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 Account Value (or portion thereof) being
surrendered, withdrawn, transferred or applied (and may even result in the
payment of an amount less than the Net Single Premium allocated to or the
portion of Account Value transferred to the Guarantee Period). Similarly, if the
Credited Rate is higher than the Current Rate, then 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 Account Value (or portion thereof) being surrendered,
withdrawn, transferred or applied.
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<PAGE> 17
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred, or applied to a Death Benefit or an Annuity
Payment Option by the Market Value Adjustment Factor. The Market Value
Adjustment Factor is calculated as:
n/12
[ (1 + a ) -1]
[ (------) ]
[ (1 + b ) ]
where:
"a" is the Credited Rate;
"b" is the Current Rate. Where the time remaining to the expiration of
the Guarantee Period is not comparable to a Guarantee Period duration then
offered by the Company, "b" is the rate found by linear interpolation
between the rate for the Guarantee Periods 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 Account from which the surrender,
withdrawal, transfer, or application to a Death Benefit or an Annuity
Payment Option is being made.
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 Issue Date is 75. A Single Premium must be delivered to the
Service Center along with the Owner's application. The minimum Single Premium is
$5,000. Additional premium payments under a Contract are not permitted; however,
an Owner may purchase more than one Contract. Unless the Company gives its prior
approval, it will not accept a Single Premium in excess of $500,000 and reserves
the right not to accept any Single Premium or application for a Contract for any
reason. The Company will send Owners a confirmation notice upon receipt and
acceptance of the Owner's Single Premium.
CANCELING THE CONTRACT
Owners may cancel the Contract during the Cancellation Period, which is the
ten 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 Adjusted Accumulation Value (or, for some states, the
Single Premium).
CREDITING AND ALLOCATING NET SINGLE PREMIUM
If the application for a Contract is properly completed and is accompanied
by all the information necessary to process it, including payment of the Single
Premium, the Net Single Premium will be allocated, as designated by the Owner,
to one or more of the Accounts on the Investment Start Date.
From the Issue Date until the Investment Start Date, the Company will
credit interest to the Net Single Premium of at least 3%. Currently, the
Investment Start Date will be the first or 15th calendar day of the month (each,
a "bi-monthly day"), whichever comes first, that next follows the Company's
receipt of the Single Premium, with the following exception: if the Company
receives the Single Premium on the last business day immediately preceding a
bi-monthly day that is not a Business Day, then the Investment Start Date will
be the second (next subsequent) bi-monthly day after the Company receives the
Single Premium (whether or not the next subsequent bi-monthly day is a Business
Day).
If the Investment Start Date falls on a day that is not a Business Day,
then the value of the Index on the Investment Start Date for all purposes under
the Contract (including the calculation of Index Increases) will
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<PAGE> 18
be the value of the Index at the close of the Business Day next preceding the
Investment Start Date. The Company reserves the right to specify different
Investment Start Dates under Contracts issued in the future. On the Investment
Start Date, the Company will allocate the resulting sum to each Account based on
the Owner's allocation percentages.
An Owner may allocate the Net Single Premium among any or all Accounts
available on the Issue Date. At least $500 of a Net Single Premium must be
allocated to that Account. All percentage allocations must be in whole numbers.
TRANSFERS
GENERAL. On any Contract Anniversary, by Written Notice, an Owner may
transfer all or part of the balance of an Account to a new Account(s). An Owner
may also transfer some or all of the balance to an existing Account for which
the Reset Date falls on the Contract Anniversary. Transfers may only occur on
Contract Anniversaries.
The amount transferred cannot be less than $500. If the Owner does not
transfer the entire balance of an Account, the amount remaining in the Account
after the transfer must be at least equal to $500.
If the transfer from an Account occurs at a Reset Date for that Account,
then the Owner may select any new Guarantee Period for the transferred amount
that the Company then offers that does not expire prior to the Annuity Date. If
the transfer does not occur at such a Reset Date, then, in addition to the
foregoing, the Guarantee Period selected from those the Company then offers must
be no shorter than the number of years remaining in the Guarantee Period of the
Account from which the amount is being transferred (rounded up to the next whole
number of years for a Guarantee Period the Company is then offering).
A Market Value Adjustment will usually apply to the amount transferred.
(See "THE COMPANY AND THE ACCOUNTS--Market Value Adjustment.") However, if the
transfer occurs during the Window Period for the Account from which some or all
of the balance is being transferred, no Market Value Adjustment will apply to
the amount transferred from that Account.
ADDITIONAL RESTRICTIONS. Transfers of some or all of the balance of an
Account (the "Source Account") to another Account (the "Destination Account")
are also subject to the following conditions:
- The Destination Account must be of an Account Type and Guarantee Period
duration that the Company is offering at the time of the transfer;
- The date of transfer must be a Reset Date for the Destination Account,
unless it is a new Account;
- The Guarantee Period for a Destination Account may not be longer than the
number of years remaining until the Annuity Date;
- If the date of transfer is not a Reset Date for the Source Account, then
the Guarantee Period for the Destination Account must be no shorter than
the number of years remaining in the Guarantee Period for the Source
Account, rounded up to the next whole number of years;
- If the transfer occurs at a Reset Date for the Source Account, then the
Destination Account may be any type of Account;
- If the Source Account is an Interest Account, then the Destination
Account may be any type of Account;
- If the Source Account is an Indexed Account, then the Destination Account
may be a different type of Account only if the transfer occurs at a Reset
Date for the Source Account.
WITHDRAWALS
GENERAL. At any time prior to the Annuity Date, an Owner may withdraw part
of the Surrender Value, subject to certain limitations. Each withdrawal must be
requested by Written Notice. A Written Notice of withdrawal must specify the
amount to be withdrawn from each Account. If the Written Notice does not specify
this information, or if the value of the specified Account(s) is inadequate to
comply with the request, the Company will make the withdrawal from Interest
Accounts and Indexed Accounts based on the proportion that the value of each
Account bears to the Accumulation Value as of the day of the withdrawal.
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<PAGE> 19
The amount withdrawn cannot be less than the Minimum Withdrawal Amount,
which is $500. The maximum withdrawal is the amount that would leave a Minimum
Account Value per Account of $500. A withdrawal request that would reduce any
Account Value below the Minimum Account Value will be treated as a request for a
withdrawal of all of that Account Value.
The Company withdraws the amount requested from the Account Value as of the
day that the Owner's Written Notice is received at the Service Center, and sends
the Owner that amount plus or minus any applicable Market Value Adjustment. The
Company will then deduct any applicable surrender charge and any applicable
Premium Tax Charge from the remaining Account Value.
TAX CONSEQUENCES OF WITHDRAWALS. Consult your tax adviser regarding the tax
consequences associated with making withdrawals. A withdrawal may have federal
income tax consequences, including the possible imposition of a penalty tax of
10% of the taxable portion withdrawn when a withdrawal is made before the
taxpayer reaches age 59 1/2. See "FEDERAL TAX CONSIDERATIONS" for more details.
SURRENDERS
An Owner may surrender the Contract at any time prior to the Annuity Date.
An Owner may elect to have the Surrender Value paid in a single sum or under an
Annuity Payment Option. If no election is made, the Surrender Value will be paid
in a single sum. The Surrender Value will be determined as of the date the
Company receives both the Written Notice for surrender and the Contract at the
Service Center. If an Owner elects to receive payment in a lump sum, then
Surrender Value will be paid. If an Annuity Payment Option is selected on
surrender, the Annuity Value will be applied to the Annuity Payment Option. The
Contract ends when the Company pays the Surrender Value or applies such sum to
an Annuity Payment Option.
The Surrender Value generally reflects the imposition of the surrender
charge. (See "CONTRACT CHARGES AND FEES--Surrender Charge.") However, no
surrender charge will be imposed on surrenders from an Account during the
Account's Window Period. In addition, if the Contract is surrendered during a
Contract Year after the first Contract Year, no surrender charge will apply to
the Free Withdrawal Amount for that Contract Year, or to amounts in excess of
the Net Allocation for each Account, determined on an Account-by-Account basis.
Consult your tax adviser regarding the tax consequences of a surrender. A
surrender may have federal income tax consequences, including the possible
imposition of a penalty tax of 10% of the taxable portion of the Surrender Value
when a surrender is made before age 59 1/2. See "FEDERAL TAX CONSIDERATIONS" for
more details.
DEATH BENEFITS
THE DEATH BENEFIT. The Death Benefit the Company pays on the death of an
Owner who is not the Annuitant is the Surrender Value. Thus, the Death Benefit
in this circumstance may reflect a surrender charge and a Market Value
Adjustment. The Death Benefit the Company pays on the death of the Annuitant is
the greater of the Accumulation Value and the Reference Value. In calculating
the Death Benefit, the Accumulation Value will include any Index Increase
payable, treating the date of death as the Reset Date for each Indexed Account.
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 Accumulation 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 AN 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,
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<PAGE> 20
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.
The following options are available to new Owners:
1. to receive the Death Benefit in a single lump sum within five years
of the deceased Owner's death; or
2. elect to receive the Death Benefit 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 Owners or over a
period not greater than the life expectancy of the new Owners; 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.
With regard to new Owners who are not the spouse of the deceased Owner: (a)
options 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.
Death Benefit is computed as of the date that the Company receives Due
Proof of Death of the Owner. Payment of the death benefit is 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 (or the Owner's estate, if the
Owner is then deceased) 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 five
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 one 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.
If the Beneficiary is not a natural person, only Option 1 is available.
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<PAGE> 21
REFERENCE VALUE
The Surrender Value, Annuity Value, and Death Benefits provided under the
Contract are subject to certain minimums based on a Contract's Reference Value.
The Reference Value at any time is equal to
(a) 90% of the Single Premium; plus
(b) any Excess Interest Credits; less
(c) any charges for riders or additional benefits under the Contract,
including the rider cost of 0.85% or 1.50% (for 5 year and 7 year Guarantee
Period, respectively) if allocation(s) have been made to Indexed Accounts;
less
(d) the total amount of previous surrenders and withdrawals from the
Contract (including Market Value Adjustments); plus
(e) interest on (a) through (d) above credited daily at an annual rate
at least equal to 3% (as shown in the Contract).
Excess Interest Credits will be calculated on each Reset Date after any
Index Increases are credited. The amount of Excess Interest Credits will be the
amount, if any, by which (i) all interest credited to Interest Accounts,
together with all Index Increases to Indexed Accounts, exceeds (ii) the sum of
all Reference Value interest, including previous Excess Interest Credits, as
described in (b) and (e) above.
The Adjusted Reference Value is equal to the Reference Value, multiplied by
the ratio of the Adjusted Accumulation Value to the Accumulation Value. Thus,
like the Adjusted Accumulation Value, the Adjusted Reference Value reflects the
impact of changes in prevailing interest rates.
PAYMENTS BY THE COMPANY
The Company generally makes payments of withdrawals, surrenders, Death
Benefits, or any Annuity Payments within seven business days of receipt of all
applicable Written Notices and/or Due Proof of Death. Due Proof of Death is
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.
The Company may defer payment of any withdrawal, surrender, or transfer for
up to six months after it receives an Owner's Written Notice. The Company pays
interest on the amount of any payment that is delayed for more than thirty days
after the payment becomes payable, or after the time required by the applicable
jurisdiction if less than thirty days. This interest will accrue from the date
that the payment becomes payable to the date of payment, but not for more than
one year, at an annual rate of 3%, or the rate and time required by law, if
greater.
TELEPHONE TRANSFER PRIVILEGES
If an Owner has elected this privilege in a form provided by the Company,
an Owner may make transfers 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 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.
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CONTRACT CHARGES AND FEES
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
GENERAL. No sales charge is deducted from the Single Premium at the time
the payment is made. However, a surrender charge may be deducted upon a
withdrawal or surrender prior to the Annuity Date.
CHARGE FOR SURRENDER OR WITHDRAWALS. Surrender charges are calculated for
each Account individually, and are the product of:
(a) the amount allocated to the Account at its most recent Reset Date,
less any transfers and withdrawals from the Account (including any
previously imposed Market Value Adjustment or surrender charge) since then
(the Net Allocation), and
(b) the surrender charge percentage for the Account (see below).
Surrender charges are waived during the last thirty days of each Guarantee
Period (the Window Period). No surrender charge applies to surrender or
withdrawal amounts in excess of the Net Allocation.
In the first Contract Year, the Company calculates the surrender charge
under the assumption that amounts surrendered and withdrawn come first from the
Net Allocation, and then from any interest credited to the Account Value. In
Contract Years after the first, a Free Withdrawal Amount is calculated, equal to
10% of the Net Allocation. Surrenders and withdrawals are assumed to come first
from the Free Withdrawal Amount, then from the remaining 90% of the Net
Allocation, and then from any interest credited to the Account Value since the
last Reset Date.
At any time on or before the fifth Contract Anniversary, the Annuity Value
equals the Surrender Value, and therefore reflects any applicable surrender
charge.
WITHDRAWALS. With regard to all withdrawals, the Company withdraws the
amount requested from the Account(s) specified by the Owner as of the day that
the Company receives the Written Notice regarding the withdrawal, and sends the
Owner that amount plus or minus any applicable Market Value Adjustment. The
Company then deducts any surrender charge and any applicable Premium Tax Charge
from the remaining Account Values of the Account(s) from which the withdrawal
was taken. The surrender charge is deducted from each Account from which a
withdrawal is taken based on the ratio of the amount surrendered or withdrawn to
the Net Allocation of each affected Account.
SURRENDER CHARGE PERCENTAGES. Surrender charge percentages differ among
Interest Accounts and Indexed Accounts, and are higher for Accounts with longer
Guarantee Periods. In addition, surrender charge percentages for all Accounts
vary by the time remaining until the Annuity Date. For a given Guarantee Period
and type of Account, the surrender charge percentage is constant until the
Contract Anniversary ten years before the Annuity Date, and then declines in ten
equal increments on each Contract Anniversary to zero on the Annuity Date.
Because surrender charge percentages are higher for longer Guarantee
Periods, transferring from an Account with a shorter Guarantee Period to one
with a longer Guarantee Period may lead to a larger surrender charge. However,
the amount of the surrender charge may in some cases be limited, because the
Adjusted Reference Value may be greater than the Adjusted Accumulation Value
less surrender charges.
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The surrender charge percentage applicable to Accounts selected by an Owner
for allocations are set forth in the Contract, and will never exceed 8%. The
surrender charge percentages applicable to Accounts available as of the date of
this prospectus are set forth below:
INTEREST ACCOUNTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SURRENDER
GUARANTEE PERIOD CHARGE %
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year 3%
3 years 5%
5 years 6%
7 years 7%
10 years 8%
- --------------------------------------------------------------------------------
</TABLE>
INDEXED ACCOUNTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SURRENDER
GUARANTEE PERIOD CHARGE %
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5 years 7%
7 years 8%
- --------------------------------------------------------------------------------
</TABLE>
AMOUNTS NOT SUBJECT TO A SURRENDER CHARGE. On each Contract Anniversary,
the Company calculates a Free Withdrawal Amount equal to 10% of the sum of the
amounts allocated to each of the Accounts at their most recent Reset Dates, less
all amounts withdrawn and transferred from those Accounts (including Market
Value Adjustments and surrender charges) since their most recent Reset Dates.
The Owner may withdraw an amount up to the Free Withdrawal Amount as of the
Contract Anniversary on or next preceding the effective date of the withdrawal
pro-rata from the Accounts after the first Contract Year without incurring a
surrender charge. Free Withdrawal Amounts remain subject to a Market Value
Adjustment unless the withdrawal is made during a Window Period.
If a Nursing Home Confinement/Terminal Medical Condition Rider is attached
to the Contract, then the Free Withdrawal Amount may be increased under certain
conditions:
- If the Annuitant is confined to a nursing home for a period of at least
90 days or has a "terminal medical condition," then the Free Withdrawal
Amount is 50% of the Account Value.
- If the Annuitant's spouse is confined to a nursing home for a period of
at least 90 days or has a "terminal medical condition," then the Free
Withdrawal Amount is 25% of the Account Value.
"Terminal Medical Condition" means a determinable medical condition,
diagnosed by a physician practicing within the scope of his or her license,
causing a life expectancy of 12 months or less from the date of the physician's
diagnosis. This rider is not available if the Annuitant or Annuitant's spouse is
confined to a nursing home on the Issue Date, and terminates upon termination of
the Contract (or may be terminated by the Owner upon thirty days Written
Notice).
Currently no negative Market Value Adjustment is imposed on free
withdrawals made under this rider.
PREMIUM TAX CHARGE
Certain states and municipalities impose a tax on the Company in connection
with the receipt of annuity considerations. This tax can range generally from 0%
to 3.5% of such considerations and generally varies based on the Annuitant's
state of residence. The tax may be incurred by the Company as of the Annuity
Date based on the Accumulation Value on that date, or at the time such
considerations are made. The Company reserves the right to deduct any state and
local taxes on annuity considerations from the Account Value at the time such
tax is due.
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<PAGE> 24
RIDER COST
The Contract's Reference Value will reflect charges for any riders or
endorsements to the Contract, including (if allocations have been made to
Indexed Accounts) an annual charge of 0.85% of the value of the Indexed
Account(s) for the five year Guarantee Period and 1.50% for the seven year
Guarantee Period. The daily compounded equivalent of this change is deducted
daily from Reference Value.
SELECTING AN ANNUITY PAYMENT OPTION
ANNUITY DATE
The Initial Annuity Payment Date may be any day of the month other than the
29th, 30th, or 31st day of a month. For all Contracts, the Annuity Date will be
the Contract Anniversary following the Annuitant's Age 85. In addition, for
Qualified Contracts, Owners have responsibility for ensuring that Account Value
is distributed, or distribution commences, on a distribution start date that is
no later than April 1 of the calendar year following the calendar year in which
the Owner attains Age 70 1/2.
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 Owner selects the Initial Annuity Payment Date in the
application. 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.
ELECTION AND CHANGES OF ANNUITY PAYMENT OPTIONS
On the Annuity Date, the Surrender Value or Adjusted Accumulation 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
Accumulation Value (or Adjusted Reference Value, if greater) 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 up to three days prior to the Annuity Date. If no
Annuity Payment Option has been selected by the Annuity Date, Surrender Value or
Adjusted Accumulation Value (or Adjusted Reference Value, if greater) will be
paid in a lump sum.
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 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 Annuity Value applied to purchase the Annuity
Payments, and the applicable annuity purchase rates. The annuity purchase rates
in the Contract are based on an interest rate of not less than 3.0%.
The dollar amount of the Annuity Payment is determined by dividing the
dollar amount of Annuity Value being applied to purchase Annuity Payments by
$1,000 and multiplying the result by the annuity purchase rate
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<PAGE> 25
in the settlement option tables set forth in the Contract for the selected
Annuity Payment Option. These settlement option tables are based on the 1983A
Mortality Table with a ten-year improvement by scale G, with a five-year setback
for females.
AFTER THE ANNUITY DATE, VALUES (INCLUDING THE AMOUNT OF ANNUITY PAYMENTS)
DO NOT REFLECT GUARANTEED INTEREST RATES OR INDEX INCREASES.
ANNUITY PAYMENT OPTIONS
OPTION 1. INTEREST PAYMENTS. The Company holds the Annuity 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.
OPTION 2. PAYMENTS OF A SPECIFIED AMOUNT. The Company pays the Annuity
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.
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. The amount of each Annuity Payment for each $1,000
applied under this option is calculated at an interest rate of 3% per year
compounded annually. 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.
If at any age the amount of the payments is the same for two or more periods
certain, payment will be made as if the largest period certain was 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.
Unless instructed otherwise at the time that the Annuity Payment Option is
selected, at the death of the Payee the Company pays the amounts below in a lump
sum to the Payee's estate:
1. Under Annuity Payment Option 1, the amount left on deposit with the
Company to accumulate interest.
2. Under Annuity Payment Option 2, 3, or 5, the commuted value of the
amount payable at the Payee's death as provided under the Option selected.
The commuted value is based on the interest rate used to calculate the
amount of the payments under that Option.
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<PAGE> 26
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 the Net Single Premium among and between the Accounts, and (6) transfer
Account Values among and between the Accounts.
If a successor Owner is named in the application or by subsequent Written
Notice and the Owner is not the Annuitant, the successor Owner shall become the
new Owner should the Owner die before the Annuitant.
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
At any time prior to the Annuity Date while the Annuitant is still living,
an Owner may assign ownership of the Contract by Written Notice. The Company is
not responsible for the validity or sufficiency of any assignment. The Company
is not bound by the assignment until it receives a duplicate of the original of
the assignment at the Service Center.
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.
Any change of Beneficiary takes 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 Beneficiary change.
For possible tax consequences associated with changing the Owner or Beneficiary,
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
Separate Accounts to the requirements of any law (or regulation issued by a
government agency) to which the Contract, the Company or the Separate
Accounts are subject;
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<PAGE> 27
2. assure continued qualification of the Contract as an annuity
contract under the Code; or
3. reflect a change (as permitted in the Contract) in the operation of
the Separate Accounts.
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
The Company will send each Owner a report at least annually, or more often
as required by law, indicating the following items as of a date shown on the
report: the Accumulation Value and Adjusted Accumulation Value; the Reference
Value, Adjusted Reference Value, and Surrender Value; any withdrawals or
surrenders made and Death Benefits paid since the last report; the current
interest rate applicable to each Interest Account; 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 single premium. The entire
Contract is made up of the group contract, the certificate, 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.
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<PAGE> 28
FEDERAL TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION OF CERTAIN FEDERAL TAX CONSIDERATIONS THAT RELATE
TO THE CONTRACT IS GENERAL IN NATURE, AND IS NOT INTENDED AS TAX ADVICE TO
OWNERS. OWNERS, ANNUITANTS, AND PAYEES SHOULD CONSULT THEIR QUALIFIED TAX
ADVISER FOR ADDITIONAL INFORMATION AND FOR ADVICE REGARDING OWNERSHIP OF A
CONTRACT, AND THE POTENTIAL FEDERAL TAX IMPLICATIONS OF TRANSACTIONS THEREUNDER.
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. No representation is made
as to the likelihood of the continuation of the present federal income tax laws.
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
The Company believes that the Contract will be treated as an annuity
contract and that the Company will be treated as owning the assets supporting
the Contract for federal income tax purposes. The Company, however, reserves the
right to modify the Contract as necessary to prevent the Owner from being
considered the owner of the assets supporting the Contract for federal tax
purposes.
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
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<PAGE> 29
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 Surrender Value until distribution occurs by withdrawing all or
part of the Accumulation 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
Accumulation 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 Surrender 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 qualified 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 greater of the Reference Value or the Accumulation Value
immediately before the withdrawal exceeds the "investment in the contract" at
that time. Any additional amount withdrawn is not taxable. The Accumulation
Value immediately before a partial withdrawal may have to be increased by any
positive Market Value Adjustment which results from a partial withdrawal. There
is, however, no definitive guidance on the proper tax treatment of Market Value
Adjustments and an Owner should contact a qualified tax adviser with respect to
the potential tax consequences of such an adjustment.
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."
EXCHANGES. 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
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<PAGE> 30
return at the annuity starting date. 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 or the Annuitant. 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. For these purposes, the investment in
the contract is not affected by the owner's or annuitant's death. That is, the
investment in the contract remains the amount of any purchase payment paid that
was not excluded from gross income.
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).
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
25
<PAGE> 31
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, an 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. Owners are responsible for determining that contributions, distributions
and other transactions with respect to the Contracts satisfy applicable law.
Purchasers of Contracts for use with any retirement plan should consult their
legal and tax adviser regarding the suitability of the Contract. 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.
Adverse tax consequences to the plan, to the participant or to both may result
if this Contract is assigned or transferred to any individual as a means to
provide benefit payments. Employers intending to use the Contract with such
plans should seek competent advice.
INDIVIDUAL RETIREMENT ANNUITIES. Sections 219 and 408 of the Code permit
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 with
26
<PAGE> 32
respect to non-governmental plans, all investments are owned by the sponsoring
employer and are subject to the claims of the general creditors of the employer.
Depending on the terms of the particular plan, a non-governmental employer may
be entitled to draw on deferred amounts for purposes unrelated to its Section
457 plan obligations. In general, all amounts distributed from a Section 457
plan to the owner or annuitant are taxable at the time of distribution.
RESTRICTIONS UNDER QUALIFIED CONTRACTS. Other restrictions with respect to
the election, commencement, or distribution of benefits may apply under
Qualified Contracts or under the terms of the plans in respect of which
Qualified Contracts are issued.
UNISEX LEGAL CONSIDERATIONS FOR EMPLOYERS. In 1983, the Supreme Court held
in Arizona Governing Committee v. Norris that optional annuity benefits provided
under an employee's deferred compensation plan could not, under Title VII of the
Civil Rights Act of 1964, vary between men and women. In addition, legislative,
regulatory and decisional authority of some states may prohibit use of
sex-distinct mortality tables under certain circumstances.
Generally, the annuity payment rates under the Annuity Payment Options are
based on tables that distinguish between men and women. As a result, different
benefits may be paid to men and women of the same age. Employers and employee
organizations should check with their legal advisers before purchasing these
Contracts.
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 Contracts 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 percentage of the Single Premium made (up to a maximum of 6.5%). 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. In general, commissions paid will vary with the type of
Account and Guarantee Period durations selected by the Owner, with longer
duration Guarantee Periods generating relatively higher commissions. Additional
compensation may be paid in accordance with the rules of the NASD.
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 Single Premiums,
Annuity Payments, Death Benefits, surrenders, withdrawals, and transfers;
27
<PAGE> 33
preparing confirmation notices and periodic reports; calculating Account Values;
distributing tax reports; and generally assisting Owners.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Accounts are a party
to or which the assets of the Separate Accounts 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 Separate Accounts nor does the Company
expect to incur significant losses from such actions.
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, L.L.P.
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, 1996 and 1995, and the
related statements of operations and cash flows for each of the three years in
the period ended December 31, 1996, have been audited by Deloitte & Touche LLP,
independent auditors, as set forth in their report thereon, and included herein.
Such financial statements are included in this prospectus in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION ABOUT VALLEY FORGE
LIFE INSURANCE COMPANY
HISTORY AND BUSINESS
Valley Forge Life Insurance Company ("VFL" or "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.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed, to a large extent, on a combined basis. Effective December 31,
1985, pursuant to a Reinsurance Pooling Agreement the Company began ceding all
of its business to its parent, Assurance. This business is then pooled with the
business of Assurance, excluding Assurance's participating contracts and
separate accounts, and 10% of the combined net pool is retroceded to the
Company. This agreement was amended effective July 1, 1996, for the purpose of
also excluding the separate accounts of the Company.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term, universal life, and
life insurance policies and individual annuities. Group insurance products
include life, accident and health, consisting primarily of major medical and
hospitalization and pension products.
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<PAGE> 34
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.
SELECTED FINANCIAL DATA FOR THE PERIODS ENDED DECEMBER 31
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Investment Income................................. $ 29,312 $ 31,494 $ 22,759 $ 16,144 $ 19,627
- ----------------------------------------------------------------------------------------------------------------------------
Net Operating Income (Excluding Realized Investment
Gains/Losses)....................................... $ 13,618 $ 13,551 $ 10,408 $ 4,655 $ 6,425
- ----------------------------------------------------------------------------------------------------------------------------
Net Income............................................ $ 16,719 $ 22,510 $ 7,482 $ 7,107 $ 7,119
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets.......................................... $1,947,296 $1,641,438 $1,447,122 $1,258,039 $1,122,762
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 35
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.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed, to a large extent, on a combined basis. Effective December 31,
1985, pursuant to a Reinsurance Pooling Agreement, VFL began ceding all of its
business to its parent, Assurance. This business is then pooled with the
business of Assurance, excluding Assurance's participating contracts and
separate accounts, and 10% of the combined net pool is retroceded to VFL. This
agreement was amended effective July 1, 1996, for the purpose of also excluding
the separate accounts of VFL.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term, universal life, and
life insurance policies and individual annuities. Group insurance products
include life, accident and health, consisting primarily of major medical and
hospitalization and pension products.
Products developed in 1996 included a portfolio of variable products and
new universal life products which are being marketed in 1997. These products
will offer investors the option of allocating payments to one or more variable
accounts or to a guaranteed income account or both. Payments allocated to the
variable accounts will be invested in corresponding investment portfolios where
the investment risk is borne by the investor while payments allocated to the
guaranteed income account will earn a minimum guaranteed rate of interest for a
specified period of time for annuity contracts and one year for life products.
RESULTS OF OPERATIONS
The following table summarizes key components of VFL's operating results
for each of the last three years.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
OPERATING SUMMARY:
(excluding realized investment gains/losses):
Revenues:
Individual premium........................................ $ 52,572 $ 48,368 $ 37,691
Group premium............................................. 272,914 248,285 225,289
-------- -------- --------
Total premiums.......................................... 325,486 296,653 262,980
-------- -------- --------
Net investment income....................................... 29,312 31,494 22,759
Other....................................................... 8,217 4,818 4,789
-------- -------- --------
Total revenues.......................................... 363,015 332,965 290,528
Total benefits and expenses................................. 342,039 312,038 274,439
-------- -------- --------
Operating income before income tax........................ 20,976 20,927 16,089
Income tax expense.......................................... (7,358) (7,376) (5,681)
- -----------------------------------------------------------------------------------------------------
Net operating income
(excluding realized investment gains/losses) $ 13,618 $ 13,551 $ 10,408
=====================================================================================================
SUPPLEMENTAL FINANCIAL DATA:
Net operating income:
Individual................................................ $ 8,209 $ 5,597 $ 3,119
Group..................................................... 5,409 7,954 7,289
-------- -------- --------
Net operating income.................................... 13,618 13,551 10,408
Net realized investment gains (losses).................... 3,101 8,959 (2,926)
- -----------------------------------------------------------------------------------------------------
Net income $ 16,719 $ 22,510 $ 7,482
=====================================================================================================
</TABLE>
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<PAGE> 36
VFL's revenues, excluding net realized investment gains/losses, were up
9.0% to $363.0 million for 1996 as compared to $333.0 million for 1995 and up
25.0% from $290.5 million for 1994. Premiums for 1996 were up 9.7% to $325.5
million as compared to $296.7 million for 1995 and up 23.8% from 1994 premiums
of $263.0 million. The largest portion of this increase was due to the increase
in group premiums, reflecting the growth in the Federal Employees Health
Benefits Program. Individual premium increased primarily due to increased sales
of VFL's Viaterm life product that was first introduced in late 1994.
VFL's investment income increased from $22.8 million in 1994 to $31.5
million in 1995 and decreased to $29.3 million in 1996. The decrease in 1996 is
mainly due to the negative cash flow experienced in 1996 resulting in a
reduction in the total investment portfolio.
VFL's net operating income excluding net realized investment gains/losses
was $13.6 million for 1996, compared to $13.6 million and $10.4 million for 1995
and 1994, respectively.
Net realized investment gains, net of tax, amounted to $3.1 million in
1996, compared to $9.0 million in 1995 and losses of $2.9 million in 1994. Net
realized investment gains for 1996 were primarily realized on sales of fixed
maturities.
FINANCIAL CONDITION
Assets totaled $1,947 million at December 31, 1996, an increase of 18.6%
over 1995 and 34.6% over 1994. VFL's cash and invested assets of $452 million
decreased by $53 million, or 10.5%, over the 1995 level of $505 million, and
increased $12 million over the 1994 level of $440 million.
VFL's stockholder's equity was approximately $200 million at December 31,
1996, compared to $195 million and $156 million at December 31, 1995 and 1994,
respectively. The increase in stockholder's equity in 1996 is due to net income
of $16.7 million offset by a $12.6 million decrease in net unrealized investment
gains. The increase in stockholder's equity in 1995 was primarily due to net
income of $22.5 million and an increase of $16.8 million in net unrealized
investment gains.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
STATUTORY STOCKHOLDER'S
SURPLUS ASSETS* EQUITY*
- ---------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
December 31, 1996.......................................... $124,324 $1,947,296 $199,540
December 31, 1995.......................................... 129,912 1,641,438 195,472
December 31, 1994.......................................... 122,267 1,447,122 156,196
December 31, 1993.......................................... 117,650 1,258,039 153,249
December 31, 1992.......................................... 115,660 1,122,762 144,873
- ---------------------------------------------------------------------------------------------------
</TABLE>
* In accordance with generally accepted accounting principles
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<PAGE> 37
INVESTMENTS
The following table summarizes VFL's investments shown at cost or amortized
cost for each of the last two years.
DISTRIBUTION OF INVESTMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
DECEMBER 31 1996 % 1995 %
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
Fixed maturities:
U.S. Treasuries and government agencies................. $117,213 27.5% $186,083 42.1%
Asset backed............................................ 113,376 26.6 84,785 19.2
Other debt securities................................... 90,843 21.4 76,533 17.4
-------- ----- -------- -----
Total fixed maturities................................ 321,432 75.5 347,401 78.7
Common stocks............................................. 1,073 0.3 1,074 0.2
Policy loans.............................................. 60,267 14.2 56,008 12.7
Short-term investments.................................... 42,757 10.0 37,184 8.4
- -----------------------------------------------------------------------------------------------------------------
Investments at Amortized Cost $425,529 100.0% $441,667 100.0%
=================================================================================================================
Investments at Carrying Value* $427,049 $462,650
=================================================================================================================
</TABLE>
* As reported in the Balance Sheet.
As mentioned previously, the operations, assets and liabilities of VFL and
Assurance are, to a large extent, managed on a combined basis. The investment
portfolio is managed to maximize after-tax investment return while minimizing
credit risks with investments concentrated in high quality securities to support
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, tax and credit considerations, or other similar factors. Accordingly, the
fixed maturity securities are classified as available-for-sale. See Note 2 of
the Financial Statements for further information.
The investment portfolio consists primarily of high quality marketable
fixed maturities, approximately 98% of which are rated as investment grade at
both December 31, 1996 and 1995.
The following table summarizes the ratings of VFL's fixed maturity debt
portfolio at carrying value (market):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
DECEMBER 31 1996 % 1995 %
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
U.S. government and affiliated securities................... $115,926 36.1% $280,057 76.2%
Other AAA rated............................................. 127,910 39.8 22,007 6.0
AA and A rated.............................................. 33,913 10.6 39,337 10.7
BBB rated................................................... 38,272 11.9 18,124 4.9
Below investment grade...................................... 5,045 1.6 8,237 2.2
- ------------------------------------------------------------------------------------------------------
Total $321,066 100.0% $367,762 100.0%
======================================================================================================
</TABLE>
Included in VFL's fixed maturity securities at December 31, 1996, are $113
million of asset-backed securities, consisting of approximately 5% in U.S.
government agency issued pass-through certificates, 89% in collateralized
mortgage obligations (CMOs) and 6% in corporate asset-backed obligations. The
majority of CMOs held are U.S. government agency issues, which are actively
traded in liquid markets and are priced by broker-dealers.
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<PAGE> 38
VFL limits the risks associated with interest rate fluctuations and
prepayments by concentrating its CMO investments in planned amortization classes
with relatively short principal repayment windows. At December 31, 1996, the
fair value of asset-backed securities was below the amortized cost by
approximately $.1 million compared with unrealized gains of approximately $2.5
million at December 31, 1995. VFL has not invested in derivative financial
instruments, including complex mortgage derivatives without readily
ascertainable market prices, 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 $321.1
million at December 31, 1996, compared with $367.8 million at December 31, 1995.
At December 31, 1996, net unrealized losses on fixed maturity securities
amounted to approximately $.4 million. This compares with net unrealized gains
of approximately $20.4 million at December 31, 1995. The gross unrealized gains
and losses for the fixed maturity securities portfolio at December 31, 1996,
were $3.2 million and $3.6 million, respectively, compared to $20.4 million and
$25 thousand, respectively, at December 31, 1995. Such fluctuations from
year-to-year are primarily due to changes in interest rates.
VFL's investments in equity securities are carried at a fair value of $3.0
million at December 31, 1996, compared with $1.7 million at December 31, 1995.
At December 31, 1996, net unrealized gains on equity securities amounted to
approximately $1.9 million. This compares with net unrealized gains of
approximately $.6 million at December 31, 1995. There were no unrealized losses
on equity securities for the years ended December 31, 1996 and 1995.
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 payment
for claims, policy benefits and operating expenses.
For the year ended December 31, 1996, VFL's operating activities generated
net negative cash flows of approximately $43 million, compared with net positive
cash flows of $21 million in 1995 and $75 million in 1994. The deterioration in
cash flow in 1996 was caused by the significant acquisition and other first-year
expenses related to the large volume of new business, as well as the delayed
settlement of receivables from an affiliate. 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. The table below
reflects ratings for VFL/Assurance as of December 31, 1996:
<TABLE>
<CAPTION>
A.M. BEST STANDARD & POOR'S DUFF & PHELPS
--------- ----------------- -------------
<S> <C> <C> <C>
RATING.................................. A AA AA
</TABLE>
ACCOUNTING STANDARDS
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 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. This Statement did not have a significant impact
on VFL.
33
<PAGE> 39
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
Statement are effective for 1996 financial statements. This Statement had no
impact on VFL or CNA as the Companies have no compensation which qualifies.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement provides standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This Statement has
been amended and is now effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 or
1997, depending on the type of transaction. This Statement will not have a
significant impact on VFL.
Accounting Disclosure Rules and Practices
In January 1997, the Securities and Exchange Commission approved amendments
to Regulation S-X, Regulation S-K, Regulation S-B, and various forms to clarify
and expand existing disclosure requirements with respect to derivative financial
instruments and derivative commodity instruments. The new rules require enhanced
descriptions in the footnotes to the financial statements of accounting policies
for derivative financial instruments and derivative commodity instruments. They
also require disclosure outside the financial statements of qualitative and
quantitative information about market risk related to derivative financial
instruments, other financial instruments, and derivative commodity instruments.
The requirement of these amendments are effective for 1997 financial statements.
These amendments will not have a significant impact on VFL.
FORWARD-LOOKING STATEMENTS
When included in this report, the words "expects," "intends,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, competition, changes in financial
markets (credit, currency, commodities and stocks) changes in foreign,
political, social and economic conditions, regulatory initiatives and compliance
with governmental regulations, judicial decisions and rulings, and various other
matters, many of which are beyond VFL's control. These forward-looking
statements speak only as of the date of this Prospectus. VFL expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in VFL's
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.
ADDITIONAL INFORMATION
EMPLOYEES
At December 31, 1996, VFL had no employees as it has contracted with
Casualty for services provided by Casualty employees. Casualty has experienced
satisfactory labor relations and has never had work stoppages due to labor
disputes.
PROPERTIES
The Company does not own or directly lease any office space. The Company
reimburses Casualty for its proportionate share of office facilities.
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<PAGE> 40
CERTAIN AGREEMENTS
The Company is party to The Intercompany Pooling Agreement with Assurance
which is discussed above and in Notes to the Company's Financial Statements
included in this Prospectus. 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 approximate ten percent of the combined acquisition
and underwriting expenses of the Company and Assurance. For information
regarding expenses pursuant to the CNA Intercompany Expense Agreement see Note 8
of the Notes to Financial Statements.
REGULATION
VFL is subject to the laws of the Commonwealth of Pennsylvania governing
insurance companies and to the regulations of the Pennsylvania Department of
Insurance (the "Insurance Department"). Regulation by the Insurance Department
includes periodic examination to determine, among other items, contract
liabilities and reserves so that the Insurance Department may certify that these
items are correct. VFL's books and accounts are subject to review by the
Insurance Department at all times.
In addition, VFL is subject to regulation under the insurance laws of all
jurisdictions in which it operates. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect to
various matters, including licensing to transact business, overseeing trade
practices, licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted.
Further, many states regulate affiliated groups of insurers, such as VFL
and its affiliates, under insurance holding company legislation. Under such
laws, inter-company transfers of assets and dividend payments from insurance
subsidiaries may be subject to prior notice or approval, depending on the size
of the transfer payments in relation to the financial positions of the companies
involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed as a result of the insolvencies of other insurers. The
assessments are based on formulas, subject to prescribed limits, and are
intended to fund the benefits and continuation of coverage for policyholders of
the insolvent insurers. Most of these laws provide that an assessment may be
excused or deferred if it would threaten an insurer's own solvency.
Although the Federal government generally does not directly regulate the
business of insurance, Federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of VFL are subject to various
Federal securities laws and regulations. In addition, current and proposed
Federal measures that may significantly affect the insurance business include
regulation of insurance company solvency, employee benefit regulation, removal
of barriers preventing banks from engaging in the insurance business, tax law
changes affecting the taxation of insurance companies and the tax treatment of
insurance products and its impact on the relative desirability of various
personal investment vehicles.
After failing to enact the massive health reform introduced in 1994,
Congress passed a health insurance reform bill in August of 1996 and the
President signed it into law (P.L. 104-191) on August 21, 1996. The new law does
little for Americans without health insurance but it will protect those who have
health insurance from losing it. The 105th Congress is expected to consider
additional incremental health care reform as it attempts to provide greater
access and affordability to Americans. Among the bills that have been introduced
this year are measures that would allow small businesses to band together to
form association health plans to buy insurance; bar the use of clauses
restricting what doctors can tell patients about treatment options; restructure
the Medicare program; subsidize health insurance for uninsured children; and
limit or prohibit underwriting on the basis of genetic information. VFL cannot
predict if any of these proposals will be enacted or the extent to which the may
affect the insurance industry.
35
<PAGE> 41
In recent years increased scrutiny of state regulated insurer solvency
requirements by certain members of the U.S. Congress resulted in the National
Association of Insurance Commissioners (NAIC) developing industry minimum
Risk-Based Capital (RBC) requirements, establishing a formal state accreditation
process designed to more closely regulate for solvency, minimizing the diversity
of approved statutory accounting and actuarial practices, and increasing the
annual statutory statement disclosure requirements.
The RBC formulas are designed to identify an insurer's minimum capital
requirements based upon the inherent risks (e.g., asset default, credit and
underwriting) of its operations. In addition to the minimum capital
requirements, the RBC formula and related regulations identify various levels of
capital adequacy and corresponding actions that the state insurance departments
should initiate. The level of capital adequacy below which insurance departments
would take action is defined as the Company Action Level. As of December 31,
1996, VFL has capital in excess of the Company Action Level.
36
<PAGE> 42
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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
OFFICERS OF THE COMPANY
- ----------------------------------------------------------------------------------------------------
POSITION(S) HELD
NAME AND ADDRESS AGE WITH THE COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dennis H. Chookaszian 53 Director, Chairman of the Board and Chief Executive
CNA Plaza Chairman of the Officer of the CNA Insurance Companies since
Chicago, IL 60685 Board and Chief September 1992. From November 1990 to
Executive September 1992, Mr. Chookaszian was President
Officer and Chief Operating Officer of the CNA
Insurance Companies. Prior thereto, he was
Vice President and Controller. Mr. Chookaszian
has served as a Director of the Company since
April 1978.
- ----------------------------------------------------------------------------------------------------
Philip L. Engel 56 Director, President of the CNA Insurance Companies since
CNA Plaza President September 1992. From November 1990 until
Chicago, IL 60685 September 1992 he was Executive Vice President
of the CNA Insurance Companies. Prior thereto,
Mr. Engel had been Vice President of the CNA
Insurance Companies since 1977. Mr. Engel has
served as a Director of the Company since
September 1992.
- ----------------------------------------------------------------------------------------------------
William J. Adamson, Jr. 44 Senior Vice Senior Vice President of the CNA Insurance
200 S. Wacker Drive President Companies since November 1995; Group Vice
Chicago, IL 60606 President of the CNA Insurance Companies from
April 1993 through October 1995; Vice
President of the CNA Insurance Companies from
May 1987 through April 1993.
- ----------------------------------------------------------------------------------------------------
James P. Flood 46 Senior Vice Senior Vice President of the CNA Insurance
CNA Plaza President Companies since May 1995; Senior Vice
Chicago, IL 60685 President of The Continental Insurance Company
from October 1992 through May 1995, Vice
President of The Continental Insurance Company
from August 1991 through May 1995.
- ----------------------------------------------------------------------------------------------------
Michael C. Garner 44 Director, Senior Senior Vice President of the CNA Insurance
CNA Plaza Vice President Companies since September 1993. Partner of
Chicago, IL 60685 Coopers and Lybrand from October 1989 through
September 1993. Mr. Garner has served as a
Director of the Company since October 1996.
- ----------------------------------------------------------------------------------------------------
Bernard L. Hengesbaugh 50 Senior Vice Senior Vice President of the CNA Insurance
CNA Plaza President Companies since November 1990.
Chicago, IL 60685
- ----------------------------------------------------------------------------------------------------
Peter E. Jokiel 49 Director, Senior Senior Vice President and Chief Financial
CNA Plaza Vice President Officer of the CNA Insurance Companies since
Chicago, IL 60685 and Chief November 1990. Mr. Jokiel has served as a
Financial Director of the Company since July 1992.
Officer
- ----------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 43
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
OFFICERS OF THE COMPANY
- ----------------------------------------------------------------------------------------------------
POSITION(S) HELD
NAME AND ADDRESS AGE WITH THE COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jonathan D. Kantor 41 Director, Senior Director, Senior Vice President, Secretary and
CNA Plaza Vice President, General Counsel of the CNA Insurance Companies
Chicago, IL 60685 Secretary and since April 1997. Group Vice President of CNA
General Counsel Insurance Companies since April 1994. Prior
thereto, Mr. Kantor was a Partner at the law
firm of Shea & Gould.*
- ----------------------------------------------------------------------------------------------------
Patricia L. Kubera 41 Director, Group Group Vice President and Controller of the CNA
CNA Plaza Vice President Insurance Companies since January 1993. Prior
Chicago, IL 60685 and Controller thereto she was Assistant Vice President of
the CNA Insurance Companies. Ms. Kubera has
served as a Director of the Company since
November 1994.
- ----------------------------------------------------------------------------------------------------
Carolyn L. Murphy 52 Senior Vice Senior Vice President of the CNA Insurance
CNA Plaza President Companies since November 1990.
Chicago, IL 60685
- ----------------------------------------------------------------------------------------------------
William H. Sharkey, Jr. 49 Director, Senior Senior Vice President of the CNA Insurance
CNA Plaza Vice President Companies since January 1994; Senior Vice
Chicago, IL 60685 President of Cigna Healthcare from October
1991 through February 1994. Mr. Sharkey, Jr.
has served as a Director of the Company since
November 1994.
- ----------------------------------------------------------------------------------------------------
Adrian M. Tocklin 45 Senior Vice Senior Vice President of the CNA Insurance
CNA Plaza President Companies since May 1995; President of The
Chicago, IL 60685 Continental Insurance Company from June 1994
through May 1995; Executive Vice President of
The Continental Insurance Company from August
11 through June 1994.
- ----------------------------------------------------------------------------------------------------
Jae L. Wittlich 54 Senior Vice Senior Vice President of the CNA Insurance
CNA Plaza President Companies since November 1990.
Chicago, IL 60685
- ----------------------------------------------------------------------------------------------------
David W. Wroe 50 Senior Vice Senior Vice President of the CNA Insurance
CNA Plaza President Companies since June 1996; President of Agency
Chicago, IL 60685 Management Systems from August 1991 through
June 1996.
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Shea & Gould declared bankruptcy in 1995.
Each director is elected to serve until the next annual meeting of stockholders
or until his or her successor is elected and shall have qualified. Some
directors hold various executive positions with insurance company affiliates of
the Company.
EXECUTIVE COMPENSATION
The following table includes compensation paid by CNA 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, 1996. These officers also serve as executive officers of VFL;
therefore, an applicable portion of their compensation (4.45%) is charged to
VFL.
38
<PAGE> 44
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM
---------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(A) BONUS(B) PAYMENTS COMPENSATION(D)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dennis H. Chookaszian............... 1996 $ 950,000 $ -- $1,450,000(c) $51,362(e)
Chairman of the Board and 1995 1,593,027 -- -- 66,587
Chief Executive Officer of 1994 1,242,091 -- -- 51,939
CNA Insurance Companies
Philip L. Engel..................... 1996 800,000 -- 400,000(c) 40,131(e)
President 1995 962,587 -- -- 40,429
CNA Insurance Companies 1994 825,539 -- -- 34,661
Carolyn L. Murphy................... 1996 600,000 317,000 -- 25,200
Senior Vice President 1995 562,307 206,000 -- 23,100
CNA Insurance Companies 1994 558,333 173,000 -- 23,380
Bernard L. Hengesbaugh.............. 1996 550,000 250,000 -- 23,100
Senior Vice President 1995 500,082 170,000 -- 19,950
CNA Insurance Companies 1994 460,578 142,000 -- 18,900
Adrian M. Tocklin................... 1996 548,595 225,000 -- 23,100
Senior Vice President 1995 474,808 170,000 154,180(f) 10,741(g)
CNA Insurance Companies 1994 368,077 0 -- 10,833(g)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(a) Base salary includes compensation deferred under the CNA Savings Plan and
CNA Supplemental Savings Plan.
(b) Amounts disclosed are for bonus awards earned and accrued in the year
indicated under CNA's annual incentive plans hereinafter described. Bonus
awards are typically paid in March of the following year.
(c) Represents payout under the Incentive Compensation Plan.
(d) Represents amounts contributed or accrued to the named officers for the CNA
Savings Plan and CNA Supplemental Savings Plan.
(e) Includes $10,422 and $6,009 of Long Term Disability Insurance Premium paid
by the company on behalf of Mr. Chookaszian and Mr. Engel, respectively.
(f) Represents a payout under the Continental Long-Term Incentive Program.
(g) Includes $5,012 and $3,910, for 1995 and 1994 respectively, of benefit plan
subsidies to help offset benefit plan costs.
EMPLOYMENT CONTRACTS
The Company is a wholly-owned subsidiary of Assurance. Assurance is a
wholly-owned subsidiary of Casualty which is wholly-owned by 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 respects, the
39
<PAGE> 45
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.
40
<PAGE> 46
RETIREMENT PLANS
<TABLE>
<CAPTION>
PENSION PLAN TABLE
NORMAL RETIREMENT IN 1996
- -------------------------------------------------------------------------
AVERAGE ESTIMATED ANNUAL PENSION FOR
ANNUAL REPRESENTATIVE YEARS OF CREDITED SERVICE
COMPENSATION 15 20 25 30 35
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 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
1,400,000 416,658 555,545 694,431 739,986 785,541
1,500,000 446,658 595,545 744,431 793,319 842,208
1,600,000 476,658 635,545 794,431 846,653 898,875
1,700,000 506,658 675,545 844,431 899,986 955,542
1,800,000 536,658 715,545 894,431 953,320 1,012,209
1,900,000 566,658 755,545 944,431 1,006,653 1,068,876
2,000,000 596,658 795,545 994,431 1,059,987 1,125,543
2,100,000 626,658 835,545 1,044,431 1,113,320 1,182,210
2,200,000 656,658 875,545 1,094,431 1,166,654 1,238,877
2,300,000 686,658 915,545 1,144,431 1,219,987 1,295,544
2,400,000 716,658 955,545 1,194,431 1,273,321 1,352,211
</TABLE>
The amounts in the table reflect deductions for estimated Social Security
payments.
Mr. Chookaszian, Mr. Engel, Ms. Murphy, Mr. Hengesbaugh, and Ms. Tocklin
have 21, 31, 19, 16 and 19 years of credited service, respectively.
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", "Bonus" and "Long-Term Compensation
Payouts" in the Summary Compensation Table above. The 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 1996 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.
41
<PAGE> 47
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, a
wholly-owned subsidiary of CNA Financial Corporation, an affiliate of Loews
Corporation) as of December 31, 1996 and 1995 and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 12, 1997
42
<PAGE> 48
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
DECEMBER 31 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
ASSETS
Investments-Note 2:
Fixed maturities available-for-sale (cost: $321,432 and
$347,401).............................................. $ 321,066 $ 367,762
Equity securities available-for-sale (cost: $1,073 and
$1,074)................................................ 2,959 1,696
Policy loans............................................ 60,267 56,008
Short-term investments.................................. 42,757 37,184
---------- ----------
TOTAL INVESTMENTS................................... 427,049 462,650
Cash...................................................... 24,759 42,103
Insurance receivables:
Reinsurance receivables--Note 7......................... 1,320,583 1,073,481
Premium and other insurance receivables................. 27,884 2,566
Less allowance for doubtful accounts.................... (378) (175)
Deferred acquisition costs................................ 74,589 50,600
Accrued investment income................................. 4,945 4,687
Federal income taxes recoverable--Note 6.................. -- 575
Deferred income taxes--Note 6............................. 312 --
Due from affiliates....................................... 67,499 4,936
Other assets.............................................. 54 15
- -------------------------------------------------------------------------------------
TOTAL ASSETS $1,947,296 $1,641,438
=====================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Insurance reserves--Note 7:
Future policy benefits.................................. $1,621,504 $1,334,393
Claims.................................................. 60,568 59,423
Policyholders' funds.................................... 38,145 34,574
Federal income taxes payable--Note 6...................... 3,824 --
Deferred income taxes--Note 6............................. -- 3,191
Other liabilities......................................... 23,715 14,385
---------- ----------
TOTAL LIABILITIES................................... 1,747,756 1,445,966
---------- ----------
Stockholder's equity--Note 4:
Common stock ($50 par value; Authorized--200,000 shares;
Issued--50,000 shares).................................. 2,500 2,500
Additional paid-in capital................................ 39,150 39,150
Retained earnings......................................... 156,900 140,181
Net unrealized investment gains--Note 2................... 990 13,641
---------- ----------
TOTAL STOCKHOLDER'S EQUITY.......................... 199,540 195,472
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,947,296 $1,641,438
=====================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
F-1
<PAGE> 49
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Revenues:
Premiums--Note 7.......................................... $325,486 $296,653 $262,980
Net investment income--Note 2............................. 29,312 31,494 22,759
Realized investment gains (losses)--Note 2................ 4,771 13,783 (4,502)
Other..................................................... 8,217 4,818 4,789
-------- -------- --------
367,786 346,748 286,026
-------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits--Note 7...... 304,840 270,936 237,334
Amortization of deferred acquisition costs................ 1,177 6,066 4,874
Other operating expenses--Note 8.......................... 36,022 35,036 32,231
-------- -------- --------
342,039 312,038 274,439
-------- -------- --------
Income before income tax................................ 25,747 34,710 11,587
Income tax expense--Note 6.................................. 9,028 12,200 4,105
- ------------------------------------------------------------------------------------------------
NET INCOME.............................................. $ 16,719 $ 22,510 $ 7,482
================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
F-2
<PAGE> 50
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED INVESTMENT
STOCK CAPITAL EARNINGS GAINS (LOSSES) TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
BALANCE, DECEMBER 31, 1993................................. $2,500 $39,150 $110,189 $ 1,410 $153,249
Net income............................................... -- -- 7,482 -- 7,482
Change in net unrealized investment gains/(losses)--
Note 2................................................... -- -- -- (4,535) (4,535)
------ ------- -------- -------- --------
BALANCE, DECEMBER 31, 1994................................. 2,500 39,150 117,671 (3,125) 156,196
Net income............................................... -- -- 22,510 -- 22,510
Change in net unrealized investment gains/(losses)--
Note 2................................................... -- -- -- 16,766 16,766
------ ------- -------- -------- --------
BALANCE, DECEMBER 31, 1995................................. 2,500 39,150 140,181 13,641 195,472
Net income............................................... -- -- 16,719 -- 16,719
Change in net unrealized investment gains/(losses)--
Note 2................................................... -- -- -- (12,651) (12,651)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $2,500 $39,150 $156,900 $ 990 $199,540
=======================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
F-3
<PAGE> 51
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 16,719 $ 22,510 $ 7,482
--------- --------- ---------
Adjustments to reconcile net income to net cash flows from
operating activities:
Pre-tax realized investment (gains) losses.............. (4,771) (13,783) 4,502
Amortization of bond discount........................... (4,922) (3,921) (886)
Changes in:
Insurance receivables................................. (272,218) (121,933) (119,090)
Deferred acquisition costs............................ (23,989) (9,267) (1,112)
Accrued investment income............................. (258) 69 (1,606)
Federal income taxes recoverable...................... 4,399 (28) (1,356)
Deferred income taxes................................. 3,309 453 (172)
Insurance reserves.................................... 291,826 196,478 144,704
Due from affiliates................................... (62,563) (55,308) 37,119
Other, net............................................ 9,293 5,730 5,130
--------- --------- ---------
TOTAL ADJUSTMENTS............................... (59,894) (1,510) 67,233
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES........ (43,175) 21,000 74,715
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturities............................. (535,263) (361,579) (863,023)
Proceeds from fixed maturities:
Sales................................................... 530,828 336,731 408,505
Maturities, calls and redemptions....................... 36,726 51,046 189,355
Purchases of equity securities............................ (728) -- (93)
Proceeds from sale of equity securities................... 1,306 -- --
Change in short-term investments.......................... (2,851) 1,901 196,581
Change in policy loans.................................... (4,259) (9,007) (6,058)
Other, net................................................ 72 85 24
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES........ 25,831 19,177 (74,709)
--------- --------- ---------
NET CASH FLOWS.................................. (17,344) 40,177 6
Cash at beginning of year................................... 42,103 1,926 1,920
- -----------------------------------------------------------------------------------------------
CASH AT END OF YEAR......................................... $ 24,759 $ 42,103 $ 1,926
===============================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Federal income taxes.................................... $ 1,965 $ 6,531 $ 5,426
===============================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
F-4
<PAGE> 52
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 sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term, universal life, and
life insurance policies and individual annuities. Group insurance products
include life, accident and health, consisting primarily of major medical and
hospitalization and pension products.
Effective December 31, 1985, pursuant to a Reinsurance Pooling Agreement,
VFL began ceding all of its business to its parent, Assurance. This business is
then pooled with the business of Assurance, excluding Assurance's participating
contracts and separate accounts, and 10% of the combined net pool is retroceded
to VFL. This agreement was amended effective July 1, 1996, for the purpose of
also excluding the separate accounts of VFL.
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
amounts applicable to prior years have been reclassified to conform to
classifications followed in 1996.
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.
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% to 11%, 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 5.6% to 6.6% for the three years ended December 31,
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.
F-5
<PAGE> 53
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED)
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, premium taxes 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. Based on 1996 evaluations, the assumed interest rate spreads were
adjusted, the effect of which was to reduce amortization by approximately $3
million.
INVESTMENTS
Valuation of investments--VFL classifies its fixed maturity securities
(bonds and redeemable preferred stocks) and its equity securities as
available-for-sale, and as such, they are carried at fair value. 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.
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. Investments are
written down to estimated fair values and losses are charged to income when a
decline in value is considered to be other than temporary.
Securities sold under repurchase agreements--VFL has a securities lending
program 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. The liabilities for securities sold subject to repurchase agreements
are recorded at the contractual repurchase amounts. VFL had no securities on
loan at December 31, 1996 or 1995.
INCOME TAXES
The provision for income taxes includes deferred taxes, resulting from
temporary differences between the financial statement and tax return bases of
assets and liabilities under the liability method. Such temporary differences
primarily relate to insurance reserves, investment valuation differences, net
unrealized investment gains/losses and deferred acquisition costs.
F-6
<PAGE> 54
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2. INVESTMENTS:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Fixed maturities:
Bonds:
Taxable................................................. $21,597 $21,576 $16,568
Tax exempt.............................................. 12 23 23
Equity securities........................................... 59 64 64
Policy loans................................................ 3,669 3,925 2,979
Short-term investments...................................... 4,197 6,037 3,658
Security repurchase transactions............................ -- 135 63
Other....................................................... -- 2 (381)
------- ------- -------
29,534 31,762 22,974
Investment expense.......................................... 222 268 215
- -----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $29,312 $31,494 $22,759
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT GAINS (LOSSES)
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Realized investment gains (losses):
Fixed maturities.......................................... $ 4,123 $13,674 $(4,306)
Equity securities......................................... 578 -- --
Other..................................................... 70 109 (196)
------- ------- -------
4,771 13,783 (4,502)
Income tax (expense) benefit.............................. (1,670) (4,824) 1,576
------- ------- -------
NET REALIZED INVESTMENT GAINS (LOSSES).............. 3,101 8,959 (2,926)
------- ------- -------
Change in net unrealized investment gains (losses):
Fixed maturities.......................................... (20,726) 25,405 (6,892)
Equity securities......................................... 1,263 389 (85)
------- ------- -------
(19,463) 25,794 (6,977)
Income tax (expense) benefit.............................. 6,812 (9,028) 2,442
------- ------- -------
CHANGE IN NET UNREALIZED INVESTMENT GAINS
(LOSSES)............................................ (12,651) 16,766 (4,535)
- -----------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED INVESTMENT GAINS
(LOSSES)............................................ $(9,550) $25,725 $(7,461)
===============================================================================================
</TABLE>
SUMMARY OF GROSS REALIZED
INVESTMENT GAINS (LOSSES) FOR FIXED
MATURITIES AND EQUITY SECURITIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
FIXED EQUITY FIXED EQUITY FIXED EQUITY
YEAR ENDED DECEMBER 31 MATURITIES SECURITIES MATURITIES SECURITIES MATURITIES SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Proceeds from sales......................... $530,828 $1,306 $336,731 $-- $408,505 $ --
======== ====== ======== === ======== ====
Gross realized gains........................ $ 7,927 $ 578 $ 18,185 $-- $ 1,559 $ --
Gross realized losses....................... (3,804) -- (4,511) -- (5,865) --
- -------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS (LOSSES) ON SALES.... $ 4,123 $ 578 $ 13,674 $-- $ (4,306) $ --
=========================================================================================================================
</TABLE>
F-7
<PAGE> 55
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED)
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS
(LOSSES) INCLUDED IN STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
--------------------------- ----------------------------
YEAR ENDED DECEMBER 31 GAINS LOSSES NET GAINS LOSSES NET
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Fixed maturities............................................ $3,226 $(3,592) $ (366) $20,386 $(25) $20,361
Equity securities........................................... 1,886 -- 1,886 622 -- 622
------ ------- ------ ------- ---- -------
$5,112 $(3,592) 1,520 $21,008 $(25) 20,983
====== ======= ======= ====
Deferred income tax expense................................. (530) (7,342)
- ---------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS $ 990 $13,641
===========================================================================================================================
</TABLE>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE-FOR-SALE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
DECEMBER 31, 1996
United States Treasury securities and obligations of
government agencies....................................... $117,213 $ 141 $2,486 $114,868
Asset-backed securities..................................... 113,376 641 767 113,251
States, municipalities and tax exempt political
subdivisions.............................................. 30 -- -- 30
Corporate securities........................................ 55,196 988 335 55,849
Other debt securities....................................... 35,617 1,456 4 37,068
-------- ------- ------ --------
Total fixed maturities.................................. 321,432 3,226 3,592 321,066
Equity securities........................................... 1,073 1,886 -- 2,959
- -----------------------------------------------------------------------------------------------------------------
Total $322,505 $ 5,112 $3,592 $324,025
=================================================================================================================
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
subdivisions.............................................. 279 14 -- 293
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
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED
MATURITIES BY CONTRACTUAL MATURITY
- --------------------------------------------------------------------------------------------------------------
1996 1995
--------------------- ---------------------
AMORTIZED MARKET AMORTIZED MARKET
DECEMBER 31 COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
Due in one year or less..................................... $ 3,299 $ 3,305 $ 7,470 $ 7,666
Due after one year through five years....................... 118,507 116,223 135,160 136,297
Due after five years through ten years...................... 47,998 48,866 35,869 37,538
Due after ten years......................................... 38,252 39,421 84,117 98,939
Asset-backed securities not due at a single maturity date... 113,376 113,251 84,785 87,322
- --------------------------------------------------------------------------------------------------------------
Total $321,432 $321,066 $347,401 $367,762
==============================================================================================================
</TABLE>
Actual maturities may differ from contractual maturities because securities
may be called or prepaid with or without call or prepayment penalties.
F-8
<PAGE> 56
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED)
There are no investments (other than equity securities) that have not
produced income for the years ended December 31, 1996 and 1995. There are no
investments in a single issuer, other than the U.S. government, that when
aggregated exceed 10% of stockholder's equity.
NOTE 3. 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,
reinsurance receivables, deferred income taxes and insurance reserves, are
excluded from fair value disclosure. Thus, the total fair value amounts cannot
be aggregated to determine the underlying economic value of VFL.
The carrying amounts reported in the balance sheet approximate fair value
for cash, short-term investments, premium and other insurance receivables,
accrued investment income, and certain other assets and other liabilities
because of their short-term nature. As such, these financial instruments are not
listed in the table below.
The carrying amounts and estimated fair values of certain of VFL's
financial instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1996 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
DECEMBER 31 AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
FINANCIAL ASSETS
Investments:
Fixed maturities--Note 2.................................. $321,066 $321,066 $367,762 $367,762
Equity securities--Note 2................................. 2,959 2,959 1,696 1,696
Policy loans.............................................. 60,267 56,169 56,008 52,648
FINANCIAL LIABILITIES
Premium deposits and annuity contracts.................... 167,049 153,676 68,578 64,565
===========================================================================================================
</TABLE>
The following methods and assumptions were used by VFL in estimating its
fair value amounts for financial instruments:
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.
F-9
<PAGE> 57
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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. VFL has no
material permitted accounting practices. VFL had a statutory net loss of $2.7
million, compared with net income of $8.9 million and $5.2 million for the years
ended December 31, 1996, 1995 and 1994, respectively. The statutory net loss for
1996 is primarily due to the increase in sales of individual life and annuity
products. Costs related to these sales are charged immediately to income for
statutory reporting purposes; under GAAP, such costs are capitalized and
amortized to income over the duration of these contracts. Statutory capital and
surplus for VFL was $124.3 million and $129.9 million at December 31, 1996 and
1995, respectively.
The payment of dividends by VFL to Assurance without prior approval of the
Pennsylvania Insurance Department is limited to formula amounts. As of December
31, 1996, approximately $12.4 million was not subject to prior Insurance
Department approval.
NOTE 5. BENEFIT PLANS:
VFL has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of CNA,
all Casualty employees are covered by CNA's benefit plans. The plans are
discussed below.
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.
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.
Net periodic pension cost allocated to VFL was $3.6 million, $1.7 million
and $1.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-10
<PAGE> 58
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 5.--(CONTINUED)
The following table sets forth the Plans' funded status and amounts
recognized in CNA's consolidated financial statements at December 31, 1996, 1995
and 1994.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1996* 1995* 1994
------------------------ ------------------------ ----------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED OVERFUNDED
DECEMBER 31 PLANS PLANS PLANS PLANS PLANS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
Actuarial present value of accumulated plan benefits:
Vested............................................. $517,221 $ 622,548 $ 491,052 $ 646,017 $ 376,377
Nonvested.......................................... 37,718 32,369 28,346 14,126 39,152
-------- --------- --------- --------- ---------
Accumulated benefit obligation................... $554,939 $ 654,917 $ 519,398 $ 660,143 $ 415,529
======== ========= ========= ========= =========
Net pension asset (liability):
Projected benefit obligation....................... $777,755 $ 788,333 $ 769,999 $ 809,308 $ 651,418
Plan assets at fair value.......................... 701,854 503,623 629,673 496,264 495,492
-------- --------- --------- --------- ---------
Plan assets less than projected benefit
obligation..................................... (75,901) (284,710) (140,326) (313,044) (155,926)
Unrecognized net asset at January 1, 1986 being
recognized over 12 years......................... (7,099) -- (12,176) -- (17,253)
Unrecognized prior service costs................... 19,077 77,747 21,445 104,042 20,773
Unrecognized net loss.............................. 122,173 (11,793) 164,585 13,508 174,039
-------- --------- --------- --------- ---------
Net pension asset (liability).................... $ 58,250 $(218,756) $ 33,528 $(195,494) $ 21,633
======== ========= ========= ========= =========
Net periodic pension cost:
Service cost -- benefits attributed to employee
service during the year.......................... $ 36,489 $ 18,825 $ 32,118 $ 11,596 $ 32,354
Interest cost on projected benefit obligation...... 53,549 56,771 51,056 32,760 44,666
Actual return on plan assets....................... (31,106) (29,013) (115,363) (43,432) 11,579
Net amortization and deferral...................... (16,059) (5,982) 72,415 19,547 (43,265)
- -----------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 42,873 $ 40,601 $ 40,226 $ 20,471 $ 45,334
=======================================================================================================================
</TABLE>
* The 1996 and 1995 data includes The Continental Corporation Retirement Plans
which are underfunded.
Actuarial assumptions are set forth in the following table.
ASSUMPTIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Discount rate............................................... 7.50% 7.25% 8.50% 7.25%
Rate of increase in compensation levels*.................... 2.75 2.75 4.00 4.50
Expected long-term rate of return on plan assets............ 7.75-8.50 7.50-8.50 8.75 7.50
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Excludes age/service related merit and productivity increases.
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.
Net periodic postretirement benefit cost allocated to VFL was $1.3 million,
$.7 million and $.6 million for the years ended December 31, 1996, 1995 and
1994, respectively.
F-11
<PAGE> 59
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 5.--(CONTINUED)
The following table sets forth the amounts recognized in CNA's consolidated
financial statements at December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DECEMBER 31 1996* 1995* 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Accumulated postretirement benefit obligation:
Retirees.................................................. $171,950 $185,507 $ 27,088
Fully eligible, active plan participants.................. 89,009 59,173 53,684
Other active plan participants............................ 88,191 62,540 41,106
-------- -------- --------
Total accumulated postretirement benefit obligation..... 349,150 307,220 121,878
Unrecognized prior service cost............................. (70) -- (11,177)
Unrecognized net gain (loss)................................ (12,215) 7,380 19,702
-------- -------- --------
Accrued postretirement benefit cost....................... $336,865 $314,600 $130,403
======== ======== ========
Net periodic postretirement benefit cost:
Service cost/benefits attributed to employee service
during the year......................................... $ 11,935 $ 5,969 $ 8,603
Interest cost on accumulated post retirement benefit
obligation.............................................. 24,146 17,506 10,342
Amortization.............................................. 374 (941) 655
- ------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 36,455 $ 22,534 $ 19,600
================================================================================================
</TABLE>
* The 1996 and 1995 data includes postretirement benefit obligations for The
Continental Corporation retirees.
<TABLE>
<CAPTION>
ASSUMPTIONS
- ------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumptions used in determining net periodic benefit cost:
Discount rate............................................. 7.25% 8.50% 7.25%
Assumptions used in determining the projected benefit
obligation (liability):
Discount rate............................................. 7.50% 7.25% 8.50%
- ------------------------------------------------------------------------------------------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 12% in 1996, 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, 1996 by $24.2 million and the aggregate net periodic postretirement
benefit cost for 1996 by $3.1 million.
SAVINGS PLAN
VFL is included in the CNA Employees' Savings Plan which is a contributory
plan that allows employees to make regular contributions of up to 6% of their
salary. CNA 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.
CNA contributions allocated to and expensed by VFL for the Savings Plan were
$1.0 million, $.7 million and $.5 million for the years ended December 31, 1996,
1995 and 1994, respectively.
NOTE 6. INCOME TAXES:
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included in the consolidated
Federal income tax return with 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.
F-12
<PAGE> 60
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED)
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,
1996, the amount in the Shareholder's Surplus Account was $100 million. Another
tax memorandum account, defined as the "Policyholders' Surplus Account," totaled
$5 million at December 31, 1996. No further additions to this account are
allowed. Amounts accumulated in the Policyholders' Surplus Account are subject
to income tax if distributed to the shareholder. VFL has not provided for such a
tax as VFL has no plans for such a distribution.
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, 1996 and 1995 are
shown in the table below.
<TABLE>
<CAPTION>
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------------
DECEMBER 31 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
Insurance reserves.......................................... $ 17,166 $ 15,900
Deferred acquisition costs.................................. (22,078) (14,382)
Investment valuation........................................ 5,411 2,518
Net unrealized gains........................................ (530) (7,342)
Receivables................................................. (646) 661
Other, net.................................................. 989 (546)
- ------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS (LIABILITIES) $ 312 $ (3,191)
====================================================================================
</TABLE>
At December 31, 1996, gross deferred tax assets and liabilities amounted to
$24.9 million and $24.6 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1995, amounted to $20.1 million and $23.3 million,
respectively.
VFL has not established a valuation reserve at December 31, 1996 as it
believes that all deferred tax assets are fully realizable. VFL has had a
history of profitability and anticipates future taxable income sufficient to
support its deferred tax balances at December 31, 1996, including but not
limited to the reversal of existing temporary differences and the implementation
of tax planning strategies, if needed.
Significant components of VFL's income tax provision are as follows:
<TABLE>
<CAPTION>
PROVISION FOR INCOME TAX
- ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Current tax (expense) benefit on:
Ordinary income........................................... $(2,217) $ (7,417) $(5,603)
Realized investment gains (losses)........................ (3,502) (4,330) 1,326
------- -------- -------
Total current tax expense............................... (5,719) (11,747) (4,277)
------- -------- -------
Deferred tax (expense) benefit on:
Ordinary income (loss).................................... (5,141) 41 (78)
Realized investment gains (losses)........................ 1,832 (494) 250
------- -------- -------
Total deferred tax (expense) benefit.................... (3,309) (453) 172
- ------------------------------------------------------------------------------------------------
Total income tax expense $(9,028) $(12,200) $(4,105)
================================================================================================
</TABLE>
F-13
<PAGE> 61
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED)
A reconciliation of the expected income tax resulting from the use of
statutory tax rates to the effective income tax expense follows:
<TABLE>
<CAPTION>
RECONCILIATION-OF-EXPECTED-AND-EFFECTIVE-TAXES
- ------------------------------------------------------------------------------------------------------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
YEAR ENDED DECEMBER 31 1996 INCOME 1995 INCOME 1994 INCOME
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Expected tax expense on ordinary income at statutory
rates................................................ $(7,341) (35.0)% $ (7,325) (35.0)% $(5,623) (35.0)%
State income taxes..................................... (54) (0.3) (51) (0.2) (43) (0.3)
Other items, net....................................... 37 0.2 -- -- (15) (0.1)
------- ----- --------- ------ ------- -----
Income tax expense on ordinary income................ (7,358) (35.1) (7,376) (35.2) (5,681) (35.4)
Income tax (expense) benefit on realized investment
gains/losses at statutory rates.................... (1,670) (35.0)% (4,824) (35.0)% 1,576 (35.0)%
- ------------------------------------------------------------------------------------------------------------------------
Income tax expense $(9,028) (35.1)% $(12,200) (35.1)% $(4,105) (35.4)%
========================================================================================================================
</TABLE>
NOTE 7. REINSURANCE:
The effects of reinsurance on premium revenues are shown in the following
schedule:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PREMIUMS
----------------------------------------- ASSUMED/NET
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET %
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
1996
Life.................................................... $422,700 $ 72,718 $424,907 $ 70,511 103%
Accident and Health..................................... 1,080 254,975 1,080 254,975 100
-------- -------- -------- -------- ---
Total................................................. $423,780 $327,693 $425,987 $325,486 101%
======== ======== ======== ======== ===
1995
Life.................................................... $316,011 $ 75,053 $316,577 $ 74,487 101%
Accident and Health..................................... 422 222,166 422 222,166 100
-------- -------- -------- -------- ---
Total................................................. $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%
==================================================================================================================
</TABLE>
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 (see Note 1),
are reflected in the above table. Premium revenues ceded to non-affiliated
companies were $43.0 million, $9.9 million and $7.5 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Additionally, insurance claims
and policyholders' benefits recoveries from non-affiliated companies were $7.0
million, $6.1 million and $3.0 million for the years ended December 31, 1996,
1995 and 1994, respectively.
The ceding of insurance does not discharge primary liability of the
original insurer. VFL's placement of reinsurance with non-affiliated carriers
entails careful review of the nature of the contract and a thorough assessment
of the reinsurers' credit quality and claim settlement performance.
F-14
<PAGE> 62
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 7.--(CONTINUED)
Reinsurance receivables reflected on the balance sheet are recoverables
from reinsurers related to insurance reserves. Balances due from Assurance
pursuant to the pooling agreement comprise most of these balances which were
approximately $1.3 billion and $1.1 billion at December 31, 1996 and 1995,
respectively.
The impact of reinsurance, including transactions with Assurance, on life
insurance in force is shown in the following schedule:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE
--------------------------------------- ASSUMED/NET
DIRECT ASSUMED CEDED NET %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
December 31, 1996.......................................... $108,126 $22,085 $109,873 $20,338 108.6%
December 31, 1995.......................................... 57,138 16,996 58,442 15,692 108.3
December 31, 1994.......................................... 22,933 13,215 24,112 12,036 109.8
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 8. RELATED PARTIES:
As discussed in Note 1, VFL is party to a pooling agreement with its
parent, Assurance. In addition, VFL is party to the CNA Intercompany Expense
Agreement whereby expenses incurred by CNA and each of its subsidiaries are
allocated to the appropriate company. All acquisition and underwriting expenses
allocated to VFL are further subject to the Intercompany Pooling Agreement, so
that acquisition and underwriting expenses recognized by VFL approximate ten
percent of the combined acquisition and underwriting expenses of VFL and
Assurance. Pursuant to the foregoing agreements, VFL recorded amortization of
deferred acquisition costs and other operating expenses totaling $37 million,
$41 million and $37 million for 1996, 1995 and 1994, respectively. Expenses of
VFL exclude $12.3 million, $5.5 million and $4.1 million of general and
administrative expenses incurred by VFL and allocated to CNA for the years ended
December 31, 1996, 1995 and 1994, respectively. VFL had a $67.5 million
affiliated receivable at December 31, 1996 and a $4.9 million affiliated
receivable at December 31, 1995 for net cash settlements due from Assurance in
the normal course of operations related to pooling and general expense
reimbursements. There are no interest charges on intercompany receivables and
payables.
NOTE 9. LEGAL:
VFL is party to litigation arising in the ordinary course of business. The
outcome of this litigation will not, in the opinion of management, materially
affect the results of operations or equity of VFL.
F-15
<PAGE> 63
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 10. BUSINESS SEGMENTS:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
REVENUES
Individual................................................ $ 70,208 $ 69,577 $ 52,812
Group..................................................... 292,807 263,388 237,716
Realized gains (losses)................................... 4,771 13,783 (4,502)
---------- ---------- ----------
Total............................................... $ 367,786 $ 346,748 $ 286,026
========== ========== ==========
INCOME BEFORE INCOME TAX
Individual................................................ $ 12,752 $ 8,611 $ 4,794
Group..................................................... 8,224 12,316 11,295
Realized gains (losses)................................... 4,771 13,783 (4,502)
---------- ---------- ----------
Total............................................... $ 25,747 $ 34,710 $ 11,587
========== ========== ==========
NET INCOME
Individual................................................ $ 8,209 $ 5,597 $ 3,119
Group..................................................... 5,409 7,954 7,289
Realized gains (losses)................................... 3,101 8,959 (2,926)
---------- ---------- ----------
Total............................................... $ 16,719 $ 22,510 $ 7,482
========== ========== ==========
ASSETS
Individual................................................ $ 665,000 $ 786,918 $ 686,754
Group..................................................... 1,282,296 854,520 760,368
---------- ---------- ----------
Total............................................... $1,947,296 $1,641,438 $1,447,122
======================================================================================================
</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 $210.1 million, $187.0 million and $179.4 million
for the years ended December 31, 1996, 1995 and 1994, respectively under
contracts covering U.S. government employees and their dependents.
F-16
<PAGE> 64
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:
[ ( 1+A ) (N/12) - 1 ]
[ ( 1+B ) ]
where:
"a" is the Credited Rate;
"b" is the Current Rate. Where the time remaining to the expiration of
the Guarantee Period is not comparable to a Guarantee Period duration then
offered by the Company, "b" is the rate found by linear interpolation
between the rate for the Guarantee Periods 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 Account from which the surrender,
withdrawal, transfer, or application to an Annuity Payment Option is being
made.
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 following examples illustrate the effect of the Market Value Adjustment
and surrender charge on a surrender of Interest Account Value (Example 1A),
Index Account Value (Example 1B), and a Contract with both Account types
(Example 1C) prior to the end of the applicable Guarantee Period in an interest
rate environment in which rates are rising and falling, but are ultimately
higher at the time of surrender; thus the Market Value Adjustment will operate
to reduce the amount paid upon surrender.
EXAMPLE 1A: SURRENDER OF INTEREST ACCOUNT VALUE 3 YEARS AFTER ISSUE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
INTEREST ACCOUNT ASSUMPTIONS--
- -----------------------------------------------------------------------
<S> <C>
Guaranteed Interest Rate.................................... 5.00%
Guarantee Period............................................ 7 years
Net Single Premium Allocated................................ $10,000
Applicable Surrender Charge Percentage...................... 7%
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
YEARS
INTEREST INTEREST REMAINING - CURRENT RATE MARKET VALUE
CONTRACT ACCOUNT CREDIT GUARANTEE FOR REMAINING ADJUSTMENT SURRENDER
YEARS VALUE (YEAR-END) PERIOD GUARANTEE PERIOD FACTOR CHARGE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0 $ 10,000 $ 500 7 5.00% 0.00000 $700
- ----------------------------------------------------------------------------------------------------------
1 10,500 525 6 4.50% 0.02905 700
- ----------------------------------------------------------------------------------------------------------
2 11,025 551.25 5 5.00% 0.00000 700
- ----------------------------------------------------------------------------------------------------------
3 11,576.25 4 6.00% -0.03721 700
- ----------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE> 65
If the Owner surrenders the Interest Account Value three years after issue
($11,576.25), then the amount paid on surrender will equal the Interest Account
Value increased or decreased by the application of the Market Value Adjustment,
less surrender charge, or $11,576.25, minus $430.70, minus $700, or $10,445.55.
EXAMPLE 1B: SURRENDER OF INDEXED ACCOUNT VALUE 3 YEARS AFTER ISSUE
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
INDEXED ACCOUNT ASSUMPTIONS --
- -----------------------------------------------------------------------
Index Participation Rate.................................... 70%
Floor....................................................... 0%
Cap......................................................... 12%
Guarantee Period............................................ 5 years
Guaranteed Interest Rate for 5 Year Guaranteed Interest
Account................................................... 4.75%
Net Single Premium Allocated................................ $15,000
Applicable Surrender Charge Percentage...................... 7%
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
CURRENT
INDEX RATE FOR MARKET
INDEXED YEAR FINAL INCREASE INDEX REMAINING REMAINING VALUE
CONTRACT ACCOUNT START AVERAGE %AGE INCREASE GUARANTEE GUARANTEE ADJUSTMENT SURRENDER
YEARS VALUE INDEX INDEX FACTOR (YEAR-END) PERIOD PERIOD FACTOR CHARGE
- -------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 $15,000 600 610 1.17% $ 175 5 4.75% 0.00000 $1,050
------------------------------------------------------------------------------------------------------------------
1 15,175 600 780 12.00% 1,821 4 4.25% 0.01932 1,050
------------------------------------------------------------------------------------------------------------------
2 16,996 800 700 0.00% 0 3 4.75% 0.00000 1,050
------------------------------------------------------------------------------------------------------------------
3 16,996 700 2 5.50% -0.01417 1,050
------------------------------------------------------------------------------------------------------------------
</TABLE>
If the Owner surrenders the Indexed Account Value three years after issue
($16,996), then the amount paid on surrender will equal the Interest Account
Value increased or decreased by the application of the Market Value Adjustment,
less surrender charge, or $16,996, minus $240.79, minus $1,050, or $15,705.21.
EXAMPLE 1C: SURRENDER OF INTEREST ACCOUNT VALUE AND INDEXED ACCOUNT VALUE 3
YEARS AFTER ISSUE
<TABLE>
<S> <C>
- ---------------------------------------------------------------------
INTEREST ACCOUNT ASSUMPTIONS--
- ---------------------------------------------------------------------
Guaranteed Interest Rate.................................... 5.00%
Guarantee Period............................................ 7 years
Net Single Premium Allocated................................ $10,000
Applicable Surrender Charge Percentage...................... 7%
- ---------------------------------------------------------------------
INDEXED ACCOUNT ASSUMPTIONS--
- ---------------------------------------------------------------------
Index Participation Rate.................................... 70%
Floor....................................................... 0%
Cap......................................................... 12%
Guarantee Period............................................ 5 years
Guaranteed Interest Rate for 5 Year Guaranteed Interest
Account................................................... 4.75%
Net Single Premium Allocated................................ $15,000
Applicable Surrender Charge Percentage...................... 7%
- ---------------------------------------------------------------------
</TABLE>
A-2
<PAGE> 66
Thus, the assumed Net Single Premium is $25,000. $10,000 has been allocated
to an Interest Account, as described in Example 1A; and $15,000 has been
allocated to an Indexed Account, as described in Example 1B. Based on these
assumptions, values under the contract would be as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
INTEREST INDEXED ADJUSTED ADJUSTED
CONTRACT ACCOUNT ACCOUNT ACCOUNT ACCOUNT REFERENCE REFERENCE
YEAR VALUE VALUE VALUE VALUE VALUE VALUE
- ---------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
0 $ 10,000 $15,000 $ 25,000 $25,000 $22,500.00 $22,500.00
- ---------------------------------------------------------------------------------------------
1 10,500 15,175 25,675 26,273 23,046.14 23,583.10
- ---------------------------------------------------------------------------------------------
2 11,025 16,996 28,021 28,021 23,607.15 23,607.15
- ---------------------------------------------------------------------------------------------
3 11,576.25 16,996 28,572.25 27,901 24,169.35 23,601.34
- ---------------------------------------------------------------------------------------------
</TABLE>
If the Owner surrenders the Contract three years after issue, then the
amount paid on surrender will equal the greater of (i) the Surrender Value (the
sum of the Surrender Value of the Interest Account, and of the Indexed Account,
or $26,150.76) or (ii) the Adjusted Reference Value ($23,601.34). Accordingly,
the amount paid on surrender would equal the Surrender Value of $26,150.76.
A-3
<PAGE> 67
APPENDIX B
THE EXAMPLES BELOW ARE INTENDED ONLY TO ILLUSTRATE THE CALCULATION OF
INDEXED ACCOUNT VALUE, INDEX INCREASES, AND REFERENCE VALUE, AND ARE NOT
INTENDED TO REFLECT PAST PERFORMANCE OR PREDICT FUTURE PERFORMANCE OF THE INDEX.
THE S&P 500(R) WILL INCREASE AND DECREASE OVER TIME, AND DURING ANY GIVEN PERIOD
OF TIME, MAY REMAIN RELATIVELY CONSTANT, OR MAY EXPERIENCE SIGNIFICANT
FLUCTUATIONS. INDEX INCREASES ARE CALCULATED IN ACCORDANCE WITH THE TERMS OF THE
CONTRACT, AND DUE TO THE EFFECT OF THE INDEX PARTICIPATION RATE, CAP AND FLOOR,
WILL NOT CORRESPOND DIRECTLY TO INCREASES (OR DECREASES) IN THE INDEX.
The following examples illustrate the calculation of the Index Increases
(if any) credited to an Indexed Account, and the resulting Indexed Account Value
and Reference Value. Each example assumes that (i) the entire Net Single Premium
of $10,000 has been allocated to an Indexed Account with a five year Guarantee
Period; (ii) the applicable Index Participation Rate is 75%; (iii) the
applicable Floor is 0%; (iv) the applicable Cap is 12%; and (v) the rider cost
is 0.85%. (The daily equivalent of the rider cost, which is reflected in
Reference Value, is 0.002319%.) Actual Index Participation Rates, Caps, and
Floors under the Contract may be different.
EXAMPLE 1A: Example 1A assumes that the Index (the S&P 500(R)) remains
flat, or constant, over the course of the Guarantee Period applicable to the
Indexed Account. Given this assumption, Indexed Account Value, Index Increases,
and Reference Value over the course of the five year Guarantee Period would be
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
INDEX
INDEXED YEAR FINAL INCREASE INDEX YEAR-START REFERENCE RIDER EXCESS
CONTRACT ACCOUNT START AVERAGE %AGE INCREASE REFERENCE VALUE CHARGE TO INTEREST
YEARS VALUE INDEX INDEX FACTOR (YEAR-END) VALUE INTEREST YEAR-END CREDIT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 $10,000.00 600 600 0.00% $0.00 $9,000.00 $268.73 $84.64 $0.00
- --------------------------------------------------------------------------------------------------------------
1 10,000.00 600 600 0.00% 0.00 9,184.09 274.25 84.64 0.00
- --------------------------------------------------------------------------------------------------------------
2 10,000.00 600 600 0.00% 0.00 9,373.70 279.94 84.64 0.00
- --------------------------------------------------------------------------------------------------------------
3 10,000.00 600 600 0.00% 0.00 9,569.00 285.80 84.64 0.00
- --------------------------------------------------------------------------------------------------------------
4 10,000.00 600 600 0.00% 0.00 9,770.16 291.83 84.64 0.00
- --------------------------------------------------------------------------------------------------------------
5 10,000.00 9,977.36
- --------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE 1B: Example 1B assumes that the Index (the S&P 500(R)) increases
and decreases over the course of the Guarantee Period applicable to the Indexed
Account. In addition, the Example assumes that the Index Increase after the end
of Contract Year 1 is subject to the Cap of 12%. (In other words, but for the
Cap, the Index Increase after Contract Year 1 would have been higher than 12%.)
Given the assumptions set forth above, Indexed Account Value, Index Increases,
and Reference Value over the course of the five year Guarantee Period would be
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
INDEX
INDEXED YEAR FINAL INCREASE INDEX YEAR-START REFERENCE RIDER EXCESS
CONTRACT ACCOUNT START AVERAGE %AGE INCREASE REFERENCE VALUE CHARGE TO INTEREST
YEARS VALUE INDEX INDEX FACTOR (YEAR-END) VALUE INTEREST YEAR-END CREDIT
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 $10,000.00 600 700 12.00% $1,200.00 $9,000.00 $268.73 $ 84.64 $ 0.00
- ---------------------------------------------------------------------------------------------------------------
1 11,200.00 700 810 11.79% 1,320.00 9,184.09 274.10 94.80 0.00
- ---------------------------------------------------------------------------------------------------------------
2 12,520.00 825 700 0.00% 0.00 9,363.39 279.31 105.97 0.00
- ---------------------------------------------------------------------------------------------------------------
3 12,520.00 700 750 5.36% 670.71 9,536.74 284.51 105.97 0.00
- ---------------------------------------------------------------------------------------------------------------
4 13,190.71 740 700 0.00% 0.00 9,715.28 289.79 111.65 1,794.27
- ---------------------------------------------------------------------------------------------------------------
7 13,190.71 11,687.68
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE 1C: Example 1C assumes that the Index (the S&P 500(R)) increases
and decreases over the course of the Guarantee Period applicable to the Indexed
Account. In addition, the Example assumes that
B-1
<PAGE> 68
overall, the Index does not experience significant increases over the course of
the Guaranteed Period. Given the assumptions set forth above, Indexed Account
Value, Index Increases, and Reference Value over the course of the five year
Guarantee Period would be as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
INDEX
INDEXED YEAR FINAL INCREASE INDEX YEAR-START REFERENCE RIDER EXCESS
CONTRACT ACCOUNT START AVERAGE %AGE INCREASE REFERENCE VALUE CHARGE TO INTEREST
YEARS VALUE INDEX INDEX FACTOR (YEAR-END) VALUE INTEREST YEAR-END CREDIT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 $10,000.00 600 550 0.00% $ 0.00 $9,000.00 $268.73 $84.64 $0.00
- --------------------------------------------------------------------------------------------------------------
1 10,000.00 560 600 5.36% 535.71 9,184.09 274.25 84.64 0.00
- --------------------------------------------------------------------------------------------------------------
2 10,535.71 600 625 3.13% 329.24 9,373.70 279.88 89.18 0.00
- --------------------------------------------------------------------------------------------------------------
3 10,864.96 620 650 3.63% 394.29 9,564.40 285.55 91.96 0.00
- --------------------------------------------------------------------------------------------------------------
4 11,259.25 650 550 0.00% 0.00 9,757.99 291.31 95.30 0.00
- --------------------------------------------------------------------------------------------------------------
7 11,259.25 9,954.00
- --------------------------------------------------------------------------------------------------------------
</TABLE>
B-2
<PAGE> 69
APPENDIX C
THE EXAMPLES BELOW ARE INTENDED ONLY TO DEMONSTRATE THE CALCULATION OF THE
AVERAGE INDEX INCREASE PERCENTAGE AND ARE NOT INTENDED TO REFLECT PAST
PERFORMANCE OR PREDICT FUTURE PERFORMANCE OF THE INDEX. THE S&P 500(R) WILL
INCREASE AND DECREASE OVER TIME, AND DURING ANY GIVEN PERIOD OF TIME, MAY REMAIN
RELATIVELY CONSTANT, OR MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS. THE AVERAGE
INDEX INCREASE PERCENTAGE IS CALCULATED IN ACCORDANCE WITH THE TERMS OF THE
CONTRACT, AND WILL NOT CORRESPOND DIRECTLY TO INCREASES (OR DECREASES) IN THE
INDEX. THE AMOUNT OF AN AVERAGE INDEX INCREASE PERCENTAGE, IF ANY, FOR A
CONTRACT YEAR WILL DEPEND IN PART ON THE TIMING, FREQUENCY, AND AMOUNT OF ANY
INCREASES (OR DECREASES) IN THE INDEX DURING THAT CONTRACT YEAR, AND THE
SELECTED AVERAGING PERIOD. DEPENDING ON HOW THE INDEX MOVES DURING A CONTRACT
YEAR, A PARTICULAR SELECTED AVERAGING PERIOD MAY RESULT IN A HIGHER OR LOWER
INDEX INCREASE THAN WOULD A DIFFERENT SELECTED AVERAGING PERIOD.
The following examples refer to the Hypothetical S&P 500(R) Index Values
displayed in the accompanying chart. The Average Index Increase Percentage for
an Indexed Account on any Contract Anniversary within a Guaranteed Period
equals:
(B) - (A)
---------
(A)
where
(a) is the value of the Index on the previous Contract Anniversary;
and
(b) is the arithmetic average of the values of the Index on each day
that the Exchange is open for business during the Averaging Period ending
on the Contract Anniversary.
C-1
<PAGE> 70
EXAMPLE 1: Example 1 assumes that (i) the entire Net Single Premium has
been allocated at the indicated time to an Indexed Account with the indicated
Index Participation Rate, Cap and Averaging Period. The Floor is assumed to be
0, and the Guaranteed Period is assumed to be 7 years. Actual Index
Participation Rates, Caps, Floors and Averaging Periods currently available
under the Contract may be different.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TIME PERIOD (FROM CHART 1) PERIOD A1 PERIOD A2 PERIOD A3 PERIOD A4
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Participation Rate................... 75% 95% 75% 95% 75% 95% 75% 95%
Cap.................................. 12% none 12% none 12% none 12% none
Averaging Period in days............. 90 365 90 365 90 365 90 365
Hypothetical S&P 500(R) Index Value
at allocation...................... 680.00 680.00 680.00 680.00 680.00 680.00 680.00 680.00
Hypothetical S&P 500(R) Index Value
12 months later.................... 680.00 680.00 680.00 680.00 680.00 680.00 680.00 680.00
Arithmetic Average ((b) in above
formula)........................... 705.00 705.00 713.33 697.08 725.00 764.58 746.67 709.17
Average Index Increase Percentage.... 3.68% 3.68% 4.90% 2.51% 6.62% 12.44% 9.80% 4.29%
Index Increase....................... 2.76% 3.49% 3.68% 2.39% 4.96% 11.82% 7.35% 4.08%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The following graph is intended to illustrate the hypothetical value of the
S&P 500 Index of common stocks during four separate twelve month periods.
CNA GRAPH
THAT PORTION OF REFERENCE VALUE BASED ON INDEX ACCOUNT VALUES IS SUBJECT TO
AN INDEX RIDER CHARGE, AND CONTRACT VALUES MAY BE SUBJECT TO A MARKET VALUE
ADJUSTMENT, SURRENDER CHARGES, AND PREMIUM TAX CHARGES. SEE "DESCRIPTION OF THE
CONTRACT" AND "CONTRACT CHARGES AND FEES" IN THE PROSPECTUS.
C-2
<PAGE> 71
EXAMPLE 2: Example 2 assumes that (i) the entire Net Single Premium has
been allocated at the indicated time to an Indexed Account with the indicated
Index Participation Rate, Cap, and Averaging Period. The Floor is assumed to be
0, and the Guaranteed Period is assumed to be 7 years. Actual Index
Participation Rates, Caps, Floors and Averaging Periods currently available
under the Contract may be different.
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------
Participation Rate.......................................... 75% 95%
Cap......................................................... 12% none
Averaging Period in days.................................... 90 365
Hypothetical S&P 500(R) Index Value at allocation........... 680.00 680.00
Hypothetical S&P 500(R) Index Value 12 months later......... 691.80 691.80
Arithmetic Average ((b) in above formula)................... 661.76 668.91
Average Index Increase Percentage........................... -2.68% -1.63%
Index Increase.............................................. 0.00% 0.00%
- ----------------------------------------------------------------------------------
</TABLE>
The following graph is intended to illustrate the hypothetical value of the
S&P 500 Index of common stocks during a twelve month period.
CNA GRAPH
THAT PORTION OF REFERENCE VALUE BASED ON INDEX ACCOUNT VALUES IS SUBJECT TO
AN INDEX RIDER CHARGE, AND CONTRACT VALUES MAY BE SUBJECT TO A MARKET VALUE
ADJUSTMENT, SURRENDER CHARGES, AND PREMIUM TAX CHARGES. SEE "DESCRIPTION OF THE
CONTRACT" AND "CONTRACT CHARGES AND FEES" IN THE PROSPECTUS.
C-3
<PAGE> 72
EXAMPLE 3: Example 3 assumes that (i) the entire Net Single Premium has
been allocated at the indicated time to an Indexed Account with the indicated
Index Participation Rate, Cap, and Averaging Period. The Floor is assumed to be
0, and the Guaranteed Period is assumed to be 7 years. Actual Index
Participation Rates, Caps, Floors and Averaging Periods currently available
under the Contract may be different.
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
Participation Rate.......................................... 75% 95%
Cap......................................................... 12% none
Averaging Period in days.................................... 90 365
Hypothetical S&P 500(R)Index Value at allocation............ 680.00 680.00
Hypothetical S&P 500(R)Index Value 12 months later.......... 798.00 798.00
Arithmetic Average ((b) in above formula)................... 781.67 717.75
Average Index Increase Percentage........................... 14.95% 5.55%
Index Increase.............................................. 11.21% 5.27%
- --------------------------------------------------------------------------------
</TABLE>
The following graph is intended to illustrate the hypothetical value of the
S&P 500 Index of common stocks during a twelve month period.
CNA GRAPH
THAT PORTION OF REFERENCE VALUE BASED ON INDEX ACCOUNT VALUES IS SUBJECT TO
AN INDEX RIDER CHARGE, AND CONTRACT VALUES MAY BE SUBJECT TO A MARKET VALUE
ADJUSTMENT, SURRENDER CHARGES, AND PREMIUM TAX CHARGES. SEE "DESCRIPTION OF THE
CONTRACT" AND "CONTRACT CHARGES AND FEES" IN THE PROSPECTUS.
C-4
<PAGE> 73
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.
1290 Silas Deane Highway
P.O. Box 290794
Wethersfield, Connecticut 06129-0794
C-5
