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As filed with the Securities and Exchange Commission on April 11, 1997
File No. 333-1083
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
Post-Effective Amendment No. 1 to the
Registration Statement Under
the Securities Act of 1933
VALLEY FORGE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 6312 23-6200031
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
CNA Plaza, 43 South
Chicago, Illinois 60685
(312) 822-6597
(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
Corporate Secretary Copy to:
Continental Assurance Company Stephen E. Roth, Esq.
CNA Plaza, 43 South Sutherland, Asbill & Brennan, L.L.P.
Chicago, Illinois 60685 1275 Pennsylvania Avenue, N.W.
(312) 822-6597 Washington, DC 20004-2404
(Name, address, including zip code,
and telephone number, including area
code, of agent for service)
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
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CROSS REFERENCE SHEET
Pursuant to Regulation S-K, Item 501(b)
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<CAPTION>
ITEM OF FORM S-1 PROSPECTUS CAPTION
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1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........................ Outside Front Cover
2. Inside Front and Outside Back Cover
Pages of Prospectus........................................... Summary; Table of
Contents
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges............................ Outside Front Cover;
Summary; Definitions;
Description of
the Contract
4. Use of Proceeds............................................... Additional
Information About
Valley Forge Life
Insurance Company
-- Investments
5. Determination of Offering Price............................... Not Applicable
6. Dilution...................................................... Not Applicable
7 Selling Security Holders....................................... Not Applicable
8. Plan of Distribution.......................................... Other Information --
Distribution of the
Contracts
9. Description of Securities to be Registered.................... Summary; Description
of the Contract;
Contract Charges and
Fees; Selecting an
Annuity Payment
Option; Other
Information
10. Interests of Named Experts and Counsel........................ Legal Matters;
Experts
11. Information with Respect to the Registrant.................... The Company, The
Variable Account,
The Funds, and The
Guaranteed Interest
Option; Additional
Information About
Valley Forge Life
Insurance Company
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities................ Item 14 of Part II
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PROSPECTUS
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY
SEPARATE ACCOUNT
This prospectus describes a flexible premium deferred variable annuity
contract (the "Contract") issued by Valley Forge Life Insurance Company (the
"Company" or "VFL"). The Contract may be sold to or used in connection with
retirement plans, including plans that qualify for special federal income tax
treatment under the Internal Revenue Code.
The Owner of a Contract may allocate Net Purchase Payments and Contract
values to one or more of the Subaccounts of Valley Forge Life Insurance Company
Variable Annuity Separate Account (the "Variable Account"), or to the Guaranteed
Interest Option for one or more Guarantee Periods, or to both. Assets of each of
the 18 Subaccounts of the Variable Account are invested in a corresponding
investment portfolio (each, a "Fund") of Insurance Series, Variable Insurance
Products Fund, Variable Insurance Products Fund II, The Alger American Fund, MFS
Variable Insurance Trust, SoGen Variable Funds, Inc., and Van Eck Worldwide
Insurance Trust. The Guaranteed Interest Option guarantees a minimum fixed rate
of interest for specified periods of time, currently 1 year, 3 years, 5 years, 7
years, and 10 years.
The Contract Value will vary daily as a function of the investment
performance of the Subaccounts and any interest credited under the Guaranteed
Interest Option. The Company does not guarantee any minimum Variable Contract
Value for amounts allocated to the Variable Account. Annuity Payments and other
values provided by this Contract, when based on the Guaranteed Interest Option,
are subject to a Market Value Adjustment, the operation of which may result in
upward or downward adjustments in amounts withdrawn, surrendered, transferred,
paid on a Death Benefit, or applied to purchase Annuity Payments.
This prospectus sets forth the information regarding the Contract, the
Variable Account, and the Guaranteed Interest Option that a prospective investor
should know before purchasing a Contract. The prospectuses for the Funds, which
provide information regarding investment objectives and policies of each of the
Funds, should be read in conjunction with this prospectus. A Statement of
Additional Information having the same date as this prospectus and providing
additional information about the Contract and the Variable Account has been
filed with the Securities and Exchange Commission and is incorporated herein by
reference. To obtain a free copy of this document, call or write the Service
Center.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR EACH OF THE
FUNDS.
AN INVESTMENT IN A CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, NOR IS THE CONTRACT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN
THE CONTRACT INVOLVES CERTAIN RISKS, INCLUDING THE RISK OF LOSS OF PURCHASE
PAYMENTS (PRINCIPAL).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
MAY 1, 1997
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LEFT BLANK
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TABLE OF CONTENTS
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DEFINITIONS.................................................
FEE TABLE...................................................
SUMMARY.....................................................
General Description.......................................
Purchasing a Contract.....................................
Canceling the Contract....................................
Transfers.................................................
Withdrawals...............................................
Surrenders................................................
Charges and Fees..........................................
CONDENSED FINANCIAL INFORMATION.............................
THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS, AND THE
GUARANTEED INTEREST OPTION................................
The Company...............................................
The Variable Account......................................
The Funds.................................................
The Guaranteed Interest Option............................
DESCRIPTION OF THE CONTRACT.................................
Purchasing a Contract.....................................
Canceling the Contract....................................
Crediting and Allocating Purchase Payments................
Variable Contract Value...................................
Transfers.................................................
Withdrawals...............................................
Surrenders................................................
Death Benefits............................................
Payments by the Company...................................
Telephone Transaction Privileges..........................
CONTRACT CHARGES AND FEES...................................
Surrender Charge (Contingent Deferred Sales Charge).......
Annual Administration Fee.................................
Transfer Processing Fee...................................
Taxes on Purchase Payments................................
Mortality and Expense Risk Charge.........................
Administration Charge.....................................
Fund Expenses.............................................
Possible Charge for the Company's Taxes...................
SELECTING AN ANNUITY PAYMENT OPTION.........................
Annuity Date..............................................
Annuity Payment Dates.....................................
Election and Changes of Annuity Payment Options...........
Annuity Payments..........................................
Annuity Payment Options...................................
ADDITIONAL CONTRACT INFORMATION.............................
Ownership.................................................
Changing the Owner or Beneficiary.........................
Misstatement of Age or Sex................................
Change of Contract Terms..................................
</TABLE>
i
<PAGE> 6
Reports to Owners.........................................
Miscellaneous.............................................
YIELDS AND TOTAL RETURNS....................................
FEDERAL TAX CONSIDERATIONS..................................
Introduction..............................................
Tax Status of the Contract................................
Taxation of Annuities.....................................
Transfers, Assignments or Exchanges of a Contract.........
Withholding...............................................
Multiple Contracts........................................
Taxation of Qualified Plans...............................
Other Tax Consequences....................................
OTHER INFORMATION...........................................
Distribution of the Contracts.............................
Administrative Services...................................
Voting Privileges.........................................
Legal Proceedings.........................................
Company Holidays..........................................
Legal Matters.............................................
Experts...................................................
ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE
COMPANY...................................................
History and Business......................................
Selected Financial Data...................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................
Other Additional Information..............................
Employees..............................................
Properties.............................................
Certain Agreements.....................................
Regulation.............................................
Directors and Executive Officers.......................
Executive Compensation.................................
Employment Contracts...................................
Retirement Plans.......................................
INDEPENDENT AUDITORS' REPORT................................
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE
COMPANY...................................................
APPENDIX A..................................................
APPENDIX B..................................................
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.
ii
<PAGE> 7
DEFINITIONS
ACCUMULATION UNIT: A unit of measure used to calculate Variable Contract
Value.
ADJUSTED CONTRACT VALUE: The Contract Value plus or minus any applicable
Market Value Adjustment less purchase payment tax charges not previously
deducted less the annual administration fee.
AGE: The age of any person on the birthday nearest the date for which Age
is determined.
ANNUITANT: The person or persons whose life (or lives) determines the
Annuity Payments payable under the Contract and whose death determines the death
benefit. With regard to joint and survivorship Annuity Payment Options, the
maximum number of joint Annuitants is two and provisions referring to the death
of an Annuitant mean the death of the last surviving Annuitant. Provisions
relating to an action by the Annuitant mean, in the case of joint Annuitants,
both Annuitants acting jointly.
ANNUITY DATE: The date on which Surrender Value or Adjusted Contract Value
is applied to purchase Annuity Units or a Fixed Annuity.
ANNUITY PAYMENT: One of several periodic payments made by the Company to
the Payee under an Annuity Payment Option.
ANNUITY PAYMENT DATE: The date each month, quarter, semi-annual period, or
year as of which the Company computes Annuity Payments. The Annuity Payment
Date(s) is shown on the Contract.
ANNUITY PAYMENT OPTION: The form of Annuity Payments selected by the Owner
under the Contract. The Annuity Payment Option is shown on the Contract.
ANNUITY UNIT: A unit of measure used to calculate Variable Annuity
Payments.
BENCHMARK RATE OF RETURN: An annual rate of return shown on the Contract
and used by the Company to determine the degree of fluctuation in the amount of
Variable Annuity Payments in response to fluctuations in the net investment
return of selected Subaccounts by assuming (among other things) that the assets
in the Variable Account supporting the Contract will have a net annual
investment return over the anticipated Annuity Payment period equal to that rate
of return.
BENEFICIARY: The person(s) to whom the death benefit will be paid on the
death of the Owner or Annuitant prior to the Annuity Date.
CANCELLATION PERIOD: The period described on the cover page of the Contract
during which the Owner may return the Contract for a refund.
THE CODE: The Internal Revenue Code of 1986, as amended.
THE COMPANY OR VFL: Valley Forge Life Insurance Company.
CONTINGENT ANNUITANT: The person designated by the Owner in the application
who becomes the Annuitant in the event that the Annuitant dies before the
Annuity Date while the Owner is still alive.
CONTINGENT BENEFICIARY: The person(s) to whom the death benefit will be
paid if the Beneficiary (or Beneficiaries) is not living.
CONTRACT ANNIVERSARY: The same date in each Contract Year as the Contract
Effective Date.
CONTRACT EFFECTIVE DATE: The date on which the Company issues the Contract
and upon which the Contract becomes effective. The Contract Effective Date is
shown on the Contract and is used to determine Contract Years and Contract
Anniversaries.
CONTRACT YEAR: A twelve-month period beginning on the Contract Effective
Date or on a Contract Anniversary.
CONTRACT VALUE: The total amount invested under the Contract. It is the sum
of Variable Contract Value and the Guaranteed Interest Option Value.
<PAGE> 8
DUE PROOF OF DEATH: Proof of death satisfactory to the Company. Due Proof
of Death may consist of the following if acceptable to the Company:
(a) a certified copy of the death record;
(b) a certified copy of a court decree reciting a finding of death; or
(c) any other proof satisfactory to the Company.
FIXED ANNUITY PAYMENT: An Annuity Payment that is supported by the General
Account and does not vary in amount as a function of the investment return of
the Variable Account from one Annuity Payment Date to the next.
FUND: Any open-end management investment company or investment portfolio
thereof or unit investment trust or series thereof, in which a Subaccount
invests.
GENERAL ACCOUNT: The assets of the Company other than those allocated to
the Variable Account or any other separate account of the Company.
GIO ACCOUNT: Valley Forge Life Insurance Company Guaranteed Interest Option
Separate Account.
GUARANTEE AMOUNT: Before the Annuity Date, the amount equal to that part of
any Net Purchase Payment allocated to or any amount transferred to the
Guaranteed Interest Option for a designated Guarantee Period with a particular
expiration date (including interest thereon) less any withdrawals (including any
applicable surrender charges and any applicable purchase payment tax charge) or
transfers therefrom.
GUARANTEE PERIOD: A specific number of years for which the Company agrees
to credit a particular effective annual rate of interest.
GUARANTEED INTEREST OPTION: An investment option under the Contract
supported by the GIO Account. It is not part of nor dependent upon the
investment performance of the Variable Account.
GUARANTEED INTEREST OPTION VALUE: The sum of all Guarantee Amounts.
GUARANTEED INTEREST RATE: Unless a Market Value Adjustment is made, an
effective annual rate of interest that the Company will pay on a Guarantee
Amount.
HOME OFFICE: The Company's office at 401 Penn Street, Reading, PA 19601.
MARKET VALUE ADJUSTMENT: A positive or negative adjustment made to any
portion of a Guarantee Amount upon the surrender, withdrawal, transfer or
application to an Annuity Payment Option of such portion of the Guarantee Amount
prior to 30 days before the expiration of the Guarantee Period applicable to
that Guarantee Amount.
NET ASSET VALUE PER SHARE: The value per share of any Fund on any Valuation
Day. The method of computing the Net Asset Value Per Share is described in the
prospectus for the Fund.
NET PURCHASE PAYMENT: A purchase payment less any purchase payment tax
charge deducted from the purchase payment.
NON-QUALIFIED CONTRACT: A Contract that is not a "qualified contract."
OWNER: The person or persons who owns (or own) the Contract and who is
(are) entitled to exercise all rights and privileges provided in the Contract.
The maximum number of joint Owners is two. Provisions relating to action by the
Owner mean, in the case of joint Owners, both Owners acting jointly. In the
context of a Contract issued on a group basis, Owners refers to holders of
certificates under a group Contract.
PAYEE: The person entitled to receive Annuity Payments under the Contract.
QUALIFIED CONTRACT: A Contract that is issued in connection with a
retirement plan that qualifies for special federal income tax treatment under
Sections 401, 408 or 457 of the Code.
SEC: The U.S. Securities and Exchange Commission.
2
<PAGE> 9
SERVICE CENTER: The offices of the Company's administrative agent at 1290
Silas Deane Highway, P.O. Box 290794, Wethersfield, Connecticut 06129-0794.
SUBACCOUNT: A subdivision of the Variable Account, the assets of which are
invested in a corresponding Fund.
SUBACCOUNT VALUE: Before the Annuity Date, the amount equal to that part of
any Net Purchase Payment allocated to the Subaccount and any amount transferred
to that Subaccount, adjusted by interest income, dividends, net capital gains or
losses, realized or unrealized, and decreased by withdrawals (including any
applicable surrender charges and any applicable purchase payment tax charge) and
any amounts transferred out of that Subaccount.
SURRENDER VALUE: The Adjusted Contract Value less any applicable surrender
charges.
VALUATION DAY: For each Subaccount, each day on which the New York Stock
Exchange is open for business except for certain holidays listed in the
prospectus and days that a Subaccount's corresponding Fund does not value its
shares.
VALUATION PERIOD: The period that starts at the close of regular trading on
the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next succeeding Valuation Day.
VARIABLE ACCOUNT: Valley Forge Life Insurance Company Variable Annuity
Separate Account.
VARIABLE CONTRACT VALUE: The sum of all Subaccount Values.
VARIABLE ANNUITY PAYMENT: An Annuity Payment that may vary in amount from
one Annuity Payment Date to the next as a function of the investment experience
of one or more Subaccounts selected by the Owner to support such payments.
WRITTEN NOTICE: A notice or request submitted in writing in a form
satisfactory to the Company that is signed by the Owner and received at the
Service Center.
3
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FEE TABLE
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<TABLE>
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CONTRACT OWNER TRANSACTION EXPENSES
Sales load imposed on purchase payments..................... 0%
Maximum Surrender Charge (as a percentage of purchase
payments surrendered or withdrawn)........................ 7%
Transfer Processing Fee (each, after first 12 in a Contract
Year)..................................................... $25
Annual Administration Fee (waived if Contract Value exceeds
$50,000).................................................. $30
VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF NET
ASSETS)
Mortality and Expense Risk Charge........................... 1.25%
Administration Charge....................................... 0.15%
- -------------------------------------------------------------------
Total Variable Account Expenses 1.40%
===================================================================
</TABLE>
ANNUAL FUND EXPENSES
(AS A PERCENTAGE OF FUND AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
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MANAGEMENT
(ADVISORY) OTHER TOTAL ANNUAL
FEES EXPENSES EXPENSES
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<S> <C> <C> <C>
INSURANCE SERIES:
Federated High Income Bond Fund II........................ 0.00%[1] 0.80% 0.80%
Federated Prime Money Fund II............................. 0.00%[1] 0.80% 0.80%
Federated Utility Fund II................................. 0.24%[1] 0.61% 0.85%
VARIABLE INSURANCE PRODUCTS FUND (VIP) AND
VARIABLE INSURANCE PRODUCTS FUND II (VIP II):
Fidelity VIP Equity-Income Portfolio...................... 0.51% 0.07% 0.58%[2]
Fidelity VIP II Asset Manager Portfolio................... 0.64% 0.10% 0.74%[2]
Fidelity VIP II Contrafund Portfolio...................... 0.61% 0.13% 0.74%[2]
Fidelity VIP II Index 500 Portfolio....................... 0.13% 0.15% 0.28%[3]
THE ALGER AMERICAN FUND:
Alger American Growth Portfolio........................... 0.75% 0.04% 0.79%
Alger American MidCap Growth Portfolio.................... 0.80% 0.04% 0.84%
Alger American Small Capitalization Portfolio............. 0.85% 0.03% 0.88%
MFS VARIABLE INSURANCE TRUST:
MFS Emerging Growth Series................................ 0.75% 0.25% 1.00%[4][5]
MFS Growth With Income Series............................. 0.75% 0.25% 1.00%[4][5]
MFS Limited Maturity Series............................... 0.55% 0.45% 1.00%[4][5]
MFS Research Series....................................... 0.75% 0.25% 1.00%[4][5]
MFS Total Return Series................................... 0.75% 0.25% 1.00%[4][5]
SOGEN VARIABLE FUNDS, INC.:
SoGen Overseas Portfolio.................................. 0.75% 0.60% 1.35%
VAN ECK WORLDWIDE INSURANCE TRUST:
Van Eck Worldwide Emerging Markets Fund................... 1.00% 0.50% 1.50%[6]
Van Eck Worldwide Hard Assets Fund........................ 1.00% 0.23% 1.23%
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[1] Federated Advisers has voluntarily agreed to waive a portion of its
management fee with respect to these funds. Absent this waiver, the
management fee would have been .60%, .50%, and .75% for the Federated High
Income Bond Fund, Federated Prime Money Fund II and Federated Utility Fund
II, respectively.
[2] A portion of the brokerage commissions that these funds pay was used to
reduce fund expenses. In addition, these funds have entered into
arrangements with their custodian and transfer agent whereby interest earned
on uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses presented
in the table would have been .56%, .73%, and .71% for the Equity-Income,
Asset Manager and contrafund portfolios, respectively.
[3] Fidelity Management and Research Company has agreed to reimburse a portion
of this fund's expenses during the period. Absent this reimbursement, the
fund's management fee would have been .28% and its total annual expenses
would have been .43%.
[4] Each of these funds has an expense offset arrangement which reduces its
custodian fee based upon the amount of cash it maintains with its custodian
and dividend disbursing agent, and may enter into such arrangements and
directed brokerage arrangements (which would also have the effect of
reducing its expenses). Any such fee reductions are not reflected under
"Other Expenses".
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[5] Massachusetts Financial Services Company has agreed to bear expenses for
these funds, subject to reimbursement by each fund, such that each fund's
"Other Expenses" shall not exceed the following percentages of the average
daily net assets of the series during the current fiscal year: .45% for the
Limited Maturity Series and .25% for each of the Emerging Growth Series,
Growth with Income Series, Research Series, and Total Return Series. Absent
this arrangement, actual other expenses would have been .41%, 1.32%, 7.00%,
.73%, and 1.35% and total operating expenses would have been 1.16%, 2.07%,
7.55%, 1.48%, and 2.10% for the Emerging Growth Series, Growth With Income
Series, Limited Maturity Series, Research Series, and Total Return Series,
respectively.
[6] For the eight months ended December 31, 1996, Van Eck Associates Corporation
agreed to waive its management fees and assume all expenses of the fund
except interest, taxes, brokerage commissions and extraordinary expenses.
Absent this waiver and reimbursement, management fees, other expenses and
total annual expenses would have been, 1.00%, 1.64% and 2.64%, respectively.
The fund has a fee arrangement, based on cash balances left on deposit with
the custodian, which reduces the fund's operating expenses.
Taxes on purchase payments, generally ranging from 0% to 3.5% of purchase
payments, may be applicable, depending upon the laws of various jurisdictions.
The above tables are intended to assist the Owner in understanding the
costs and expenses that he or she will bear directly or indirectly. The table
reflects the anticipated expenses of the Variable Account and reflect the actual
expenses for each Fund for the year ended December 31, 1996. Expenses for these
Funds are estimates and are not based on past experience. For a more complete
description of the various costs and expenses, see "CONTRACT CHARGES AND FEES"
and the prospectuses for each Fund.
EXAMPLES
If you surrender your Contract at the end of the applicable time period,
you would pay the following expenses on a $1,000 purchase payment, assuming a 5%
annual rate of return on assets:
<TABLE>
<CAPTION>
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ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
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Federated High Income Bond Fund II................... $ 96 $139 $169 $268
Federated Prime Money Fund II........................ $ 96 $139 $169 $268
Federated Utility Fund II............................ $ 96 $141 $172 $273
Fidelity VIP Equity-Income Subaccount................ $ 94 $132 $157 $243
Fidelity VIP II Asset Manager Subaccount............. $ 95 $137 $166 $261
Fidelity VIP II Contrafund Subaccount................ $ 95 $137 $166 $261
Fidelity VIP II Index 500 Subaccount................. $ 91 $123 $141 $209
Alger American Growth Subaccount..................... $ 96 $139 $168 $267
Alger American MidCap Growth Subaccount.............. $ 96 $140 $171 $272
Alger American Small Capitalization Subaccount....... $ 97 $141 $173 $277
MFS Emerging Growth Subaccount....................... $ 98 $145 $179 $290
MFS Growth With Income Subaccount.................... $ 98 $145 $179 $290
MFS Limited Maturity Subaccount...................... $ 98 $145 $179 $290
MFS Research Subaccount.............................. $ 98 $145 $179 $290
MFS Total Return Subaccount.......................... $ 98 $145 $179 $290
SoGen Overseas Subaccount............................ $102 $156 $198 $327
Van Eck Worldwide Emerging Markets Subaccount........ $103 $161 $205 $343
Van Eck Worldwide Hard Assets Subaccount............. $100 $152 $191 $314
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</TABLE>
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<PAGE> 12
If you do not surrender your Contract or if you annuitize, you would pay
the following expenses on a $1,000 purchase payment, assuming a 5% annual rate
of return on assets:
<TABLE>
<CAPTION>
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ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
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<S> <C> <C> <C> <C>
Federated High Income Bond Fund II................... $ 26 $ 79 $129 $268
Federated Prime Money Fund II........................ $ 26 $ 79 $129 $268
Federated Utility Fund II............................ $ 26 $ 81 $132 $273
Fidelity VIP Equity-Income Subaccount................ $ 24 $ 72 $117 $243
Fidelity VIP II Asset Manager Subaccount............. $ 25 $ 77 $126 $261
Fidelity VIP II Contrafund Subaccount................ $ 25 $ 77 $126 $261
Fidelity VIP II Index 500 Subaccount................. $ 21 $ 63 $101 $209
Alger American Growth Subaccount..................... $ 26 $ 79 $128 $267
Alger American MidCap Growth Subaccount.............. $ 26 $ 80 $131 $272
Alger American Small Capitalization Subaccount....... $ 27 $ 81 $133 $277
MFS Emerging Growth Subaccount....................... $ 28 $ 85 $139 $290
MFS Growth With Income Subaccount.................... $ 28 $ 85 $139 $290
MFS Limited Maturity Subaccount...................... $ 28 $ 85 $139 $290
MFS Research Subaccount.............................. $ 28 $ 85 $139 $290
MFS Total Return Subaccount.......................... $ 28 $ 85 $139 $290
SoGen Overseas Subaccount............................ $ 32 $ 96 $158 $327
Van Eck Worldwide Emerging Markets Subaccount........ $ 33 $101 $165 $343
Van Eck Worldwide Hard Assets Subaccount............. $ 30 $ 92 $151 $314
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</TABLE>
The examples provided above assume that no transfer processing fees or
purchase payment taxes have been assessed. The examples also assume that the
annual administration fee is $30 and that the Contract Value per Contract is
$10,000, which translates the annual administration fee into an assumed .30%
charge for purposes of the examples based on a $1,000 investment.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE 5% ANNUAL
RETURN ASSUMED IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS THAN THE ASSUMED
RATE.
6
<PAGE> 13
SUMMARY
GENERAL DESCRIPTION
This prospectus has been designed to provide prospective Owners with the
information necessary to decide whether or not to purchase a Contract. This
summary provides a concise description of the more significant aspects of the
Contract. Further detail is provided in this prospectus, the related Statement
of Additional Information, the Contract, and the prospectuses of the Funds. For
further information, contact the Service Center.
In many jurisdictions, the Contract is issued directly to individuals. In
certain jurisdictions, however, the Contract is only available as a group
contract. Group Contracts are issued to or on behalf of groups such as employers
for their employees. Individuals who are part of groups for which a Contract is
issued receive a certificate that recites substantially all of the provisions of
the Group Contract. Throughout this prospectus, the term "Contract" refers to
individual Contracts, Group Contracts and certificates for Group Contracts.
Owners may allocate all or a portion of Net Purchase Payments or transfer
Contract Value among several Subaccounts of the Variable Account. The Contract
also offers a Guaranteed Interest Option under which Owners may allocate all or
a portion of Net Purchase Payments and transfer Contract Value among several
Guarantee Periods selected by the Owner. The Company currently offers Guarantee
Periods with durations of 1, 3, 5, 7, and 10 years. If the amount allocated or
transferred remains in a Guarantee Period until the expiration date of a
Guarantee Period, its value will be equal to the amount originally allocated or
transferred, multiplied on an annually compounded basis, by its Guaranteed
Interest Rate. Any surrender, withdrawal, transfer, or annuitization made prior
to 30 days before the expiration of a Guarantee Period will be subject to a
Market Value Adjustment that may increase or decrease the Guarantee Amount (or
portion thereof) being surrendered, withdrawn, transferred, or annuitized.
Depending on the size of the Market Value Adjustment, such an adjustment may
reduce the Guarantee Amount (or portion thereof) to less than the Net Purchase
Payment allocated to or Contract Value transferred to a Guarantee Period. (See
"THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS, AND THE GUARANTEED INTEREST
OPTION--The Guaranteed Interest Option - Market Value Adjustment.")
The Company makes no promise that the Contract Value will increase.
Depending on the investment experience of the Subaccounts and interest credited
to various Guarantee Amounts, the Contract Value, Adjusted Contract Value,
Surrender Value and the death benefit may increase or decrease on any Valuation
Day. Owners bear the investment risk for amounts invested in the Subaccounts and
for Guarantee Amounts surrendered, withdrawn, transferred or applied to an
Annuity Payment Option before the 30-day period prior to the expiration of a
Guarantee Period.
The Contract also offers a choice of Annuity Payment Options to which
Owners may apply the Adjusted Contract Value as of the Annuity Date.
Beneficiaries may also apply the death benefit to certain Annuity Payment
Options. An Owner may change the Annuity Date within certain limits.
PURCHASING A CONTRACT
The minimum initial purchase payment for a Contract is $2,000. The minimum
additional purchase payment the Company will accept is $100. The Company may
refuse to accept additional purchase payments at any time for any reason.
The initial Net Purchase Payment is allocated to each Subaccount or to
Guarantee Periods of the Guaranteed Interest Option, or to both, as specified on
the application, unless the Contract is issued in a state that requires the
return of purchase payments during the Cancellation Period. In those states,
that portion of an Owner's initial Net Purchase Payment allocated to a
Subaccount is allocated to the Prime Money Subaccount (the "Money Market
Subaccount") for a period equal to the number of days in the Cancellation
Period. At the expiration of this period, such portion of the Net Purchase
Payment, as adjusted to reflect the investment performance of the Money Market
Subaccount during this period, is then allocated to the
7
<PAGE> 14
Subaccounts based on the proportion that the Owner's allocation percentage shown
in the application bears to the Variable Contract Value. (See "DESCRIPTION OF
THE CONTRACT--Canceling the Contract.")
If an Owner elects to invest in a particular Subaccount or Guarantee
Period, at least 1% of the Net Purchase Payment must be allocated to that
Subaccount or Guarantee Period. All percentage allocations must be in whole
numbers. In addition, allocations to a Guarantee Period must be at least $500.
The Company allocates any additional Net Purchase Payments among the Subaccounts
and the Guarantee Periods in accordance with the allocation schedule in effect
when such Net Purchase Payment is received at the Service Center unless it is
accompanied by Written Notice directing a different allocation. (See "Crediting
and Allocating Purchase Payments.")
CANCELING THE CONTRACT
At any time during the Cancellation Period, an Owner may cancel the
Contract and receive a refund equal to the Contract Value plus fees or charges
deducted except for the mortality and expense risk charge and the administration
charge. However, if required by state law, the Company will return the purchase
payments made. The Cancellation Period is a 10-day period of time beginning when
the Contract is received by an Owner. Some states may require that the Company
provide a longer Cancellation Period. (See "DESCRIPTION OF THE
CONTRACT--Canceling the Contract.")
TRANSFERS
Prior to the Annuity Date, an Owner may transfer all or part of any
Subaccount Value to another available Subaccount(s) or to one or more Guarantee
Periods, or transfer all or part of any Guarantee Amount to any available
Subaccount(s) or other available Guarantee Periods, subject to certain
restrictions. (See "DESCRIPTION OF THE CONTRACT--Transfers.")
WITHDRAWALS
Upon Written Notice prior to the Annuity Date, an Owner may, subject to
certain restrictions, withdraw part of the Surrender Value. Withdrawals of
Surrender Value may result in the Company deducting from the remaining Contract
Value a Market Value Adjustment, any applicable surrender charge and any
applicable purchase payment tax charge. (See "DESCRIPTION OF THE
CONTRACT--Withdrawals.") A withdrawal may have adverse federal income tax
consequences including the possibility of being subject to a penalty tax. (See
"FEDERAL TAX CONSIDERATIONS.")
SURRENDERS
Upon Written Notice prior to the Annuity Date, an Owner may surrender the
Contract and receive its Surrender Value. An Owner may elect to have the
Surrender Value paid in a single sum or under an Annuity Payment Option. (See
"DESCRIPTION OF THE CONTRACT--Surrenders.") Surrenders may have adverse federal
income tax consequences including the possibility of being subject to a penalty
tax. (See "FEDERAL TAX CONSIDERATIONS.")
CHARGES AND FEES
The following charges and fees are assessed under the Contracts:
SURRENDER CHARGE. If a purchase payment is withdrawn or surrendered (or
received by a Payee as part of a lump sum payment) within five full calendar
years since the date the purchase payment was received, the Company assesses a
surrender charge. During the first five Contract Years, the Company also
assesses a surrender charge if a purchase payment is applied, as part of
Contract Value, to an Annuity Payment Option. The surrender charge is 7% of the
purchase payment if surrendered or withdrawn within two full years after the
purchase payment was received and reduces by 1% each year for the next three
years and is 0% after five full years following receipt of the purchase payment.
No surrender charge is assessed upon the withdrawal or surrender (or payment) of
Contract Value in excess of aggregate purchase payments (less prior withdrawals
of
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<PAGE> 15
purchase payments). For purposes of determining the surrender charge, it is
assumed that purchase payments are surrendered or withdrawn before any Contract
Value in excess of purchase payments (less prior withdrawals of purchase
payments) and purchase payments are considered withdrawn on a first-in-first-out
basis. (See "Surrender Charge (Contingent Deferred Sales Charge)").
ADMINISTRATION CHARGE. The Company makes a daily charge of 0.000411%
(approximately equivalent to an effective annual rate of 0.15%) of the Variable
Account's net assets to cover a portion of the Company's Contract administration
costs. (See "Administration Charge.")
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a daily charge of
0.003446% (approximately equivalent to an effective annual rate of 1.25%) of the
Variable Account's net assets to compensate the Company for assuming certain
mortality and expense risks. (See "Mortality and Expense Risk Charge.")
ANNUAL ADMINISTRATION FEE. The Company deducts an annual administration fee
of $30 per Contract Year if an Owner's Contract Value is less than $50,000 at
the time of deduction. (See "Annual Administration Fee.")
TRANSFER PROCESSING FEE. A $25 charge is assessed by the Company for each
transfer in excess of 12 during a Contract Year. (See "Transfer Processing
Fee.")
TAXES ON PURCHASE PAYMENTS. Generally, taxes on purchase payments, if any,
are incurred as of the Annuity Date, and a charge for taxes on purchase payments
is deducted from the Contract Value as of that date. These taxes range generally
from 0% to 3.5% of purchase payments. (See "Taxes on Purchase Payments.")
EXPENSES OF THE FUNDS. The investment experience of each Subaccount
reflects that of the Fund whose shares it holds. The investment experience of
each Fund, in turn, reflects its fees and other operating expenses. Please read
the prospectus for each of the Funds for details.
CONDENSED FINANCIAL INFORMATION
There is no condensed financial information included for the Variable
Account because, as of the date of the most recent fiscal year end, the Variable
Account had not yet commenced operations. The audited financial statements of
the Company (as well as the independent auditors' reports thereon) appear
elsewhere herein.
THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS,
AND THE GUARANTEED INTEREST OPTION
THE COMPANY
The Company is a life insurance company organized under the laws of the
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
consolidated assets of approximately $13.9 billion. Subject to a reinsurance
pooling agreement (a type of reinsurance arrangement) with Assurance, the
Company assumes all insurance risks under the Contracts, and the Company's
assets, which as of December 31, 1996 exceeded $1.9 billion, support the
benefits under the Contracts. See "ADDITIONAL INFORMATION ABOUT VALLEY FORGE
LIFE INSURANCE COMPANY" for more detail regarding the Company.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of the Company
established under Pennsylvania law on October 18, 1995. The Company owns the
assets of the Variable Account. These assets are held separately from the
Company's General Account and its other separate accounts. That portion of the
Variable Account's assets that is equal to the reserves and other Contract
liabilities of the Variable Account is not
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<PAGE> 16
chargeable with liabilities arising out of any other business the Company may
conduct. If the assets exceed the required reserves and other contract
liabilities, the Company may transfer the excess to the Company's General
Account. The Variable Account's assets will at all times, equal or exceed the
sum of the Subaccount Values of all Contracts funded by the Variable Account.
The Variable Account is registered with the SEC under the Investment
Company Act of 1940 (the "1940 Act") as a unit investment trust and meets the
definition of a "separate account" under the federal securities laws. Such
registration does not involve any supervision by the SEC of the management of
the Variable Account or the Company. The Variable Account also is governed by
the laws of Pennsylvania, the Company's state of domicile, and may also be
governed by laws of other states in which the Company does business.
The Variable Account has 18 Subaccounts, each of which invests in shares of
a corresponding Fund. Income, gains and losses, realized or unrealized, from
assets allocated to a Subaccount are credited to or charged against that
Subaccount without regard to other income, gains or losses of the Company.
Changes to the Variable Account. Where permitted by applicable law, the
Company may make the following changes to the Variable Account:
1. any changes required by the 1940 Act or other applicable law or
regulation;
2. combine separate accounts, including the Variable Account;
3. add new subaccounts to or remove existing Subaccounts from the
Variable Account or combine Subaccounts;
4. make Subaccounts (including new Subaccounts) available to such
classes of Contracts as the Company may determine;
5. add new Funds or remove existing Funds;
6. substitute new Funds for any existing Fund if shares of the Fund
are no longer available for investment or if the Company determines that
investment in a Fund is no longer appropriate in light of the purposes of
the Variable Account;
7. deregister the Variable Account under the 1940 Act if such
registration is no longer required; and
8. operate the Variable Account as a management investment company
under the 1940 Act or as any other form permitted by law.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. Owners will be notified of any changes.
THE FUNDS
Each Subaccount invests in a corresponding Fund. Each of the Funds is
either an open-end diversified management investment company or a separate
investment portfolio of such a company and is managed by a registered investment
adviser. The Funds as well as a brief description of their investment objectives
are provided below.
INSURANCE SERIES
The High Income Bond Fund II, Prime Money Fund II and Utility Fund II
Subaccounts each invest in shares of corresponding Funds (i.e., investment
portfolios) of Insurance Series ("IS"). IS issues five "series" or classes of
shares, each of which represents an interest in a Fund of IS. Three of these
series of shares are available as investment options under the Contracts. The
investment objectives of these Funds are set forth below.
FEDERATED HIGH INCOME BOND FUND II. This Fund invests primarily in
lower-rated fixed-income securities that seek to achieve high current
income.
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<PAGE> 17
FEDERATED PRIME MONEY FUND II. This Fund invests in money market
instruments maturing in thirteen months or less to achieve current income
consistent with stability of principal and liquidity.
FEDERATED UTILITY FUND II. This Fund invests in equity and debt
securities of utility companies to achieve high current income and moderate
capital appreciation.
IS is advised by Federated Advisers.
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Equity-Income Subaccount invests in shares of a corresponding Fund of
Variable Insurance Products Fund ("VIP Fund"). VIP Fund issues five "series" or
classes of shares, each of which represents an interest in a Fund of VIP Fund.
One of these series of shares is available as an investment option under the
Contracts. Asset Manager, Contrafund, and Index 500 Subaccounts each invest in
shares of corresponding Funds of Variable Insurance Products Fund II ("VIP Fund
II"). VIP Fund II issues five "series" or classes of shares, each of which
represents an interest in a Fund of VIP Fund II. Three of these series of shares
are available as investment options under the Contracts. The investment
objectives of these Funds are set forth below.
ASSET MANAGER PORTFOLIO. This Fund seeks high total return with
reduced risk over the long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term fixed-income instruments.
CONTRAFUND PORTFOLIO. This Fund seeks capital appreciation over the
long-term by investing in companies that are undervalued or out-of-favor.
EQUITY-INCOME PORTFOLIO. This Fund seeks current income by investing
primarily in income producing equity securities. In choosing these
securities, the Fund also considers the potential for capital appreciation.
INDEX 500 PORTFOLIO. This Fund seeks investment results that
correspond to the total return of common stocks publicly traded in the
United States, as represented by the Standard & Poor's 500 Composite Index
of 500 Common Stocks.
VIP Fund and VIP Fund II are each advised by Fidelity Management & Research
Company.
THE ALGER AMERICAN FUND
Alger American Growth, Alger American MidCap Growth and Alger American
Small Capitalization Subaccounts each invest in shares of corresponding Funds of
The Alger American Fund ("AAF"). AAF issues six "series" or classes of shares,
each of which represents an interest in a Fund of AAF. Three of these series of
shares are available as investment options under the Contracts. The investment
objectives of these Funds are set forth below.
ALGER AMERICAN GROWTH PORTFOLIO. This Fund seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of
equity securities, primarily of companies with total market capitalization
of $1 billion or greater.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO. This Fund seeks long-term
capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total market
capitalization between $750 million and $3.5 billion.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO. This Fund seeks
long-term capital appreciation by investing in a diversified, actively
managed portfolio of equity securities, primarily of companies with total
market capitalization of less than $1 billion.
AAF is advised by Fred Alger Management, Inc.
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<PAGE> 18
MFS VARIABLE INSURANCE TRUST
The MFS Emerging Growth, MFS Growth with Income, MFS Limited Maturity, MFS
Research and MFS Total Return Subaccounts each invest in shares of corresponding
Funds of MFS Variable Insurance Trust ("MFSVIT"). MFSVIT issues 12 "series" or
classes of shares, each of which represents an interest in a Fund of MFSVIT.
Five of these series of shares are available as investment options under the
Contracts. The investment objectives of these Funds are set forth below.
MFS EMERGING GROWTH SERIES. This Fund seeks to obtain long-term growth
of capital by investing primarily in common stocks of small and
medium-sized companies that are early in their life cycle but which have
the potential to become major enterprises.
MFS GROWTH WITH INCOME SERIES. This Fund seeks to provide reasonable
current income and long-term growth of capital and income.
MFS LIMITED MATURITY SERIES. This Fund seeks to provide as high a
level of current income as is believed to be consistent with prudent
investment risk, with capital protection as a secondary objective.
MFS RESEARCH SERIES. This Fund seeks to provide long-term growth of
capital and future income.
MFS TOTAL RETURN SERIES. This Fund seeks primarily to provide
above-average income consistent with prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital and
income.
MFSVIT is advised by Massachusetts Financial Services Company.
SOGEN VARIABLE FUNDS, INC.
The SoGen Overseas Subaccount invests in shares of a corresponding Fund of
SoGen Variable Funds, Inc. ("SGVF"). SGVF issues one "series" or class of shares
which represents an interest in a Fund of SGVF. This series of shares is
available as an investment option under the Contracts. The investment objective
of this Fund is set forth below.
SOGEN OVERSEAS PORTFOLIO. This Fund seeks long-term growth of capital
by investing primarily in securities of small and medium size non-U.S.
companies.
SGVF is advised by Societe Generale Asset Management Corp.
VAN ECK WORLDWIDE INSURANCE TRUST
The Worldwide Emerging Markets and Worldwide Hard Assets Subaccounts each
invest in shares of corresponding Funds of Van Eck Worldwide Insurance Trust
("VEWIT"). VEWIT issues five "series" or classes of shares, each of which
represents an interest in a Fund of VEWIT. Two of these series of shares are
available as investment options under the Contracts. The investment objectives
of these Funds are set forth below.
WORLDWIDE EMERGING MARKETS FUND. This Fund seeks capital appreciation
by investing primarily in equity securities in emerging markets around the
world.
WORLDWIDE HARD ASSETS FUND. This Fund seeks long-term capital
appreciation by investing globally, primarily in securities of companies
engaged directly or indirectly in the exploration, development, production
and distribution of one or more of the following sectors: precious metals,
ferrous and non-ferrous metals, oil and gas, forest products, real estate
and other basic non-agricultural commodities.
VEWIT is advised by Van Eck Associates Corporation.
NO ONE CAN ASSURE THAT ANY FUND WILL ACHIEVE ITS STATED OBJECTIVES AND POLICIES.
More detailed information concerning the investment objectives, policies
and restrictions of the Funds, the expenses of the Funds, the risks attendant to
investing in the Funds and other aspects of their operations
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<PAGE> 19
can be found in the current prospectus for each Fund which accompanies this
prospectus and the current statement of additional information for the Funds.
The Funds' prospectuses should be read carefully before any decision is made
concerning the allocation of Net Purchase Payments or transfers among the
Subaccounts.
Please note that not all of the Funds described in the prospectuses for the
Funds are available with the Contract. Moreover, the Company cannot guarantee
that each Fund will always be available for its variable annuity contracts, but
in the unlikely event that a Fund is not available, the Company will take
reasonable steps to secure the availability of a comparable fund. Shares of each
Fund are purchased and redeemed at net asset value, without a sales charge.
The Company has entered into agreements with the investment advisers of
several of the Funds pursuant to which each such investment adviser pays the
Company a servicing fee based upon an annual percentage of the average aggregate
net assets invested by the Company on behalf of the Variable Account. These
agreements reflect administrative services provided to the Funds by the Company.
Payments of such amounts by an adviser do not increase the fees paid by the
Funds or their shareholders.
Shares of the Funds are sold to separate accounts of insurance companies
that are not affiliated with the Company or each other, a practice known as
"shared funding." They are also sold to separate accounts to serve as the
underlying investment for both variable annuity contracts and variable life
insurance contracts, a practice known as "mixed funding." As a result, there is
a possibility that a material conflict may arise between the interests of
Owners, whose Contract Values are allocated to the Variable Account, and of
owners of other contracts whose contract values are allocated to one or more
other separate accounts investing in any one of the Funds. Shares of some of the
Funds may also be sold directly to certain qualified pension and retirement
plans qualifying under Section 401 of the Code. As a result, there is a
possibility that a material conflict may arise between the interests of Owners
or owners of other contracts (including contracts issued by other companies),
and such retirement plans or participants in such retirement plans. In the event
of any such material conflicts, the Company will consider what action may be
appropriate, including removing the Fund from the Variable Account or replacing
the Fund with another Fund. There are certain risks associated with mixed and
shared funding and with the sale of shares to qualified pension and retirement
plans, as disclosed in each Fund's prospectus.
THE GUARANTEED INTEREST OPTION
The Guaranteed Interest Option is an investment option available under the
Contract and is supported by the Company's General Account and the GIO Account
(described below). All or a portion of an Owner's Net Purchase Payments may be
allocated to and transfers of Contract Value may be made to Guarantee Periods
under the Guaranteed Interest Option. Through the Guaranteed Interest Option,
the Company offers specified effective annual rates of interest (Guaranteed
Interest Rates) that are credited daily and available for specified periods of
time selected by an Owner (Guarantee Periods). Although the Guaranteed Interest
Rate may differ among Guarantee Periods, it will never be less than the
effective annual rate shown in the Contract.
Interests issued by the Company in connection with the Guaranteed Interest
Option have been registered under the Securities Act of 1933, but neither the
Guaranteed Interest Option, the GIO Account, nor the General Account has been
registered as an investment company under the 1940 Act. Accordingly, neither the
Guaranteed Interest Option, the GIO Account, nor the General Account, nor any
interest therein are generally subject to regulation under the 1940 Act.
Initial Guarantee Periods begin on the date as of which a Net Purchase
Payment is allocated to or a portion of Contract Value is transferred to the
Guarantee Period, and end when the number of years in the Guarantee Period
elected (measured from the end of the calendar month in which the amount was
allocated or transferred to the Guarantee Period) has elapsed. The last day of
the Guarantee Period is the expiration date for that Guarantee Period.
Subsequent Guarantee Periods begin on the first day following the expiration
date of a previous Guarantee Period.
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Allocations of Net Purchase Payments and transfers of Contract Value to the
Guaranteed Interest Option may have different applicable Guaranteed Interest
Rates depending on the timing of such allocations or transfers. However, the
applicable Guaranteed Interest Rate does not change during a Guarantee Period.
If the allocated or transferred amount remains in the Guaranteed Interest Option
until the end of the applicable Guarantee Period, its value will be equal to the
amount originally allocated or transferred, multiplied, on an annually
compounded basis, by its Guaranteed Interest Rate. If a Guarantee Amount is
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option
prior to 30 days before the expiration of the Guarantee Period, the Guaranteed
Interest Rate for that Guarantee Period is subject to a Market Value Adjustment,
as described below, the application of which may result in the payment of an
amount less than the amount originally allocated or transferred to the Guarantee
Period.
The Company will notify Owners in writing at least 30 days prior to the
expiration date of any Guarantee Period about the then currently available
Guarantee Periods and the Guaranteed Interest Rates applicable to such Guarantee
Periods. A new Guarantee Period of the same duration as the previous Guarantee
Period will commence automatically on the first day following the expiring
Guarantee Period, unless the Company receives Written Notice prior to the start
of the new Guarantee Period of the Owner's election of a different Guarantee
Period from among those being offered by the Company at that time, or
instructions to transfer all or a portion of the expiring Guarantee Amount to a
Subaccount. If the Company does not receive such Written Notice and is not
offering a Guarantee Period of the same duration as the expiring Guarantee
Period or if the duration of the expiring Guarantee Period would, if renewed,
extend beyond the Annuity Date, then a new Guarantee Period of one year will
commence automatically on the first day following the expiring Guarantee Period.
The minimum Guarantee Amount is $500.
To the extent permitted by law, the Company reserves the right at any time
to offer Guarantee Periods that differ from those available when an Owner's
Contract was issued. The Company also reserves the right, at any time, to stop
accepting Net Purchase Payment allocations or transfers of Contract Value to a
particular Guarantee Period. Since the specific Guarantee Periods available may
change periodically, please contact the Service Center to determine the
Guarantee Periods currently being offered.
GIO ACCOUNT. The assets in the GIO Account are used to support the values
and benefits under the Guaranteed Interest Option of the Contract and similar
contracts. The Company owns the assets in the GIO Account and holds such assets
separately from other Company assets and from the General Account. The portion
of the assets of the GIO Account equal to the reserves and other contract
liabilities of the GIO Account are not chargeable with liabilities that arise
from any other business that the Company conducts. The Company may transfer to
the General Account any assets of the GIO Account that are in excess of such
reserves and other liabilities.
Under Pennsylvania insurance law, the Company is required to maintain
assets in the GIO Account at least equal to the reserves and other contract
liabilities of the GIO Account. In the unlikely event of liquidation of the
Company, if the Company cannot satisfy all of its insurance obligations, Owners
with Guaranteed Interest Option Value will have a priority claim against assets
of the GIO Account equal to its liabilities, and a claim against the Company's
general account for any remaining Company liabilities. Thus, the GIO Account
represents a pool of assets that provides an additional measure of assurance
that Owners allocating Net Purchase Payments and Contract Value to the
Guaranteed Interest Option will receive full payment of benefits attributable to
Guaranteed Interest Option.
Owners allocating Net Purchase Payments and/or Contract Value to the
Guaranteed Interest Option do not participate in the investment performance of
assets of the GIO Account, and this performance does not determine the
Guaranteed Interest Option Value or benefits relating thereto. The Guaranteed
Interest Option provides values and benefits based only upon the Net Purchase
Payments and Contract Values allocated thereto, the Guaranteed Interest Rate
credited on such amounts, and any charges or Market Value Adjustments imposed on
such amounts in accordance with the terms of the Contract.
MARKET VALUE ADJUSTMENT. A Market Value Adjustment reflects the
relationship between: (i) the current Guaranteed Interest Rate that the Company
is crediting for a Guarantee Period equal to the time remaining in the Guarantee
Period from which the Guarantee Amount is requested to be surrendered,
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<PAGE> 21
withdrawn, transferred or annuitized; and (ii) the Guaranteed Interest Rate
being applied to the Guarantee Period from which the Guarantee Amount will be
surrendered, withdrawn, transferred or annuitized. Any surrender, withdrawal,
transfer or application to an Annuity Payment Option of a Guarantee Amount is
subject to a Market Value Adjustment that may be positive or negative, unless
the effective date of the surrender, withdrawal, transfer or application is
within 30 days prior to the end of a Guarantee Period. The Market Value
Adjustment will be applied after the deduction of any applicable annual
administration fee or transfer processing fee, and before the deduction of any
applicable surrender charge or charge for taxes on purchase payments (also
referred to as a "premium tax" charge).
Generally, if the Guaranteed Interest Rate for the selected Guarantee
Period is lower than the Guaranteed Interest Rate currently being offered for
new Guarantee Periods of a duration equal to the balance of the selected
Guarantee Period as of the date that the Market Value Adjustment is applied,
then the application of the Market Value Adjustment will result in the payment,
upon surrender, withdrawal, transfer or application of amounts to an Annuity
Payment Option, of an amount less than the Guarantee Amount (or portion thereof)
being surrendered, withdrawn, transferred or applied to an Annuity Payment
Option, or may even result in the payment of an amount less than the Net
Purchase Payment allocated to or the portion of Contract Value transferred to
the Guarantee Period. Similarly, if the Guaranteed Interest Rate for the
selected Guarantee Period is higher than the Guaranteed Interest Rate currently
being offered for new Guarantee Periods of a duration equal to the balance of
the selected Guarantee Period as of the date that the Market Value Adjustment is
applied, then the application of the Market Value Adjustment will result in the
payment, upon surrender, withdrawal, transfer or application of amounts to an
Annuity Payment Option, of an amount greater than the Guarantee Amount (or
portion thereof) being surrendered, withdrawn, transferred or applied to an
Annuity Payment Option.
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option, by
the Market Value Adjustment Factor. The Market Value Adjustment Factor is
calculated as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Market Value Adjustment = Amount multiplied by 3 1 1+A 2 N/12 -1 4
1+B
</TABLE>
where:
"Amount" is the amount being surrendered, withdrawn, transferred or
applied to an Annuity Payment Option less any applicable annual
administration fees or transfer processing fees;
"a" is the Guaranteed Interest Rate currently being credited to the
"Amount";
"b" is the Guaranteed Interest Rate that is currently being offered
for a Guarantee Period of duration equal to the time remaining to the
expiration of the Guarantee Period for the Guarantee Amount from which the
"Amount" is taken. Where the time remaining to the expiration of the
Guarantee Period is not 1, 3, 5, 7, or 10 years, "b" is the rate found by
linear interpolation of the rate for the Guarantee Period having the
duration closest to the time remaining or, if the time remaining is less
than 1 year, "b" is the rate for a 1 year period; and
"n" is the number of complete months remaining before the expiration
of the Guarantee Period for the Guarantee Amount from which the "Amount" is
taken.
Examples of computing the Market Value Adjustment are set forth in Appendix A.
DESCRIPTION OF THE CONTRACT
PURCHASING A CONTRACT
A prospective Owner may purchase a Contract by submitting an application
through a licensed agent of the Company who is also a representative of a
broker-dealer having a selling agreement with CNA Investor Services, Inc.
("CNA/ISI"), the principal underwriter for the Contracts. The maximum Age for
Owners on
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<PAGE> 22
the Contract Effective Date is 85. An initial purchase payment must be delivered
to the Service Center along with the Owner's application. The minimum initial
purchase payment is $2,000. The minimum additional purchase payment the Company
will accept is $100. Unless the Company gives its prior approval, it will not
accept an initial purchase payment in excess of $500,000 and reserves the right
not to accept any purchase payment for any reason. The Company will send Owners
a confirmation notice upon receipt and acceptance of the Owner's purchase
payment.
CANCELING THE CONTRACT
Owners may cancel the Contract during the Cancellation Period, which is the
10-day period after an Owner receives the Contract. Some states may require a
longer Cancellation Period. To cancel the Contract, the Owner must mail or
deliver the Contract to the Service Center or to the agent who sold it. The
Company will refund the Contract Value plus any fees or charges deducted except
for the mortality and expense risk charge and the administration charge. If the
Owner purchased a Contract in a state that requires the return of purchase
payments during the Cancellation Period and the Owner chooses to exercise the
cancellation right, the Company will return the purchase payments.
CREDITING AND ALLOCATING PURCHASE PAYMENTS
If the application for a Contract is properly completed and is accompanied
by all the information necessary to process it, including payment of the initial
purchase payment, the initial Net Purchase Payment will be allocated, as
designated by the Owner, to one or more of the Subaccounts or to one or more
Guarantee Periods within two business days of receipt of such Net Purchase
Payment by the Company at the Service Center. If the application is not properly
completed, the Company reserves the right to retain the Net Purchase Payment for
up to five business days while it attempts to complete the application. If the
application cannot be made complete within five business days, the applicant
will be informed of the reasons for the delay and the initial purchase payment
will be returned immediately unless the applicant specifically consents to the
Company retaining the initial purchase payment until the application is made
complete. The initial Net Purchase Payment will then be credited within two
business days after receipt of a properly completed application. The Company
will credit additional Net Purchase Payments that are accepted by the Company as
of the end of the Valuation Period during which the Payment was received at the
Service Center.
The initial Net Purchase Payment is allocated among the Subaccounts and
Guarantee Periods as specified on the application, unless the Contract is issued
in a state that requires the return of purchase payments during the Cancellation
Period. In those states, any portion of the initial Net Purchase Payment
allocated to the Guaranteed Interest Option will be allocated to that option
upon receipt; and any portion of the initial Net Purchase Payment allocated to
the Subaccounts will be allocated to the Money Market Subaccount for a period
equal to the number of days in the Cancellation Period. At the expiration of
this period, such portion of the Net Purchase Payment, as adjusted to reflect
the investment performance of the Money Market Subaccount during this period, is
then allocated to the Subaccounts as described above.
Owners may allocate Net Purchase Payments among any or all Subaccounts or
Guarantee Periods available. If an Owner elects to invest in a particular
Subaccount or Guarantee Period, at least 1% of the Net Purchase Payment must be
allocated to that Subaccount or Guarantee Period. All percentage allocations
must be in whole numbers. The minimum amount that may be allocated to any
Guarantee Period is $500. The Company allocates any additional Net Purchase
Payments among the Subaccounts and the Guaranteed Interest Option in accordance
with the allocation schedule in effect when such Net Purchase Payment is
received at the Service Center unless it is accompanied by Written Notice
directing a different allocation.
VARIABLE CONTRACT VALUE
SUBACCOUNT VALUE. The Variable Contract Value is the sum of all Subaccount
Values and therefore reflects the investment experience of the Subaccounts to
which it is allocated. The Subaccount Value for any Subaccount as of the
Contract Effective Date is equal to the amount of the initial Net Purchase
Payment allocated to that Subaccount. On subsequent Valuation Days prior to the
Annuity Date, the Subaccount Value is equal to that part of any Net Purchase
Payment allocated to the Subaccount and any amount transferred to
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<PAGE> 23
that Subaccount, adjusted by interest income, dividends, net capital gains or
losses, realized or unrealized, and decreased by withdrawals (including any
applicable surrender charges and any applicable purchase payment tax charge) and
any amounts transferred out of that Subaccount.
ACCUMULATION UNITS. Net Purchase Payments allocated to a Subaccount or
amounts of Contract Value transferred to a Subaccount are converted into
Accumulation Units. For any Contract, the number of Accumulation Units credited
to a Subaccount is determined by dividing the dollar amount directed to the
Subaccount by the value of the Accumulation Unit for that Subaccount for the
Valuation Day on which the Net Purchase Payment or transferred amount is
invested in the Subaccount. Therefore, Net Purchase Payments allocated to or
amounts transferred to a Subaccount under a Contract increase the number of
Accumulation Units of that Subaccount credited to the Contract.
Decreases in Subaccount Value under a Contract are effected by the
cancellation of Accumulation Units of a Subaccount. Therefore, surrenders,
withdrawals, transfers out of a Subaccount, payment of a death benefit, the
application of Variable Contract Value to an Annuity Payment Option on the
Annuity Date, and the deduction of the annual administration fee all result in
the cancellation of an appropriate number of Accumulation Units of one or more
Subaccounts. Accumulation Units are canceled as of the end of the Valuation
Period in which the Company received Written Notice regarding the event.
The Accumulation Unit value for each Subaccount was arbitrarily set
initially at $10 when the Subaccount began operations. Thereafter, the
Accumulation Unit value at the end of every Valuation Day equals the
Accumulation Unit value at the end of the preceding Valuation Day multiplied by
the Net Investment Factor (described below). The Subaccount Value for a Contract
is determined on any day by multiplying the number of Accumulation Units
attributable to the Contract in that Subaccount by the Accumulation Unit value
for that Subaccount.
THE NET INVESTMENT FACTOR. The Net Investment Factor is an index applied to
measure the investment performance of a Subaccount from one Valuation Period to
the next. For each Subaccount, the Net Investment Factor reflects the investment
experience of the Fund in which that Subaccount invests and the charges assessed
against that Subaccount for a Valuation Period. The Net Investment Factor is
calculated by dividing (1) by (2) and subtracting (3) from the result, where:
(1) is the result of:
a. the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the current Valuation
Period; plus
b. the per share amount of any dividend or capital gain
distributions made by the Fund held in the Subaccount, if the
"ex-dividend" date occurs during the current Valuation Period;
plus or minus
c. a per share charge or credit for any taxes reserved for, which
is determined by the Company to have resulted from the
operations of the Subaccount.
(2) is the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the last prior Valuation Period.
(3) is a daily factor representing the mortality and expense risk
charge and the administration charge deducted from the Subaccount, adjusted
for the number of days in the Valuation Period.
TRANSFERS
GENERAL. Prior to the Annuity Date and after the Cancellation Period, by
Written Notice, an Owner may transfer all or part of any Subaccount Value to
another Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, or transfer all or part of any Guarantee Amount to any
Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, subject to the following restrictions. The minimum transfer
amount is $500 or the entire Subaccount Value or Guarantee Amount, if less. The
minimum Subaccount Value or Guarantee Amount that may remain following a
transfer is $500. A transfer
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<PAGE> 24
request that would reduce any Subaccount Value or Guarantee Amount below $500 is
treated as a transfer request for the entire Subaccount Value or Guarantee
Amount. Only four transfers may be made per Contract Year from all or part of
any Guarantee Amount. The first 12 transfers during each Contract Year are free.
The Company assesses a transfer processing fee of $25 for each transfer in
excess of 12 during a Contract Year. The transfer processing fee is deducted
from the amount being transferred. Each Written Notice of transfer is considered
one transfer regardless of how many Subaccounts or Guarantee Periods are
affected by the transfer.
DOLLAR-COST AVERAGING FACILITY. If elected in the application or at any
time thereafter prior to the Annuity Date by Written Notice, an Owner may
systematically transfer (on a monthly, quarterly, semi-annual or annual basis)
specified dollar amounts from the Money Market Subaccount to other Subaccounts.
This is known as the "dollar-cost averaging" method of investment. The
fixed-dollar amount purchases more Accumulation Units of a Subaccount when their
value is lower and fewer units when their value is higher. Over time, the cost
per unit averages out to be less than if all purchases of Units had been made at
the highest value and greater than if all purchases had been made at the lowest
value. The dollar-cost averaging method of investment reduces the risk of making
purchases only when the price of Accumulation Units is high. It does not assure
a profit or protect against a loss in declining markets.
Owners may only elect to use the dollar-cost averaging facility if their
Money Market Subaccount Value is at least $1,000 at the time of the election.
The minimum transfer amount under the facility is $100 per month (or the
equivalent). If dollar-cost averaging transfers are to be made to more than one
Subaccount, then the Owner must indicate the dollar amount of the transfer to be
made to each. At least $50 must be designated to each Subaccount.
Transfers under the dollar-cost averaging facility are made as of the same
calendar day each month. If this calendar day is not a Valuation Day, transfers
are made as of the next Valuation Day. Once elected, transfers under the
dollar-cost averaging facility continue until the Money Market Subaccount Value
is depleted, the Annuity Date occurs or until the Owner cancels the election by
Written Notice at least seven days in advance of the next transfer date.
Alternatively, Owners may specify in advance a date for transfers under the
facility to cease. There is no additional charge for using the dollar-cost
averaging facility. Transfers under the facility do not count towards the 12
transfers permitted without a transfer processing fee in any Contract Year. The
Company reserves the right to discontinue offering the dollar-cost averaging
facility at any time and for any reason or to change its features.
AUTOMATIC SUBACCOUNT VALUE REBALANCING. If elected in the application or
requested by Written Notice at any time thereafter prior to the Annuity Date, an
Owner may instruct the Company to automatically transfer (on a quarterly,
semi-annual or annual basis) Variable Contract Value between and among specified
Subaccounts in order to achieve a particular percentage allocation of Variable
Contract Value among such Subaccounts ("automatic Subaccount Value
rebalancing"). Such percentage allocations must be in whole numbers. Once
elected, automatic Subaccount Value rebalancing begins on the first Valuation
Day of the next calendar quarter or other period (or, if later, the next
calendar quarter or other period after the expiration of the Cancellation
Period).
Owners may stop automatic Subaccount Value rebalancing at any time by
Written Notice at least seven calendar days before the first Valuation Day in a
new period. Owners may specify allocations between and among as many Subaccounts
as are available at the time automatic Subaccount Value rebalancing is elected.
Once automatic Subaccount Value rebalancing has been elected, any subsequent
allocation instructions that differ from the then-current rebalancing allocation
instructions are treated as a request to change the automatic Subaccount Value
rebalancing allocation. Owners may change automatic Subaccount Value rebalancing
allocations at any time. Allocation changes will take effect as of the Valuation
Day that instructions are received at the Service Center. Once automatic
Subaccount Value rebalancing is in effect, an Owner may only transfer Subaccount
Value among or between Subaccounts by changing the automatic Subaccount Value
rebalancing allocation instructions. Changes to automatic Subaccount Value
rebalancing must be made by Written Notice.
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<PAGE> 25
There is no additional charge for automatic Subaccount Value rebalancing
and rebalancing transfers do not count as one the 12 transfers available without
a transfer processing fee during any Contract Year. If automatic Subaccount
Value rebalancing is elected at the same time as the dollar-cost averaging
facility or when the dollar-cost averaging facility is being utilized, automatic
Subaccount Value rebalancing will be postponed until the first Valuation Day in
the calendar quarter or other period following the termination of dollar-cost
averaging facility. The Company reserves the right to discontinue offering
automatic Subaccount Value rebalancing at any time for any reason or to change
its features.
WITHDRAWALS
GENERAL. Prior to the Annuity Date and after the Cancellation Period, an
Owner may withdraw part of the Surrender Value, subject to certain limitations.
Each withdrawal must be requested by Written Notice. The minimum withdrawal
amount is $500. The maximum withdrawal is the amount that would leave a minimum
Surrender Value of $1,000. A withdrawal request that would reduce any Subaccount
Value or Guarantee Amount below $500 will be treated as a request for a
withdrawal of all of that Subaccount Value or Guarantee Amount.
The Company withdraws the amount requested from the Contract Value as of
the day that the Company receives an Owner's Written Notice, and sends the Owner
that amount. The Company will then deduct any applicable surrender charge and
any applicable purchase payment tax charge from the remaining Contract Value. If
the withdrawal is requested from a Guarantee Amount, the Company deducts any
applicable Market Value Adjustment from, or adds any applicable Market Value
Adjustment to, remaining Contract Value. A deduction of a Market Value
Adjustment from Contract Value may result in the payment of an amount which,
when added to any remaining Guarantee Amount and amounts previously withdrawn or
transferred, is less than the amount allocated or transferred to a Guarantee
Period to create that Guarantee Amount.
A Written Notice of withdrawal must specify the amount to be withdrawn from
each Subaccount or Guarantee Amount. If the Written Notice does not specify this
information, or if any Subaccount Value or Guarantee Amount is inadequate to
comply with the request, the Company will make the withdrawal based on the
proportion that each Subaccount Value and each Guarantee Amount bears to the
Contract Value as of the day of the withdrawal.
SYSTEMATIC WITHDRAWALS. If elected in the application or requested at any
time thereafter prior to the Annuity Date by Written Notice, an Owner may elect
to receive periodic withdrawals under the Company's systematic withdrawal plan.
Under the systematic withdrawal plan, the Company will make withdrawals (on a
monthly, quarterly, semi-annual or annual basis) from Subaccounts specified by
the Owner. Systematic withdrawals must be at least $100 each and may only be
made from Variable Contract Value. Withdrawals under the systematic withdrawal
plan may only be made from Subaccounts having $1,000 or more of Subaccount Value
at the time of election. The systematic withdrawal plan is not available to
Owners using the dollar-cost averaging facility or automatic Subaccount Value
rebalancing.
The Company makes systematic withdrawals on the following basis: (1) as a
specified dollar amount, or (2) as a specified whole percent of Subaccount
Value.
Participation in the systematic withdrawal plan terminates on the earliest
of the following events: (1) the Subaccount Value from which withdrawals are
being made becomes zero, (2) a termination date specified by the Owner is
reached, or (3) the Owner requests that his or her participation in the plan
cease. Systematic withdrawals being made in order to meet the required minimum
distribution under the Code or to make substantially equal payments as required
under the Code will continue even though a surrender charge is deducted.
TAX CONSEQUENCES OF WITHDRAWALS. Consult your tax adviser regarding the tax
consequences associated with making withdrawals. A withdrawal made before the
taxpayer reaches Age 59 1/2, including systematic withdrawals, may result in
imposition of a penalty tax of 10% of the taxable portion withdrawn. See
"FEDERAL TAX CONSIDERATIONS" for more details.
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<PAGE> 26
SURRENDERS
An Owner may surrender the Contract for its Surrender Value at any time
prior to the Annuity Date. A Contract's Surrender Value fluctuates daily as a
function of the investment experience of the Subaccounts in which an Owner is
invested. The Company does not guarantee any minimum Surrender Value for amounts
invested in the Subaccounts. Likewise, the Company does not guarantee any
minimum Surrender Value for Guarantee Amounts surrendered, withdrawn,
transferred or applied to an Annuity Payment Option before the 30-day period
prior to the expiration of a Guarantee Period.
An Owner may elect to have the Surrender Value paid in a single sum or
under an Annuity Payment Option. The Surrender Value will be determined as of
the date the Company receives the Written Notice for surrender and the Contract
at the Service Center.
Consult your tax adviser regarding the tax consequences of a Surrender. A
Surrender made before age 59 1/2 may result in the imposition of a penalty tax
of 10% of the taxable portion of the Surrender Value. See "FEDERAL TAX
CONSIDERATIONS" for more details.
DEATH BENEFITS
DEATH BENEFITS ON OR AFTER THE ANNUITY DATE. If an Owner dies on or after
the Annuity Date, any surviving joint Owner becomes the sole Owner. If there is
no surviving Owner, any successor Owner becomes the new Owner. If there is no
surviving or successor Owner, the Payee becomes the new Owner. If an Annuitant
or an Owner dies on or after the Annuity Date, the remaining undistributed
portion, if any, of the Contract Value will be distributed at least as rapidly
as under the method of distribution being used as of the date of such death.
Under some Annuity Payment Options, there will be no death benefit.
DEATH BENEFITS WHEN THE OWNER DIES BEFORE THE ANNUITY DATE. If any Owner
dies prior to the Annuity Date, any surviving joint Owner becomes the new sole
Owner. If there is no surviving joint Owner, any successor Owner becomes the new
Owner and if there is no successor Owner the Annuitant becomes the new Owner
unless the deceased Owner was also the Annuitant. If the sole deceased Owner was
also the Annuitant, then the provisions relating to the death of the Annuitant
(described below) will govern unless the deceased Owner was one of two joint
Annuitants, in which event the surviving Annuitant becomes the new Owner.
The following options are available to new Owners:
1. to receive the Adjusted Contract Value in a single lump sum within
five years of the deceased Owner's death; or
2. elect to receive the Adjusted Contract Value paid out under an
Annuity Payment Option provided that: (a) Annuity Payments begin within one
year of the deceased Owner's death, and (b) Annuity Payments are made in
substantially equal installments over the life of the new Owner or over a
period not greater than the life expectancy of the new Owner; or
3. if the new Owner is the spouse of the deceased Owner, he or she may
by Written Notice within one year of the Owner's death, elect to continue
the Contract as the new Owner. If the spouse so elects, all of his or her
rights as a Beneficiary cease and if the deceased Owner was also the sole
Annuitant and appointed no Contingent Annuitant, he or she will become the
Annuitant. The spouse will be deemed to have made the election to continue
the Contract if he or she makes no election before the expiration of the
one year period or if he or she makes any purchase payments under the
Contract.
With regard to new Owners who are not the spouse of the deceased Owner: (a)
1 and 2 apply even if the Annuitant or Contingent Annuitant is alive at the time
of the deceased Owner's death, (b) if the new Owner is not a natural person,
only option 1 is available, (c) if no election is made within one year of the
deceased Owner's death, option 1 is deemed to have been elected.
Adjusted Contract Value is computed as of the date that the Company
receives Due Proof of Death of the Owner. Payments under this provision are in
full settlement of all of the Company's liability under the Contract.
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<PAGE> 27
DEATH BENEFITS WHEN THE ANNUITANT DIES BEFORE THE ANNUITY DATE. If the
Annuitant dies before the Annuity Date while the Owner is still living, any
Contingent Annuitant will become the Annuitant. If the Annuitant dies before the
Annuity Date and no Contingent Annuitant has been named, the Company will pay
the death benefit described below to the Beneficiary. If there is no surviving
Beneficiary, the Company will pay the death benefit to any Contingent
Beneficiary. If there is no surviving Contingent Beneficiary, the Company will
immediately pay the death benefit to the Owner's estate in a lump sum.
If the Annuitant who is also an Owner dies or if the Annuitant dies and the
Owner is not a natural person, a Beneficiary (or a Contingent Beneficiary):
1. will receive the death benefit in a single lump sum within 5 years
of the deceased Annuitant's death; or
2. may elect to receive the death benefit paid out under an Annuity
Payment Option provided that: (a) Annuity Payments begin within 1 year of
the deceased Annuitant's death, and (b) Annuity Payments are made in
substantially equal installments over the life of the Beneficiary or over a
period not greater than the life expectancy of the Beneficiary; or
3. if the Beneficiary is the spouse of the deceased Annuitant, he or
she may by Written Notice within one year of the Annuitant's death, elect
to continue the Contract as the new Owner. If the spouse so elects, all his
or her rights as a Beneficiary cease and if the deceased Annuitant was also
the sole Annuitant and appointed no Contingent Annuitant, he or she will
become the Annuitant. The spouse will be deemed to have made the election
to continue the Contract if he or she makes no election before the
expiration of the one year period or if he or she makes any purchase
payments under the Contract.
THE DEATH BENEFIT. If the Annuitant is Age 75 or younger, the death benefit
is an amount equal to the greatest of:
1. aggregate purchase payments made less any withdrawals (including
the applicable surrender charges, purchase payment tax charge and Market
Value Adjustments) as of the date that the Company receives Due Proof of
Death of the Annuitant; or
2. the Contract Value as of the date that the Company receives Due
Proof of Death of the Annuitant; or
3. the minimum death benefit described below;
less any applicable purchase payment tax charge on the date that the death
benefit is paid.
The minimum death benefit is the death benefit floor amount as of the date
of the Annuitant's death (a) adjusted, for each withdrawal made since the most
recent reset of the death benefit floor amount, multiplying that amount by the
product of all ratios of the Contract Value immediately after a withdrawal to
the Contract Value immediately before such withdrawal (b) plus any purchase
payments made since the most recent reset of the death benefit floor amount.
The death benefit floor amount is the largest Contract Value attained on
any prior death benefit floor computation anniversary. Death benefit floor
computation anniversaries are the 5th Contract Anniversary and each subsequent
5th Contract Anniversary (i.e., the 10th Contract Anniversary, the 15th Contract
Anniversary, etc.) prior to the Annuitant's Age 76. Therefore, the death benefit
floor amount is reset when, on a death benefit floor computation anniversary,
Contract Value exceeds the current death benefit floor amount.
If the Annuitant is Age 76 or older, the death benefit is an amount equal
to the greater of 1 or 2 above.
Examples of the computation of the death benefit are shown in Appendix B.
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PAYMENTS BY THE COMPANY
The Company generally makes payments of withdrawals, surrenders, death
benefits, or any Annuity Payments within seven days of receipt of all applicable
Written Notices and/or Due Proofs of Death. However, the Company may postpone
such payments for any of the following reasons:
1. when the New York Stock Exchange ("NYSE") is closed for trading
other than customary holiday or weekend closing, or trading on the NYSE is
restricted, as determined by the SEC; or
2. when the SEC by order permits a postponement for the protection of
Owners; or
3. when the SEC determines that an emergency exists that would make
the disposal of securities held in the Variable Account or the
determination of their value not reasonably practicable.
If a recent check or draft has been submitted, the Company has the right to
defer payment of surrenders, withdrawals, death benefits, or Annuity Payments
until the check or draft has been honored.
The Company may defer payment of any withdrawal, surrender, or transfer of
Guaranteed Interest Option Value up to six months after it receives an Owner's
Written Notice. The Company pays interest on the amount of any payment that is
deferred.
TELEPHONE TRANSACTION PRIVILEGES
If an Owner has elected this privilege in a form provided by the Company,
an Owner may make transfers or change allocation instructions by telephoning the
Service Center. A telephone authorization form received by the Company at the
Service Center is valid until it is rescinded or revoked by Written Notice or
until a subsequently dated form signed by the Owner is received at the Service
Center. The Company will send Owners a written confirmation of all transfers and
allocation changes made pursuant to telephone instructions.
The Service Center requires a form of personal identification prior to
acting on instructions received by telephone and also may tape record
instructions received by phone. If the Company follows these procedures, it is
not liable for any losses due to unauthorized or fraudulent transactions. The
Company reserves the right to suspend telephone transaction privileges at any
time for any reason.
CONTRACT CHARGES AND FEES
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
GENERAL. No sales charge is deducted from purchase payments at the time
that such payments are made. However, within certain time limits described
below, a surrender charge is deducted upon any withdrawal or surrender. A
surrender charge is assessed on Cash Value applied to an Annuity Payment Option
during the first five Contract Years. No surrender charge is assessed on
Contract Value applied to an Annuity Payment Option after the fifth Contract
Year. If on the Annuity Date, however, the Payee elects (or the Owner previously
elected) to receive a lump sum, this sum will equal the Surrender Value on such
date.
In the event that surrender charges are not sufficient to cover sales
expenses, such expenses will be borne by the Company. Conversely, if the revenue
from such charges exceeds such expenses, the excess of revenues from such
charges over expenses will be retained by the Company. The Company does not
currently believe that the surrender charges deducted will cover the expected
costs of distributing the Contracts. Any shortfall will be made up from the
Company's general assets, which may include amounts derived from the mortality
and expense risk charge.
CHARGE FOR SURRENDER OR WITHDRAWALS. The surrender charge is equal to the
percentage of each purchase payment surrendered or withdrawn (or applied to an
Annuity Payment Option during the first five Contract Years) as shown in the
table below. The surrender charge is separately calculated and applied to each
purchase payment at the time that the purchase payment is surrendered or
withdrawn. No surrender charge applies to the Contract Value in excess of
aggregate purchase payments (less prior withdrawals of the payments). The
surrender charge is calculated using the assumption that purchase payments are
surrendered
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<PAGE> 29
or withdrawn before Contract Value in excess of aggregate purchase payments
(less prior withdrawals of purchase payments) and that purchase payments are
withdrawn on a first-in-first-out basis.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
SURRENDER CHARGE
NUMBER OF FULL YEARS AS A PERCENTAGE
ELAPSED BETWEEN DATE OF OF PURCHASE
RECEIPT OF PURCHASE PAYMENT PAYMENT WITHDRAWN
AND DATE OF SURRENDER OF WITHDRAWAL OR SURRENDERED
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
0 7%
1 7%
2 6%
3 5%
4 4%
5+ 0%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
WITHDRAWALS. With regard to all withdrawals, the Company withdraws the
amount requested from the Contract Value as of the day that it receives the
Written Notice regarding the withdrawal and sends the Owner that amount. The
Company then deducts any surrender charge and any applicable purchase payment
tax charge from the remaining Contract Value. If the withdrawal is requested
from a Guarantee Amount, the Company deducts any applicable Market Value
Adjustment from, or adds any applicable Market Value Adjustment to, remaining
Contract Value. For the purpose of computing the surrender charge, the deduction
of the Market Value Adjustment, purchase payment tax charge and surrender charge
is considered to be made from Contract Value in excess of aggregate purchase
payments (less prior withdrawals of purchase payments).
AMOUNTS NOT SUBJECT TO A SURRENDER CHARGE. Each Contract Year after the
first Contract Year, an Owner may withdraw an amount equal to 15% of the
aggregate purchase payments less prior withdrawals of purchase payments as of
the first Valuation Day of that Contract Year without incurring a surrender
charge. The Company reserves the right to limit the number of such "free"
withdrawals in any Contract Year.
WAIVER OF SURRENDER CHARGE. The Company will waive the surrender charge in
the event that the Owner: (1) enters an "eligible nursing home," as defined in
the Contract, for a period of at least 90 days, (2) is diagnosed as having a
"terminal medical condition," as defined in the Contract, or (3) is less than
age 65 and sustains a "permanent and total disability," as defined in the
Contract. The Company reserves the right to require written proof of terminal
medical condition or permanent and total disability satisfactory to it and to
require an examination by a licensed physician of its choice. The surrender
charge waiver is not available in all states due to applicable insurance laws in
effect in various states.
ANNUAL ADMINISTRATION FEE
An annual administration fee is deducted as of each Contract Anniversary
for the prior Contract Year. The Company also deducts this fee for the current
Contract Year when determining the Surrender Value prior to the end of a
Contract Year and on the Annuity Date. If Contract Value is $50,000 or less at
the time of the fee deduction, then the annual administration fee is $30. The
fee is zero for Contracts where the Contract Value exceeds $50,000 at the time
the fee would be deducted. This fee is to cover a portion of the Company's
administrative expenses related to the Contracts. The Company does not expect to
make a profit from this fee.
The annual administration fee is assessed against Subaccount Values and
Guarantee Amounts based on the proportion that each bears to the Contract Value.
Where the fee is deducted from Subaccount Values, the Company will cancel an
appropriate number of Accumulation Units. Where the fee is obtained from a
Guarantee Amount, the Company will reduce the Guarantee Amount by the amount of
the fee.
TRANSFER PROCESSING FEE
Prior to the Annuity Date, the Company permits 12 free transfers per
Contract Year among and between the Subaccounts and the Guarantee Periods. For
each additional transfer, the Company charges $25 at the
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<PAGE> 30
time each such transfer is processed. The fee is deducted from the amount being
transferred. The Company does not expect to make a profit from this fee.
TAXES ON PURCHASE PAYMENTS
Certain states and municipalities impose a tax on the Company in connection
with the receipt of annuity considerations. This tax generally can range from 0%
to 3.5% of such considerations and generally varies based on the Annuitant's
state of residence. Taxes on annuity considerations are generally incurred by
the Company as of the Annuity Date based on the Contract Value on that date, and
the Company deducts the charge for taxes on annuity considerations from the
Contract Value as of the Annuity Date. Some jurisdictions impose a tax on
annuity considerations at the time such considerations are made. In those
jurisdictions, the Company's current practice is to pay the tax on annuity
considerations and then deduct the charge for these taxes from the Contract
Value upon surrender, payment of the death benefit, or upon the Annuity Date.
The Company reserves the right to deduct any state and local taxes on annuity
considerations from the Contract Value at the time such tax is due.
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a daily charge from the assets of the Variable Account
to compensate it for mortality and expense risks that it assumes under the
Contract. The daily charge is at the rate of 0.003446% (approximately equivalent
to an effective annual rate of 1.25%) of the net assets of the Variable Account.
Approximately .70% of this annual charge is for the assumption of mortality risk
and .55% is for the assumption of expense risk. If the mortality and expense
risk charge is insufficient to cover the actual cost of the mortality and
expense risks undertaken by the Company, the Company will bear the shortfall.
Conversely, if the charge proves more than sufficient, the excess will be profit
to the Company and will be available for any proper purpose including, among
other things, payment of expenses incurred in selling the Contracts.
The mortality risk that the Company assumes is the risk that Annuitants, as
a group, will live for a longer period of time than the Company estimated when
it established the guaranteed Annuity Payment rates in the Contract. Because of
these guarantees, each Payee is assured that his or her longevity will not have
an adverse effect on the Annuity Payments that he or she receives under Annuity
Payment Options based on life contingencies. The Company also assumes a
mortality risk because the Contracts guarantee a death benefit if the Annuitant
dies before the Annuity Date. The expense risk that the Company assumes is the
risk that administration charge, annual administration fee and the transfer
processing fee may be insufficient to cover the actual expenses of administering
the Contracts.
ADMINISTRATION CHARGE
The Company deducts a daily administration charge from the assets of the
Variable Account to compensate it for a portion of the expenses it incurs in
administering the Contracts. The daily charge is at a rate of 0.000411%
(approximately equivalent to an effective annual rate of 0.15%) of the net
assets of the Variable Account. The Company does not expect to make a profit
from this charge.
FUND EXPENSES
The investment performance of each Fund reflects the management fee that it
pays to its investment manager or adviser as well as other operating expenses
that it incurs. Investment management fees are generally daily fees computed as
a percent of a Fund's average daily net assets at an annual rate. Please read
the prospectus for each Fund for complete details.
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
At the present time, the Company makes no charge to the Variable Account
for any federal, state, or local taxes that the Company incurs which may be
attributable to the Variable Account or the Contracts. The Company, however,
reserves the right in the future to make a charge for any such tax or other
economic burden resulting from the application of the tax laws that it
determines to be properly attributable to the Subaccounts or to the Contracts.
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SELECTING AN ANNUITY PAYMENT OPTION
ANNUITY DATE
The Owner selects the Annuity Date in the application. For Non-Qualified
Contracts, the Annuity Date must be no later than the later of the Contract
Anniversary following the Annuitant's Age 99. For Qualified Contracts, the
Annuity Date must be no later than April 1 of the calendar year following the
calendar year in which the Owner attains age 70 1/2. An Owner may change the
Annuity Date by Written Notice, subject to the following limitations:
1. Written Notice is received at least 30 days before the current
Annuity Date; and
2. the requested new Annuity Date must be at least 30 days after the
Company receives Written Notice.
ANNUITY PAYMENT DATES
The Company computes the first Annuity Payment as of the Annuity Date and
makes the first Annuity Payment as of the initial Annuity Payment Date selected
by the Owner. The initial Annuity Payment Date is the Annuity Date unless the
Annuity Date is the 29th, 30th, or 31st day of a calendar month, in which event,
the Owner must select a different date. All subsequent Annuity Payments are
computed and payable as of Annuity Payment Dates. These dates will be the same
day of the month as the initial Annuity Payment Date. Monthly Annuity Payments
will be computed and payable as of the same day each month as the initial
Annuity Payment Date. Quarterly Annuity Payments will be computed and payable as
of the same day in the third, sixth, ninth, and twelfth month following the
initial Annuity Payment Date and on the same days of such months in each
successive Contract Year. Semi-annual Annuity Payment Dates will be computed and
payable as of the same day in the sixth and twelfth month following the initial
Annuity Payment Date and on the same days of such months in each successive
Contract Year. Annual Annuity Payments will be computed and payable as of the
same day in each Contract Year as the initial Annuity Payment Date. The
frequency of Annuity Payments selected is shown in the Contract. In the event
that the Owner does not select a payment frequency, payments will be made
monthly.
ELECTION AND CHANGES OF ANNUITY PAYMENT OPTIONS
On the Annuity Date, the Surrender Value or Adjusted Contract Value is
applied under an Annuity Payment Option, unless the Owner elects to receive the
Surrender Value in a lump sum. If the Annuity Date falls during the first five
Contract Years, Surrender Value is applied under an Annuity Payment Option. If
the Annuity Date falls after the fifth Contract Anniversary, Adjusted Contract
Value is applied under an Annuity Payment Option. The Annuity Payment Option
specifies the type of annuity to be paid and determines how long the annuity
will be paid, the frequency, and the amount of each payment. The Owner may elect
or change the Annuity Payment Option by Written Notice at any time prior to the
Annuity Date. The Owner may elect to apply any portion of the Surrender Value or
Adjusted Contract Value to provide either Variable Annuity Payments or Fixed
Annuity Payments or a combination of both. If Variable Annuity Payments are
selected, the Owner must also select the Subaccounts to which Surrender Value or
Adjusted Contract Value will be applied. If no selection has been made by the
Annuity Date, Surrender Value or Adjusted Contract Value from any Guaranteed
Interest Option Value will be applied to purchase Fixed Annuity Payments and
Surrender Value or Adjusted Contract Value from each Subaccount Value will be
applied to purchase Variable Annuity Payments from that Subaccount. If no
Annuity Payment Option has been selected by the Annuity Date, Surrender Value or
Adjusted Contract Value will be applied under Annuity Payment Option 5 (Life
Annuity with Period Certain) with a designated period of 10 years. Any death
benefit applied to purchase Annuity Payments is allocated among the Subaccounts
and/or the Guaranteed Interest Option as instructed by the Beneficiary unless
the Owner previously made the foregoing elections.
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ANNUITY PAYMENTS
FIXED ANNUITY PAYMENTS. Fixed Annuity Payments are periodic payments from
the Company to the designated Payee, the amount of which is fixed and guaranteed
by the Company. The dollar amount of each Fixed Annuity Payment depends on the
form and duration of the Annuity Payment Option chosen, the Age of the
Annuitant, the sex of the Annuitant (if applicable), the amount of Adjusted
Contract Value applied to purchase the Fixed Annuity Payments and, for Annuity
Payment Options 3-6, the applicable annuity purchase rates. The annuity purchase
rates in the Contract are based on a Guaranteed Interest Rate of not less than
3.0%. The Company may, in its sole discretion, make Fixed Annuity Payments in an
amount based on a higher interest rate. If Fixed Annuity Payments are computed
based on an interest rate in excess of the minimum Guaranteed Interest Rate,
then, for the period of the higher rate, the dollar amount of such Fixed Annuity
Payments will be greater than the dollar amount based on 3.0%. The Company
guarantees that any higher rate will be in effect for at least 12 months.
Except for Annuity Payment Options 1 and 2, the dollar amount of the first
Fixed Annuity Payment is determined by dividing the dollar amount of Adjusted
Contract Value being applied to purchase Fixed Annuity Payments by $1,000 and
multiplying the result by the annuity purchase rate in the Contract for the
selected Annuity Payment Option. Subsequent Fixed Annuity Payments are of the
same dollar amount unless the Company makes payments based on an interest rate
different from that used to compute the first payment.
VARIABLE ANNUITY PAYMENTS. Variable Annuity Payments are periodic payments
from the Company to the designated Payee, the amount of which varies from one
Annuity Payment Date to the next as a function of the net investment experience
of the Subaccounts selected by the Owner or Payee to support such payments. The
dollar amount of the first Variable Annuity Payment is determined in the same
manner as that of a Fixed Annuity Payment. Therefore, provided that the interest
rate on which Fixed Annuity Payments are based equals the Benchmark Rate of
Return on which Variable Annuity Payments are based, for any particular amount
of Adjusted Contract Value applied to a particular Annuity Payment Option, the
dollar amount of the first Variable Annuity Payment would be the same as the
dollar amount of each Fixed Annuity Payment. Variable Annuity Payments after the
first Payment are similar to Fixed Annuity Payments except that the amount of
each Payment varies to reflect the net investment experience of the Subaccounts
selected by the Owner or Payee.
The dollar amount of the initial Variable Annuity Payment attributable to
each Subaccount is determined by dividing the dollar amount of the Adjusted
Contract Value to be allocated to that Subaccount on the Annuity Date by $1,000
and multiplying the result by the annuity purchase rate in the Contract for the
selected Annuity Payment Option. The dollar value of the total initial Variable
Annuity Payment is the sum of the initial Variable Annuity Payments attributable
to each Subaccount.
The number of Annuity Units attributable to a Subaccount is derived by
dividing the initial Variable Annuity Payment attributable to that Subaccount by
the Annuity Unit Value for that Subaccount for the Valuation Period ending on
the Annuity Date or during which the Annuity Date falls if the Valuation Period
does not end on such date. The number of Annuity Units attributable to each
Subaccount under a Contract remains fixed unless there is an exchange of Annuity
Units.
The dollar amount of each subsequent Variable Annuity Payment attributable
to each Subaccount is determined by multiplying the number of Annuity Units of
that Subaccount credited under the Contract by the Annuity Unit Value (described
below) for that Subaccount for the Valuation Period ending on the Annuity
Payment Date, or during which the Annuity Payment Date falls if the Valuation
Period does not end on such date. The dollar value of each subsequent Variable
Annuity Payment is the sum of the subsequent Variable Annuity Payments
attributable to each Subaccount.
The Annuity Unit Value of each Subaccount for any Valuation Period is equal
to (a) multiplied by (b) divided by (c) where:
(a) is the Net Investment Factor for the Valuation Period for which
the Annuity Unit Value is being calculated;
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(b) is the Annuity Unit Value for the preceding Valuation Period; and
(c) is a daily Benchmark Rate of Return factor (for the 3% benchmark
rate of return) adjusted for the number of days in the Valuation Period.
The Benchmark Rate of Return factor is equal to one plus 3%, or 1.03. The
annual factor can be translated into a daily factor of 1.00008098.
If the net investment return of the Subaccount for an Annuity Payment
period is equal to the pro-rated portion of the 3% Benchmark Rate of Return, the
Variable Annuity Payment attributable to that Subaccount for that period will
equal the Payment for the prior period. To the extent that such net investment
return exceeds an annualized rate of return of 3% for a Payment period, the
Payment for that period will be greater than the Payment for the prior period
and to the extent that such return for a period falls short of an annualized
rate of 3%, the Payment for that period will be less than the Payment for the
prior period.
EXCHANGE OF ANNUITY UNITS. By Written Notice at any time after the Annuity
Date, the Payee may exchange the dollar value of a designated number of Annuity
Units of a particular Subaccount for an equivalent dollar amount of Annuity
Units of another Subaccount. On the date of the exchange, the dollar amount of a
Variable Annuity Payment generated from the Annuity Units of either Subaccount
would be the same. Exchanges of Annuity Units are treated as transfers for the
purpose of computing any transfer processing fee.
ANNUITY PAYMENT OPTIONS
OPTION 1. INTEREST PAYMENTS. The Company holds the Adjusted Contract Value
as principal and pays interest to the Payee. The interest rate is 3% per year
compounded annually. The Company pays interest every 1 year, 6 months, 3 months
or 1 month, as specified at the time this option is selected. At the death of
the Payee, the value of the remaining payments are paid in a lump sum to the
Payee's estate. Only Fixed Annuity Payments are available under Annuity Payment
Option 1.
OPTION 2. PAYMENTS OF A SPECIFIED AMOUNT. The Company pays the Adjusted
Contract Value in equal payments every 1 year, 6 months, 3 months or 1 month.
The amount and frequency of the payments is specified at the time this option is
selected. After each payment, interest is added to the remaining amount applied
under this option that has not yet been paid. The interest rate is 3% per year
compounded annually. Payments are made to the Payee until the amount applied
under this option, including interest, is exhausted. The total of the payments
made each year must be at least 5% of the amount applied under this option. If
the Payee dies before the amount applied is exhausted, the Company pays the
value of the remaining payments in a lump sum to the Payee's estate. Only Fixed
Annuity Payments are available under Annuity Payment Option 2.
ADDITIONAL INTEREST EARNINGS. The Company may pay interest at rates in
excess of the rates guaranteed in Annuity Payment Options 1 and 2.
OPTION 3. PAYMENTS FOR A SPECIFIED PERIOD. The Company pays the lump sum in
equal payments for the number of years specified when the option is selected.
Payments are made every 1 year, 6 months, 3 months or 1 month, as specified when
the option is selected. If the Payee dies before the expiration of the specified
number of years, the Company pays the commuted value of the remaining payments
in a lump sum to the Payee's estate.
OPTION 4. LIFE ANNUITY. The Company makes monthly payments to the Payee for
as long as the Annuitant lives. UNDER THIS OPTION, A PAYEE COULD RECEIVE ONLY
ONE PAYMENT IF THE ANNUITANT DIES AFTER THE FIRST PAYMENT, TWO PAYMENTS IF THE
ANNUITANT DIES AFTER THE SECOND PAYMENT, ETC.
OPTION 5. LIFE ANNUITY WITH PERIOD CERTAIN. The Company makes monthly
payments to the Payee for as long as the Annuitant lives. At the time this
option is selected, a period certain of 5, 10, 15, or 20 years must also be
selected. If the Annuitant dies before the specified period certain ends, the
payments to the Payee will
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continue until the end of the specified period. The amount of the monthly
payments therefore depends on the period certain selected.
OPTION 6. JOINT LIFE AND SURVIVORSHIP ANNUITY. The Company makes monthly
payments to the Payee while both Annuitants are living. After the death of
either Annuitant, payments continue to the Payee for as long as the other
Annuitant lives. UNDER THIS OPTION, THE PAYEE COULD RECEIVE ONLY ONE PAYMENT IF
BOTH ANNUITANTS DIE AFTER THE FIRST PAYMENT, TWO PAYMENTS IF BOTH ANNUITANTS DIE
AFTER THE SECOND PAYMENT, ETC.
ADDITIONAL CONTRACT INFORMATION
OWNERSHIP
The Contract belongs to the Owner. An Owner may exercise all of the rights
and options described in the Contract.
Subject to more specific provisions elsewhere herein, an Owner's rights
include the right to: (1) select or change a successor Owner, (2) select or
change any Beneficiary or Contingent Beneficiary, (3) select or change the Payee
prior to the Annuity Date, (4) select or change the Annuity Payment Option, (5)
allocate Net Purchase Payments among and between the Subaccounts and Guarantee
Periods, (6) transfer Contract Value among and between the Subaccounts and
Guarantee Periods, and (7) select or change the Subaccounts on which Variable
Annuity Payments are based.
The rights of Owners of Qualified Contracts may be restricted by the terms
of a related employee benefit plan. For example, such plans may require an Owner
of a Qualified Contract to obtain the consent of his or her spouse before
exercising certain ownership rights or may restrict withdrawals. See "FEDERAL
TAX CONSIDERATIONS" for more details.
Selection of an Annuitant or Payee who is not the Owner may have tax
consequences. See "FEDERAL TAX CONSIDERATIONS" for more details.
CHANGING THE OWNER OR BENEFICIARY
Prior to the Annuity Date and after the Cancellation Period, an Owner may
transfer ownership of the Contract subject to the Company's published rules at
the time of the change. A new Owner must be less than Age 76.
At any time before a death benefit is paid, the Owner may name a new
Beneficiary by Written Notice unless an irrevocable Beneficiary has previously
been named. When an irrevocable Beneficiary has been designated, the Owner must
provide the irrevocable Beneficiary's written consent to the Company before a
new Beneficiary is designated.
These changes take effect as of the day the Written Notice is received at
the Service Center and the Company is not liable for any payments made under the
Contract prior to the effectiveness of any change. For possible tax consequences
of these changes, see "FEDERAL TAX CONSIDERATIONS."
MISSTATEMENT OF AGE OR SEX
If an Age or sex of the Annuitant given in the application is misstated,
the Company will adjust the benefits it pays under the Contract to the amount
that would have been payable at the correct Age or sex. If the Company made any
underpayments because of any such misstatement, it shall pay the amount of such
underpayment plus interest at an annual effective rate of 3%, immediately to the
Payee or Beneficiary in one sum. If the Company makes any overpayments because
of a misstatement of Age or sex, it shall deduct from current or future payments
due under the Contract, the amount of such overpayment plus interest at an
annual effective rate of 3%.
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CHANGE OF CONTRACT TERMS
Upon notice to the Owner, the Company may modify the Contract to:
1. conform the Contract or the operations of the Company or of the
Variable Account to the requirements of any law (or regulation issued by a
government agency) to which the Contract, the Company or the Variable
Account is subject;
2. assure continued qualification of the Contract as an annuity
contract or a Qualified Contract under the Code;
3. reflect a change (as permitted in the Contract) in the operation of
the Variable Account; or
4. provide additional Subaccounts and/or Guarantee Periods.
In the event of any such modification, the Company will make appropriate
endorsements to the Contract.
Only one of the Company's officers may modify the Contract or waive any of
the Company's rights or requirements under the Contract. Any modification or
waiver must be in writing. No agent may bind the Company by making any promise
not contained in the Contract.
REPORTS TO OWNERS
Prior to the Annuity Date, the Company will send each Owner a report at
least annually, or more often as required by law, indicating: the number of
Accumulation or Annuity Units credited to the Contract and the dollar value of
such units; the Contract Value, Adjusted Contract Value and Surrender Value; any
purchase payments, withdrawals, or surrenders made, death benefits paid and
charges deducted since the last report; the current interest rate applicable to
each Guarantee Amount; and any other information required by law.
The reports, which will be mailed to Owners at their last known address,
will include any information that may be required by the SEC or the insurance
supervisory official of the jurisdiction in which the Contract is delivered. The
Company will also send any other reports, notices or documents required by law
to be furnished to Owners.
MISCELLANEOUS
NON-PARTICIPATING. The Contract does not participate in the surplus or
profits of the Company and the Company does not pay dividends on the Contract.
PROTECTION OF PROCEEDS. To the extent permitted by law, no benefits payable
under the Contract to a Beneficiary or Payee are subject to the claims of an
Owner's or a Beneficiary's creditors.
DISCHARGE OF LIABILITY. Any payments made by the Company under any Annuity
Payment Option or in connection with the payment of any withdrawal, surrender or
death benefit, shall discharge the Company's liability to the extent of each
such payment.
PROOF OF AGE AND SURVIVAL. The Company reserves the right to require proof
of the Annuitant's Age prior to the Annuity Date. In addition, for life
contingent Annuity Options, the Company reserves the right to require proof of
the Annuitant's survival before any Annuity Payment Date.
CONTRACT APPLICATION. The Company issues the Contract in consideration of
the Owner's application and payment of the initial purchase payment. The entire
Contract is made up of the Contract, any attached endorsements or riders, and
the application. In the absence of fraud, the Company considers statements made
in the application to be representations and not warranties. The Company will
not use any statement in defense of a claim or to void the Contract unless it is
contained in the application. The Company will not contest the Contract.
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YIELDS AND TOTAL RETURNS
From time to time, the Company may advertise or include in sales literature
certain performance related information for the Subaccounts, including yields
and average annual total returns. Certain Funds have been in existence prior to
the commencement of the offering of the Contracts. The Company may advertise or
include in sales literature the performance of the Subaccounts that invest in
these Funds for these prior periods. The performance information of any period
prior to the commencement of the offering of the Contracts is calculated as if
the Contract had been offered during those periods, using current charges and
expenses.
Performance information discussed herein is based on historic results and
does not indicate or project future performance. For a description of the
methods used to determine yield and total return for the Subaccounts, see the
Statement of Additional Information.
Effective yields and total returns for the Subaccounts are based on the
investment performance of the corresponding Funds. The performance of a Fund in
part reflects its expenses. See the prospectuses for the Funds for Fund expense
information.
The yield of the Money Market Subaccount refers to the annualized income
generated by an investment in the Subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-day
period is generated each seven-day period over a 52-week period and is shown as
a percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Subaccount is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Subaccount other than the Money Market Subaccount refers to
the annualized income generated by an investment in the Subaccount over a
specified 30-day or one-month period. The yield is calculated by assuming that
the income generated by the investment during that 30-day or one-month period is
generated each period over a 12-month period and is shown as a percentage of the
investment.
The total return of a Subaccount refers to return quotations assuming an
investment under a Contract has been held in the Subaccount for various periods
of time including, but not limited to, a period measured from the date the
Subaccount commenced operations. Average annual total return refers to total
return quotations that are annualized based on an average return over various
periods of time.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which total return quotations are provided. Average
annual total return information shows the average annual percentage change in
the value of an investment in the Subaccount from the beginning date of the
measuring period to the end of that period. This standardized version of average
annual total return reflects all historical investment results, less all charges
and deductions applied against the Subaccount (including any surrender charge
that would apply if an Owner terminated the Contract at the end of each period
indicated, but excluding any deductions for premium taxes). When a Subaccount,
other than the Money Market Subaccount, has been in operation for one, five and
ten years respectively, the standard version average annual total return for
these periods will be provided.
In addition to the standard version described above, total return
performance information computed on two different non-standard bases may be used
in advertisements or sales literature. Average annual total return information
may be presented, computed on the same basis as described above, except
deductions will not include the surrender charge. In addition, the Company may
from time to time disclose cumulative total return for Contracts funded by
Subaccounts.
From time to time, yields, standard average annual total returns, and
non-standard total returns for the Funds may be disclosed, including such
disclosures for periods prior to the date the Variable Account commenced
operations.
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Non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed. For additional
information regarding the calculation of other performance data, please refer to
the Statement of Additional Information.
In advertising and sales literature, the performance of each Subaccount may
be compared with the performance of other variable annuity issuers in general or
to the performance of particular types of variable annuities investing in mutual
funds, or investment portfolios of mutual funds with investment objectives
similar to the Subaccount. Lipper Analytical Services, Inc. ("Lipper"), Variable
Annuity Research Data Service ("VARDS") and Morningstar, Inc. ("Morningstar")
are independent services which monitor and rank the performance of variable
annuity issuers in each of the major categories of investment objectives on an
industry-wide basis.
Lipper's and Morningstar's rankings include variable life insurance issuers
as well as variable annuity issuers. VARDS rankings compare only variable
annuity issuers. The performance analyses prepared by Lipper, VARDS and
Morningstar each rank such issuers on the basis of total return, assuming
reinvestment of distributions, but do not take sales charges, redemption fees,
or certain expense deductions at the separate account level into consideration.
In addition, VARDS prepares risk rankings, which consider the effects of market
risk on total return performance. This type of ranking provides data as to which
funds provide the highest total return within various categories of funds
defined by the degree of risk inherent in their investment objectives.
Advertising and sales literature may also compare the performance of each
Subaccount to the Standard & Poor's Index of 500 Common Stocks, a widely used
measure of stock performance. This unmanaged index assumes the reinvestment of
dividends but does not reflect any "deduction" for the expense of operating or
managing an investment portfolio. Other independent ranking services and indices
may also be used as a source of performance comparison.
The Company may also report other information including the effect of
tax-deferred compounding on a Subaccount's investment returns, or returns in
general, which may be illustrated by tables, graphs or charts.
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FEDERAL TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION IS GENERAL AND
IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
This discussion is not intended to address the tax consequences resulting
from all of the situations in which a person may be entitled to or may receive a
distribution under the Contract issued by the Company. Any person concerned
about these tax implications should consult a competent tax adviser before
initiating any transaction. This discussion is based upon the Company's
understanding of the present federal income tax laws, as they are currently
interpreted by the Internal Revenue Service ("IRS"). No representation is made
as to the likelihood of the continuation of the present federal income tax laws
or of the current interpretation by the IRS. Moreover, no attempt has been made
to consider any applicable state or other tax laws.
The Contract may be purchased on a non-qualified basis or purchased and
used in connection with plans qualifying for favorable tax treatment. The
Qualified Contract is designed for use by individuals whose purchase payments
are comprised solely of proceeds from and/or contributions under retirement
plans that are intended to qualify as plans entitled to special income tax
treatment under sections 401(a), 408, or 457 of the Code. The ultimate effect of
federal income taxes on the amounts held under a Contract, or Annuity Payments,
and on the economic benefit to the Owner, the Annuitant, or the Beneficiary
depends on the type of retirement plan, on the tax and employment status of the
individual concerned, and on the Company's tax status. In addition, certain
requirements must be satisfied in purchasing a Qualified Contract with proceeds
from a tax-qualified plan and receiving distributions from a Qualified Contract
in order to continue receiving favorable tax treatment. Therefore, purchasers of
Qualified Contracts should seek competent legal and tax advice regarding the
suitability of a Contract for their situation, the applicable requirements, and
the tax treatment of the rights and benefits of a Contract. The following
discussion assumes that Qualified Contracts are purchased with proceeds from
and/or contributions under retirement plans that qualify for the intended
special federal income tax treatment.
TAX STATUS OF THE CONTRACT
DIVERSIFICATION REQUIREMENTS. Section 817(h) of the Code provides that
separate account investments underlying a contract must be "adequately
diversified" in accordance with Treasury Department regulations in order for the
contract to qualify as an annuity contract under Section 72 of the Code. The
Variable Account, through each underlying Fund, intends to comply with the
diversification requirements prescribed in regulations under Section 817(h) of
the Code, which affect how the assets in the various Subaccounts may be
invested. Although the Company does not have direct control over the Funds in
which the Variable Account invests, the Company believes that each Fund will
meet the diversification requirements, and therefore, the Contract will be
treated as an annuity contract under the Code.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances, income
and gains from the separate account assets would be includible in the variable
annuity contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
Department has also announced, in connection with the issuance of regulations
concerning investment diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
contract owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also states that guidance would
be issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no such
guidance has been issued.
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The ownership rights under the Contracts are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the Owner of a Contract has the choice of several Subaccounts in which
to allocate Net Purchase Payments and Contract Values, and may be able to
transfer among Subaccounts more frequently than in such rulings. These
differences could result in an Owner being treated as the owner of the assets of
the Variable Account. In addition, the Company does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Company therefore reserves the
right to modify the Contract as necessary to attempt to prevent the Owner from
being considered the owner of the Variable Account's assets.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
federal income tax purposes, section 72(s) of the Code requires any
Non-Qualified Contract to provide that: (a) if any Owner dies on or after the
Annuity Date but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest will be distributed at least
as rapidly as under the method of distribution being used as of the date of that
Owner's death; and (b) if any Owner dies prior to the Annuity Date, the entire
interest in the Contract will be distributed within five years after the date of
the Owner's death. These requirements will be considered satisfied as to any
portion of the Owner's interest that is payable to or for the benefit of a
"designated beneficiary," and that is distributed over the life of such
beneficiary or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of that
Owner's death. The Owner's "designated beneficiary" is the person designated by
such Owner as a beneficiary and to whom ownership of the contract passes by
reason of death and must be a natural person. However, if the Owner's
"designated beneficiary" is the surviving spouse of the Owner, the Contract may
be continued with the surviving spouse as the new Owner.
Non-Qualified Contracts contain provisions that are intended to comply with
the requirements of section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. The Company intends to
review such provisions and modify them if necessary to assure that they comply
with the requirements of Code section 72(s) when clarified by regulation or
otherwise.
Other Rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes.
TAXATION OF ANNUITIES
IN GENERAL. Section 72 of the Code governs taxation of annuities in
general. The Company believes that an Owner who is a natural person is not taxed
on increases in Contract Value until distribution occurs by withdrawing all or
part of the Contract Value (e.g., withdrawals and surrenders) or as Annuity
Payments under the Annuity Payment Option elected. For this purpose, the
assignment, pledge, or agreement to assign or pledge any portion of the Contract
Value (and in the case of a Qualified Contract, any portion of an interest in
the qualified plan) generally will be treated as a distribution. The taxable
portion of a distribution (in the form of a single sum payment or payment
option) is taxable as ordinary income.
The owner of any annuity contract who is not a natural person generally
must include in income any increase in the excess of the contract value over the
"investment in the contract" during the taxable year. There are some exceptions
to this rule, and a prospective Owner that is not a natural person may wish to
discuss these with a competent tax adviser.
The following discussion generally applies to Contracts owned by natural
persons.
WITHDRAWALS. In the case of a withdrawal from a Qualified Contract, under
section 72(e) of the Code, a ratable portion of the amount received is taxable,
generally based on the ratio of the "investment in the contract" to the
participant's total accrued benefit or balance under the retirement plan. The
"investment in the contract" generally equals the portion, if any, of any
purchase payments paid by or on behalf of the individual under a Contract that
was not excluded from the individual's gross income. For Contracts issued in
33
<PAGE> 40
connection with qualified plans, the "investment in the contract" can be zero.
Special tax rules may be available for certain distributions from Qualified
Contracts.
In the case of a withdrawal from a Non-Qualified Contract, under section
72(e), any amounts received are generally first treated as taxable income to the
extent that the Contract Value immediately before the withdrawal exceeds the
"investment in the contract" at that time. Any additional amount withdrawn is
not taxable.
In the case of a surrender under a Qualified or Non-Qualified Contract, the
amount received generally will be taxable only to the extent it exceeds the
"investment in the contract."
Section 1035 of the Code generally provides that no gain or loss shall be
recognized on the exchange of one annuity contract for another. If the
surrendered contract was issued prior to August 14, 1982, the tax rules formerly
provided that the surrender was taxable only to the extent the amount received
exceeds the owner's investment in the contract will continue to apply to amounts
allocable to investments in that contract prior to August 14, 1982. In contrast,
contracts issued after January 19, 1985 in a Code section 1035 exchange are
treated as new contracts for purposes of the penalty and distribution-at-death
rules. Special rules and procedures apply to section 1035 transactions.
Prospective Owners wishing to take advantage of section 1035 should consult
their tax adviser.
ANNUITY PAYMENTS. Although tax consequences may vary depending on the
payment option elected under an annuity contract, under Code section 72(b),
generally (prior to recovery of the investment in the contract) gross income
does not include that part of any amount received as an annuity under an annuity
contract that bears the same ratio to such amount as the investment in the
contract bears to the expected return at the annuity starting date. For variable
annuity payments, the taxable portion is generally determined by an equation
that establishes a specific dollar amount of each payment that is not taxed. The
dollar amount is determined by dividing the "investment in the contract" by the
total number of expected periodic payments. However, the entire distribution
will be taxable once the recipient has recovered the dollar amount of his or her
"investment in the contract." For fixed annuity payments, in general, there is
no tax on the portion of each payment that represents the same ratio that the
"investment in the contract" bears to the total expected value of the annuity
payments for the term of the payments; however, the remainder of each annuity
payment is taxable until the recovery of the investment in the contract, and
thereafter the full amount or each annuity payment is taxable. If death occurs
before full recovery of the investment in the contract, the unrecovered amount
may be deducted on the annuitant's final tax return. Taxation of Death Benefit
Proceeds. Amounts may be distributed from a Contract because of the death of an
Owner. Generally, such amounts are includible in the income of the recipient as
follows: (i) if distributed in a lump sum, they are taxed in the same manner as
a full surrender of the Contract or (ii) if distributed under an Annuity Payment
Option, they are taxed in the same way as Annuity Payments.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution pursuant
to a Non-Qualified Contract, there may be imposed a federal penalty tax equal to
10% of the amount treated as taxable income. In general, however, there is no
penalty on distributions:
1. made on or after the taxpayer reaches age 59 1/2;
2. made on or after the death of the holder (or if the holder is not
an individual, the death of the primary annuitant);
3. attributable to the taxpayer's becoming disabled;
4. a part of a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of the taxpayer
and his or her designated beneficiary;
5. made under certain annuities issued in connection with structured
settlement agreements; and
34
<PAGE> 41
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 January 1, 1993, distributions from certain qualified
plans are generally subject to mandatory withholding. Certain states also
require withholding of state income tax whenever federal income tax is withheld.
MULTIPLE CONTRACTS
All non-qualified deferred annuity contracts that are issued by the Company
(or its affiliates) to the same owner during any calendar year are treated as
one annuity contract for purposes of determining the amount includible in gross
income under section 72(e) of the Code. The effects of this rule are not yet
clear; however, it could affect the time when income is taxable and the amount
that might be subject to the 10% penalty tax described above. In addition, the
Treasury Department has specific authority to issue regulations that prevent the
avoidance of section 72(e) of the Code through the serial purchase of annuity
contracts or otherwise. There may also be other situations in which the Treasury
Department may conclude that it would be appropriate to aggregate two or more
annuity contracts purchased by the same owner. Accordingly, a Contract Owner
should consult a competent tax adviser before purchasing more than one annuity
contract.
TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans.
The tax rules applicable to participants in these qualified plans vary according
to the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; aggregate distributions in excess of a specified
annual amount; and in other specified circumstances. Therefore, no attempt is
made to provide more than general information about the use of the Contracts
with the various types of qualified retirement plans. Owners, Annuitants, and
Beneficiaries are cautioned that the rights of any person to any benefits under
these qualified retirement plans may be subject to the terms and conditions of
the plans themselves, regardless of the terms and conditions of the Contract,
but the Company shall not be bound by the terms and conditions of such plans to
the extent such terms contradict the Contract, unless the Company consents to be
bound. Brief descriptions follow of the
35
<PAGE> 42
various types of qualified retirement plans in connection with a Contract. The
Company will amend the Contract as necessary to conform it to the requirements
of such plan.
CORPORATE PENSION AND PROFIT SHARING PLANS AND H.R. 10 PLANS. Section
401(a) of the Code permits corporate employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
establish these plans for themselves and their employees. Such retirement plans
may permit the purchase of the Contract to provide benefits under the plans.
Employers intending to use the Contract with such plans should seek competent
advice.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." These IRAs are subject to limits on
the amount that may be contributed, the persons who may be eligible, and on the
time when distributions may commence. Also, distributions from certain other
types of qualified retirement plans may be "rolled over" on a tax-deferred basis
into an IRA. Sales of the Contract for use with IRAs may be subject to special
requirements of the IRS. Employers may establish Simplified Employee Pension
(SEP) Plans to provide IRA contributions on behalf of their employees. The
Internal Revenue Service has not reviewed the Contract for qualification as an
IRA and has not generally ruled whether a death benefit provision such as the
provision in the Contract comports with IRA qualification requirements.
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 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.
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 Investor Services, Inc. ("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 percent of purchase payments made (up to a maximum of 7%). The
writing agent will receive a percentage of these commissions from the respective
broker-dealer, depending on the practice of that broker-dealer. Owners do not
pay these commissions.
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<PAGE> 43
ADMINISTRATIVE SERVICES
Financial Administration Services, Inc. administers the Contract on behalf
of the Company at the Service Center. In this capacity, Financial Administration
Services, Inc. is responsible for the following: processing purchase payments,
Annuity Payments, death benefits, surrenders, withdrawals, and transfers;
preparing confirmation notices and periodic reports; calculating mortality and
expense risk charges; calculating Accumulation and Annuity Unit Values;
distributing voting materials and tax reports; and generally assisting Owners.
VOTING PRIVILEGES
In accordance with current interpretations of applicable law, the Company
votes Fund shares held in the Variable Account at regular and special
shareholder meetings of the Funds in accordance with instructions received from
persons having voting interests in the corresponding Subaccounts. If, however,
the 1940 Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or the Company otherwise determines that
it is allowed to vote the shares in its own right, it may elect to do so.
The number of votes that an Owner or Annuitant has the right to instruct
are calculated separately for each Subaccount, and may include fractional votes.
Prior to the Annuity Date, the Owner holds a voting interest in each Subaccount
to which Variable Contract Value is allocated. After the Annuity Date, the Payee
has a voting interest in each Subaccount from which Variable Annuity Payments
are made.
For each Owner, the number of votes attributable to a Subaccount will be
determined by dividing the Owner's Subaccount Value by the Net Asset Value Per
Share of the Fund in which that Subaccount invests. For each Payee, the number
of votes attributable to a Subaccount is determined by dividing the liability
for future Variable Annuity Payments to be paid from that Subaccount by the Net
Asset Value Per Share of the Fund in which that Subaccount invests. This
liability for future payments is calculated on the basis of the mortality
assumptions, the selected Benchmark Rate of Return and the Annuity Unit Value of
that Subaccount on the date that the number of votes is determined. As Variable
Annuity Payments are made to the Payee, the liability for future payments
decreases as does the number of votes.
The number of votes available to an Owner or Payee are determined as of the
date coinciding with the date established by the Fund for determining
shareholders eligible to vote at the relevant meeting of the Fund's
shareholders. Voting instructions are solicited by written communication prior
to such meeting in accordance with procedures established for the Fund. Each
Owner or Payee having a voting interest in a Subaccount will receive proxy
materials and reports relating to any meeting of shareholders of the Funds in
which that Subaccount invests.
Fund shares as to which no timely instructions are received and shares held
by the Company in a Subaccount as to which no Owner or Payee has a beneficial
interest are voted in proportion to the voting instructions that are received
with respect to all Contracts participating in that Subaccount. Voting
instructions to abstain on any item to be voted upon are applied to reduce the
total number of votes eligible to be cast on a matter. Under the 1940 Act,
certain actions affecting the Variable Account may require Contract Owner
approval. In that case, an Owner will be entitled to vote in proportion to his
Variable Contract Value.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or
to which the assets of the Variable Account are subject. The Company, as an
insurance company, is ordinarily involved in litigation. The Company does not
believe that any current litigation is material to its ability to meet its
obligations under the Contract or to the Variable Account nor does the Company
expect to incur significant losses from such actions.
COMPANY HOLIDAYS
The Company is closed on the following days in 1997: New Year's Day,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, the day after
Thanksgiving Day, and Christmas Day.
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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.
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>
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<PAGE> 45
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 expected to be 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
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
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> 46
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 which was partially offset by $4.5 million of net
unrealized investment losses.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
STATUTORY STOCKHOLDER'S
SURPLUS ASSETS* EQUITY*
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
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
40
<PAGE> 47
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> <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.
41
<PAGE> 48
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 VLF/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.
42
<PAGE> 49
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.
OTHER ADDITIONAL INFORMATION
EMPLOYEES
As of December 31, 1996, the Company 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.
43
<PAGE> 50
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 approximates 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.
44
<PAGE> 51
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.
45
<PAGE> 52
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 Acting Chief
CNA Plaza Vice President Financial Officer of the CNA Insurance
Chicago, IL 60685 and Acting Chief Companies since November 1990. Mr. Jokiel has
Financial served as a Director of the Company since July
Officer 1992.
- ----------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 53
<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
1991 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.
47
<PAGE> 54
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.
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.
48
<PAGE> 55
CNA is party to employment agreements (the "Agreements") with each of
Dennis H. Chookaszian and Philip L. Engel. The Agreements are for a three-year
term at an annual Base Salary of $950,000 for Mr. Chookaszian and $800,000 for
Mr. Engel. The Agreements provide for the adoption by the Board of an Incentive
Compensation Plan which will provide Mr. Chookaszian and Mr. Engel with an
opportunity to earn a bonus based on performance and attainment of specified
corporate goals. In all other respect, the agreements contain substantially the
same terms as the prior agreements as approved by the Board in February of 1992.
A brief summary of the Plan as adopted by the CNA Board is set forth herein.
Each of the Agreements requires CNA to provide long-term disability
coverage and permits the employee to participate in other benefit programs
offered by the Company to its employees. In the event of death or disability,
the employee is entitled to be paid the Base Salary to the end of the month in
which such death or disability occurs and a prorated amount based on assumed
attainment of the incentive compensation in effect at the time. Any incentive
compensation paid is included in the computation of pensionable earnings under
the Company's retirement plans. The employee may participate in the Qualified
and Supplemental Savings Plan established by CNA wherein CNA pays a matching
percentage of 70% of the first 6% of the employee's contributions. This matching
amount is also included in the computation of pensionable earnings.
CNA may terminate each Agreement without cause at any time, in which event
CNA is required to continue to make payments to the employee for a period of
three years from the date of termination at a fixed rate based on Base Salary
and the incentive compensation in effect at the time of such termination. Each
Agreement contemplates negotiation of a renewal for an additional three year
period at the expiration of its term on December 31, 1998 and provides that if
the parties have not reached an agreement before March 31, 1999 at a Base Salary
and opportunity for incentive compensation of not less than the amount of Base
Salary and incentive compensation provided for the year 1998 at substantially
the same terms as the expiring agreement, then the employment shall be
considered terminated by CNA and the employee shall be entitled to termination
pay for a period of three years based on the combined Base Salary and the
assumed incentive compensation for 1998. If a renewal is not negotiated before
December 31, 1998, the Executives shall become employees-at-will for a three
month period at an actual salary representing the combined Base Salary and
assumed Incentive Compensation for the year 1998.
The Incentive Compensation Committee of CNA has granted Mr. Chookaszian and
Mr. Engel, subject to shareholder approval of the Incentive Compensation Plan,
allocations under the Incentive Compensation Plan entitling each of them to
awards thereunder of a maximum of $1,450,000 for Mr. Chookaszian and $400,000
for Mr. Engel for the year 1996. A maximum of $1,650,000 for 1997 and $1,850,000
for 1998 has been granted to Mr. Chookaszian and maximums of $500,000 and
$600,000 for the years 1997 and 1998, respectively, have been granted to Mr.
Engel. The actual awards to Messrs. Chookaszian and Engel would be subject to
the attainment of specific performance goals in relation to after-tax income
CNA, excluding realized investment gains and losses.
49
<PAGE> 56
RETIREMENT PLANS
PENSION PLAN TABLE
NORMAL RETIREMENT IN 1996
<TABLE>
<CAPTION>
ESTIMATED ANNUAL PENSION FOR
REPRESENTATIVE YEARS OF CREDITED SERVICE
- -------------------------------------------------------------------------------------------------------------
AVERAGE
ANNUAL
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
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.
50
<PAGE> 57
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
51
<PAGE> 58
The following financial statements are those of Valley Forge Life Insurance
Company and not those of the Separate Account. They are included in this
Statement of Additional Information for the purpose of informing investors as to
the financial position and operations of the Company.
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 3:
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> 59
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> 60
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> 61
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> 62
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
F-5
<PAGE> 63
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED)
each product line with VFL's retained amount varying by type of coverage.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability.
Deferred acquisition costs--Costs of acquiring insurance business which
vary with and are primarily related to the production of such business are
deferred. Such costs include commissions, 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 and participating
policyholders' interest. 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> 64
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> 65
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>
SUMMARY OF INVESTMENTS IN FIXED
MATURITIES BY CONTRACTUAL MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
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> 66
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> 67
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:
PENSION PLAN
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.
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> 68
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
========= ========= ========= ========= =========
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>
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> 69
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> 70
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> 71
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 nonaffiliated 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> 72
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> 73
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> 74
APPENDIX A
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option, by
the Market Value Adjustment Factor. The Market Value Adjustment factor is
calculated as follows:
Market Value Adjustment = Amount multiplied by
[ (N/12) ]
[(1+A) ]
[----- -1 ]
[(1+B) ]
Where:
"Amount" is the amount being surrendered, withdrawn, transferred or
applied to an Annuity Payment Option less any applicable annual
administration fees or transfer processing fees;
"a" is the Guaranteed Interest Rate currently being credited to the
"Amount"; and
"b" is the Guaranteed Interest Rate that is currently being offered
for a Guarantee Period of duration equal to the time remaining to the
expiration of the Guarantee Period for the Guarantee Amount from which the
"Amount" is taken. Where the time remaining to the expiration of the
Guarantee Period is not 1, 3, 5, 7, or 10 years, "b" is the rate found by
linear interpolation of the rate for the Guarantee Period having the
duration closest to the time remaining or, if the time remaining is less
than 1 year, "b" is the rate for a 1 year period; and
"n" is the number of complete months remaining before the expiration
of the Guarantee Period for the Guarantee Amount from which the "Amount" is
taken.
As an example of calculating "b" by linear interpolation, if the time
remaining to the expiration of the Guarantee Period is 4.5 years, the
interpolated Guaranteed Interest Rate is equal to the sum of one-fourth of the
three-year Guaranteed Interest Rate and three-fourths of the five-year
Guaranteed Interest Rate. If the three-year Guaranteed Interest Rate is 4.5% and
the five-year Guaranteed Interest Rate is 5%, the interpolated Guaranteed
Interest Rate equals 4.875%--that is, 4.5% multiplied by 0.25 plus 5% multiplied
by 0.75.
The Market Value Adjustment is computed as in the following examples:
1. Assume that the Owner selects a 7 year Guarantee Period and that the
Company is crediting a 4.5% effective annual interest rate on the amount
allocated or transferred to such Guarantee Period. Assume also that 55 months
into the 7-year Period (seven months into the fifth year), the Owner withdraws
$7,500.
If at the time of the withdrawal the Company is offering a 2.5% effective
annual rate of interest on Guarantee Periods of 3 years and a 2.0% effective
annual rate of interest on Guarantee Periods of 1 year, then:
i = 0.04500
j = 0.02354 = (0.025 * 17/24) + (0.02 * 7/24) = linear interpolation
between the 3 year rate and the 1 year rate
The MVA factor = [(1.04500)] (29/12)
[---------] -1=0.05142
[(1.02354)]
MVA = $7,500.00 * 0.05142 = $385.65 Amount received = $7,500 + $385.65 =
$7,885.65
If at the time of the withdrawal the Company is offering a 5.75% effective
annual rate of interest on Guarantee Periods of 3 years and a 6.5% effective
annual rate of interest on Guarantee Periods of 1 year, then:
i = 0.04500
j = 0.05969 = (0.0575 * 17/24) + (0.065 * 7/24) = linear interpolation
between the 3 year rate and the 1 year rate
The MVA factor = [(1.04500)] (29/12)
[---------] -1=0.03317
[(1.05969)]
MVA = $7,500.00 * -0.03317 = -$248.78
Amount received = $7,500 - $248.78 = $7,251.22
A-1
<PAGE> 75
APPENDIX B
DEATH BENEFIT EXAMPLES
Assume that an Owner makes purchase payments on the first day of certain
Contract Years as shown in the table below. Assume also that the Owner withdraws
$7,500 during the seventh month of Contract Year five and $5,000 at the
beginning of Contract Years thirteen and fifteen. Assume that the Annuitant is
younger that age 76 for all twenty years. All "beginning of year death benefits"
are computed as of the first day of the Contract Year except for the figure for
Contract Year 5 which is computed as of the seventh month of that year (i.e., as
of the time of the $7,500 withdrawal).
EXPLANATIONS:
The Death Benefit at the beginning of Contract Years 1 through 4 is
determined from the Contract Value at the end of the prior Contract Year plus
the purchase payment made at the beginning of the year for which the computation
is being made.
The Death Benefit at the end of month 7 of Contract Year 5 is determined
from the prior year's Contract Value plus the purchase payment made at the
beginning of that year, minus the $7,500 withdrawn in the seventh month minus a
$318.75 surrender charge assessed in connection with the withdrawal.
The Death Benefit at the beginning of Contract Years 6 through 10 is
determined from the Contract Value at the end of the prior Contract Year plus
the purchase payment made at the beginning of the Year for which the computation
is being made. Since the first day of Contract Year 6 is a minimum death benefit
floor computation anniversary, a new death benefit floor amount is set at
$8,506.
The Death Benefit at the beginning of Contract Year 11 is determined solely
from the prior Year's Contract Value. Since this is a minimum death benefit
floor computation anniversary, a new death benefit floor amount is set at
$42,610.
The Death Benefit at the beginning of Contract Year 12 is determined from
the minimum death benefit which is the most recently reset death benefit floor
amount of $42,610. This is so because the Contract Value declined and no
purchase payments or withdrawals occurred since the prior reset of the death
benefit floor amount.
The Death Benefit at the beginning of Contract Year 13 is determined from
the minimum death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for the $5,000 withdrawal. The $36,762 results from
$42,610 being multiplied by $31,432/$36,432.
The Death Benefit at the beginning of Contract Year 14 is the minimum death
benefit which is the most recently reset death benefit floor amount adjusted for
the $5,000 withdrawal made since that floor amount was set, or $36,762.
The Death Benefit at the beginning of Contract Year 15 is the minimum death
benefit which is the most recently reset death benefit floor amount of $42,610
adjusted for both $5,000 withdrawals made since that floor amount was set. The
$28,372 results from $42,610 being multiplied by $31,432/$36,432, and this
result multiplied by $16,908/$21,908.
The Death Benefit at the beginning of Contract Year 16 is the minimum death
benefit which is the most recently reset death benefit floor amount of $42,610
adjusted for both $5,000 withdrawals made since that floor amount was set. The
$28,372 results from $42,610 being multiplied by $31,432/$36,432, and this
result multiplied by $16,908/$21,908. Even though this is a death benefit floor
computation anniversary, the death benefit floor amount is not reset since the
Contract Value has not exceeded its previous high of $42,610 occurring in
Contract Year 10. No purchase payments or withdrawals were made.
The Death Benefit at the beginning of Contract Year 17 through 20 is the
minimum death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for both $5,000 withdrawals made
B-1
<PAGE> 76
since that floor amount was set and adjusted further for the $10,000 purchase
payment made on the first day of Contract Year 17.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
ACCUMULATED
BEGINNING OF NET END OF YEAR BEGINNING YEAR
CONTRACT PURCHASE PURCHASE ACCUMULATION END OF YEAR DEATH
YEAR PAYMENTS WITHDRAWALS PAYMENTS UNIT VALUE CONTRACT VALUE BENEFIT
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
1 $ 2,000 $ 0 $ 2,000 10.50000 $ 2,100 $ 2,000
- -------------------------------------------------------------------------------------------------------------
2 $ 2,000 $ 0 $ 4,000 11.23500 $ 4,387 $ 4,100
- -------------------------------------------------------------------------------------------------------------
3 $ 2,500 $ 0 $ 6,500 12.13380 $ 7,438 $ 6,887
- -------------------------------------------------------------------------------------------------------------
4 $ 3,000 $ 0 $ 9,500 13.34718 $11.482 $10.438
- -------------------------------------------------------------------------------------------------------------
5 $ 4,000 $7,500 $ 6,000 14.81537 $ 8,506 $ 7,663
- -------------------------------------------------------------------------------------------------------------
6 $ 5,000 $ 0 $11,000 16.59321 $15,127 $13,506
- -------------------------------------------------------------------------------------------------------------
7 $ 5,000 $ 0 $16,000 18.25254 $22,139 $20,127
- -------------------------------------------------------------------------------------------------------------
8 $ 5,000 $ 0 $21,000 19.71274 $29,310 $27,139
- -------------------------------------------------------------------------------------------------------------
9 $ 5,000 $ 0 $26,000 20.89550 $36,369 $34,310
- -------------------------------------------------------------------------------------------------------------
10 $ 5,000 $ 0 $31,000 21.52237 $42,610 $41,369
- -------------------------------------------------------------------------------------------------------------
11 $ 0 $ 0 $31,000 20.44625 $40,480 $42,610
- -------------------------------------------------------------------------------------------------------------
12 $ 0 $ 0 $31,000 18.40162 $36,432 $42,610
- -------------------------------------------------------------------------------------------------------------
13 $ 0 $5,000 $26,000 15.64138 $26,717 $36,762
- -------------------------------------------------------------------------------------------------------------
14 $ 0 $ 0 $26,000 12.82593 $21,908 $36,762
- -------------------------------------------------------------------------------------------------------------
15 $ 0 $5,000 $21,000 13.46723 $17,753 $28,372
- -------------------------------------------------------------------------------------------------------------
16 $ 0 $ 0 $21,000 14.14059 $18,641 $28,372
- -------------------------------------------------------------------------------------------------------------
17 $10,000 $ 0 $31,000 14.14059 $28,641 $38,372
- -------------------------------------------------------------------------------------------------------------
18 $ 0 $ 0 $31,000 13.43356 $27,209 $38,372
- -------------------------------------------------------------------------------------------------------------
19 $ 0 $ 0 $31,000 13.43356 $27,209 $38,372
- -------------------------------------------------------------------------------------------------------------
20 $ 0 $ 0 $31,000 13.97090 $28,297 $38,372
- -------------------------------------------------------------------------------------------------------------
</TABLE>
B-2
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Not Applicable
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant has no officers, directors or employees. The depositor
and the registrant do not indemnify the officers, directors or
employees of the depositor. CNA-Financial Corporation, ("CNAFC") a
parent of the depositor, indemnifies the depositor's officers,
directors and employees in their capacity as such. Most of the
depositor's officers, directors and employees are also
officers, directors and/or employees of CNAFC.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of CNAFC) by reason of the
fact that he is or was a director, officer, employee or agent of CNAFC,
or was serving at the request of CNAFC as a director, officer, employee
or agent of another corporation, partnership,joint venture, trust or
other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of CNAFC, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit
by or in the right of CNAFC to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or
agent of CNAFC, or was serving at the request of CNAFC as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of CNAFC. No indemnification is made,
however, in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to CNAFC unless and only to
the extent that a court determines that, despite the
-1-
<PAGE> 78
adjudication of liability but in view of all of the circumstances of
the case, such person is fairly and reasonably entitled to indemnity
for such expenses which the court deems proper.
To the extent that any person referred to above is successful on the
merits or otherwise in defense of any action, suit or proceeding
referred to above,or in defense of any claim, issue or matter therein,
CNAFC will indemnify such person against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
therewith. CNAFC may advance to such a person, expenses incurred in
defending a civil or criminal action, suit or proceeding as authorized
by CNAFC's board of directors upon receipt of an undertaking by (or on
behalf of) such person to repay the amount advanced unless it is
ultimately determined that he is entitled to be indemnified.
Indemnification and advancement of expenses described above (unless
pursuant to a court order) is only made as authorized in the specific
case upon a determination that such indemnification or advancement of
expenses is proper in the circumstances because he has met the
applicable standard of conduct. Such determination must be made by a
majority vote of a quorum of CNAFC's board of directors who are not
parties to the action, suit or proceeding or by independent legal
counsel in a written opinion or by CNAFC's stockholders.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable
ITEM 16(a). EXHIBITS
1. Form of Underwriting Agreement between Valley Forge
Life Insurance Company (the "Company") and CNA
Investor Services, Inc.*
3(i). Articles of Incorporation of Valley Forge Life
Insurance Company.*
(ii). By-Laws of Valley Forge Life Insurance Company.*
<PAGE> 79
4. (a) Form of Flexible Premium Deferred Variable
Annuity Contract.*
(b) Form of Qualified Plan Endorsement.*
(c) Form of IRA Endorsement.*
(d) Form of Nursing Home Confinement, Terminal
Medical Condition, Total Disability
Endorsement.*
5. Opinion regarding legality and consent.
- 2 -
<PAGE> 80
10. (a) Form of Participation Agreement between the
Company and Insurance Management Series.*
(b) Form of Participation Agreement between the
Company and Variable Insurance Products
Fund.*
(c) Form of Participation Agreement between the
Company and The Alger American Fund.*
(d) Form of Participation Agreement between the
Company and MFS Variable Insurance
Trust.*
(e) Form of Participation Agreement between the
Company and SoGen Variable Funds, Inc.*
(f) Form of Participation Agreement between
the Company and Van Eck Worldwide Insurance
Trust.*
23. (a) Consent of Sutherland, Asbill & Brennan, L.L.P.
(b) Consent of Deloitte & Touche LLP.
27. Financial Data Schedule.
*Incorporated herein by reference to Form N-4 Registration Statement
filed with the Securities and Exchange Commission on February 20,
1996.
(b) Financial Statement Schedules
(i) Schedule III Supplementary Insurance
Information
(ii) Schedule V Valuation and Qualifying
Accounts and Reserves
Other schedules are omitted because of the absence of
conditions under which they are required or because the
information is provided in the Financial Statements or
notes thereto.
(c) Independent Auditors' Report
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)
(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
<PAGE> 81
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Valley Forge Life Insurance Company hereby represents that the
fees and charges deducted under the Contract, in the aggregate,
are reasonable in relation to the Services rendered, the expenses
expected to be incurred, and the risks assumed by the Valley
Forge Life Insurance Company.
- 3 -
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it meets all of the requirements for effectiveness of this
registration statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Chicago, State of Illinois, on this 11th day of April, 1997
VALLEY FORGE LIFE INSURANCE COMPANY
(Registrant)
Attest: /s/ JONATHAN D. KANTOR By: /s/ PETER E. JOKIEL
------------------ ----------------------
Jonathan D. Kantor Peter E. Jokiel
Senior Vice President, Senior Vice President,
Secretary and General Acting Chief Financial
Counsel, Director Officer, Director
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- ------------------------ --------------------
<S> <C> <C>
/s/ DENNIS H. CHOOKASZIAN Chairman of the Board, April 11, 1997
- ---------------------------- Chief Executive Officer
Dennis H. Chookaszian
/s/ PHILIP L. ENGEL President, Director April 11, 1997
- ----------------------------
Philip L. Engel
/s/ JAMES P. FLOOD Senior Vice President April 11, 1997
- ----------------------------
James P. Flood
/s/ MICHAEL C. GARNER Senior Vice President April 11, 1997
- ----------------------------
Michael C. Garner
/s/ BERNARD L. HENGESBAUGH Senior Vice President April 11, 1997
- ----------------------------
Bernard L. Hengesbaugh
/s/ PETER E. JOKIEL Senior Vice President,
- ---------------------------- Acting Chief Financial Officer, April 11, 1997
Peter E. Jokiel Director
/s/ JONATHAN D. KANTOR Senior Vice President, Secretary, April 11, 1997
- ---------------------------- General Counsel,
Jonathan D. Kantor Director
/s/ PATRICIA L. KUBERA Group Vice President, April 11, 1997
- ---------------------- Controller, Director
Patricia L. Kubera
</TABLE>
<PAGE> 83
SIGNATURES CONTINUED
/s/CAROLYN L. MURPHY Senior Vice President April 11, 1997
- -------------------------
Carolyn L. Murphy
/s/WILLIAM H. SHARKEY, JR. Senior Vice President, April 11, 1997
- ------------------------- Director
William H. Sharkey, Jr.
/s/ADRIAN M. TOCKLIN Senior Vice President April 11, 1997
- -------------------------
Adrian M. Tocklin
/s/JAE L. WITTLICH Senior Vice President April 11, 1997
- -------------------------
Jae L. Wittlich
/s/DAVID W. WROE Senior Vice President April 11, 1997
- -------------------------
David W. Wroe
-4-
<PAGE> 1
Opinion regarding Legality and Consent (Exhibit 5)
EXHIBIT
CNA INSURANCE COMPANIES
CNA PLAZA
CHICAGO, ILLINOIS 60685
April 11, 1997
Board of Directors
Valley Forge Life Insurance Company
CNA Plaza, 438
Chicago, IL 60685
Gentlemen:
I have acted as counsel to Valley Forge Life Insurance Company (the "Company"),
a Pennsylvania insurance company, Valley Forge Life Insurance Company Variable
Annuity Separate Account (the "Variable Annuity Account") and the Valley Forge
Life Insurance Company Guaranteed Interest Option Account (the "GIO Account") in
connection with the amendment to the registration under the Securities Act of
1933 (file No. 333-1083) of certain flexible premium modified Guaranteed
Annuity Contracts (the "Contract").
In rendering this opinion, I have assumed the genuineness of all signatures of
all documents I have examined, the authority of representations made to me, the
authenticity of all original documents of which copies were furnished to me,
and the conformity to original documents of all documents submitted to me as
certified, conformed or photostatic copies. I have made such examinations of
law and documents as are in my judgment necessary or appropriate.
Based upon the foregoing, I am of the opinion that:
1. The Company was organized in accordance with the laws of the Commonwealth of
Pennsylvania and is a duly authorized stock life insurance company under the
laws of Pennsylvania and the laws of those states in which the Company is
admitted to do business;
2. The Variable Annuity Account and the GIO Account have been duly created and
are validly existing as separate accounts pursuant to Section 40-37-109 of
the Pennsylvania Unconsolidated Statutes;
3. The Company is authorized to issue the Contracts in those states in which it
is admitted and upon compliance with applicable local law;
4. The Contract, when issued in accordance with the prospectus contained in
the aforesaid registration statement and upon compliance with applicable local
law, will be legal and binding obligations of the Company in accordance with
their terms.
I hereby consent to the filing of this opinion as an exhibit to the
Post-Effective Amendment No. 1 of the aforesaid registration statement and to
the reference to me under the caption "Legal Matters" in the prospectus
contained in said amendment to the registration statement.
Sincerely,
s/LYNNE GUGENHEIM
Lynne Gugenheim
Vice President and
Associate General Counsel
<PAGE> 1
EXHIBIT 23(a)
[Sutherland, Asbill & Brennan L.L.P. letterhead]
April 9, 1997
Board of Directors
Valley Forge Life Insurance Company
CNA Plaza
Chicago, IL 60685
Directors:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the prospectus filed as part of Post-Effective Amendment No. 1 to
the Registration Statement on Form S-1 filed by Valley Forge Life Insurance
Company (Reg. File No. 333-1083) with the Securities and Exchange Commission.
In giving this consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL, & BRENNAN, L.L.P.
By: /s/ Kimberly J. Smith
Kimberly J. Smith
<PAGE> 1
EXHIBIT 23(b)
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No. 333-1083 on Form S-1 of Valley Forge Life Insurance Company
Variable Annuity Separate Account our reports dated February 12, 1997,
accompanying the financial statements and financial statement schedules of
Valley Forge Life Insurance Company, appearing in the Prospectus, and Part II
Item 16(b), respectively, which are part of such Registration Statement, and to
the reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Chicago, Illinois
April 11, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001007008
<NAME> VALLEY FORGE LIFE INSURANCE COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 321,066
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,959
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 427,049
<CASH> 24,759
<RECOVER-REINSURE> 1,320,583
<DEFERRED-ACQUISITION> 74,589
<TOTAL-ASSETS> 1,947,296
<POLICY-LOSSES> 1,682,072
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 38,145
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 197,040
<TOTAL-LIABILITY-AND-EQUITY> 1,947,296
325,486
<INVESTMENT-INCOME> 29,312
<INVESTMENT-GAINS> 4,771
<OTHER-INCOME> 8,217
<BENEFITS> 304,840
<UNDERWRITING-AMORTIZATION> 1,177
<UNDERWRITING-OTHER> 36,022
<INCOME-PRETAX> 25,747
<INCOME-TAX> 9,028
<INCOME-CONTINUING> 16,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,719
<EPS-PRIMARY> 334.38
<EPS-DILUTED> 334.38
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
Exhibit 99(b)
FINANCIAL STATEMENT SCHEDULES SCHEDULE III
VALLEY FORGE LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
GROSS INSURANCE RESERVES
------------------------
CLAIM
DEFERRED AND FUTURE POLICY-
ACQUISITION CLAIM POLICY HOLDERS'
(In thousands of dollars) COSTS EXPENSE BENEFITS FUNDS
- ------------------------- ----------- ------------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Individual................. $71,268.6 $10,411.5 $277,943.4 $ 548.0
Group...................... 3,320.1 50,156.3 32,020.3 37,596.9
--------- --------- ---------- ---------
Total.................... $74,588.7 $60,567.8 $309,963.7 $38,144.9
========= ========= ========== =========
DECEMBER 31, 1995
Individual................. $50,420.8 $14,118.6 $242,076.0 $ 676.4
Group...................... 178.8 45,304.8 24,524.2 33,897.9
--------- --------- ---------- ---------
Total.................... $50,599.6 $59,423.4 $266,600.2 $34,574.3
========= ========= ========== =========
DECEMBER 31, 1994
Individual................. $41,025.0 $12,721.6 $214,144.2 $ 699.0
Group...................... 308.4 42,914.7 15,557.9 29,897.4
--------- --------- ---------- ---------
Total.................... $41,333.4 $55,636.3 $229,702.1 $30,596.4
========= ========= ========== =========
<CAPTION>
INSURANCE AMORTIZATION OF
NET NET CLAIMS AND DEFERRED OTHER
PREMIUM INVESTMENT POLICYHOLDERS' ACQUISITION OPERATING
(In thousands of dollars) REVENUE INCOME BENEFITS COSTS EXPENSES
- -------------------------- -------- --------- ---------- --------- ----------
<S> <C> C> <C> <C> <C>
DECEMBER 31, 1996
Individual................. $ 49,226.4 $13,123.6 $ 84,559.1 $1,124.7 $42,834.7
Group...................... 276,260.0 16,188.6 220,280.8 52.4 (6,812.1)
---------- --------- ---------- -------- ---------
Total.................... $325,486.4 $29,312.2 $304,839.9 $1,177.1 $36,022.6
========== ========= ========== ======== =========
DECEMBER 31, 1995
Individual................. $ 49,435.0 $18,918.0 $ 60,208.5 $6,044.9 $44,419.0
Group...................... 247,218.0 12,576.3 210,727.7 21.2 (9,383.1)
---------- --------- ---------- -------- ---------
Total.................... $296,653.0 $31,494.3 $270,936.2 $6,066.1 $35,035.9
========== ========= ========== ======== =========
DECEMBER 31, 1994
Individual................. $ 37,708.7 $13,323.2 $ 22,621.0 $4,837.9 $12,353.4
Group...................... 225,270.8 9,435.4 214,712.9 36.6 19,877.6
---------- --------- ---------- -------- ---------
Total................... $262,979.5 $22,758.6 $237,333.9 $4,874.5 $32,231.0
========== ========= ========== ======== =========
</TABLE>
<PAGE> 2
FINANCIAL STATEMENT SCHEDULES SCHEDULE V
VALLEY FORGE LIFE INSURANCE COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE BALANCE
AT CHARGED TO CHARGED TO AT
BEGINNING COSTS AND OTHER END OF
(In thousands of dollars) OF PERIOD EXPENSES AMOUNTS DEDUCTIONS PERIOD
- ------------------------- --------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables.............. $175.2 $211.7 $ - $ 9.1 $377.8
====== ====== ==== ====== ======
YEAR ENDED DECEMBER 31, 1995
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables.............. $ - $228.7 $ - $ 53.5 $175.2
====== ====== ==== ====== ======
YEAR ENDED DECEMBER 31, 1994
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables.............. $ - $(13.4) $ - $(13.4) $ -
====== ====== ==== ====== ======
</TABLE>
<PAGE> 1
Exhibit 99(c)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Valley Forge Life Insurance Company
We have audited the financial statements 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 for each of the three years in the period
ended December 31, 1996 and 1995, and for each of the three years in the periods
ended December 31, 1996, and have issued our report thereon dated February 12,
1997; such financial statements and report are included in Post-Effective
Amendment No. 1 to Registration Statement No. 333-1083 on Form S-1 and are
included herein. Our audits also included the financial statement schedules of
Valley Forge Life Insurance Company, listed in Part II Item 16(b). These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Chicago, Illinois
February 12, 1997
