As filed with the Securities and Exchange Commission on September 2, 1999
File No. 333-1083
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
Post-Effective Amendment No. 4 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 Continental Assurance Company CNA Plaza, 43 South Chicago,
Illinois 60685 (312) 822-6597 (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]
==============================================================================
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
==============================================================================
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") that Valley Forge Life Insurance Company ("VFL")
issues. 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.
You (the Owner) 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. The 23 Subaccounts of the
Variable Account invest their assets 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., Van Eck Worldwide Insurance Trust, and Janus
Aspen Series (you may review a complete list of the Funds on the next page). The
Guaranteed Interest Option guarantees a minimum fixed interest rate 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 Subaccounts'
investment performance and any interest VFL credits under the Guaranteed
Interest Option. VFL does not guarantee any minimum Variable Contract Value for
amounts you allocate to the Variable Account. VFL may apply a market value
adjustment to annuity payments and other values the Contract provides, when such
payments are based on the Guaranteed Interest Option. The market value
adjustment may result in upward or downward adjustments to amounts withdrawn,
surrendered, transferred, paid on a Death Benefit, or applied to purchase
annuity payments.
This prospectus sets forth information regarding the Contract, the Variable
Account, and the Guaranteed Interest Option that you should know before
purchasing a Contract. You should read the prospectuses for the Funds, which
provide information regarding each Fund's investment objectives and policies, 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 (the "SEC"). It is incorporated herein by reference. To
obtain a free copy of this document, call or write the Service Center.
The SEC maintains a website that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including VFL. The website address is http://www.sec.gov.
Please read this prospectus carefully and keep it for future reference. The
current prospectuses for the Funds must accompany this prospectus.
An investment in a Contract is not:
- - - a bank deposit or obligation
- - - guaranteed or endorsed by any bank
- - - insured by the Federal Deposit Insurance Corporation or any other government
agency
An investment in the Contract involves certain risks. You may lose your
purchase payments (principal).
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
September _____, 1999
You may choose to invest in the following funds:
- - - Federated High Income Bond Fund II
- - - Federated Prime Money Fund II
- - - Federated Utility Fund II
- - - Asset Manager Portfolio in the Variable Insurance Products Fund II
- - - Contrafund Portfolio in the Variable Insurance Products Fund II
- - - Index 500 Portfolio in the Variable Insurance Products Fund II
- - - Equity-Income Portfolio in the Variable Insurance Products Fund
- - - Alger American Growth Portfolio
- - - Alger American MidCap Growth Portfolio
- - - Alger American Small Capitalization Portfolio
- - - MFS Emerging Growth Series
- - - MFS Growth With Income Series
- - - MFS Research Series
- - - MFS Total Return Series
- - - SoGen Overseas Variable Funds
- - - Van Eck Worldwide Emerging Markets Fund
- - - Van Eck Worldwide Hard Assets Funds
- - - Janus Aspen Capital Appreciation Portfolio
- - - Janus Aspen Growth Portfolio
- - - Janus Aspen Balanced Portfolio
- - - Janus Aspen Flexible Income Portfolio
- - - Janus Aspen International Growth Portfolio
- - - Janus Aspen Worldwide Growth Portfolio
TABLE OF CONTENTS
<TABLE>
<S> <C>
FEE TABLE................................................... 1
SUMMARY..................................................... 5
General Description of the Contract....................... 5
Purchasing a Contract..................................... 6
Canceling the Contract.................................... 6
Charges and Fees.......................................... 7
Transfers................................................. 8
Withdrawals............................................... 8
Surrenders................................................ 8
VFL, THE VARIABLE ACCOUNT, THE FUNDS AND THE GUARANTEED
INTEREST OPTION........................................... 9
VFL....................................................... 9
The Variable Account...................................... 9
The Funds................................................. 10
The Guaranteed Interest Option............................ 13
DESCRIPTION OF THE CONTRACT................................. 16
Purchasing a Contract..................................... 16
Canceling the Contract.................................... 16
Crediting and Allocating Purchase Payments................ 17
Variable Contract Value................................... 17
Transfers................................................. 19
Withdrawals............................................... 21
Surrenders................................................ 22
Death of Owner or Annuitant............................... 22
Payments by VFL........................................... 24
Telephone Transaction Privileges.......................... 24
Supplemental Riders....................................... 25
CONTRACT CHARGES AND FEES................................... 25
Surrender Charge (Contingent Deferred Sales Charge)....... 25
Annual Administration Fee................................. 27
Transfer Processing Fee................................... 27
Taxes on Purchase Payments................................ 27
Mortality and Expense Risk Charge......................... 27
Administration Charge..................................... 28
Fund Expenses............................................. 28
Possible Charge for VFL's Taxes........................... 28
SELECTING AN ANNUITY PAYMENT OPTION......................... 28
Annuity Date.............................................. 28
Annuity Payment Dates..................................... 29
Election and Changes of Annuity Payment Options........... 29
Annuity Payments.......................................... 29
Annuity Payment Options................................... 31
ADDITIONAL CONTRACT INFORMATION............................. 32
Ownership................................................. 32
Changing the Owner or Beneficiary......................... 33
Misstatement of Age or Sex................................ 33
Change of Contract Terms.................................. 33
Reports to Owners......................................... 34
Miscellaneous............................................. 34
YIELDS AND TOTAL RETURNS.................................... 34
</TABLE>
i
<TABLE>
<S> <C>
FEDERAL TAX STATUS.......................................... 37
Introduction.............................................. 37
Tax Status of the Contracts............................... 37
The Treatment of Annuities................................ 38
Taxation of Non-Qualified Contracts....................... 38
Taxation of Qualified Plans............................... 39
Withholding............................................... 41
Possible Changes in Taxation.............................. 41
Other Tax Consequences.................................... 41
OTHER INFORMATION........................................... 42
Distribution of the Contracts............................. 42
Voting Privileges......................................... 42
Legal Proceedings......................................... 43
Company Holidays.......................................... 43
Legal Matters............................................. 43
Experts................................................... 43
ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE
COMPANY................................................... 44
History and Business...................................... 44
Selected Financial Data................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 45
Results of Operations.................................. 46
Financial Condition.................................... 46
Investments............................................ 47
Impact of Year 2000 on FVL.............................
Liquidity and Capital Resources........................ 50
Accounting Standards................................... 50
Market risk............................................ 52
Other Additional Information.............................. 56
Employees.............................................. 56
Properties............................................. 56
Certain Agreements..................................... 56
Regulation............................................. 56
Directors and Executive Officers....................... 58
Executive Compensation................................. 59
Employment Contracts................................... 60
Retirement Plans....................................... 61
INDEPENDENT AUDITORS' REPORT................................ 64
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE
COMPANY................................................... 65
GLOSSARY.................................................... 83
APPENDIX A.................................................. A-1
APPENDIX B.................................................. B-1
APPENDIX C.................................................. C-1
</TABLE>
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
FEE TABLE
- - ------------------------------------------------------------------------------
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales load imposed on purchase payments..................... 0%
Maximum Surrender Charge (as a percentage of purchase
payments surrendered or withdrawn)........................ 7%
Transfer Processing Fee (each, after first 12 in a Contract
Year)..................................................... $25
Annual Administration Fee (waived if Contract Value exceeds
$50,000).................................................. $30
VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF NET
ASSETS)
Mortality and Expense Risk Charge........................... 1.25%
Administration Charge....................................... 0.15%
- - -------------------------------------------------------------------
Total Variable Account Annual Expenses 1.40%
===================================================================
</TABLE>
ANNUAL FUND EXPENSES
(AS A PERCENTAGE OF FUND AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------
MANAGEMENT
(ADVISORY) OTHER TOTAL ANNUAL
FEES EXPENSES EXPENSES
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
INSURANCE SERIES:
Federated High Income Bond Fund II.......... 0.60% 0.18% 0.78%[1]
Federated Prime Money Fund II............... 0.49% 0.31% 0.80%[1]
Federated Utility Fund II................... 0.68% 0.25% 0.93%[1]
VARIABLE INSURANCE PRODUCTS FUND (VIP) AND
VARIABLE INSURANCE PRODUCTS FUND II (VIP II):
Fidelity VIP Equity-Income Portfolio........ 0.49% 0.09% 0.58%[2]
Fidelity VIP II Asset Manager Portfolio..... 0.54% 0.10% 0.64%[2]
Fidelity VIP II Contrafund Portfolio........ 0.59% 0.11% 0.70%[2]
Fidelity VIP II Index 500 Portfolio......... 0.24% 0.11% 0.35%[2]
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% 0.04% 0.89%
MFS VARIABLE INSURANCE TRUST:
MFS Emerging Growth Series.................. 0.75% 0.10% 0.85%[3]
MFS Growth With Income Series............... 0.75% 0.13% 0.88%[3]
MFS Research Series......................... 0.75% 0.11% 0.86%[3]
MFS Total Return Series..................... 0.75% 0.16% 0.91%[3]
SOGEN VARIABLE FUNDS, INC.:
SoGen Overseas Variable Fund................ 0.75% 0.75% 1.50%[4]
VAN ECK WORLDWIDE INSURANCE TRUST:
Van Eck Worldwide Emerging Markets Fund..... 1.00% 0.50% 1.50%[5]
Van Eck Worldwide Hard Assets Fund.......... 1.00% 0.16% 1.16%[6]
JANUS ASPEN SERIES
Janus Aspen Capital Appreciation Portfolio.. 0.70% 0.22% 0.92%[7]
Janus Aspen Growth Portfolio................ 0.65% 0.03% 0.68%[7]
Janus Aspen Balanced Portfolio.............. 0.72% 0.02% 0.74%
Janus Aspen Flexible Income Portfolio....... 0.65% 0.08% 0.73%
Janus Aspen International Growth Portfolio.. 0.66% 0.20% 0.86%[7]
Janus Aspen Worldwide Growth Portfolio...... 0.65% 0.07% 0.72%[7]
- - -----------------------------------------------------------------------------------------
</TABLE>
[1] Federated Advisors has voluntarily agreed to waive a portion of its
management fee with respect to these funds. Absent this waiver, the total
annual expenses would have
1
been 0.78%, 0.81% and 1.00% for the Federated High Income Bond Fund II, the
Federated Prime Money Fund II and the 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 whereby credits realized as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses presented in the table would
have been .57%, .63% and .66% for the Equity-Income, Asset Manager and
Contrafund portfolios, respectively.
[3] 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".
[4] The annualized ratios of operating expenses to average net assets for the
period ended December 31, 1998 would have been 4.98% without the effect of
earnings credits, and the investment advisory fee waiver and expense
reimbursement provided by the advisor.
[5] For the year ended December 31, 1998, 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 exceeding
1.5% of average daily net assets. Absent this reimbursement, management
fees, other expenses and total annual expenses would have been 1.00%,
0.61%, and 1.61%, respectively.
[6] The fund directs certain portfolio trades to a broker that, in turn, pays a
portion of the Fund's operating expenses. The fund also has a fee
arrangement based on cash balances left on deposit with the custodian,
which reduces the fund's operating expenses. Absent these arrangements,
management fees, other expenses, and total annual expenses would have been
1.00%, 0.20% and 1.20%, respectively.
[7] Expenses are stated net of contractual waivers and fee reductions by Janus
Capital. Absent these waivers, the total annual expenses would have been
0.97%, 0.75%, 0.95% and 0.74% for the Janus Aspen Capital Appreciation
Portfolio, Janus Aspen Growth Portfolio, Janus Aspen International Growth
Portfolio, and Janus Aspen Worldwide Growth Portfolio, respectively.
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, 1998. For a more complete
description of the various costs and expenses, see "CONTRACT CHARGES AND FEES"
and the prospectuses for each Fund.
2
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>
- - --------------------------------------------------------------------------------------------
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federated High Income Bond Fund II
Subaccount............................... $ 96 $134 $164 $262
Federated Prime Money Fund II Subaccount... $ 96 $134 $165 $264
Federated Utility Fund II Subaccount....... $ 97 $141 $172 $278
Fidelity VIP Equity-Income Subaccount...... $ 94 $127 $153 $239
Fidelity VIP II Asset Manager Subaccount... $ 94 $129 $156 $246
Fidelity VIP II Contrafund Subaccount...... $ 95 $130 $157 $249
Fidelity VIP II Index 500 Subaccount....... $ 91 $120 $141 $215
Alger American Growth Subaccount........... $ 96 $134 $164 $263
Alger American MidCap Growth Subaccount.... $ 97 $135 $167 $268
Alger American Small Capitalization
Subaccount............................... $ 97 $137 $170 $274
MFS Emerging Growth Subaccount............. $ 97 $136 $168 $269
MFS Growth With Income Subaccount.......... $ 97 $137 $169 $273
MFS Research Subaccount.................... $ 97 $136 $168 $270
MFS Total Return Subaccount................ $ 97 $138 $171 $276
SoGen Overseas Subaccount.................. $103 $156 $201 $336
Van Eck Worldwide Emerging Markets
Subaccount............................... $103 $156 $201 $236
Van Eck Worldwide Hard Assets Subaccount... $100 $146 $184 $302
Janus Aspen Capital Appreciation Subaccount $ 97 $138
Janus Aspen Growth Subaccount.............. $ 95 $130
Janus Aspen Balanced Subaccount............ $ 95 $132
Janus Aspen Flexible Income Subaccount..... $ 95 $132
Janus Aspen International Growth Subaccount $ 97 $136
Janus Aspen Worldwide Growth Subaccount.... $ 95 $132
- - --------------------------------------------------------------------------------------------
</TABLE>
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>
- - --------------------------------------------------------------------------------------------
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federated High Income Bond Fund II
Subaccount............................... $ 26 $ 74 $124 $262
Federated Prime Money Fund II Subaccount... $ 26 $ 74 $125 $264
Federated Utility Fund II Subaccount....... $ 27 $ 78 $132 $278
Fidelity VIP Equity-Income Subaccount...... $ 24 $ 67 $113 $239
Fidelity VIP II Asset Manager Subaccount... $ 24 $ 69 $116 $246
Fidelity VIP II Contrafund Subaccount...... $ 25 $ 70 $117 $249
Fidelity VIP II Index 500 Subaccount....... $ 21 $ 60 $101 $215
Alger American Growth Subaccount........... $ 26 $ 74 $124 $263
Alger American MidCap Growth Subaccount.... $ 27 $ 75 $127 $268
Alger American Small Capitalization
Subaccount............................... $ 27 $ 77 $130 $274
MFS Emerging Growth Subaccount............. $ 27 $ 76 $128 $269
MFS Growth With Income Subaccount.......... $ 27 $ 77 $129 $273
MFS Research Subaccount.................... $ 27 $ 76 $128 $270
MFS Total Return Subaccount................ $ 27 $ 78 $131 $276
SoGen Overseas Subaccount.................. $ 33 $ 96 $161 $336
Van Eck Worldwide Emerging Markets
Subaccount............................... $ 33 $ 96 $161 $336
Van Eck Worldwide Hard Assets Subaccount... $ 30 $ 86 $144 $302
Janus Aspen Capital Appreciation Subaccount $ 27 $ 78
Janus Aspen Growth Subaccount.............. $ 25 $ 70
Janus Aspen Balanced Subaccount............ $ 25 $ 72
Janus Aspen Flexible Income Subaccount..... $ 25 $ 72
Janus Aspen International Growth Subaccount $ 27 $ 76
Janus Aspen Worldwide Growth Subaccount.... $ 25 $ 72
- - --------------------------------------------------------------------------------------------
</TABLE>
3
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. Under some
fixed annuity options, the surrender charges would not apply.
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.
4
SUMMARY
GENERAL DESCRIPTION OF THE CONTRACT
The summary section of this prospectus contains a brief description of the
most important parts of the contract. You may find further detail in other
sections of this prospectus, the related Statement of Additional Information,
the contract, and the prospectuses of the underlying mutual funds. If you need
more information, please contact our Service Center at (800)808-4537.
In many jurisdictions, we issue the contract directly to individuals. In
some jurisdictions, however, we may issue only group contracts. We issue group
contracts to or on behalf of groups. For example, we may issue a group contract
to an employer on behalf of its employees. Individuals who are part of groups
for which a contract is issued receive a certificate containing the same
provisions as the group contract. Throughout this prospectus, the term
"contract" refers to individual contracts, group contracts and certificates for
group contracts.
Under this contract you may:
- allocate all or a portion of your net purchase payments among
several subaccounts of our Valley Forge Life Insurance Company
Variable Annuity Separate Account;
- transfer amounts you have already invested under the contract
among the subaccounts;
- allocate all (or a portion of) your net purchase payments to
our Guaranteed Interest Option Account; and
- transfer amounts you have already invested under the contract to
our Guaranteed Interest Option Account.
You may invest in the Guaranteed Interest Option Account for a guarantee
period of 1, 3, 5, 7, or 10 years. If the amount that you allocated or
transferred to the Guaranteed Interest Option Account remains in the account for
the entire guarantee period that you selected, its value will be equal to the
amount originally allocated or transferred plus the interest earned. We
calculate the interest that you earn by multiplying the amount you allocate or
transfer to the Guarantee Interest Option Account by the guarantee interest rate
on an annually compounded basis.
If you surrender, withdraw, transfer, or annuitize the amount that you
invested or transferred from another subaccount at any time other than within
the 30 days prior to the expiration of the guarantee period that you selected,
that amount will be subject to a market value adjustment. The market value
adjustment may cause the amount that you remove from the Guaranteed Interest
Option Account to increase or decrease from the amount you would receive if you
had invested for the entire guarantee period. The market value adjustment may
even reduce the amount you remove from the Guaranteed Interest Option Account to
an amount that is less than the net purchase payment that you initially
allocated or transferred to the Guaranteed Interest Option Account.
We do not promise that the amount that you invest under this contract will
increase in value. You bear the investment risk for all amounts invested under
this contract, except for the amounts that you allocate to the Guaranteed
Interest Option Account and leave in such account until at least 30 days before
the end of the guarantee period.
5
You have a choice of annuity payment options. The beneficiary that you
select also may apply any death benefit to certain annuity payment options. You
may change your annuity date, within certain limits.
PURCHASING A CONTRACT
Your initial purchase payment for a contract must be at least $2,000. You
may make additional purchase payments of at least $100. We may refuse to accept
additional purchase payments at any time for any reason.
In your application to purchase a contract, you specify the accounts to
which you want to allocate your initial purchase payment. Your initial purchase
payment may be allocated in any combination among the subaccounts, and the
guarantee periods within the Guaranteed Interest Option Account.
Once you have selected the subaccounts or guarantee periods within the
Guarantee Interest Option Account to which you want to allocate your initial
purchase payment, you must then decide the percentage of the purchase payment to
be allocated to each selected account. All percentage allocations must be in
whole numbers. You must allocate at least:
- 1% of a purchase payment to any subaccount or to any guarantee
period within the Guaranteed Interest Option Account; and
- $500.00 to any selected guarantee period within the Guaranteed
Interest Option Account.
We will allocate any subsequent purchase payments among the subaccounts and
the guarantee periods within the Guaranteed Interest Option Account in
accordance with the percentages that you provided to us in your application. If
you want to change these percentage allocations, you must let us know, in
writing, of such changes.
You may also change these percentage allocations by telephone, provided you
have authorized us to accept such changes in your application, or in another
writing.
CANCELING THE CONTRACT
You may cancel this contract by returning it to us within 10 days after you
first receive it. Once you cancel the contract, we will give you a refund. Your
refund will be equal to the sum of the investment values in the subaccounts and
Guarantee Interest Option Accounts, less certain fees or charges. We will not
deduct any mortality risk charge, expense risk charge, or administration charge
from your refund.
Please note, you may live in a state that (1) requires a cancellation
period longer than 10 days; and/or (2) requires that we return to you the amount
of purchase payments that you made to us (rather than the investment values in
the subaccounts and Guarantee Interest Option Accounts). If you do live in such
a state, we will comply with such state's laws regarding cancellations and
refunds. For this purpose, we will allocate your initial purchase payment to a
money market account, then at the expiration of the cancellation period, we will
add (or subtract) the income earned (or lost) on this investment to your initial
purchase payment. We will then allocate the initial purchase payment as you
direct in your application.
6
CHARGES AND FEES
Once you purchase a contract, your contract value may be decreased by the
following charges and fees:
(1) SURRENDER CHARGE. We will deduct a surrender charge for certain
withdrawals if:
- you withdraw or surrender an amount equal to your purchase payment
(as described in the next two paragraphs) before the passage of
five full calendar years from the date that we received your
purchase payment; or
- you decide to receive annuity payments during the first full five
calendar years from the date we received your purchase payment.
The surrender charge is 7% of the purchase payment if you surrender or
withdraw the purchase payment within two full years after we received it. The
surrender charge reduces by 1% each year for the next three years and is 0%
after five full years following receipt of the purchase payment.
In determining whether you have withdrawn your purchase payment, we assume
that when you withdraw amounts under your contract, that:
- you first withdraw the portion of your contract value that is
greater than the sum of your purchase payments; and
- you withdraw earlier purchases payments before later purchase
payments.
We will not deduct a surrender charge for withdrawals of any amount of your
contract value that exceeds the sum of your purchase payments. We will not
deduct a surrender charge under certain fixed annuitization options.
(2) ADMINISTRATION CHARGE. We will deduct a daily charge equal to 0.000411%
of the Valley Forge Life Insurance Company Variable Annuity Separate Account's
net assets. This daily charge covers a portion of our administration costs. This
daily charge is approximately equal to an annual charge of 0.15 %.
(3) MORTALITY AND EXPENSE RISK CHARGE. We will deduct a daily charge equal
to 0.003446% of the Valley Forge Life Insurance Company Variable Annuity
Separate Account's net assets. This charge compensates us for assuming certain
mortality and expense risks. This daily charge is approximately equal to an
annual charge of 1.25%.
(4) ANNUAL ADMINISTRATION FEE. If your contract value is less than $50,000,
we will deduct an annual administration fee of $30.
(5) TRANSFER PROCESSING FEE. Your first 12 transfers among the subaccounts
and/or Guarantee Interest Option Account are free. We will then deduct $25 for
each transfer in excess of the 12 free transfers during a Contract Year.
(6) TAXES ON PURCHASE PAYMENTS. Generally, you are taxed for income tax
purposes on purchase payments, if at all, at the time you begin to receive
annuity payments. Any charges for taxes on purchase payments are deducted from
your contract value at that time. These taxes range generally between 0% and
3.5% of purchase payments.
7
(7) MUTUAL FUND EXPENSES. The mutual funds in which your purchase payments
are invested may deduct certain operating fees. Please read the prospectus for
each of the mutual funds for details.
TRANSFERS
At any time prior to the date you begin to receive annuity payments, you
may transfer all or part of a contract value among subaccount(s) or guarantee
periods of the Guarantee Interest Option Account. You may transfer the lesser of
$500 or the entire value of the account.
WITHDRAWALS
At any time prior to the date you begin to receive annuity payments, you
may (subject to certain restrictions) withdraw part of the contract value. We
may deduct certain amounts from your withdrawal, which may include a surrender
charge, a market value adjustment, and purchase payment tax charges. Your
withdrawals may result in adverse federal income tax consequences, including a
penalty tax, in addition to any income tax that you may owe.
SURRENDERS
At any time prior to date you begin to receive annuity payments, you may
surrender the contract and receive its surrender value. The surrender value is
equal to the contract value, less certain charges (including a surrender charge,
purchase payment tax charges, administration charges, and market value
adjustments). You may elect to have the surrender value paid in a single sum or
under an annuity payment option. Your surrender may result in adverse federal
income tax consequences, including a penalty tax, in addition to any income tax
that you may owe.
OTHER INFORMATION
CONDENSED FINANCIAL INFORMATION. You will find the Variable Account's
condensed financial information in Appendix A of this prospectus.
8
THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS
AND THE GUARANTEED INTEREST OPTION
VFL
VFL 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.
VFL's home office is located at 401 Penn St., Reading, Pennsylvania 19601, and
its executive office is located at CNA Plaza, Chicago, Illinois 60685. VFL is a
wholly-owned subsidiary of Continental Assurance Company ("Assurance"), a life
insurance company which, as of December 31, 1998, had consolidated assets of
approximately $14.4 billion. Subject to a reinsurance pooling agreement with
Assurance, VFL assumes all insurance risks under the Contracts, and VFL's
assets, which as of December 31, 1998 were approximately $3 billion, support the
benefits under the Contracts. See "ADDITIONAL INFORMATION ABOUT VALLEY FORGE
LIFE INSURANCE COMPANY" for more detail regarding VFL.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of VFL established
under Pennsylvania law on October 18, 1995. VFL owns the assets of the Variable
Account. These assets are held separately from VFL's General Account and its
other separate accounts. That portion of the Variable Account's assets that is
equal to the reserves and other Contract liabilities of the Variable Account is
not chargeable with liabilities arising out of any other business VFL may
conduct. If the assets exceed the required reserves and other contract
liabilities, VFL may transfer the excess to VFL'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 VFL. The Variable Account also is governed by the laws
of Pennsylvania, VFL's state of domicile, and may also be governed by laws of
other states in which VFL does business.
The Variable Account has 23 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 VFL.
CHANGES TO THE VARIABLE ACCOUNT. Where permitted by applicable law, VFL 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 VFL may determine;
5. add new Funds or remove existing Funds;
9
6. substitute new Fund(s) for any existing Fund if shares of the Fund
are no longer available for investment or if VFL 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.
Certain Funds may have investment objectives and policies similar to other
funds that are managed by the same investment advisor or manager. The investment
results of the Funds, however, may be higher or lower than those of such other
funds. We do not guarantee or make any representation that the investment
results of the Funds will be comparable to any other fund, even those with the
same investment advisor or manager.
INSURANCE SERIES
The Federated High Income Bond Fund II, Federated Prime Money Fund II and
Federated Utility Fund II Subaccounts each invest in shares of corresponding
Funds (i.e., investment portfolios) of Insurance Series ("IS"). IS issues five
"series" or classes of shares, each of which represents an interest in a Fund of
IS. Three of these series of shares are available as investment options under
the Contract. The investment objectives of these Funds are set forth below.
FEDERATED HIGH INCOME BOND FUND II. This Fund invests primarily in
lower-rated fixed-income securities that seek to achieve high current
income.
FEDERATED PRIME MONEY FUND II. This Fund invests in money market
instruments maturing in thirteen months or less to achieve current income
consistent with stability of principal and liquidity.
FEDERATED UTILITY FUND II. This Fund invests in equity and debt
securities of utility companies to achieve high current income and moderate
capital appreciation.
IS is advised by Federated Advisers.
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Equity-Income Subaccount invests in shares of a corresponding Fund 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,
10
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 Contract. 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 Contract. The investment
objectives of these Funds are set forth below.
ALGER AMERICAN GROWTH PORTFOLIO. This Fund seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of
equity securities, primarily of companies with total market capitalization
of $1 billion or greater.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO. This Fund seeks long-term
capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total market
capitalization between $750 million and $3.5 billion.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO. This Fund seeks
long-term capital appreciation by investing in a diversified, actively
managed portfolio of equity securities, primarily of companies with total
market capitalization of less than $1 billion.
AAF is advised by Fred Alger Management, Inc.
MFS VARIABLE INSURANCE TRUST
The MFS Emerging Growth, MFS Growth with Income, MFS 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
11
which represents an interest in a Fund of MFSVIT. Four of these series of shares
are available as investment options under the Contract. 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 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 Contract. The investment objective
of this Fund is set forth below.
SOGEN OVERSEAS VARIABLE FUND. 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 Contract. 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.
JANUS ASPEN SERIES
The Janus Aspen Capital Appreciation, Janus Aspen Growth, Janus Aspen
Balanced, Janus Aspen Flexible Income, Janus Aspen International Growth and
Janus Aspen Worldwide Growth Subaccounts each invest in shares of corresponding
Funds (i.e., "investment portfolios") of Janus Aspen Series ("JAS"). JAS issues
11 "series" or classes of shares, each of which represents an interest in a Fund
of JAS. Six of these series of shares are available as investment options under
the Contract. The investment objectives of these Funds are set forth below.
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO. This Fund seeks long-term
growth of capital by investing primarily in common stocks selected for
their growth potential.
JANUS ASPEN GROWTH PORTFOLIO. This Fund seeks long-term growth of
capital in a manner consistent with the preservation of capital by
investing primarily in common stocks selected for their growth potential.
JANUS ASPEN BALANCED PORTFOLIO. This Fund seeks long-term capital
growth, consistent with preservation of capital and balanced by current
income by normally investing 40-60% of its assets in securities selected
primarily for their growth potential and 40-60% of its assets in securities
selected primarily for their income potential.
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO. This Fund seeks to obtain
maximum total return, consistent with preservation of capital by investing
primarily in a wide variety of income-producing securities such as
corporate bonds and notes, government securities and preferred stock.
JANUS ASPEN INTERNATIONAL GROWTH PORTFOLIO. This Fund seeks long-term
growth of capital by normally investing at least 65% of its total assets in
securities of issuers from at least five different countries, excluding the
United States.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO. This Fund seeks long-term
growth of capital in a manner consistent with the preservation of capital
by investing primarily in common stocks of companies of any size throughout
the world.
12
NO ONE CAN ASSURE THAT ANY FUND WILL ACHIEVE ITS STATED OBJECTIVES AND POLICIES.
More detailed information concerning the investment objectives, policies
and restrictions of the Funds, the expenses of the Funds, the risks attendant to
investing in the Funds and other aspects of their operations can be found in the
current prospectus for each Fund which accompanies this prospectus and the
current statement of additional information for the Funds. The Funds'
prospectuses should be read carefully before any decision is made concerning the
allocation of 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, VFL cannot guarantee that each
Fund will always be available for its variable annuity contracts, but in the
event that a Fund is not available, VFL 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.
VFL has entered into agreements with the investment advisers of several of
the Funds pursuant to which each such investment adviser pays VFL a servicing
fee based upon an annual percentage of the average aggregate net assets invested
by VFL on behalf of the Variable Account. These agreements reflect
administrative services provided to the Funds by VFL. 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 VFL 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, VFL 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 VFL's General Account and the GIO Account
(described below). All or a portion of an Owner's 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,
VFL 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.
13
Interests issued by VFL 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 Purchase Payment
is allocated to or a portion of Contract Value is transferred to the Guarantee
Period, and end when the number of years in the Guarantee Period elected
(measured from the end of the calendar month in which the amount was allocated
or transferred to the Guarantee Period) has elapsed. The last day of the
Guarantee Period is the expiration date for that Guarantee Period. Subsequent
Guarantee Periods begin on the first day following the expiration date of a
previous Guarantee Period.
Allocations of 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 a Market Value Adjustment may result in
the payment of an amount less than the amount originally allocated or
transferred to the Guarantee Period.
VFL 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 VFL 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 VFL at that time, or instructions to transfer all
or a portion of the expiring Guarantee Amount to a Subaccount. If VFL 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, VFL reserves the right at any time to offer
Guarantee Periods that differ from those available when an Owner's Contract was
issued. VFL also reserves the right, at any time, to stop accepting 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. VFL owns the assets in the GIO Account and holds such assets
separately from its other assets
14
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 VFL
conducts. VFL 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, VFL 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 VFL, if VFL 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 VFL's general account for any remaining VFL
liabilities. Thus, the GIO Account represents a pool of assets that provides an
additional measure of assurance that Owners allocating Purchase Payments and
Contract Value to the Guaranteed Interest Option will receive full payment of
benefits attributable to Guaranteed Interest Option.
Owners allocating 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 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 VFL is
crediting for a Guarantee Period equal to the time remaining in the Guarantee
Period from which the Guarantee Amount is requested to be surrendered,
withdrawn, transferred or annuitized; and (ii) the Guaranteed Interest Rate
being applied to the Guarantee Period from which the Guarantee Amount will be
surrendered, withdrawn, transferred or annuitized. Any surrender, withdrawal,
transfer or application to an Annuity Payment Option of a Guarantee Amount is
subject to a Market Value Adjustment that may be positive or negative, unless
the effective date of the surrender, withdrawal, transfer or application is
within 30 days prior to the end of a Guarantee Period. The Market Value
Adjustment will be applied after the deduction of any applicable annual
administration fee or transfer processing fee, and before the deduction of any
applicable surrender charge or charge for taxes on purchase payments (also
referred to as a "premium tax" charge).
Generally, if the Guaranteed Interest Rate for the selected Guarantee
Period is lower than the Guaranteed Interest Rate currently being offered for
new Guarantee Periods of a duration equal to the balance of the selected
Guarantee Period as of the date that the Market Value Adjustment is applied,
then the application of the Market Value Adjustment will result in the payment,
upon surrender, withdrawal, transfer or application of amounts to an Annuity
Payment Option, of an amount less than the Guarantee Amount (or portion thereof)
being surrendered, withdrawn, transferred or applied to an Annuity Payment
Option. It may even result in the payment of an amount less than the 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
15
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 C.
DESCRIPTION OF THE CONTRACT
PURCHASING A CONTRACT
A prospective Owner may purchase a Contract by submitting an application
through a licensed agent of VFL 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 on the Contract
Effective Date for Annuitants 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 VFL
will accept is $100. Unless VFL 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. VFL 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. VFL will
refund the Contract Value plus any fees or charges deducted except for the
mortality and expense risk charge and the
16
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, then VFL 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) VFL will allocate the initial Purchase Payment then as
designated by the Owner, to one or more of the Subaccounts or to the Guarantee
Periods within two business days of receipt of such Purchase Payment by VFL at
its Service Center. If the application is not properly completed, VFL reserves
the right to retain the 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 VFL retaining the initial Purchase Payment
until the application is made complete. The initial Purchase Payment will then
be credited within two business days after receipt of a properly completed
application. VFL will credit additional Purchase Payments that are accepted by
VFL as of the end of the Valuation Period during which the Payment was received
at the Service Center.
The initial 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 Purchase Payment allocated
to the Guaranteed Interest Option will be allocated to that option upon receipt;
and any portion of the initial 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 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 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 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. VFL allocates any additional Purchase Payments among
the Subaccounts and the Guaranteed Interest Option in accordance with the
allocation schedule in effect when such 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 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 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
17
surrender charges and any applicable purchase payment tax charge) and any
amounts transferred out of that Subaccount.
ACCUMULATION UNITS. 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 Purchase Payment or transferred amount is invested in
the Subaccount. Therefore, 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 VFL 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 VFL 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.
18
TRANSFERS
GENERAL. Prior to the Annuity Date and after the Cancellation Period, an
Owner may transfer (by Written Notice) all or part of any Subaccount Value to
another Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, or transfer all or part of any Guarantee Amount to any
Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, subject to the following restrictions. The minimum transfer
amount is $500 or the entire Subaccount Value or Guarantee Amount, if less. The
minimum Subaccount Value or Guarantee Amount that may remain following a
transfer is $500. A transfer request that would reduce any Subaccount Value or
Guarantee Amount below $500 is treated as a transfer request for the entire
Subaccount Value or Guarantee Amount. Only four transfers may be made each
Contract Year from all or part of any Guarantee Amount. The first 12 transfers
during each Contract Year are free. VFL 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.
Dollar cost averaging begins on the first available transfer date after our
Service Center receives your request. 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. VFL
reserves the right to discontinue offering the dollar-cost averaging facility at
any time and for any reason or to change its features.
19
GUARANTEED DOLLAR-COST AVERAGING FACILITY. If elected in the application,
an Owner may use the dollar-cost averaging facility to systematically transfer
specified dollar amounts (on a monthly or quarterly basis) from a Guarantee
Amount under the Guaranteed Interest Option. For this purpose, VFL may, from
time to time, offer a special one-year or six-month Guarantee Period designed
for use with the dollar-cost averaging facility. When available, an Owner may
allocate all or part of the initial purchase payment to a special Guarantee
Period. These special Guarantee Periods are not available for subsequent
purchase payments or transfers of Contract Value. The minimum dollar amount that
may be transferred from a Guarantee Amount using the dollar-cost averaging
facility is that amount which results in the entire Guarantee Amount being
transferred to one or more Subaccounts by the end of the special Guarantee
Period and in no case shall be less than $5,000. Once elected, transfers from a
Guarantee Amount under the facility do not cease until the Guarantee Amount is
depleted. No Market Value Adjustment applies to transfers described in this
paragraph. All other requirements applicable to dollar-cost averaging transfers
from the Money Market Subaccount apply to transfers described in this paragraph.
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 VFL to automatically transfer (on a quarterly, semi-annual or
annual basis) Variable Contract Value between and among specified Subaccounts in
order to achieve a particular percentage allocation of Variable Contract Value
among such Subaccounts ("automatic Subaccount Value rebalancing"). Such
percentage allocations must be in whole numbers. Once elected, automatic
Subaccount Value rebalancing begins on the first Valuation Day of the next
calendar quarter or other period (or, if later, the next calendar quarter or
other period after the expiration of the Cancellation Period).
Owners may stop automatic Subaccount Value rebalancing at any time by
Written Notice at least seven calendar days before the first Valuation Day in a
new period. Owners may specify allocations between and among as many Subaccounts
as are available at the time automatic Subaccount Value rebalancing is elected.
Once automatic Subaccount Value rebalancing has been elected, any subsequent
allocation instructions that differ from the then-current rebalancing allocation
instructions are treated as a request to change the automatic Subaccount Value
rebalancing allocation. Owners may change automatic Subaccount Value rebalancing
allocations at any time. Allocation changes will take effect as of the Valuation
Day that instructions are received at the Service Center. Once automatic
Subaccount Value rebalancing is in effect, an Owner may only transfer Subaccount
Value among or between Subaccounts by changing the automatic Subaccount Value
rebalancing allocation instructions. Changes to automatic Subaccount Value
rebalancing must be made by Written Notice.
There is no additional charge for automatic Subaccount Value rebalancing
and rebalancing transfers do not count as one the 12 transfers available without
a transfer processing fee during any Contract Year. If automatic Subaccount
Value rebalancing is elected at the same time as the dollar-cost averaging
facility or when the dollar-cost averaging facility is being utilized, automatic
Subaccount Value rebalancing will be postponed until the first Valuation Day in
the calendar quarter or other period following the termination of dollar-cost
averaging facility. VFL reserves the right to discontinue offering automatic
Subaccount Value rebalancing at any time for any reason or to change its
features.
20
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.
VFL withdraws the amount requested from the Contract Value as of the day
that VFL receives an Owner's Written Notice, and sends the Owner that amount.
VFL 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, VFL 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, VFL 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 VFL's systematic withdrawal plan, free of
any surrender charges. Under the systematic withdrawal plan, VFL will make
withdrawals (on a monthly, quarterly, semi-annual or annual basis) from
Subaccounts specified by the Owner. Withdrawals will begin one frequency period
after the request is received at our Service Center. 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.
VFL 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
21
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
STATUS" for more details.
SURRENDERS
An Owner may surrender the Contract for its Surrender Value at any time
prior to the Annuity Date. A Contract's Surrender Value fluctuates daily as a
function of the investment experience of the Subaccounts in which an Owner is
invested. VFL does not guarantee any minimum Surrender Value for amounts
invested in the Subaccounts. Likewise, VFL 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 VFL 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 STATUS"
for more details.
DEATH OF OWNER OR ANNUITANT
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
22
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 VFL receives Due
Proof of Death of the Owner. Payments under this provision are in full
settlement of all of VFL's liability under the Contract.
DEATH BENEFITS WHEN THE ANNUITANT DIES BEFORE THE ANNUITY DATE. If the
Annuitant dies before the Annuity Date while the Owner is still living, any
Contingent Annuitant will become the Annuitant. If the Annuitant dies before the
Annuity Date and no Contingent Annuitant has been named, VFL will pay the death
benefit described below to the Beneficiary. If there is no surviving
Beneficiary, VFL will pay the death benefit to any Contingent Beneficiary. If
there is no surviving Contingent Beneficiary, VFL 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. The death benefit is an amount equal to the greatest of:
1. aggregate purchase payments made less any withdrawals as of the
date that VFL receives Due Proof of Death of the Annuitant; or
23
2. the Contract Value as of the date that VFL 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 Contract Anniversary prior to the Annuitant's Age 81. Therefore, the
death benefit floor amount is reset when, on a Contract Anniversary, Contract
Value exceeds the current death benefit floor amount.
Examples of the computation of the death benefit are shown in Appendix C.
PAYMENTS BY VFL
VFL 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, VFL 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, VFL has the right to defer
payment of surrenders, withdrawals, death benefits or Annuity Payments until the
check or draft has been honored.
VFL 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. VFL pays interest on the amount of any payment that is deferred.
TELEPHONE TRANSACTION PRIVILEGES
An Owner may make transfers or change allocation instructions by
telephoning the Service Center. An Owner may authorize his agent or
representative to make such transfer by completing a form provided by VFL. A
telephone authorization form received by VFL 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. VFL will
24
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 VFL follows these procedures, it is not
liable for any losses due to unauthorized or fraudulent transactions. VFL
reserves the right to suspend telephone transaction privileges at any time for
any reason.
SUPPLEMENTAL RIDERS
The following rider is available and may be added to a Contract.
GUARANTEED INTEREST OPTION FOR SYSTEMATIC TRANSFERS RIDER. This rider
allows you to systematically transfer specified dollar amounts of your initial
purchase payment (on a monthly or quarterly basis) from a designated Guaranteed
Interest Option Account under the Guaranteed Interest Option. There is no cost
associated with this rider.
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, surrender or
annuitization. A surrender charge is assessed on Cash Value applied to an
Annuity Payment Option during the first five Contract Years. The surrender
charge is waived if annuitization occurs during Contract Years 2 to 5 and you
select annuitization Option 4, 5, or 6. 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 VFL. Conversely, if the revenue from
such charges exceeds such expenses, the excess of revenues from such charges
over expenses will be retained by VFL. VFL 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 VFL'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 Contract Value in excess of aggregate purchase payments (less
25
prior withdrawals of purchase payments) is surrendered or withdrawn before any
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, VFL 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. VFL 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, VFL deducts any applicable Market Value Adjustment from, or adds any
applicable Market Value Adjustment to, remaining Contract Value.
AMOUNTS NOT SUBJECT TO A SURRENDER CHARGE. Each Contract Year after the
first Contract Year (or the first Contract Year if systematic withdrawals are in
effect), an Owner may withdraw an amount equal to 15% of the greater of: (1)
aggregate purchase payments (less prior withdrawals of purchase payments) as of
the first Valuation Day of that Contract Year, or (2) Contract Value as of the
day Written Request for the withdrawal is received, without incurring surrender
charge. VFL reserves the right to limit the number of such "free" withdrawals in
any Contract Year. Owners may carry over to subsequent Contract Years, any
unused "free" withdrawal percentages. For example, if 10% of either aggregate
purchase payments (less prior withdrawals of purchase payments) or Contract
Value is withdrawn in a Contract Year, then in the next Contract Year, the Owner
may withdraw an amount equal to 20% (5% unused from the previous Contract Year
plus 15% withdrawal percentage for the current Contract Year) of the greater of:
(1) aggregate purchase payments (less prior withdrawals of purchase payments) as
of the first Valuation Day of that Contract Year, or (2) Contract Value as of
the day Written Request for the withdrawal is received, without incurring
surrender charge. However, the maximum amount of "free" withdrawals in any
Contract Year is 30% of the greater of (1) or (2) as defined above.
WAIVER OF SURRENDER CHARGE. VFL 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. VFL 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.
26
ANNUAL ADMINISTRATION FEE
An annual administration fee is deducted as of each Contract Anniversary
for the prior Contract Year. VFL 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 VFL's administrative expenses
related to the Contracts. VFL 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, VFL will cancel an appropriate
number of Accumulation Units. Where the fee is obtained from a Guarantee Amount,
VFL will reduce the Guarantee Amount by the amount of the fee.
TRANSFER PROCESSING FEE
Prior to the Annuity Date, VFL permits 12 free transfers per Contract Year
among and between the Subaccounts and the Guarantee Periods. For each additional
transfer, VFL charges $25 at the time each such transfer is processed. The fee
is deducted from the amount being transferred. VFL does not expect to make a
profit from this fee.
TAXES ON PURCHASE PAYMENTS
Certain states and municipalities impose a tax on VFL 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 VFL as
of the Annuity Date based on the Contract Value on that date, and VFL 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, VFL'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. VFL 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
VFL 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 VFL, VFL will bear the shortfall. Conversely, if the
charge proves more than sufficient, the excess will be profit to VFL and will be
available for any proper purpose including, among other things, payment of
expenses incurred in selling the Contracts.
27
The mortality risk that VFL assumes is the risk that Annuitants, as a
group, will live for a longer period of time than VFL 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. VFL also assumes a mortality risk
because the Contracts guarantee a death benefit if the Annuitant dies before the
Annuity Date. The expense risk that VFL 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
VFL 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. VFL 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 VFL'S TAXES
VFL currently makes no charge to the Variable Account for any federal,
state or local taxes that VFL incurs which may be attributable to the Variable
Account or the Contracts. VFL, however, reserves the right in the future to make
a charge for any such tax or other economic burden resulting from the
application of the tax laws that it determines to be properly attributable to
the Subaccounts or to the Contracts.
SELECTING AN ANNUITY PAYMENT OPTION
ANNUITY DATE
The Owner selects the Annuity Date. For Non-Qualified Contracts, the
Annuity Date must be no later than the later of the Contract Anniversary
following the Annuitant's Age 85 (Age 99 where permitted under state law). For
most 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 VFL
receives Written Notice.
28
ANNUITY PAYMENT DATES
VFL 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.
However, the surrender charge will be waived if annuitization occurs during
Contract Years 2 to 5 and you select annuitization Option 4, 5, or 6. 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.
(See "Annuity Payment Options.") The Owner may elect to apply any portion of the
Surrender Value or Adjusted Contract Value to provide either Variable Annuity
Payments or Fixed Annuity Payments or a combination of both. If Variable Annuity
Payments are selected, the Owner must also select the Subaccounts to which
Surrender Value or Adjusted Contract Value will be applied. If no selection has
been made by the Annuity Date, Surrender Value or Adjusted Contract Value from
any Guaranteed Interest Option Value will be applied to purchase Fixed Annuity
Payments and Surrender Value or Adjusted Contract Value from each Subaccount
Value will be applied to purchase Variable Annuity Payments from that
Subaccount. If no Annuity Payment Option has been selected by the Annuity Date,
Surrender Value or Adjusted Contract Value will be applied under Annuity Payment
Option 5 (Life Annuity with Period Certain) with a designated period of 10
years. Any death benefit applied to purchase Annuity Payments is allocated among
the Subaccounts and/or the Guaranteed Interest Option as instructed by the
Beneficiary unless the Owner previously made the foregoing elections.
ANNUITY PAYMENTS
FIXED ANNUITY PAYMENTS. Fixed Annuity Payments are periodic payments from
VFL to the designated Payee, the amount of which is fixed and guaranteed by VFL.
The dollar
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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%. VFL 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 a 3% interest rate. VFL 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 VFL 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 VFL 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.
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The dollar value of each subsequent Variable Annuity Payment is the sum of the
subsequent Variable Annuity Payments attributable to each Subaccount.
The Annuity Unit Value of each Subaccount for any Valuation Period is equal
to (a) multiplied by (b) divided by (c) where:
(a) is the Net Investment Factor for the Valuation Period for which
the Annuity Unit Value is being calculated;
(b) is the Annuity Unit Value for the preceding Valuation Period; and
(c) is a daily Benchmark Rate of Return factor (for the 3% benchmark
rate of return) adjusted for the number of days in the Valuation Period.
The Benchmark Rate of Return factor is equal to one plus 3%, or 1.03. The
annual factor can be translated into a daily factor of 1.00008098.
If the net investment return of the Subaccount for an Annuity Payment
period is equal to the pro-rated portion of the 3% Benchmark Rate of Return, the
Variable Annuity Payment attributable to that Subaccount for that period will
equal the Payment for the prior period. To the extent that such net investment
return exceeds an annualized rate of return of 3% for a Payment period, the
Payment for that period will be greater than the Payment for the prior period
and to the extent that such return for a period falls short of an annualized
rate of 3%, the Payment for that period will be less than the Payment for the
prior period.
"TRANSFERS" BETWEEN SUBACCOUNTS. By Written Notice at any time after the
Annuity Date, the Payee may change the Subaccount(s) from which Annuity Payments
are being made by exchanging 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. VFL holds the Adjusted Contract Value as
principal and pays interest to the Payee. The interest rate is 3% per year
compounded annually. VFL 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. VFL 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, VFL pays the
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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. VFL 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. VFL 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, VFL pays the commuted value of the remaining payments in a lump
sum to the Payee's estate.
OPTION 4. LIFE ANNUITY. VFL 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. VFL makes monthly payments to
the Payee for as long as the Annuitant lives. At the time this option is
selected, a period certain of 5, 10, 15, or 20 years must also be selected. If
the Annuitant dies before the specified period certain ends, the payments to the
Payee will continue until the end of the specified period. The amount of the
monthly payments therefore depends on the period certain selected.
OPTION 6. JOINT LIFE AND SURVIVORSHIP ANNUITY. VFL 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 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 STATUS" for more details.
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Selection of an Annuitant or Payee who is not the Owner may have tax
consequences. You should consult a tax advisor as to these consequences.
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 VFL's published rules at the time
of the change.
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 VFL before a new
Beneficiary is designated.
These changes take effect as of the day the Written Notice is received at
the Service Center and VFL 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 STATUS."
MISSTATEMENT OF AGE OR SEX
If the Age or sex of the Annuitant given in the application is misstated,
VFL will adjust the benefits it pays under the Contract to the amount that would
have been payable at the correct Age or sex. If VFL 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 VFL makes any overpayments because of a misstatement
of Age or sex, it shall deduct from current or future payments due under the
Contract, the amount of such overpayment plus interest at an annual effective
rate of 3%.
CHANGE OF CONTRACT TERMS
Upon notice to the Owner, VFL may modify the Contract to:
1. conform the Contract or the operations of VFL or of the Variable
Account to the requirements of any law (or regulation issued by a
government agency) to which the Contract, VFL 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, VFL will make appropriate
endorsements to the Contract.
Only one of VFL's officers may modify the Contract or waive any of VFL's
rights or requirements under the Contract. Any modification or waiver must be in
writing. No agent may bind VFL by making any promise not contained in the
Contract.
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REPORTS TO OWNERS
Prior to the Annuity Date, VFL 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. VFL
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 VFL and VFL 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 VFL under any Annuity Payment
Option or in connection with the payment of any withdrawal, surrender or death
benefit, shall discharge VFL's liability to the extent of each such payment.
PROOF OF AGE AND SURVIVAL. VFL reserves the right to require proof of the
Annuitant's Age prior to the Annuity Date. In addition, for life contingent
Annuity Options, VFL reserves the right to require proof of the Annuitant's
survival before any Annuity Payment Date.
CONTRACT APPLICATION. VFL 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, VFL considers statements made in the
application to be representations and not warranties. VFL will not use any
statement in defense of a claim or to void the Contract unless it is contained
in the application. VFL will not contest the Contract.
YIELDS AND TOTAL RETURNS
From time to time, VFL 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. VFL 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.
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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, VFL may from time
to time disclose cumulative total return for Contracts funded by Subaccounts.
From time to time, yields, standard average annual total returns, and
non-standard total returns for the Funds may be disclosed, including such
disclosures for periods prior to the date the Variable Account commenced
operations.
Non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed. For additional
information regarding the
35
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.
VFL 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 STATUS
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Contract and does not purport to be
complete or to cover all tax situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers should be consulted for more
complete information. This discussion is based upon VFL's understanding of the
present Federal income tax laws. No representation is made as to the likelihood
of continuation of the present Federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service (the "IRS").
The Contract may be purchased on a tax-qualified basis ("Qualified
Contract") or non-tax-qualified basis ("Non-Qualified Contract"). Qualified
Contracts are designed for use by individuals whose premium 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), 403(b), 408, 408A, or 459 of the Code. The ultimate
effect of Federal income taxes on the amounts held under a Contract, or annuity
payments, depends on the type of retirement plan, on the tax and employment
status of the individual concerned, and on VFL'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. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into our Contract administration procedures. Owners, participants
and Beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law. Therefore, purchasers of Qualified Contracts should seek
competent legal and tax advice regarding the suitability of a Contract for their
situation. 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 CONTRACTS
DIVERSIFICATION REQUIREMENTS. The Code requires that the investments of the
Variable Account be adequately diversified in order for the Contracts to be
treated as annuity contracts for Federal income tax purposes. It is intended
that the Variable Account, through the Funds, will satisfy these diversification
requirements.
OWNER CONTROL. In certain circumstances, owners of variable annuity
contracts have been considered for Federal income tax purposes to be the owners
of the assets of the variable account supporting their contracts due to their
ability to exercise investment control over those assets. When this is the case,
the contract owners have been currently taxed on income and gains attributable
to the variable account assets. There is little guidance in this area, and some
features of the Contracts, such as the flexibility of an Owner to allocate
premium payments and transfer Contract Value, have not been explicitly addressed
in published rulings. While VFL believes that the Contracts do not give Owners
investment control over Variable Account assets, VFL reserves the right to
modify the
37
Contracts as necessary to prevent an Owner from being treated as the owner of
the Variable Account assets supporting the Contract.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
Federal income tax purposes, the Code requires any Non-Qualified Contract to
contain certain provisions specifying how your interest in the Contract will be
distributed in the event of your death. The Non-Qualified Contracts contain
provisions that are intended to comply with these Code requirements, although no
regulations interpreting these requirements have yet been issued. We intend to
review such provisions and modify them if necessary to assure that they comply
with the applicable requirements when such requirements are 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.
THE TREATMENT OF ANNUITIES
IN GENERAL. VFL believes that if you are a natural person you will not be
taxed on increases in the value of a Contract until a distribution occurs or
until annuity payments begin. (For these purposes, an 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 is treated
as a distribution.)
TAXATION OF NON-QUALIFIED CONTRACTS
NON-NATURAL PERSON. 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" (generally, the premiums or
other consideration paid for 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 tax adviser. The following discussion
generally applies to Contracts owned by natural persons.
WITHDRAWALS. When a withdrawal from a Non-Qualified Contract occurs, the
amount received will be treated as ordinary income subject to tax up to an
amount equal to the excess (if any) of the Contract Account Value immediately
before the distribution over the Owner's investment in the Contract at that
time. In the case of a surrender under a Non-Qualified Contract, the amount
received generally will be taxable only to the extent it exceeds the Owner's
investment in the Contract.
MARKET VALUE ADJUSTMENTS. The tax treatment of market value adjustments is
uncertain. You should consult a tax advisor as to those consequences.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution from a
Non-Qualified Contract, there may be imposed a federal tax penalty equal to ten
percent of the amount treated as income. In general, however, there is no
penalty on distributions:
- made on or after the taxpayer reaches age 59 1/2
- made on or after the death of an Owner;
- attributable to the taxpayer"s becoming disabled; or
38
- made as part of a series of substantially equal periodic payments for
the life (or life expectancy) of the taxpayer.
Other exceptions may be applicable under certain circumstances and special
rules may be applicable in connection with the exceptions enumerated above. A
tax adviser should be consulted with regard to exceptions from the penalty tax.
Other tax penalties may apply to Qualified Contracts.
ANNUITY PAYMENTS. Although tax consequences may vary depending on the
Annuity Payment Option elected under an annuity contract, a portion of each
annuity payment is generally not taxed and the remainder is taxed as ordinary
income. The non-taxable portion of an annuity payment is generally determined in
a manner that is designed to allow an Owner to recover his or her investment in
the Contract ratably on a tax-free basis over the expected stream of annuity
payments, as determined when annuity payments start. Once an investment in the
Contract has been fully recovered, however, the full amount of each annuity
payment is subject to tax as ordinary income.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a
Contract because of the Owner's or the Annuitant's death. Generally, such
amounts are includible in the income of the recipient as follows: (a) if
distributed in a lump sum, they are taxed in the same manner as a surrender of
the Contract, or (b) if distributed under a Payment Option, they are taxed in
the same way as annuity payments.
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT. A transfer or assignment
of ownership of a Contract, the designation of an Annuitant, the selection of
certain Annuity Dates, or the exchange of a Contract may result in certain tax
consequences to Owners that are not discussed herein. An Owner contemplating any
such transfer, assignment or exchange, should consult a tax advisor as to the
tax consequences.
WITHHOLDING. Annuity distributions are generally subject to withholding for
the recipient's federal income tax liability. Recipients can generally elect,
however, not to have tax withheld from distributions.
MULTIPLE CONTRACTS. All annuity contracts that are issued by VFL (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 such
Owner's income when a taxable distribution occurs.
TAXATION OF QUALIFIED CONTRACTS
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; 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, Beneficiaries and Payees 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
39
terms and conditions of the Contract, but VFL is not bound by the terms and
conditions of such plans to the extent such terms contradict the Contract,
unless VFL consents.
DISTRIBUTIONS. Annuity payments are generally taxed in the same manner as
under a Non-Qualified Contract. When a withdrawal from a Qualified Contract
occurs, a pro rata portion of the amount received is taxable, generally based on
the ratio of the Owner's investment in the Contract to the participant's total
accrued benefit balance under the retirement plan. For Qualified Contracts, the
investment in the contract can be zero.
Brief descriptions follow of the various types of qualified retirement
plans in connection with a Contract. We will endorse the Contract as necessary
to conform it to the requirements of such plan.
CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING 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. These retirement plans
may permit the purchase of the Contracts to accumulate retirement savings under
the plans. Adverse tax or other legal consequences to the plan, to the
participant, or to both may result if this Contract is assigned or transferred
to any individual as a means to provide benefit payments, unless the plan
complies with all legal requirements applicable to such benefits prior to
transfer of the Contract. 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 can be contributed, the deductible amount of the contribution,
the persons who may be eligible, and the time when distributions commence. Also,
distributions from certain other types of qualified retirement plans may be
"rolled over" or transferred on a tax-deferred basis into an IRA. There are
significant restrictions on rollover or transfer contributions from Savings
Incentive Match Plans (SIMPLE), under which certain employers may, provide
contributions to IRAs on behalf of their employees, subject to special
restrictions. Employers may establish Simplified Employee Pension (SEP) Plans to
provide IRA contributions on behalf of their employees. Sales of the Contract
for use with IRAs may be subject to special requirements of the IRS.
ROTH IRAS. Effective January 1, 1998, section 408A of the Code permits
certain eligible individuals to contribute to a Roth IRA. Contributions to a
Roth IRA, which are subject to certain limitations, are not deductible, and must
be made in cash or as a rollover or transfer from another Roth IRA or other IRA.
A rollover from or conversion of an IRA to a Roth IRA may be subject to tax, and
other special rules may apply. Distributions from a Roth IRA generally are not
taxed, except that, once aggregate distributions exceed contributions to the
Roth IRA, income tax and a 10% penalty tax may apply to distributions made (1)
before age 59 1/2 (subject to certain exceptions) or (2) during the five taxable
years starting with the year in which the first contribution is made to the Roth
IRA.
TAX SHELTERED ANNUITIES. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from their
gross income the premium payments made, within certain limits, on a Contract
that will provide an annuity for the employee's retirement. These premium
payments may be subject to FICA (social security) tax.
40
The following amounts may not be distributed from Code section 403(b)
annuity contracts prior to the employee's death, attainment of age 59 1/2,
separation from service, disability, or financial hardship: (1) elective
contributions made in years beginning after December 31, 1988; (2) earnings on
those contributions; and (3) earnings in such years on amounts held as of the
last year beginning before January 1, 1989. In addition, income attributable to
elective contributions may not be distributed in the case of hardship.
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; and
depending on the terms of the particular plan, the employer may be entitled to
draw on the deferred amounts for purposes unrelated to its Section 457 plan
obligations.
WITHHOLDING
Distributions from Contracts generally are subject to withholding for the
Owner's federal income tax liability. The withholding rate varies according to
the type of distribution and the Owner's tax status. The Owner will be provided
the opportunity to elect not have tax withheld from distributions.
"Eligible rollover distributions" from section 401(a) plans and section
403(b) tax-sheltered annuities are subject to a mandatory federal income tax
withholding of 20%. An eligible rollover distribution is the taxable portion of
any distribution from such a plan, except certain distributions such as minimum
distributions required by the Code or distributions in a specified annuity form.
The 20% withholding does not apply, however, if the Owner chooses a "direct
rollover" from the plan to another tax-qualified plan or IRA.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is always
the possibility that the tax treatment of the Contracts could change by
legislation or other means. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax adviser
should be consulted with respect to legislative developments and their effect on
the Contract.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences
under the Contracts are not exhaustive, and special rules are provided with
respect to other tax situations not discussed in this prospectus. Further, the
Federal income tax consequences discussed herein reflect our 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 of
recipient of the distribution. A competent tax adviser should be consulted for
further information.
41
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 VFL, is registered with the SEC as a
broker-dealer, and is a member of the National Association of Securities
Dealers, Inc. VFL pays CNA/ISI for acting as principal underwriter under a
distribution agreement. The Contracts are offered on a continuous basis and VFL
does not anticipate discontinuing the offer.
Applications for Contracts are solicited by agents who are licensed by
applicable state insurance authorities to sell VFL'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.
VOTING PRIVILEGES
In accordance with current interpretations of applicable law, VFL 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 VFL 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.
42
Fund shares as to which no timely instructions are received and shares held
by VFL 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 Separate Accounts are a party
or to which the assets of the Variable Account are subject. VFL, as an insurance
company, is ordinarily involved in litigation including class action lawsuits.
In some class action and other lawsuits involving insurance companies,
substantial damages have been sought and/or material settlement payments have
been made. Although the outcome of any litigation cannot be predicted with
certainty, VFL believes that at the present time there are no pending or
threatened lawsuits that are reasonably likely to have a material adverse impact
on its ability to meet its obligations under the Contract or to the Variable
Account nor does VFL expect to incur significant losses from such actions.
COMPANY HOLIDAYS
VFL is closed on the following days in 1999: Memorial Day, the day after
Independence Day, Labor Day, Thanksgiving Day, the day after Thanksgiving Day,
Christmas Eve, and New Years Eve.
LEGAL MATTERS
All matters relating to Pennsylvania law pertaining to the Contracts,
including the validity of the Contracts and VFL's authority to issue the
Contracts, have been passed upon by Timothy Scott, Esquire, Assistant Vice
President and Assistant General Counsel of VFL.
EXPERTS
The financial statements for Valley Forge Life Insurance Company as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 included in this prospectus and the related financial
statement schedules included elsewhere in this registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The financial statements for each of the subaccounts that comprise the
Valley Forge Life Insurance Company Variable Annuity Separate Account as of
December 31, 1998 and 1997 and for year ended December 31, 1998 and for the
period from inception through December 31, 1997 included in the Statement of
Additional Information which is part of this registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing in the registration statement, and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
43
ADDITIONAL INFORMATION ABOUT
VALLEY FORGE LIFE INSURANCE COMPANY
HISTORY AND BUSINESS
Valley Forge Life Insurance Company was incorporated under the laws of the
Commonwealth of Pennsylvania on August 9, 1956 and commenced business on
December 1, 1956. The Company markets a full range of life and health insurance
products either directly or through its pooling agreement with Assurance,
including universal life, traditional life, variable life and variable
annuities.
Formation of the Company was sponsored American Casualty Company of Reading,
Pennsylvania, which owned 50% of the outstanding shares of the Company. The
remaining 50% was held by the Valley Forge Insurance Company, a wholly owned
subsidiary of American Casualty Company.
In late 1963, the parent company was acquired by Continental Casualty Company of
Chicago, Illinois. In 1967, all outstanding shares of Continental Casualty
Company were exchanged for stock of CNA Financial Corporation, the parent
company of the CNA group of life insurance companies. On December 30, 1983, all
outstanding shares of the Company were acquired by Continental Assurance
Company, a life insurance company subsidiary of CNA Financial Corporation.
Controlling interest of CNA Financial Corporation is held by Loews Corporation,
a Delaware Corporation, 667 Madison Avenue, New York, New York 10021-8087. Loews
Corporation has interests in insurance, hotels, watches and other timing
devices, drilling rigs and tobacco. As of August 1, 1999, Loews Corporation held
86% of the outstanding voting securities of CNA Financial Corporation. Loews
Corporation is a publicly traded company whose shares are traded on the New York
Stock Exchange.
Effective December 31, 1985, pursuant to a Reinsurance Pooling Agreement the
Company began ceding all of its business to its parent, Continental Assurance
Company. This business was then pooled with the business of Continental
Assurance Company, excluding Continental Assurance Company's participating
contracts and separate accounts, and separate accounts of the Company, and 10%
of the combined net pool was retroceded to the Company. This Agreement was
amended effective July 1, 1996, for the purpose of also excluding the separate
accounts of the Company.
SELECTED FINANCIAL DATA
The following selected financial data for VFL should be read in conjunction
with the financial statements and notes thereto included in this prospectus.
SELECTED FINANCIAL DATA FOR THE PERIODS ENDED
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
June 30, Dec.31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(IN THOUSANDS OF DOLLARS) 1999 1998 1997 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Investment Income..........$ 18,108 $ 35,539 $ 29,913 $ 29,312 $ 31,494 $ 22,759
- - ----------------------------------------------------------------------------------------------------------------
Net Operating Income (Excluding
Realized Investment
Gains/Losses)................$ 6,767 $ 6,424 $ 10,600 $ 13,618 $ 13,551 $ 10,408
- - ----------------------------------------------------------------------------------------------------------------
Net Income.....................$(4,230) $ 17,453 $ 13,330 $ 16,719 $ 22,510 $ 7,482
- - ----------------------------------------------------------------------------------------------------------------
Total Assets...................$3,178,038 $2,991,429 $2,368,426 $1,980,802 $1,641,438 $1,447,122
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
44
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNAF). CNAF is a holding company whose primary
subsidiaries consist of property/casualty and life insurance companies,
collectively CNA. As of August 1, 1999, Loews Corporation owns 86% of the
outstanding common stock of CNAF.
The operations, assets and liabilities of VFL and its parent, Assurance, are
managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement,
amended July 1, 1996, VFL cedes all of its business, excluding its separate
account business, to its parent, Assurance. This business is then pooled with
the business of Assurance, which excludes Assurance's participating contracts
and separate account business, and 10% of the combined pool is assumed by VFL.
VFL, along with its parent Assurance, markets and underwrites insurance products
designed to satisfy the life, health and retirement needs of individuals and
groups. The individual insurance products consist primarily of term and
universal life insurance policies and individual annuities. Group insurance
products include life, accident and health, consisting primarily of major
medical and hospitalization and pension products. VFL and Assurance also market
a portfolio of variable products, including annuity and universal life products.
These variable products offer policyholders 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 are invested in corresponding
investment portfolios where the investment risk is borne by the policyholder
while payments allocated to the guaranteed income account earn a minimum
guaranteed rate of interest for a specified period of time for annuity contracts
and one year for life products.
RESULTS OF OPERATIONS:
The following table summarizes key components of VFL's operating results
for each of the last three years and six months ended June 30, 1999.
<TABLE>
<CAPTION>
Period Ending 6/30/99 12/31/98 12/31/97 12/31/96
Operating Revenues (excluding realized investment gains/losses):
<S> <C> <C> <C> <C>
Premiums $158,324 $315,599 $332,172 $325,486
Net investment income $ 18,108 35,539 29,913 29,312
Other $ 5,262 7,959 6,872 8,217
-------- ----- ----- -----
Total operating revenues 181,694 359,097 368,957 363,015
Benefits and expenses 170, 781 349,520 352,530 342,039
Operating income before income tax 10,913 9,577 16,427 20,976
Income tax (expense) (4,146) (3,153) (5,827) (7,358)
Net operating income
(excluding realized investment gains/losses) 6,767 6,424 10,600 13,618
Net realized investment gains (losses), net of income tax (10,763) 11,029 2,730 3,101
------- ------ ----- -----
Net Income (4,230) 17,453 13,330 16,719
</TABLE>
VFL's revenues, excluding net realized investment gains (losses), were $181.7
million for the first six months of 1999, compared to $176.4 million for the
same period in 1998. Premiums for the six months ended June 30, 1999 increased
approximately 2.4% to $158.3 million compared to $154.6 million for the same
period in 1998. The increase in premiums is due to an increase in the premiums
earned for the Federal Employees Health Benefits Plan. This positive effect was
offset somewhat by the decision to exit the insured comprehensive medical
market, and by lower sales of single premium fixed annuity products.
Premiums for the three months ended June 30, 1999 increased approximately 14.6%
to $83.7 million compared to $73.0 million for the same period in 1998. This
increase in premiums can be attributed to the same factors that accounted for
the increase in premiums for the six month reporting period, more fully
discussed above.
VFL's investment income for the six months ended June 30, 1999 was $18.1
million, an increase of 2.8% from the comparable 1998 period when investment
income was $17.6 million. The increase is attributable to a larger portfolio of
fixed maturity investments, funded by premiums received during the twelve months
ended June 30, 1999.
VFL's realized investment losses, net of tax for the six months ended June 30,
1999 of $10.8 million, compares unfavorably to $2.3 million of investment gains,
net of tax, realized during the comparable period in 1998. Sales of fixed
maturity securities accounted for virtually all of the net realized gains and
(losses) in both reporting periods. Accordingly, the interest rate environment
during all 1999 and 1998 reporting periods was an important factor underlying
the comparative realized investment results. VFL's realized investment gains
(losses), net of tax for the three months ended June 30, 1999 and 1998 were
$(8.0) million and $1.0 million, respectively. This decline in investment gains
can be attributed to the same factors underlying realized investment performance
for the six month reporting periods, more fully discussed above.
FINANCIAL CONDITION:
Assets increased approximately $187 million from December 31, 1998 to $3.178
billion as of June 30, 1999. VFL's cash and invested assets decreased by $31
million from December 31, 1998 to $591 million.
During the first six months of 1999, VFL's stockholder's equity decreased by
$9.5 million, or 3.6%, to approximately $254.3 million. The decrease in
stockholder's equity in 1999 is due primarily to a net loss of $4.2 million and
other comprehensive loss of $5.3 million during the six months ended June 30,
1999.
<TABLE>
<CAPTION>
Assets Stockholders Equity
<S> <C> <C> <C> <C>
June 30, 1999 $3,178,038 $254,265
December 31, 1998 $2,991,429 $263,820
December 31, 1997 $2,368,426 $216,260
December 31, 1996 $1,980,802 $199,540
December 31, 1995 $1,641,438 $195,472
December 31, 1994 $1,447,122 $156,196
</TABLE>
INVESTMENTS:
The following table summarizes VFL's investments shown at cost or amortized
cost and carrying value at June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENTS
June 30, 1999 % December 31,1998 % December 31, 1997 %
(In thousands of dollars) Fixed maturity securities:
U.S. Treasury Securities and
<S> <C> <C> <C> <C> <C> <C>
obligations of government agencies $240,729 40.8% 223,743 36.6% $ 299,066 55.4
Asset backed securities $ 99,393 16.8 109,207 17.8 $ 68,612 12.7
Other debt securities $141,225 23.9 121,685 19.9 $ 98,589 18.3
-------- ---- ------- ---- --------- ----
Total fixed maturity securities $481,347 81.5 454,635 74.3 $ 466,267 86.4
Common stocks 981 0.1 981 0.2 981 0.2
Policy loans $ 74,213 12.6 74,150 12.1 66,971 12.4
Other invested assets 446 0.1 485 0.1 579 0.1
Short-term investments 33,500 5.7 81,418 13.3 4,597 0.9
------ --- ------ ---- ----- ---
INVESTMENTS AT AMORTIZED COST $590,487 100.0% $611,669 100.0% $539,395 100.0%
======== ===== ======== ===== ======== =====
INVESTMENTS AT CARRYING VALUE* $586,887 $618,787 $545,968
======== ======== ========
<FN>
* As reported on the Balance Sheet
</FN>
</TABLE>
The operations, assets and liabilities of VFL and CAC are managed on a combined
basis. The investment portfolios of VFL and CAC are managed to maximize
after-tax investment return, while minimizing credit risks, with investments
concentrated in high quality securities to support insurance underwriting
operations. The investment portfolios are segregated for the purpose of
supporting policy liabilities for universal life, annuities and other interest
sensitive products.
VFL's investments in fixed maturity securities are carried at a fair value
of $476.3 million at June 30, 1999, compared with $460.5 million at December 31,
1998. At June 30, 1999, net unrealized losses on fixed maturity securities
amounted to approximately $5.1 million. This compares with net unrealized gains
of approximately $5.9 million at December 31, 1998. The gross unrealized gains
and (losses) for the fixed maturities portfolio at June 30, 1999 were $3.0
million and $(8.1) million, respectively, compared to $6.9 million and $(1.0)
million, respectively, at December 31, 1998. At December 31, 1998, net
unrealized gains on fixed maturities amounted to approximately $5.9 million.
This compares with net unrealized gains of approximately $5.4 million at
December 31, 1997. The gross unrealized gains and losses for the fixed
maturities portfolio at December 31, 1998 were $6.9 million and $1.0 million,
respectively, compared to $6.2 million and $0.8 million, respectively, at
December 31, 1997. 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 $2.2 million at December 31, 1998, compared with $2.3 million at
December 31, 1997. At December 31, 1998, unrealized gains on equity securities
amounted to approximately $1.2 million. This compares with unrealized gains of
approximately $1.3 million at December 31, 1997. There were no unrealized losses
on equity securities as of December 31, 1998 and 1997.
VFL's investments in equity securities are carried at a fair value of $2.6
million and $2.2 million at June 30, 1999 and December 31, 1998, respectively.
At June 30, 1999, unrealized gains on equity securities amounted to
approximately $1.6 million. This compares with unrealized gains of approximately
$1.2 million at December 31, 1998. There were no unrealized losses on equity
securities at June 30, 1999 and December 31, 1998.
VFL has the capacity to hold its fixed maturity portfolio to maturity.
However, securities may be sold as part of VFL's asset/liability management
strategies or to take advantage of investment opportunities generated by
changing interest rates, tax and credit considerations or other similar factors.
Accordingly, the fixed maturity securities are classified as available-for-sale.
The following table summarizes the ratings of VFL's fixed maturity
portfolio at carrying value (market):
<TABLE>
<CAPTION>
June 30, 1999 % December 31, 1998 % December 31, 1997 %
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and affiliated securities $ 279,846 58.8 $ 270,600 58.8 $300,676 63.8%
Other AAA rated 64,547 13.5 76,258 16.5 75,531 16.0
AA and A rated 37,263 7.8 53,528 11.6 61,404 13.0
BBB rated 91,312 19.2 54,241 11.8 27,292 5.8
Below investment grade 3,297 0.7 5,889 1.3 6,804 1.4
----- --- ----- --- ----- ---
TOTAL $ 476,265 100.0 $ 460,516 100.0 $471,707 100.0
</TABLE>
Included in the carrying value of fixed maturity securities at June 30, 1999 are
$97.6 million of asset-backed securities, consisting of approximately 46% in
collateralized mortgage obligations (CMOs), 40% in U.S. government agency issued
pass-through certificates, 8% in corporate mortgage-backed pass-through
certificates 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.
CMOs are subject to prepayment risk that tends to vary with changes in interest
rates. During periods of declining interest rates, CMOs generally prepay faster
as the underlying mortgages are prepaid and refinanced by the borrowers in order
to take advantage of the lower rates. Conversely, during periods of rising
interest rates, prepayments are generally slow. VFL limits the risks associated
with interest rate fluctuations and prepayments by concentrating its CMO
investments in planned amortization classes with relatively short principal
repayment windows. Net unrealized gains (losses) on CMOs is $(0.8) million and
$1.0 million at June 30, 1999 and December 31, 1998, respectively. VFL avoids
investments in complex mortgage derivatives and does not have any investments in
mortgage loans or real estate.
VFL invests from time to time in derivative financial instruments primarily to
reduce its exposure to market risk. VFL also uses derivatives to mitigate the
risk associated with certain guaranteed annuity contracts by purchasing certain
options in a notional amount equal to the original customer deposit. VFL's
general account derivatives are classified as other invested assets and its
Separate Accounts' derivatives are classified as Separate Account business.
Derivative financial instruments consist of interest rate caps in the general
account and purchased options in the Separate Accounts at June 30, 1999. The
gross notional or contractual amounts of derivative financial instruments in the
general account totaled $50 million at June 30, 1999 and December 31, 1998. The
gross notional principal or contractual amounts of derivative financial
instruments in the Separate Accounts totaled $1.5 million at June 30, 1999 and
December 31, 1998. The fair value of derivative financial instruments in the
general account and Separate Accounts at June 30, 1999 totaled $0.4 million and
$0.5 million, respectively. The fair value of derivative financial instruments
in the general account and Separate Accounts at December 31, 1998 totaled $0.1
million and $0.5 million, respectively. Net realized gains on derivative
financial instruments held in the general account and Separate Accounts were
$0.2 million, while net realized gains on derivatives in the Separate Accounts
were not material for the period ended June 30, 1999. Net realized losses on
derivative financial instruments held in the general account totaled $0.3
million while net realized gains (losses) on derivatives in the Separate
Accounts were not material for the 1998 reporting period.
High yield securities are bonds rated below investment grade by bond rating
agencies, and other unrated securities which, in the opinion of management, are
below investment grade (below BBB). High yield securities generally involve a
greater degree of risk than that of investment grade securities. Returns are
expected to compensate for the added risk. The risk is also considered in the
interest rate assumptions in the underlying insurance products. VFL's
concentration in high yield bonds was approximately 0.1% and 0.2% of total
assets as of June 30, 1999 and December 31, 1998, respectively. At June 30, 1999
and December 31, 1998, net unrealized gains on high yield securities were
approximately $0.3 million.
IMPACT OF YEAR 2000 ON VFL:
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates after 1999. Such malfunctions could lead
to business delays and disruptions. VFL does not maintain any systems. Instead,
it relies on the systems of CNA Financial, third party vendors and other
business partners. CNA Financial, on behalf of VFL, has a plan under which it
reviews periodically the progress that these parties are making on this issue.
As of December 1, 1998, CNA Financial had certified internally as Year
2000-ready all of the internal systems used by VFL. However, as business
conditions change, CNA may respond by revising previous Year 2000 strategies or
solutions affecting specific systems. In limited cases, a system that was to
have been replaced, instead, may be renovated to become Year 2000 ready prior to
January 1, 2000. VFL does not believe these changes will have a material impact
on the Company.
CNA Financial has also received statements of Year 2000 compliance from certain
key business partners. VFL management believes that the systems on which it
relies do not have any significant remaining exposure to the Year 2000 issue
and, therefore VFL does not have a material exposure to the Year 2000 issue.
However, due to the interdependent nature of computer systems, there may be an
adverse impact on VFL if its business partners fail to address the Year 2000
issue successfully. To mitigate this impact, if any, CNA Financial on behalf of
itself and VFL is communicating with its business partners to coordinate Year
2000 conversion. In addition, CNA Financial has developed business resumption
plans to ensure that it and VFL are able to continue critical processes through
other means in the event that it becomes necessary to do so. Formal strategies
have been developed to include appropriate recovery processes and use of
alternative vendors.
Based on its current assessment, CNA Financial estimates that the total
cost to replace and upgrade its systems to accommodate Year 2000 processing will
be approximately $70 million. As of June 30, 1999, CNA Financial has spent
approximately $60 million on Year 2000 readiness matters. VFL is allocated its
proportionate share of this cost.
LIQUIDITY AND CAPITAL RESOURCES:
The liquidity requirements of VFL have been met primarily by funds
generated from operating, investing and financing activities. VFL's principal
cash flow sources are premiums, investment income, receipts for investment
contracts sold and sales and maturities of investments. The primary cash flow
uses are payments for claims, policy benefits, payments on matured policyholder
contracts and operating expenses.
During the first six months of 1999, VFL's operating activities generated
net positive cash flows of approximately $11.4 million, compared with net
negative cash flows of $8.3 million for the same period in 1998.
Management believes that future liquidity needs will be met primarily by
cash generated from operations. Net cash flows from operations are generally
invested in marketable securities. Investment strategies employed by VFL
consider the cash flow requirements of the insurance products sold and the tax
attributes of the various types of marketable investments.
ACCOUNTING STANDARDS:
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires that entities recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. VFL is currently
evaluating the effects of this Statement on its accounting and reporting for
derivative securities and hedging activities.
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk
In October 1998, the American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued SOP 98-7, "Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." This
guidance excludes long-duration life and health insurance contracts from its
scope. This Statement is effective for financial statements in the year 2000,
with early adoption encouraged. VFL is currently evaluating the effects of this
SOP.
MARKET RISK
Market risk is a broad term related to economic losses due to adverse
changes in the fair value of a financial instrument. Market risk is inherent to
all financial instruments, and accordingly, VFL's risk management policies and
procedures include all market risk sensitive financial instruments.
According to the Securities and Exchange Commission (SEC) disclosure rules,
discussions regarding market risk focus on only one element of market
risk--change in price levels. Price levels can be affected by changes in
interest rates, equity prices, foreign exchange rates or other factors that
relate to volatility of the interest rates, index or price of the underlying
financial instrument. VFL's primary market risk exposures are due to changes in
interest rates, although VFL has certain exposures to changes in equity prices
and foreign currency exchange rates.
Active management of market risk is integral to VFL's operations. VFL may
use the following tools to manage its exposure to market risk within tolerable
ranges: 1) change the character of future investments purchased or sold, 2) use
derivatives to offset the market behavior of existing assets and liabilities or
assets expected to be purchased and liabilities to be incurred, or 3) rebalance
its existing asset and liability portfolios.
For purposes of this disclosure, market risk sensitive instruments are
divided into two categories: instruments entered into for trading purposes and
instruments entered into for purposes other than trading.
Interest Rate Risk: VFL has exposure to economic losses due to interest
rate risk arising from changes in the level or volatility of interest rates. VFL
attempts to mitigate its exposure to interest rate risk through active portfolio
management. VFL may also reduce this risk by utilizing instruments such as
interest rate swaps, interest rate caps, commitments to purchase securities,
options, futures and forwards. This exposure is also offset by VFL's
asset/liability duration matching strategy.
Equity Price Risk: VFL is exposed to equity price risk as a result of its
investment in equity securities and equity derivatives. Equity price risk
results from changes in the level or volatility of equity prices, which affect
the value of equity securities, or instruments which derive their value from
such securities or indexes. VFL attempts to mitigate its security specific risk
by limiting its investment in any one security or index.
Foreign Exchange Risk: Foreign exchange rate risk arises from the
possibility that changes in foreign currency exchange rates will impact the
value of financial instruments. VFL has foreign exchange exposure when it buys
or sells foreign currencies or financial instruments denominated in a foreign
currency. VFL's foreign transactions are primarily denominated in Canadian
Dollars. This exposure is mitigated by VFL's asset/liability matching strategy
and through the use of forwards for those instruments, which are not matched.
Sensitivity Analysis: VFL monitors its sensitivity to interest rate risks
by evaluating the change in its financial assets and liabilities relative to
fluctuations in interest rates. The evaluation is made using an instantaneous
parallel change in interest rates of varying magnitudes on a static balance
sheet to determine the effect such a change in rates would have on VFL's market
value at risk and the resulting effect on stockholder's equity. The analysis
presents the sensitivity of the market value of VFL's financial instruments to
selected changes in market rates and prices. The range of changes selected
reflects VFL's view of changes, which are reasonably possible over a one-year
period. The selection of the range of values chosen to represent changes in
interest rates should not be construed as VFL's prediction of future market
events, but rather an illustration of the impact of such events. Accordingly,
the analysis may not be indicative of, is not intended to provide, and does not
provide a precise forecast of the effect of changes of market interest rates on
VFL's income or stockholder's equity. Further, the computations do not reflect
any actions VFL would undertake in response to changes in interest rates.
The sensitivity analysis modeled an instantaneous increase and decrease in
market interest rates of 100 and 150 basis points from their levels at June 30,
1999 with all other variables held constant. A 100 and 150 basis point increase
in market interest rates would result in a pre-tax decrease in the net financial
instrument position of $25.4 million and $36.8 million, respectively. Similarly,
a 100 and 150 basis point decrease in market interest rates would result in a
pre-tax increase in the net financial instrument position of $28.8 million and
$44.0 million, respectively.
Equity price risk was measured assuming an instantaneous 10% and 25% change
in the Standard & Poor's 500 Index (the Index) from its level of June 30, 1999
with all other variables held constant. VFL's equity holdings were assumed to be
perfectly positively correlated with the Index. A 10% and 25% decrease in the
Index would result in a $11.1 million and $27.8 million decrease, respectively,
in the market rate of VFL's equity investments. Of these amounts, $10.8 million
and $27.1 million, respectively, would be offset by decreases in liabilities to
customers under variable annuity contracts. Similarly, increases in the Index
would result in like increases in the market value of VFL's equity investments
and increases in liabilities to customers under variable annuity contracts.
The sensitivity analysis also assumes an instantaneous 10% and 20% change
in the foreign currency exchange rates versus the U.S. Dollar from their levels
at June 30, 1999, with all other variables held constant. A 10% and 20%
strengthening of the U.S. Dollar versus other currencies would result in
decreases of $0.6 million and $1.2 million in the market value of financial
instruments that are denominated in foreign currencies. Weakening of the U.S.
Dollar versus all other currencies would result in like increases in the market
value of financial instruments that are denominated in foreign currencies.
Credit Risk
Credit risk arises from the potential inability of counterparties to
perform on an obligation in accordance with the terms of the contract. VFL is
exposed to credit risk in its capacity as counterparty in financial and
insurance contracts, reinsurance arrangements and as a holder of securities. VFL
accepts risk whenever a counterparty is obligated to perform under a contract.
As a holder of securities, VFL is exposed to default by the issuer or to the
possibility of market price deterioration. As a purchaser of reinsurance, VFL
has exposure that a reinsurer may not be able to reimburse VFL under the terms
of the reinsurance agreement. VFL has established policies and procedures to
manage credit risk, including collateral requirements and master "netting
arrangements."
Legal/Regulatory Risk
Legal/regulatory risk is the risk that changes in the legal or regulatory
environment in which VFL operates will create additional expenses not
anticipated by VFL in pricing its products or that VFL will experience advertent
or inadvertent compliance problems that require significant expenditure to
remedy, or that diminish business prospects. Regulatory initiatives, tax law
changes, new legal theories or insolvency of other insurance companies, through
guaranty fund assessments, may create costs for the insurer beyond those
currently recorded in the financial statements. VFL mitigates this risk by
offering a wide range of products and by operating throughout the United States,
thus reducing its exposure to any single product or region, and also by
employing underwriting practices which identify and minimize the adverse impact
of legal risk.
OTHER ADDITIONAL INFORMATION
EMPLOYEES
As of December 31, 1998, VFL had no employees as it has contracted with
Casualty for services provided by Casualty employees. Casualty has experienced
satisfactory labor relations and has never had work stoppages due to labor
disputes.
PROPERTIES
VFL does not own or directly lease any office space. VFL reimburses
Casualty for its proportionate share of office facilities.
CERTAIN AGREEMENTS
VFL is party to the Reinsurance Pooling Agreement with Assurance which was
previously mentioned and is also discussed in the Notes to VFL's Financial
Statements included in this Prospectus. In addition, VFL is party to the CNA
Intercompany Expense Agreement whereby expenses incurred by CNAF and each of its
subsidiaries are allocated to the appropriate company. All acquisition and
underwriting expenses allocated to VFL are further subject to the Reinsurance
Pooling Agreement with Assurance, so that acquisition and underwriting expenses
recognized by VFL are ten percent of the acquisition and underwriting expenses
of the combined pool. For information regarding expenses pursuant to the CNA
Intercompany Expense Agreement see Note 9 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 ("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
56
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 insolvency 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.
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 Company Action Level. As of December 31, 1998,
VFL has capital in excess of Company Action Level.
57
DIRECTORS AND EXECUTIVE OFFICERS
The name, age, positions and offices, term as director, and business
experience during the past five years for VFL's directors and executive officers
are listed in the following table:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------
OFFICERS OF VFL
- - ----------------------------------------------------------------------------------------------------
POSITION(S) HELD
NAME AND ADDRESS AGE WITH VFL PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Philip L. Engel* 58 Director and President of CNA since September, 1992. Prior
CNA Plaza President thereto, Mr. Engel was Executive Vice
Chicago, IL 60685 President of CNA. Mr. Engel has served as a
Director of VFL since
September, 1992.
- - ----------------------------------------------------------------------------------------------------
Bernard L. Hengesbaugh 52 Chairman of the Chairman of the Board and Chief Executive
CNA Plaza Board, Chief Officer of CNA since February, 1999. Prior
Chicago, IL 60685 Executive thereto, Mr. Hengesbaugh served as Executive
Officer, and Vice President and Chief Operating Officer of
Director CNA since February, 1998. Prior thereto, Mr.
Hengesbaugh was Senior Vice President of CNA
since November, 1990. Mr. Hengesbaugh has
served as Director since February, 1999.
- - ----------------------------------------------------------------------------------------------------
Peter E. Jokiel 51 Senior Vice Senior Vice President of CNA since November,
CNA Plaza President 1990. Chief Financial Officer of CNA from
Chicago, IL 60685 November, 1990 through October, 1997. Mr.
Jokiel served as a
Director of VFL from July,
1992 through October,
1997.
- - ----------------------------------------------------------------------------------------------------
Jonathan D. Kantor 43 Senior Vice Senior Vice President, Secretary and General
CNA Plaza President, Counsel of CNA since April, 1997. Group Vice
Chicago, IL 60685 Secretary, President of CNA since April, 1994. Prior
General Counsel thereto, Mr. Kantor was a partner at the law
and Director firm of Shea & Gould.** Mr. Kantor has served
as a Director of VFL since April, 1997.
- - ----------------------------------------------------------------------------------------------------
Robert V. Deutsch*** 39 Senior Vice Senior Vice President, Chief Financial Officer
CNA Plaza President, Chief and Director since August 16, 1999. Prior
Chicago, IL 60685 Financial thereto, Chief Financial Officer for Executive
Officer, Director Risk, Inc.
- - ----------------------------------------------------------------------------------------------------
Tom Taylor 47 Executive Vice Executive Vice President, Underwriting Policy
President Group since June 1999. Specialty Operations,
1998-1999. President and Chief Operating
Officer, Financial Insurance, 1992-1998.
- ------------------------------------------------------------------------------------------------------
Carol Dubnicki 48 Senior Vice Senior Vice President, Human Resources since
President, May, 1998. Prior thereto, Senior Vice
Director President, Human Resources, Amoco, 1993-1998.
- ------------------------------------------------------------------------------------------------------
Donald P. Lofe, Jr. 42 Group Vice Group Vice President, Corporate Finance
President, Department since October 1998. Prior thereto,
Director partner-in-charge of PricewaterhouseCoopers LLP.
- ------------------------------------------------------------------------------------------------------
John M. Squarok 46 Group Vice Group Vice President of CNA since July 1998.
President Prior thereto, Mr. Squarok was Chief Financial
and Director Officer of various businesses of GE Capital from
August 1988 until July 1998. Director since
August 1998.
- ------------------------------------------------------------------------------------------------------
</TABLE>
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 VFL. Executive officers serve at the discretion of the Board of
Directors.
* Mr. Engel plans to retire effective September, 1999.
** Shea & Gould declared bankruptcy in 1995.
***Mr. Deutsch became acting Chief Financial Officer on August 16, 1999.
58
EXECUTIVE COMPENSATION
The following table includes compensation paid by CNAF 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, 1998. 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 ALL OTHER LONG-TERM
--------------------- ANNUAL COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(A) BONUS(B) COMPENSATION PAYOUTS(C) COMPENSATION(D)
--------------------------- ---- --------- -------- ------------ ------------ ---------------
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dennis H. Chookaszian(e)....... 1998 $950,000 -- $71,358(f) $ 900,000 140,423(g)
Chairman of the Board and 1997 950,000 -- -- 1,650,000 129,288(h)
Chief Executive Officer of 1996 950,000 -- -- 1,450,000 51,362(i)
CNA Insurance Companies
Philip L. Engel(j)............. 1998 800,000 -- -- 300,000 67,794(g)
President 1997 800,000 -- -- 500,000 62,226(h)
CNA Insurance Companies 1996 800,000 -- -- 400,000 40,131(i)
Bernard L. Hengesbaugh(e)...... 1998(k) 684,423 $750,000(l) -- 42,500 28,746
Executive Vice President & 1997(k) 550,000 508,000 -- -- 23,100
Chief Operating Officer 1996(k) 550,000 250,000 -- -- 23,100
CNA Insurance Companies
Peter E. Jokiel................ 1998 550,000 550,000 -- -- 23,100
Senior Vice President 1997 550,000 399,000 -- -- 23,100
CNA Insurance Companies 1996 500,000 240,000 -- -- 21,000
W. James MacGinnitie(m)*....... 1998 500,000 220,000 -- -- 21,000
Senior Vice President & 1997 123,077 317,000(n) -- -- 1,131
Chief Financial Officer
CNA Insurance Companies
- - -------------------------------------------------------------------------------------------------------------------
*Mr. Deutsch became the acting Chief Financial Officer on August 16, 1999.
There is no compensation history for Mr. Deutsch and therefore the financial
information provided is for James MacGinnitie, the previous Chief Financial
Officer.
</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 the company's annual incentive plans and the supplemental
incentive bonus ("Supplemental Bonus") hereinafter described. Bonus awards
are typically paid in March of the following year unless deferred.
(c) Represents payout under the Incentive Compensation Plan for Certain
Executive Officers.
(d) Represents amounts contributed or accrued to the named officers for the CNA
Savings Plan and CNA Supplemental Savings Plan.
(e) On February 9, 1999, Mr. Chookaszian retired as Chairman and Chief Executive
Officer of CNA Companies and was succeeded by Mr. Hengesbaugh See
"Director's Compensation" above.
(f) Includes compensation for personal use of corporate transportation.
(g) Includes $30,004 and $12,584 of insurance premiums paid by the company on
behalf of Messrs. Chookaszian and Engel, respectively.
(h) Includes $27,356 and $11,260 of insurance premiums paid by the company on
behalf of Messrs. Chookaszian and Engel, respectively.
(i) Includes $10,422 and $6,009 of insurance premiums paid by the company on
behalf of Messrs. Chookaszian and Engel, respectively.
(j) Mr. Engel has announced his intention to retire as President effective
September, 1999.
(k) Mr. Hengesbaugh's compensation for 1996, 1997 and through February 4, 1998
was paid to him as Senior Vice President of CNA Insurance Companies.
(l) Mr. Hengesbaugh was awarded a $750,000 retention recognition award, of which
$460,000 will be deferred, pursuant to his promotion.
(m) Mr. MacGinnitie was employed by the Company effective October 1, 1997.
Consequently, he received no compensation from the Company during a portion
of 1997 and all of 1996.
(n) Includes $150,000 hiring bonus paid.
59
EMPLOYMENT CONTRACTS
VFL is a wholly-owned subsidiary of Assurance. Assurance is a wholly-owned
subsidiary of Casualty which is wholly-owned by CNAF. Loews Corporation owns
approximately 86% of the outstanding common stock of CNAF. All employees of the
CNA Insurance Companies are employed by Casualty, with the exception of Bernard
L. Hengesbaugh and Philip L. Engel who are employees of CNAF.
CNAF is party to employment agreements with each of Bernard L. Hengesbaugh
and Philip L. Engel.
The term of Mr. Hengesbaugh's agreement with CNAF (the "Agreement") expires
on December 31, 2000. The Agreement provides that he will be paid an annual Base
Salary of $950,000. In addition, Mr. Hengesbaugh will participate in an
Incentive Compensation Plan that will provide him with an opportunity to earn a
bonus based on performance and the attainment of specified corporate goals as
approved by the Incentive Compensation Committee. The amount of the Incentive
Compensation Award for the calendar year 1999 shall be determined as follows:
(i) dividing the lesser of (a) the Net Operating Income for the 1999 calendar
year or (b) $100 million by (c) $100 million, and multiplying the resulting
percentage by $950,000; and (ii) dividing the lesser of (a) the Net Operating
Income for the calendar year in excess of $200 million for the calendar year or
(b) $300 million by (c) $300 million and multiplying the resulting percentage by
200% of $950,000 and adding the products of (i) and (ii) subject to a cap of
$2,850,000. For 2000, the award shall be determined as follows: (i) dividing the
lesser of (a) the Net Operating Income for the 2000 calendar year or (b) $200
million by (c) $200 million, and multiplying the resulting percentage by
$950,000, and (ii) dividing the lesser of (a) the Net Operating Income for the
calendar year in excess of $200 million for the calendar year or (b) $300
million by (c) $300 million and multiplying the resulting percentage by 200% of
$950,000 and adding the products of (i) and (ii) subject to a cap of $2,850,000.
Any incentive compensation paid is included in the computation of pensionable
earnings under CNAF's retirement plans. Mr. Hengesbaugh may participate in the
Qualified and Supplemental Savings Plan established by CNAF wherein CNAF pays a
matching percentage of 70% of the first 6% of the employee's contributions. The
Agreement permits Mr. Hengesbaugh to participate in other benefit programs
offered by CNAF to its employees. The Agreement requires CNAF to pay Mr.
Hengesbaugh a one-time award of $750,000 for assuming the position of Chairman
and Chief Executive Officer. A portion of the one-time award has been deferred.
CNAF may terminate the Agreement without cause at any time, in which event
CNAF is required to continue to make payments to Mr. Hengesbaugh for a period of
three years from the date of termination of three times his annual rate of base
salary. The Agreement contemplates negotiation of a renewal and provides that if
the parties have not reached an agreement before March 31, 2001 then the
employment shall be considered terminated by CNAF and Mr. Hengesbaugh shall be
entitled to termination pay of three times his annual rate of base salary as of
December 31, 2000 for a period of three years. The Agreement requires Mr.
Hengesbaugh to maintain the confidentiality of information concerning CNAF's
business while he is employed by CNAF and at all times thereafter and contains
covenants whereunder Mr. Hengesbaugh shall not compete or interfere with any of
CNAF's businesses for a specified period of time.
Mr. Engel's employment agreement with CNAF (the "Agreement") expired on
December 31, 1998 and has been extended until September 30, 1999. Mr. Engel will
retire
60
from his position with CNAF on or about September 30, 1999. See "Election of
Directors" above. The Agreement provides that he will be paid an annual Base
Salary of $800,000. In addition, Mr. Engel will participate in an Incentive
Compensation Plan that will provide him with an opportunity to earn a bonus
based on performance and the attainment of specified corporate goals. The amount
of the award for 1999 shall consist of 0.3% of Net Operating Income capped at
$900,000. Any incentive compensation paid is included in the computation of
pensionable earnings under CNAF's retirement plans. Mr. Engel may participate in
the Qualified and Supplemental Savings Plan established by CNAF wherein CNAF
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. CNAF may terminate the Agreement without cause at any
time, in which event CNAF is required to continue to make payments to Mr. Engel
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.
CNAF was party to an employment agreement with Mr. Chookaszian which
expired on December 31, 1998 at which time all compensation obligations of CNAF
thereunder ceased. On February 9, 1999, CNAF and Mr. Chookaszian entered into a
Continuing Service Agreement. See "Director Compensation" above for a
description of Mr. Chookaszian's Continuing Service Agreement with CNAF.
RETIREMENT PLANS
CNAF 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") that provides for the accrual and payment of
benefits that are not available under tax qualified plans such as the Retirement
Plans. The following description of the Retirement Plans also 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 CNAF). Compensation under
the Retirement Plans consists of salary paid by CNAF and its subsidiaries
included under "Salary," "Bonus" and "Long-Term Compensation Payouts" in the
Summary Compensation Table above. The following table shows estimated annual
benefits payable upon retirement under the Retirement Plans for various
compensation levels and years of credited service, based upon normal retirement
in 1999 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.
61
PENSION PLAN TABLE
<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>
$ 400,000............ $116,343 $ 155,125 $ 193,906 $ 206,021 $ 218,136
500,000........... 146,343 195,125 243,906 259,354 274,803
600,000........... 176,343 235,125 293,906 312,688 331,470
700,000........... 206,343 275,125 343,906 366,021 388,137
800,000........... 236,343 315,125 393,906 419,355 444,804
900,000........... 266,343 355,125 443,906 472,688 501,471
1,000,000........... 296,343 395,125 493,906 526,022 558,138
1,100,000........... 326,343 435,125 543,906 579,355 614,805
1,200,000........... 356,343 475,125 593,906 632,689 671,472
1,300,000........... 386,343 515,125 643,906 686,022 728,139
1,400,000........... 416,343 555,125 693,906 739,356 784,806
1,500,000........... 446,343 595,125 743,906 792,689 841,473
1,600,000........... 476,343 635,125 793,906 846,023 898,140
1,700,000........... 506,343 675,125 843,906 899,356 954,807
1,800,000........... 536,343 715,125 893,906 952,690 1,011,474
1,900,000........... 566,343 755,125 943,906 1,006,023 1,068,141
2,000,000........... 596,343 795,125 993,906 1,059,357 1,124,808
2,100,000........... 626,343 835,125 1,043,906 1,112,690 1,181,475
2,200,000........... 656,343 875,125 1,093,906 1,166,024 1,238,142
2,300,000........... 686,343 915,125 1,143,906 1,219,357 1,294,809
2,400,000........... 716,343 955,125 1,193,906 1,272,691 1,351,476
2,500,000........... 746,343 995,125 1,243,906 1,326,024 1,408,143
2,600,000........... 776,343 1,035,125 1,293,906 1,379,358 1,464,810
2,700,000........... 806,343 1,075,125 1,343,906 1,432,691 1,521,477
2,800,000........... 836,343 1,115,125 1,393,906 1,486,025 1,578,144
2,900,000........... 866,343 1,155,125 1,443,906 1,539,358 1,634,811
- - -----------------------------------------------------------------------------------------------------
</TABLE>
The amounts in the table reflect deductions for estimated Social Security
payments.
Mr. Chookaszian, Mr. Engel, Mr. Hengesbaugh and Mr. MacGinnitie have 23,
33, 18 and 5 years of credited service, respectively.
62
LONG-TERM INCENTIVE PLAN -- AWARDS IN 1998
The following table contains information with respect to awards made in
1998 under CNAF's Incentive Compensation Plan and under CNAF's long-term award
plan to CNAF's most highly compensated executive officers:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------
ESTIMATED FUTURE PAYOUTS
-----------------------------------
NAME PERFORMANCE PERIOD(1) MAXIMUM(2)
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
Dennis H. Chookaszian............................... 1 year - 1998 900,000
Philip L. Engel..................................... 1 year - 1998 $300,000
Bernard L. Hengesbaugh.............................. 1 year - 1998 $ 42,500
- - -------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to the Incentive Compensation Plan, in 1996 the Incentive
Compensation Committee granted three single year awards (each, an "Award")
to Dennis Chookaszian and Philip Engel for each of the years 1996, 1997 and
1998 (each year being a "Performance Period"). On February 4, 1998, Mr.
Hengesbaugh was approved as a participant in the Plan. Each Award represents
a designated percentage of CNAF's consolidated after-tax net income,
exclusive of realized investment gains and losses ("Net Operating Income")
for one or more Performance Periods reduced by factors which in the judgment
of the Incentive Compensation Committee merited consideration. There is no
award of units or securities under the Incentive Compensation Plan. As
previously stated, Mr. Chookaszian's employment agreement expired on
December 31, 1998.
(2) The figures given for Messrs. Chookaszian, Engel and Hengesbaugh represent
actual payouts to those executives pursuant to the Incentive Compensation
Plan. The Estimated Future Payouts Maximum for Messrs. Chookaszian, Engel
and Hengesbaugh had been $1,850,000, $600,000 and $600,000 respectively. The
Performance Goal set for Dennis Chookaszian for the 1998 Performance Period
was 1/3% of 1996 Net Operating Income plus 1/3% of 1997 Net Operating Income
plus 1/3% of 1998 Net Operating Income. The Performance Goal set for Philip
Engel for the 1998 Performance Period was 1/12% of 1996 Net Operating Income
plus 1/12% of 1997 Net Operating Income plus 1/12% of 1998 Net Operating
Income. The Performance Goal set for Bernard Hengesbaugh for the 1998
Performance Period was 1/4% of 1998 Net Operating Income.
63
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
JUNE 30 DECEMBER 31
1999 1998
(Unaudited)
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars, except per share amounts)
ASSETS:
Investments:
Fixed maturities available-for-sale (amortized cost: $481,347 and $454,635) $ 476,265 $ 460,516
Equity securities available-for-sale (cost: $981 and $981) 2,558 2,218
Policy loans 74,213 74,150
Other invested assets 351 485
Short-term investments 33,500 81,418
----------- -----------
TOTAL INVESTMENTS 586,887 618,787
Cash 4,515 3,750
Receivables:
Reinsurance 2,215,669 2,119,897
Premium and other insurance 53,088 54,664
Deferred acquisition costs 119,845 111,963
Receivables for securities sold 17,309 --
Accrued investment income 8,229 7,721
Due from affiliates 39,165 --
Deferred income taxes 2,804 --
Other 1,836 902
Separate Account business 128,691 73,745
- - --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,178,038 $ 2,991,429
==============================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits $ 2,540,154 $ 2,438,305
Claims 142,776 93,001
Policyholders' funds 48,003 42,746
Payables for securities purchased 17,106 370
Federal income taxes payable 8,260 6,468
Deferred income taxes -- 6,213
Due to affiliates -- 1,946
Commissions and other payables 38,783 64,815
Separate Account business 128,691 73,745
----------- -----------
TOTAL LIABILITIES 2,923,773 2,727,609
----------- -----------
Commitments and contingent liabilities - Note 3 -- --
Stockholder's Equity:
Common stock ($50 par value; Authorized-200,000 shares;
Issued-50,000 shares) 2,500 2,500
Additional paid-in capital 69,150 69,150
Retained earnings 183,453 187,683
Accumulated other comprehensive income (838) 4,487
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 254,265 263,820
- - --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 3,178,038 $ 2,991,429
==============================================================================================================
</TABLE>
See accompanying Notes to Condensed Financial Statements (Unaudited).
3
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
PERIOD ENDED JUNE 30 1999 1998 1999 1998
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
Revenues:
Premiums $ 83,651 $ 73,025 $158,324 $154,580
Net investment income 9,004 9,032 18,108 17,623
Realized investment gains (losses) (13,213) 1,520 (17,902) 3,513
Other 3,597 2,595 5,262 4,156
-------- -------- -------- --------
83,039 86,172 163,792 179,872
-------- -------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits 80,891 70,228 151,002 145,381
Amortization of deferred acquisition costs 3,068 2,615 6,065 5,167
Other operating expenses 7,415 6,713 13,714 16,571
-------- -------- -------- --------
91,374 79,556 170,781 167,119
-------- -------- -------- --------
Income (loss) before income tax and cumulative
effect of change in accounting principle (8,335) 6,616 (6,989) 12,753
Income tax expense (benefit) (3,485) 2,336 (2,993) 4,554
-------- -------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle (4,850) 4,280 (3,996) 8,199
Cumulative effect of change in accounting
principle, net of taxes - Note 5 - - (234) -
- - ------------------------------------------------------------- ------- -------- -------
NET INCOME (LOSS) $ (4,850) $ 4,280 $ (4,230) $ 8,199
============================================================= ======= ======== =======
</TABLE>
See accompanying Notes to Condensed Financial Statements (Unaudited).
4
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Six Months Ended Common Paid-in Comprehensive Retained Comprehensive Stockholder's
June 30, 1999 and 1998 Stock Capital Income (Loss) Earnings Income (Loss) Equity
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Balance, December 31, 1997 $ 2,500 $ 39,150 $ 170,230 $ 4,380 $ 216,260
Comprehensive income (loss):
Net income - - $ 8,199 8,199 - 8,199
Other comprehensive income - - 788 - 788 788
---------
Total comprehensive income $ 8,987
=========
- - ----------------------------------------------------------- ------------------------------------------
Balance, June 30, 1998 $ 2,500 $ 39,150 $ 178,429 $ 5,168 $ 225,247
=========================================================== ==========================================
Balance, December 31, 1998 $ 2,500 $ 69,150 $ 187,683 $ 4,487 $ 263,820
Comprehensive income (loss):
Net loss - - $ (4,230) (4,230) - (4,230)
Other comprehensive loss - - (5,325) - (5,325) (5,325)
---------
Total comprehensive loss $ (9,555)
=========
- - ----------------------------------------------------------- -------------------------------------------
Balance, June 30, 1999 $ 2,500 $ 69,150 $ 183,453 $ (838) $ 254,265
=========================================================== ===========================================
</TABLE>
See accompanying Notes to Condensed Financial Statements (Unaudited).
5
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30 1999 1998
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (4,230) $ 8,199
Adjustments to reconcile net income to net cash flows from
operating activities:
Deferred income provision (6,277) 4,292
Net realized investment (gains) losses, pre-tax 17,902 (3,513)
Amortization of bond discount (1,237) (1,955)
Changes in:
Insurance receivables, net (94,196) (491,676)
Deferred acquisition costs (5,657) (8,873)
Accrued investment income (508) (514)
Due from affiliates (41,111) 29,566
Federal income taxes 1,792 102
Insurance reserves 171,590 495,132
Commissions and other payables and other (26,631) (39,109)
--------- ---------
Total adjustments 15,667 (16,548)
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES 11,437 (8,349)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities (989,428) (190,742)
Proceeds from fixed maturities:
Sales 898,060 173,683
Maturities, calls and redemptions 46,529 28,186
Change in policy loans (63) (3,329)
Change in other invested assets (214) --
Change in short-term investments 49,153 (29,854)
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES 4,037 (22,056)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for investment contracts credited to policyholder account balances 5,982 27,111
Return of policyholder account balances on investment contracts (20,691) (19,836)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES (14,709) 7,275
--------- ---------
NET CASH FLOWS 765 (23,130)
Cash at beginning of period 3,750 24,565
- - -------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 4,515 $ 1,435
=======================================================================================================
Supplemental disclosures of cash flow information:
Federal income taxes paid $ -- $ --
=======================================================================================================
</TABLE>
See accompanying Notes to Condensed Financial Statements (Unaudited).
6
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION:
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (CAC). CAC is a wholly-owned subsidiary of
Continental Casualty Company (Casualty) which is wholly-owned by CNA Financial
Corporation (CNA Financial). CNA Financial is a holding company whose primary
subsidiaries consist of property/casualty and life insurance companies,
collectively CNA. Loews Corporation owns approximately 86% of the outstanding
common stock of CNA Financial.
VFL markets and underwrites insurance products designed to satisfy the life,
health and retirement needs of individuals and groups. Products available in
individual policy form include annuities as well as term and universal life
insurance. Products available in group policy form include life, pension,
accident and health.
The operations, assets and liabilities of VFL and its parent, CAC, are
managed on a combined basis pursuant to a Reinsurance Pooling Agreement. Under
this Reinsurance Pooling Agreement, VFL cedes all of its business, excluding its
Separate Account business, to its parent, CAC. This business is then pooled with
the business of CAC, which excludes CAC's participating contracts and separate
account business, and 10% of the combined pool is assumed by VFL.
The operating results for the interim periods are not necessarily indicative
of the results to be expected for the full year. These statements should be read
in conjunction with the financial statements and notes thereto included in VFL's
Form 10-K for the year ended December 31, 1998, filed with the Securities and
Exchange Commission.
The accompanying condensed financial statements have been prepared in
conformity with generally accepted accounting principles. Certain amounts
applicable to prior years have been reclassified to conform to classifications
followed in 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of VFL's management, these statements include all adjustments,
consisting of normal recurring accruals, which are necessary for the fair
presentation of the financial position, results of operations and cash flows in
the accompanying condensed financial statements.
7
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
NOTE 2. REINSURANCE:
The ceding of insurance does not discharge the primary liability of the
original insurer. VFL places reinsurance with other carriers only after careful
review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claim settlement performance. Further, for
carriers that are not authorized reinsurers in VFL's state of domicile, VFL
receives collateral, primarily in the form of bank letters of credit.
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health earned
premiums is from short duration contracts. The effects of reinsurance on premium
revenues are shown in the following schedule:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------
PREMIUMS
-------------------------------------------
ASSUMED/
SIX MONTHS ENDED JUNE 30 DIRECT ASSUMED CEDED NET NET %
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
1999
Life $312,515 $ 38,004 $319,682 $ 30,837 123%
Accident and health 2,945 127,487 2,945 127,487 100
- - --------------------------------------------------------------------------------------------
TOTAL PREMIUMS $315,460 $165,491 $322,627 $158,324 105%
============================================================================================
1998
Life $255,982 $ 41,293 $258,973 $ 38,302 108%
Accident and health 1,827 116,278 1,827 116,278 100%
- - --------------------------------------------------------------------------------------------
Total premiums $257,809 $157,571 $260,800 $154,580 102%
============================================================================================
</TABLE>
Transactions with CAC, as part of the pooling agreement described in Note 1,
are reflected in the above table. Premium revenues ceded to non-affiliated
companies were $187.4 million for the six months ended June 30, 1999, and $111.0
million for the six months ended June 30, 1998. Additionally, benefits and
expenses for insurance claims and policyholders' benefits are net of reinsurance
recoveries from non-affiliated companies of $139.2 million for the period ended
June 30, 1999, and $77.5 million for the same period in 1998.
Reinsurance receivables reflected on the balance sheets are amounts
recoverable from reinsurers who have assumed a portion of VFL's insurance
reserves. These balances are principally due from CAC pursuant to the
Reinsurance Pooling Agreement.
NOTE 3. LEGAL PROCEEDINGS:
VFL is party to litigation in the ordinary course of business. The outcome
of this litigation will not, in the opinion of management, materially affect the
results of operations or equity of VFL.
8
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
NOTE 4. OTHER COMPREHENSIVE INCOME:
Comprehensive income is comprised of all changes to stockholder's equity,
including net income, except those changes resulting from investments by, and
distributions to, the stockholder. Other comprehensive income (loss) is
comprehensive income exclusive of net income. The change in the components of
other comprehensive income (loss) are presented in the following table:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
PRE-TAX TAX (EXPENSE) NET
THREE MONTHS ENDED JUNE 30, 1999 AMOUNT BENEFIT AMOUNT
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Net unrealized gains (losses) on investments securities:
Net unrealized gains (losses) arising during the period $(1,304) $ 354 (950)
Reclassification adjustment for (gains) losses included in net income (566) 198 (368)
- - --------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE LOSS $(1,870) $ 552 $(1,318)
==========================================================================================================================
Pre-tax Tax (Expense) Net
Three Months Ended June 30, 1998 Amount Benefit Amount
- - --------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net unrealized gains (losses) on investments securities:
Net unrealized gains (losses) arising during the period $(3,606) $ 1,263 $(2,343)
Reclassification adjustment for (gains) losses included in net income 5,428 (1,900) 3,528
- - --------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income $ 1,822 $ (637) $ 1,185
==========================================================================================================================
- - --------------------------------------------------------------------------------------------------------------------------
PRE-TAX TAX (EXPENSE) NET
SIX MONTHS ENDED JUNE 30, 1999 AMOUNT BENEFIT AMOUNT
- - --------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net unrealized gains (losses) on investments securities:
Net unrealized gains (losses) arising during the period $(5,323) $ 1,851 $(3,472)
Reclassification adjustment for (gains) losses included in net income (2,851) 998 (1,853)
- - --------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE LOSS $(8,174) $ 2,849 $(5,325)
==========================================================================================================================
Pre-tax Tax (Expense) Net
Six Months Ended June 30, 1998 Amount Benefit Amount
- - --------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net unrealized gains (losses) on investments securities:
Net unrealized gains (losses) arising during the period $(1,750) $ 613 $(1,137)
Reclassification adjustment for (gains) losses included in net income 2,962 (1,037) 1,925
- - --------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income $ 1,212 $ (424) $ 788
==========================================================================================================================
</TABLE>
9
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONCLUDED
NOTE 5. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
In December 1997, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position (SOP)
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 requires that entities recognize liabilities for
insurance-related assessments when all of the following criteria have been met:
an assessment has been imposed or it is probable that an assessment will be
imposed; the event obligating an entity to pay an imposed or probable assessment
has occurred on or before the date of the financial statements; and the amount
of the assessment can be reasonably estimated. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998.
Accordingly, VFL adopted SOP 97-3 effective January 1, 1999 and an after-tax
charge of $234,000 ($360,000 pre-tax) was recorded during 1999 to reflect the
cumulative effect of a change in accounting principle.
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, 1998 and 1997, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 10, 1999
64
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE COMPANY
The following financial statements are those of VFL and not those of the
separate account. They are included for the purpose of informing investors as to
the financial position and operations of VFL.
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
- - ----------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
ASSETS:
Investments:
Fixed maturities available-for-sale (amortized cost:
$454,635 and $466,267)................................ $ 460,516 $ 471,707
Equity securities available-for-sale (cost: $981 and
$981)................................................. 2,218 2,260
Policy loans............................................ 74,150 66,971
Other invested assets................................... 485 433
Short-term investments.................................. 81,418 4,597
---------- ----------
TOTAL INVESTMENTS................................... 618,787 545,968
Cash...................................................... 3,750 24,565
Receivables:
Reinsurance............................................. 2,119,897 1,586,471
Premium and other insurance............................. 54,690 65,196
Less allowance for doubtful accounts.................... (26) (285)
Deferred acquisition costs................................ 111,963 95,354
Accrued investment income................................. 7,721 5,245
Receivables for securities sold........................... -- 744
Due from affiliates....................................... -- 35,999
Other..................................................... 902 228
Separate Account business................................. 73,745 8,941
- - ----------------------------------------------------------------------------------------
TOTAL ASSETS $2,991,429 $2,368,426
- - ----------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits.................................. $2,438,305 $1,906,899
Claims.................................................. 93,001 81,242
Policyholders' funds.................................... 42,746 39,928
Payables for securities purchased......................... 370 497
Federal income taxes payable.............................. 6,468 5,975
Deferred income taxes..................................... 6,213 4,098
Due to affiliates......................................... 1,946 --
Commissions and other payables............................ 64,815 104,586
Separate Account business................................. 73,745 8,941
---------- ----------
TOTAL LIABILITIES................................... 2,727,609 2,152,166
---------- ----------
Commitments and contingent liabilities -- Notes 8 and 10.... -- --
Stockholder's Equity
Common stock ($50 par value; Authorized-200,000 shares;
Issued-50,000 shares)................................... 2,500 2,500
Additional paid-in capital................................ 69,150 39,150
Retained earnings......................................... 187,683 170,230
Accumulated other comprehensive income.................... 4,487 4,380
---------- ----------
TOTAL STOCKHOLDER'S EQUITY.......................... 263,820 216,260
- - ----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,991,429 $2,368,426
- - ----------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
65
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Revenues:
Premiums.................................................. $315,599 $332,172 $325,486
Net investment income..................................... 35,539 29,913 29,312
Realized investment gains................................. 16,967 4,200 4,771
Other..................................................... 7,959 6,872 8,217
-------- -------- --------
376,064 373,157 367,786
-------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits.............. 301,900 307,207 304,840
Amortization of deferred acquisition costs................ 11,807 11,818 1,177
Other operating expenses.................................. 35,813 33,505 36,022
-------- -------- --------
349,520 352,530 342,039
-------- -------- --------
Income before income tax................................ 26,544 20,627 25,747
Income tax expense.......................................... 9,091 7,297 9,028
================================================================================================
NET INCOME $ 17,453 $ 13,330 $ 16,719
================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
66
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL INCOME EARNINGS INCOME EQUITY
- - -----------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995....... $2,500 $39,150 $140,181 $ 13,641 $195,472
Comprehensive income:
Net income..................... -- -- $ 16,719 16,719 16,719
Other comprehensive loss....... -- -- (12,651) -- (12,651) (12,651)
--------
Total comprehensive
income................... $ 4,068
========
BALANCE, DECEMBER 31, 1996....... 2,500 39,150 156,900 990 199,540
Comprehensive income:
Net income..................... -- -- $ 13,330 13,330 -- 13,330
Other comprehensive income..... -- -- 3,390 -- 3,390 3,390
--------
Total comprehensive
income................... $ 16,720
========
BALANCE, DECEMBER 31, 1997....... 2,500 39,150 170,230 4,380 216,260
Capital contribution from
Assurance...................... -- 30,000 -- -- 30,000
Comprehensive income:
Net income..................... -- -- $ 17,453 17,453 -- 17,453
Other comprehensive income..... -- -- 107 -- 107 107
--------
Total comprehensive
income................... $ 17,560
=================================================================================================================
BALANCE, DECEMBER 31, 1998 $2,500 $69,150 $187,683 $ 4,487 $263,820
=================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
67
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 17,453 $ 13,330 $ 16,719
Adjustments to reconcile net income to net cash flows from
operating activities:
Deferred income tax provision............................. 2,115 2,581 3,309
Realized investment gains................................. (16,967) (4,200) (4,771)
Amortization of bond discount............................. (4,821) (2,438) (4,922)
Changes in:
Insurance receivables, net.............................. (522,920) (269,787) (254,549)
Deferred acquisition costs.............................. (16,746) (20,765) (23,989)
Accrued investment income............................... (2,476) (300) (258)
Due to/from affiliates.................................. 37,945 31,500 (62,563)
Federal income taxes payable............................ 493 2,151 4,399
Insurance reserves...................................... 541,560 221,252 198,239
Commissions and other payables and other................ (40,861) 47,212 (8,376)
--------- --------- ---------
TOTAL ADJUSTMENTS................................... (22,678) 7,206 (153,481)
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES............ (5,225) 20,536 (136,762)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities............................... (744,431) (464,361) (535,263)
Proceeds from fixed maturities:
Sales..................................................... 741,277 278,459 530,828
Maturities, calls and redemptions......................... 33,635 45,442 36,726
Purchases of equity securities.............................. (5) (1,334) (728)
Proceeds from sale of equity securities..................... 5 2,447 1,306
Change in short-term investments............................ (73,233) 39,301 (2,851)
Change in policy loans...................................... (7,179) (6,704) (4,259)
Change in other invested assets............................. (82) (580) --
Other, net.................................................. -- -- 72
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES............ (50,013) (107,330) 25,831
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for investment contracts credited to policyholder
accounts................................................ 30,007 111,478 98,091
Return of policyholder account balances on investment
contracts............................................... (25,584) (24,878) (4,504)
Capital contribution from Affiliate....................... 30,000 -- --
--------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES............ 34,423 86,600 93,587
--------- --------- ---------
NET CASH FLOWS...................................... (20,815) (194) (17,344)
Cash at beginning of period................................. 24,565 24,759 42,103
- - ---------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD....................................... $ 3,750 $ 24,565 $ 24,759
===================================================================================================
Supplemental disclosures of cash flow information:
Federal income taxes paid................................. $ 6,651 $ 2,488 $ 1,965
===================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
68
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 (CNAF). Loews Corporation owns approximately 85% of
the outstanding common stock of CNAF.
VFL markets and underwrites insurance products designed to satisfy the
life, health and retirement needs of individuals and groups. Products available
in individual policy form include annuities as well as term and universal life
insurance. Products available in group policy form include life, pension,
accident and health.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement,
amended July 1, 1996, VFL cedes all of its business, excluding its separate
account business, to its parent, Assurance. This business is then pooled with
the business of Assurance, which excludes Assurance's participating contracts
and separate account business, and 10% of the combined pool is assumed by VFL.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). Certain amounts applicable to
prior years have been reclassified to conform to classifications followed in
1998.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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.
Future policy benefit reserves--Reserves for traditional life insurance
products (whole and term life products) are computed based upon the net level
premium method 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 9%, and mortality, morbidity and withdrawal
assumptions reflect VFL and industry experience prevailing at the time of issue.
Expense assumptions include the estimated effects of inflation and expenses
beyond the premium paying period. Reserves for universal life-type contracts are
69
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED)
equal to the account balances that accrue to the benefit of the policyholders.
Interest crediting rates ranged from 4.30% to 7.25% for the three years ended
December 31, 1998.
Claim reserves--Claim reserves include provisions for reported claims in
the course of settlement and estimates of unreported losses based upon past
experience.
Reinsurance--In addition to the Pooling Agreement with Assurance, VFL also
assumes and cedes insurance with other insurers and reinsurers and members of
various reinsurance pools and associations. VFL utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of risk
and minimize exposures on larger risks. The reinsurance coverages are tailored
to the specific risk characteristics of each product line with VFL's retained
amount varying by type of coverage. VFL's reinsurance includes coinsurance,
yearly renewable term and facultative programs. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim liability.
Deferred acquisition costs--Life acquisition costs are capitalized and
amortized based on assumptions consistent with those used for computing policy
benefit reserves. Acquisition costs on traditional life business are amortized
over the 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. To the extent that unrealized
gains or losses on available-for-sale securities would result in an adjustment
of deferred policy acquisition costs had those gains or losses actually been
realized, the related unamortized deferred policy acquisition costs are recorded
as an adjustment of the unrealized gains or losses included in stockholder's
equity.
INVESTMENTS
Valuation of investments--VFL classifies its fixed maturities and its
equity securities as available-for-sale, and as such, they are carried at fair
value. The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and accretion
are included in net 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
that approximates market value. VFL has no real estate or mortgage loans.
VFL accounts for its derivative securities under the fair value method.
Under this method the derivative securities are recorded at fair value at the
reporting date and changes in fair value are reflected in realized investment
gains and losses. VFL's derivatives are made up of interest rate caps and
purchased options and are classified as other invested assets.
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 maturities and equity securities are reflected as part of
stockholder's equity, net of applicable deferred income taxes and deferred
acquisition costs. Investments are written down to estimated fair
70
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED)
values and losses are charged to income when a decline in value is considered to
be other than temporary.
Securities lending activities--VFL has a securities lending program were
securities are loaned to third parties, primarily major brokerage firms.
Borrowers of these securities must deposit 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 are invested in short-term investments
(primarily commercial paper). VFL continues to receive the interest on the
loaned debt securities, as beneficial owner, and accordingly, loaned debt
securities are included within fixed maturity securities. VFL had no securities
on loan at December 31, 1998 or 1997.
Separate Account business--VFL writes certain variable annuity contracts
and universal life policies. The supporting assets and liabilities of these
contracts and policies are legally segregated and reflected as assets and
liabilities of Separate Account business. Substantially all assets of the
Separate Account business are carried at fair value. Separate Account
liabilities are principally obligations due to contractholders and are carried
at contract values.
INCOME TAXES
The provision for income taxes includes deferred taxes, resulting from
temporary differences between the financial statement and tax return basis of
assets and liabilities under the liability method. Temporary differences
primarily relate to insurance reserves, deferred acquisition costs, investment
valuation differences, and net unrealized investment gains/losses.
71
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2. INVESTMENTS:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
- - -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- - -----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Fixed maturities:
Taxable bonds............................................. $27,150 $20,669 $21,597
Equity securities........................................... 72 72 59
Policy loans................................................ 4,760 4,264 3,669
Short-term investments...................................... 3,803 4,885 4,197
Other....................................................... 105 201 12
------- ------- -------
35,890 30,091 29,534
Investment expense.......................................... 351 178 222
- - -----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $35,539 $29,913 $29,312
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT GAINS (LOSSES)
- - ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- - ------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities.......................................... $16,907 $ 3,333 $ 4,123
Equity securities......................................... -- 1,021 578
Other..................................................... 60 (154) 70
------- ------- --------
16,967 4,200 4,771
Income tax expense.......................................... (5,938) (1,470) (1,670)
------- ------- --------
NET REALIZED INVESTMENT GAINS......................... 11,029 2,730 3,101
------- ------- --------
Change in net unrealized investment gains (losses):
Fixed maturities.......................................... 441 5,806 (20,726)
Equity securities......................................... (42) (607) 1,263
Separate Account business and other....................... (235) 20 --
------- ------- --------
164 5,219 (19,463)
Deferred income tax (expense) benefit....................... (57) (1,829) 6,812
------- ------- --------
CHANGE IN NET UNREALIZED INVESTMENT GAINS (LOSSES).... 107 3,390 (12,651)
- - ------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) $11,136 $ 6,120 $ (9,550)
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF GROSS REALIZED
INVESTMENT GAINS (LOSSES) FOR FIXED
MATURITIES AND EQUITY SECURITIES
- - ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
FIXED EQUITY FIXED EQUITY FIXED EQUITY
YEAR ENDED DECEMBER 31 MATURITIES SECURITIES MATURITIES SECURITIES MATURITIES SECURITIES
- - ---------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales................... $741,277 $ 5 $278,459 $2,447 $530,828 $1,306
======== === ======== ====== ======== ======
Gross realized gains.................. $ 17,604 $-- $ 4,793 $1,113 $ 7,927 $ 578
Gross realized losses................. (697) -- (1,460) (92) (3,804) --
- - ---------------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS ON SALES $ 16,907 $-- $ 3,333 $1,021 $ 4,123 $ 578
=====================================================================================================================
</TABLE>
72
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED)
<TABLE>
<CAPTION>
ANALYSIS OF NET UNREALIZED INVESTMENT
GAINS (LOSSES) INCLUDED IN ACCUMULATED
OTHER COMPREHENSIVE INCOME
- - ---------------------------------------------------------------------------------------------------------------
1998 1997
---------------------------- ---------------------------
DECEMBER 31 GAINS LOSSES NET GAINS LOSSES NET
- - ---------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities.................................. $6,926 $(1,045) $ 5,881 $6,227 $(787) $ 5,440
Equity securities................................. 1,237 -- 1,237 1,279 -- 1,279
Separate Account business and other............... -- (215) (215) 20 -- 20
------ ------- ------- ------ ----- -------
$8,163 $(1,260) 6,903 $7,526 $(787) 6,739
====== ======= ====== =====
Deferred income tax expense....................... (2,416) (2,359)
- - ---------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS $ 4,487 $ 4,380
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
- - ------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
- - ------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
U.S. Treasuries and obligations of government agencies... $223,743 $1,601 $ 563 $224,781
Asset-backed securities.................................. 109,207 1,163 180 110,190
Corporate securities..................................... 98,466 2,512 81 100,897
Other debt securities.................................... 23,219 1,650 221 24,648
-------- ------ ------ --------
Total fixed maturities............................... 454,635 6,926 1,045 460,516
Equity securities........................................ 981 1,237 -- 2,218
- - ------------------------------------------------------------------------------------------------------------
TOTAL $455,616 $8,163 $1,045 $462,734
============================================================================================================
DECEMBER 31, 1997
U.S. Treasuries and obligations of government agencies... $299,066 $2,073 $ 711 $300,428
Asset-backed securities.................................. 68,612 147 74 68,685
Corporate securities..................................... 72,431 2,384 2 74,813
Other debt securities.................................... 26,158 1,623 -- 27,781
-------- ------ ------ --------
Total fixed maturities............................. 466,267 6,227 787 471,707
Equity securities........................................ 981 1,279 -- 2,260
- - ------------------------------------------------------------------------------------------------------------
TOTAL $467,248 $7,506 $ 787 $473,967
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED
MATURITIES BY CONTRACTUAL MATURITY
- - -------------------------------------------------------------------------------------
1998
---------------------
AMORTIZED MARKET
DECEMBER 31 COST VALUE
- - -------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Due in one year or less..................................... $ 7,507 $ 7,508
Due after one year through five years....................... 111,381 112,434
Due after five years through ten years...................... 45,393 46,494
Due after ten years......................................... 181,146 183,891
Asset-backed securities not due at a single maturity date... 109,208 110,189
- - -------------------------------------------------------------------------------------
TOTAL $454,635 $460,516
=====================================================================================
</TABLE>
73
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED)
Actual maturities may differ from contractual maturities because securities
may be called or prepaid with or without call or prepayment penalties.
There are no investments, other than equity securities, that have not
produced income for the years ended December 31, 1998 and 1997. There are no
equity investments in a single issuer that when aggregated exceed 10% of
stockholder's equity.
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
In the normal course of business, VFL invests in various financial assets,
incurs various financial liabilities, and enters into agreements involving
derivative securities, including off-balance sheet financial instruments.
Fair values are required to be 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 a current market exchange.
All non-financial 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, accrued investment income, receivables for
securities sold, payables for securities purchased and certain other assets and
other liabilities because of their short-term nature. Accordingly, these
financial instruments are not listed in the table below. The carrying amounts
and estimated fair values of VFL's other financial instrument assets and
liabilities are listed below:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
1998 1997
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....................................... $460,516 $ 460,516 $471,707 $ 471,707
Equity securities...................................... 2,218 2,218 2,260 2,260
Policy loans........................................... 74,150 72,148 66,971 63,756
Other.................................................. 485 485 433 433
Separate Account business:
Fixed maturities....................................... 247 247 3,198 3,198
Mutual funds........................................... 55,577 55,577 5,233 5,233
Other.................................................. 340 340 305 305
FINANCIAL LIABILITIES
Premium deposits and annuity contracts................... 332,665 312,979 266,093 247,567
- - -------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
74
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 3.--(CONTINUED)
The following methods and assumptions were used by VFL in estimating the
fair value amounts for financial instruments:
Fixed maturities 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,
costs to settle, 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.
Valuation techniques to determine fair value of Separate Account
business assets consist of discounted cash flows and quoted market prices
of (a) the investments or (b) comparable instruments. The fair value of
Separate Account business liabilities approximates their carrying value.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
VFL invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk. Financial instruments used for
such purposes may include interest rate caps, put and call options, commitments
to purchase securities, futures and forwards. VFL also uses derivatives to
mitigate the risk associated with certain guaranteed annuity contracts by
purchasing certain options in a notional amount equal to the original customer
deposit. VFL generally does not hold or issue these instruments for trading
purposes.
Derivative financial instruments consist of interest rate caps in the
general account and purchased options in the Separate Accounts at December 31,
1998. The gross notional principal or contractual amounts of derivative
financial instruments in the general account at December 31, 1998 and 1997
totaled $50 million. The gross notional principal or contractual amounts of
derivative financial instruments in the Separate Accounts totaled $1.5 million
at December 31, 1998 and 1997. The contract or notional amounts are used to
calculate the exchange of contractual payments under the agreements and are not
representative of the potential for gain or loss on these agreements.
The fair values associated with derivative financial instruments are
generally affected by interest rates, equity stock prices and foreign exchange
rates. The credit exposure associated with these instruments is generally
limited to the unrealized fair value of the instruments and will vary based on
the credit worthiness of the counterparties. The risk of default depends on the
creditworthiness of the counterparty to the instrument. Although VFL is exposed
to the aforementioned credit risk, it does not expect any counterparty to fail
to perform as contracted based on the creditworthiness of the counterparties.
Due to the nature of the derivative securities, VFL does not require collateral.
75
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 3.--(CONTINUED)
The fair value of derivatives generally reflects the estimated amounts that
VFL would receive or pay upon termination of the contracts at the reporting
date. Dealer quotes are available for substantially all of VFL's derivatives.
For securities not actively traded, fair values are estimated using values
obtained from independent pricing services, costs to settle, or quoted market
prices of comparable instruments. The fair value of derivative financial assets
(liabilities) in the general account and Separate Accounts at December 31, 1998
totaled $0.1 million and $0.5 million, respectively, and compares to $0.4
million and $0.3 million, respectively, at December 31, 1997. Net realized gains
(losses) on derivative financial instruments held in the general account and
Separate Accounts totaled ($0.2) million and $0.1 million, respectively, for the
year ended December 31, 1998. Net realized losses on derivative financial
instruments held in the general account totaled $0.1 million for the year ended
December 31, 1997, while net realized losses on derivatives in the Separate
Accounts were negligible for the same period.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time.
An interest rate cap consists of a guarantee given by the issuer to the
purchaser in exchange for the payment of a premium. This guarantee states that
if interest rates rise above a specified rate, the issuer will pay to the
purchaser the difference between the then current market rate and the specified
rate on the notional principal amount. The notional principal amount is not
actually borrowed or repaid.
NOTE 4. STATUTORY CAPITAL AND SURPLUS (UNAUDITED):
Statutory capital and surplus and net income for VFL are determined in
accordance with accounting practices prescribed or permitted 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 statutory net losses of $8.1
million, $1.0 million and $2.7 million for the years ended December 31, 1998,
1997 and 1996, respectively. The statutory net losses for 1998, 1997 and 1996
were primarily due to the immediate expensing of acquisition costs which were
substantial and a result of sales of individual life and annuity products. Under
GAAP, such costs are capitalized and amortized to income over the duration of
these contracts. Statutory capital and surplus for VFL was $147.1 million, and
$125.3 million at December 31, 1998 and 1997, 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, 1998, dividends of approximately $14.7 million was not subject to prior
Insurance Department approval.
76
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME:
Comprehensive income is comprised of all changes to stockholder's equity,
including net income, except those changes resulting from investments by, and
distributions to, the stockholder. Other comprehensive income (loss) is
comprehensive income exclusive of net income. The change in the components of
accumulated other comprehensive income (loss) are shown in the following tables.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
PRE-TAX TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1998 AMOUNT BENEFIT AMOUNT
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Net unrealized gains on investment securities:
Net unrealized holding gains arising during the period.... $ 3,756 $(1,314) $ 2,442
Adjustment for (gains) losses included in net income...... (3,592) 1,257 (2,335)
- - ---------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME $ 164 $ (57) $ 107
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
PRE-TAX TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1997 AMOUNT BENEFIT AMOUNT
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Net unrealized gains on investment securities:
Net unrealized holding gains (losses) arising during the
period.................................................. $ 6,447 $(2,256) $ 4,191
Adjustment for (gains) losses included in net income...... (1,228) 427 (801)
- - ---------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME $ 5,219 $(1,829) $ 3,390
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
PRE-TAX TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1996 AMOUNT BENEFIT AMOUNT
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the
period.................................................. $ (5,822) $ 2,038 $ (3,784)
Adjustment for (gains) losses included in net income...... (13,641) 4,774 (8,867)
- - ---------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE LOSS $(19,463) $ 6,812 $(12,651)
===================================================================================================
</TABLE>
NOTE 6. BENEFIT PLANS:
VFL has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of
CNAF, all Casualty employees are covered by CNAF's Benefit Plans. The plans are
discussed below.
PENSION PLAN
CNAF has noncontributory pension plans covering all full-time employees age
21 or over that have completed at least one year of service. While the benefits
for the plans vary, they are generally based on years of credited service and
the employee's highest sixty consecutive months of compensation. Casualty is
included in the CNA Employees' Retirement Plan and VFL is allocated its
proportionate share of these expenses. The net pension cost allocated to VFL was
$1.1 million, $4.0 million and $3.6 million for the years ended December 31,
1998, 1997 and 1996, respectively.
77
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED)
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
CNAF 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. CNAF funds benefit costs principally
on the basis of current benefit payments.
Net postretirement benefit cost allocated to VFL was $0.5 million, $2.1
million and $1.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
SAVINGS PLAN
Casualty 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. VFL is allocated its proportionate share of CNA Employees'
Savings Plan expenses. CNAF contributes an 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 matching contribution by CNAF.
CNAF contributions allocated to and expensed by VFL for the Savings Plan were
$0.2 million in 1998 and 1997, and $1.0 million in 1996.
NOTE 7. INCOME TAXES:
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included along with Assurance,
its parent company, which is ultimately included in the consolidated Federal
income tax return of Loews. The Federal income tax provision of VFL generally is
computed on a stand-alone basis, as if VFL was filing its own separate tax
return.
VFL maintains a special tax memorandum account designated as the
"Shareholder's Surplus Account." Dividends from this account may be distributed
to the shareholder without resulting in any additional tax. The amount in the
Shareholder's Surplus Account was $156.3 million and $121.8 million at December
31, 1998 and 1997, respectively.
Significant components of VFL's deferred tax liabilities as of December 31,
1998 and 1997 are shown in the table below:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------
DECEMBER 31 1998 1997
- - ------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
Insurance reserves.......................................... $ 26,880 $ 24,961
Deferred acquisition costs.................................. (37,729) (33,374)
Investment valuation........................................ 3,693 6,129
Net unrealized gains........................................ (2,416) (2,359)
Receivables................................................. 1,009 (2,486)
Other, net.................................................. 2,350 3,031
- - ------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITIES $ (6,213) $ (4,098)
- - ------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------
</TABLE>
78
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 7.--(CONTINUED)
At December 31, 1998, gross deferred tax assets and liabilities amounted to
$35.5 million and $41.7 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1997, amounted to $35.1 million and $39.2 million,
respectively.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Current tax expense......................................... $7,033 $4,716 $5,719
Deferred tax expense........................................ 2,058 2,581 3,309
- - ------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE................................ $9,091 $7,297 $9,028
==========================================================================================
</TABLE>
A reconciliation of the statutory federal income tax rate on income is as
follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
YEAR ENDED DECEMBER 31 1998 INCOME 1997 INCOME 1996 INCOME
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Income taxes at statutory rates.................... $9,290 35.0 $7,219 35.0 $9,011 35.0
Other.............................................. (199) (0.8) 78 0.4 17 0.1
- - ---------------------------------------------------------------------------------------------------------------
INCOME TAX AT EFFECTIVE RATES.................. $9,091 34.2 $7,297 35.4 $9,028 35.1
===============================================================================================================
</TABLE>
NOTE 8. REINSURANCE:
The ceding of insurance does not discharge primary liability of VFL. VFL
places reinsurance with other carriers only after careful review of the nature
of the contract and a thorough assessment of the reinsurers' credit quality and
claim settlement performance. For carriers that are not authorized reinsurers in
VFL's state of domicile, VFL receives collateral, primarily in the form of bank
letters of credit. Such collateral totaled approximately $0.1 million at both
December 31, 1998 and 1997.
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health earned
premiums is from short
79
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 8.--(CONTINUED)
duration contracts. The effects of reinsurance on premium revenues are shown in
the following table:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
PREMIUMS
-------------------------------------------- ASSUMED/NET
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET %
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
1998
Life........................................ $687,644 $78,156 $690,541 $ 75,259 104%
Accident and Health......................... 4,158 240,340 4,158 240,340 100
-------- -------- -------- -------- ---
Total premiums............................ $691,802 $318,496 $694,699 $315,599 101%
======== ======== ======== ======== ===
1997
Life........................................ $564,891 $81,502 $567,217 $ 79,176 103%
Accident and Health......................... 2,776 252,996 2,776 252,996 100
-------- -------- -------- -------- ---
Total premiums............................ $567,667 $334,498 $569,993 $332,172 101%
======== ======== ======== ======== ===
1996
Life........................................ $422,700 $72,718 $424,907 $ 70,511 103%
Accident and Health......................... 1,080 254,975 1,080 254,975 100
-------- -------- -------- -------- ---
Total premiums............................ $423,780 $327,693 $425,987 $325,486 101%
- - -------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
Transactions with Assurance, as part of the Pooling Agreement described in
Note 1, are reflected in the above table. Premium revenues ceded to
non-affiliated companies were $263.4 million, $116.2 million and $43.0 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
Additionally, benefits and expenses for insurance claims and policyholder
benefits are net of reinsurance recoveries from non-affiliated companies of
$203.4 million, $77.8 million and $7.0 million for the years ended December 31,
1998, 1997 and 1996, respectively.
Reinsurance receivables reflected on the balance sheets are amounts
recoverable from reinsurers who have assumed a portion of the Company's
insurance reserves. These balances are principally due from Assurance pursuant
the Reinsurance Pooling Agreement.
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, 1998............................ $224,615 $32,253 $230,734 $26,134 123.4%
December 31, 1997............................ $166,308 $25,557 $168,353 $23,512 108.7
December 31, 1996............................ $108,126 $22,085 $109,873 $20,338 108.6
- - -----------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 9. 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 CNAF and each of its subsidiaries are
allocated to the
80
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 9.--(CONTINUED)
appropriate companies. All acquisition and underwriting expenses allocated to
VFL are further subject to the Reinsurance Pooling Agreement with Assurance, so
that acquisition and underwriting expenses recognized by VFL are ten percent of
the acquisition and underwriting expenses of the combined pool. Pursuant to the
foregoing agreements, VFL recorded amortization of deferred acquisition costs
and other operating expenses totaling $47.6 million, $45.3 million and $37.2
million for 1998, 1997 and 1996, respectively. Expenses of VFL exclude $9.2
million, $9.9 million and $12.3 million of general and administrative expenses
incurred by VFL and allocated to CNAF for the years ended December 31, 1998,
1997 and 1996, respectively. At December 31, 1998, VFL had a payable of $1.9
million to affiliated companies. VFL had a $36.0 million affiliated receivable
at December 31, 1997, 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 or payables.
During 1998, Assurance made a $30.0 million capital contribution to VFL.
NOTE 10. LEGAL:
VFL is party to litigation arising in the ordinary course of business. The
outcome of this litigation will not, in the opinion of management, materially
affect the results of operations or equity of VFL.
NOTE 11. BUSINESS SEGMENTS:
VFL operates in one reportable segment, the business of which is to market
and underwrite insurance products designed to satisfy the life, health and
retirement needs of individuals and groups. VFL products are distributed
primarily in the United States. Premium revenues earned outside the United
States are not material.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement,
amended July 1, 1996, VFL cedes all of its business, excluding its Separate
Account business, to Assurance which is then pooled with the business of
Assurance, excluding Assurance's participating contracts and separate account
business, and 10% of the combined pool is assumed by VFL.
The following represents premiums by product group for each of the years in
the three years ended December 31, 1998:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life........................................................ $ 75,259 $ 79,176 $ 70,511
Accident and Health......................................... 240,340 252,996 254,975
- - ------------------------------------------------------------------------------------------------
Total....................................................... $315,599 $332,172 $325,486
- - ------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------
</TABLE>
81
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 11.--(CONTINUED)
Assurance is a large provider of health insurance benefits to postal and
other federal employees under the Federal Employees Health Benefit Plan (FEHBP).
Premiums under this contract totaled $2.0 billion, $2.1 billion and $2.1 billion
for the years ended December 31, 1998, 1997 and 1996, respectively, and the
portion of these premiums assumed by VFL under the Reinsurance Pooling Agreement
totaled $202 million, $212 million and $210 million for the years ended December
31, 1998, 1997 and 1996, respectively.
82
GLOSSARY
ACCUMULATION UNIT: A unit of measure we use 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 we
determine Age.
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 we apply Surrender Value or Adjusted
Contract Value to purchase Annuity Units or to initiate Fixed Annuitization.
ANNUITY PAYMENT: One of several periodic payments we make to the Payee
under an Annuity Payment Option.
ANNUITY PAYMENT DATE: The date each month, quarter, semi-annual period, or
year as of which VFL computes Annuity Payments. The Annuity Payment Date(s) is
shown on the Contract.
ANNUITY PAYMENT OPTION: The form of Annuity Payments you select under the
Contract. The Annuity Payment Option is shown on the Contract.
ANNUITY UNIT: A unit of measure we use to calculate Variable Annuity
Payments.
BENCHMARK RATE OF RETURN: An annual rate of return shown on the Contract
that we use 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. We assume (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 we will pay the death benefit if
Annuitant dies prior to the Annuity Date.
CANCELLATION PERIOD: The period described on the cover page of the Contract
during which you may return the Contract for a refund.
THE CODE: The Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT: The person that the Owner designates 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 we will pay the death benefit
if the Beneficiary (or Beneficiaries) is not living.
83
CONTRACT ANNIVERSARY: The same date in each Contract Year as the Contract
Effective Date.
CONTRACT EFFECTIVE DATE: The date on which VFL issues the Contract and upon
which the Contract becomes effective. The Contract Effective Date is shown on
the Contract and is used to determine Contract Years and Contract Anniversaries.
CONTRACT YEAR: A twelve-month period beginning on the Contract Effective
Date or on a Contract Anniversary.
CONTRACT VALUE: The total amount invested under the Contract. It is the sum
of Variable Contract Value and the Guaranteed Interest Option Value.
DUE PROOF OF DEATH: Proof of death satisfactory to VFL. Due Proof of Death
may consist of the following if acceptable to VFL:
(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 VFL.
FIXED ANNUITY PAYMENT: An Annuity Payment that the General Account supports
and which 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: VFL's assets, other than those allocated to the Variable
Account or any other separate account of VFL.
GIO ACCOUNT: Valley Forge Life Insurance Company Guaranteed Interest Option
Separate Account.
GUARANTEE AMOUNT: The amount equal to that part of any Net Purchase Payment
that you allocate to, or any amount you transfer to the GIO Account for a
designated Guarantee Period with a particular expiration date plus any interest
thereon and less the amount of any withdrawals (including any applicable
surrender charges and any applicable premium payment tax charge) or transfers
therefrom.
GUARANTEE PERIOD: A specific number of years for which VFL 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 Variable
Account's investment performance.
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 VFL will pay on a Guarantee Amount.
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
84
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 Funds.
NET PURCHASE PAYMENT: A purchase payment less any premium 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.
The Annuitant is the Payee unless the Owner designates a different person as
Payee.
QUALIFIED CONTRACT: A Contract that is issued in connection with a
retirement plan that qualifies for special federal income tax treatment under
Sections 401, 403(b), 408, 408A or 457 of the Code.
SEC: The U.S. Securities and Exchange Commission.
SERVICE CENTER: The offices of VFL's administrative department at P.O. Box
305139, Nashville, Tennessee 37230-5139 (1-800-808-4537). Any overnight
deliveries should be sent to us at:
CNA Insurance Company
100 CNA Drive
Attention: Variable POS/Correspondence Team
Nashville, TN 37214
SUBACCOUNT: A subdivision of the Variable Account, the assets of which are
invested in a corresponding Fund.
SUBACCOUNT VALUE: 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 (actually
realized or not yet realized) and decreased by withdrawals (including any
applicable surrender charges and any applicable premium payment tax charge) and
any amounts transferred out of that Subaccount.
SUCCESSOR OWNER: Any Owner named in the application to follow the original
Owner should the original Owner die, provided the original Owner is not also the
Annuitant.
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.
85
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.
VFL: Valley Forge Life Insurance Company.
WRITTEN NOTICE: A notice or request submitted in writing in a form
satisfactory to VFL that the Owner signs and VFL receives at the Service Center.
86
APPENDIX A
CONDENSED FINANCIAL INFORMATION
The Variable Account commenced operations in 1997. Following are the number
of Accumulation Units outstanding and their values at inception, at December 31,
1997, December 31, 1998 and June 30, 1999. This information should be read in
conjunction with the financial statements, including related notes, for the
Variable Annuity Separate Account (as well as the independent auditor's report
thereon) which are included in the Statement of Additional Information ("SAI").
The SAI, having the same date as this prospectus and providing additional
information about the Contract and the Variable Account, has been filed with the
SEC and is incorporated herein by reference.
The audited financial statements of VFL (as well as the independent
auditor's report thereon) and the unaudited financial statements of VFL appear
elsewhere herein.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY
PRIME FEDERATED INCOME VIP VIP II FIDELITY ALGER ALGER
MONEY UTILITY BOND EQUITY- ASSET VIP II FIDELITY AMERICAN AMERICAN
FUND II FUND II FUND II INCOME MANAGER INDEX 500 CONTRAFUND SMALL CAP GROWTH
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value at
inception........... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Unit value at
December 31, 1997... $ 1.00 $ 14.29 $ 10.95 $ 24.28 $ 18.01 $114.39 $ 19.94 $ 43.75 $ 42.76
Units outstanding at
December 31, 1997... 861,083.8 3,546.7 17,395.3 20,427.1 14,845.4 4,920.8 16,502.8 4,473.8 5,832.2
Unit value at
December 31, 1998... $ 1.00 $ 15.27 $ 10.92 $ 25.42 $ 18.16 $141.25 $ 24.44 $ 43.97 $ 53.22
Units outstanding at
December 31, 1998... 5,562,204 110,914 289,997 167,760 124,340 75,681 151,918 36,417 102,309
Unit value at
June 30, 1999....... $ 10.91 $ 14.95 $ 11.77 $ 16.29 $ 14.57 $ 19.33 $ 18.30 $ 14.27 $ 21.34
Units outstanding at
June 30, 1999....... 1,659,824.8 187,941.9 369,764.0 437,244.9 289,258.1 953,208.4 394,122.8 155,817.7 601,778.3
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
ALGER MFS SOGEN VANECK VANECK
AMERICAN MFS GROWTH MFS OVERSEAS WORLDWIDE WORLDWIDE
MID-CAP EMERGING MFS WITH LIMITED MFS VARIABLE HARD EMERGING
GROWTH GROWTH RESEARCH INCOME MATURITY TOTAL RETURN PORTFOLIO ASSETS MARKETS
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value at
inception........... $ 10.00 $ 10.00 $ 10.00 $10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Unit value at
December 31, 1997... $ 24.18 $ 16.14 $ 15.79 $16.44 $ 10.01 $ 16.63 $ 9.77 $ 15.72 $ 11.00
Units outstanding at
December 31, 1997... 1,754.7 8,776.2 9,906.0 13,322.2 8,162.4 15,625.0 77,061.7 574.9 1,535.5
Unit value at
December 31, 1998... $ 28.87 $ 21.47 $ 19.05 $20.11 $ 10.16 $ 18.12 $ 10.07 $ 9.20 $ 7.12
Units outstanding at
December 31, 1998... 40,631 136,181 88,093 118,618 101,531 104,481 202,429 15,342 56,387
Unit value at
June 30, 1999....... $ 16.86 $ 17.80 $ 16.12 $ 16.91 $ 10.53 $ 14.26 $ 12.15 $ 8.05 $ 8.51
Units outstanding at
June 30, 1999....... 123,833.0 271,947.6 205,711.06 262,354.0 158,811.4 281,782.4 230,846.2 26,024.0 73,946.7
- - -----------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
APPENDIX B
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
F11+A2 (N/12) G
--------------------------------------------
1+B -1
Where:
"Amount" is the amount being surrendered, withdrawn, transferred or
applied to an Annuity Payment Option less any applicable annual
administration fees or transfer processing fees;
"a" is the Guaranteed Interest Rate currently being credited to the
"Amount"; and
"b" is the Guaranteed Interest Rate that is currently being offered
for a Guarantee Period of duration equal to the time remaining to the
expiration of the Guarantee Period for the Guarantee Amount from which the
"Amount" is taken. Where the time remaining to the expiration of the
Guarantee Period is not 1, 3, 5, 7, or 10 years, "b" is the rate found by
linear interpolation of the rate for the Guarantee Period having the
duration closest to the time remaining or, if the time remaining is less
than 1 year, "b" is the rate for a 1 year period; and
"n" is the number of complete months remaining before the expiration
of the Guarantee Period for the Guarantee Amount from which the "Amount" is
taken.
As an example of calculating "b" by linear interpolation, if the time
remaining to the expiration of the Guarantee Period is 4.5 years, the
interpolated Guaranteed Interest Rate is equal to the sum of one-fourth of the
three-year Guaranteed Interest Rate and three-fourths of the five-year
Guaranteed Interest Rate. If the three-year Guaranteed Interest Rate is 3.6% and
the five-year Guaranteed Interest Rate is 4%, the interpolated Guaranteed
Interest Rate equals 3.9%--that is, 3.6% multiplied by 0.25 plus 4% 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 VFL is
crediting a 3.75% 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 VFL is offering a 3.4% effective annual
rate of interest on Guarantee Periods of 3 years and a 3.0% effective annual
rate of interest on Guarantee Periods of 1 year, then:
a = 0.03750
b = 0.03283 = (0.034 * 17/24) + (0.03 * 7/24) = linear interpolation
between the 3 year rate and the 1 year rate
The MVA factor = F(1.03750)G(29/12)-1 = 0.01096
-----------------------------------
(1.03283)
B-1
MVA = $7,500.00 * 0.01096 = $82.20 Amount received = $7,500 + $82.20 =
$7,582.20
If at the time of the withdrawal VFL 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:
a = 0.03750
b = 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 = F(1.03750)G(29/12)-1 = -0.04986
-----------------------------------
(1.05969)
MVA = $7,500.00 * -0.04986 = -$373.95
Amount received = $7,500 - $373.95 = $7,126.05
B-2
APPENDIX C
Assume that an Owner makes purchase payments on the first day of certain
Contract Years as shown in the table below. Assume also that the Owner withdraws
$7,500 during the seventh month of Contract Year five and $5,000 at the
beginning of Contract Years thirteen and fifteen. Assume that the Annuitant is
younger than age 76 for all twenty years. All "beginning of year death benefits"
are computed as of the first day of the Contract Year except for the figure for
Contract Year 5 which is computed as of the seventh month of that year (i.e., as
of the time of the $7,500 withdrawal).
EXPLANATIONS:
The Death Benefit at the beginning of Contract Years 1 through 4 is
determined from the Contract Value at the end of the prior Contract Year plus
the purchase payment made at the beginning of the year for which the computation
is being made.
The Death Benefit at the end of month 7 of Contract Year 5 is determined
from the prior year's Contract Value plus the purchase payment made at the
beginning of that year, minus the $7,500 withdrawn in the seventh month minus a
$318.75 surrender charge assessed in connection with the withdrawal.
The Death Benefit at the beginning of Contract Years 6 through 10 is
determined from the Contract Value at the end of the prior Contract Year plus
the purchase payment made at the beginning of the Year for which the computation
is being made. Since the first day of Contract Year 6 is a minimum death benefit
floor computation anniversary, a new death benefit floor amount is set at
$8,506.
The Death Benefit at the beginning of Contract Year 11 is determined solely
from the prior Year's Contract Value. Since this is a minimum death benefit
floor computation anniversary, a new death benefit floor amount is set at
$42,610.
The Death Benefit at the beginning of Contract Year 12 is determined from
the minimum death benefit which is the most recently reset death benefit floor
amount of $42,610. This is so because the Contract Value declined and no
purchase payments or withdrawals 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
C-1
$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 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 NET END OF YEAR BEGINNING YEAR
OF CONTRACT PURCHASE PURCHASE ACCUMULATION END OF YEAR DEATH
YEAR PAYMENTS WITHDRAWALS PAYMENTS UNIT VALUE CONTRACT VALUE BENEFIT
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 2,000 $ 0 $ 2,000 10.50000 $ 2,100 $ 2,000
- - ----------------------------------------------------------------------------------------------------
2 $ 2,000 $ 0 $ 4,000 11.23500 $ 4,387 $ 4,100
- - ----------------------------------------------------------------------------------------------------
3 $ 2,500 $ 0 $ 6,500 12.13380 $ 7,438 $ 6,887
- - ----------------------------------------------------------------------------------------------------
4 $ 3,000 $ 0 $ 9,500 13.34718 $11.482 $10.438
- - ----------------------------------------------------------------------------------------------------
5 $ 4,000 $7,500 $ 6,000 14.81537 $ 8,506 $ 7,663
- - ----------------------------------------------------------------------------------------------------
6 $ 5,000 $ 0 $11,000 16.59321 $15,127 $13,506
- - ----------------------------------------------------------------------------------------------------
7 $ 5,000 $ 0 $16,000 18.25254 $22,139 $20,127
- - ----------------------------------------------------------------------------------------------------
8 $ 5,000 $ 0 $21,000 19.71274 $29,310 $27,139
- - ----------------------------------------------------------------------------------------------------
9 $ 5,000 $ 0 $26,000 20.89550 $36,369 $34,310
- - ----------------------------------------------------------------------------------------------------
10 $ 5,000 $ 0 $31,000 21.52237 $42,610 $41,369
- - ----------------------------------------------------------------------------------------------------
11 $ 0 $ 0 $31,000 20.44625 $40,480 $42,610
- - ----------------------------------------------------------------------------------------------------
12 $ 0 $ 0 $31,000 18.40162 $36,432 $42,610
- - ----------------------------------------------------------------------------------------------------
13 $ 0 $5,000 $26,000 15.64138 $26,717 $36,762
- - ----------------------------------------------------------------------------------------------------
14 $ 0 $ 0 $26,000 12.82593 $21,908 $36,762
- - ----------------------------------------------------------------------------------------------------
15 $ 0 $5,000 $21,000 13.46723 $17,753 $28,372
- - ----------------------------------------------------------------------------------------------------
16 $ 0 $ 0 $21,000 14.14059 $18,641 $28,372
- - ----------------------------------------------------------------------------------------------------
17 $10,000 $ 0 $31,000 14.14059 $28,641 $38,372
- - ----------------------------------------------------------------------------------------------------
18 $ 0 $ 0 $31,000 13.43356 $27,209 $38,372
- - ----------------------------------------------------------------------------------------------------
19 $ 0 $ 0 $31,000 13.43356 $27,209 $38,372
- - ----------------------------------------------------------------------------------------------------
20 $ 0 $ 0 $31,000 13.97090 $28,297 $38,372
- - ----------------------------------------------------------------------------------------------------
</TABLE>
C-2
================================================================================
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 Separate Account 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
II-1
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.*
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*
5. Opinion regarding legality and consent.
II-2
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.*
(g) Form of Participation Agreement between the
Company and Janus Aspen Series.
23. (a) Consent of Deloitte & Touche LLP
27. Financial Data Schedule (Not Applicable).
*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.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)
(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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.
II-3
SIGNATURES
As required by the Securities Act of 1933, the registrant certifies
that it has duly caused this registration statement to be signed on
its behalf, by the undersigned thereunto duly authorized, in the City
of Chicago, and the State of Illinois, on this 2nd day of September, 1999.
VALLEY FORGE LIFE INSURANCE COMPANY
(Registrant)
Attest:/s/G. STEPHEN WASTEK By: /s/KEVIN M. HOGAN
------------------------------ ------------------------------
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/PHILIP L. ENGEL President, Director September 2, 1999
- - ----------------------------
Philip L. Engel
/s/BERNARD L. HENGESBAUGH Chairman of the Board, September 2, 1999
- - ---------------------------- Chief Executive Officer,
Bernard L. Hengesbaugh Director
Senior Vice President, Secretary,
- - ---------------------------- General Counsel,
Jonathan D. Kantor Director
/s/ROBERT V. DEUTSCH Chief Financial Officer and September 2, 1999
- - --------------------------- Director
Robert V. Deutsch
/s/CAROL DUBNICKI Senior Vice President, September 2, 1999
- ----------------------------- Director
Carol Dubnicki
Group Vice President,
- ---------------------------- Director
Donald P. Lofe, Jr.
Group Vice President,
- ---------------------------- Director
John M. Squarok
</TABLE>
II-4
INDEX TO EXHIBITS
EX-5 Opinion regarding legality and consent
EX-10.(g) Form of Participation Agreement between the Company
and Janus Aspen Series
EX-23(a) Consent of Deloitte & Touche LLP
EX-99.1 Financial Statement Schedules
September 1, 1999
Board of Directors
Valley Forge Life Insurance Company
CNA Plaza, 43S
Chicago, IL 60685
Gentlemen:
I have acted as counsel to Valley Forge Life Insurance Company (the "Company"),
a Pennsylvania insurance company, and the Valley Forge Life Insurance Company
Variable Annuity Separate Account (the "Separate Account") in connection with
the registration under the Securities Act of 1933 (File No. 333-1083) of
flexible premium deferred variable annuity contracts (the "Contracts").
In rendering this opinion, I have assumed the genuineness of all signatures of
all documents I have examined, the authority of such signatories to execute the
same, the truthfulness and accuracy of representations made to me, the
authenticity of all original documents of which copies were furnished to me, and
the conformity to original documents of all documents submitted to me as
certified, conformed or photostatic copies. I have made such examinations of law
and documents as are in my judgment are necessary or appropriate.
Based upon the foregoing, I am of the opinion that:
1. The Company was organized in accordance with the laws of the State of
Pennsylvania and is a duly authorized stock life insurance company under
the laws of Pennsylvania and the laws of those states in which the Company
is admitted to do business;
2. The Separate Account has been duly created and is validly existing as
separate account pursuant to Section 40-37-109 of the Pennsylvania
Unconsolidated Statutes;
3. The Company is authorized to issue the Contracts in those states in which
it is admitted and upon compliance with applicable local law;
4. The Contracts, when issued in accordance with the prospectus contained in
the aforesaid registration statement and upon compliance with applicable
local law, will be legal and binding obligations of the Company in
accordance with their terms
I hereby consent to the filing of this opinion as an exhibit to the
Post-Effective Amendment No. 4, the aforesaid registration statement and to the
reference to me under the caption "Legal Matters" in the prospectus contained in
said registration statement and amendment thereto.
Sincerely,
/s/ Timothy Scott
Timothy Scott
Assistant Vice President and
Assistant General Counsel
JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this 16 day of June, 1999, between JANUS ASPEN
SERIES, an open-end management investment company organized as a Delaware
business trust (the "Trust"), and CONTINENTAL ASSURANCE COMPANY, a life
insurance company organized under the laws of the State of Illinois (the
"Company"), on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A, as may be amended from time to time (the
"Accounts").
W I T N E S S E T H :
---------------------
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the " 1940 Act"), and has registered the offer
and sale of its shares under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has received an order from the Securities and Exchange
Commission granting Participating Insurance Companies and their separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the
extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) certain variable life insurance policies
and/or variable annuity contracts under the 1933 Act (the "Contracts"); and
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act; and
WHEREAS, the Company desires to utilize shares of one or more Portfolios as
an investment vehicle of the Accounts;
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I
Sale of Trust Shares
--------------------
1.1 The Trust shall make shares of its Portfolios available to the Accounts
at the net asset value next computed after receipt of such purchase order by the
Trust (or its agent), as established in accordance with the provisions of the
then current prospectus of the Trust. Shares of a particular Portfolio of the
Trust shall be ordered in such quantities and at such times as determined by the
Company to be necessary to meet the requirements of the Contracts. The Trustees
of the Trust (the "Trustees") may refuse to sell shares of any Portfolio to any
person, or suspend or terminate the offering of shares of any Portfolio if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Trustees acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.2 The Trust will redeem any full or fractional shares of any Portfolio
when requested by the Company on behalf of an Account at the net asset value
next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints the
Company as its agent for the limited purpose of receiving and accepting purchase
and redemption orders resulting from investment in and payments under the
Contracts. Receipt by the Company shall constitute receipt by the Trust provided
that i) such orders are received by the Company in good order prior to the time
the net asset value of each Portfolio is priced in accordance with its
prospectus and ii) the Trust receives notice of such orders by 10:00 a.m. New
York time on the next following Business Day. "Business Day" shall mean any day
on which the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for no later than 12:00 noon New York time on the same
Business Day that the Trust receives notice of the order. Payments shall be made
in federal funds transmitted by wire.
1.5 Issuance and transfer of the Trust's shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account. Shares
ordered from the Trust will be recorded in the appropriate title for each
Account or the appropriate subaccount of each Account.
1.6 The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional shares of
that Portfolio. The Trust shall notify the Company of the number of shares so
issued as payment of such dividends and distributions.
1.7 The Trust shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6 p.m. New York time.
1.8 The Trust agrees that its shares will be sold only to Participating
Insurance Companies and their separate accounts and to certain qualified pension
and retirement plans to the extent permitted by the Exemptive Order. No shares
of any Portfolio will be sold directly to the general public. The Company agrees
that Trust shares will be used only for the purposes of funding the Contracts
and Accounts listed in Schedule A, as amended from time to time.
1.9 The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and conflicts
of interest corresponding to those contained in Section 2.8 and Article IV of
this Agreement.
ARTICLE II
Obligations of the Parties
--------------------------
2.1 The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and statements
of additional information of the Trust. The Trust shall bear the costs of
registration and qualification of its shares, preparation and filing of the
documents listed in this Section 2.1 and all taxes to which an issuer is subject
on the issuance and transfer of its shares.
2.2 At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
as the Company shall reasonably request; or (b) provide the Company with a
camera ready copy of such documents in a form suitable for printing. The Trust
shall provide the Company with a copy of its statement of additional information
in a form suitable for duplication by the Company. The Trust (at its expense)
shall provide the Company with copies of any Trust-sponsored proxy materials in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.3 (a) The Company shall bear the costs of printing and distributing the
Trust's prospectus, statement of additional information, shareholder reports and
other shareholder communications to owners of and applicants for policies for
which the Trust is serving or is to serve as an investment vehicle. The Company
shall bear the costs of distributing proxy materials (or similar materials such
as voting solicitation instructions) to Contract owners. The Company assumes
sole responsibility for ensuring that such materials are delivered to Contract
owners in accordance with applicable federal and state securities laws.
(b) If the Company elects to include any materials provided by the Trust,
specifically prospectuses, SAIs, shareholder reports and proxy materials, on its
web site or in any other computer or electronic format, the Company assumes sole
responsibility for maintaining such materials in the form provided by the Trust
and for promptly replacing such materials with all updates provided by the
Trust.
2.4 The Company agrees and acknowledges that the Trust's adviser, Janus
Capital Corporation (" Janus Capital"), is the sole owner of the name and mark
"Janus" and that all use of any designation comprised in whole or part of Janus
(a "Janus Mark") under this Agreement shall inure to the benefit of Janus
Capital. Except as provided in Section 2.5, the Company shall not use any Janus
Mark on its own behalf or on behalf of the Accounts or Contracts in any
registration statement, advertisement, sales literature or other materials
relating to the Accounts or Contracts without the prior written consent of Janus
Capital. Upon termination of this Agreement for any reason, the Company shall
cease all use of any Janus Mark(s) as soon as reasonably practicable.
2.5 The Company shall furnish, or cause to be furnished, to the Trust or
its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or its investment adviser is named prior to the
filing of such document with the Securities and Exchange Commission. The Company
shall furnish, or shall cause to be furnished, to the Trust or its designee,
each piece of sales literature or other promotional material in which the Trust
or its investment adviser is named, at least fifteen Business Days prior to its
use. No such material shall be used if the Trust or its designee reasonably
objects to such use within fifteen Business Days after receipt of such material.
2.6 The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or its investment
adviser in connection with the sale of the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Trust shares (as such registration statement and
prospectus may be amended or supplemented from time to time), reports of the
Trust, Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as required
by legal process or regulatory authorities or with the written permission of the
Trust or its designee.
2.7 The Trust shall not give any information or make any representations or
statements on behalf of the Company or concerning the Company, the Accounts or
the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may be amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
as required by legal process or regulatory authorities or with the written
permission of the Company.
2.8 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each Account, the
Company will vote shares of the Trust held by the Account and for which no
timely voting instructions from policyowners are received as well as shares it
owns that are held by that Account, in the same proportion as those shares for
which voting instructions are received. The Company and its agents will in no
way recommend or oppose or interfere with the solicitation of proxies for Trust
shares held by Contract owners without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion.
2.9 The Company shall notify the Trust of any applicable state insurance
laws that restrict the Portfolios' investments or otherwise affect the operation
of the Trust and shall notify the Trust of any changes in such laws.
ARTICLE III
Representations and Warranties
------------------------------
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Illinois and
that it has legally and validly established each Account as a segregated asset
account under such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that each Account has been
registered or, prior to any issuance or sale of the Contracts, will be
registered as a unit investment trust in accordance with the provisions of the
1940 Act.
3.3 The Company represents and warrants that the Contracts or interests in
the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that it will take
reasonable steps to ensure that the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and the sale of the Contracts shall comply in all material respects with state
insurance suitability requirements.
3.4 Each party to this Agreement represents and warrants that it has taken,
or will take, appropriate measures to adjust its computer systems so that its
operations and services provided under this agreement will not be materially
affected upon January 1, 2000. If the operations and services are materially
affected by a party's failure to implement any Year 2000 required adjustments,
such party shall indemnify and hold harmless the other parties to this Agreement
from and against all claims, demands, actions, losses, damages, liabilities,
costs, charges, reasonable counsel fees and expenses incurred as a result of
such failure, in accordance with Section 2. No party shall be liable for any
indirect, special or consequential losses, even if the party has notice of the
possibility of such losses.
3.5 The Trust represents and warrants that it is duly organized and validly
existing under the laws of the State of Delaware.
3.6 The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust shall be registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Trust shall register and qualify its shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.7 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder.
ARTICLE IV
Potential Conflicts
-------------------
4.1 The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a variety
of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Trustees shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of its
disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested Trustees. Any such withdrawal and
termination must take place within six (6) months after the Trust gives written
notice that this provision is being implemented. Until the end of such six (6)
month period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Exemptive Order) on terms and conditions materially different
from those contained in the Exemptive Order, then the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 6e-3, as adopted, to the extent such
rules are applicable.
ARTICLE V
Indemnification
---------------
5.1 Indemnification By the Company. The Company agrees to indemnify and
hold harmless the Trust and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Trust within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts themselves or
in sales literature generated or approved by the Company on behalf of the
Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article V), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance upon
and was accurately derived from written information furnished to the
Company by or on behalf of the Trust for use in Company Documents or
otherwise for use in connection with the sale of the Contracts or Trust
shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Trust Documents as defined in Section 5.2(a)) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as defined in
Section 5.2(a) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished to
the Trust by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company.
5.2 Indemnification By the Trust. The Trust agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Trust (or any amendment or supplement
thereto), (collectively, "Trust Documents" for the purposes of this Article
V), or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this indemnity
shall not apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Trust by or on
behalf of the Company for use in Trust Documents or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Company Documents) or wrongful conduct of the Trust or persons under its
control, with respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately derived from
written information furnished to the Company by or on behalf of the Trust;
or
(d) arise out of or result from any failure by the Trust to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this Agreement or arise
out of or result from any other material breach of this Agreement by the
Trust.
5.3 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
5.4 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice of
service upon or other notification to any designated agent), but failure to
notify the party against whom indemnification is sought of any such claim shall
not relieve that party from any liability which it may have to the Indemnified
Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties, the
indemnifying party shall be entitled to participate, at its own expense, in the
defense of such action. The indemnifying party also shall be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the party named in
the action. After notice from the indemnifying party to the Indemnified Party of
an election to assume such defense, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the indemnifying
party will not be liable to the Indemnified Party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
ARTICLE VI
Termination
-----------
6.1 This Agreement may be terminated by either party for any reason by
ninety (90) days advance written notice delivered to the other party.
6.2 Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares of the
Trust (or any Portfolio) pursuant to the terms and conditions of this Agreement
for all Contracts in effect on the effective date of termination of this
Agreement, provided that the Company continues to pay the costs set forth in
Section 2.3.
6.3 The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
ARTICLE VII
Notices
-------
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
Janus Aspen Series
100 Fillmore Street
Denver, Colorado 80206
Attention: General Counsel
If to the Company:
Continental Assurance Company
Variable Life Insurance Products - 34 South
CNA Plaza
Chicago, IL 60611
Attention: Kevin Hogan
ARTICLE VIII
Miscellaneous
-------------
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of State of Colorado.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8 The parties to this Agreement acknowledge and agree that this Agreement
shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
JANUS ASPEN SERIES
By: /s/ BONNIE HOWE
Name: Bonnie M. Howe
Title: Assistant Vice President
CONTINENTAL ASSURANCE COMPANY
By: /s/ KEVIN M. HOGAN
Name: Kevin M. Hogan
Title: Vice President
Schedule A
Separate Accounts and Associated Contracts
------------------------------------------
Name of Separate Account and Contracts Funded
Date Established by Board of Directors By Separate Account
- -------------------------------------- -------------------
Continental Assurance Company CNA Capital Select VA
Variable Annuity Separate Account
January 30, 1996
Continental Assurance Company CNA Capital Select VUL
Variable Life Separate Account
January 30, 1996
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 4 to Registration
Statement No. 333-1083 on Form S-1 of Valley Forge Life Insurance Company of our
report on the financial statements and financial statement schedules of Valley
Forge Life Insurance Company, dated February 10, 1999 and to the reference to us
under the heading "Experts" in the Registration Statement.
Deloitte & Touche LLP
Chicago, Illinois
August 31, 1999
EXHIBIT 99-1
SCHEDULE III
VALLEY FORGE LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS)
GROSS INSURANCE RESERVES
------------------------------- AMORTIZATION
CLAIM INSURANCE OF
DEFERRED AND FUTURE POLICY- NET NET CLAIMS AND DEFERRED OTHER
Year Ended ACQUISITION CLAIM POLICY HOLDERS' PREMIUM INVESTMENT POLICYHOLDERS' ACQUISITION OPERATING
December 31, COSTS EXPENSE BENEFITS FUNDS REVENUE INCOME BENEFITS COSTS EXPENSES
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $111,963 $ 93,001 $ 2,438,305 $ 42,746 $ 315,599 $ 35,539 $ 301,900 $ 11,807 $ 35,813
======== ======== =========== ======== ========= ======== ========= ======== ========
1997 $ 95,354 $ 81,242 $ 1,906,899 $ 39,928 $ 332,172 $ 29,913 $ 307,207 $ 11,818 $ 33,505
======== ======== =========== ======== ========= ======== ========= ======== ========
1996 $ 74,589 $ 60,568 $ 1,621,504 $ 38,145 $ 325,486 $ 29,312 $ 304,840 $ 1,177 $ 36,022
======== ======== =========== ======== ========= ======== ========= ======== ========
</TABLE>
EXHIBIT 99-2
SCHEDULE V
VALLEY FORGE LIFE INSURANCE COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
BALANCE CHARGED CHARGED BALANCE
AT TO 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, 1998
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables....................... $ 285 $ 9 $ - $ 268 $ 26
====== ====== ======== ====== ======
YEAR ENDED DECEMBER 31, 1997 Deducted from assets: Allowance for doubtful
accounts:
Insurance receivables....................... $ 378 $ 246 $ - $ 339 $ 285
====== ====== ======== ====== ======
YEAR ENDED DECEMBER 31, 1996 Deducted from assets: Allowance for doubtful
accounts:
Insurance receivables....................... $ 175 $ 212 $ - $ 9 $ 378
====== ====== ======== ====== ======
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
