As filed with the Securities and Exchange Commission on September 4, 1996
File No. 333-1087
File No. 811-7547
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|
Pre-Effective Amendment No. 1 |X|
Post-Effective Amendment No._________ |_|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
Amendment No. 1 |X|
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE
ANNUITY SEPARATE ACCOUNT
(Exact Name of Registrant)
VALLEY FORGE LIFE INSURANCE COMPANY
(Name of Depositor)
CNA Plaza, 43 South
Chicago, Illinois 60685
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: (312) 822-6597
Corporate Secretary
Continental Assurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
(Name and Address of Agent for Service)
Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, DC 20004-2404
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of the registration statement.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the registrant
has elected to register an indefinite amount of securities being offered. The
filing fee of $500 was paid with the initial filing on February 20, 1996.
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 Section 8(a), shall
determine.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rules 481(a) and 495(a)
Showing location in Part A (prospectus) and Part B (statement of additional
information) of registration statement of information required by Form N-4
PART A
ITEM OF FORM N-4 PROSPECTUS CAPTION
1. Cover Page ............................ Cover Page
2. Definitions ........................... Definitions
3. Synopsis............................... Fee Table; Summary
4. Condensed Financial
Information ........................... Condensed Financial
Information
5. General Description of Registrant,
Depositor, and Portfolio Companies
(a) Depositor ...................... The Company; Additional
Information About Valley
Forge Life Insurance
Company
(b) Registrant ...................... The Variable Account
(c) Portfolio Company ............... The Funds
(d) Portfolio Company Prospectus .... The Funds
(e) Voting Rights ................... Voting Privileges
(f) Administrator ................... Administrative Services
6. Deductions
(a) General ......................... Contract Charges and Fees;
Summary
(b) Sales Load ...................... Contract Charges and Fees
(c) Special Purchase Plan ........... Not Applicable
(d) Commission ...................... Distribution of the
Contracts
(e) Expenses ........................ Contract Charges and Fees
(f) Organizational Expenses ......... Not Applicable
<PAGE>
7. General Description of Variable
Annuity Contracts
(a) Persons with Rights .............. Cover Page; Summary;
Description of the
Contract; Additional
Contract Information;
Selecting an Annuity
Payment Option
(b)(i) Allocation of Purchase
Payments........................... Summary; Cancelling the
Contract; Crediting and
Allocating Purchase
Payments
(ii) Transfers ......................... Summary; Transfers;
Annuity Payments
(iii) Exchanges ......................... Not Applicable
(c) Changes ........................... The Variable Account;
Additional Contract
Information
(d) Inquiries ......................... Cover Page; Summary
8. Annuity Period ............................. Summary; Selecting an
Annuity Payment Option
9. Death Benefit .............................. Death Benefits
10. Purchases and Contract Value
(a) Purchases ......................... Summary; Purchasing a
Contract; Cancelling the
Contract; Crediting and
Allocating Purchase
Payments; Variable
Contract Value; Transfers;
Selecting an Annuity
Payment Option
(b) Valuation ........................ Summary; Description of
the Contract; Contract
Charges and Fees;
Selecting an Annuity
Payment Option
(c) Calculations ...................... Variable Contract Value;
The Guaranteed Interest
Option; Selecting an
Annuity Payment Option
(d) Underwriter ....................... Distribution of the
Contracts
<PAGE>
11. Redemptions
(a) By Owners ......................... Summary; Withdrawals;
Surrenders; Selecting an
Annuity Payment Option;
Federal Tax Considerations
By Annuitant ...................... Not Applicable
(b) Texas ORP ......................... Not Applicable
(c) Payment Delay ..................... Payments by the Company
(d) Lapse ............................. Not Applicable
(e) Free Look ......................... Summary; Cancelling the
Contract
12. Taxes ...................................... Federal Tax Considerations
13. Legal Proceedings .......................... Legal Proceedings
14. Table of Contents for the Statement of
Additional Information ..................... Statement of Additional
Information
PART B
ITEM OF FORM N-4 STATEMENT OF ADDITIONAL
INFORMATION CAPTION
15. Cover Page ................................. Cover Page
16. Table of Contents .......................... Table of Contents
17. General Information and History ............ Additional Information
About Valley Forge Life
Insurance Company
(Prospectus)
18. Services
(a) Fees and Expenses of
Registrant ........................ Contract Charges and Fees
(Prospectus)
(b) Management Contracts .............. Not Applicable
(c) Custodian ......................... Not Applicable
Accountant ........................ Experts
(d) Assets of Registrant .............. The Variable Account
(Prospectus)
(e) Affiliated Persons ................ Administrative Services
(Prospectus); Distribution
of The Contracts
(Prospectus)
(f) Underwriter ....................... Distribution of the
Contract (Prospectus)
19. Purchase of Securities Being Offered ....... Summary (Prospectus);
Purchasing a Contract
(Prospectus); Distribution
of the Contracts
(Prospectus)
20. Underwriters ............................... Distribution of the
Contracts (Prospectus)
<PAGE>
21. Calculation of Performance Data ............ Performance Information
22. Annuity Payments ........................... Selecting an Annuity
Payment Option
(Prospectus)
23. Financial Statements ....................... Financial Statements of
Valley Forge Life
Insurance Company
(Prospectus)
PART C -- OTHER INFORMATION
ITEM OF FORM N-4 PART C CAPTION
24. Financial Statements and Exhibits .......... Financial Statements and
Exhibits
25. Directors and Officers of the
Depositor ................................... Directors and Officers
of the Company
26. Persons Controlled By or Under
Common Control with the Depositor
or Registrant ................................ Persons Controlled By or
Under Common Control
with the Depositor or
Registrant
27. Number of Contractowners ..................... Not Applicable
28. Indemnification .............................. Indemnification
29. Principal Underwriters ....................... Principal Underwriter
30. Location of Books and Records ................ Location of Books and
Records
31. Management Services .......................... Management Services
32. Undertakings ................................. Undertakings
<PAGE>
PROSPECTUS
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
issued by
VALLEY FORGE LIFE INSURANCE COMPANY AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY SEPARATE ACCOUNT
This prospectus describes a flexible premium deferred variable annuity contract
(the "Contract") issued by Valley Forge Life Insurance Company (the "Company").
The Contract may be sold to or used in connection with retirement plans,
including plans that qualify for special federal income tax treatment under the
Internal Revenue Code.
The Owner of a Contract may allocate Net Purchase Payments and Contract values
to one or more of the Subaccounts of Valley Forge Life Insurance Company
Variable Annuity Separate Account (the "Variable Account"), or to the Guaranteed
Interest Option for one or more Guarantee Periods, or to both. Assets of each of
the 18 Subaccounts of the Variable Account are invested in a corresponding
investment portfolio (each, a "Fund") of Insurance Series, Variable Insurance
Products Fund, Variable Insurance Products Fund II, The Alger American Fund, MFS
Variable Insurance Trust, SoGen Variable Funds, Inc., and Van Eck Worldwide
Insurance Trust. The Guaranteed Interest Option guarantees a minimum fixed rate
of interest for specified periods of time, currently 1 year, 3 years, 5 years, 7
years, and 10 years.
The Contract Value will vary daily as a function of the investment performance
of the Subaccounts and any interest credited under the Guaranteed Interest
Option. The Company does not guarantee any minimum Variable Contract Value for
amounts allocated to the Variable Account. Annuity Payments and other values
provided by this Contract, when based on the Guaranteed Interest Option, are
subject to a Market Value Adjustment, the operation of which may result in
upward or downward adjustments in amounts withdrawn, surrendered, transferred,
paid on a Death Benefit, or applied to purchase Annuity Payments.
This prospectus sets forth the information regarding the Contract, the Variable
Account, and the Guaranteed Interest Option that a prospective investor should
know before purchasing a Contract. The prospectuses for the Funds, which provide
information regarding investment objectives and policies of each of the Funds,
should be read in conjunction with this prospectus. A Statement of Additional
Information having the same date as this prospectus and providing additional
information about the Contract and the Variable Account has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. To
obtain a free copy of this document, call or write the Service Center.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR EACH OF THE FUNDS.
AN INVESTMENT IN A CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, NOR IS THE CONTRACT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE
CONTRACT INVOLVES CERTAIN RISKS, INCLUDING THE RISK OF LOSS OF PURCHASE PAYMENTS
(PRINCIPAL).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
September __, 1996
<PAGE>
TABLE OF CONTENTS
DEFINITIONS.................................................................
FEE TABLE...................................................................
SUMMARY....................................................................
General Description................................................
Purchasing a Contract..............................................
Cancelling the Contract............................................
Transfers..........................................................
Withdrawals........................................................
Surrenders.........................................................
Charges and Fees...................................................
CONDENSED FINANCIAL INFORMATION.............................................
THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS, AND
THE GUARANTEED INTEREST OPTION..............................................
The Company........................................................
The Variable Account...............................................
The Funds..........................................................
The Guaranteed Interest Option.....................................
DESCRIPTION OF THE CONTRACT.................................................
Purchasing a Contract..............................................
Cancelling the Contract............................................
Crediting and Allocating Purchase Payments.........................
Variable Contract Value............................................
Transfers..........................................................
Withdrawals........................................................
Surrenders.........................................................
Death Benefits.....................................................
Payments by the Company............................................
Telephone Transaction Privileges...................................
CONTRACT CHARGES AND FEES...................................................
Surrender Charge (Contingent Deferred Sales Charge)................
Annual Administration Fee..........................................
Transfer Processing Fee............................................
Taxes on Purchase Payments.........................................
Mortality and Expense Risk Charge..................................
Administration Charge..............................................
Fund Expenses......................................................
Possible Charge for the Company's Taxes............................
<PAGE>
SELECTING AN ANNUITY PAYMENT OPTION.........................................
Annuity Date.......................................................
Annuity Payment Dates..............................................
Election and Changes of Annuity Payment Options....................
Annuity Payments...................................................
Annuity Payment Options............................................
ADDITIONAL CONTRACT INFORMATION.............................................
Ownership..........................................................
Changing the Owner or Beneficiary..................................
Misstatement of Age or Sex.........................................
Change of Contract Terms...........................................
Reports to Owners..................................................
Miscellaneous......................................................
YIELDS AND TOTAL RETURNS....................................................
FEDERAL TAX CONSIDERATIONS..................................................
Introduction.......................................................
Tax Status of the Contract.........................................
Taxation of Annuities..............................................
Transfers, Assignments or Exchanges of a Contract..................
Withholding........................................................
Multiple Contracts.................................................
Taxation of Qualified Plans........................................
Other Tax Consequences.............................................
OTHER INFORMATION...........................................................
Distribution of the Contracts......................................
Administrative Services............................................
Voting Privileges..................................................
Legal Proceedings..................................................
Company Holidays...................................................
Legal Matters......................................................
Experts............................................................
ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE COMPANY ...........
History and Business...............................................
Selected Financial Data............................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................
Results of Operations..............................................
Liquidity and Capital Resources....................................
Segment Information................................................
Reinsurance........................................................
Investments........................................................
Competition........................................................
Employees..........................................................
Properties.........................................................
State Regulation...................................................
Directors and Executive Officers...................................
<PAGE>
Executive Compensation.............................................
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE COMPANY.................
STATEMENT OF ADDITIONAL INFORMATION.........................................
APPENDIX A ................................................................
APPENDIX B.................................................................
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
<PAGE>
DEFINITIONS
ACCUMULATION UNIT: A unit of measure used to calculate Variable Contract Value.
ADJUSTED CONTRACT VALUE: The Contract Value plus or minus any applicable Market
Value Adjustment less purchase payment tax charges not previously deducted less
the annual administration fee.
AGE: The Age of any person on the birthday nearest the date for which Age is
determined.
ANNUITANT: The person or persons whose life (or lives) determines the Annuity
Payments payable under the Contract and whose death determines the death
benefit. With regard to joint and survivorship Annuity Payment Options, the
maximum number of joint Annuitants is two and provisions referring to the death
of an Annuitant mean the death of the last surviving Annuitant. Provisions
relating to an action by the Annuitant mean, in the case of joint Annuitants,
both Annuitants acting jointly.
ANNUITY DATE: The date on which Surrender Value or Adjusted Contract Value is
applied to purchase Annuity Units or a Fixed Annuity.
ANNUITY PAYMENT: One of several periodic payments made by the Company to the
Payee under an Annuity Payment Option.
ANNUITY PAYMENT DATE: The date each month, quarter, semi-annual period, or
year as of which the Company computes Annuity Payments. The Annuity Payment
Date(s) is shown on the Contract.
ANNUITY PAYMENT OPTION: The form of Annuity Payments selected by the Owner
under the Contract. The Annuity Payment Option is shown on the Contract.
ANNUITY UNIT: A unit of measure used to calculate Variable Annuity Payments.
BENCHMARK RATE OF RETURN: An annual rate of return shown on the Contract and
used by the Company to determine the degree of fluctuation in the amount of
Variable Annuity Payments in response to fluctuations in the net investment
return of selected Subaccounts by assuming (among other things) that the assets
in the Variable Account supporting the Contract will have a net annual
investment return over the anticipated Annuity Payment period equal to that rate
of return.
BENEFICIARY: The person(s) to whom the death benefit will be paid on the death
of the Owner or Annuitant prior to the Annuity Date.
CANCELLATION PERIOD: The period described on the cover page of the Contract
during which the Owner may return the Contract for a refund.
THE CODE: The Internal Revenue Code of 1986, as amended.
THE COMPANY: Valley Forge Life Insurance Company.
CONTINGENT ANNUITANT: The person designated by the Owner in the application who
becomes the Annuitant in the event that the Annuitant dies before the Annuity
Date while the Owner is still alive.
CONTINGENT BENEFICIARY: The person(s) to whom the death benefit will be paid if
the Beneficiary (or Beneficiaries) is not living.
CONTRACT ANNIVERSARY: The same date in each Contract Year as the Contract
Effective Date.
<PAGE>
CONTRACT EFFECTIVE DATE: The date on which the Company issues the Contract and
upon which the Contract becomes effective. The Contract Effective Date is shown
on the Contract and is used to determine Contract Years and Contract
Anniversaries.
CONTRACT YEAR: A twelve-month period beginning on the Contract Effective Date
or on a Contract Anniversary.
CONTRACT VALUE: The total amount invested under the Contract. It is the sum of
Variable Contract Value and the Guaranteed Interest Option Value.
DUE PROOF OF DEATH: Proof of death satisfactory to the Company. Due Proof of
Death may consist of the following if acceptable to the Company:
(a) a certified copy of the death record;
(b) a certified copy of a court decree reciting a finding of
death; or
(c) any other proof satisfactory to the Company.
FIXED ANNUITY PAYMENT: An Annuity Payment that is supported by the General
Account and does not vary in amount as a function of the investment return of
the Variable Account from one Annuity Payment Date to the next.
FUND: Any open-end management investment company or investment portfolio
thereof or unit investment trust or series thereof, in which a Subaccount
invests.
GENERAL ACCOUNT: The assets of the Company other than those allocated to the
Variable Account or any other separate account of the Company.
GIO ACCOUNT: Valley Forge Life Insurance Company Guaranteed Interest Option
Separate Account.
GUARANTEE AMOUNT: Before the Annuity Date, the amount equal to that part of any
Net Purchase Payment allocated to or any amount transferred to the Guaranteed
Interest Option for a designated Guarantee Period with a particular expiration
date (including interest thereon) less any withdrawals (including any applicable
surrender charges and any applicable purchase payment tax charge) or transfers
therefrom.
GUARANTEE PERIOD: A specific number of years for which the Company agrees to
credit a particular effective annual rate of interest.
GUARANTEED INTEREST OPTION: An investment option under the Contract supported
by the GIO Account. It is not part of nor dependent upon the investment
performance of the Variable Account.
GUARANTEED INTEREST OPTION VALUE: The sum of all Guarantee Amounts.
GUARANTEED INTEREST RATE: Unless a Market Value Adjustment is made, an
effective annual rate of interest that the Company will pay on a Guarantee
Amount.
HOME OFFICE: The Company's office at 401 Penn Street, Reading, PA 19601.
MARKET VALUE ADJUSTMENT: A positive or negative adjustment made to any portion
of a Guarantee Amount upon the surrender, withdrawal, transfer or application to
an Annuity Payment Option of such portion of the Guarantee Amount prior to 30
days before the expiration of the Guarantee Period applicable to that Guarantee
Amount.
<PAGE>
NET ASSET VALUE PER SHARE: The value per share of any Fund on any Valuation Day.
The method of computing the Net Asset Value Per Share is described in the
prospectus for the Fund.
NET PURCHASE PAYMENT: A purchase payment less any purchase payment tax charge
deducted from the purchase payment.
NON-QUALIFIED CONTRACT: A Contract that is not a "qualified contract."
OWNER: The person or persons who owns (or own) the Contract and who is (are)
entitled to exercise all rights and privileges provided in the Contract. The
maximum number of joint Owners is two. Provisions relating to action by the
Owner mean, in the case of joint Owners, both Owners acting jointly. In the
context of a Contract issued on a group basis, Owners refers to holders of
certificates under a group Contract.
PAYEE: The person entitled to receive Annuity Payments under the Contract.
QUALIFIED CONTRACT: A Contract that is issued in connection with a retirement
plan that qualifies for special federal income tax treatment under Sections 401,
408 or 457 of the Code.
SEC: The U.S. Securities and Exchange Commission.
SERVICE CENTER: The offices of the Company's administrative agent at 95 Bridge
Street (or P.O. Box 310), Haddam, Connecticut 06438.
SUBACCOUNT: A subdivision of the Variable Account, the assets of which are
invested in a corresponding Fund.
SUBACCOUNT VALUE: Before the Annuity Date, the amount equal to that part of any
Net Purchase Payment allocated to the Subaccount and any amount transferred to
that Subaccount, adjusted by interest income, dividends, net capital gains or
losses, realized or unrealized, and decreased by withdrawals (including any
applicable surrender charges and any applicable purchase payment tax charge) and
any amounts transferred out of that Subaccount.
SURRENDER VALUE: The Adjusted Contract Value less any applicable surrender
charges.
VALUATION DAY: For each Subaccount, each day on which the New York Stock
Exchange is open for business except for certain holidays listed in the
prospectus and days that a Subaccount's corresponding Fund does not value its
shares.
VALUATION PERIOD: The period that starts at the close of regular trading on the
New York Stock Exchange on any Valuation Day and ends at the close of regular
trading on the next succeeding Valuation Day.
VARIABLE ACCOUNT: Valley Forge Life Insurance Company Variable Annuity Separate
Account.
VARIABLE CONTRACT VALUE: The sum of all Subaccount Values.
VARIABLE ANNUITY PAYMENT: An Annuity Payment that may vary in amount from one
Annuity Payment Date to the next as a function of the investment experience of
one or more Subaccounts selected by the Owner to support such payments.
WRITTEN NOTICE: A notice or request submitted in writing in a form satisfactory
to the Company that is signed by the Owner and received at the Service Center.
<PAGE>
<TABLE>
<CAPTION>
FEE TABLE
CONTRACT OWNER TRANSACTION EXPENSES
<S> <C>
Sales load imposed on purchase payments........................................................... 0%
Maximum Surrender Charge (as a percentage of purchase payments surrendered or withdrawn) ......... 7%
Transfer Processing Fee (each, after first 12 in a Contract Year) ................................ $25
ANNUAL ADMINISTRATION FEE (waived if Contract Value exceeds $50,000) $30
VARIABLE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF NET ASSETS)
Mortality and Expense Risk Charge ............................................................... 1.25%
Administration Charge............................................................................ 0.15%
-----
Total Variable Account Expenses.................................................................. 1.40%
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND EXPENSES
(as a percentage of Fund average net assets)
Management
(Advisory) Other Total Annual
Fees Expenses Expenses
<S> <C> <C> <C>
Insurance Series:
Federated High Income Bond Fund II 0.0% [1] 0.80% 0.80%
Federated Prime Money Fund II 0.0% [2] 0.80% 0.80%
Federated Utility Fund II 0.0% [3] 0.85% 0.85%
Variable Insurance Products Fund and
Variable Insurance Products Fund II:
VIP Equity-Income Portfolio 0.51% 0.10% 0.61%
VIP II Asset Manager Portfolio 0.71% 0.08% 0.79% [4]
VIP II Contrafund Portfolio 0.61% 0.11% 0.72% [4]
VIP II Index 500 Portfolio 0.00% 0.28% 0.28% [5]
The Alger American Fund:
Alger American Growth Portfolio 0.75% 0.10% 0.85%
Alger American MidCap Growth Portfolio 0.80% 0.10% 0.90%
Alger American Small Capitalization Portfolio 0.85% 0.07% 0.92%
MFS Variable Insurance Trust:
MFS Emerging Growth Series 0.75% 0.25% 1.00% [6]
MFS Growth With Income Series 0.75% 0.25% 1.00% [6]
<PAGE>
MFS Limited Maturity Series 0.55% 0.45% 1.00% [7]
MFS Research Series 0.75% 0.25% 1.00% [6]
MFS Total Return Series 0.75% 0.25% 1.00% [6]
SoGen Variable Funds, Inc.:
SoGen Overseas Portfolio 0.75% 0.60% 1.35%
Van Eck Worldwide Insurance Trust:
Emerging Markets Fund 0.00% [8] 0.00% [8] 0.00% [8]
Gold and Natural Resources Fund 1.00% 0.21% 1.21%
<FN>
[1]Voluntary waiver of management fee (0.60% maximum)
[2]Voluntary waiver of management fee (0.50% maximum)
[3]Voluntary waiver of management fee (0.75% maximum)
[4]Brokerage commissions used to reduce expenses (otherwise total operating
expenses were 0.81% for Asset Mangager and 0.73% for Contrafund)
[5]Voluntary reduction of fund expenses (otherwise management fee, other
expenses, and total expenses were 0.28%, 0.19% and 0.47% respectively)
[6]Adviser has agreed to bear expenses (otherwise other ecpenses and total
expenses were 1.00% and 1.55%, respectively)
[7]Adviser has agreed to bear expenses (otherwise other expenses and total
expenses were 1.00% and 1.55% respectively)
[8]Start up period, no experience to report (2.00% maximum, 1.50% estimate)
</FN>
</TABLE>
Taxes on purchase payments, 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, 1995. Expenses for these Funds are
estimates and are not based on past experience. For a more complete description
of the various costs and expenses, see "CONTRACT CHARGES AND FEES" and the
prospectuses for each Fund.
<PAGE>
Examples
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 purchase payment, assuming a 5%
annual rate of return on assets:
One Year Three Years
Federated High Income Bond Fund II $96 $139
Federated Prime Money Fund II $96 $139
Federated Utility Fund II $96 $141
VIP Equity-Income Subaccount $94 $133
VIP II Asset Manager Subaccount $96 $139
VIP II Contrafund Subaccount $95 $136
VIP II Index 500 Subaccount $91 $123
Alger American Growth Subaccount $96 $141
Alger American MidCap Growth Subaccount $97 $142
Alger American Small Capitalization Subaccount $97 $143
MFS Emerging Growth Subaccount $98 $145
MFS Growth With Income Subaccount $98 $145
MFS Limited Maturity Subaccount $98 $145
MFS Research Subaccount $98 $145
MFS Total Return Subaccount $98 $145
SoGen Overseas Subaccount $102 $156
Emerging Markets Subaccount $103 $161
Gold and Natural Resources Subaccount $100 $152
================================================================================
If you do not surrender your Contract or if you annuitize, you would pay the
following expenses on a $1,000 purchase payment, assuming a 5% annual rate of
return on assets:
One Year Three Years
Federated High Income Bond Fund II $26 $79
Federated Prime Money Fund II $26 $79
Federated Utility Fund II $26 $81
VIP Equity-Income Subaccount $24 $73
VIP II Asset Manager Subaccount $26 $79
VIP II Contrafund Subaccount $25 $76
VIP II Index 500 Subaccount $21 $63
Alger American Growth Subaccount $26 $81
Alger American MidCap Growth Subaccount $27 $82
Alger American Small Capitalization Subaccount $27 $83
MFS Emerging Growth Subaccount $28 $85
MFS Growth With Income Subaccount $28 $85
MFS Limited Maturity Subaccount $28 $85
MFS Research Subaccount $28 $85
MFS Total Return Subaccount $28 $85
SoGen Overseas Subaccount $32 $96
Emerging Markets Subaccount $33 $101
Gold and Natural Resources Subaccount $30 $92
================================================================================
The examples provided above assume that no transfer processing fees or purchase
payment taxes have been assessed. The examples also assume that the annual
administration fee is $30 and that the Contract Value per Contract is $10,000,
which translates the annual administration fee into an assumed .30% charge for
purposes of the examples based on a $1,000 investment.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE 5% ANNUAL
RETURN ASSUMED IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS THAN THE ASSUMED
RATE.
<PAGE>
SUMMARY
GENERAL DESCRIPTION
This prospectus has been designed to provide prospective Owners with the
information necessary to decide whether or not to purchase a Contract. This
summary provides a concise description of the more significant aspects of the
Contract. Further detail is provided in this prospectus, the related Statement
of Additional Information, the Contract, and the prospectuses of the Funds. For
further information, contact the Service Center.
In many jurisdictions, the Contract is issued directly to individuals. In
certain jurisdictions, however, the Contract is only available as a group
contract. Group Contracts are issued to or on behalf of groups such as employers
for their employees. Individuals who are part of groups for which a Contract is
issued receive a certificate that recites substantially all of the provisions of
the Group Contract. Throughout this prospectus, the term "Contract" refers to
individual Contracts, Group Contracts and certificates for Group Contracts.
Owners may allocate all or a portion of Net Purchase Payments or transfer
Contract Value among several Subaccounts of the Variable Account. The Contract
also offers a Guaranteed Interest Option under which Owners may allocate all or
a portion of Net Purchase Payments and transfer Contract Value among several
Guarantee Periods selected by the Owner. The Company currently offers Guarantee
Periods with durations of 1, 3, 5, 7, and 10 years. If the amount allocated or
transferred remains in a Guarantee Period until the expiration date of a
Guarantee Period, its value will be equal to the amount originally allocated or
transferred, multiplied on an annually compounded basis, by its Guaranteed
Interest Rate. Any surrender, withdrawal, transfer, or annuitization made prior
to 30 days before the expiration of a Guarantee Period will be subject to a
Market Value Adjustment that may increase or decrease the Guarantee Amount (or
portion thereof) being surrendered, withdrawn, transferred, or annuitized.
Depending on the size of the Market Value Adjustment, such an adjustment may
reduce the Guarantee Amount (or portion thereof) to less than the Net Purchase
Payment allocated to or Contract Value transferred to a Guarantee Period. (See
"THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS, AND THE GUARANTEED INTEREST
OPTION -- The Guaranteed Interest Option - Market Value Adjustment.")
The Company makes no promise that the Contract Value will increase. Depending on
the investment experience of the Subaccounts and interest credited to various
Guarantee Amounts, the Contract Value, Adjusted Contract Value, Surrender Value
and the death benefit may increase or decrease on any Valuation Day. Owners bear
the investment risk for amounts invested in the Subaccounts and for Guarantee
Amounts surrendered, withdrawn, transferred or applied to an Annuity Payment
Option before the 30-day period prior to the expiration of a Guarantee Period.
The Contract also offers a choice of Annuity Payment Options to which Owners may
apply the Adjusted Contract Value as of the Annuity Date. Beneficiaries may also
apply the death benefit to certain Annuity Payment Options. An Owner may change
the Annuity Date within certain limits.
PURCHASING A CONTRACT
The minimum initial purchase payment for a Contract is $2,000. The minimum
additional purchase payment the Company will accept is $100. The Company may
refuse to accept additional purchase payments at any time for any reason.
The initial Net Purchase Payment is allocated to each Subaccount or to Guarantee
Periods of the Guaranteed Interest Option, or to both, as specified on the
application, unless the Contract is issued in a state that requires the return
of purchase payments during the Cancellation Period. In those states, that
portion of an Owner's initial Net Purchase Payment allocated to a Subaccount is
allocated to the Prime Money Subaccount (the "Money Market Subaccount") for a
period equal to the number of days in the Cancellation Period. At the expiration
of this period, such portion of the Net Purchase Payment, as adjusted to reflect
the investment performance of the Money Market Subaccount during this period, is
then allocated to the Subaccounts based on the proportion that the Owner's
allocation percentage shown in the application bears to the Variable Contract
Value. (See "DESCRIPTION OF THE CONTRACT -- Cancelling the Contract.")
If an Owner elects to invest in a particular Subaccount or Guarantee Period, at
least 1% of the Net Purchase Payment must be allocated to that Subaccount or
Guarantee Period. All percentage allocations must be in whole numbers. In
addition, allocations to a Guarantee Period must be at least $500. The Company
allocates any additional Net Purchase Payments among the Subaccounts and the
Guarantee Periods in accordance with the allocation schedule in effect when such
Net Purchase Payment is received at the Service Center unless it is accompanied
by Written Notice directing a different allocation. (See "Crediting and
Allocating Purchase Payments.")
CANCELLING THE CONTRACT
At any time during the Cancellation Period, an Owner may cancel the Contract and
receive a refund equal to the Contract Value plus fees or charges deducted
except for the mortality and expense risk charge and the administration charge.
However, if required by state law, the Company will return the purchase payments
made. The Cancellation Period is a 10-day period of time beginning when the
Contract is received by an Owner. Some states may require that the Company
provide a longer Cancellation Period. (See "DESCRIPTION OF THE CONTRACT --
Cancelling the Contract.")
TRANSFERS
Prior to the Annuity Date, an Owner may transfer all or part of any Subaccount
Value to another available Subaccount(s) or to one or more Guarantee Periods, or
transfer all or part of any Guarantee Amount to any available Subaccount(s) or
other available Guarantee Periods, subject to certain restrictions. (See
"DESCRIPTION OF THE CONTRACT -- Transfers.")
WITHDRAWALS
Upon Written Notice prior to the Annuity Date, an Owner may, subject to certain
restrictions, withdraw part of the Surrender Value. Withdrawals of Surrender
Value may result in the Company deducting from the remaining Contract Value a
Market Value Adjustment, any applicable surrender charge and any applicable
purchase payment tax charge. (See "DESCRIPTION OF THE CONTRACT -- Withdrawals.")
A withdrawal may have adverse federal income tax consequences including the
possibility of being subject to a penalty tax. (See "FEDERAL TAX
CONSIDERATIONS.")
SURRENDERS
Upon Written Notice prior to the Annuity Date, an Owner may surrender the
Contract and receive its Surrender Value. An Owner may elect to have the
Surrender Value paid in a single sum or under an Annuity Payment Option. (See
"DESCRIPTION OF THE CONTRACT -- Surrenders.") Surrenders may have adverse
federal income tax consequences including the possibility of being subject to a
penalty tax. (See "FEDERAL TAX CONSIDERATIONS.")
CHARGES AND FEES
The following charges and fees are assessed under the Contracts:
Surrender Charge. If a purchase payment is withdrawn or surrendered (or received
by a Payee as part of a lump sum payment) within five full calendar years since
the date the purchase payment was received, the Company assesses a surrender
charge. During the first five Contract Years, the Company also assesses a
surrender charge if a purchase payement is applied, as part of Contract Value,
to an Annuity Payment Option. The surrender charge is 7% of the purchase payment
if surrendered or withdrawn within two full years after the purchase payment was
received and reduces by 1% each year for the next three years and is 0% after
five full years following receipt of the purchase payment. No surrender charge
is assessed upon the withdrawal or surrender (or payment) of Contract Value in
excess of aggregate purchase payments (less prior withdrawals of purchase
payments). For purposes of determining the surrender charge, it is assumed that
purchase payments are surrendered or withdrawn before any Contract Value in
excess of purchase payments (less prior withdrawals of purchase payments) and
purchase payments are considered withdrawn on a first-in-first-out basis. (See
"Surrender Charge (Contingent Deferred Sales Charge).")
Administration Charge. The Company makes a daily charge of 0.000411%
(approximately equivalent to an effective annual rate of 0.15%) of the Variable
Account's net assets to cover a portion of the Company's Contract administration
costs. (See "Administration Charge.")
Mortality and Expense Risk Charge. The Company makes a daily charge of
0.003446% (approximately equivalent to an effective annual rate of 1.25%) of the
Variable Account's net assets to compensate the Company for assuming certain
mortality and expense risks. (See "Mortality and Expense Risk Charge.")
Annual Administration Fee. The Company deducts an annual administration fee of
$30 per Contract Year if an Owner's Contract Value is less than $50,000 at the
time of deduction. (See "Annual Administration Fee.")
Transfer Processing Fee. A $25 charge is assessed by the Company for each
transfer in excess of 12 during a Contract Year. (See "Transfer Processing
Fee.")
Taxes on Purchase Payments. Generally, taxes on purchase payments, if any, are
incurred as of the Annuity Date, and a charge for taxes on purchase payments is
deducted from the Contract Value as of that date. These taxes range from 0% to
3.5% of purchase payments. (See "Taxes on Purchase Payments.")
Expenses of the Funds. The investment experience of each Subaccount reflects
that of the Fund whose shares it holds. The investment experience of each Fund,
in turn, reflects its fees and other operating expenses. Please read the
prospectus for each of the Funds for details.
CONDENSED FINANCIAL INFORMATION
There is no condensed financial information included for the Variable Account
because, as of the date of this prospectus, the Variable Account had not yet
commenced operations. The audited financial statements of the Company (as well
as the auditors' reports thereon) appear elsewhere herein.
THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS, AND
THE GUARANTEED INTEREST OPTION
THE COMPANY
The Company is a life insurance company organized under the laws of the State of
Pennsylvania in 1956 and is authorized to transact business in the District of
Columbia, Puerto Rico, Guam and all states except New York. The Company's home
office is located at 401 Penn St., Reading, Pennsylvania 19601, and its
executive office is located at CNA Plaza, Chicago, Illinois 60685. The Company
is a wholly-owned subsidiary of Continental Assurance Company ("Assurance"), a
life insurance company which, as of December 31, 1995, had consolidated assets
of approximately $13.1 billion. Subject to a reinsurance pooling agreement (a
type of reinsurance arrangement) with CAC, the Company assumes all insurance
risks under the Contracts, and the Company's assets, which as of December 31,
1995 exceeded $627.0 million, support the benefits under the Contracts. See
"ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE COMPANY" for more
detail regarding the Company.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of the Company established
under Pennsylvania law on October 18, 1995. The Company owns the assets of the
Variable Account. These assets are held separately from the Company's General
Account and its other separate accounts. That portion of the Variable Account's
assets that is equal to the reserves and other Contract liabilities of the
Variable Account is not chargeable with liabilities arising out of any other
business the Company may conduct. If the assets exceed the required reserves and
other contract liabilities, the Company may transfer the excess to the Company's
General Account. The Variable Account's assets will at all times, equal or
exceed the sum of the Subaccount Values of all Contracts funded by the Variable
Account.
The Variable Account is registered with the SEC under the Investment Company Act
of 1940 (the "1940 Act") as a unit investment trust and meets the definition of
a "separate account" under the federal securities laws. Such registration does
not involve any supervision by the SEC of the management of the Variable Account
or the Company. The Variable Account also is governed by the laws of
Pennsylvania, the Company's state of domicile, and may also be governed by laws
of other states in which the Company does business.
The Variable Account has 18 Subaccounts, each of which invests in shares of a
corresponding Fund. Income, gains and losses, realized or unrealized, from
assets allocated to a Subaccount are credited to or charged against that
Subaccount without regard to other income, gains or losses of the Company.
Changes to the Variable Account. Where permitted by applicable law, the Company
may make the following changes to the Variable Account:
1. any changes required by the 1940 Act or other applicable law
or regulation;
2. combine separate accounts, including the Variable Account;
3. add new subaccounts to or remove existing Subaccounts from the
Variable Account or combine Subaccounts;
4. make Subaccounts (including new Subaccounts) available to such
classes of Contracts as the Company may determine;
5. add new Funds or remove existing Funds;
6. substitute new Funds for any existing Fund if shares of the
Fund are no longer available for investment or if the Company
determines that investment in a Fund is no longer appropriate
in light of the purposes of the Variable Account;
7. deregister the Variable Account under the 1940 Act if such
registration is no longer required; and
8. operate the Variable Account as a management investment
company under the 1940 Act or as any other form permitted by
law.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. Owners will be notified of any changes.
THE FUNDS
Each Subaccount invests in a corresponding Fund. Each of the Funds is either an
open-end diversified management investment company or a separate investment
portfolio of such a company and is managed by a registered investment adviser.
The Funds as well as a brief description of their investment objectives are
provided below.
Insurance Series
-----------------
The High Income Bond Fund II, Prime Money Fund II and Utility Fund II
Subaccounts each invest in shares of corresponding Funds (i.e., investment
portfolios) of Insurance Series ("IS"). IS issues five "series" or classes of
shares, each of which represents an interest in a Fund of IS. Three of
these series of shares are available as investment options under the
Contracts. The investment objectives of these Funds are set forth below.
Federated High Income Bond Fund II. This Fund invests primarily in
lower-rated fixed-income securities that seek to achieve high current
income.
Federated Prime Money Fund II. This Fund invests in money market
instruments maturing in thirteen months or less to achieve
current income consistent with stability of principal and liquidity.
Federated Utility Fund II. This Fund invests in equity and debt
securities of utility companies to achieve high current income and
moderate capital appreciation.
IS is advised by Federated Advisers.
Variable Insurance Products Fund and Variable Insurance Products Fund II
------------------------------------------------------------------------
The Equity-Income Subaccount invests in shares of a corresponding Fund
(i.e., investment portfolios) of Variable Insurance Products Fund ("VIP Fund").
VIP Fund issues five "series" or classes of shares, each of which represents an
interest in a Fund of VIP Fund. One of these series of shares is available as an
investment option under the Contracts. Asset Manager, Contrafund, and Index 500
Subaccounts each invest in shares of corresponding Funds (i.e., investment
portfolios) of Variable Insurance Products Fund II ("VIP Fund II"). VIP Fund II
issues five "series" or classes of shares, each of which represents an interest
in a Fund of VIP Fund II. Three of these series of shares are available as
investment options under the Contracts. The investment objectives of these Funds
are set forth below.
Asset Manager Portfolio. This Fund seeks high total return with reduced
risk over the long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term fixed-income instruments.
Contrafund Portfolio. This Fund seeks capital appreciation over the
long-term by investing in companies that are undervalued or
out-of-favor.
Equity-Income Portfolio. This Fund seeks current income by investing
primarily in income producing equity securities. In choosing these
securities, the Fund also considers the potential for capital
appreciation.
Index 500 Portfolio. This Fund seeks investment results that correspond
to the total return of common stocks publicly traded in the United
States, as represented by the Standard & Poor's 500 Composite Index of
500 Common Stocks.
VIP Fund and VIP Fund II are each advised by Fidelity Management &
Research Company.
The Alger American Fund
-----------------------
Alger American Growth, Alger American MidCap Growth and Alger American
Small Capitalization Subaccounts each invest in shares of corresponding Funds
(i.e., investment portfolios) of The Alger American Fund ("AAF"). AAF issues 6
"series" or classes of shares, each of which represents an interest in a Fund of
AAF. Three of these series of shares are available as investment options under
the Contracts. The investment objectives of these Funds are set forth below.
Alger American Growth Portfolio. This Fund seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio
of equity securities, primarily of companies with total market
capitalization of $ 1 billion or greater.
Alger American MidCap Growth Portfolio. This Fund seeks long-term
capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total
market capitalization between $750 million and $3.5 billion.
Alger American Small Capitalization Portfolio. This Fund seeks
long-term capital appreciation by investing in a diversified, actively
managed portfolio of equity securities, primarily of companies with
total market capitalization of less than $1 billion.
AAF is advised by Fred Alger Management, Inc.
MFS Variable Insurance Trust
----------------------------
The MFS Emerging Growth, MFS Growth with Income, MFS Limited Maturity,
MFS Research and MFS Total Return Subaccounts each invest in shares of
corresponding Funds (i.e., investment portfolios) of MFS Variable Insurance
Trust ("MFSVIT"). MFSVIT issues 12 "series" or classes of shares, each of which
represents an interest in a Fund of MFSVIT. Five of these series of shares are
available as investment options under the Contracts. The investment objectives
of these Funds are set forth below.
MFS Emerging Growth Series. This Fund seeks to obtain long-term growth
of capital by investing primarily in common stocks of small and
medium-sized companies that are early in their life cycle but which
have the potential to become major enterprises.
MFS Growth With Income Series. This Fund seeks to provide reasonable
current income and long-term growth of capital and income.
MFS Limited Maturity Series. This Fund seeks to provide as high a level
of current income as is believed to be consistent with prudent
investment risk, with capital protection as a secondary objective.
MFS Research Series. This Fund seeks to provide long-term growth of
capital and future income.
MFS Total Return Series. This Fund seeks primarily to provide
above-average income consistent with prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital
and income.
MFSVIT is advised by Massachusetts Financial Services Company.
SoGen Variable Funds, Inc.
--------------------------
The SoGen Overseas Subaccount invests in shares of a corresponding Fund
(i.e., investment portfolio) of SoGen Variable Funds, Inc. ("SGVF"). SGVF issues
1 "series" or classes of shares, each of which represents an interest in a
Fund of SGVF. One of these series of shares is available as an investment option
under the Contracts. The investment objective of this Fund is set forth below.
SoGen Overseas Portfolio. This Fund seeks long-term growth of capital
by investing primarily in securities of small and medium size non-U.S.
companies.
SGVF is advised by Societe Generale Asset Management Corp.
Van Eck Worldwide Insurance Trust
---------------------------------
The Emerging Market and Gold and Natural Resources Subaccounts each
invest in shares of corresponding Funds (i.e., investment portfolios) of Van Eck
Worldwide Insurance Trust ("VEWIT"). VEWIT issues 5 "series" or classes of
shares, each of which represents an interest in a Fund of VEWIT. Two of these
series of shares are available as investment options under the Contracts. The
investment objectives of these Funds are set forth below.
Emerging Markets Fund. This Fund seeks capital appreciation by
investing primarily in equity securities in emerging markets around
the world.
Gold and Natural Resources Fund. This Fund seeks long-term capital
appreciation by investing in equity and debt securities of companies
engaged in the exploration, development, production and distribution of
gold and other natural resources such as strategic and other metals,
minerals, forest products, oil, natural gas and coal.
VEWIT is advised by Van Eck Associates Corporation.
NO ONE CAN ASSURE THAT ANY FUND WILL ACHIEVE ITS STATED OBJECTIVES AND
POLICIES.
More detailed information concerning the investment objectives, policies and
restrictions of the Funds, the expenses of the Funds, the risks attendant to
investing in the Funds and other aspects of their operations can be found in the
current prospectus for each Fund which accompanies this prospectus and the
current statement of additional information for the Funds. The Funds'
prospectuses should be read carefully before any decision is made concerning the
allocation of Net Purchase Payments or transfers among the Subaccounts.
Please note that not all of the Funds described in the prospectuses for the
Funds are available with the Contract. Moreover, the Company cannot guarantee
that each Fund will always be available for its variable annuity contracts, but
in the unlikely event that a Fund is not available, the Company will take
reasonable steps to secure the availability of a comparable fund. Shares of each
Fund are purchased and redeemed at net asset value, without a sales charge.
The Company has entered into agreements with the investment advisers of several
of the Funds pursuant to which each such investment adviser pays the Company a
servicing fee based upon an annual percentage of the average aggregate net
assets invested by the Company on behalf of the Variable Account. These
agreements reflect administrative services provided to the Funds by the Company.
Payments of such amounts by an adviser do not increase the fees paid by the
Funds or their shareholders.
Shares of the Funds are sold to separate accounts of insurance companies that
are not affiliated with the Company or each other, a practice known as "shared
funding." They are also sold to separate accounts to serve as the underlying
investment for both variable annuity contracts and variable life insurance
contracts, a practice known as "mixed funding." As a result, there is a
possibility that a material conflict may arise between the interests of Owners,
whose Contract Values are allocated to the Variable Account, and of owners of
other contracts whose contract values are allocated to one or more other
separate accounts investing in any one of the Funds. Shares of some of the Funds
may also be sold directly to certain qualified pension and retirement plans
qualifying under Section 401 of the Code. As a result, there is a possibility
that a material conflict may arise between the interests of Owners or owners of
other contracts (including contracts issued by other companies), and such
retirement plans or participants in such retirement plans. In the event of any
such material conflicts, the Company will consider what action may be
appropriate, including removing the Fund from the Variable Account or replacing
the Fund with another Fund. There are certain risks associated with mixed and
shared funding and with the sale of shares to qualified pension and retirement
plans, as disclosed in each Fund's prospectus.
THE GUARANTEED INTEREST OPTION
The Guaranteed Interest Option is an investment option available under the
Contract and is supported by the Company's General Account and the GIO Account
(described below). All or a portion of an Owner's Net Purchase Payments may be
allocated to and transfers of Contract Value may be made to Guarantee Periods
under the Guaranteed Interest Option. Through the Guaranteed Interest Option,
the Company offers specified effective annual rates of interest (Guaranteed
Interest Rates) that are credited daily and available for specified periods of
time selected by an Owner (Guarantee Periods). Although the Guaranteed Interest
Rate may differ among Guarantee Periods, it will never be less than the
effective annual rate shown in the Contract.
Interests issued by the Company in connection with the Guaranteed Interest
Option have been registered under the Securities Act of 1933, but neither the
Guaranteed Interest Option, the GIO Account, nor the General Account has been
registered as an investment company under the 1940 Act. Accordingly, neither the
Guaranteed Interest Option, the GIO Account, nor the General Account, nor any
interest therein are generally subject to regulation under the 1940 Act.
Initial Guarantee Periods begin on the date as of which a Net Purchase Payment
is allocated to or a portion of Contract Value is transferred to the Guarantee
Period, and end when the number of years in the Guarantee Period elected
(measured from the end of the calendar month in which the amount was allocated
or transferred to the Guarantee Period) has elapsed. The last day of the
Guarantee Period is the expiration date for that Guarantee Period. Subsequent
Guarantee Periods begin on the first day following the expiration date of a
previous Guarantee Period.
Allocations of Net Purchase Payments and transfers of Contract Value to the
Guaranteed Interest Option may have different applicable Guaranteed Interest
Rates depending on the timing of such allocations or transfers. However, the
applicable Guaranteed Interest Rate does not change during a Guarantee Period.
If the allocated or transferred amount remains in the Guaranteed Interest Option
until the end of the applicable Guarantee Period, its value will be equal to the
amount originally allocated or transferred, multiplied, on an annually
compounded basis, by its Guaranteed Interest Rate. If a Guarantee Amount is
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option
prior to 30 days before the expiration of the Guarantee Period, the Guaranteed
Interest Rate for that Guarantee Period is subject to a Market Value Adjustment,
as described below, the application of which may result in the payment of an
amount less than the amount originally allocated or transferred to the Guarantee
Period.
The Company will notify Owners in writing at least 30 days prior to the
expiration date of any Guarantee Period about the then currently available
Guarantee Periods and the Guaranteed Interest Rates applicable to such Guarantee
Periods. A new Guarantee Period of the same duration as the previous Guarantee
Period will commence automatically on the first day following the expiring
Guarantee Period, unless the Company receives Written Notice prior to the start
of the new Guarantee Period of the Owner's election of a different Guarantee
Period from among those being offered by the Company at that time, or
instructions to transfer all or a portion of the expiring Guarantee Amount to a
Subaccount. If the Company does not receive such Written Notice and is not
offering a Guarantee Period of the same duration as the expiring Guarantee
Period or if the duration of the expiring Guarantee Period would, if renewed,
extend beyond the Annuity Date, then a new Guarantee Period of one year will
commence automatically on the first day following the expiring Guarantee Period.
The minimum Guarantee Amount is $500.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods that differ from those available when an Owner's
Contract was issued. The Company also reserves the right, at any time, to stop
accepting Net Purchase Payment allocations or transfers of Contract Value to a
particular Guarantee Period. Since the specific Guarantee Periods available may
change periodically, please contact the Service Center to determine the
Guarantee Periods currently being offered.
GIO Account. The assets in the GIO Account are used to support the values and
benefits under the Guaranteed Interest Option of the Contract and similar
contracts. The Company owns the assets in the GIO Account and holds such assets
separately from other Company assets and from the General Account. The portion
of the assets of the GIO Account equal to the reserves and other contract
liabilities of the GIO Account are not chargeable with liabilities that arise
from any other business that the Company conducts. The Company may transfer to
the General Account any assets of the GIO Account that are in excess of such
reserves and other liabilities.
Under Pennsylvania insurance law, the Company is required to maintain assets in
the GIO Account at least equal to the reserves and other contract liabilities of
the GIO Account. In the unlikely event of liquidation of the Company, if the
Company cannot satisfy all of its insurance obligations, Owners with Guaranteed
Interest Option Value will have a priority claim against assets of the GIO
Account equal to its liabilities, and a claim against the Company's general
account for any remaining Company liabilities. Thus, the GIO Account represents
a pool of assets that provides an additional measure of assurance that Owners
allocating Net Purchase Payments and Contract Value to the Guaranteed Interest
Option will receive full payment of benefits attributable to Guaranteed Interest
Option.
Owners allocating Net Purchase Payments and/or Contract Value to the Guaranteed
Interest Option do not participate in the investment performance of assets of
the GIO Account, and this performance does not determine the Guaranteed Interest
Option Value or benefits relating thereto. The Guaranteed Interest Option
provides values and benefits based only upon the Net Purchase Payments and
Contract Values allocated thereto, the Guaranteed Interest Rate credited on such
amounts, and any charges or Market Value Adjustments imposed on such amounts in
accordance with the terms of the Contract.
Market Value Adjustment. A Market Value Adjustment reflects the relationship
between: (i) the current Guaranteed Interest Rate that the Company is crediting
for a Guarantee Period equal to the time remaining in the Guarantee Period from
which the Guarantee Amount is requested to be surrendered, withdrawn,
transferred or annuitized; and (ii) the Guaranteed Interest Rate being applied
to the Guarantee Period from which the Guarantee Amount will be surrendered,
withdrawn, transferred or annuitized. Any surrender, withdrawal, transfer or
application to an Annuity Payment Option of a Guarantee Amount is subject to a
Market Value Adjustment that may be positive or negative, unless the effective
date of the surrender, withdrawal, transfer or application is within 30 days
prior to the end of a Guarantee Period. The Market Value Adjustment will be
applied after the deduction of any applicable annual administration fee or
transfer processing fee, and before the deduction of any applicable surrender
charge or charge for taxes on purchase payments (also referred to as a "premium
tax" charge).
Generally, if the Guaranteed Interest Rate for the selected Guarantee Period is
lower than the Guaranteed Interest Rate currently being offered for new
Guarantee Periods of a duration equal to the balance of the selected Guarantee
Period as of the date that the Market Value Adjustment is applied, then the
application of the Market Value Adjustment will result in the payment, upon
surrender, withdrawal, transfer or application of amounts to an Annuity Payment
Option, of an amount less than the Guarantee Amount (or portion thereof) being
surrendered, withdrawn, transferred or applied to an Annuity Payment Option, or
may even result in the payment of an amount less than the Net Purchase Payment
allocated to or the portion of Contract Value transferred to the Guarantee
Period. Similarly, if the Guaranteed Interest Rate for the selected Guarantee
Period is higher than the Guaranteed Interest Rate currently being offered for
new Guarantee Periods of a duration equal to the balance of the selected
Guarantee Period as of the date that the Market Value Adjustment is applied,
then the application of the Market Value Adjustment will result in the payment,
upon surrender, withdrawal, transfer or application of amounts to an Annuity
Payment Option, of an amount greater than the Guarantee Amount (or portion
thereof) being surrendered, withdrawn, transferred or applied to an Annuity
Payment Option.
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option,
by the Market Value Adjustment Factor. The Market Value Adjustment Factor is
calculated as follows:
Market Value Adjustment = Amount multiplied by
[[(1+a)/(1+b)]^n/12 -1]
where:
"Amount" is the amount being surrendered, withdrawn, transferred or
applied to an Annuity Payment Option less any applicable
annual administration fees or transfer processing fees;
"a" is the Guaranteed Interest Rate currently being credited to the
"Amount";
"b" is the Guaranteed Interest Rate that is currently being offered for a
Guarantee Period of duration equal to the time remaining to the
expiration of the Guarantee Period for the Guarantee Amount from which
the "Amount" is taken. Where the time remaining to the expiration of
the Guarantee Period is not 1, 3, 5, 7, or 10 years, "b" is the rate
found by linear interpolation of the rate for the Guarantee Period
having the duration closest to the time remaining or, if the time
remaining is less than 1 year, "b" is the rate for a 1 year period; and
"n" is the number of complete months remaining before the expiration of the
Guarantee Period for the Guarantee Amount from which the "Amount" is
taken.
Examples of computing the Market Value Adjustment are set forth in Appendix A.
DESCRIPTION OF THE CONTRACT
PURCHASING A CONTRACT
A prospective Owner may purchase a Contract by submitting an application through
a licensed agent of the Company who is also a representative of a broker-dealer
having a selling agreement with CNA Investor Services, Inc. ("CNA/ISI"), the
principal underwriter for the Contracts. The maximum Age for Owners on the
Contract Effective Date is 85. An initial purchase payment must be delivered to
the Service Center along with the Owner's application. The minimum initial
purchase payment is $2,000. The minimum additional purchase payment the Company
will accept is $100. Unless the Company gives its prior approval, it will not
accept an initial purchase payment in excess of $500,000 and reserves the right
not to accept any purchase payment for any reason. The Company will send Owners
a confirmation notice upon receipt and acceptance of the Owner's purchase
payment.
CANCELLING THE CONTRACT
Owners may cancel the Contract during the Cancellation Period, which is the
10-day period after an Owner receives the Contract. Some states may require a
longer Cancellation Period. To cancel the Contract, the Owner must mail or
deliver the Contract to the Service Center or to the agent who sold it. The
Company will refund the Contract Value plus any fees or charges deducted except
for the mortality and expense risk charge and the administration charge. If the
Owner purchased a Contract in a state that requires the return of purchase
payments during the Cancellation Period and the Owner chooses to exercise the
cancellation right, the Company will return the purchase payments.
CREDITING AND ALLOCATING PURCHASE PAYMENTS
If the application for a Contract is properly completed and is accompanied by
all the information necessary to process it, including payment of the initial
purchase payment, the initial Net Purchase Payment will be allocated, as
designated by the Owner, to one or more of the Subaccounts or to one or more
Guarantee Periods within two business days of receipt of such Net Purchase
Payment by the Company at the Service Center. If the application is not properly
completed, the Company reserves the right to retain the Net Purchase Payment for
up to five business days while it attempts to complete the application. If the
application cannot be made complete within five business days, the applicant
will be informed of the reasons for the delay and the initial purchase payment
will be returned immediately unless the applicant specifically consents to the
Company retaining the initial purchase payment until the application is made
complete. The initial Net Purchase Payment will then be credited within two
business days after receipt of a properly completed application. The Company
will credit additional Net Purchase Payments that are accepted by the Company as
of the end of the Valuation Period during which the Payment was received at the
Service Center.
The initial Net Purchase Payment is allocated among the Subaccounts and
Guarantee Periods as specified on the application, unless the Contract is issued
in a state that requires the return of purchase payments during the Cancellation
Period. In those states, any portion of the initial Net Purchase Payment
allocated to the Guaranteed Interest Option will be allocated to that option
upon receipt; and any portion of the initial Net Purchase Payment allocated to
the Subaccounts will be allocated to the Money Market Subaccount for a period
equal to the number of days in the Cancellation Period. At the expiration of
this period, such portion of the Net Purchase Payment, as adjusted to reflect
the investment performance of the Money Market Subaccount during this period, is
then allocated to the Subaccounts as described above.
Owners may allocate Net Purchase Payments among any or all Subaccounts or
Guarantee Periods available. If an Owner elects to invest in a particular
Subaccount or Guarantee Period, at least 1% of the Net Purchase Payment must be
allocated to that Subaccount or Guarantee Period. All percentage allocations
must be in whole numbers. The minimum amount that may be allocated to any
Guarantee Period is $500. The Company allocates any additional Net Purchase
Payments among the Subaccounts and the Guaranteed Interest Option in accordance
with the allocation schedule in effect when such Net Purchase Payment is
received at the Service Center unless it is accompanied by Written Notice
directing a different allocation.
VARIABLE CONTRACT VALUE
Subaccount Value. The Variable Contract Value is the sum of all Subaccount
Values and therefore reflects the investment experience of the Subaccounts to
which it is allocated. The Subaccount Value for any Subaccount as of the
Contract Effective Date is equal to the amount of the initial Net Purchase
Payment allocated to that Subaccount. On subsequent Valuation Days prior to the
Annuity Date, the Subaccount Value is equal to that part of any Net Purchase
Payment allocated to the Subaccount and any amount transferred to that
Subaccount, adjusted by interest income, dividends, net capital gains or losses,
realized or unrealized, and decreased by withdrawals (including any applicable
surrender charges and any applicable purchase payment tax charge) and any
amounts transferred out of that Subaccount.
Accumulation Units. Net Purchase Payments allocated to a Subaccount or amounts
of Contract Value transferred to a Subaccount are converted into Accumulation
Units. For any Contract, the number of Accumulation Units credited to a
Subaccount is determined by dividing the dollar amount directed to the
Subaccount by the value of the Accumulation Unit for that Subaccount for the
Valuation Day on which the Net Purchase Payment or transferred amount is
invested in the Subaccount. Therefore, Net Purchase Payments allocated to or
amounts transferred to a Subaccount under a Contract increase the number of
Accumulation Units of that Subaccount credited to the Contract.
Decreases in Subaccount Value under a Contract are effected by the cancellation
of Accumulation Units of a Subaccount. Therefore, surrenders, withdrawals,
transfers out of a Subaccount, payment of a death benefit, the application of
Variable Contract Value to an Annuity Payment Option on the Annuity Date, and
the deduction of the annual administration fee all result in the cancellation of
an appropriate number of Accumulation Units of one or more Subaccounts.
Accumulation Units are cancelled as of the end of the Valuation Period in which
the Company received Written Notice regarding the event.
The Accumulation Unit value for each Subaccount was arbitrarily set initially at
$10 when the Subaccount began operations. Thereafter, the Accumulation Unit
value at the end of every Valuation Day equals the Accumulation Unit value at
the end of the preceding Valuation Day multiplied by the Net Investment Factor
(described below). The Subaccount Value for a Contract is determined on any day
by multiplying the number of Accumulation Units attributable to the Contract in
that Subaccount by the Accumulation Unit value for that Subaccount.
The Net Investment Factor. The Net Investment Factor is an index applied to
measure the investment performance of a Subaccount from one Valuation Period to
the next. For each Subaccount, the Net Investment Factor reflects the investment
experience of the Fund in which that Subaccount invests and the charges assessed
against that Subaccount for a Valuation Period. The Net Investment Factor is
calculated by dividing (1) by (2) and subtracting (3) from the result, where:
(1) is the result of:
a. the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the current
Valuation Period; plus
b. the per share amount of any dividend or capital gain
distributions made by the Fund held in the
Subaccount, if the "ex-dividend" date occurs during
the current Valuation Period; plus or minus
c. a per share charge or credit for any taxes reserved
for, which is determined by the Company to have
resulted from the operations of the Subaccount.
(2) is the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the last prior Valuation
Period.
(3) is a daily factor representing the mortality and expense risk
charge and the administration charge deducted from the
Subaccount, adjusted for the number of days in the Valuation
Period.
TRANSFERS
General. Prior to the Annuity Date and after the Cancellation Period, by Written
Notice, an Owner may transfer all or part of any Subaccount Value to another
Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, or transfer all or part of any Guarantee Amount to any
Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, subject to the following restrictions. The minimum transfer
amount is $500 or the entire Subaccount Value or Guarantee Amount, if less. The
minimum Subaccount Value or Guarantee Amount that may remain following a
transfer is $500. A transfer request that would reduce any Subaccount Value or
Guarantee Amount below $500 is treated as a transfer request for the entire
Subaccount Value or Guarantee Amount. Only four transfers may be made per
Contract Year from all or part of any Guarantee Amount. The first 12 transfers
during each Contract Year are free. The Company assesses a transfer processing
fee of $25 for each transfer in excess of 12 during a Contract Year. The
transfer processing fee is deducted from the amount being transferred. Each
Written Notice of transfer is considered one transfer regardless of how many
Subaccounts or Guarantee Periods are affected by the transfer.
Dollar-Cost Averaging Facility. If elected in the application or at any time
thereafter prior to the Annuity Date by Written Notice, an Owner may
systematically transfer (on a monthly, quarterly, semi-annual or annual basis)
specified dollar amounts from the Money Market Subaccount to other Subaccounts.
This is known as the "dollar-cost averaging" method of investment. The
fixed-dollar amount purchases more Accumulation Units of a Subaccount when their
value is lower and fewer units when their value is higher. Over time, the cost
per unit averages out to be less than if all purchases of Units had been made at
the highest value and greater than if all purchases had been made at the lowest
value. The dollar-cost averaging method of investment reduces the risk of making
purchases only when the price of Accumulation Units is high. It does not assure
a profit or protect against a loss in declining markets.
Owners may only elect use the dollar-cost averaging facility if their Money
Market Subaccount Value is at least $1,000 at the time of the election. The
minimum transfer amount under the facility is $100 per month (or the
equivalent). If dollar-cost averaging transfers are to be made to more than one
Subaccount, then the Owner must indicate the dollar amount of the transfer to be
made to each. At least $50.00 must be designated to each Subaccount.
Transfers under the dollar-cost averaging facility are made as of the same
calendar day each month. If this calendar day is not a Valuation Day, transfers
are made as of the next Valuation Day. Once elected, transfers under the
dollar-cost averaging facility continue until the Money Market Subaccount Value
is depleted, the Annuity Date occurs or until the Owner cancels the election by
Written Notice at least seven days in advance of the next transfer date.
Alternatively, Owners may specify in advance a date for transfers under the
facility to cease. There is no additional charge for using the dollar-cost
averaging facility. Transfers under the facility do not count towards the 12
transfers permitted without a transfer processing fee in any Contract Year. The
Company reserves the right to discontinue offering the dollar-cost averaging
facility at any time and for any reason or to change its features.
Automatic Subaccount Value Rebalancing. If elected in the application or
requested by Written Notice at any time thereafter prior to the Annuity Date, an
Owner may instruct the Company to automatically transfer (on a quarterly,
semi-annual or annual basis) Variable Contract Value between and among specified
Subaccounts in order to achieve a particular percentage allocation of Variable
Contract Value among such Subaccounts ("automatic Subaccount Value
rebalancing"). Such percentage allocations must be in whole numbers. Once
elected, automatic Subaccount Value rebalancing begins on the first Valuation
Day of the next calendar quarter or other period (or, if later, the next
calendar quarter or other period after the expiration of the Cancellation
Period).
Owners may stop automatic Subaccount Value rebalancing at any time by Written
Notice at least seven calendar days before the first Valuation Day in a new
period. Owners may specify allocations between and among as many Subaccounts as
are available at the time automatic Subaccount Value rebalancing is elected.
Once automatic Subaccount Value rebalancing has been elected, any subsequent
allocation instructions that differ from the then-current rebalancing allocation
instructions are treated as a request to change the automatic Subaccount Value
rebalancing allocation. Owners may change automatic Subaccount Value rebalancing
allocations at any time. Allocation changes will take effect as of the Valuation
Day that instructions are received at the Service Center. Once automatic
Subaccount Value rebalancing is in effect, an Owner may only transfer Subaccount
Value among or between Subaccounts by changing the automatic Subaccount Value
rebalancing allocation instructions. Changes to automatic Subaccount Value
rebalancing must be made by Written Notice.
There is no additional charge for automatic Subaccount Value rebalancing and
rebalancing transfers do not count as one the 12 transfers available without a
transfer processing fee during any Contract Year. If automatic Subaccount Value
rebalancing is elected at the same time as the dollar-cost averaging facility or
when the dollar-cost averaging facility is being utilized, automatic Subaccount
Value rebalancing will be postponed until the first Valuation Day in the
calendar quarter or other period following the termination of dollar-cost
averaging facility. The Company reserves the right to discontinue offering
automatic Subaccount Value rebalancing at any time for any reason or to change
its features.
<PAGE>
WITHDRAWALS
General. Prior to the Annuity Date and after the Cancellation Period, an Owner
may withdraw part of the Surrender Value, subject to certain limitations. Each
withdrawal must be requested by Written Notice. The minimum withdrawal amount is
$500. The maximum withdrawal is the amount that would leave a minimum Surrender
Value of $1,000. A withdrawal request that would reduce any Subaccount Value or
Guarantee Amount below $500 will be treated as a request for a withdrawal of all
of that Subaccount Value or Guarantee Amount.
The Company withdraws the amount requested from the Contract Value as of the day
that the Company receives an Owner's Written Notice, and sends the Owner that
amount. The Company will then deduct any applicable surrender charge and any
applicable purchase payment tax charge from the remaining Contract Value. If the
withdrawal is requested from a Guarantee Amount, the Company deducts any
applicable Market Value Adjustment from, or adds any applicable Market Value
Adjustment to, remaining Contract Value. A deduction of a Market Value
Adjustment from Contract Value may result in the payment of an amount which,
when added to any remaining Guarantee Amount and amounts previously withdrawn or
transferred, is less than the amount allocated or transferred to a Guarantee
Period to create that Guarantee Amount.
A Written Notice of withdrawal must specify the amount to be withdrawn from each
Subaccount or Guarantee Amount. If the Written Notice does not specify this
information, or if any Subaccount Value or Guarantee Amount is inadequate to
comply with the request, the Company will make the withdrawal based on the
proportion that each Subaccount Value and each Guarantee Amount bears to the
Contract Value as of the day of the withdrawal.
Systematic Withdrawals. If elected in the application or requested at any time
thereafter prior to the Annuity Date by Written Notice, an Owner may elect to
receive periodic withdrawals under the Company's systematic withdrawal plan.
Under the systematic withdrawal plan, the Company will make withdrawals (on a
monthly, quarterly, semi-annual or annual basis) from Subaccounts specified by
the Owner. Systematic withdrawals must be at least $100 each and may only be
made from Variable Contract Value. Withdrawals under the systematic withdrawal
plan may only be made from Subaccounts having $1,000 or more of Subaccount Value
at the time of election. The systematic withdrawal plan is not available to
Owners using the dollar-cost averaging facility or automatic Subaccount Value
rebalancing.
The Company makes systematic withdrawals on the following basis: (1) as a
specified dollar amount, or (2) as a specified whole percent of Subaccount
Value.
Participation in the systematic withdrawal plan terminates on the earliest of
the following events: (1) the Subaccount Value from which withdrawals are being
made becomes zero, (2) a termination date specified by the Owner is reached, or
(3) the Owner requests that his or her participation in the plan cease.
Systematic withdrawals being made in order to meet the required minimum
distribution under the Code or to make substantially equal payments as required
under the Code will continue even though a surrender charge is deducted.
Tax Consequences of Withdrawals. Consult your tax adviser regarding the tax
consequences associated with making withdrawals. A withdrawal made before the
taxpayer reaches Age 59 1/2, including systematic withdrawals, may result in
imposition of a penalty tax of 10% of the taxable portion withdrawn. See
"FEDERAL TAX CONSIDERATIONS" for more details.
SURRENDERS
An Owner may surrender the Contract for its Surrender Value at any time prior to
the Annuity Date. A Contract's Surrender Value fluctuates daily as a function of
the investment experience of the Subaccounts in which an Owner is invested. The
Company does not guarantee any minimum Surrender Value for amounts invested in
the Subaccounts. Likewise, the Company does not guarantee any minimum Surrender
Value for Guarantee Amounts surrendered, withdrawn, transferred or applied to an
Annuity Payment Option before the 30-day period prior to the expiration of a
Guarantee Period.
An Owner may elect to have the Surrender Value paid in a single sum or under an
Annuity Payment Option. The Surrender Value will be determined as of the date
the Company receives the Written Notice for surrender and the Contract at the
Service Center.
Consult your tax adviser regarding the tax consequences of a Surrender. A
Surrender made before age 59 1/2 may result in the imposition of a penalty tax
of 10% of the taxable portion of the Surrender Value. See "FEDERAL TAX
CONSIDERATIONS" for more details.
DEATH BENEFITS
Death Benefits on or After the Annuity Date. If an Owner dies on or after the
Annuity Date, any surviving joint Owner becomes the sole Owner. If there is no
surviving Owner, any successor Owner becomes the new Owner. If there is no
surviving or successor Owner, the Payee becomes the new Owner. If an Annuitant
or an Owner dies on or after the Annuity Date, the remaining undistributed
portion, if any, of the Contract Value will be distributed at least as rapidly
as under the method of distribution being used as of the date of such death.
Under some Annuity Payment Options, there will be no death benefit.
Death Benefits When the Owner Dies Before the Annuity Date. If any Owner dies
prior to the Annuity Date, any surviving joint Owner becomes the new sole Owner.
If there is no surviving joint Owner, any successor Owner becomes the new Owner
and if there is no successor Owner the Annuitant becomes the new Owner unless
the deceased Owner was also the Annuitant. If the sole deceased Owner was also
the Annuitant, then the provisions relating to the death of the Annuitant
(described below) will govern unless the deceased Owner was one of two joint
Annuitants, in which event the surviving Annuitant becomes the new Owner.
The following options are available to new Owners:
1. to receive the Adjusted Contract Value in a single lump sum
within five years of the deceased Owner's death; or
2. elect to receive the Adjusted Contract Value paid out under an
Annuity Payment Option provided that: (a) Annuity Payments
begin within one year of the deceased Owner's death, and (b)
Annuity Payments are made in substantially equal installments
over the life of the new Owner or over a period not greater
than the life expectancy of the new Owner; or
3. if the new Owner is the spouse of the deceased Owner, he or
she may by Written Notice within one year of the Owner's
death, elect to continue the Contract as the new Owner. If the
spouse so elects, all of his or her rights as a Beneficiary
cease and if the deceased Owner was also the sole Annuitant
and appointed no Contingent Annuitant, he or she will become
the Annuitant. The spouse will be deemed to have made the
election to continue the Contract if he or she makes no
election before the expiration of the one year period or if he
or she makes any purchase payments under the Contract.
With regard to new Owners who are not the spouse of the deceased Owner: (a) 1
and 2 apply even if the Annuitant or Contingent Annuitant is alive at the time
of the deceased Owner's death, (b) if the new Owner is not a natural person,
only option 1 is available, (c) if no election is made within one year of the
deceased Owner's death, option 1 is deemed to have been elected.
Adjusted Contract Value is computed as of the date that the Company receives Due
Proof of Death of the Owner. Payments under this provision are in full
settlement of all of the Company's liability under the Contract.
Death Benefits When the Annuitant Dies Before the Annuity Date. If the Annuitant
dies before the Annuity Date while the Owner is still living, any Contingent
Annuitant will become the Annuitant. If the Annuitant dies before the Annuity
Date and no Contingent Annuitant has been named, the Company will pay the death
benefit described below to the Beneficiary. If there is no surviving
Beneficiary, the Company will pay the death benefit to any Contingent
Beneficiary. If there is no surviving Contingent Beneficiary, the Company will
immediately pay the death benefit to the Owner's estate in a lump sum.
If the Annuitant who is also an Owner dies or if the Annuitant dies and the
Owner is not a natural person, a Beneficiary (or a Contingent Beneficiary):
1. will receive the death benefit in a single lump sum within 5
years of the deceased Annuitant's death; or
2. may elect to receive the death benefit paid out under an
Annuity Payment Option provided that: (a) Annuity Payments
begin within 1 year of the deceased Annuitant's death, and (b)
Annuity Payments are made in substantially equal installments
over the life of the Beneficiary or over a period not greater
than the life expectancy of the Beneficiary; or
3. if the Beneficiary is the spouse of the deceased Annuitant, he
or she may by Written Notice within one year of the
Annuitant's death, elect to continue the Contract as the new
Owner. If the spouse so elects, all his or her rights as a
Beneficiary cease and if the deceased Annuitant was also the
sole Annuitant and appointed no Contingent Annuitant, he or
she will become the Annuitant. The spouse will be deemed to
have made the election to continue the Contract if he or she
makes no election before the expiration of the one year period
or if he or she makes any purchase payments under the
Contract.
The Death Benefit. If the Annuitant is Age 75 or younger, the death benefit is
an amount equal to the greatest of:
1. aggregate purchase payments made less any withdrawals
(including the applicable surrender charges, purchase payment
tax charge and Market Value Adjustments) as of the date that
the Company receives Due Proof of Death of the Annuitant; or
2. the Contract Value as of the date that the Company receives
Due Proof of Death of the Annuitant; or
3. the minimum death benefit described below;
less any applicable purchase payment tax charge on the date that the death
benefit is paid.
The minimum death benefit is the death benefit floor amount as of the date of
the Annuitant's death (a) adjusted, for each withdrawal made since the most
recent reset of the death benefit floor amount, multiplying that amount by the
product of all ratios of the Contract Value immediately after a withdrawal to
the Contract Value immediately before such withdrawal (b) plus any purchase
payments made since the most recent reset of the death benefit floor amount.
The death benefit floor amount is the largest Contract Value attained on any
prior death benefit floor computation anniversary. Death benefit floor
computation anniversaries are the 5th Contract Anniversary and each subsequent
5th Contract Anniversary (i.e., the 10th Contract Anniversary, the 15th Contract
Anniversary, etc.) prior to the Annuitant's Age 76. Therefore, the death benefit
floor amount is reset when, on a death benefit floor computation anniversary,
Contract Value exceeds the current death benefit floor amount.
If the Annuitant is Age 76 or older, the death benefit is an amount equal to the
greater of 1 or 2 above.
Examples of the computation of the death benefit are shown in Appendix B.
PAYMENTS BY THE COMPANY
The Company generally makes payments of withdrawals, surrenders, death benefits,
or any Annuity Payments within seven days of receipt of all applicable Written
Notices and/or Due Proofs of Death. However, the Company may postpone such
payments for any of the following reasons:
1. when the New York Stock Exchange ("NYSE") is closed for
trading other than customary holiday or weekend closing, or
trading on the NYSE is restricted, as determined by the SEC;
or
2. when the SEC by order permits a postponement for the
protection of Owners; or
3. when the SEC determines that an emergency exists that would
make the disposal of securities held in the Variable Account
or the determination of their value not reasonably
practicable.
If a recent check or draft has been submitted, the Company has the right to
defer payment of surrenders, withdrawals, death benefits, or Annuity Payments
until the check or draft has been honored.
The Company may defer payment of any withdrawal, surrender, or transfer of
Guaranteed Interest Option Value up to six months after it receives an Owner's
Written Notice. The Company pays interest on the amount of any payment that is
deferred.
TELEPHONE TRANSACTION PRIVILEGES
If an Owner has elected this privilege in a form provided by the Company, an
Owner may make transfers or change allocation instructions by telephoning the
Service Center. A telephone authorization form received by the Company at the
Service Center is valid until it is rescinded or revoked by Written Notice or
until a subsequently dated form signed by the Owner is received at the Service
Center. The Company will send Owners a written confirmation of all transfers and
allocation changes made pursuant to telephone instructions.
The Service Center requires a form of personal identification prior to acting on
instructions received by telephone and also may tape record instructions
received by phone. If the Company follows these procedures, it is not liable for
any losses due to unauthorized or fraudulent transactions. The Company reserves
the right to suspend telephone transaction privileges at any time for any
reason.
CONTRACT CHARGES AND FEES
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
General. No sales charge is deducted from purchase payments at the time that
such payments are made. However, within certain time limits described below, a
surrender charge is deducted upon any withdrawal or surrender. A surrender
charge is assessed on Cash Value applied to an Annuity Payment Option during the
first five Contract Years. No surrender charge is assessed on Contract Value
applied to an Annuity Payment Option after the fifth Contract Year. If on the
Annuity Date, however, the Payee elects (or the Owner previously elected) to
receive a lump sum, this sum will equal the Surrender Value on such date.
In the event that surrender charges are not sufficient to cover sales expenses,
such expenses will be borne by the Company. Conversely, if the revenue from such
charges exceeds such expenses, the excess of revenues from such charges over
expenses will be retained by the Company. The Company does not currently believe
that the surrender charges deducted will cover the expected costs of
distributing the Contracts. Any shortfall will be made up from the Company's
general assets, which may include amounts derived from the mortality and expense
risk charge.
Charge for Surrender or Withdrawals. The surrender charge is equal to the
percentage of each purchase payment surrendered or withdrawn (or applied to an
Annuity Payment Option during the first five Contract Years) as shown in the
table below. The surrender charge is separately calculated and applied to each
purchase payment at the time that the purchase payment is surrendered or
withdrawn. No surrender charge applies to the Contract Value in excess of
aggregate purchase payments (less prior withdrawals of the payments). The
surrender charge is calculated using the assumption that purchase payments are
surrendered or withdrawn before Contract Value in excess of aggregate purchase
payments (less prior withdrawals of purchase payments) and that purchase
payments are withdrawn on a first-in-first-out basis.
Number of Full Years Elapsed Between Surrender Charge as a Percentage
Date of Receipt of Purchase Payment and of Purchase Payment Withdrawn
Date of Surrender of Withdrawal or Surrendered
0 7%
1 7%
2 6%
3 5%
4 4%
5+ 0%
Withdrawals. With regard to all withdrawals, the Company withdraws the amount
requested from the Contract Value as of the day that it receives the Written
Notice regarding the withdrawal and sends the Owner that amount. The Company
then deducts any surrender charge and any applicable purchase payment tax charge
from the remaining Contract Value. If the withdrawal is requested from a
Guarantee Amount, the Company deducts any applicable Market Value Adjustment
from, or adds any applicable Market Value Adjustment to, remaining Contract
Value. For the purpose of computing the surrender charge, the deduction of the
Market Value Adjustment, purchase payment tax charge and surrender charge is
considered to be made from Contract Value in excess of aggregate purchase
payments (less prior withdrawals of purchase payments).
Amounts Not Subject to a Surrender Charge. Each Contract Year after the first
Contract Year, an Owner may withdraw an amount equal to 15% of the aggregate
purchase payments less prior withdrawals of purchase payments as of the first
Valuation Day of that Contract Year without incurring a surrender charge. The
Company reserves the right to limit the number of such "free" withdrawals in any
Contract Year.
Waiver of Surrender Charge. The Company will waive the surrender charge in the
event that the Owner: (1) enters an "eligible nursing home," as defined in the
Contract, for a period of at least 90 days, (2) is diagnosed as having a
"terminal medical condition," as defined in the Contract, or (3) is less than
age 65 and sustains a "permanent and total disability," as defined in the
Contract. The Company reserves the right to require written proof of terminal
medical condition or permanent and total disability satisfactory to it and to
require an examination by a licensed physician of its choice. The surrender
charge waiver is not available in all states due to applicable insurance laws in
effect in various states.
ANNUAL ADMINISTRATION FEE
An annual administration fee is deducted as of each Contract Anniversary for the
prior Contract Year. The Company also deducts this fee for the current Contract
Year when determining the Surrender Value prior to the end of a Contract Year
and on the Annuity Date. If Contract Value is $50,000 or less at the time of the
fee deduction, then the annual administration fee is $30. The fee is zero for
Contracts where the Contract Value exceeds $50,000 at the time the fee would be
deducted. This fee is to cover a portion of the Company's administrative
expenses related to the Contracts. The Company does not expect to make a profit
from this fee.
The annual administration fee is assessed against Subaccount Values and
Guarantee Amounts based on the proportion that each bears to the Contract Value.
Where the fee is deducted from Subaccount Values, the Company will cancel an
appropriate number of Accumulation Units. Where the fee is obtained from a
Guarantee Amount, the Company will reduce the Guarantee Amount by the amount of
the fee.
TRANSFER PROCESSING FEE
Prior to the Annuity Date, the Company permits 12 free transfers per Contract
Year among and between the Subaccounts and the Guarantee Periods. For each
additional transfer, the Company charges $25 at the time each such transfer is
processed. The fee is deducted from the amount being transferred. The Company
does not expect to make a profit from this fee.
TAXES ON PURCHASE PAYMENTS
Certain states and municipalities impose a tax on the Company in connection with
the receipt of annuity considerations. This tax generally can range from 0% to
3.5% of such considerations and generally varies based on the Annuitant's state
of residence. Taxes on annuity considerations are generally incurred by the
Company as of the Annuity Date based on the Contract Value on that date, and the
Company deducts the charge for taxes on annuity considerations from the Contract
Value as of the Annuity Date. Some jurisdictions impose a tax on annuity
considerations at the time such considerations are made. In those jurisdictions,
the Company's current practice is to pay the tax on annuity considerations and
then deduct the charge for these taxes from the Contract Value upon surrender,
payment of the death benefit, or upon the Annuity Date. The Company reserves the
right to deduct any state and local taxes on annuity considerations from the
Contract Value at the time such tax is due.
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a daily charge from the assets of the Variable Account to
compensate it for mortality and expense risks that it assumes under the
Contract. The daily charge is at the rate of 0.003446% (approximately equivalent
to an effective annual rate of 1.25%) of the net assets of the Variable Account.
Approximately .70% of this annual charge is for the assumption of mortality risk
and .55% is for the assumption of expense risk. If the mortality and expense
risk charge is insufficient to cover the actual cost of the mortality and
expense risks undertaken by the Company, the Company will bear the shortfall.
Conversely, if the charge proves more than sufficient, the excess will be profit
to the Company and will be available for any proper purpose including, among
other things, payment of expenses incurred in selling the Contracts.
The mortality risk that the Company assumes is the risk that Annuitants, as a
group, will live for a longer period of time than the Company estimated when it
established the guaranteed Annuity Payment rates in the Contract. Because of
these guarantees, each Payee is assured that his or her longevity will not have
an adverse effect on the Annuity Payments that he or she receives under Annuity
Payment Options based on life contingencies. The Company also assumes a
mortality risk because the Contracts guarantee a death benefit if the Annuitant
dies before the Annuity Date. The expense risk that the Company assumes is the
risk that administration charge, annual administration fee and the transfer
processing fee may be insufficient to cover the actual expenses of administering
the Contracts.
ADMINISTRATION CHARGE
The Company deducts a daily administration charge from the assets of the
Variable Account to compensate it for a portion of the expenses it incurs in
administering the Contracts. The daily charge is at a rate of 0.000411%
(approximately equivalent to an effective annual rate of 0.15%) of the net
assets of the Variable Account. The Company does not expect to make a profit
from this charge.
FUND EXPENSES
The investment performance of each Fund reflects the management fee that it pays
to its investment manager or adviser as well as other operating expenses that it
incurs. Investment management fees are generally daily fees computed as a
percent of a Fund's average daily net assets at an annual rate. Please read the
prospectus for each Fund for complete details.
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
At the present time, the Company makes no charge to the Variable Account for any
federal, state, or local taxes that the Company incurs which may be attributable
to the Variable Account or the Contracts. The Company, however, reserves the
right in the future to make a charge for any such tax or other economic burden
resulting from the application of the tax laws that it determines to be properly
attributable to the Subaccounts or to the Contracts.
SELECTING AN ANNUITY PAYMENT OPTION
ANNUITY DATE
The Owner selects the Annuity Date in the application. For Non-Qualified
Contracts, the Annuity Date must be no later than the later of the Contract
Anniversary following the Annuitant's Age 99. For Qualified Contracts, the
Annuity Date must be no later than April 1 of the calendar year following the
calendar year in which the Owner attains age 70 1/2. An Owner may change the
Annuity Date by Written Notice, subject to the following limitations:
1. Written Notice is received at least 30 days before the current
Annuity Date; and
2. the requested new Annuity Date must be at least 30 days after
the Company receives Written Notice.
ANNUITY PAYMENT DATES
The Company computes the first Annuity Payment as of the Annuity Date and makes
the first Annuity Payment as of the initial Annuity Payment Date selected by the
Owner. The initial Annuity Payment Date is the Annuity Date unless the Annuity
Date is the 29th, 30th, or 31st day of a calendar month, in which event, the
Owner must select a different date. All subsequent Annuity Payments are computed
and payable as of Annuity Payment Dates. These dates will be the same day of the
month as the initial Annuity Payment Date. Monthly Annuity Payments will be
computed and payable as of the same day each month as the initial Annuity
Payment Date. Quarterly Annuity Payments will be computed and payable as of the
same day in the third, sixth, ninth, and twelfth month following the initial
Annuity Payment Date and on the same days of such months in each successive
Contract Year. Semi-annual Annuity Payment Dates will be computed and payable as
of the same day in the sixth and twelfth month following the initial Annuity
Payment Date and on the same days of such months in each successive Contract
Year. Annual Annuity Payments will be computed and payable as of the same day in
each Contract Year as the initial Annuity Payment Date. The frequency of Annuity
Payments selected is shown in the Contract. In the event that the Owner does not
select a payment frequency, payments will be made monthly.
ELECTION AND CHANGES OF ANNUITY PAYMENT OPTIONS
On the Annuity Date, the Surrender Value or Adjusted Contract Value is applied
under an Annuity Payment Option, unless the Owner elects to receive the
Surrender Value in a lump sum. If the Annuity Date falls during the first five
Contract Years, Surrender Value is applied under an Annuity Payment Option. If
the Annuity Date falls after the fifth Contract Anniversary, Adjusted Contract
Value is applied under an Annuity Payment Option. The Annuity Payment Option
specifies the type of annuity to be paid and determines how long the annuity
will be paid, the frequency, and the amount of each payment. The Owner may elect
or change the Annuity Payment Option by Written Notice at any time prior to the
Annuity Date. The Owner may elect to apply any portion of the Surrender Value or
Adjusted Contract Value to provide either Variable Annuity Payments or Fixed
Annuity Payments or a combination of both. If Variable Annuity Payments are
selected, the Owner must also select the Subaccounts to which Surrender Value or
Adjusted Contract Value will be applied. If no selection has been made by the
Annuity Date, Surrender Value or Adjusted Contract Value from any Guaranteed
Interest Option Value will be applied to purchase Fixed Annuity Payments and
Surrender Value or Adjusted Contract Value from each Subaccount Value will be
applied to purchase Variable Annuity Payments from that Subaccount. If no
Annuity Payment Option has been selected by the Annuity Date, Surrender Value or
Adjusted Contract Value will be applied under Annuity Payment Option 5 (Life
Annuity with Period Certain) with a designated period of 10 years. Any death
benefit applied to purchase Annuity Payments is allocated among the Subaccounts
and/or the Guaranteed Interest Option as instructed by the Beneficiary unless
the Owner previously made the foregoing elections.
ANNUITY PAYMENTS
Fixed Annuity Payments. Fixed Annuity Payments are periodic payments from the
Company to the designated Payee, the amount of which is fixed and guaranteed by
the Company. The dollar amount of each Fixed Annuity Payment depends on the form
and duration of the Annuity Payment Option chosen, the Age of the Annuitant, the
sex of the Annuitant (if applicable), the amount of Adjusted Contract Value
applied to purchase the Fixed Annuity Payments and, for Annuity Payment Options
3-6, the applicable annuity purchase rates. The annuity purchase rates in the
Contract are based on a Guaranteed Interest Rate of not less than 3.0%. The
Company may, in its sole discretion, make Fixed Annuity Payments in an amount
based on a higher interest rate. If Fixed Annuity Payments are computed based on
an interest rate in excess of the minimum Guaranteed Interest Rate, then, for
the period of the higher rate, the dollar amount of such Fixed Annuity Payments
will be greater than the dollar amount based on 3.0%. The Company guarantees
that any higher rate will be in effect for at least 12 months.
Except for Annuity Payment Options 1 and 2, the dollar amount of the first Fixed
Annuity Payment is determined by dividing the dollar amount of Adjusted Contract
Value being applied to purchase Fixed Annuity Payments by $1,000 and multiplying
the result by the annuity purchase rate in the Contract for the selected Annuity
Payment Option. Subsequent Fixed Annuity Payments are of the same dollar amount
unless the Company makes payments based on an interest rate different from that
used to compute the first payment.
Variable Annuity Payments. Variable Annuity Payments are periodic payments from
the Company to the designated Payee, the amount of which varies from one Annuity
Payment Date to the next as a function of the net investment experience of the
Subaccounts selected by the Owner or Payee to support such payments. The dollar
amount of the first Variable Annuity Payment is determined in the same manner as
that of a Fixed Annuity Payment. Therefore, provided that the interest rate on
which Fixed Annuity Payments are based equals the Benchmark Rate of Return on
which Variable Annuity Payments are based, for any particular amount of Adjusted
Contract Value applied to a particular Annuity Payment Option, the dollar amount
of the first Variable Annuity Payment would be the same as the dollar amount of
each Fixed Annuity Payment. Variable Annuity Payments after the first Payment
are similar to Fixed Annuity Payments except that the amount of each Payment
varies to reflect the net investment experience of the Subaccounts selected by
the Owner or Payee.
The dollar amount of the initial Variable Annuity Payment attributable to each
Subaccount is determined by dividing the dollar amount of the Adjusted Contract
Value to be allocated to that Subaccount on the Annuity Date by $1,000 and
multiplying the result by the annuity purchase rate in the Contract for the
selected Annuity Payment Option. The dollar value of the total initial Variable
Annuity Payment is the sum of the initial Variable Annuity Payments attributable
to each Subaccount.
The number of Annuity Units attributable to a Subaccount is derived by dividing
the initial Variable Annuity Payment attributable to that Subaccount by the
Annuity Unit Value for that Subaccount for the Valuation Period ending on the
Annuity Date or during which the Annuity Date falls if the Valuation Period does
not end on such date. The number of Annuity Units attributable to each
Subaccount under a Contract remains fixed unless there is an exchange of Annuity
Units.
The dollar amount of each subsequent Variable Annuity Payment attributable to
each Subaccount is determined by multiplying the number of Annuity Units of that
Subaccount credited under the Contract by the Annuity Unit Value (described
below) for that Subaccount for the Valuation Period ending on the Annuity
Payment Date, or during which the Annuity Payment Date falls if the Valuation
Period does not end on such date. The dollar value of each subsequent Variable
Annuity Payment is the sum of the subsequent Variable Annuity Payments
attributable to each Subaccount.
The Annuity Unit Value of each Subaccount for any Valuation Period is equal to
(a) multiplied by (b) divided by (c) where:
(a) is the Net Investment Factor for the Valuation Period for
which the Annuity Unit Value is being calculated;
(b) is the Annuity Unit Value for the preceding Valuation Period;
and
(c) is a daily Benchmark Rate of Return factor (for the 3%
benchmark rate of return) adjusted for the number of days in
the Valuation Period.
The Benchmark Rate of Return factor is equal to one plus 3%, or 1.03. The annual
factor can be translated into a daily factor of 1.00008098.
If the net investment return of the Subaccount for an Annuity Payment period is
equal to the pro-rated portion of the 3% Benchmark Rate of Return, the Variable
Annuity Payment attributable to that Subaccount for that period will equal the
Payment for the prior period. To the extent that such net investment return
exceeds an annualized rate of return of 3% for a Payment period, the Payment for
that period will be greater than the Payment for the prior period and to the
extent that such return for a period falls short of an annualized rate of 3%,
the Payment for that period will be less than the Payment for the prior period.
Exchange of Annuity Units. By Written Notice at any time after the Annuity Date,
the Payee may exchange the dollar value of a designated number of Annuity Units
of a particular Subaccount for an equivalent dollar amount of Annuity Units of
another Subaccount. On the date of the exchange, the dollar amount of a Variable
Annuity Payment generated from the Annuity Units of either Subaccount would be
the same. Exchanges of Annuity Units are treated as transfers for the purpose of
computing any transfer processing fee.
ANNUITY PAYMENT OPTIONS
OPTION 1. INTEREST PAYMENTS. The Company holds the Adjusted Contract Value as
principal and pays interest to the Payee. The interest rate is 3% per year
compounded annually. The Company pays interest every 1 year, 6 months, 3 months
or 1 month, as specified at the time this option is selected. At the death of
the Payee, the value of the remaining payments are paid in a lump sum to the
Payee's estate. Only Fixed Annuity Payments are available under Annuity Payment
Option 1.
OPTION 2. PAYMENTS OF A SPECIFIED AMOUNT. The Company pays the Adjusted
Contract Value in equal payments every 1 year, 6 months, 3 months or 1 month.
The amount and frequency of the payments is specified at the time this option is
selected. After each payment, interest is added to the remaining amount applied
under this option that has not yet been paid. The interest rate is 3% per year
compounded annually. Payments are made to the Payee until the amount applied
under this option, including interest, is exhausted. The total of the payments
made each year must be at least 5% of the amount applied under this option. If
the Payeedies before the amount applied is exhausted, the Company pays the value
of the remaining payments in a lump sum to the Payee's estate. Only Fixed
Annuity Payments are available under Annuity Payment Option 2.
ADDITIONAL INTEREST EARNINGS. The Company may pay interest at rates in excess
of the rates guaranteed in Annuity Payment Options 1 and 2.
OPTION 3. PAYMENTS FOR A SPECIFIED PERIOD. The Company pays the lump sum in
equal payments for the number of years specified when the option is selected.
Payments are made every 1 year, 6 months, 3 months or 1 month, as specified when
the option is selected. If the Payee dies before the expiration of the specified
number of years, the Company pays the commuted value of the remaining payments
in a lump sum to the Payee's estate.
OPTION 4. LIFE ANNUITY. The Company makes monthly payments to the Payee for as
long as the Annuitant lives. UNDER THIS OPTION, A PAYEE COULD RECEIVE ONLY ONE
PAYMENT IF THE ANNUITANT DIES AFTER THE FIRST PAYMENT, TWO PAYMENTS IF THE
ANNUITANT DIES AFTER THE SECOND PAYMENT, ETC.
OPTION 5. LIFE ANNUITY WITH PERIOD CERTAIN. The Company makes monthly payments
to the Payee for as long as the Annuitant lives. At the time this option is
selected, a period certain of 5, 10, 15, or 20 years must also be selected. If
the Annuitant dies before the specified period certain ends, the payments to the
Payee will continue until the end of the specified period. The amount of the
monthly payments therefore depends on the period certain selected.
OPTION 6. JOINT LIFE AND SURVIVORSHIP ANNUITY. The Company makes monthly
payments to the Payee while both Annuitants are living. After the death of
either Annuitant, payments continue to the Payee for as long as the other
Annuitant lives. UNDER THIS OPTION, THE PAYEE COULD RECEIVE ONLY ONE PAYMENT IF
BOTH ANNUITANTS DIE AFTER THE FIRST PAYMENT, TWO PAYMENTS IF BOTH ANNUITANTS DIE
AFTER THE SECOND PAYMENT, ETC.
ADDITIONAL CONTRACT INFORMATION
OWNERSHIP
The Contract belongs to the Owner. An Owner may exercise all of the rights and
options described in the Contract.
Subject to more specific provisions elsewhere herein, an Owner's rights include
the right to: (1) select or change a successor Owner, (2) select or change any
Beneficiary or Contingent Beneficiary, (3) select or change the Payee prior to
the Annuity Date, (4) select or change the Annuity Payment Option, (5) allocate
Net Purchase Payments among and between the Subaccounts and Guarantee Periods,
(6) transfer Contract Value among and between the Subaccounts and Guarantee
Periods, and (7) select or change the Subaccounts on which Variable Annuity
Payments are based.
The rights of Owners of Qualified Contracts may be restricted by the terms of a
related employee benefit plan. For example, such plans may require an Owner of a
Qualified Contract to obtain the consent of his or her spouse before exercising
certain ownership rights or may restrict withdrawals. See "FEDERAL TAX
CONSIDERATIONS" for more details.
Selection of an Annuitant or Payee who is not the Owner may have tax
consequences. See "FEDERAL TAX CONSIDERATIONS" for more details.
CHANGING THE OWNER OR BENEFICIARY
Prior to the Annuity Date and after the Cancellation Period, an Owner may
transfer ownership of the Contract subject to the Company's published rules at
the time of the change. A new Owner must be less than Age 76.
At any time before a death benefit is paid, the Owner may name a new Beneficiary
by Written Notice unless an irrevocable Beneficiary has previously been named.
When an irrevocable Beneficiary has been designated, the Owner must provide the
irrevocable Beneficiary's written consent to the Company before a new
Beneficiary is designated.
These changes take effect as of the day the Written Notice is received at the
Service Center and the Company is not liable for any payments made under the
Contract prior to the effectiveness of any change. For possible tax consequences
of these changes, see "FEDERAL TAX CONSIDERATIONS."
MISSTATEMENT OF AGE OR SEX
If an Age or sex of the Annuitant given in the application is misstated, the
Company will adjust the benefits it pays under the Contract to the amount that
would have been payable at the correct Age or sex. If the Company made any
underpayments because of any such misstatement, it shall pay the amount of such
underpayment plus interest at an annual effective rate of 3%, immediately to the
Payee or Beneficiary in one sum. If the Company makes any overpayments because
of a misstatement of Age or sex, it shall deduct from current or future payments
due under the Contract, the amount of such overpayment plus interest at an
annual effective rate of 3%.
CHANGE OF CONTRACT TERMS
Upon notice to the Owner, the Company may modify the Contract to:
1. conform the Contract or the operations of the Company or of
the Variable Account to the requirements of any law (or
regulation issued by a government agency) to which the
Contract, the Company or the Variable Account is subject;
2. assure continued qualification of the Contract as an annuity
contract or a Qualified Contract under the Code;
3. reflect a change (as permitted in the Contract) in the
operation of the Variable Account; or
4. provide additional Subaccounts and/or Guarantee Periods.
In the event of any such modification, the Company will make appropriate
endorsements to the Contract.
Only one of the Company's officers may modify the Contract or waive any of the
Company's rights or requirements under the Contract. Any modification or waiver
must be in writing. No agent may bind the Company by making any promise not
contained in the Contract.
REPORTS TO OWNERS
Prior to the Annuity Date, the Company will send each Owner a report at least
annually, or more often as required by law, indicating: the number of
Accumulation or Annuity Units credited to the Contract and the dollar value of
such units; the Contract Value, Adjusted Contract Value and Surrender Value; any
purchase payments, withdrawals, or surrenders made, death benefits paid and
charges deducted since the last report; the current interest rate applicable to
each Guarantee Amount; and any other information required by law.
The reports, which will be mailed to Owners at their last known address, will
include any information that may be required by the SEC or the insurance
supervisory official of the jurisdiction in which the Contract is delivered.
The Company will also send any other reports, notices or documents required by
law to be furnished to Owners.
MISCELLANEOUS
Non-Participating. The Contract does not participate in the surplus or profits
of the Company and the Company does not pay dividends on the Contract.
Protection of Proceeds. To the extent permitted by law, no benefits payable
under the Contract to a Beneficiary or Payee are subject to the claims of an
Owner's or a Beneficiary's creditors.
Discharge of Liability. Any payments made by the Company under any Annuity
Payment Option or in connection with the payment of any withdrawal, surrender or
death benefit, shall discharge the Company's liability to the extent of each
such payment.
Proof of Age and Survival. The Company reserves the right to require proof of
the Annuitant's Age prior to the Annuity Date. In addition, for life contingent
Annuity Options, the Company reserves the right to require proof of the
Annuitant's survival before any Annuity Payment Date.
Contract Application. The Company issues the Contract in consideration of the
Owner's application and payment of the initial purchase payment. The entire
Contract is made up of the Contract, any attached endorsements or riders, and
the application. In the absence of fraud, the Company considers statements made
in the application to be representations and not warranties. The Company will
not use any statement in defense of a claim or to void the Contract unless it is
contained in the application. The Company will not contest the Contract.
YIELDS AND TOTAL RETURNS
From time to time, the Company may advertise or include in sales literature
certain performance related information for the Subaccounts, including yields
and average annual total returns. Certain Funds have been in existence prior to
the commencement of the offering of the Contracts. The Company may advertise or
include in sales literature the performance of the Subaccounts that invest in
these Funds for these prior periods. The performance information of any period
prior to the commencement of the offering of the Contracts is calculated as if
the Contract had been offered during those periods, using current charges and
expenses.
Performance information discussed herein is based on historic results and does
not indicate or project future performance. For a description of the methods
used to determine yield and total return for the Subaccounts, see the Statement
of Additional Information.
Effective yields and total returns for the Subaccounts are based on the
investment performance of the corresponding Funds. The performance of a Fund in
part reflects its expenses. See the prospectuses for the Funds for Fund expense
information.
The yield of the Money Market Subaccount refers to the annualized income
generated by an investment in the Subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-day
period is generated each seven-day period over a 52-week period and is shown as
a percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Subaccount is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Subaccount other than the Money Market Subaccount refers to the
annualized income generated by an investment in the Subaccount over a specified
30-day or one-month period. The yield is calculated by assuming that the income
generated by the investment during that 30-day or one-month period is generated
each period over a 12-month period and is shown as a percentage of the
investment.
The total return of a Subaccount refers to return quotations assuming an
investment under a Contract has been held in the Subaccount for various periods
of time including, but not limited to, a period measured from the date the
Subaccount commenced operations. Average annual total return refers to total
return quotations that are annualized based on an average return over various
periods of time.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which total return quotations are provided. Average
annual total return information shows the average annual percentage change in
the value of an investment in the Subaccount from the beginning date of the
measuring period to the end of that period. This standardized version of average
annual total return reflects all historical investment results, less all charges
and deductions applied against the Subaccount (including any surrender charge
that would apply if an Owner terminated the Contract at the end of each period
indicated, but excluding any deductions for premium taxes). When a Subaccount,
other than the Money Market Subaccount, has been in operation for one, five and
ten years respectively, the standard version average annual total return for
these periods will be provided.
In addition to the standard version described above, total return performance
information computed on two different non-standard bases may be used in
advertisements or sales literature. Average annual total return information may
be presented, computed on the same basis as described above, except deductions
will not include the surrender charge. In addition, the Company may from time to
time disclose cumulative total return for Contracts funded by Subaccounts.
From time to time, yields, standard average annual total returns, and
non-standard total returns for the Funds may be disclosed, including such
disclosures for periods prior to the date the Variable Account commenced
operations.
Non-standard performance data will only be disclosed if the standard performance
data for the required periods is also disclosed. For additional information
regarding the calculation of other performance data, please refer to the
Statement of Additional Information.
In advertising and sales literature, the performance of each Subaccount may be
compared with the performance of other variable annuity issuers in general or to
the performance of particular types of variable annuities investing in mutual
funds, or investment portfolios of mutual funds with investment objectives
similar to the Subaccount. Lipper Analytical Services, Inc. ("Lipper"), Variable
Annuity Research Data Service ("VARDS") and Morningstar, Inc. ("Morningstar")
are independent services which monitor and rank the performance of variable
annuity issuers in each of the major categories of investment objectives on an
industry-wide basis.
Lipper's and Morningstar's rankings include variable life insurance issuers as
well as variable annuity issuers. VARDS rankings compare only variable annuity
issuers. The performance analyses prepared by Lipper, VARDS and Morningstar each
rank such issuers on the basis of total return, assuming reinvestment of
distributions, but do not take sales charges, redemption fees, or certain
expense deductions at the separate account level into consideration. In
addition, VARDS prepares risk rankings, which consider the effects of market
risk on total return performance. This type of ranking provides data as to which
funds provide the highest total return within various categories of funds
defined by the degree of risk inherent in their investment objectives.
Advertising and sales literature may also compare the performance of each
Subaccount to the Standard & Poor's Index of 500 Common Stocks, a widely used
measure of stock performance. This unmanaged index assumes the reinvestment of
dividends but does not reflect any "deduction" for the expense of operating or
managing an investment portfolio. Other independent ranking services and indices
may also be used as a source of performance comparison.
The Company may also report other information including the effect of
tax-deferred compounding on a Subaccount's investment returns, or returns in
general, which may be illustrated by tables, graphs or charts.
<PAGE>
FEDERAL TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION IS GENERAL AND
IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
This discussion is not intended to address the tax consequences resulting from
all of the situations in which a person may be entitled to or may receive a
distribution under the Contract issued by the Company. Any person concerned
about these tax implications should consult a competent tax adviser before
initiating any transaction. This discussion is based upon the Company's
understanding of the present federal income tax laws, as they are currently
interpreted by the Internal Revenue Service ("IRS"). No representation is made
as to the likelihood of the continuation of the present federal income tax laws
or of the current interpretation by the IRS. Moreover, no attempt has been made
to consider any applicable state or other tax laws.
The Contract may be purchased on a non-qualified basis or purchased and used in
connection with plans qualifying for favorable tax treatment. The Qualified
Contract is designed for use by individuals whose purchase payments are
comprised solely of proceeds from and/or contributions under retirement plans
that are intended to qualify as plans entitled to special income tax treatment
under sections 401(a), 408, or 457 of the Code. The ultimate effect of federal
income taxes on the amounts held under a Contract, or Annuity Payments, and on
the economic benefit to the Owner, the Annuitant, or the Beneficiary depends on
the type of retirement plan, on the tax and employment status of the individual
concerned, and on the Company's tax status. In addition, certain requirements
must be satisfied in purchasing a Qualified Contract with proceeds from a
tax-qualified plan and receiving distributions from a Qualified Contract in
order to continue receiving favorable tax treatment. Therefore, purchasers of
Qualified Contracts should seek competent legal and tax advice regarding the
suitability of a Contract for their situation, the applicable requirements, and
the tax treatment of the rights and benefits of a Contract. The following
discussion assumes that Qualified Contracts are purchased with proceeds from
and/or contributions under retirement plans that qualify for the intended
special federal income tax treatment.
TAX STATUS OF THE CONTRACT
Diversification Requirements. Section 817(h) of the Code provides that separate
account investments underlying a contract must be "adequately diversified" in
accordance with Treasury Department regulations in order for the contract to
qualify as an annuity contract under Section 72 of the Code. The Variable
Account, through each underlying Fund, intends to comply with the
diversification requirements prescribed in regulations under Section 817(h) of
the Code, which affect how the assets in the various Subaccounts may be
invested. Although the Company does not have direct control over the Funds in
which the Variable Account invests, the Comapny believes that each Fund will
meet the diversification requirements, and therefore, the Contract will be
treated as an annuity contract under the Code.
In certain circumstances, owners of variable annuity contracts may be considered
the owners, for federal income tax purposes, of the assets of the separate
account used to support their contracts. In those circumstances, income and
gains from the separate account assets would be includible in the variable
annuity contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
Department has also announced, in connection with the issuance of regulations
concerning investment diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
contract owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also states that guidance would
be issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no such
guidance has been issued.
The ownership rights under the Contracts are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the Owner of a Contract has the choice of several Subaccounts in which
to allocate Net Purchase Payments and Contract Values, and may be able to
transfer among Subaccounts more frequently than in such rulings. These
differences could result in an Owner being treated as the owner of the assets of
the Variable Account. In addition, the Company does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Company therefore reserves the
right to modify the Contract as necessary to attempt to prevent the Owner from
being considered the owner of the Variable Account's assets.
Required Distributions. In order to be treated as an annuity contract for
federal income tax purposes, section 72(s) of the Code requires any
Non-Qualified Contract to provide that: (a) if any Owner dies on or after the
Annuity Date but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest will be distributed at least
as rapidly as under the method of distribution being used as of the date of that
Owner's death; and (b) if any Owner dies prior to the Annuity Date, the entire
interest in the Contract will be distributed within five years after the date of
the Owner's death. These requirements will be considered satisfied as to any
portion of the Owner's interest that is payable to or for the benefit of a
"designated beneficiary," and that is distributed over the life of such
beneficiary or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of that
Owner's death. The Owner's "designated beneficiary" is the person designated by
such Owner as a beneficiary and to whom ownership of the contract passes by
reason of death and must be a natural person. However, if the Owner's
"designated beneficiary" is the surviving spouse of the Owner, the Contract may
be continued with the surviving spouse as the new Owner.
Non-Qualified Contracts contain provisions that are intended to comply with the
requirements of section 72(s) of the Code, although no regulations interpreting
these requirements have yet been issued. The Company intends to review such
provisions and modify them if necessary to assure that they comply with the
requirements of Code section 72(s) when clarified by regulation or otherwise.
Other Rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes.
TAXATION OF ANNUITIES
In General. Section 72 of the Code governs taxation of annuities in general. The
Company believes that an Owner who is a natural person is not taxed on increases
in Contract Value until distribution occurs by withdrawing all or part of the
Contract Value (e.g., withdrawals and surrenders) or as Annuity Payments under
the Annuity Payment Option elected. For this purpose, the assignment, pledge, or
agreement to assign or pledge any portion of the Contract Value (and in the case
of a Qualified Contract, any portion of an interest in the qualified plan)
generally will be treated as a distribution. The taxable portion of a
distribution (in the form of a single sum payment or payment option) is taxable
as ordinary income.
The owner of any annuity contract who is not a natural person generally must
include in income any increase in the excess of the contract value over the
"investment in the contract" during the taxable year. There are some exceptions
to this rule, and a prospective Owner that is not a natural person may wish to
discuss these with a competent tax adviser.
The following discussion generally applies to Contracts owned by natural
persons.
Withdrawals. In the case of a withdrawal from a Qualified Contract, under
section 72(e) of the Code, a ratable portion of the amount received is taxable,
generally based on the ratio of the "investment in the contract" to the
participant's total accrued benefit or balance under the retirement plan. The
"investment in the contract" generally equals the portion, if any, of any
purchase payments paid by or on behalf of the individual under a Contract that
was not excluded from the individual's gross income. For Contracts issued in
connection with qualified plans, the "investment in the contract" can be zero.
Special tax rules may be available for certain distributions from Qualified
Contracts.
In the case of a withdrawal from a Non-Qualified Contract, under section 72(e),
any amounts received are generally first treated as taxable income to the extent
that the Contract Value immediately before the withdrawal exceeds the
"investment in the contract" at that time. Any additional amount withdrawn is
not taxable.
In the case of a surrender under a Qualified or Non-Qualified Contract, the
amount received generally will be taxable only to the extent it exceeds the
"investment in the contract."
Section 1035 of the Code generally provides that no gain or loss shall be
recognized on the exchange of one annuity contract for another. If the
surrendered contract was issued prior to August 14, 1982, the tax rules formerly
provided that the surrender was taxable only to the extent the amount received
exceeds the owner's investment in the contract will continue to apply to amounts
allocable to investments in that contract prior to August 14, 1982. In contrast,
contracts issued after January 19, 1985 in a Code section 1035 exchange are
treated as new contracts for purposes of the penalty and distribution-at-death
rules. Special rules and procedures apply to section 1035 transactions.
Prospective Owners wishing to take advantage of section 1035 should consult
their tax adviser.
Annuity Payments. Although tax consequences may vary depending on the payment
option elected under an annuity contract, under Code section 72(b), generally
(prior to recovery of the investment in the contract) gross income does not
include that part of any amount received as an annuity under an annuity contract
that bears the same ratio to such amount as the investment in the contract bears
to the expected return at the annuity starting date. For variable annuity
payments, the taxable portion is generally determined by an equation that
establishes a specific dollar amount of each payment that is not taxed. The
dollar amount is determined by dividing the "investment in the contract" by the
total number of expected periodic payments. However, the entire distribution
will be taxable once the recipient has recovered the dollar amount of his or her
"investment in the contract." For fixed annuity payments, in general, there is
no tax on the portion of each payment that represents the same ratio that the
"investment in the contract" bears to the total expected value of the annuity
payments for the term of the payments; however, the remainder of each annuity
payment is taxable until the recovery of the investment in the contract, and
thereafter the full amount or each annuity payment is taxable. If death occurs
before full recovery of the investment in the contract, the unrecovered amount
may be deducted on the annuitant's final tax return.
Taxation of Death Benefit Proceeds. Amounts may be distributed from a Contract
because of the death of an Owner. Generally, such amounts are includible in the
income of the recipient as follows: (i) if distributed in a lump sum, they are
taxed in the same manner as a full surrender of the Contract or (ii) if
distributed under an Annuity Payment Option, they are taxed in the same way as
Annuity Payments.
Penalty Tax on Certain Withdrawals. In the case of a distribution pursuant to a
Non-Qualified Contract, there may be imposed a federal penalty tax equal to 10%
of the amount treated as taxable income. In general, however, there is no
penalty on distributions:
1. made on or after the taxpayer reaches age 59 1/2;
2. made on or after the death of the holder (or if the holder is
not an individual, the death of the primary annuitant);
3. attributable to the taxpayer's becoming disabled;
4. a part of a series of substantially equal periodic payments
(not less frequently than annually) for the life (or life
expectancy) of the taxpayer or the joint lives (or joint life
expectancies) of the taxpayer and his or her designated
beneficiary;
5. made under certain annuities issued in connection with
structured settlement agreements; and
6. made under an annuity contract that is purchased with a single
purchase payment when the annuity date is no later than a year
from purchase of the annuity and substantially equal periodic
payments are made, not less frequently than annually, during
the annuity payment period.
Other tax penalties may apply to certain distributions under a Qualified
Contract.
Possible Changes in Taxation. In past years, legislation has been proposed that
would have adversely modified the federal taxation of certain annuities. For
example, one such proposal would have changed the tax treatment of non-qualified
annuities that did not have "substantial life contingencies" by taxing income as
it is credited to the annuity. Although as of the date of this prospectus
Congress is not considering any legislation regarding taxation of annuities,
there is always the possibility that the tax treatment of annuities could change
by legislation or other means (such as IRS regulations, revenue rulings,
judicial decisions, etc.). Moreover, it is also possible that any change could
be retroactive (that is, effective prior to the date of the change).
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer of ownership of a Contract, the designation of an Annuitant, Payee or
other Beneficiary who is not also the Owner, the selection of certain Annuity
Dates or the exchange of a Contract may result in certain tax consequences to
the Owner that are not discussed herein. An Owner contemplating any such
transfer, assignment, or exchange of a Contract should contact a competent tax
adviser with respect to the potential tax effects of such a transaction.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Effective January 1, 1993, distributions from certain qualified
plans are generally subject to mandatory withholding. Certain states also
require withholding of state income tax whenever federal income tax is withheld.
MULTIPLE CONTRACTS
All non-qualified deferred annuity contracts that are issued by the Company (or
its affiliates) to the same owner during any calendar year are treated as one
annuity contract for purposes of determining the amount includible in gross
income under section 72(e) of the Code. The effects of this rule are not yet
clear; however, it could affect the time when income is taxable and the amount
that might be subject to the 10% penalty tax described above. In addition, the
Treasury Department has specific authority to issue regulations that prevent the
avoidance of section 72(e) of the Code through the serial purchase of annuity
contracts or otherwise. There may also be other situations in which the Treasury
Department may conclude that it would be appropriate to aggregate two or more
annuity contracts purchased by the same owner. Accordingly, a Contract Owner
should consult a competent tax adviser before purchasing more than one annuity
contract.
TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans. The
tax rules applicable to participants in these qualified plans vary according to
the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; aggregate distributions in excess of a specified
annual amount; and in other specified circumstances. Therefore, no attempt is
made to provide more than general information about the use of the Contracts
with the various types of qualified retirement plans. Owners, Annuitants, and
Beneficiaries are cautioned that the rights of any person to any benefits under
these qualified retirement plans may be subject to the terms and conditions of
the plans themselves, regardless of the terms and conditions of the Contract,
but the Company shall not be bound by the terms and conditions of such plans to
the extent such terms contradict the Contract, unless the Company consents to be
bound. Brief descriptions follow of the various types of qualified retirement
plans in connection with a Contract. The Company will amend the Contract as
necessary to conform it to the requirements of such plan.
Corporate Pension and Profit Sharing Plans and H.R. 10 Plans. Section 401(a) of
the Code permits corporate employers to establish various types of retirement
plans for employees, and permits self-employed individuals to establish these
plans for themselves and their employees. Such retirement plans may permit the
purchase of the Contract to provide benefits under the plans. Employers
intending to use the Contract with such plans should seek competent advice.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." These IRAs are subject to limits on
the amount that may be contributed, the persons who may be eligible, and on the
time when distributions may commence. Also, distributions from certain other
types of qualified retirement plans may be "rolled over" on a tax-deferred basis
into an IRA. Sales of the Contract for use with IRAs may be subject to special
requirements of the IRS. Employers may establish Simplified Employee Pension
(SEP) Plans to provide IRA contributions on behalf of their employees.
Deferred Compensation Plans. Section 457 of the Code provides for certain
deferred compensation plans. These plans may be offered with respect to service
for state governments, local governments, political subdivisions, agencies,
instrumentalities, certain affiliates of such entities, and tax exempt
organizations. The plans may permit participants to specify the form of
investment for their deferred compensation account. All investments are owned by
the sponsoring employer and are subject to the claims of the general creditors
of the employer.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the federal tax consequences under
these Contracts are not exhaustive, and special rules are provided with respect
to other tax situations not discussed in the prospectus. Further, the federal
income tax consequences discussed herein reflect the Company's understanding of
current law and the law may change. Federal estate and state and local estate,
inheritance and other tax consequences of ownership or receipt of distributions
under a Contract depend on the individual circumstances of each Owner or
recipient of the distribution. A competent tax adviser should be consulted for
further information.
<PAGE>
OTHER INFORMATION
DISTRIBUTION OF THE CONTRACTS
CNA/ISI, which is located at CNA Plaza, Chicago, Illinois 60685, is principal
underwriter and distributor of the Contracts. CNA/ISI is an affiliate of the
Company, is registered with the SEC as a broker-dealer, and is a member of the
National Association of Securities Dealers, Inc. ("NASD"). The Company pays
CNA/ISI for acting as principal underwriter under a distribution agreement. The
Contract are offered on a continuous basis and the Company does not anticipate
discontinuing the offer.
Applications for Contracts are solicited by agents who are licensed by
applicable state insurance authorities to sell the Company's insurance contracts
and who are also registered representatives of a broker-dealer having a selling
agreement with CNA/ISI. Such broker-dealers will generally receive commissions
based on a percent of purchase payments made (up to a maximum of 7%). The
writing agent will receive a percentage of these commissions from the respective
broker-dealer, depending on the practice of that broker-dealer. Owners do not
pay these commissions.
ADMINISTRATIVE SERVICES
Financial Administration Services, Inc. administers the Contract on behalf of
the Company at the Service Center. In this capacity, Financial Administration
Services, Inc. is responsible for the following: processing purchase payments,
Annuity Payments, death benefits, surrenders, withdrawals, and transfers;
preparing confirmation notices and periodic reports; calculating mortality and
expense risk charges; calculating Accumulation and Annuity Unit Values;
distributing voting materials and tax reports; and generally assisting Owners.
VOTING PRIVILEGES
In accordance with current interpretations of applicable law, the Company votes
Fund shares held in the Variable Account at regular and special shareholder
meetings of the Funds in accordance with instructions received from persons
having voting interests in the corresponding Subaccounts. If, however, the 1940
Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or the Company otherwise determines that
it is allowed to vote the shares in its own right, it may elect to do so.
The number of votes that an Owner or Annuitant has the right to instruct are
calculated separately for each Subaccount, and may include fractional votes.
Prior to the Annuity Date, the Owner holds a voting interest in each Subaccount
to which Variable Contract Value is allocated. After the Annuity Date, the Payee
has a voting interest in each Subaccount from which Variable Annuity Payments
are made.
For each Owner, the number of votes attributable to a Subaccount will be
determined by dividing the Owner's Subaccount Value by the Net Asset Value Per
Share of the Fund in which that Subaccount invests. For each Payee, the number
of votes attributable to a Subaccount is determined by dividing the liability
for future Variable Annuity Payments to be paid from that Subaccount by the Net
Asset Value Per Share of the Fund in which that Subaccount invests. This
liability for future payments is calculated on the basis of the mortality
assumptions, the selected Benchmark Rate of Return and the Annuity Unit Value of
that Subaccount on the date that the number of votes is determined. As Variable
Annuity Payments are made to the Payee, the liability for future payments
decreases as does the number of votes.
The number of votes available to an Owner or Payee are determined as of the date
coinciding with the date established by the Fund for determining shareholders
eligible to vote at the relevant meeting of the Fund's shareholders. Voting
instructions are solicited by written communication prior to such meeting in
accordance with procedures established for the Fund. Each Owner or Payee having
a voting interest in a Subaccount will receive proxy materials and reports
relating to any meeting of shareholders of the Funds in which that Subaccount
invests.
Fund shares as to which no timely instructions are received and shares held by
the Company in a Subaccount as to which no Owner or Payee has a beneficial
interest are voted in proportion to the voting instructions that are received
with respect to all Contracts participating in that Subaccount. Voting
instructions to abstain on any item to be voted upon are applied to reduce the
total number of votes eligible to be cast on a matter. Under the 1940 Act,
certain actions affecting the Variable Account may require Contract Owner
approval. In that case, an Owner will be entitled to vote in proportion to his
Variable Contract Value.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or to
which the assets of the Variable Account are subject. The Company, as an
insurance company, is ordinarily involved in litigation. The Company does not
believe that any current litigation is material to its ability to meet its
obligations under the Contract or to the Variable Account nor does the Company
expect to incur significant losses from such actions.
COMPANY HOLIDAYS
The Company is closed on the following days in 1996: New Year's Day, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, the day after Thanksgiving
Day, and Christmas Day.
LEGAL MATTERS
All matters relating to Pennsylvania law pertaining to the Contracts,
including the validity of the Contracts and the Company's authority to issue the
Contracts, have been passed upon by Lynne Gugenheim, Esquire, Vice President and
Associate General Counsel of the Company. Sutherland, Asbill & Brennan of
Washington, D.C. has provided advice on certain matters relating to the federal
securities laws.
EXPERTS
The balance sheets of the Company as of December 31, 1995 and 1994, and the
related statements of income, stockholder's equity, and cash flows for the years
ended December 31, 1995, 1994 and 1993, which are included in the prospectus,
have been audited by Deloitte & Touche LLP, independent auditors, as set forth
in their report therein, and are included therein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE COMPANY
HISTORY AND BUSINESS
Valley Forge Life Insurance Company was incorporated under the laws of the state
of Pennsylvania on August 9, 1956 and began its operations on December 1, 1956.
The Company markets a full range of life and accident and health insurance
products either directly or through its pooling agreement with CAC, including
group medical and life, universal life, traditional life, and annuities.
Formation of the Company was sponsored by American Casualty Company of Reading,
Pennsylvania, which owned 50% of the 44,000 outstanding shares of the Company.
The remaining 50% interest was held by the Valley Forge Insurance Company, a
wholly owned subsidiary of American Casualty Company.
In late 1963, control of the parent companies was acquired by Continental
Casualty Company of Chicago, Illinois. In 1967, all outstanding shares of
Continental Casualty Company were exchanged for stock of CNA Financial
Corporation, the parent company of the CNA insurance companies. On December 30,
1983, all outstanding shares of the Company were acquired by Continental
Assurance Company, a life insurance company subsidiary of CNA Financial
Corporation. Controlling interest of CNA Financial Corporation is held by Loews
Corporation.
Effective December 31, 1985, pursuant to a Reinsurance Pooling Agreement the
Company began ceding all of its business to its parent, Assurance . This
business was then pooled with the business of Assurance , excluding Assurance's
participating contracts and separate accounts, 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 the Company should be read in
conjunction with the financial statements and notes thereto included in this
prospectus.
<TABLE>
<CAPTION>
(000)
Selected Financial Data
For the Periods Ended
--------------------------------------------------
December 31
-------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net Investment Income $ 31,494 $ 22,759 $ 16,144 $ 19,627 $ 25,815
Net Operating Income
(Excluding Realized Capital Gains/Losses) $ 13,551 $ 10,408 $ 4,655 $ 6,425 $ 4,291
Net Income $ 22,510 $ 7,482 $ 7,107 $ 7,119 $ 10,142
Total Assets $624,820 $552,836 $475,892 $443,577 $402,535
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management discussion and analysis should be read in conjunction
with the financial statements and related notes.
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA.
VFL and Assurance, have an intercompany pooling agreement to share their
combined underwriting results inclusive of Assurance's participating policies
and Separate Account business. Under this pooling agreement, VFL cedes 100% of
its net business before pooling to Assurance and in turn receives 10% of the
combined results. Assurance retains 90% of the combined results. See Note 8 of
the Financial Statements for the effects of reinsurance on VFL's premium
revenues.
VFL markets a variety of individual and group insurance products, either
directly or through its pooling agreement with Assurance. The individual
insurance products currently being marketed consist primarily of term, universal
life, and individual annuity products. Group insurance products include life,
accident and health consisting primarily of major medical and hospitalization,
and pension products.
All aspects of the insurance business are highly competitive. The combined
operations of VFL and Assurance compete with a large number of stock and mutual
life insurance companies for both producers and customers and Assurance and VFL
and must continuously allocate resources to refine and improve insurance
products and services. There are approximately 1,800 companies selling life
insurance (including health insurance and pension products) in the United
States. The combined companies of VFL and Assurance rank as the twenty-second
largest life insurance organization based on 1995 consolidated statutory premium
volume.
The operations and assets and liabilities of VFL and its parent, Assurance, are
managed to a large extent on a combined basis. The discussion in the following
five paragraphs is based on the combined results, excluding participating
policies and separate account business which relate solely to Assurance.
In 1994, CNA formed the Life Operations Department to increase substantially its
presence and profitability in the individual life marketplace. The department is
continuing to experience strong growth in the individual life business, which
markets term, universal and annuities products. The department has introduced
new term and permanent life products, as well as annuities. All new products
have been very well received in the marketplace, as 1995 applications for new
policies increased to more than 169,000 from 67,000 in 1994, a 152% increase.
Sales volume as measured by first year paid premium and deposits increased to
$276 million in 1995 from $69 million in 1994, a 300% increase. In 1994, the
department began distributing its products through managing general agencies in
addition to its traditional distribution channel of property/casualty
independent agents. Managing general agents produced almost half of the first
year premium in 1995.
Another notable accomplishment in 1995 was the conversion of all processing from
a main frame computer system to a more efficient PC-based processing systems,
thus substantially reducing operating expenses.
CNA is a prominent player in group life and health insurance. It offers a range
of products, including medical and hospitalization coverages, group life and
pension products sold to businesses, groups and associations.
In the medical and hospitalization market, Assurance's $2 billion Federal
Employees Health Benefits Program (FEHBP) continues to compete effectively.
Assurance has undertaken a number of initiatives to enhance service, manage
health care utilization demand and quality, and strengthen Assurance's networks
of physicians, hospitals and other providers.
In the market for private employer medical benefits, Assurance launched a niche
strategy of developing risk- and profit-sharing partnerships with health care
providers for point-of-service managed care products in selected geographic
markets. Looking ahead, Assurance will also promote full-service medical savings
account products. These strategies are expected to enhance future operating
results.
Results of Operations:
The following chart summarizes key components of the Valley Forge Life Insurance
Company (VFL) operating results for each of the last three years and the first
half of 1996 and 1995.
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
June 30 June 30 December 31 December 31 December 31
For the Period Ended 1996 1995 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
Operating Summary
(excluding realized investment gains/losses):
Revenues:
Individual
Accident and health $ 75 $ 1,540 $ 3,197 $ 3,191 $ 2,995
Life and annuity 26,737 19,270 45,171 34,500 28,760
---------- ------- ---------- ---------- -----------
Total Individual 26,812 20,810 48,368 37,691 31,755
---------- ------- ---------- ---------- -----------
Group
Accident and health 124,290 107,751 218,969 211,120 198,300
Life and annuity 9,119 14,334 29,316 14,169 10,790
---------- -------- ---------- ---------- -----------
Total Group 133,409 122,085 248,285 225,289 209,090
- -------------------------------------------------------------------------------------------------------------------
Total Premiums 160,221 142,895 296,653 262,980 240,845
Net investment income 13,369 15,434 31,494 22,759 16,144
Other 2,499 1,913 4,818 4,789 3,435
- -------------------------------------------------------------------------------------------------------------------
Total revenues 176,089 160,242 332,965 290,528 260,424
Benefits and expenses 167,376 149,201 312,038 274,439 253,355
- -------------------------------------------------------------------------------------------------------------------
Income before income tax 8,713 11,041 20,927 16,089 7,069
Income tax expense (3,055) (3,889) (7,376) (5,681) (2,414)
===================================================================================================================
Net operating income
(excluding realized investment gains/losses) $ 5,658 $ 7,152 $ 13,551 $ 10,408 $ 4,655
===================================================================================================================
Supplemental Financial Data:
Net operating income:
Individual $ 2,742 $ 3,030 $ 5,597 $ 3,119 $ 885
Group 2,916 4,122 7,954 7,289 3,770
- ---------------------------------------------------------------------------------------------------------------------
Net operating income 5,658 7,152 13,551 10,408 4,655
Net realized investment gains (losses): 2,434 8,169 8,959 (2,926) 2,452
=====================================================================================================================
Net income $ 8,092 $ 15,321 $ 22,510 $ 7,482 $ 7,107
=====================================================================================================================
</TABLE>
<PAGE>
VFL's revenues for the year ended December 31, 1995, excluding net realized
investment gains, were $333.0 million or up 14.6% from year end 1994 and up
27.9% from 1993. Total life individual premium income for 1995 was $48.4
million, up 28.3% from the $37.7 million earned in 1994 and up 52.3% from 1993.
The increase in 1995 is due primarily to increased sales of new term and
permanent life products as previously discussed. Premium revenue as defined by
generally accepted accounting principles, and disclosed in the above exhibit,
does not include deposits on annuity contracts or premiums on universal life
policies.
VFL's total group premium income was $248.3 million, up 10.2% from the $225.3
million earned in 1994 and up 18.7% from 1993's $209.1 million. Group accident
and health premium income included in total group premium income, is primarily
from the contract with FEHBP. Group accident and health premium income was
$219.0 million for 1995 a 3.7% increase from 1994's premium of $211.1 million,
and a 10.6% increase from 1993's premium of $198.3 million . Group life and
annuity premium income, included in total group premium income above, exhibited
strong growth rising 31.3% to $14.2 million in 1994 from $10.8 million in 1993
and up 106.9% from $14.2 million in 1994 to $29.3 million in 1995. This growth
is attributable to strong positive cash flow from the growth in new business.
VFL's investment income increased substantially from $16.1 million in 1993 to
$22.8 million in 1994 and $31.5 million in 1995 due to strong positive cash flow
from the growth in new business and higher yielding investments resulting from a
shift of VFL's investment portfolio during 1994 to longer term securities.
VFL's net operating income excluding net realized investment gains/losses was
$13.6 million for 1995, compared to $10.4 million and $4.7 million for 1994 and
1993, respectively. The individual business segment reported net operating
income of $5.6 million for 1995, compared to $3.1 million and $0.9 million for
1994 and 1993, respectively. The group business segment reported net operating
income of $8.0 million for 1995, compared to $7.3 million for 1994 and $3.8
million for 1993. Profits for the individual business segment increased due to
increased investment income, improved mortality experience and increased
interest rate spreads on interest sensitive products.
Net realized investment gains, net of tax, amounted to $9.0 million in 1995,
compared to net realized investment losses of $2.9 million in 1994 and net
realized investment gains of $2.5 million in 1993. Net realized investment gains
for 1995 were primarily realized on sales of fixed maturities such sales being
in the ordinary course of portfolio management.
Six Months Results of Operations
VFL revenues, excluding realized investment gains, for the six months ended June
30, 1996 were $176.1 million, up 9.9% when compared to $162.4 million for the
similar period of 1995. Total life individual premium income for the first half
of 1996 was $26.8 million, up 28.8% from the $20.8 million earned in the first
half of 1995. This growth is due to continued sales and market acceptance of new
products first offered in late 1994. Total group premium was $133.4 million, up
9.3% from the $122.1 million earned in the comparable 1995 period. This increase
is primarily attributable to FEHBP.
Investment income decreased 13.4% to $13.4 million in the first quarter of 1996,
as compared to $15.4 million for the same period a year ago. The decline was due
to a increase in lower yielding short-term securities as proceeds from sales of
fixed maturities were invested in short term securities.
Pretax operating income for VFL, excluding net realized investment gains/losses,
was $8.7 million for the first six months of 1996, down 21.1% compared to the
$11.0 million recognized for the same period in 1995.
VFL's net income excluding net realized investment gains/losses was $5.7 million
for the first six months of 1996, compared to $7.2 million for the same period
in 1995. The individual segment reported net operating income of $2.7 million
for the first half of 1996 a decrease of 9.5%, compared to $3.0 million in the
comparable period a year ago. This decrease is a result of very favorable
mortality experienced in the individual life business in the first half of 1995,
as well as reduced investment income results in 1996. The group segment reported
net operating income for the first six months of 1996 of $2.9 million, a decline
of 29.3% compared to the $4.1 million earned in the first half of 1995. The
decline was due to the decreased investment income as well as unfavorable
mortality experience in group life cases and lower administrative fees in group
pension cases.
Net realized investment gains for the first six months of 1996 were $2.4
million, compared to net realized investment gains of $8.2 million for the
comparable period in 1995, both reflective of the interest rate environments
during the respective periods.
Financial Condition:
<TABLE>
<CAPTION>
FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------
Stockholder's
Statutory Assets Equity
Surplus
(In thousands of dollars, except per share data)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 1996 $ 126,508 $ 687,795 $ 187,938
December 1995 129,912 624,820 195,472
December 1994 122,267 552,836 156,196
December 1993 117,650 475,892 153,249
December 1992 115,660 443,577 144,873
December 1991 111,382 402,535 137,857
- ---------------------------------------------------------------------------------------------------
</TABLE>
Assets totaled $625 million at the end of 1995, an increase of 13.0% over 1994
and 31.3% over 1993. VFL's cash and invested assets of $504 million increased by
$64 million, or 14.6%, over the 1994 level of $440 million, and increased $29
million over the 1993 level of $475 million.
VFL's stockholder's equity was $195 million at December 31, 1995, compared to
$156 million and $153 million at December 31, 1994 and 1993, respectively. The
increase in stockholder's equity in 1995 is due to a $16.8 million increase in
net unrealized investment gains and net income of $22.5 million. The increase in
stockholder's equity in 1994 was primarily due to net income of $7.5 million
which was partially offset by $4.5 million of net unrealized investment losses.
The decrease in stockholder's equity of $7.5 million at June 30, 1996 compared
to December 31, 1995 is due to a decrease in net unrealized gains of $15.6
million, offset by net income of $8.1 million. The change in net unrealized net
unrealized gains/losses is attributable, in large part, to increases in interest
rates which have an adverse effect on bond prices.
Statutory surplus of VFL has grown steadily from $111 million at December 31,
1991 to $127 million at June 30, 1996. The decrease in surplus for the six
months ended June 30, 1996 is due to a net statutory loss which is primarily
attributable to the substantial acquisition costs related to the new sales of of
individual life and annuity products. Such costs are immediately charged to
income for statutory reporting purposes; under generally accepted accounting
principles, such costs are capitalized and amortized to income over the duration
of these policies.
<PAGE>
The National Association of Insurance Commissioners (NAIC) has developed
industry minimum Risk-Based Capital (RBC) requirements. The RBC formulas are
designed to identify an insurer's minimum capital requirements based upon the
inherent risks (e.g., asset default, credit and underwriting) of its operations.
In addition to the minimum capital requirements, the RBC formula and related
regulations identify various levels of capital adequacy and corresponding
actions that the state insurance departments should initiate. The level of
capital adequacy below which insurance departments would take action is defined
as the Company Action Level. As of December 31, 1995, VFL has capital in excess
of the Company Action Level.
The NAIC also maintains the Insurance Regulatory Information System ("IRIS),
which assists the state insurance departments in overseeing the financial
condition of both life and property/casualty insurers through application of a
number of financial ratios. These ratios have a range of results characterized
as "usual" by the NAIC. The NAIC IRIS user guide regarding these ratios states
that "Falling outside the usual range is not considered a failing
result"...and... "in some years it may not be unusual for financially sound
companies to have several ratios with results outside the usual range."
Management believes that IRIS ratio test results should be reviewed carefully in
conjunction with all other financial information. VFL had one IRIS ratio for
1995 with an unusual value, surplus relief. The unusual value relates to the
substantial commissions on new individual business ceded to Assurance under the
pooling agreement.
Investments:
The following table summarizes VFL's investments with fixed maturities and short
term investments shown at amortized cost and all other investments shown at cost
for each of the last three years and for the first quarter of 1996. Fixed
maturities and equity securities are considered available for sale and are shown
at market value in the financial statements, the effect of which is shown in
"Investments at Market Value" in the table below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS -
June 30 December 31
----------------- -----------------------------------------------------------
For the period ended 1996 % 1995 % 1994 % 1993 %
- ---------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:
Fixed maturities
(at amortized cost):
U.S. Treasuries and
Agencies $ 114,889 21.7 $ 186,083 42.1 $ 69,148 15.6 $ 23,631 6.4
Asset Backed 68,119 12.9 84,785 19.2 219,470 49.6 6,378 1.7
Other Debt Securities 94,177 17.8 76,533 17.4 67,381 15.2 64,167 17.2
-------- ---- ---------- ---- ---------- ---- -------- ----
Total Fixed maturities 277,185 52.4 347,401 78.7 355,999 80.4 94,176 25.3
Equity securities:
Common stocks 1,074 0.2 1,074 0.2 1,074 0.2 981 0.3
Policy loans 59,979 11.3 56,008 12.7 47,001 10.6 40,942 11.0
Short-term investments 191,482 36.1 37,184 8.4 39,067 8.8 235,948 63.4
- ---------------------------------------------------------------------------------------------------------------
Investments $ 529,720 100.0% $ 441,667 100.0% $ 443,141 100.0 $ 372,047 100.0%
===============================================================================================================
Investments at Market Value $ 526,663 $ 462,650 $438,330 $ 374,214
===============================================================================================================
</TABLE>
<PAGE>
As mentioned previously, the operations and assets and liabilities of VFL and
Assurance are, to a large extent, managed on a combined basis. The investment
portfolio is managed to maximize after-tax investment return while minimizing
credit risks with investments concentrated in high quality securities to support
its insurance underwriting operations. The investment portfolios segregated for
the purpose of supporting policy liabilities for universal life, annuities and
other interest sensitive products are held by Assurance.
VFL has the capacity to hold its fixed maturity portfolio to maturity. However,
securities may be sold as part of VFL's asset/liability strategies or to take
advantage of investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, or other similar factors.
Accordingly, the fixed maturity securities are classified as available-for-sale.
Footnote 3 to the financial statements is incorporated herein by reference and
provides market value information for fixed maturity and equity securities.
The investment portfolio consists primarily of high quality marketable fixed
maturities at December 31, 1995, 98% of which are rated as investment grade.
At December 31, 1995, 76% of the fixed maturity portfolio was invested in U.S.
government and government agencies securities, 6% in other AAA rated securities,
and 11% in AA and A rated securities.
Included in VFL's fixed maturity securities at December 31, 1995 are $85 million
of asset-backed securities, consisting of approximately 23% in U.S. government
agency issued pass-through certificates, 70% in collateralized mortgage
obligations (CMO's), and 7% in corporate asset-backed obligations. The majority
of CMO's held are U.S. government agency issues, which are actively traded in
liquid markets and are priced by broker-dealers.
VFL limits the risks associated with interest rate fluctuations and prepayments
by concentrating its CMO investments in planned amortization classes with
relatively short principal repayment windows. VFL avoids investments in complex
mortgage derivatives without readily ascertainable market prices. At December
31, 1995, the fair value of asset-backed securities was in excess of the
amortized cost by approximately $3 million compared with unrealized losses of $8
million at December 31, 1994. VFL has not invested in derivative financial
instruments during the last three years.
Nor does it have any investments in mortgage loans or real estate.
VFL's investments in fixed maturities are carried at a fair value of $368
million, compared with $351 million at December 31, 1995 and 1994, respectively.
At December 31, 1995, net unrealized gains on fixed maturity securities amounted
to approximately $20 million. This compares with net unrealized losses of $5
million at December 31, 1994. The gross unrealized gains and losses for the
fixed maturity securities portfolio at December 31, 1995, were $20.4 million and
$25 thousand, respectively, compared to $5.6 million and $10.7 million,
respectively, at December 31, 1994 and $3.0 million and $1.2 million,
respectively, at December 31, 1993. Such fluctuations from year-to-year are
primarily due to change in interest rates.
<PAGE>
The following table summarizes the unrealized net gains and losses from fixed
maturity and equity securities for the last three years and for the first
half of 1996.
NET UNREALIZED APPRECIATION (DEPRECIATION)
FIXED MATURITY AND EQUITY SECURITIES
- -------------------------------------------------------------------------------
June 30, December 31,
---------------- ------------------------------
For the period ended 1996 1995 1994 1993
- -------------------------------------------------------------------------------
(In thousands of dollars)
Fixed Maturities $ (3,808) $ 20,361 $ (5,044) $ 1,847
Equity securities 751 622 233 319
- -------------------------------------------------------------------------------
Liquidity and Capital Resources:
The liquidity requirements of VFL have been met primarily by funds generated
from operations. VFL's principal operating cash flow sources are premiums and
investment income. The primary operating cash flow uses are payments for claims,
policy benefits and operating expenses.
For the year ended December 31, 1995, VFL's operating activities generated net
positive cash flows of approximately $21 million, compared with $75 million in
1994 and $23 million in 1993. VFL believes that future liquidity needs will be
met primarily by cash generated from operations. Net cash flows from operations
are invested in marketable securities.
VFL's insurance ratings are pooled ratings with Assurance. VFL/Assurance has
received the following ratings as of June 30, 1996: A.M. Best, A; Standard and
Poor's, AA; and Duff and Phelps, AA such ratings are subject to regular review
and change.
Standards adopted during 1995:
Disclosures of Certain Significant Risks and Uncertainties
In December 1994, the AICPA issued SOP 94-6, "Disclosure of Certain Significant
Risks and Uncertainties." This SOP requires reporting entities to include in
their financial statements disclosures about the nature of their operations and
the use of estimates in the preparation of financial statements. Additional
disclosures are required for certain significant estimates utilized in the
financial statements and current vulnerability due to certain concentrations if
specific criteria are met. This Statement is effective for financial statements
issued for fiscal years ending after December 15, 1995. The adoption of this
Statement had no impact on the results of operations of VFL.
Accounting by Creditors for Impairment of a Loan
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) 114, "Accounting by Creditors for
Impairment of a Loan." This Statement addresses the accounting by creditors for
impairment of certain loans. It also requires that applicable loans be treated
as impaired when it is probable that a creditor will be unable to collect all
amounts (both principal and interest) contractually due. This Statement applies
to financial statements for fiscal years beginning after December 15, 1994. In
October 1994, the FASB issued SFAS 118, "Accounting by Creditors for Impairment
of a Loan -- Income Recognition and Disclosures" which amends SFAS 114 to allow
a creditor to use existing methods for recognizing interest income on an
impaired loan. It also amends the disclosure requirements to require information
about the recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. The adoption of
these Statements did not have a significant impact on VFL.
Standards Adopted in 1996
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of In March 1995, the FASB issued SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
This Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used for long-lived assets and certain identifiable intangibles
to be disposed of. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by the entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This Statement is effective
for 1996 financial statements, although earlier adoption is permissible. This
Statement had no significant impact on the results of operations for VFL.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation". This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. The requirements of this
Statementis effective for 1996 financial statements. This Statement had no
impact on the financial statements of VFL as the Company has no compensation
which qualifies.
<PAGE>
EMPLOYEES
As of December 31, 1995, the Company had no employees as it has contracted with
CCC for services provided by CCC employees.
PROPERTIES
The Company reimburses CCC for its proportionate share of office facilities. The
Company neither owns nor directly leases any office space.
CERTAIN AGREEMENTS
The Company is party to The Intercompany Pooling Agreement with Continental
Assurance Company (Assurance) which is discussed above and in Notes to the
Company's Financial Statements included in this Prospectus. Such disclosure in
Note 1, Significant Accounting Policies; Note 8, Reinsurance; and Note 9,
Related Parties is specifically incorporated herein by reference. In addition,
the Company is party to the CNA Intercompany Expense Agreement whereby expenses
incurred by CNA Financial Corporation and each of its subsidiaries are allocated
to the appropriate company. All acquisition and underwriting expenses allocated
to the Company are further subject to the Intercompany Pooling Agreement, so
that acquisition and underwriting expenses recognized by the Company
approximates ten percent of the combined acquisition and underwriting expenses
of the Company and Assurance. Pursuant to the foregoing agreements, the Company
recorded amortization of deferred acquisition costs and other operating expenses
totaling $41 million, $37 million, and $32 million for 1995, 1994 and 1993,
respectively. Disclosure regarding expenses pursuant to the CNA Intercompany
Expense Agreement in Note 9 in Notes to the Company's Financial Statements is
also specifically incorporated herein by reference.
<PAGE>
STATE REGULATION
The Company is subject to the laws of the Commonwealth of Pennsylvania governing
insurance companies and to the regulations of the Pennsylvania Department of
Insurance (the "Insurance Department"). A detailed financial statement in the
prescribed form (the "Statement") is filed with the Insurance Department each
year covering the Company's operations for the preceding year and its financial
condition as of the end of that year. Regulation by the Insurance Department
includes periodic examination to determine contract liabilities and reserves so
that the Insurance Department may certify that these items are correct. The
Company's books and accounts are subject to review by the Insurance Department
at all times. A full examination of the Company's operations is conducted
periodically by the Insurance Department and under the auspices of the NAIC.
In addition, the Company is subject to regulation under the insurance laws of
all jurisdictions in which it operates. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect to
various matters, including licensing to transact business, overseeing trade
practices, licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. The Company is required to file the Statement with
supervisory agencies in each of the jurisdictions in which it does business, and
its operations and accounts are subject to examination by these agencies at
regular intervals.
The NAIC has adopted several regulatory initiatives designed to improve the
surveillance and financial analysis regarding the solvency of insurance
companies in general. These initiatives include the development and
implementation of a risk-based capital formula for determining adequate levels
of capital and surplus. Insurance companies are required to calculate their
risk-based capital in accordance with this formula and to include the results in
their Statement. It is anticipated that these standards will have no significant
effect upon the Company.
Further, many states regulate affiliated groups of insurers, such as the Company
and its affiliates, under insurance holding company legislation. Under such
laws, inter-company transfers of assets and dividend payments from insurance
subsidiaries may be subject to prior notice or approval, depending on the size
of the transfers and payments in relation to the financial positions of the
companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for contract owner losses
incurred by other insurance companies that have become insolvent. Most of these
laws provide that an assessment may be excused or deferred if it would threaten
an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of the Company are subject to
various federal securities laws and regulations. In addition, current and
proposed federal measures that may significantly affect the insurance business
include regulation of insurance company solvency, employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance products and its impact on the relative desirability of
various personal investment vehicles.
DIRECTORS AND EXECUTIVE OFFICERS
The name, age, positions and offices, term as director, and business experience
during the past five years for the Company's directors and executive officers
are listed in the following table:
<PAGE>
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 have held various executive positions with insurance company
affiliates of the Company.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
|-------------------------------------------------------------------------------------------------------------------|
| Officers of the Company |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
| Name and |Age| Position(s) Held | Principal Occupation(s) |
| Address | | with the Company | During Past Five Years |
| | | | |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Dennis H. Chookaszian |53 |Director, Chairman|Chairman of the Board and Chief Executive Officer of the CNA |
|CNA Plaza | |of the Board and |Insurance Companies since September 1992. From November 1990 to |
|Chicago, IL 60685 | |Chief Executive |September 1992, Mr. Chookaszian was President and Chief Operating |
| | |Officer |Officer of the CNA Insurance Companies. Prior thereto, he was Vice |
| | | |President and Controller Mr. Chookaszian has served as a Director |
| | | |since 1990.
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Phillip L. Engel |56 |Director, |President of the CNA Insurance Companies since September 1992. From |
|CNA Plaza | |President |November 1990 until September 1992 he was Executive Vice President |
|Chicago, IL 60685 | | |of the CNA Insurance Companies. Prior thereto, Mr. Engel had been a |
| | | |Vice President of the CNA Insurance Companies since 1977. |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|William J. Adamson, Jr.|43 |Senior Vice |Senior Vice President of the CNA Insurance Companies since November |
|200 S. Wacker Drive | |President |1995; Group Vice President of the CNA Insurance Companies from |
|Chicago, IL | | |April 1993 through October 1995; Vice President of the CNA |
| | | |Insurance Companies from May 1987 through April 1993. |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|James P. Flood |45 |Senior Vice |Senior Vice President of the CNA Insurance Companies since April |
|CNA Plaza | |President |1995; Senior Vice President of the Continental Insurance Company |
|Chicago, IL 60685 | | |from October 1992 through May 1995; Vice President of the |
|August 1991 | | |Continental Insurance Company from August 1991 through May 1995. |
|through May 1995. | | | |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Michael C. Garner |44 |Senior Vice |Senior Vice President of the CNA Insurance Companies since September|
|CNA Plaza | |President |1993. Partner of Coopers and Lybrand from October 1989 through |
|Chicago, IL 60685 | | |September 1993. |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Bernard L. Hengesbaugh |49 |Senior Vice |Senior Vice President of the CNA Insurance Companies since November |
|CNA Plaza | |President |1990. |
|Chicago, IL 60685 | | | |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Peter E. Jokiel |49 |Director, Senior |Senior Vice President and Chief Financial Officer of the CNA |
|CNA Plaza | |Vice President |Insurance Companies since November 1990. |
|Chicago, IL 60685 | |and Chief | |
| | |Financial Officer | |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Jack Kettler |52 |Senior Vice |Senior Vice President of the CNA Insurance Companies since May 1994;|
|CNA Plaza | |President |Senior Vice President of Midland Mutual Life Insurance Company from |
|Chicago, IL 60685 | | |January 1989 through May 1994. |
|-----------------------|---|------------------|--------------------------------------------------------------------|
<PAGE>
|-----------------------|---|------------------|--------------------------------------------------------------------|
|Donald M. Lowry |66 |Director, Senior |Senior Vice President, Secretary and General Counsel of the CNA |
|CNA Plaza | |Vice President, |Insurance Companies since August 1992; Senior Vice President and |
|Chicago, IL 60685 | |Secretary and |General Counsel of the CNA Insurance Companies from November 1990 |
| | |General Counsel |to August 1992. |
|-----------------------|---|------------------|--------------------------------------------------------------------|
|--------------------------------------------------------------------------------------------------------------------|
| Officers of the Company |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
| Name and |Age| Position(s) Held | Principal Occupation(s) |
| Address | | with the Company | During Past Five Years |
| | | | |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|Carolyn L. Murphy |51 |Senior Vice |Senior Vice President of the CNA Insurance Companies since November |
|CNA Plaza | |President |1990. |
|Chicago, IL 60685 | | | |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|William H. Sharkey, Jr.|48 |Director, Senior |Senior Vice President of the CNA Insurance Companies since January |
|CNA Plaza | |Vice President |1994; Senior Vice President of Cigna Healthcare from October 1970 |
|Chicago, IL 60685 | | |through February 1994. |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|Wayne R. Smith III |50 |Senior Vice |Senior Vice President of the CNA Insurance Companies since May 1994; |
|CNA Plaza | |President |1994; Group Vice President of the CNA Insurance Companies from August|
|Chicago, IL 60685 | | |1993 through May 1994; Senior Vice President of the Computer Power |
| | | |Group from August 1991 through August 1993. |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|Adrian M. Tocklin |45 |Senior Vice |Senior Vice President of the CNA Insurance Companies since May 1995; |
|CNA Plaza | |President |President of the Continental Insurance Company from June 1994 |
|Chicago, IL 60685 | | |through May 1995; Executive Vice President of the Continental |
| | | |Insurance Company from August 1991 through August 1994. |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|Jae L. Wittlich |54 |Senior Vice |Senior Vice President of the CNA Insurance Companies since November |
|CNA Plaza | |President |1990. |
|Chicago, IL 60685 | | | |
|-----------------------|---|------------------|---------------------------------------------------------------------|
|-----------------------|---|------------------|---------------------------------------------------------------------|
|David W. Wroe |49 |Senior Vice |Senior Vice President of the CNA Insurance Companies since June |
|CNA Plaza | |President |1996; President of Agency Management Systems from August 1991 |
|Chicago, IL 60685 | | |through June 1996. |
|-----------------------|---|------------------|---------------------------------------------------------------------|
</TABLE>
EXECUTIVE COMPENSATION
The following table includes compensation paid by the CNA Financial
Corporation and its subsidiaries for services rendered in all capacities for the
years indicated for the Chief Executive Officer and the next four most highly
compensated Executive Officers as of December 31, 1995. These officers also
serve as executive officers of Valley Forge Life Insurance Company (VFL);
therefore, an applicable portion of their compensation (4.45%) is charged to
VFL.
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Name and Principal Position Year Salary Bonus All Other
Compensation (f)
- ------------------------------------------------------------------------------------------------------------
Dennis H. Chookaszian 1995 1,593,027 -- 66,587
Chairman of the Board 1994 1,242,091 - 51,939
Chief Executive Officer 1993 1,132,716 350,000 (d)(e) 51,984
CNA Insurance Companies
Philip L. Engel 1995 962,587 -- 40,429
President 1994 825,539 - 34,661
CNA Insurance Companies 1993 760,171 90,000 (d) 36,397
Carolyn L. Murphy 1995 562,307 206,000(a) 23,100
Senior Vice President 1994 558,333 173,000(b) 23,380
CNA Insurance Companies 1993 528,333 180,000(d) 22,190
Jack Kettler 1995 486,752 317,000(a)(c) 287,850(g)
Senior Vice President 1994 266,309 100,000(c) 118,452(g)
CNA Insurance Companies 1993 n/a n/a n/a
Bernard L. Hengesbaugh 1995 500.082 142,000(a) 19,950
Senior Vice President 1994 460,578 --- 18,900
CNA Insurance Companies 1993 415,000 248,281(d) 17,430
<FN>
(a) Represents amounts earned for the year 1995 (paid in March of 1996),
under the Annual Incentive Plan for Officers as hereinafter described.
(b) Represents amounts earned for the year 1994 (paid in March of 1995),
under the Annual Incentive Plan for Officers as hereinafter described.
(c) Represents employee signing bonus of $100,000 paid in 1995 and 1994.
(d) Represents amounts awarded under the Long Term Award Plan. The Long Term
Award Program was instituted in 1990 to provide cash awards to key
executives in recognition of individual performance and contribution to
long term results. Awards were made on a discretionary basis and were
approved by the Chairman and Chief Executive Officer of the CNA Insurance
Companies. The amounts shown include both the 1992 and 1993 awards granted
in April 1993 and December 1993, respectively. The awards granted to
Messrs. Chookaszian and Engel of $100,000 and $90,000, respectively,
recognized services rendered prior to October 1, 1992. These and all
previously awarded but unpaid amounts were paid in 1993 when the Plan was
terminated.
(e) Includes a $250,000 bonus paid to Mr. Chookaszian in 1993.
(f) Represents amounts contributed or accrued for fiscal 1995, 1994 and 1993
for the named officers under the Company's savings plan and related
supplemental savings plan.
(g) Includes $267,900 and $106,604 of relocation expenses paid in 1995 and
1994, respectively.
</FN>
</TABLE>
<PAGE>
Employment Contracts
Valley Forge Life Insurance Company (the Company) is a wholly-owned subsidiary
of Continental assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA. All employees of the CNA Insurance Companies
are employed by Casualty, with the exception of Dennis H. Chookaszian and Philip
L. Engel who are employees of CNA.
CNA is party to employment agreements (the "Agreements") with each of
Dennis H. Chookaszian and Philip L. Engel. The Agreements are for a three-year
term at an annual Base Salary of $950,000 for Mr. Chookaszian and $800,000 for
Mr. Engel. The Agreements provide for the adoption by the Board of an Incentive
Compensation Plan which will provide Mr. Chookaszian and Mr. Engel with an
opportunity to earn a bonus based on performance and attainment of specified
corporate goals. In all other respect, the agreements contain substantially the
same terms as the prior agreements as approved by the Board in February of 1992.
A brief summary of the Plan as adopted by the CNA Board is set forth herein.
Each of the Agreements requires CNA to provide long-term disability
coverage and permits the employee to participate in other benefit programs
offered by the Company to its employees. In the event of death or disability,
the employee is entitled to be paid the Base Salary to the end of the month in
which such death or disability occurs and a prorated amount based on assumed
attainment of the incentive compensation in effect at the time. Any incentive
compensation paid is included in the computation of pensionable earnings under
the Company's retirement plans. The employee may participate in the Qualified
and Supplemental Savings Plan established by CNA wherein CNA pays a matching
percentage of 70% of the first 6% of the employee's contributions. This matching
amount is also included in the computation of pensionable earnings.
CNA may terminate each Agreement without cause at any time, in which
event CNA is required to continue to make payments to the employee for a period
of three years from the date of termination at a fixed rate based on Base Salary
and the incentive compensation in effect at the time of such termination. Each
Agreement contemplates negotiation of a renewal for an additional three year
period at the expiration of its term on December 31, 1998 and provides that if
the parties have not reached an agreement before March 31, 1999 at a Base Salary
and opportunity for incentive compensation of not less than the amount of Base
Salary and incentive compensation provided for the year 1998 at substantially
the same terms as the expiring agreement, then the employment shall be
considered terminated by CNA and the employee shall be entitled to termination
pay for a period of three years based on the combined Base Salary and the
assumed incentive compensation for 1998. If a renewal is not negotiated before
December 31, 1998, the Executives shall become employees-at-will for a three
month period at an actual salary representing the combined Base Salary and
assumed Incentive Compensation for the year 1998.
The Incentive Compensation Committee of CNA has granted Mr. Chookaszian
and Mr. Engel, subject to shareholder approval of the Incentive Compensation
Plan, allocations under the Incentive Compensation Plan entitling each of them
to awards thereunder of a maximum of $1,450,000 for Mr. Chookaszian and $400,000
for Mr. Engel for the year 1996. A maximum of $1,650,000 for 1997 and $1,850,000
for 1998 has been granted to Mr. Chookaszian and maximums of $500,000 and
$600,000 for the years 1997 and 1998 respectively have been granted to Mr.
Engel. The actual awards to Messrs. Chookaszian and Engel would be subject to
the attainment of specific performance goals in relation to after-tax income
CNA, excluding realized investment gains and losses.
<PAGE>
Retirement Plans
Casualty provides funded, tax qualified, non-contributory retirement
plans for all salaried employees, including executive officers (the "Retirement
Plans") and an unfunded, non-qualified, non-contributory benefits equalization
plan (the "Supplemental Retirement Plan") which provides for the accrual and
payment of benefits which are not available under tax qualified plans such as
the Retirement Plans. The following description of the Retirement Plans gives
effect to benefits provided under the Supplemental Retirement Plan.
The Retirement Plans provide for retirement benefits based upon
average final compensation (i.e., based upon the highest average sixty
consecutive months compensation and years of credited service with Casualty).
Compensation under the Retirement Plans consists of salary paid by Casualty and
its subsidiaries included under "Salary" and "Bonus" in the Summary Compensation
Table above. The following table shows estimated annual benefits payable upon
retirement under the Retirement Plans for various compensation levels and years
of credited service, based upon normal retirement in 1995 and a straight life
annuity form of benefit. In addition to a straight life annuity, the Plans also
allow the participant to elect payment to be made in a Joint and Contingent (or
Survivor) Annuitant form where the Contingent (or Survivor) Annuitant would
receive payment at 50%, 66 2/3% or 100% of the participant's benefit amount.
<TABLE>
<CAPTION>
Pension Plan Table
Normal Retirement in 1995
Estimated Annual Pension For
Representative Years of Credited Service
Average Annual 15 20 25 30 35
Compensation
<S> <C> <C> <C> <C> <C>
$400,000 $116,855 $155,807 $194,758 $207,044 $219,330
$500,000 $146,855 $195,807 $244,758 $260,378 $275,997
$600,000 $176,855 $235,807 $294,758 $313,711 $332,664
$700,000 $206,855 $275,807 $344,758 $367,045 $389,331
$800,000 $236,855 $315,807 $394,758 $420,378 $445,998
$900,000 $266,855 $355,807 $444,758 $473,712 $502,665
$1,000,000 $296,855 $395,807 $494,758 $527,045 $559,332
$1,100,000 $326,855 $435,807 $544,758 $580,379 $615,999
$1,200,000 $356,855 $475,807 $594,758 $633,712 $672,666
$1,300,000 $386,855 $515,807 $644,758 $687,046 $729,333
</TABLE>
The amounts in the table reflect deductions for estimated Social
Security payments.
Mr. Chookaszian, Mr. Engel, Ms. Murphy, Mr. Hengesbaugh, and Mr.
Kettler have 20, 30, 18, 16 and 2 years of credited service, respectively.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Valley Forge Life Insurance Company
We have audited the accompanying balance sheets of Valley Forge Life Insurance
Company (a wholly-owned subsidiary of Continental Assurance Company, which is a
wholly-owned subsidiary of Continental Casualty Company, an affiliate of CNA
Financial Corporation, an affiliate of Loews Corporation) as of December 31,
1995 and 1994 and the related statements of operations, stockholder's equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Valley Forge Life Insurance Company as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for certain investments in debt and equity securities in
1993.
Deloitte & Touche LLP
Chicago, Illinois
June 21, 1996
<PAGE>
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE COMPANY
The following financial statements are those of Valley Forge Life Insurance
Company and not those of the Separate Account. They are included in this
Statement of Additional Information for the purpose of informing investors as to
the financial position and operations of the Company.
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------------------
June 30 December 31
--------------------------
1996 1995 1994
(In thousands of dollars) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Investments-Note 3:
Fixed maturities available-for-sale (cost: $277,185, $347,401 and $ 273,377 $ 367,762 $ 350,955
$355,999)...................................................................
Equity securities available-for-sale (cost: $1,074, $1,074 and $1,074).. 1,825 1,696 1,307
Policy loans............................................................ 59,979 56,008 47,001
Short-term investments.................................................. 191,482 37,184 39,067
-------- -------- --------
Total investments................................................. 526,663 462,650 438,330
Cash...................................................................... 4,260 42,103 1,926
Insurance receivables:
Reinsurance receivables................................................. 9,316 5,688 4,280
Premium and other insurance receivables................................. 61,311 53,741 55,373
Less allowance for doubtful accounts.................................... (301) (175) -
Deferred acquisition costs................................................ 62,051 50,600 41,333
Accrued investment income................................................. 4,036 4,687 4,756
Receivables for securities sold........................................... 12,008 - -
Federal income taxes recoverable-Note 7................................... 3,702 575 547
Deferred income taxes-Note 7.............................................. 3,573 - 6,290
Other assets.............................................................. 1,176 4,951 1
=====================================================================================================================
Total assets $ 687,795 $ 624,820 $ 552,836
=====================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
- --------------------------------------------------------------------------------------------------------------------
June 30 December 31
-------------------------
1996 1995 1994
(In thousands of dollars) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liabilities and Stockholder's Equity
Liabilities:
Insurance reserves-Note 8:
Future policy benefits.................................................. $ 290,740 $ 266,600 $ 229,702
Claims.................................................................. 57,987 59,423 55,636
Policyholders' funds.................................................... 36,299 34,574 30,596
Deferred income taxes..................................................... - 3,191 -
Remittances and items not allocated....................................... 30,896 51,219 22,100
Payable to affiliates-Note 9.............................................. 62,166 - 50,371
Other liabilities......................................................... 21,769 14,341 8,235
------- ------- -------
Total liabilities................................................. 499,857 429,348 396,640
------- ------- -------
Stockholder's equity-Note 4:
Common stock ($50 par value; Authorized-200,000 shares; Issued-50,000 2,500 2,500 2,500
shares).....................................................................
Additional paid-in capital................................................ 39,150 39,150 39,150
Retained earnings......................................................... 148,273 140,181 117,671
Net unrealized investment gains (losses), net of taxes-Note 3............. (1,985) 13,641 (3,125)
------- -------- --------
Total stockholder's equity........................................ 187,938 195,472 156,196
====================================================================================================================
Total liabilities and stockholder's equity $ 687,795 $ 624,820 $ 552,836
====================================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
(In thousands of dollars)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums-Note 8........................................... $296,653 $262,980 $240,845
Net investment income-Note 3.............................. 31,494 22,759 16,144
Realized investment gains (losses)-Note 3................. 13,783 (4,502) 3,773
Other..................................................... 4,818 4,789 3,435
-------- ------- -------
346,748 286,026 264,197
------- ------- -------
Benefits and expenses:
Insurance claims and policyholders' benefits-Note 8....... 270,936 237,334 221,092
Amortization of deferred acquisition costs................ 6,066 4,874 2,794
Other operating expenses-Note 9........................... 35,036 32,231 29,469
------- -------- -------
312,038 274,439 253,355
------- ------- -------
Income before income tax.......................... 34,710 11,587 10,842
Income tax expense-Note 7................................... 12,200 4,105 3,735
=====================================================================================================
Net income $ 22,510 $ 7,482 $ 7,107
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
Six Months Ended June 30 1996 1995
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Premiums-Note 8............................................................ $160,221 $142,895
Net investment income-Note 3............................................... 13,369 15,434
Realized investment gains (losses)-Note 3.................................. 3,745 12,568
Other...................................................................... 2,499 1,913
------- -------
179,834 172,810
Benefits and expenses:
Insurance claims and policyholders' benefits-Note 8........................ 147,263 130,355
Amortization of deferred acquisition costs................................. 330 1,600
Other operating expenses-Note 9............................................ 19,783 17,246
------- -------
167,376 149,201
------- -------
Income before income tax........................................... 12,458 23,609
Income tax expense-Note 7.................................................... 4,366 8,288
=========================================================================================================
Net income $ 8,092 $ 15,321
=========================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
----------------------------------------- ----------- ------------- -------------- ---------------- ------------
Net
Additional Unrealized
Common Paid-in Retained Investment
(In thousands of dollars) Stock Capital Earnings Gains (Losses) Total
----------------------------------------- ----------- ------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992.............. $2,500 $39,150 $103,082 $ 141 $144,873
Net income............................ - - 7,107 - 7,107
Net unrealized investment gains, net of - - - 68 68
taxes-Note 3......................
Adjustment resulting from change in
accounting for debt securities-Note 2. - - - 1,201 1,201
------------ ------------- -------------- --------------- -----------
Balance, December 31, 1993 2,500 39,150 110,189 1,410 153,249
Net income............................ - - 7,482 - 7,482
Net unrealized investment losses, net of
taxes-Note 3........................ - - - (4,535) (4,535)
------------ ------------- --------------- -------------- ------------
Balance, December 31, 1994 2,500 39,150 117,671 (3,125) 156,196
Net income............................ - - 22,510 - 22,510
Net unrealized investment gains, net of
taxes-Note 3...................... - - - 16,766 16,766
------------ ------------- ---------------- ------------- -----------
Balance, December 31, 1995 $2,500 $39,150 $140,181 $13,641 $195,472
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1996 and 1995 Net
Additional Unrealized
Common Paid-in Retained Investment
(In thousands of dollars) Stock Capital Earnings Gains (Losses) Total
- ----------------------------------------- ----------- ------------ --------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $2,500 $39,150 $117,671 $ (3,125) $156,196
Net income............................ - - 15,321 - 15,321
Net unrealized investment gains, net of
taxes-Note 3...................... - - - 8,244 8,244
- ----------------------------------------- ----------- ------------ --------------- ------------- --------------
Balance, June 30, 1995 $2,500 $39,150 $132,992 $5,119 $179,761
========================================= =========== ============ =============== ============== =============
Balance, December 31, 1995 $2,500 $39,150 $140,181 $13,641 $195,472
Net income............................ - - 8,092 - 8,092
Net unrealized investment gains, net of
taxes-Note 3...................... - - - (15,626) (15,626)
- ----------------------------------------- ----------- ------------ -------------- -------------- --------------
Balance, June 30, 1996 $2,500 $39,150 $148,273 $(1,985) $187,938
===============================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
(In thousands of dollars)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 22,510 $ 7,482 $ 7,107
-------- ------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Pre-tax realized investment (gains) losses..................... (13,783) 4,502 (3,773)
Amortization of bond (discount) premium........................ (3,921) (886) 51
Changes in:
Insurance receivables...................................... 399 (6,951) (1,693)
Deferred acquisition costs................................. (9,267) (1,112) (3,250)
Accrued investment income.................................. 69 (1,606) 992
Federal income taxes recoverable........................... (28) (1,356) (5)
Deferred income taxes...................................... 453 (172) (804)
Insurance reserves......................................... 44,663 30,734 21,430
Other, net................................................. (20,095) 44,080 2,550
-------- ------- -------
Total adjustments................................. (1,510) 67,233 15,498
-------- ------- -------
Net cash provided by operating activities......... 21,000 74,715 22,605
-------- ------- -------
Cash flows from investing activities:
Purchases of fixed maturities....................................... (361,579) (863,023) (95,982)
Proceeds from fixed maturities:
Sales............................................................ 336,731 408,505 88,622
Maturities, calls and redemptions................................ 51,046 189,355 12,828
Purchases of equity securities...................................... - (93) -
Proceeds from sale of equity securities............................. - - 336
Change in short-term investments.................................... 1,986 196,605 (21,344)
Change in policy loans.............................................. (9,007) (6,058) (5,541)
--------- -------- ---------
Net cash provided by (used in) investing activities 19,177 (74,709) (21,081)
--------- -------- ---------
Net increase in cash.............................. 40,177 6 1,524
Cash at beginning of year.............................................. 1,926 1,920 396
================================================================================================================
Cash at end of year $ 42,103 $ 1,926 $ 1,920
================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Federal income taxes.............................................. $ 6,531 $ 5,426 $ 3,847
================================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
Six Months Ended June 30 1996 1995
(In thousands of dollars)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 8,092 $ 15,321
------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Pre-tax realized investment gains............................. (3,745) (12,568)
Amortization of bond discount.................................. (2,017) (2,154)
Changes in:
Insurance receivables...................................... (11,072) (2,798)
Deferred acquisition costs................................. (11,451) (4,116)
Accrued investment income.................................. 651 116
Federal income taxes....................................... (3,127) 4,197
Deferred income taxes...................................... 1,650 200
Insurance reserves......................................... 24,429 21,005
Other, net................................................. 53,044 (2,460)
------ ------
Total adjustments................................. 48,362 1,472
----- ------
Net cash provided by operating activities......... 56,454 16,793
------ ------
Cash flows from investing activities:
Purchases of fixed maturities....................................... (301,008) (236,040)
Proceeds from fixed maturities:
Sales............................................................ 346,192 241,768
Maturities, calls and redemptions................................ 18,134 24,103
Change in short-term investments.................................... (153,644) (41,705)
Change in securities sold under repurchase agreements............... - -
Change in policy loans.............................................. (3,971) (3,587)
------- --------
Net cash used in investing activities............. (94,297) (15,461)
------- --------
Net increase (decrease) in cash................... (37,843) 1,332
Cash at beginning of period............................................ 42,103 1,926
==========================================================================================================
Cash at end of period $ 4,260 $ 3,258
==========================================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Federal income taxes.............................................. $ 7,216 $ 3,852
=========================================================================================================
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA.
VFL and Assurance have an intercompany pooling agreement to share their
combined underwriting results, exclusive of Assurance's participating policies
and Separate Account business. Under this pooling agreement, VFL cedes 100% of
its net business before pooling to Assurance and in turn receives 10% of the
combined results. Assurance retains 90% of the combined results.
VFL markets a variety of individual and group insurance products, either
directly or through its pooling agreement with Assurance. The individual
insurance products currently being marketed consist primarily of term, universal
life and individual annuity products. Group insurance products include life,
accident and health consisting primarily of medical and hospitalization, and
pension products.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. In the opinion of VFL's management, these statements include all
adjustments, consisting of normal recurring accruals, which are necessary for
the fair presentation of the financial position, results of operations and cash
flows in the accompanying financial statements.
Insurance
Premium revenue-Revenues on universal life-type contracts are comprised of
contract charges and fees which are recognized over the coverage period.
Accident and health insurance premiums are earned ratably over the terms of the
policies after provision for estimated adjustments on retrospectively rated
policies and deductions for ceded insurance. Other life insurance premiums are
recognized as revenue when due, after deductions for ceded insurance.
Claim reserves-Claim reserves include provisions for reported claims in the
course of settlement and estimates of unreported losses based upon past
experience.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 1. - (Continued):
Future policy benefit reserves-Reserves for traditional life insurance
products are computed based upon net level premium methods using actuarial
assumptions as to interest rates, mortality, morbidity, withdrawals and
expenses. Actuarial assumptions include a margin for adverse deviation, and
generally vary by plan, age at issue and policy duration. Interest rates range
from 3.0% to 10.5%, and mortality, morbidity and withdrawal assumptions reflect
VFL and industry experience prevailing at the time of issue. Expense estimates
include the estimated effects of inflation and expenses beyond the premium
paying period. Reserves for universal life-type contracts are established using
the retrospective deposit method. Under this method, liabilities are equal to
the account balances that accrue to the benefit of the policyholders. Interest
crediting rates ranged from 5.9% to 7.3% for the three years ended December 31,
1995 and from 5.7% to 5.9% for the six-month period ended June 30, 1996.
Reinsurance-In addition to the pooling agreement with Assurance, VFL also
assumes and cedes insurance with other insurers and reinsurers and members of
various reinsurance pools and associations. VFL utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of risk
and minimize exposures on larger risks. The reinsurance coverages are tailored
to the specific risk characteristics of each product line with VFL's retained
amount varying by type of coverage. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability.
Deferred acquisition costs-Costs of acquiring insurance business which vary
with and are primarily related to the production of such business are deferred.
Such costs include commissions and certain underwriting and policy issuance
costs. Acquisition costs are capitalized and amortized based on assumptions
consistent with those used for computing policy benefit reserves. Acquisition
costs on ordinary life business are amortized over their assumed premium paying
periods. Universal life and annuity acquisition costs are amortized in
proportion to the present value of the estimated gross profits over the
products' assumed durations, which are regularly evaluated and adjusted as
appropriate. To the extent that unrealized gains or losses on available-for-sale
securities would result in an adjustment of deferred policy acquisition costs
had those gains or losses actually been realized, the related unamortized
deferred policy acquisition costs are recorded as an adjustment of the
unrealized gains or losses included in stockholder's equity.
Valuation of investments - VFL believes it has the ability to hold all
fixed maturity securities until they mature. However, securities may be sold to
take advantage of investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, as part of VFL's asset/liability
strategy, or other similar factors. As a result, VFL considers its fixed
maturity securities (bonds and redeemable preferred stocks) as
available-for-sale and VFL also classifies its equity securities as
available-for-sale, and as such, are carried at fair value. Unrealized holding
gains and losses are reflected as a separate component of stockholder's equity,
net of deferred income taxes. The amortized cost of fixed maturity securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion are included in investment income.
Policy loans are carried at unpaid balances. Short-term investments, which
have an original maturity of one year or less, are carried at amortized cost
which approximates market value. The Company has no real estate, mortgage loans
or investments in derivative securities.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 1. - (Continued):
Investment gains and losses - All securities transactions are recorded on
the trade date. Realized investment gains and losses are determined on the basis
of the cost of the specific securities sold. Unrealized investment gains and
losses on fixed maturity and equity securities are reflected as part of
stockholder's equity, net of applicable deferred income taxes and deferred
acquisition costs. Investments are written down to estimated fair values and
losses are charged to income when a decline in value is considered to be other
than temporary.
Securities sold under agreements to repurchase - VFL has a securities
lending program where securities are loaned to third parties, primarily major
brokerage firms. Borrowers of these securities must maintain a deposit of 100%
of the fair value of the securities if the collateral is cash, or 102% if the
collateral is securities. Cash deposits from these transactions have been
invested in short-term investments (primarily commercial paper). VFL continues
to receive the interest on the loaned debt securities, as beneficial owner and,
accordingly, the loaned debt securities are included in fixed maturity
securities. VFL had no securities on loan at December 31, 1995 or 1994, or at
June 30, 1996.
Income Taxes
The provision for income taxes includes deferred taxes, resulting from
temporary differences between the financial statement and tax return bases of
assets and liabilities which are accounted for under the liability method. Such
temporary differences primarily relate to life insurance reserves, net
unrealized investment gains/losses and deferred acquisition costs.
Interim Financial Data (Unaudited)
The accompanying Financial Statements for the six-month period ended June
30, 1996 and 1995 have been prepared in conformity with generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of VFL's management, these statements include all adjustments,
consisting of normal recurring accruals, which are necessary for the fair
presentation of the financial position, results of operations and cash flows in
the accompanying financial statements.
NOTE 2. CHANGES IN ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES:
Effective December 31, 1993, VFL adopted Statement of Financial Accounting
Standards 115, "Accounting for Certain Investments in Debt and Equity
Securities." This Statement requires that investments in debt and equity
securities classified as available-for-sale be carried at fair value.
(Previously, fixed maturity securities classified as available-for-sale were
carried at the lower of aggregate amortized cost or market value). The effect at
December 31, 1993 of adopting this Statement was to increase stockholder's
equity by $1.2 million (net of $.6 million in deferred taxes). The adoption of
this Statement did not impact net income.
<PAGE>
<TABLE>
<CAPTION>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. INVESTMENTS:
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income Six Months Ended
Year Ended December 31 June 30
----------------------------------------- ---------------------------
(In thousands of dollars)
1995 1994 1993 1996 1995
- -------------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Fixed maturities........................... $21,599 $16,591 $ 6,520 $10,805 $ 9,852
Equity securities.......................... 64 64 64 32 32
Policy loans............................... 3,925 2,979 2,498 1,355 1,620
Short-term investments..................... 6,037 3,658 7,240 1,294 3,943
Security repurchase transactions-income.... 135 63 - - 136
Other...................................... 2 (381) 2 - 1
-------- ------------ ---------- ----------- ------------
31,762 22,974 16,324 13,486 15,584
Investment expense......................... 268 215 180 117 150
===================================================================================================================
Net investment income $31,494 $22,759 $16,144 $13,369 $15,434
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Analysis of Investment Gains (Losses) Six Months Ended
Year Ended December 31 June 30
----------------------------------- ----------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- ------------------------------------------------------- --------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Realized investment gains (losses):: (Unaudited)
Fixed maturities.................................. $13,674 $(4,306) $3,313 $3,745 $ 12,521
Equity securities................................. - - 332 - -
Other............................................. 109 (196) 128 - 47
--------- --------- -------- ------- ---------
13,783 (4,502) 3,773 3,745 12,568
Income tax (expense) benefit...................... (4,824) 1,576 (1,321) (1,311) (4,399)
--------- --------- --------- ------- --------
Net realized investment gains (losses)........ 8,959 (2,926) 2,452 2,434 8,169
--------- --------- ---------- ------- --------
Change in net unrealized investment gains (losses):
Fixed maturities.................................. 25,405 (6,892) - (24,169) 12,551
Equity securities................................. 389 (85) 106 129 132
-------- --------- ---------- -------- ---------
25,794 (6,977) 106 (24,040) 12,683
Income tax (expense) benefit...................... (9,028) 2,442 (38) 8,414 (4,439)
-------- --------- ---------- --------- ---------
Change in net unrealized investment gains
(losses)..................................... 16,766 (4,535) 68 (15,626) 8,244
Change in accounting for adoption of SFAS 115-
Note 2...................................... - - 1,201 - -
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized investment
gains (losses) $25,725 $(7,461) $3,721 $(13,192) $16,413
===================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Summary of Gross Realized Investment Gains (Losses)
for Fixed Maturities and Equity Securities
December 31 1995 1994 1993
--------------------------- ---------------------- ------------------------
Fixed Equity Fixed Equity Fixed Equity
(In thousands of dollars) Maturities Securities Maturities Securities Maturities Securities
- ----------------------------- ----------- --------------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales $ 336,731 $ - $ 408,505 $ - $ 88,622 $ 336
===========================================================================================================
Gross realized gains......... 18,185 - 1,559 - 3,355 332
Gross realized losses........ (4,511) - (5,865) - (42) -
- -----------------------------------------------------------------------------------------------------------
Net realized gains (losses) $ 13,674 $ - $ (4,306) $ - $ 3,313 $ 332
===========================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. - (Continued):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Summary of Gross Realized Investment Gains (Losses)
for Fixed Maturities and Equity Securities
June 30 1996 1995
(Unaudited) (Unaudited)
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
Fixed Equity Fixed Equity
(In thousands of dollars) Maturities Securities Maturities Securities
- -------------------------------- ------------- ------------- -------------------- ------------
Proceeds from sales $ 346,192 $ - $ 241,768 $ -
================================ =========== =============== ================ ================
Gross realized gains............ 6,626 - 16,805 -
Gross realized losses........... (2,881) - (4,284) -
- -------------------------------- ------------ -------------- ----------------- ---------------
Net realized gains $ 3,745 $ - $ 12,521 $ -
================================ =========== =============== ================= ===============
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Analysis of Net Unrealized Investment Gains (Losses)
Included in Stockholder's Equity
December 31 1995 1994
-------------------------------- ---------------------------------
(In thousands of dollars) Gains Losses Net Gains Losses Net
- ------------------------------------------- -------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities.......................... $20,386 $(25) $ 20,361 $5,624 $(10,668) $ (5,044)
Equity securities......................... 622 - 622 233 - 233
---------- --------- ----------- --------- ----------- -----------
$21,008 $(25) 20,983 $5,857 $(10,668) (4,811)
======= ===== ====== =========
Deferred income tax benefit (expense)..... (7,342) 1,686
=================================================================================================================
Net unrealized investment gains (losses) $ 13,641 $ (3,125)
=================================================================================================================
</TABLE>
<PAGE>
- ------------------------------------------------------------------------------
Analysis of Net Unrealized Investment Gains (Losses)
Included in Stockholder's Equity
June 30 1996
(Unaudited)
---------------------------------------
(In thousands of dollars) Gains Losses Net
- -------------------------------------- ----------- ------------ --------------
Fixed maturities...................... $3,296 $(7,104) $ (3,808)
Equity securities..................... 751 - 751
---------- ----------- --------------
$4,047 $(7,104) (3,057)
====== ========
Deferred income tax benefit........... 1,072
==============================================================================
Net unrealized investment losses $ (1,985)
==============================================================================
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. - (Continued):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Summary of Investments in Fixed Maturities
and Equity Securities Available-for-Sale Amortized Unrealized Unrealized Market
(In thousands of dollars) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995
United States Treasury securities and obligations of
government agencies.................................. $186,083 $12,526 $ 1 $198,608
Asset-backed securities................................. 84,785 2,545 8 87,322
States, municipalities and tax exempt political 279 14 - 293
subdivisions............................................
Corporate securities.................................... 50,523 2,508 6 53,025
Other debt securities................................... 25,731 2,793 10 28,514
-------- ------- --- --------
Total fixed maturities............................... 347,401 20,386 25 367,762
Equity securities....................................... 1,074 622 - 1,696
===============================================================================================================
Total $348,475 $21,008 $ 25 $369,458
===============================================================================================================
December 31, 1994
United States Treasury securities and obligations of
government agencies.................................. $ 69,148 $ 3,770 $ 1,182 $ 71,736
Asset-backed securities................................. 219,470 136 7,898 211,708
States, municipalities and tax exempt political 277 20 2 295
subdivisions............................................
Corporate securities.................................... 38,223 227 1,016 37,434
Other debt securities................................... 28,881 1,471 570 29,782
-------- ------ -------- ---------
Total fixed maturities............................... 355,999 5,624 10,668 350,955
Equity securities....................................... 1,074 233 - 1,307
===============================================================================================================
Total $357,073 $ 5,857 $ 10,668 $352,262
===============================================================================================================
June 30, 1996 (Unaudited)
United States Treasury securities and obligations of
government agencies.................................. $114,889 $37 $4,791 $110,135
Asset-backed securities................................. 68,119 457 1,348 67,228
States, municipalities and tax exempt political
subdivisions............................................ 30 - - 30
Corporate securities.................................... 71,672 1,747 783 72,636
Other debt securities................................... 22,475 1,055 182 23,348
-------- ------- ------ --------
Total fixed maturities............................... 277,185 3,296 7,104 273,377
Equity securities....................................... 1,074 751 - 1,825
==============================================================================================================
Total $278,259 $4,047 $ 7,104 $275,202
==============================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. - (Continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Summary of Investments in Fixed Maturities December 31 June 30
------------------------------------------- -------------------------
by Contractual Maturity 1995 1994 1996
-------------------- --------------------- -------------------------
Amortized Market Amortized Market Amortized Market
(In thousands of dollars) Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
Due in one year or less.................... $ 7,470 $ 7,666 $ 22,725 $ 22,391 $ 9,789 $ 9,861
Due after one year through five years...... 135,160 136,297 33,291 32,382 120,918 118,066
Due after five years through ten years..... 35,869 37,538 14,054 12,803 29,576 29,483
Due after ten years........................ 84,117 98,939 66,459 71,671 48,783 48,739
Asset-backed securities not due at a single
maturity date.............................. 84,785 87,322 219,470 211,708 68,119 67,228
==================================================================================================================
Total $347,401 $ 367,762 $ 355,999 $ 350,955 $ 277,185 $ 273,377
==================================================================================================================
</TABLE>
Actual maturities may differ from contractual maturities because securities
may be called or prepaid with or without call or prepayment penalties.
There are no investments that have not produced income for the year ended
December 31, 1995 or for the six months ended June 30, 1996. There are no
investments in a single issuer, other than the U.S. government, that when
aggregated exceed 10% of stockholder's equity.
NOTE 4. STATUTORY CAPITAL AND SURPLUS:
Statutory capital and surplus and net income for VFL are determined
in accordance with accounting practices prescribed by the Pennsylvania Insurance
Department. Prescribed statutory accounting practices are set forth in a variety
of publications of the National Association of Insurance Commissioners as well
as state laws, regulations, and general administrative rules. The Company has no
material permitted accounting practices. Statutory net income was $8.9 million,
$5.2 million and $2.5 million for the years ended December 31, 1995, 1994 and
1993, respectively, and $2.0 million and $3.5 million for the unaudited
six-month periods ended June 30, 1996 and 1995, respectively. Statutory capital
and surplus for VFL was $129.9 million and $122.3 million at December 31, 1995
and 1994, respectively, and $126.5 million (unaudited) at June 30, 1996.
The payment of dividends by VFL to Assurance without prior approval of the
Pennsylvania Insurance Department is limited to formula amounts. As of December
31, 1995 and June 30, 1996 approximately $13.0 million was not subject to prior
Insurance Department approval.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair values are disclosed for all financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values may be
based on estimates using present value or other valuation techniques. These
techniques are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. Potential taxes and other
transaction costs have not been considered in estimating fair value. The
estimates presented herein are subjective in nature and are not necessarily
indicative of the amounts VFL could realize in the current market exchange. Any
difference would not be expected to be material.
All nonfinancial instruments such as deferred acquisition costs, deferred
income taxes and insurance reserves, are excluded from fair value disclosure.
Thus, the total fair value amounts cannot be aggregated to determine the
underlying economic value of VFL.
The carrying amounts and estimated fair values of certain of VFL's financial
instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
December 31 1995 1994
------------------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands of dollars) Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Investments:
Fixed maturities available-for-sale........ $367,762 $367,762 $350,955 $350,955
Equity securities available-for-sale....... 1,696 1,696 1,307 1,307
Policy loans............................... 56,008 52,648 47,001 41,361
Financial Liabilities
Premium deposits and annuity contracts....... 68,578 64,565 42,982 42,122
- -----------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used by VFL in estimating its
fair value disclosures for financial instruments:
The carrying amounts reported in the balance sheet approximate
fair value for cash, short-term investments, premium and other
insurance receivables, accrued investment income, and certain other
assets and other liabilities because of their short-term nature. As
such, these financial instruments are not shown in the above table.
Fixed maturity securities and equity securities are based on
quoted market prices, where available. For securities not actively
traded, fair values are estimated using values obtained from
independent pricing services or quoted market prices of comparable
instruments.
The fair values for policy loans are estimated using discounted
cash flow analyses at interest rates currently offered for similar
loans to borrowers with comparable credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 6. BENEFIT PLANS:
Pension Plan
CNA has several noncontributory pension plans covering all full-time
employees age 21 or over who have completed at least one year of service. VFL is
included in the CNA Employees' Retirement Plan. Plan benefits are based on years
of credited service and the employee's highest sixty consecutive months of
compensation.
CNA's funding policy is to make contributions in accordance with applicable
governmental regulatory requirements. The assets of the plan are invested
primarily in U.S. government securities with the balance in short-term
investments, common stocks and other fixed income securities.
Effective January 1, 1996, the retirement plans redefined compensation to
include base pay, overtime and bonuses. This amendment generated an unrecognized
prior service cost of $20.2 million for CNA.
In 1994, the plan adopted the rule of 65. This change allows Plan
participants to receive early retirement benefits if their combined years and
months of age and service with CNA equals a minimum of 65. This amendment
generated an unrecognized prior service cost of $1.6 million for CNA.
Net periodic pension cost allocated to VFL was $1.7 million, $1.1 million
and $.7 million for the years ended December 31, 1995, 1994 and 1993,
respectively, and $1.4 million (unaudited) and $.9 million (unaudited) for the
six-month periods ended June 30, 1996 and 1995, respectively.
The following table sets forth the Plans' funded status and amounts
recognized in CNA's consolidated financial statements at December 31, 1995, 1994
and 1993.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1995* 1994 1993
December 31 Overfunded Underfunded Overfunded Overfunded
(In thousands of dollars) Plans Plans Plans Plans
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested........................................................ $ 508,506 $ 628,564 $ 376,377 $ 401,481
Nonvested..................................................... 31,180 11,292 39,152 41,585
--------- ---------- ---------- -----------
Accumulated benefit obligation............................. $ 539,686 $ 639,856 $ 415,529 $ 443,066
========= ========== ========== ===========
Projected benefit obligation................................... $ 808,289 $ 771,018 $ 651,418 $ 617,764
Plan assets at fair value...................................... 629,673 496,264 495,492 465,279
------- ------- ------- -------
Plan assets less than projected benefit obligation.......... (178,616) (274,754) (155,926) (152,485)
Unrecognized net asset at January 1, 1986 being recognized over (12,176) - (17,253) (22,330)
12 years..
Unrecognized prior service costs............................... 38,584 86,903 20,773 21,553
Unrecognized net loss.......................................... 172,269 5,825 174,039 160,825
------- --------- ------- -------
Net pension asset (liability)............................... $ 20,061 $ (182,026) $ 21,633 $ 7,563
======== ========= ======= =======
Net periodic pension cost:
Service cost - benefits attributed to employee service during $ 33,020 $ 10,694 $ 32,354 $ 27,527
the year.......................................................
Interest cost on projected benefit obligation................ 52,783 31,033 44,666 40,640
Actual return on plan assets................................. (115,363) (43,432) 11,579 (25,609)
Net amortization and deferral................................ 73,312 18,650 (43,265) (13,967)
====================================================================================================================
Net periodic pension cost $ 43,752 $ 16,945 $ 45,334 $ 28,591
====================================================================================================================
<FN>
*The 1995 data includes The Continental Corporation Retirement Plans which are
underfunded. CNA acquired The Continental Corporation on May 10, 1995.
</FN>
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 6. - (Continued):
Actuarial assumptions are set forth in the following table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Assumptions
December 31 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate.............................................. 7.25% 8.50% 7.25% 8.25%
Rate of increase in compensation levels *.................. 2.75 4.00 4.50 5.25
Expected long-term rate of return on plan assets........... 7.50 8.75 7.50 9.00
- --------------------------------------------------------------------------------------------------
<FN>
* Excludes age/service related merit and productivity increases.
</FN>
</TABLE>
The funded status is determined using assumptions at the end of the year.
Pension cost is determined using assumptions at the beginning of the year.
Postretirement Health Care and Life Insurance Benefits
CNA provides certain health and dental care benefits for eligible retirees,
through age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired persons. CNA funds benefit costs principally
on the basis of current benefit payments.
As described previously, in 1994, the Plan adopted the Rule of 65. For the
postretirement plan, this amendment generated an unrecognized prior service cost
of $11.2 million for CNA.
Net periodic postretirement benefit cost allocated to VFL was $.7 million,
$.6 million and $.4 million for the years ended December 31, 1995, 1994 and
1993, respectively, and $.5 million (unaudited) and $.3 million (unaudited)
for the six-month periods ended June 30, 1996 and 1995, respectively.
<PAGE>
The following table sets forth the amounts recognized in CNA's consolidated
financial statements at December 31, 1995, 1994 and 1993.
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
December 31
(In thousands of dollars) 1995* 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................................... $ 185,507 $ 27,088 $ 26,245
Fully eligible, active plan participants..................... 59,173 53,684 24,097
Other active plan participants.............................. 62,540 41,106 70,804
------ ------ ------
Total accumulated postretirement benefit obligation......... 307,220 121,878 121,146
Unrecognized prior service cost.............................. - (11,177) -
Unrecognized net gain (loss).................................. 7,380 19,702 (5,291)
-------- -------- ---------
Accrued postretirement benefit cost......................... $ 314,600 $ 130,403 $ 115,855
======== ========== =========
Net periodic postretirement benefit cost:
Service cost/benefits attributed to employee service during
the year.................................................... $ 5,969 $ 8,603 $ 5,625
Interest cost on accumulated post retirement benefit
obligation.................................................. 17,506 10,342 7,742
Amortization.................................................. (941) 655 (104)
===================================================================================================================
Net periodic postretirement benefit cost $ 22,534 $ 19,600 $ 13,263
===================================================================================================================
<FN>
*The 1995 data includes postretirement benefit obligations for The Continental
Corporation retirees.
</FN>
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 6. - (Continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Assumptions
December 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumptions used in determining net periodic benefit cost:
Discount rate................................................................. 8.50% 7.25% 8.25%
Rate of increase in compensation levels *..................................... 4.00 4.50 5.25
Assumptions used in determining the projected benefit obligation (liability):
Discount rate................................................................. 7.25% 8.50% 7.25%
Rate of increase in compensation levels *..................................... 2.75 4.00 4.50
- ------------------------------------------------------------------------------------------------------------------
<FN>
* Excludes age/service related merit and productivity increases.
</FN>
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 13% in 1995, declining 1% per year to an
ultimate rate of 5% in 2002. The health care cost trend rate assumption has a
significant effect on the amount of the benefit obligation and periodic cost
reported. An increase in the assumed health care cost trend rate of 1% in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1995 by $17.5 million and the aggregate net periodic postretirement
benefit cost for 1995 by $1.9 million.
Savings Plan
VFL is included in the CNA Employees' Savings Plan which is a contributory
plan which allows employees to make a regular contribution of up to 6% of their
salaries. VFL contributes an additional amount equal to 70% of the employee's
regular contribution. Employees may also make an additional contribution of up
to 10% of their salaries for which there is no additional contribution by CNA.
VFL contributions to the plan were $.7 million, $.5 million and $.5 million for
the years ended December 31, 1995, 1994 and 1993, respectively, and $.5 million
(unaudited) and $.4 million (unaudited)for the six months ended June 30, 1996
and 1995, respectively.
NOTE 7. INCOME TAXES:
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included in the consolidated
Federal income tax return with CNA and its eligible subsidiaries (CNA Tax
Group), which in turn is consolidated in the Loews Federal income tax return.
The Federal income tax provision of VFL is computed as if VFL were filing its
own separate return.
VFL maintains a special tax memorandum account designated as the
"Shareholder's Surplus Account." Dividends from this account may be distributed
to the shareholder without resulting in any additional tax. At December 31,
1995, the amount in the Shareholder's Surplus Account was $95 million. Another
tax memorandum account, defined as the "Policyholders' Surplus Account," totaled
$5 million at December 31, 1995. No further additions to this account are
allowed. Amounts accumulated in the Policyholders' Surplus Account are subject
to income tax if distributed to the shareholder. VFL has not provided for such a
tax as VFL has no plans for such a distribution.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 7. - (Continued):
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
VFL's deferred tax assets and liabilities as of December 31, 1995 and 1994 and
March 31, 1996 are shown in the table below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Components of Deferred Tax Assets and Liabilities
December 31, June 30,
--------------------------
(In thousands of dollars) 1995 1994 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Unaudited)
Life insurance reserve differences................. $ 15,900 $ 13,372 $ 17,013
Deferred acquisition costs......................... (14,382) (11,978) (18,040)
Investment valuation............................... 2,518 2,450 3,051
Unrealized investment (gains) losses............... (7,342) 1,686 1,072
Receivables........................................ 661 (524) (1,382)
Other, net......................................... (546) 1,284 1,859
==================================================================================================
Net deferred tax assets (liabilities) $ (3,191) $ 6,290 $ 3,573
==================================================================================================
</TABLE>
At December 31, 1995, gross deferred tax assets and liabilities amounted to
$20.1 million and $23.3 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1994, amounted to $19.2 million and $12.9 million,
respectively. At June 30, 1996, gross deferred tax assets and liabilities
amounted to $24.4 million (unaudited) and $20.8 million (unaudited),
respectively.
VFL has not established a valuation reserve at December 31, 1995 as it
believes that all deferred tax assets are fully realizable. VFL has a past
history of profitability and anticipates future taxable income sufficient to
support its deferred tax balances at December 31, 1995, including but not
limited to the reversal of existing temporary differences and the implementation
of tax planning strategies, if needed.
<PAGE>
<TABLE>
<CAPTION>
Significant components of VFL's income tax provision are as follows:
- --------------------------------------------------------------------------------------------------------------
Provision for Income Tax (Expense) Benefit Six Months Ended
Year Ended December 31 June 30
---------------------------------- --------------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Current tax (expense) benefit on:
Ordinary income............................ $ (7,417) $ (5,603) $ (3,213) $ (1,396) $ (3,681)
Realized investment gains/losses........... (4,330) 1,326 (1,326) (1,320) (4,407)
---------- -------- ---------- ---------- -----------
Total current tax expense............ (11,747) (4,277) (4,539) (2,716) (8,088)
--------- --------- ---------- ---------- -----------
Deferred tax (expense) benefit on:
Ordinary income (loss)..................... 41 (78) 799 (1,660) (208)
Realized investment gains/losses........... (494) 250 5 10 8
---------- --------- ----------- ---------- -----------
Total deferred tax (expense) benefit. (453) 172 804 (1,650) (200)
==============================================================================================================
Total income tax expense $ (12,200) $ (4,105) $ (3,735) $(4,366) $(8,288)
==============================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 7. - (Continued):
A reconciliation of the expected income tax resulting from the use of
statutory tax rates to the effective income tax follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Reconciliation of Expected and Effective Taxes Six Months Ended
Year Ended December 31 June 30
------------------------------ ---------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Expected tax expense on ordinary income at statutory rates. $ (7,325) $(5,623) $(2,474) $(3,049) $(3,864)
State income tax deduction................................. 27 23 22 9 14
State income taxes......................................... (78) (66) (63) (24) (39)
Effect of 1% change in tax rate on January 1, 1993
deferred tax - - 102 - -
balance.................................................
Other items, net........................................... - (15) (1) 9 -
--------- --------- --------- --------- ---------
Income tax expense on ordinary income................... (7,376) (5,681) (2,414) (3,055) (3,889)
Income tax (expense) benefit on realized investment
gains/losses at statutory rates............................ (4,824) 1,576 (1,321) (1,311) (4,399)
====================================================================================================================
Income tax expense $(12,200) $(4,105) $(3,735) $(4,366) $(8,288)
====================================================================================================================
</TABLE>
<PAGE>
NOTE 8. REINSURANCE:
The effects of reinsurance on premium revenues are shown in the following
schedule:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Premiums Assumed/Net
-------------------------------------------------
(In millions of dollars) Direct Assumed Ceded Net %
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31
1995
Life................................. $ 316,011 $ 75,053 $ 316,577 $ 74,487 101%
Accident and Health.................. 422 222,166 422 222,166 100
--------- ---------- -------- ---------
Total............................ $ 316,433 $ 297,219 $ 316,999 $ 296,653 100
========= ========== ======== =========
1994
Life................................. $ 187,834 $ 49,998 $ 189,163 $ 48,669 103
Accident and Health.................. 468 214,311 468 214,311 100
--------- --------- --------- ----------
Total............................ $ 188,302 $ 264,309 $ 189,631 $ 262,980 101
========= ========= ========= ==========
1993
Life................................. $ 171,624 $ 41,083 $ 173,157 $ 39,550 104
Accident and Health.................. 525 201,295 525 201,295 100
--------- --------- ---------- -----------
Total........................... $ 172,149 $ 242,378 $ 173,682 $ 240,845 101
========= ========= ========== ===========
Six Months Ended June 30 (Unaudited)
1996
Life................................. $ 246,899 $ 36,649 $ 247,692 $ 35,856 102
Accident and Health.................. 399 124,365 399 124,365 100
--------- -------- ---------- ----------
Total........................... $ 247,298 $161,014 $ 248,091 $ 160,221 100
========= ======== ========== ==========
1995
Life................................. $ 137,843 $ 34,976 $ 139,215 $ 33,604 104
Accident and Health.................. 225 109,291 225 109,291 100
---------- --------- ---------- ----------
Total........................... $ 138,068 $ 144,267 $ 139,440 $ 142,895 101
========== ========= ========== ==========
=============================================================================================================
</TABLE>
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 8. - (Continued):
In the table above, the majority of Life premium revenue is from long
duration type contracts, while the Accident and Health premium revenue is
generally short duration.
Transactions with Assurance, as part of the pooling agreement, are reflected
in the above table. Premium revenues ceded to non-affiliated companies were $9.9
million, $7.5 million and $6.5 million for the years ended December 31, 1995,
1994 and 1993, respectively, and $10.5 million (unaudited) and $4.9 million
(unaudited) for the six-month periods ended June 30, 1996 and 1995,
respectively. Additionally, insurance claims and policyholders' benefits
recoveries from non-affiliated companies were $6.1 million, $3.0 million and
$4.2 million for the years ended December 31, 1995, 1994 and 1993, respectively,
and $4.7 million (unaudited) and $.9 million (unaudited) for the six-month
periods ended June 30, 1996 and 1995, respectively.
The insurance reserves included in the accompanying balance sheet are
stated at the net amount of VFL's participation pursuant to the intercompany
pooling. Insurance reserves related only to VFL's direct and assumed
(non-affiliate) business were $1,067.8 million and $916.0 million at December
31, 1995 and 1994, respectively, and $1,180.6 million (unaudited) at June 30,
1996.
The impact of reinsurance, including transactions with Assurance, on life
insurance in force is shown in the following schedule:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Life Insurance in Force Assumed/Net
-------------------------------------------------------------
(In millions of dollars) Direct Assumed Ceded Net %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31
1995............................. $57,138 $16,996 $58,442 $15,692 108.3%
1994............................. 22,933 13,215 24,112 12,036 109.8
1993............................. 18,043 11,835 19,338 10,540 112.3
Six Months Ended June 30 (Unaudited)
1996............................. 82,466 19,792 83,770 18,488 107.1
1995............................. 35,521 14,799 36,704 13,616 108.7
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The ceding of insurance does not discharge primary liability of the original
insurer. VFL places reinsurance with other carriers only after careful review of
the nature of the contract and a thorough assessment of the reinsurers' credit
quality and claim settlement performance.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 9. RELATED PARTIES:
As discussed in Note 1, VFL is party to a pooling agreement with its
parent, Assurance. In addition, the Company is party to the CNA Intercompany
Expense Agreement whereby expenses incurred by CNA and each of its subsidiaries
are allocated to the appropriate company. All acquisition and underwriting
expenses allocated to the Company are further subject to the Intercompany
Pooling Agreement, so that acquisition and underwriting expenses recognized by
the Company approximates ten percent of the combined acquisition and
underwriting expenses of the Company and Assurance. Expenses of VFL exclude
$5.5, $4.1 and $3.8 million of general and administrative expenses incurred by
VFL and allocated to CNA for the years ended December 31, 1995, 1994 and 1993,
respectively, and $6.0 and $2.7 million for the unaudited six-month periods
ended June 30, 1996 and 1995. VFL had a $4.9 million affiliated receivable
included in other assets at December 31, 1995, a $50.4 million affiliated
payable at December 31, 1994 and a $62.2 million (unaudited) affiliated payable
at June 30, 1996 for net cash settlements related to pooling and general expense
reimbursements to Casualty in the normal course of operations.
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.
<PAGE>
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 11. BUSINESS SEGMENTS:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Six Month Period
Year Ended December 31 Ended June 30
-------------------------------------------- -----------------------------
(In thousands of dollars) 1995 1994 1993 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Revenues
Individual........................... $ 69,577 $ 52,812 $ 42,721 $ 33,431 $ 30,628
Group................................ 263,388 237,716 217,703 142,658 129,614
Realized gains (losses).............. 13,783 (4,502) 3,773 3,745 12,568
---------- ---------- --------- ---------- ---------
Total........................ $ 346,748 $ 286,026 $ 264,197 $ 179,834 $ 172,810
========= ========= ========= ========= ========
Income Before Income Tax
Individual........................... $ 8,611 $ 4,794 $ 1,318 $ 4,199 $ 4,660
Group................................ 12,316 11,295 5,751 4,514 6,381
Realized gains (losses).............. 13,783 (4,502) 3,773 3,745 12,568
---------- --------- ---------- ---------- ----------
Total........................ $ 34,710 $ 11,587 $ 10,842 $ 12,458 $ 23,609
========== ======== ========= ========== =========
Net Income
Individual........................... $ 5,597 $ 3,119 $ 885 $ 2,742 $ 3,030
Group................................ 7,954 7,289 3,770 2,916 4,122
Realized gains (losses).............. 8,959 (2,926) 2,452 2,434 8,169
---------- ---------- ---------- ---------- ----------
Total........................ $ 22,510 $ 7,482 $ 7,107 $ 8,092 $ 15,321
========= ========== ========= ========== =========
Assets
Individual........................... $ 307,582 $ 307,884 $ 272,948 $ 313,218 $ 310,840
Group................................ 317,238 244,952 202,944 374,577 291,432
---------- ----------- ------------ ---------- ---------
Total........................ $ 624,820 $ 552,836 $ 475,892 $ 687,795 $ 602,272
========== =========== ============ ========== =========
</TABLE>
Assets and investment income are allocated to business segments based on
cash flows after attribution of separately identifiable assets. Income taxes
have been allocated on the basis of taxable operating income of the respective
segments.
Group revenues include $187.0 million, $179.4 million and $165.9 million
for the years ended December 31, 1995, 1994 and 1993, respectively, and $103.6
million and $90.9 million for the unaudited six-month periods ended June 30,
1996 and 1995, respectively, under contracts covering U.S. government employees
and their dependents.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available which contains more details
concerning subjects discussed in this prospectus. The following is the Table of
Contents for that Statement of Additional Information.
PERFORMANCE INFORMATION.....................................................
Money Market Subaccount Yields.....................................
Other Subaccount Yields............................................
Average Annual Total Returns.......................................
Other Total Returns................................................
Effect of the Annual Administration Fee on Performance Data........
VARIABLE ANNUITY PAYMENTS...................................................
Annuity Unit Value.................................................
Illustration of Calculation of Annuity Unit Value..................
Illustration of Variable Annuity Payments..........................
VALUATION DAYS..............................................................
OTHER INFORMATION...........................................................
FINANCIAL STATEMENTS........................................................
ISSUED BY:
Valley Forge Life Insurance Company
CNA Plaza
Chicago, Illinois 60685
Attn: Secretary 43S
DISTRIBUTED BY:
CNA Investor Services, Inc.
CNA Plaza 34S
Chicago, Illinois 60685
SERVICE CENTER:
Financial Administration Services, Inc.
95 Bridge Street
Haddam, Connecticut 06438
<PAGE>
APPENDIX A
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option, by
the Market Value Adjustment Factor. The Market Value Adjustment factor is
calculated as follows:
Market Value Adjustment = Amount multiplied by
[[(1+a)/(1+b)]^n/12 -1]
where:
"Amount" is the amount being surrendered, withdrawn, transferred or
applied to an Annuity Payment Option less any applicable
annual administration fees or transfer processing fees;
"a" is the Guaranteed Interest Rate currently being credited to the
"Amount"; and
"b" is the Guaranteed Interest Rate that is currently being offered for a
Guarantee Period of duration equal to the time remaining to the
expiration of the Guarantee Period for the Guarantee Amount from which
the "Amount" is taken. Where the time remaining to the expiration of
the Guarantee Period is not 1, 3, 5, 7, or 10 years, "b" is the rate
found by linear interpolation of the rate for the Guarantee Period
having the duration closest to the time remaining or, if the time
remaining is less than 1 year, "b" is the rate for a 1 year period; and
"n" is the number of complete months remaining before the expiration of the
Guarantee Period for the Guarantee Amount from which the "Amount" is
taken.
As an example of calculating "b" by linear interpolation, if the time remaining
to the expiration of the Guarantee Period is 4.5 years, the interpolated
Guaranteed Interest Rate is equal to the sum of one-fourth of the three-year
Guaranteed Interest Rate and three-fourths of the five-year Guaranteed Interest
Rate. If the three-year Guaranteed Interest Rate is 4.5% and the five-year
Guaranteed Interest Rate is 5%, the interpolated Guaranteed Interest Rate equals
4.875% -- that is, 4.5% multiplied by 0.25 plus 5% multiplied by 0.75.
The Market Value Adjustment is computed as in the following examples:
1. Assume that the Owner selects a 7 year Gurantee Period and that the Company
is crediting a 4.5% effective annual interest rate on the amount allocated or
transferred to such Guarantee Period. Assume also that 55 months into the 7-year
Period (seven months into the fifth year), the Owner withdraws $7,500.
<PAGE>
If at the time of the withdrawal the Company is offering a 2.5%
effective annual rate of interest on Guarantee Periods of 3 years and a 2.0%
effective annual rate of interest on Guarantee Periods of 1 year, then:
i = 0.04500
j = 0.02354 = (0.025 * 17/24) + (0.02 * 7/24) = linear interpolation
between the 3 year rate and the 1 year rate
The MVA factor = [(1.045000)/(1.02354)]^(29/12) -1 = 0.05142
MVA = $7,500.00 * 0.05142 = $385.65
Amount received = $7,500 + $385.65 = $7,885.65
If at the time of the withdrawal the Company is offering a 5.75%
effective annual rate of interest on Guarantee Periods of 3 years and a 6.5%
effective annual rate of interest on Guarantee Periods of 1 year, then:
i = 0.04500
j = 0.05969 = (0.0575 * 17/24) + (0.065 * 7/24) = linear interpolation
between the 3 year rate and the 1 year rate
The MVA factor = [(1.045000)/(1.05969)]^(29/12) -1 = 0.03317
MVA = $7,500.00 * -0.03317 = -$248.78
Amount received = $7,500 - $248.78 = $7,251.22
<PAGE>
APPENDIX B
DEATH BENEFIT EXAMPLES
Assume that an Owner makes purchase payments on the first day of certain
Contract Years as shown in the table below. Assume also that the Owner withdraws
$7,500 during the seventh month of Contract Year five and $5,000 at the begining
of Contract Years thirteen and fifteen. Assume that the Annuitant is younger
that age 76 for all twenty years. All "begining of year death benefits" are
computed as of the first day of the Contract Year except for the figure for
Contract Year 5 which is computed as of the seventh month of that year (i.e., as
of the time of the $7,500 withdrawal).
Explanations:
The Death Benefit at the beginning of Contract Years 1 through 4 is
determined from the Contract Value at the end of the prior Contract
Year plus the purchase payment made at the beginning of the year for
which the computation is being made.
The Death Benefit at the end of month 7 of Contract Year 5 is
determined from the prior year's Contract Value plus the purchase
payment made at the beginning of that year, minus the $7,500 withdrawn
in the seventh month minus a $318.75 surrender charge assessed in
connection with the withdrawal.
The Death Benefit at the beginning of Contract Years 6 through 10 is
determined from the Contract Value at the end of the prior Contract
Year plus the purchase payment made at the beginning of the Year for
which the computation is being made. Since the first day of Contract
Year 6 is a minimum death benefit floor computation anniversary, a new
death benefit floor amount is set at $8,506.
The Death Benefit at the beginning of Contract Year 11 is determined
solely from the prior Year's Contract Value. Since this is a minimum
death benefit floor computation anniversary, a new death benefit floor
amount is set at $42,610.
The Death Benefit at the beginning of Contract Year 12 is determined
from the minimum death benefit which is the most recently reset death
benefit floor amount of $42,610. This is so because the Contract Value
declined and no purchase payments or withdrawals occured since the
prior reset of the death benefit floor amount.
The Death Benefit at the beginning of Contract Year 13 is determined
from the minimum death benefit which is the most recently reset death
benefit floor amount of $42,610 adjusted for the $5,000 withdrawal. The
$36,762 results from $42,610 being multiplied by $31,432/$36,432.
The Death Benefit at the beginning of Contract Year 14 is the minimum
death benefit which is the most recently reset death benefit floor
amount adjusted for the $5,000 withdrawal made since that floor amount
was set, or $36,762.
The Death Benefit at the beginning of Contract Year 15 is the minimum
death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for both $5,000 withdrawals made since that
floor amount was set. The $28,372 results from $42,610 being multiplied
by $31,432/$36,432, and this result multiplied by $16,908/$21,908.
<PAGE>
The Death Benefit at the beginning of Contract Year 16 is the minimum
death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for both $5,000 withdrawals made since that
floor amount was set. The $28,372 results from $42,610 being multiplied
by $31,432/$36,432, and this result multiplied by $16,908/$21,908. Even
though this is a death benefit floor computation anniversary, the death
benefit floor amount is not reset since the Contract Value has not
exceeded its previous high of $42,610 occurring in Contract Year 10. No
purchase payments or withdrawals were made.
The Death Benefit at the beginning of Contract Year 17 through 20 is
the minimum death benefit which is the most recently reset death
benefit floor amount of $42,610 adjusted for both $5,000 withdrawals
made 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>
|==============|==============|================|=================|=================|===============|==============|
<S> <C> <C> <C> <C> <C> <C>
|Beginning of | Purchase | Withdrawals | Accumulated Net| End of Year | End of Year | Beginning of |
|Contract Year | Payments | | Purchase | Accumulation | Contract Value| Year Death |
| | | | Payments | Unit Value | | Benefit |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 1 | $ 2,000 | $ 0 | $ 2,000 | 10.50000 | $ 2,100 | $ 2,000 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 2 | $ 2,000 | $ 0 | $ 4,000 | 11.23500 | $ 4,387 | $ 4,100 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 3 | $ 2,500 | $ 0 | $ 6,500 | 12.13380 | $ 7,438 | $ 6,887 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 4 | $ 3,000 | $ 0 | $ 9,500 | 13.34718 | $11,482 | $10,438 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 5 | $ 4,000 | $ 7,500 | $ 6,000 | 14.81537 | $ 8,506 | $ 7,663 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 6 | $ 5,000 | $ 0 | $11,000 | 16.59321 | $15,127 | $13,506 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 7 | $ 5,000 | $ 0 | $16,000 | 18.25254 | $22,139 | $20,127 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 8 | $ 5,000 | $ 0 | $21,000 | 19.71274 | $29,310 | $27,139 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 9 | $ 5,000 | $ 0 | $26,000 | 20.89550 | $36,369 | $34,310 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 10 | $ 5,000 | $ 0 | $31,000 | 21.52237 | $42,610 | $41,369 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 11 | $ 0 | $ 0 | $31,000 | 20.44625 | $40,480 | $42,610 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 12 | $ 0 | $ 0 | $31,000 | 18.40162 | $36,432 | $42,610 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 13 | $ 0 | $ 5,000 | $26,000 | 15.64138 | $26,717 | $36,762 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 14 | $ 0 | $ 0 | $26,000 | 12.82593 | $21,908 | $36,762 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 15 | $ 0 | $ 5,000 | $21,000 | 13.46723 | $17,753 | $28,372 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 16 | $ 0 | $ 0 | $21,000 | 14.14059 | $18,641 | $28,372 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 17 | $10,000 | $ 0 | $31,000 | 14.14059 | $28,641 | $38,372 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 18 | $ 0 | $ 0 | $31,000 | 13.43356 | $27,209 | $38,372 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 19 | $ 0 | $ 0 | $31,000 | 13.43356 | $27,209 | $38,372 |
|--------------|--------------|----------------|-----------------|-----------------|---------------|--------------|
| 20 | $ 0 | $ 0 | $31,000 | 13.97090 | $28,297 | $38,372 |
|==============|==============|================|=================|=================|===============|==============|
</TABLE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Flexible Premium Deferred Variable Annuity Contract
Issued by
Valley Forge Life Insurance Company
and
Valley Forge Life Insurance Company Variable Annuity Separate Account
THIS STATEMENT OF ADDITIONAL INFORMATION, DATED SEPTEMBER 4, 1996, IS NOT A
PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS DATED SEPTEMBER 30, 1996 FOR THE VALLEY FORGE
LIFE INSURANCE COMPANY FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT WHICH
IS REFERRED TO HEREIN.
THE PROSPECTUS SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR SHOULD KNOW
BEFORE PURCHASING A CONTRACT. FOR A COPY OF THE PROSPECTUS, SEND A WRITTEN
REQUEST TO THE SERVICE CENTER AT 95 BRIDGE STREET, HADDAM, CONNECTICUT 06438, OR
BY TELEPHONE AT 1-800-808-4537.
<PAGE>
TABLE OF CONTENTS
PERFORMANCE INFORMATION ....................................................
Money Market Subaccount Yields ....................................
Other Subaccount Yields ...........................................
Average Annual Total Returns ......................................
Other Total Returns ...............................................
Effect of the Annual Administration Fee on Performance Data .......
VARIABLE ANNUITY PAYMENTS ..................................................
Annuity Unit Value ................................................
Illustration of Calculation of Annuity Unit Value .................
Illustration of Variable Annuity Payments .........................
VALUATION DAYS .............................................................
OTHER INFORMATION ..........................................................
FINANCIAL STATEMENTS .......................................................
<PAGE>
PERFORMANCE INFORMATION
From time to time, the Company may disclose yields, total returns, and other
performance data pertaining to the Contracts for a Subaccount. Such performance
data will be computed, or accompanied by performance data computed, in
accordance with the standards defined by the SEC.
Because of the charges and deductions imposed under a Contract, the yield for
the Subaccounts will be lower than the yield for their respective Funds. The
calculations of yields, total returns and other performance data do not reflect
the effect of any premium tax that may be applicable to a particular Contract.
Premium taxes currently range from 0% to 3.5% of the annuity considerations
(purchase payments) based on the jurisdiction in which the Contract is sold.
MONEY MARKET SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of the Money Market Subaccount for a seven-day period in a
manner that does not take into consideration any realized or unrealized gains or
losses on shares of the Money Market Fund or on that Fund's portfolio
securities.
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) at the end of the seven-day period in the value
of a hypothetical account under a Contract having a balance of one unit of the
Money Market Subaccount at the beginning of the period, dividing such net change
in account value by the value of the hypothetical account at the beginning of
the period to determine the base period return, and annualizing this quotient on
a 365-day basis. The net change in account value reflects: 1) net income from
the Subaccount attributable to the hypothetical account; and 2) charges and
deductions imposed under the Contract that are attributable to the hypothetical
account. The charges and deductions include the per unit charges for the
hypothetical account for: 1) the annual administration fee; 2) the mortality and
expense risk charge; and 3) the asset-based administration charge. For purposes
of calculating current yields for a Contract, an average per unit annual
administration fee is used based on the $30 annual administration fee deducted
for the prior Contract Year as of the Contract Anniversary. Current Yield is
calculated according to the following formula:
Current Yield = ((NCS - ES)/UV) x (365/7)
Where:
NCS = the net change in the value of the Money Market
Subaccount (exclusive of realized gains or losses on
the sale of securities and unrealized appreciation
and depreciation) for the seven-day period
attributable to a hypothetical account having a
balance of 1 Subaccount unit.
ES = per unit expenses attributable to the hypothetical
account for the seven-day period.
UV = the unit value for the first day of the seven-day
period.
<PAGE>
Effective Yield = (1 + ((NCS-ES)/UV))^365/7 - 1
Where:
NCS = the net change in the value of the Money Market
Subaccount (exclusive of realized gains or losses on
the sale of securities and unrealized appreciation
and depreciation) for the seven-day period
attributable to a hypothetical account having a
balance of 1 Subaccount unit.
ES = per unit expenses attributable to the hypothetical
account for the seven-day period.
UV = the unit value for the first day of the seven-day
period.
Because of the charges and deductions imposed under the Contract, the yield for
the Money Market Subaccount is lower than the yield for the Money Market Fund.
The current and effective yields on amounts held in the Money Market Subaccount
normally fluctuate on a daily basis. THEREFORE, THE DISCLOSED YIELD FOR ANY
GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE YIELDS OR
RATES OF RETURN. The Money Market Subaccount's actual yield is affected by
changes in interest rates on money market securities, average portfolio maturity
of the Money Market Fund, the types and quality of portfolio securities held by
the Fund and the Fund's operating expenses. Yields on amounts held in the Money
Market Subaccount may also be presented for periods other than a seven-day
period.
Yield calculations do not take into account the surrender charge under the
Contract equal to 4% to 7% of certain purchase payments during the five full
years between the date of receipt of the purchase payment and the date of
surrender or withdrawal.
OTHER SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of one or more of the Subaccounts (except the Money Market
Subaccount) for a Contract for 30-day or one-month periods. The annualized yield
of a Subaccount refers to income generated by the Subaccount during a 30-day or
one-month period and is assumed to be generated each period over a 12-month
period.
The yield is computed by: 1) dividing the net investment income of the Fund
attributable to the Subaccount units less Subaccount expenses for the period; by
2) the maximum offering price per unit on the last day of the period times the
daily average number of units outstanding for the period; by 3) compounding that
yield for a six-month period; and by 4) multiplying that result by 2. Expenses
attributable to the Subaccount include the annual administration fee, the
asset-based administration charge and the mortality and expense risk charge. The
yield calculation assumes an annual administration fee of $30 per year per
Contract deducted for the prior Contract Year as of the Contract Anniversary.
For purposes of calculating the 30-day or one-month yield, an average
administration fee based on the average Variable Account Value is used to
determine the amount of the charge attributable to the Subaccount for the 30-day
or one-month period. The 30-day or one-month yield is calculated according to
the following formula:
<PAGE>
Yield = 2 X (((NI - ES)/(U X UV) + 1)^6 - 1)
Where:
NI = net income of the Fund for the 30-day or one-month
period attributable to the Subaccount's units.
ES = expenses of the Subaccount for the 30-day or
one-month period.
U = the average number of units outstanding.
UV = the unit value at the close (highest) of the last
day in the 30-day or one-month period.
Because of the charges and deductions imposed under the Contracts, the yield for
the Subaccount is lower than the yield for the corresponding Fund.
The yield on the amounts held in the Subaccounts normally fluctuates over time.
THEREFORE, THE DISCLOSED YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR
REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. A Subaccount's actual yield
is affected by the types and quality of the securities held by the corresponding
Fund and that Fund's operating expenses.
Yield calculations do not take into account the surrender charge under the
Contract equal to 4% to 7% of certain purchase payments during the five full
years between the date of receipt of the purchase payment and the date of
surrender or withdrawal.
AVERAGE ANNUAL TOTAL RETURNS
From time to time, sales literature or advertisements may quote standard average
annual total returns for one or more of the Subaccounts for various periods of
time.
When a Subaccount or Fund has been in operation for 1, 5, and 10 years,
respectively, the standard average annual total return for these periods will be
provided. Average annual total returns for other periods of time may, from time
to time, also be disclosed.
Standard average annual total returns 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. The ending date for each period for which total return
quotations are provided will be for the most recent calendar quarter-end
practicable, considering the type of the communication and the media through
which it is communicated.
Standard average annual total returns are calculated using Subaccount unit
values which the Company calculates on each Valuation Day based on the
performance of the Subaccount's underlying Fund, the deductions for the
mortality and expense risk charge, and the deductions for the asset-based
administration charge and the annual administration fee. The calculation assumes
that the annual administration fee is $30 per year per Contract deducted for the
prior Contract Year as of the Contract Anniversary. For purposes of calculating
standard average annual total return, an average per-dollar per-day annual
administration fee attributable to the hypothetical account for the period is
<PAGE>
used. The calculation also assumes surrender of the Contract at the end of the
period for the return quotation. Standard average annual total returns will
therefore reflect a deduction of the surrender charge for any period less than
six years. The standard average annual total return is calculated according to
the following formula:
TR = ((ERV/P)^1/N) - 1
Where:
TR = the average annual total return net of Subaccount
recurring charges.
ERV = the ending redeemable value (net of any applicable
surrender charge) of the hypothetical account at the
end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
From time to time, sales literature or advertisements may quote standard average
annual total returns for periods prior to the date the Variable Account
commenced operations. Such performance information for the Subaccounts is
calculated based on the performance of the various Funds and the assumption that
the Subaccounts were in existence for the same periods as those indicated for
the Funds, with the level of Contract charges that were in effect at the
inception of the Subaccounts.
Fund total return information used to calculate the standard average annual
total returns of the Subaccounts for periods prior to the inception of the
Subaccounts has been provided by the Funds. The Funds are not affiliated with
the Company. While the Company has no reason to doubt the accuracy of these
figures provided by the Funds, the Company has not independently verified the
accuracy of these figures.
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote average
annual total returns that do not reflect the surrender charge. These are
calculated in exactly the same way as standard average annual total returns
described above, except that the ending redeemable value of the hypothetical
account for the period is replaced with an ending value for the period that does
not take into account any charges on amounts surrendered or withdrawn.
The Company may disclose cumulative total returns in conjunction with the
standard formats described above. The cumulative total returns will be
calculated using the following formula:
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of Subaccount recurring charges
for the period.
<PAGE>
ERV = The ending redeemable value of the hypothetical
investment at the end of the period.
P = A hypothetical single payment of $1,000.
EFFECT OF THE ANNUAL ADMINISTRATION FEE ON PERFORMANCE DATA
The Contract provides for a $30 annual administration fee to be deducted
annually for each prior Contract Year as of the Contract Anniversary, from the
Subaccount Values and Guarantee Amounts based on the proportion that each bears
to the Contract Value. For purposes of reflecting the change in yield and total
return quotations, the charge is converted into a per-dollar per-day charge
based on the average Subaccount Value and Guarantee Amount of all Contracts on
the last day of the period for which quotations are provided. The per-dollar
per-day average charge will then be adjusted to reflect the basis upon which the
particular quotation is calculated.
VARIABLE ANNUITY PAYMENTS
ANNUITY UNIT VALUE
The value of an Annuity Unit is calculated at the same time that the value of an
Accumulation Unit is calculated and is based on the same values for Fund shares
and other assets and liabilities. (See "Annuity Payments" in the Prospectus.)
The Annuity Unit Value for each Subaccount's first Valuation Period was set at
$10. The Annuity Unit Value for a Subaccount for each subsequent 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.
The following illustrations show, by use of hypothetical examples, the method of
determining the Annuity Unit Value and the amount of several Variable Annuity
Payments based on one Subaccount.
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
1. Annuity Unit Value for immediately preceding
Valuation Period 10.00000000
2. Net Investment Factor 1.00036164
3. Daily factor to compensate for Benchmark Rate of
Return of 3% 1.00008099
<PAGE>
4. Adjusted Net Investment Factor (2)/(3) 1.00028063
5. Annuity Unit Value for current Valuation Period
(4)x(1) 10.00280630
ILLUSTRATION OF VARIABLE ANNUITY PAYMENTS
(assuming no premium tax is applicable)
1. Number of Accumulation Units at Annuity Date 1,000.00
2. Accumulation Unit Value 12.55548000
3. Adjusted Contract Value (1)x(2) $12,555.48
4. First monthly Annuity Payment per $1,000 of
adjusted Contract Value $ 9.63
5. First monthly Annuity Payment (3)x(4)/1,000 $ 120.91
6. Annuity Unit Value 10.00280630
7. Number of Annuity Units (5)/(6) 12.08760785
8. Assume Annuity Unit value for second month
equal to 10.04000000
9. Second Monthly Annuity Payment (7)X(8) $ 121.36
10. Assume Annuity Unit value for third month
equal to 10.05000000
11. Third Monthly Annuity Payment (7)X(10) $ 121.48
VALUATION DAYS
As defined in the prospectus, for each Subaccount a Valuation Day is 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.
OTHER INFORMATION
A registration statement has been filed with the SEC under the Securities Act of
1933, as amended, with respect to the Contracts discussed in this Statement of
Additional Information. Not all the information set forth in the registration
statement, amendments and exhibits thereto has been included in this Statement
of Additional Information. Statements contained in this Statement of Additional
Information concerning the content of the Contracts and other legal instruments
are summaries. For a complete statement of the terms of these documents,
reference should be made to the instruments filed with the SEC.
FINANCIAL STATEMENTS
This Statement of Additional Information contains no financial statements for
the Variable Account because the Variable Account had not yet commenced
operations, had no assets or liabilities, and had received no income nor
incurred any expenses as of the date of this Statement of Additional
Information. Financial statements of the Company are presented in the
prospectus.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Financial statements for Valley Forge Life Insurance Company (the
"Company") are included in Part A. Financial Statements for Valley
Forge Life Insurance Company Variable Annuity Separate Account (the
"Variable Account") are not included in Part B because the Variable
Account had not yet commenced operations as of the date of this
Registration Statement.
(b) Exhibits
(1) (a) Certified resolution of the board of directors of the
Company dated October 18, 1995, establishing the
Variable Account. *
(2) Copy of agreement for lockbox services.
(3) Form of underwriting agreement between the Company and CNA
Investor Services, Inc. ("CNA/ISI").
(4) (a) Form of Flexible Premium Deferred Variable Annuity
Contract (the "Contract"). *
(b) Form of Qualified Plan Endorsement. *
(c) Form of IRA Endorsement. *
(d) Form of Nursing Home Confinement, Terminal Medical
Condition, Total Disability Endorsement. *
(5) Contract Application. *
(6) (a) Articles of Incorporation of the Company. *
(b) By-Laws of the Company. *
(7) Not applicable.
(8) (a) Form of Participation Agreement between the Company
and Insurance Series.
(b) Form of Participation Agreement between the Company
and Variable Insurance Products Fund.
(c) Form of Participation Agreement between the Company
and The Alger American Fund.
<PAGE>
(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) Agreement with Third Party Administrator
(Financial Administrative Services, Inc.)
(9) Opinion and Consent of Lynne Gugenheim, Esquire.
(10) (a) Consent of Sutherland, Asbill & Brennan.
(b) Consent of Deloitte & Touche LLP.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(27) Financial Data Schedule.
*Incorporated by reference herein to the initial registration statement N-4 EL
dated February 20, 1996 (File # 333-1087).
ITEM 25. DIRECTORS AND OFFICERS OF THE COMPANY
Incorporated herein by reference to the section titled "Directors and
Executive Officers" of the prospectus filed as Part A of this
registration statement.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
DEPOSITOR OR REGISTRANT
The registrant is a segregated asset account of the Company and is therefore
owned and controlled by the Company. The Company is a stock life insurance
company of which all of the voting securities are owned by Continental Assurance
Company. Continental Assurance Company is owned by Continental Casualty Company,
a stock casualty insurance company organized under the Illinois Insurance Code,
the home office of which is located at CNA Plaza, Chicago, Illinois 60685. All
of the voting securities of Continental Casualty Company are owned by CNA
Financial Corporation, a Delaware corporation, CNA Plaza, Chicago, Illinois
60685. Loews Corporation, a Delaware Corporation, 667 Madison Avenue, New York,
New York 10021-8087, with interests in insurance, hotels, watches and other
timing devices, drilling rigs and tobacco, owned approximately 84% of the
outstanding voting securities of CNA Financial Corporation as of August 14,
1996. Laurence A. Tisch, the Chairman of the Board, Co-Chief Executive Officer
and a director of Loews Corporation and Chief Executive Office and a director of
CNA Financial Corporation and his brother, Preston R. Tisch, President, Co-Chief
Executive Officer and a director of CNA Financial and Loews corporation, owned,
in aggregate, approximately 32% of the outstanding common stock of Loews
Corporation as of August 14, 1996. Therefore, they may be deemed to be parents
of Loews Corporation and thus of CNA Financial Corporation, Continental Casualty
Company and the Company, within the meaning of the federal securities laws.
Various companies and other entities controlled by CNA Financial Corporation may
be considered to be under common control with the registrant or the Company.
Such other companies and entities, together with the identity of their
controlling persons (where applicable), are set forth below:
<PAGE>
<TABLE>
<CAPTION>
SUBSIDIARIES OF CNA
<S> <C>
PLACE OF
COMPANY INCORPORATION
Continental Pacific (Australia) Holding Limited
Australia
Continental Pacific Insurance Company (Australia) Limited
New South Wales
Continental Re Management, Inc.
New York
Continental Rehabilitation Resources, Inc.
New Jersey
Continental Reinsurance Corporation
California
Continental Reinsurance Corporation International Limited
Bermuda
Continental Reinsurance Corporation (U.K.) Limited
United Kingdom
Continental Reinsurance Management Company Limited
United Kingdom
Continental Reinsurance Management Holding Company Limited
United Kingdom
Continental Risk Services, Ltd.
Bermuda
Continental Risk Services (Barbados) Ltd.
Barbados
Continental Service Plan, Inc.
New Jersey
Continental Solution, Inc.
Illinois
Continental Subsidiary Corporation
Delaware
Continental Vision Financial Services, Inc.
Delaware
Convida Holdings Ltd and 1 Subsidiary
Bahamas
CPI Pension Services Inc.
California
Ctek, Inc.
New Jersey
Davies & Company Pty., Ltd.
Australia
East River Indemnity Company (Barbados), Ltd.
Barbados
East River Insurance Company Ltd.
West Indies
East River Insurance Company (Bermuda), Ltd.
Bermuda
Firemen's Insurance Company of Newark, New Jersey
New Jersey
First Benefit Services, Inc.
California
First Fire & Casualty Insurance Company of Hawaii, Inc.
Hawaii
First Indemnity Insurance of Hawaii, Inc.
Hawaii
First Insurance Company of Hawaii, Ltd.
Hawaii
Foundation Insurance Agency, Inc.
New Jersey
Galway Insurance Company
California
Global Management Consultants, Inc.
New Jersey
Hull & Cargo Surveyors, Inc.
New York
Hull & Cargo Surveyors, Inc. (Canada)
British Columbia
IDBI Managers, Inc.
New York
Kansas City Fire and Marine Insurance Company
Missouri
Larwin Developments, Inc.
California
LCI Finance Limited
United Kingdom
Lombard Continental Insurance Holdings Limited
United Kingdom
Marine Office of America Corporation
New York
Marine Office of America Corporation (Canada)
Ontario
Marine Office of America (Deutschland) GmbH
Germany
Marine Office of America Corporation Italia, Spa
Italy
Marine Office of America Corporation (U.K.) Ltd.
United Kingdom
Master Capital Corporation
Delaware
National Fire Insurance Company of Hartford (NFI)
Connecticut
National-Ben Franklin Insurance Company of Illinois
Illinois
Niagara Fire Insurance Company
Delaware
North Pearl Management, Inc.
Texas
Pacific Insurance Company
California
Pacific Underwriters, Inc.
Texas
Pension/Profit Sharing Systems, Inc.
California
Settlement Options, Inc.
New Jersey
TCC Acquisition Corp.
Delaware
TCC Holdings, Inc.
Delaware
TCC Properties, Inc.
New York
The Buckeye Union Insurance Company
Ohio
The Continental Corporation (CIC)
New York
The Continental Insurance Company
New Hampshire
The Continental Insurance Company of New Jersey
New Jersey
The Continental Insurance Company (Europe) Limited
United Kingdom
The Continental Insurance Company of Puerto Rico
Puerto Rico
The Continental Insurance Holdings (Europe) Limited
United Kingdom
The CPI Group, Inc.
Delaware
The Fidelity and Casualty Company of New York
New Hampshire
The Glens Falls Insurance Company
Delaware
The Hong Kong Fire Insurance Company, Ltd
Hong Kong
The Maiden Lane Syndicate Inc.
New York
The Mayflower Insurance Company, Ltd.
Indiana
The South Place Syndicate Inc.
New York
Transcontinental Insurance Company
New York
Transcontinental Technical Services, Inc. (ServCo)
Illinois
Transportation Insurance Company
Illinois
UAM Limited
United Kingdom
United States P & I Agency, Inc.
New York
Valley Forge Insurance Company
Pennsylvania
Valley Forge Life Insurance Company
Pennsylvania
Viaticus, Inc.
Delaware
Western National Warranty Corporation
Arizona
Zeuxis Corp. VIII
Delaware
</TABLE>
<PAGE>
ITEM 27. NUMBER OF CONTRACTOWNERS
Not applicable.
ITEM 28. INDEMNIFICATION
The registrant has no officers, directors or employees. The depositor
and the registrant do not indemnify the officers, directors of
employees of the depositor. CNA-Financial Corporation, ("CNAFC") a
parent of the depositor, indemnifies the depositor's officers,
directors and employees in their capacity as such. Most of the
depositor's officers, directors and employees are also officers,
directors and/or employees of CNAFC.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of CNAFC) by reason of the
fact that he is or was a director, officer, employee or agent of CNAFC,
or was serving at the request of CNAFC as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of CNAFC, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit
by or in the right of CNAFC to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or
agent of CNAFC, or was serving at the request of CNAFC as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of CNAFC. No indemnification is made,
however, in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to CNAFC unless and only to
the extent that a court determines that, despite the adjudication of
liability but in view of all of the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses
which the court deems proper.
To the extent that any person referred to above is successful on the
merits or otherwise in defense of any action, suit or proceeding
referred to above, or in defense of any claim, issue or matter therein,
CNAFC will indemnify such person against expenses (including attorney's
fees) actually and reasonably incurred by him in connection therewith.
CNAFC may advance to such a person, expenses incurred in defending a
civil or criminal action, suit or proceeding as authorized by CNAFC's
board of directors upon receipt of an undertaking by (or on behalf of)
such person to repay the amount advanced unless it is ultimately
determined that he is entitled to be indemnified.
Indemnification and advancement of expenses described above (unless
pursuant to a court order) is only made as authorized in the specific
case upon a determination that such indemnification or advancement of
expenses is proper in the circumstances because he has met the
applicable standard of conduct. Such determination must be made by a
majority vote of a quorum of CNAFC's board of directors who are not
parties to the action, suit or proceeding or by independent legal
counsel in a written opinion or by CNAFC's stockholders.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) CNA/ISI is the registrant's principal underwriter and also
serves as the principal underwriter of certain variable life
insurance contracts issued by the Company and certain variable
annuity contracts and variable life insurance contracts issued
by affiliates of the Company.
(b) Officers and Directors of CNA/ISI.
Kevin M. Hogan, CLU
CNA Plaza, 34S
Chicago, Illinois 60685
8/94-present President, CNA Investor Services, Inc.
Assistant Vice President,Continental Casualty Company
10/86-8/94 Assistant Vice President, Continental Casualty
Company, Home Office Human Resources
Ronald S. Chapon, CFP
CNA Plaza, 34 South
Chicago, Illinois 60685
5/80-Present Vice President, CNA Investor Services, Inc.
(c) Not applicable
ITEM 30. LOCATION BOOKS AND RECORDS
All of the accounts, books, records or other documents required to be
kept by Section 31(a) of the Investment Company Act of 1940 and rules
thereunder, are maintained by the Company at CNA Plaza, Chicago,
Illinois 60685, or 100 CNA Drive, Nashville, Tennessee 37214-3439, by
Financial Administration Services, Inc. at 95 Bridge Street, Haddam,
Connecticut 06438, and by CNA/ISI at CNA Plaza, Chicago, Illinois
60685.
<PAGE>
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B of this
registration statement.
ITEM 32. UNDERTAKINGS
(a) The registrant undertakes that it will file a post-effective
amendment to this registration statement as frequently as is
necessary to ensure that the audited financial statements in
the registration statement are never more than 16 months old
for as long as purchase payments under the Contracts offered
herein are being accepted.
(b) The registrant undertakes that it will include either (1) as
part of any application to purchase a Contract offered by the
prospectus, a space that an applicant can check to request a
statement of additional information, or (2) a post card or
similar written communication affixed to or included in the
prospectus that the applicant can remove to send for a
statement of additional information.
(c) The registrant undertakes to deliver any statement of
additional information and any financial statements required
to be made available under this Form N-4 promptly upon written
or oral request to the Company at the address or phone number
listed in the prospectus.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the registrant has caused this registration statement to be signed on its
behalf, in the City of Chicago, and the State of Illinois, on this 4th day of
September 4, 1996.
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY SEPARATE ACCOUNT
(Registrant)
S/DONALD M. LOWRY By: S/PETER E. JOKIEL
Attest: __________________ ____________________________
Donald M. Lowry Peter E. Jokiel
Senior Vice President, Senior Vice President,
Secretary and General Counsel Chief Financial Officer,
Director
VALLEY FORGE LIFE INSURANCE COMPANY
(Depositor)
S/DONALD M. LOWRY By: S/PETER E. JOKIEL
Attest: ___________________ ___________________________
Donald M. Lowry Peter E. Jokiel
Senior Vice President, Senior Vice President,
Secretary and General Counsel Chief Financial Officer,
Director
As required by the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
_____________________________ ________________________________ __________________
S/DENNIS H. CHOOKASZIAN
_____________________________ Chairman of the Board, September 4, 1996
Dennis H. Chookaszian Chief Executive Officer, Director
S/PHILIP L. ENGEL
_____________________________ President, Director September 4, 1996
Philip L. Engel
S/WILLIAM J. ADAMSON
_____________________________ Senior Vice President September 4, 1996
William J. Adamson
S/JAMES P. FLOOD
_____________________________ Senior Vice President September 4, 1996
James P. Flood
S/MICHAEL C. GARNER
_____________________________ Senior Vice President September 4, 1996
Michael C. Garner
S/BERNARD L. HENGESBAUGH
_____________________________ Senior Vice President September 4, 1996
Bernard L. Hengesbaugh
S/PETER E. JOKIEL
_____________________________ Senior Vice President,
Peter E. Jokiel Chief Financial Officer, Director September 4, 1996
S/JACK KETTLER
_____________________________ Senior Vice President September 4, 1996
Jack Kettler
S/DONALD M. LOWRY
____________________________ Senior Vice President, September 4, 1996
Donald M. Lowry Secretary, General Counsel,
Director
S/CAROLYN L. MURPHY
_____________________________ Senior Vice President September 4, 1996
Carolyn L. Murphy
S/WILLIAM H. SHARKEY, JR.
_____________________________ Senior Vice President, September 4, 1996
William H. Sharkey, Jr. Director
S/WAYNE R. SMITH, III
_____________________________ Senior Vice President September 4, 1996
Wayne R. Smith, III
S/ADRIAN M. TOCKLIN
_____________________________ Senior Vice President September 4, 1996
Adrian M. Tocklin
S/JAE L. WITTLICH
_____________________________ Senior Vice President September 4, 1996
Jae L. Wittlich
S/DAVID W. WROE
_____________________________ Senior Vice President September 4, 1996
David W. Wroe
</TABLE>
Exhibit 2
Valley Forge Life Insurance Company
Lockbox 30956 8/22/96
August 22, 1996
Mr. Tino Aurigemma
Assistant Vice President
Insurance Industry / Mutual Funds
Fleet Bank
777 Main Street, MSN 250
Hartford, CT 06115
RE: Valley Forge Life Insurance Company Lockbox 30956
Dear Tino:
For purposes of effecting quicker presentation and collection of our variable
life, variable annuity and variable index annuity remittances, we, Valley Forge
Life Insurance Company (VFL), hereby authorize you, Fleet Bank, to have
exclusive and unrestricted access to our Hartford, Connecticut, Post Office Box
Number 30956, zip code 06150, which you have rented in our name.
Effective 9/1/96, we will instruct remittances to be forwarded to P. O. Box
30956, and, thereafter, you are specifically authorized to:
I. Mail Collection
Collect the mail from our lockbox according to standard operating
procedures in place at Fleet Bank, Sunday through Saturday. All work
collected from the post office each day is to be processed and checks
are to be deposited on a same day basis with the exception of
Saturdays, Sundays, and bank holidays, which will be credited on the
next business day.
II. Acceptable and Exception Item Processing
Envelopes and media will be inspected and processed as follows:
A. Date
Checks dated 6 or more months before the current day are NOT to
be processed. The unprocessed items will be inserted in their
envelopes, appropriately marked, included in our lockbox
package, but segregated from other unprocessed work and returned
daily in the lockbox package.
Checks postdated within a 3 business day period of receipt are
to be processed as normal. Checks postdated longer than 3
business days are NOT to be processed but are to be inserted in
their envelopes, appropriately marked and included in our
lockbox package.
Checks without a date are to have the postmark date inserted on
the check and processed as normal. If the post mark date is not
available, insert the current date and process as normal.
B. Amounts
Checks with no amount indicated are NOT to be processed but are
to be inserted in their envelopes, appropriately marked and
included in our lockbox package.
Checks with a written amount but no numeric field or vice a
versa will be processed using either the written or numeric field value.
If the written and numeric amount differ, process using the
written amount.
C. Signature
In the absence of signature, process as normal.
D. Payees
Checks payable to us bearing any of the following names or any
abbreviation or variation thereof are to be processed. Checks
bearing any other payee are not to be processed. The items are
to be inserted in their envelopes, appropriately marked,
included in our lockbox package, but segregated with other
unprocessed work.
CNA Insurance VFL
CNA Valley Forge Life
Insurance From CNA Continental National American Group
Continental Casualty Company Transportation Insurance Company
CCC Transcontinental Insurance Company
Continental Assurance Company National Fire Ins. Co. of Hartford
CAC American Casualty Co. of Reading PA
CNA Casualty of California Columbia Casualty Company
Any variation of the above
Checks without a payee will have Valley Forge Life Insurance
Company inserted in the payee location and be processed as
normal.
E. Qualifying Statements
Checks bearing handwritten, typed, or preprinted as part of the
check form, a restricted legend (paid-in-full, final payment, or
words of similar meaning) are to be processed as normal.
F. Foreign Currency
Checks drawn on a foreign bank payable in US currency with
appropriate MICR information will receive normal processing. All
other checks drawn on foreign banks payable in US currency are
to be entered for collection. A photocopy of the check, the
foreign check acknowledgment document, and any correspondence
will be stapled to the envelope, appropriately marked, and
included in our lockbox package. Any item not payable in US
currency is not to be processed . All checks found to be
unacceptable for deposit are to be retained in their related
envelopes, batched together, marked appropriately and included
in our lockbox package.
G. Other Unprocessable Items
All checks found to be unacceptable for deposit are to be
retained in their related envelopes, batched together, marked
appropriately, and included in our lockbox package.
III. Deposit Instructions
Acceptable items should be deposited and processed as follows:
A. Prepare photocopy of each check and staple to the front of the
supporting documentation and envelope.
B. Each check is to be endorsed with lockbox number 30956 and
deposited to VFL account number 9369383188. It is understood
that the preparation of checks for deposit will be cut off at
various times throughout the day depending upon volume and
availability cut-off times. Deposits will be made based on these
cut-off times with the final deposit to be processed in time to
receive same day ledger credit.
C. Prepare a detail credit advice for each deposit batch (no more
than 50 checks to a bundle) showing the individual items and the
total amount credited to account number 9369383188 and secure to
the batch detail.
IV. Returned Items
A. Checks returned the first time are to be automatically
redeposited.
B. Checks returned the second time are to be debited from VFL
account 9369383188. The check and advice are to be appropriately
marked, and included in our lockbox package, but segregated from
other work.
V. Lockbox Package and Transmission
A. Lockbox Package
Each workday you will prepare for pick-up by the bank's
messenger service all current day work as described above. This
package will be available for pick-up twice daily by 10:00 A.M.
and 2:00 P.M. and delivered each workday to FAS, 95 Bridge
Street, Haddam, CT, 06438-0479.
B. Transmission
There will not be any automated transmission of information
associated with this lockbox.
VI. Communication
A. Daily Processing
Questions concerning everyday processing of checks are to be
directed to:
FAS
Attn: Billing and Collection
Lisa Zawisza
95 Bridge Street
Haddam, CT, 06438-0479
860-345-6049 Telephone
860-345-6073 Fax
B. Transmission
Not Applicable
VII. Fee Payments
All fees associated with this lockbox should be included in our monthly
account analysis statement, except courier charges. The courier bills
FAS directly for their services.
VIII. Indemnification
Fleet Bank agrees to indemnify and hold Valley Forge Life Insurance
Company harmless from any damage arising directly or indirectly, as a
consequence of gross negligence or willful misconduct of any of your
employees or of any entity or employee of any entity selected by you to
provide services with respect to the above described arrangement. This
indemnity shall survive the termination of this agreement.
IX. Termination
This agreement will remain in effect until termination by either party.
Either party may terminate this agreement by written notice to the
other party to be effective ninety (90) days after receipt of notice by
the other party.
Please sign and return to us the enclosed duplicate copy of this agreement
indicating your willingness in consideration of our mutual promises made in this
letter to act in accordance with the foregoing. This shall then constitute our
agreement as to the manner in which you are to process and handle the mail
addressed to our post office box as referred to above.
Sincerely,
S/SAM G. HADDAD, MBA
Sam G. Haddad, MBA
Treasury Consultant
VALLEY FORGE LIFE INSURANCE COMPANY FLEET BANK
By: S/DONALD C. RYCROFT By:
Donald C. Rycroft
Title: Group Vice President and Treasurer Title:
Date:
By: S/PAMELA S. DEMPSEY
Pamela S. Dempsey
Title: Vice President & Assistant Treasurer
Exhibit 3
UNDERWRITING AGREEMENT
This Agreement dated this 3RD day of September 1996 is by and between CNA
INVESTOR SERVICES, INC. (herein called "Company"), an Illinois corporation, and
VALLEY FORGE LIFE INSURANCE COMPANY ON BEHALF OF ITS GUARANTEED INTEREST OPTION
SEPARATE ACCOUNT (herein called the "Separate Account"), an Investment Company
under the Investment Company Act of 1940.
WITNESSETH:
WHEREAS, Company is a broker-dealer that engages in the underwriting of
variable insurance products and other investment products;
WHEREAS, Separate Account desires to issue certain variable insurance
products described more fully below to the public through Company acting as
principal underwriter;
WHEREAS, Company and the Separate Account agree that Company shall be a
statutory underwriter within the meaning of Section 2(11) of the Securities Act
of 1933 and principal underwriter under Section 2(a)(29) of the Investment
Company Act of 1940; and
WHEREAS, Company and the Separate Account have entered into this
agreement to meet the requirements of Section 15(b) of the Investment Company
Act of 1940.
NOW, THEREFORE, in consideration of their mutual promises, Separate
Account and Company hereby agree as follows:
1. Additional Definitions.
a. Contracts -- The class or classes of variable insurance
products set forth on Schedule 1 to this Agreement as in
effect at the time this Agreement is executed, and such other
classes of variable insurance products that may be added to
Schedule 1 from time to time in accordance with Section 11.b
of this Agreement, and including any riders to such contracts
and any other contracts offered in connection therewith. For
this purpose and under this Agreement generally, a "class of
Contracts" shall mean those Contracts issued by Separate
Account on the same policy form or forms and covered by the
same Registration Statement.
b. Registration Statement -- At any time that this Agreement is
in effect, each currently effective registration statement
filed with the SEC ,as hereinafter defined, under the 1933 Act
on a prescribed form, or currently effective post-effective
amendment thereto, as the case may be, relating to a class of
Contracts, including financial statements included in, and all
exhibits to, such registration statement or post-effective
amendment. For purposes of Section 9 of this Agreement, the
term "Registration Statement" means any document which is or
at any time was a Registration Statement within the meaning of
this Section 1.b.
c. Prospectus -- The prospectus included within a Registration
----------
Statement, except that, if the most recently filed version
of the prospectus (including any supplements thereto) filed
pursuant to Rule 497 under the 1933 Act subsequent to the
date on which a Registration Statement became effective
differs from the prospectus included within such
Registration Statement at the time it became effective, the
term "Prospectus" shall refer to the most recently filed
prospectus filed under Rule 497 under the 1933 Act, from and
after the date on which it shall have been filed. For
purposes of Section 9 of this Agreement, the term "any
Prospectus" means any document which is or at any time was a
Prospectus within the meaning of this Section 1.c.
d. Fund -- An investment company in which the Separate Account
invests.
e. Variable Account -- A separate account supporting a class or
classes of Contracts and specified on Schedule 1 as in effect
at the time this Agreement is executed, or as it may be
amended from time to time in accordance with Section 11.b of
this Agreement
f. 1933 Act -- The Securities Act of 1933, as amended.
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g. 1934 Act -- The Securities Exchange Act of 1934, as amended.
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h. 1940 Act -- The Investment Company Act of 1940, as amended.
--------
i. SEC -- The Securities and Exchange Commission.
j. NASD -- The National Association of Securities Dealers, Inc.
k. Regulations -- The rules and regulations promulgated by the
SEC under the 1933 Act, the 1934 Act and the 1940 Act as in
effect at the time this Agreement is executed or thereafter
promulgated.
l. Selling Broker-Dealer -- A person registered as a
broker-dealer and licensed as a life insurance agent or
affiliated with a person so licensed, and authorized to
distribute the Contracts pursuant to a sales agreement as
provided for in Section 4 of this Agreement.
m. Agents Manual -- The agents manual and other written rules,
regulations and procedures provided by Separate Account to
insurance agents appointed to sell its insurance contracts, as
revised from time to time.
n. Representative -- When used with reference to Company or a
Selling Broker-Dealer, an individual who is an associated
person, as that term is defined in the 1934 Act, thereof.
o. Application -- An application for a Contract.
p. Premium -- A payment made under a Contract by an applicant or
purchaser to purchase benefits under the Contract.
q. Customer Service Center -- the service center identified in
the Prospectus as the location at which Premiums and
Applications are accepted.
<PAGE>
2. Authorization and Appointment.
a. Scope of Authority. Separate Account hereby authorizes Company
------------------
on an exclusive basis, and Company accepts such authority,
subject to the registration requirements of the 1933 Act and
the 1940 Act and the provisions of the 1934 Act and
conditions herein, to be the principal underwriter for the
sale of the Contracts to the public in each state and other
jurisdiction in which the Contracts may lawfully be sold
during the term of this Agreement. Separate Account hereby
appoints Company as its independent general agent for sale
of the Contracts. Separate Account hereby authorizes Company
to grant authority to Selling Broker-Dealers to solicit
Applications and Premiums to the extent Company deems
appropriate and consistent with the marketing program for
the Contracts or a class of Contracts, subject to the
conditions set forth in Section 4 of this Agreement. The
Contracts shall be offered for sale and distribution at
premium rates set from time to time by Separate Account.
Company shall use its best efforts to market the Contracts
actively, directly and/or through Selling Broker-Dealers in
accordance with Section 4 of this Agreement, subject to
compliance with applicable law, including rules of the NASD.
b. Limits on Authority. Company shall act as an independent
-------------------
contractor and nothing herein contained shall constitute
Company or its agents, officers or employees as agents,
officers or employees of Separate Account solely by virtue
of their activities in connection with the sale of the
Contracts hereunder. Company and its Representatives shall
not have authority, on behalf of Separate Account: to make,
alter or discharge any Contract or other insurance policy or
annuity entered into pursuant to a Contract; to waive any
Contract forfeiture provision; to extend the time of paying
any Premium; or to receive any monies or Premiums (except
for the sole purpose of forwarding monies or Premiums to
Separate Account). Company shall not expend, nor contract
for the expenditure of, the funds of Separate Account.
Company shall not possess or exercise any authority on
behalf of Separate Account other than that expressly
conferred on Company by this Agreement.
c. Effective Date of Appointment. This Agreement shall continue in
force until July 15, 1998 and indefinitely thereafter, but only so long as such
continuance is specifically approved at least annually by the members of the
Board of Directors of the Valley Forge Life Insurance company, who are neither
parties to the Agreement nor interested persons of any such party. Any such vote
shall be cast in person at a meeting called for the purpose of voting on the
approval of continuing this Agreement.
3. Solicitation Activities.
a. Company Representatives. No Company Representative shall
solicit the sale of a Contract unless at the time of such
solicitation such individual is duly registered with the NASD
and duly licensed with all applicable state insurance and
securities regulatory authorities, and is duly appointed as an
insurance agent of Separate Account.
b. Solicitation Activities. All solicitation and sales activities
engaged in by Company and the Company Representatives with
respect to the Contracts shall be in compliance with all
applicable federal and state securities laws and regulations,
where applicable, as well as all applicable insurance laws and
regulations and the Agents Manual. In particular, without
limiting the generality of the foregoing:
(1) Company shall train, supervise and be solely
responsible for the conduct of Company
Representatives in their solicitation of Applications
and Premiums and distribution of the Contracts, and
shall supervise their compliance with applicable
rules and regulations of any insurance or securities
regulatory agencies that have jurisdiction over
variable insurance product activities.
(2) Neither Company nor any Company Representative shall
offer, attempt to offer, or solicit Applications for,
the Contracts or deliver the Contracts, in any state
or other jurisdiction unless Separate Account has
notified Company that such Contracts may lawfully be
sold or offered for sale in such state, and has not
subsequently revised such noting.
(3) Neither Company nor any Company Representative shall
give any information or make any representation in
regard to a class of Contracts in connection with the
offer or sale of such class of Contracts that is not
in accordance with the Prospectus for such class of
Contracts, or in the then-currently effective
prospectus or statement of additional information for
a Fund, or in current advertising materials for such
class of Contracts authorized by Separate Account.
(4) All Premiums paid by check or money order that are
collected by Company or any of its Representatives
shall be remitted promptly, and in any event not
later than noon of the next business day, in full,
together with any Applications, forms and any other
required documentation, to the Customer Service
Center. Premiums may be transmitted by wire order
from Company to the Customer Service Center in
accordance with the procedures set forth in the
Agents Manual. If any Premium is held at any time by
Company, Company shall hold such Premium in a
fiduciary capacity and such Premium shall be remitted
promptly, and in any event not later than noon of the
next business day, to Separate Account. Company
acknowledges that all such Premiums, whether by
check, money order or wire, shall be the property of
Separate Account. Company acknowledges that Separate
Account shall have the unconditional right to reject,
in whole or in part, any Application or Premium.
c. Representations and Warranties of Company. Company represents
and warrants to Separate Account that Company is and shall
remain registered during the term of this Agreement as a
broker-dealer under the 1934 Act, is a member with the NASD,
and is duly registered under applicable state securities laws,
and that Company is and shall remain during the term of this
Agreement in compliance with Section 9(a) of the 1940 Act.
4. Selling Broker-Dealers. Company shall ensure that sales of the
Contracts by Selling Broker-Dealers comply with the following
conditions, and any additional conditions Separate Account may specify
from time to time.
a. Every Selling Broker-Dealer shall be both registered as a
broker-dealer with the SEC and a member of the NASD and
licensed as an insurance agent with authority to sell
variable products or associated with a insurance agent so
licensed. Any individuals to be authorized to act on behalf
of Selling Broker-Dealer shall be duly registered with the
NASD as representatives of Selling Broker-Dealer with
authority to sell variable products, and shall be licensed
as insurance agents with authority to sell variable
products. Company shall verify that Selling Broker-Dealer
and its Representatives are duly licensed under applicable
state insurance law to sell the Contracts (or, if
Broker-Dealer is not so licensed, that it is associated with
an entity so licensed).
b. Every Selling Broker-Dealer (or, if applicable, its associated
general insurance agency) and each of its Representatives
shall have been appointed by Separate Account, provided that
Separate Account reserves the right to refuse to appoint any
proposed person, or once appointed, to terminate such
appointment.
c. Every Selling Broker-Dealer must enter into a written sales
agreement with Company which sales agreement, among other
things, will require such Selling Broker-Dealer to use its
best efforts to solicit applications for Contracts and to
comply with applicable laws and regulations, including the
Separate Account's rules and regulations as reflected in the
Agents Manual or otherwise communicated to agents appointed by
Separate Account, and will contain such other provisions as
the Company deems to be consistent herewith.
d. In view of Separate Account's desire to ensure that Contracts
will be sold to purchasers for whom the Contracts will be
suitable, the written Sales Agreement shall require that
Selling Broker-Dealers and their Representatives not make
recommendations to an applicant to purchase a Contract in
the absence of reasonable grounds to believe that the
purchase of the Contract is suitable for the applicant.
While not limited to the following, a determination of
suitability shall be based on information supplied by an
applicant after a reasonable inquiry concerning the
applicant's other security holdings, insurance and
investment objectives, financial situation and needs, and
the likelihood that the applicant will continue to make any
premium payments contemplated by the Contract applied for
and will keep the Contract in force for a sufficient period
of time so that Separate Account's acquisition costs are
amortized over a reasonable period of time.
5. Marketing Materials.
a. Preparation and Filing. Company shall be primarily
-----------------------
responsible for the design and preparation of all
promotional, sales and advertising material relating to the
Contracts. Company shall be responsible for filing such
material, as required, with the NASD and any state
securities regulatory authorities. Separate Account shall be
responsible for filing all promotional, sales or advertising
material, as required, with any state insurance regulatory
authorities and the SEC. Separate Account shall be
responsible for preparing the Contract Forms and filing them
with applicable state insurance regulatory authorities, and
for preparing the Prospectuses and Registration Statements
and filing them with the SEC and state regulatory
authorities, to the extent required. The parties shall
notify each other expeditiously of any comments provided by
the SEC, NASD or any applicable securities or insurance
regulatory authority on such material, and will cooperate
expeditiously in resolving and implementing any comments, as
applicable.
b. Use in Solicitation Activities. Separate Account shall be
responsible for furnishing Company with such Applications,
Prospectuses and other materials for use by Company and any
Selling Broker-Dealers in their solicitation activities with
respect to the Contracts. Separate Account shall notify
Company of those states or jurisdictions which require
delivery of a statement of additional information with a
prospectus to a prospective purchaser.
6. Compensation and Expenses.
a. The company will receive from the Separate Account such
underwriting commissions as shall be stated from time to time
in the Separate Account's then current prospectus.
b. Separate Account shall pay all expenses in connection with:
(1) the preparation and filing of each Registration
Statement (including each pre-effective and
post-effective amendment thereto) and the preparation
and filing of each Prospectus (including any
preliminary and each definitive Prospectus);
(2) the preparation, underwriting, issuance and
administration of the Contracts;
(3) any registration, qualification or approval or other
filing of the Contracts or Contract forms required
under the insurance laws of the states in which the
Contracts will be offered, as well as any applicable
state securities laws.
(4) all registration fees for the Contracts payable to
the SEC;
(5) the printing of all promotional materials, definitive
Prospectuses for the Contracts, and any supplements
thereto for distribution to existing Contractholders;
and
(6) Company shall pay any other expenses incurred by
Company or its Representatives or employees for the
purpose of carrying out the obligations of Company
hereunder.
7. Compliance.
a. Maintaining Registration and Approvals. Separate Account shall
be responsible for maintaining the registration of the
Contracts with the SEC and any applicable state securities
regulatory authority with which such registration is required,
and for gaining and maintaining approval of the Contract forms
where required under the insurance laws and regulations of
each state or other jurisdiction in which the Contracts are to
be offered.
b. Confirmations and 1934 Act Compliance. Separate Account,
--------------------------------------
as agent for Company, shall confirm to each applicant for
and purchaser of a Contract in accordance with Rule 10b-10
under the 1934 Act acceptance of Premiums and such other
transactions as are required by Rule 10b-10 or
administrative interpretations thereunder. Separate Account
shall maintain and preserve such books and records with
respect to such confirmations in conformity with the
requirements of Rules 17a-3 and 17a-4 under the 1934 Act to
the extent such requirements apply. Separate Account shall
maintain all such books and records and hold such books and
records on behalf of and as agent for Company whose property
they are and shall remain, and acknowledges that such books
and records are at all times subject to inspection by the
SEC in accordance with Section 17(a) of the 1934 Act.
c. Issuance and Administration of Contracts. Separate Account
shall be responsible for issuing the Contracts and
administering the Contracts and the Variable Account,
provided, however, that Company shall have full responsibility
for the securities activities of all persons employed by the
Separate Account, engaged directly or indirectly in the
Contract operations, and for the training, supervision and
control of such persons to the extent of such activities.
8. Investigations and Proceedings.
a. Cooperation. Company and Separate Account shall cooperate
fully in any securities or insurance regulatory investigation
or proceeding or judicial proceeding arising in connection
with the offering, sale or distribution of the Contracts
distributed under this Agreement. Without limiting the
foregoing, Separate Account and Company shall notify each
other promptly of any customer complaint or notice of any
regulatory investigation or proceeding or judicial proceeding
received by either party with respect to the Contracts
9. Indemnification.
a. By Separate Account. Separate Account shall indemnify and
-------------------
hold harmless Company and each person who controls or is
associated with Company within the meaning of such terms
under the federal securities laws, and any officer,
director, employee or agent of the foregoing, against any
and all losses, claims, damages or liabilities, joint or
several (including any investigative, legal and other
expenses reasonably incurred in connection with, and any
amounts paid in settlement of, any action, suit or
proceeding or any claim asserted), to which Company and/or
any such person may become subject, under any statute or
regulation, any NASD rule or interpretation, at common law
or otherwise, insofar as such losses, claims, damages or
liabilities:
(1) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact
required to be stated therein or necessary to make
the statements therein not misleading, in light of
the circumstances in which they were made, contained
in any (i) Registration Statement or in any
Prospectus or (ii) blue-sky application or other
document executed by Separate Account specifically
for the purpose of qualifying any or all of the
Contracts for sale under the securities laws or
insurance laws of any jurisdiction, where applicable;
provided that Separate Account shall not be liable in
any such case to the extent that such loss, claim,
damage or liability arises out of, or is based upon,
an untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon
information furnished in writing to Separate Account
by Company specifically for use in the preparation of
any such Registration Statement or any such blue-sky
application or any amendment thereof or supplement
thereto:
(2) result from any breach by Separate Account of any
provision of this Agreement.
This indemnification agreement shall be in addition to any
liability that Separate Account may otherwise have; provided,
however, that no person shall be entitled to indemnification
pursuant to this provision if such loss, claim, damage or
liability is due to the willful misfeasance, bad faith, gross
negligence or reckless disregard of duty by the person seeking
indemnification
b. By Company. Company shall indemnify and hold harmless
----------
Separate Account and each person who controls or is
associated with Separate Account within the meaning of such
terms under the federal securities laws, and any officer,
director, employee or agent of the foregoing, against any
and all losses, claims, damages or liabilities, joint or
several (including any investigative, legal and other
expenses reasonably incurred in connection with, and any
amounts paid in settlement of, any action, suit or
proceeding or any claim asserted), to which Separate Account
and/or any such person may become subject under any statute
or regulation, any NASD rule or interpretation, at common
law or otherwise, insofar as such losses, claims, damages or
liabilities:
(1) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact
required to be stated therein or necessary in order
to make the statements therein not misleading, in
light of the circumstances in which they were made,
contained in any (i) Registration Statement or in any
Prospectus, or (ii) blue-sky application or other
document executed by Separate Account specifically
for the purpose of qualifying any or all of the
Contracts for sale under applicable securities laws
or insurance laws of any jurisdiction, where
applicable; in each case to the extent, but only to
the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was
made in reliance upon information furnished in
writing by Company to Separate Account specifically
for use in the preparation of any such Registration
Statement or any such blue-sky application or any
amendment thereof or supplement thereto
(2) result because of any use by Company or any Company
Representative of promotional, sales or advertising
material not authorized by Separate Account or any
verbal or written misrepresentations by Company or
any Company Representative or any unlawful sales
practices concerning the Contracts by Company or any
Company Representative under federal securities laws
or NASD regulations; or
(3) result from any breach by Company of any provision of
this Agreement. This indemnification shall be in
addition to any liability that Company may otherwise
have; provided, however, that no person shall be
entitled to indemnification pursuant to this
provision if such loss, claim, damage or liability is
due to the willful misfeasance, bad faith, gross
negligence or reckless disregard of duty by the
person seeking indemnification.
c. General. Promptly after receipt by a party entitled to
-------
indemnification ("indemnified person") under this Section 9
of notice of the commencement of any action as to which a
claim will be made against any person obligated to provide
indemnification under this Section 9 ("indemnifying party"),
such indemnified person shall notify the indemnifying party
in writing of the commencement thereof as soon as
practicable thereafter, but failure to so notify the
indemnifying party shall not relieve the indemnifying party
from any liability which it may have to the indemnified
person otherwise than on account of this Section 9. The
indemnifying party will be entitled to participate in the
defense of the indemnified person but such participation
will not relieve such indemnifying party of the obligation
to reimburse the indemnified person for reasonable legal and
other expenses incurred by such indemnified person in
defending himself or itself. The indemnification provisions
contained in this Section 9 shall remain operative in full
force and effect, regardless of any termination of this
Agreement. A successor by law of Company or Separate
Account, as the case may be, shall be entitled to the
benefits of the indemnification provisions contained in this
Section 9.
10. Termination. This Agreement shall terminate automatically upon
-----------
assignment. This Agreement may be terminated at any time for any
reason by either party upon 60 days' written notice to the other
party, without payment of any penalty. This Agreement may be
terminated at the option of either party to this Agreement upon the
other party's material breach of any provision of this Agreement or of
any representation or warranty made in this Agreement, unless such
breach has been cured within 10 days after receipt of notice of breach
from the non-breaching party. Upon termination of this Agreement all
authorizations, rights and obligations shall cease except the
obligation to settle accounts hereunder, including commissions on
Premiums subsequently received for Contracts in effect at the time of
termination or issued pursuant to Applications received by Separate
Account prior to termination.
11. Miscellaneous.
a. Schedules. The parties to this Agreement may amend Schedule 1
to this Agreement from time to time to reflect additions of
any class of Contracts and Variable Accounts. The provisions
of this Agreement shall be equally applicable to each such
class of Contracts and each Variable Account that may be added
to the Schedule, unless the context otherwise requires. Any
other change in the terms or provisions of this Agreement
shall be by written agreement between Separate Account and
Company.
b. Rights and Remedies are Cumulative. 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.
c. Interpretation: Jurisdiction. This Agreement constitutes the
whole agreement between the parties hereto with respect to the
subject matter hereof, and supersedes all prior oral or
written understandings, agreements or negotiations between the
parties with respect to such subject matter. No prior writings
by or between the parties with respect to the subject matter
hereof shall be used by either party in connection with the
interpretation of any provision of this Agreement. This
Agreement shall be construed and its provisions interpreted
under and in accordance with the internal laws of the state of
Illinois without giving effect to principles of conflict of
laws.
d. Severability. This is a severable Agreement. In the event that
any provision of this Agreement would require a party to
take action prohibited by applicable federal or state law or
prohibit a party from taking action required by applicable
federal or state law, then it is the intention of the
parties hereto that such provision shall be enforced to the
extent permitted under the law, and, in any event, that all
other provisions of this Agreement shall remain valid and
duly enforceable as if the provision at issue had never been
a part hereof.
e. Regulation. This Agreement shall be subject to the provisions
of the 1933 Act, 1934 Act and 1940 Act and the regulations
thereunder, and the rules and regulations of the NASD, from
time to time in effect, including such exemptions from the
1940 Act as the SEC may grant, and the terms hereof shall be
interpreted and construed in accordance therewith.
f. Section and Other Headings. The headings 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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by such authorized officers on the date specified below.
CNA INVESTOR SERVICES, INC.
By: S/KEVIN HOGAN
Name: Kevin Hogan
Title: President
VALLEY FORGE LIFE INSURANCE COMPANY ON BEHALF OF
ITS GUARANTEED INTEREST OPTION SEPARATE ACCOUNT
By: S/DONALD C. RYCROFT
Name: Donald C. Rycroft
Title: Group Vice President and Treasurer
<PAGE>
SCHEDULE 1
The terms of this underwriting agreement are limited to the
following insurance product(s):
Variable annuity products issued by the Separate Account as
described in the Separate Account's current Prospectus.
Exhibit 8A
FUND PARTICIPATION AGREEMENT
This AGREEMENT is made this day of , 1996, by and between Continental
Assurance Company, an insurance company organized under the laws of Illinois,
and Valley Forge Life Insurance Company, an insurance company organized under
the laws of Pennsylvania (each an "Insurer" for purposes of this agreement), on
their behalf and on behalf of the segregated asset accounts of the Insurer
listed on Exhibit A to this Agreement (the "Separate Accounts"); Federated
Insurance Series (the "Fund"), a Massachusetts business trust; and Federated
Securities Corp. (the "Distributor"), a Pennsylvania corporation.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange
Commission ("SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended ("1940 Act") and the Fund is
authorized to issue separate classes of shares of beneficial interest
("shares"), each representing an interest in a separate portfolio of assets
known as a "portfolio" and each portfolio has its own investment objective,
policies, and limitations; and
WHEREAS, the Fund is available to offer shares of one or more of its
portfolios to separate accounts of insurance companies that fund variable
annuity and variable life insurance contracts ("Variable Contracts") and to
serve as an investment medium for Variable Contracts offered by insurance
companies that have entered into participation agreements substantially similar
to this agreement ("Participating Insurance Companies"), and
WHEREAS, the Fund is currently comprised of seven separate portfolios,
and other portfolios may be established in the future; and
WHEREAS, the Fund has obtained an order from the SEC dated December 29,
1993 (File No. 812-8620), granting Participating Insurance Companies and
variable annuity and variable life insurance 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 Fund to be sold to and held by variable annuity and
variable life insurance separate accounts of life insurance companies that may
or may not be affiliated with one another (hereinafter the "Mixed and Shared
Funding Exemptive Order"); and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended ("1934 Act"), and is a
member in good standing of the National Association of Securities Dealers, Inc.
("NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Insurer wishes to purchase shares of one or more of the Fund's
portfolios on behalf of its Separate Accounts to serve as an investment medium
for Variable Contracts funded by the Separate Accounts, and the Distributor is
authorized to sell shares of the Fund's portfolios;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants hereinafter set forth, the parties hereby agree as
follows:
ARTICLE I. Sale of Fund Shares
1.1 The Distributor agrees to sell to the Insurer those shares of the
portfolios offered and made available by the Fund and identified on Exhibit B
("Portfolios") that the Insurer orders on behalf of its Separate Accounts, and
agrees to execute such orders on each day on which the Fund calculates its net
asset value pursuant to rules of the SEC ("business day") at the net asset value
next computed after receipt and acceptance by the Fund or its agent of the order
for the shares of the Fund.
1.2 The Fund agrees to make available on each business day shares of
the Portfolios for purchase at the applicable net asset value per share by the
Insurer on behalf of its Separate Accounts; provided, however, that the Board of
Trustees of the Fund 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 the
Trustees' fiduciary duties under applicable law, necessary in the best interests
of the shareholders of any Portfolio (it being understood that for this purpose,
"shareholders" means Variable Contract owners).
1.3 The Fund and the Distributor agree that shares of the Portfolios of
the Fund will be sold only to Participating Insurance Companies, their separate
accounts, and other persons consistent with each Portfolio being adequately
diversified pursuant to Section 817(h) of the Internal Revenue Code of 1986, as
amended ("Code"), and the regulations thereunder. No shares of any Portfolio
will be sold directly to the general public to the extent not permitted by
applicable tax law.
1.4 The Fund and the Distributor will not sell shares of the Portfolios
to any insurance company or separate account or other persons unless an
agreement containing provisions substantially the same as the provisions in
Article IV of this Agreement is in effect to govern such sales.
1.5 Upon receipt of a request for redemption in proper form from the
Insurer, the Fund agrees to redeem any full or fractional shares of the
Portfolios held by the Insurer, ordinarily executing such requests on each
business day at the net asset value next computed after receipt and acceptance
by the Fund or its agent of the request for redemption, except that the Fund
reserves the right to suspend the right of redemption, consistent with Section
22(e) of the 1940 Act and any rules thereunder. Such redemption shall be paid
consistent with applicable rules of the SEC and procedures and policies of the
Fund as described in this Agreement, so long as effected in conformity with the
current prospectus.
1.6 For purposes of Sections 1.1, 1.2 and 1.5, the Insurer shall be the
agent of the Fund for the limited purpose of receiving and accepting purchase
and redemption orders from each Separate Account and receipt of such orders by
4:00 p.m. Eastern time by the Insurer shall be deemed to be receipt by the Fund
for purposes of Rule 22c-1 of the 1940 Act; provided that the Fund receives
notice of such orders on the next following business day prior to 4:00 p.m.
Eastern time on such day, although the Insurer will use its best efforts to
provide such notice by 12:00 noon Eastern time, subject to the ability of the
Fund's recordkeeping agent to provide net asset value information by 7:00 p.m.
Eastern time the prior business day in accordance with Section 1.11.
1.7 The Insurer agrees to purchase and redeem the shares of each
Portfolio in accordance with the provisions of this Agreement, so long as
effected in conformity with the current prospectus for the Fund.
1.8 The Insurer shall pay for shares of the Portfolio on the next
business day after the valuation date applicable to the order for purchase.
Payment shall be in federal funds transmitted by wire.
1.9 The Fund shall pay for redeemed shares of the Portfolio on the next
business day after the valuation date applicable to the order for redemption.
Payment shall be in federal funds transmitted by wire.
1.10 Issuance and transfer of shares of the Portfolios will be by book
entry only unless otherwise agreed by the Fund. Stock certificates will not be
issued to the Insurer or the Separate Accounts unless otherwise agreed by the
Fund. Shares ordered from the Fund will be recorded in an appropriate title for
the Separate Accounts or the appropriate subaccounts of the Separate Accounts.
1.11 The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Insurer of any income dividends or
capital gain distributions payable on the shares of the Portfolios. The Insurer
hereby elects to reinvest in the Portfolio all such dividends and distributions
as are payable on a Portfolio's shares and to receive such dividends and
distributions in additional shares of that Portfolio. The Insurer reserves the
right to revoke this election in writing and to receive all such dividends and
distributions in cash. The Fund shall notify the Insurer of the number of shares
so issued as payment of such dividends and distributions.
1.12 The Fund shall instruct its recordkeeping agent to advise the
Insurer on each business day of the net asset value per share for each Portfolio
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 7:00 p.m. Eastern time.
ARTICLE II. Representations and Warranties
2.1 The Insurer represents and warrants that it is an insurance company
duly organized and in good standing under applicable law and that it is taxed as
an insurance company under Subchapter L of the Code.
2.2 The Insurer represents and warrants that it has legally and validly
established each of the Separate Accounts as a segregated asset account under
applicable state law, and that each of the Separate Accounts is a validly
existing segregated asset account under applicable federal and state law (or is
exempt therefrom).
2.3 The Insurer represents and warrants that the Variable Contracts
issued by the Insurer or interests in the Separate Accounts under such Variable
Contracts (1) are or, prior to issuance, will be registered as securities under
the Securities Act of 1933 ("1933 Act") or, alternatively, (2) are not
registered because they are exempt from registration under the 1933 Act or will
be offered exclusively in transactions that are exempt from registration under
the 1933 Act.
2.4 The Insurer represents and warrants that each of the Separate
Accounts (1) has been registered as a unit investment trust in accordance with
the provisions of the 1940 Act or, alternatively, (2) has not been registered in
proper reliance upon an exclusion from registration under the 1940 Act.
2.5 Subject to the Fund's compliance with applicable diversification
and any other applicable provisions of the Code, the Insurer represents that it
believes, in good faith, that the Variable Contracts issued by the Insurer are
currently treated as annuity contracts or life insurance policies (which may
include modified endowment contracts), whichever is appropriate, under
applicable provisions of the Code.
2.6 The Fund represents and warrants that it is duly organized as a
business trust under the laws of the Commonwealth of Massachusetts, and is in
good standing under applicable law.
2.7 The Fund represents and warrants that the shares of the Portfolios
are duly authorized for issuance in accordance with applicable law and that the
Fund is registered as an open-end management investment company under the 1940
Act.
2.8 The Fund represents that it believes, in good faith, that the
Portfolios currently comply with the diversification provisions of Section
817(h) of the Code and the regulations issued thereunder relating to the
diversification requirements for variable life insurance policies and variable
annuity contracts.
2.9 The Distributor represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Distributor further represents and warrants that it is duly organized as a
corporation under the laws of Pennsylvania and in good standing under applicable
state law.
ARTICLE III. General Duties
3.1 The Fund shall take all such actions as are necessary to permit the
sale of the shares of each Portfolio to the Separate Accounts, including
maintaining its registration as an investment company under the 1940 Act, and
registering the shares of the Portfolios sold to the Separate Accounts under the
1933 Act for so long as required by applicable law. The Fund shall amend its
Registration Statement filed with the SEC under the 1933 Act and the 1940 Act
from time to time as required in order to effect the continuous offering of the
shares of the Portfolios. The Fund shall register and qualify the shares for
sale in accordance with the laws of the various states to the extent deemed
necessary by the Fund or the Distributor.
3.2 The Fund shall make every effort to maintain qualification of each
Portfolio as a Regulated Investment Company under Subchapter M of the Code (or
any successor or similar provision) and shall notify the Insurer immediately
upon having a reasonable basis for believing that a Portfolio has ceased to so
qualify or that it might not so qualify in the future.
3.3 The Fund shall make every effort to enable each Portfolio to comply
with the diversification provisions of Section 817(h) of the Code and the
regulations issued thereunder relating to the diversification requirements for
variable life insurance policies and variable annuity contracts and any
prospective amendments or other modifications to Section 817 or regulations
thereunder, and shall notify the Insurer immediately upon having a reasonable
basis for believing that any Portfolio has ceased to comply.
3.4 The Insurer shall take all such actions as are necessary under
applicable federal and state law to permit the sale of the Variable Contracts
issued by the Insurer, including registering each Separate Account as an
investment company to the extent required under the 1940 Act, and registering
the Variable Contracts or interests in the Separate Accounts under the Variable
Contracts to the extent required under the 1933 Act, and obtaining all necessary
approvals to offer the Variable Contracts from state insurance commissioners in
those states in which the Insurer desires to offer the Variable Contracts, it
being understood that the Insurer reserves the right in its sole discretion to
suspend or terminate the offering of the Variable Contracts in any state at any
time for any reason, or thereafter to resume such offering.
3.5 The Insurer shall make every effort to maintain the treatment of
the Variable Contracts issued by the Insurer as annuity contracts or life
insurance policies, whichever is appropriate, under applicable provisions of the
Code, subject to the Fund's compliance with applicable diversification and any
other applicable provisions of the Code, and shall notify the Fund and the
Distributor immediately upon having a reasonable basis for believing that such
Variable Contracts have ceased to be so treated or that they might not be so
treated in the future.
3.6 The Insurer shall offer and sell the Variable Contracts issued by
the Insurer in accordance in all material respects with applicable provisions of
the 1933 Act, the 1934 Act, the 1940 Act, the NASD Rules of Fair Practice, and
shall establish requirements applicable to all agents and brokers selling the
Variable Contracts reasonably designed to ensure compliance with state law
respecting the offering of variable life insurance policies and variable annuity
contracts.
3.7 The Distributor shall sell and distribute the shares of the
Portfolios of the Fund in accordance with the applicable provisions of the 1933
Act, the 1934 Act, the 1940 Act, the NASD Rules of Fair Practice, and state law.
3.8 During such time as the Fund engages in Mixed Funding or Shared
Funding, a majority of the Board of Trustees of the Fund shall consist of
persons who are not "interested persons" of the Fund ("disinterested Trustees"),
as defined by Section 2(a)(19) of the 1940 Act and the rules thereunder, and as
modified by any applicable orders of the SEC, except that if this provision of
this Section 3.8 is not met by reason of the death, disqualification, or bona
fide resignation of any Trustee or Trustees, then the operation of this
provision shall be suspended (a) for a period of 45 days if the vacancy or
vacancies may be filled by the Fund's Board; (b) for a period of 60 days if a
vote of shareholders is required to fill the vacancy or vacancies; or (c) for
such longer period as the SEC may prescribe by order upon application.
3.9 The Insurer and its agents will not in any way recommend any
proposal or oppose or interfere with any proposal submitted by the Fund at a
meeting of owners of Variable Contracts or shareholders of the Fund, and will in
no way recommend, oppose, or interfere with the solicitation of proxies for Fund
shares held by Contract Owners, without the prior written consent of the Fund,
which consent may be withheld in the Fund's sole discretion.
3.10 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities having jurisdiction (including, without
limitation, the SEC, the NASD, 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 to the extent practicable and except when cooperation would
require waiver of any legal privilege, and any such cooperation shall not
constitute a waiver of any right either party may have against any other party
in judicial or regulatory proceeding.
ARTICLE IV. Potential Conflicts
4.1 During such time as the Fund engages in Mixed Funding or Shared
Funding, the parties hereto shall comply with the conditions in this Article IV.
4.2 The Fund's Board of Trustees shall monitor the Fund for the
existence of any material irreconcilable conflict (1) between the interests of
owners of variable annuity contracts and variable life insurance policies, and
(2) between the interests of owners of Variable Contracts ("Variable Contract
Owners") issued by different Participating Life Insurance Companies that invest
in the Fund. A material irreconcilable 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
interpretive 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 of
the Fund are being managed; (e) a difference in voting instructions given by
variable annuity and variable life insurance contract owners; or (f) a decision
by a Participating Insurance Company to disregard the voting instructions of
Variable Contract Owners.
4.3 The Insurer agrees that it shall report any potential or existing
conflicts of which it is aware to the Fund's Board of Trustees. The Insurer will
be responsible for assisting the Board of Trustees of the Fund in carrying out
its responsibilities under the Mixed and Shared Funding Exemptive Order, or, if
the Fund is engaged in Mixed Funding or Shared Funding in reliance on Rule 6e-2,
6e-3(T), or any other regulation under the 1940 Act, the Insurer will be
responsible for assisting the Board of Trustees of the Fund in carrying out its
responsibilities under such regulation, by providing the Board with all
information reasonably necessary for the Board to consider any issues raised.
This includes, but is not limited to, an obligation by the Insurer to inform the
Board whenever Variable Contract Owner voting instructions are disregarded. The
Insurer shall carry out its responsibility under this Section 4.3 with a view
only to the interests of the Variable Contract Owners.
4.4 The Insurer agrees that in the event that it is determined by a
majority of the Board of Trustees of the Fund or a majority of the Fund's
disinterested Trustees that a material irreconcilable conflict exists, the
Insurer shall, at its expense and to the extent reasonably practicable (as
determined by a majority of the disinterested Trustees of the Board of the
Fund), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the Separate Accounts from the Fund or any
Portfolio and reinvesting such assets in a different investment medium,
including another portfolio of the Fund, or submitting the question as to
whether such segregation should be implemented to a vote of all affected
Variable Contract Owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners or life insurance contract
owners of contracts issued by one or more Participating Insurance Companies),
that votes in favor of such segregation, or offering to the affected Variable
Contract Owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account. If a
material irreconcilable conflict arises because of the Insurer's decision to
disregard Variable Contract Owners' voting instructions and that decision
represents a minority position or would preclude a majority vote, the Insurer
shall be required, at the Fund's election, to withdraw the Separate Accounts'
investment in the Fund, 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, and no
charge or penalty will be imposed as a result of such withdrawal. These
responsibilities shall be carried out with a view only to the interests of the
Variable Contract Owners. A majority of the disinterested Trustees of the Fund
shall determine whether or not any proposed action adequately remedies any
material irreconcilable conflict, but in no event will the Fund or its
investment adviser or the Distributor be required to establish a new funding
medium for any Variable Contract. The Insurer shall not be required by this
Section 4.4 to establish a new funding medium for any Variable Contract if any
offer to do so has been declined by vote of a majority of Variable Contract
Owners materially adversely affected by the material irreconcilable conflict.
4.5 The Insurer, at least annually, shall submit to the Fund's Board of
Trustees such reports, materials, or data as the Board reasonably may request so
that the Trustees of the Fund may fully carry out the obligations imposed upon
the Board by the conditions contained in the application for the Mixed and
Shared Funding Exemptive Order and said reports, materials, and data shall be
submitted more frequently if deemed appropriate by the Board.
4.6 All reports of potential or existing conflicts received by the
Fund's Board of Trustees, and all Board action with regard to determining the
existence of a conflict, notifying Participating Insurance Companies of a
conflict, and determining whether any proposed action adequately remedies a
conflict, shall be properly recorded in the minutes of the Board of Trustees of
the Fund or other appropriate records, and such minutes or other records shall
be made available to the SEC upon request.
4.7 The Board of Trustees of the Fund shall promptly notify the Insurer
in writing of its determination of the existence of an irreconcilable material
conflict and its implications.
ARTICLE V. Prospectuses and Proxy Statements; Voting
5.1 The Insurer shall distribute such prospectuses, proxy statements
and periodic reports of the Fund to the owners of Variable Contracts issued by
the Insurer as required to be distributed to such Variable Contract Owners under
applicable federal or state law.
5.2 The Distributor shall provide the Insurer with as many copies of
the current prospectus of the Fund as the Insurer may reasonably request. If
requested by the Insurer in lieu thereof, the Fund shall provide such
documentation (including a final copy of the Fund's prospectus as set in type or
in camera-ready copy) and other assistance as is reasonably necessary in order
for the Insurer to either print a stand-alone document or print together in one
document the current prospectus for the Variable Contracts issued by the Insurer
and the current prospectus for the Fund, or a document combining the Fund
prospectus with prospectuses of other funds in which the Variable Contracts may
be invested. The Fund shall bear the expense of printing copies of its current
prospectus that will be distributed to existing Variable Contract Owners, and
the Insurer shall bear the expense of printing copies of the Fund's prospectus
that are used in connection with offering the Variable Contracts issued by the
Insurer.
5.3 The Fund and the Distributor shall provide, at the Fund's expense,
such copies of the Fund's current Statement of Additional Information ("SAI") as
may reasonably be requested, to the Insurer and to any owner of a Variable
Contract issued by the Insurer who requests such SAI.
5.4 The Fund, at its expense, shall provide the Insurer with copies of
its proxy materials, periodic reports to shareholders, and other communications
to shareholders in such quantity as the Insurer shall reasonably require for
purposes of distributing to owners of Variable Contracts issued by the Insurer.
The Fund, at the Insurer's expense, shall provide the Insurer with copies of its
periodic reports to shareholders and other communications to shareholders in
such quantity as the Insurer shall reasonably request for use in connection with
offering the Variable Contracts issued by the Insurer. If requested by the
Insurer in lieu thereof, the Fund shall provide such documentation (including a
final copy of the Fund's proxy materials, periodic reports to shareholders, and
other communications to shareholders, as set in type or in camera-ready copy)
and other assistance as reasonably necessary in order for the Insurer to print
such shareholder communications for distribution to owners of Variable Contracts
issued by the Insurer.
5.5 For so long as the SEC interprets the 1940 Act to require
pass-through voting by Participating Insurance Companies whose Separate Accounts
are registered as investment companies under the 1940 Act, the Insurer shall
vote shares of each Portfolio of the Fund held in a Separate Account or a
subaccount thereof, whether or not registered under the 1940 Act, at regular and
special meetings of the Fund in accordance with instructions timely received by
the Insurer (or its designated agent) from owners of Variable Contracts funded
by such Separate Account or subaccount thereof having a voting interest in the
Portfolio. The Insurer shall vote shares of a Portfolio of the Fund held in a
Separate Account or a subaccount thereof that are attributable to the Variable
Contracts as to which no timely instructions are received, as well as shares
held in such Separate Account or subaccount thereof that are not attributable to
the Variable Contracts and owned beneficially by the Insurer (resulting from
charges against the Variable Contracts or otherwise), in the same proportion as
the votes cast by owners of the Variable Contracts funded by that Separate
Account or subaccount thereof having a voting interest in the Portfolio from
whom instructions have been timely received. The Insurer shall vote shares of
each Portfolio of the Fund held in its general account, if any, in the same
proportion as the votes cast with respect to shares of the Portfolio held in all
Separate Accounts of the Insurer or subaccounts thereof, in the aggregate.
Notwithstanding the foregoing, and subject to Section 3.9, the Insurer reserves
the right to vote shares in its own right to the extent required or permitted by
Rule 6e-2 or 6e-3(T), as applicable, or by applicable state insurance law.
5.6 During such time as the Fund engages in Mixed Funding or Shared
Funding, the Fund shall disclose in its prospectus that (1) the Fund is intended
to be a funding vehicle for variable annuity and variable life insurance
contracts offered by various insurance companies, (2) material irreconcilable
conflicts possibly may arise, (3) the Board of Trustees of the Fund will monitor
events in order to identify the existence of any material irreconcilable
conflicts and to determine what action, if any, should be taken in response to
any such conflict, and (4) any other disclosure required by SEC guidelines with
regard to mixed and shared funding. The Fund hereby notifies the Insurer that
prospectus disclosure may be appropriate regarding potential risks of offering
shares of the Fund to separate accounts funding both variable annuity contracts
and variable life insurance policies and to separate accounts funding Variable
Contracts of unaffiliated life insurance companies.
<PAGE>
5.7 The Fund will provide the Insurer with as much notice as is
reasonably practicable of any proxy solicitation for any Portfolio, and of any
material change in the Fund's registration statement or prospectus, particularly
any change resulting in a change to the registration statement or prospectus for
any Account. The Fund will work with the Insurer to enable the Insurer to
solicit proxies from Variable Contract holders, or to make such changes to its
registration statement or prospectus in an orderly manner.
ARTICLE VI. Sales Material and Information
6.1 The Insurer shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund (or any Portfolio thereof) or its investment adviser
or the Distributor is named at least 15 days prior to the anticipated use of
such material, and no such sales literature or other promotional material shall
be used unless the Fund and the Distributor or the designee of either approve
the material or do not respond with comments on the material within 10 days from
receipt of the material. Notwithstanding that the Fund or Distributor or their
designee may not initially object, the Fund, Distributor or their designee
reserve the right to object at any time thereafter to the continued use of any
such sales literature or other promotional material in which the Fund or
Distributor is named, and no such material shall be used thereafter if the Fund
or Distributor or their designee so object.
6.2 The Insurer agrees that neither it nor any of its affiliates or
agents shall give any information or make any representations or statements on
behalf of the Fund or concerning the Fund other than the information or
representations contained in the Registration Statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee and by the Distributor or its designee, except with the permission of
the Fund or its designee and the Distributor or its designee.
6.3 The Fund or the Distributor or the designee of either shall furnish
to the Insurer or its designee, each piece of sales literature or other
promotional material in which the Insurer or its Separate Accounts or Contracts
are named at least 15 days prior to the anticipated use of such material, and no
such material shall be used unless the Insurer or its designee approves the
material or does not respond with comments on the material within 10 days from
receipt of the material. Notwithstanding that the Insurer or its designee may
not initially object, the Insurer and its designee reserve the right to object
at any time thereafter to the continued use of any such sales literature or
other promotional material in which the Insurer is named, and no such material
shall be used thereafter if the Insurer or its designee so object.
6.4 The Fund and the Distributor agree that each of them and the
affiliates and agents of each of them shall not give any information or make any
representations on behalf of the Insurer or concerning the Insurer, the Separate
Accounts, or the Variable Contracts issued by the Insurer, other than the
information or representations contained in a registration statement or
prospectus for such Variable Contracts, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports for
the Separate Accounts or prepared for distribution to owners of such Variable
Contracts, or in sales literature or other promotional material approved by the
Insurer or its designee, except with the prior written permission of the
Insurer.
6.5 The Fund will provide to the Insurer at least one complete copy of
the Mixed and Shared Funding Exemptive Application no later than the execution
of this Agreement, and any amendments thereto, all prospectuses, Statements of
Additional Information, reports, proxy statements and other voting solicitation
materials, applications for no-action requests, and all amendments and
supplements to any of the above, as well as SEC notices, orders and no-action
responses, that relate to the Fund or its shares, promptly after the filing of
such document with, or issuance of such documents from, the SEC or other
regulatory authorities.
6.6 The Insurer will provide to the Fund all prospectuses (which shall
include an offering memorandum if the Variable Contracts issued by the Insurer
or interests therein are not registered under the 1933 Act), Statements of
Additional Information, reports, solicitations for voting instructions relating
to the Fund, and all amendments or supplements to any of the above that relate
to the Variable Contracts issued by the Insurer or the Separate Accounts which
utilize the Fund as an underlying investment medium, promptly after the filing
of such document with the SEC or other regulatory authority.
6.7 For purposes of this Article VI, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use, in a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, electronic or other public
media), sales literature (i.e., any written or electronic communication
distributed or made generally available to customers or the public, including
brochures, circulars, research reports, market letters, performance reports or
summaries, form letters, telemarketing scripts, seminar texts, reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees.
ARTICLE VII. Indemnification
7.1 Indemnification by the Insurer
7.1(a) The Insurer agrees to indemnify and hold harmless the
Fund, each of its Trustees and officers, any affiliated person of the Fund
within the meaning of Section 2(a)(3) of the 1940 Act, and the Distributor
(collectively, the "Indemnified Parties" for purposes of this Section 7.1)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Insurer) or litigation expenses
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or litigation expenses are
related to the sale or acquisition of the Fund's shares or the Variable
Contracts issued by the Insurer and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in the registration statement or prospectus (which
shall include an offering memorandum) for the Variable
Contracts issued by the Insurer or advertisement or sales
literature for such Variable Contracts (or any amendment or
supplement to any of the foregoing), 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 agreement to indemnify 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 in
conformity with information furnished to the Insurer by or on
behalf of the Fund for use in the registration statement or
prospectus for the Variable Contracts issued by the Insurer or
advertisement or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale
of such Variable Contracts or Fund shares; or
(ii) arise out of or as a result of any statement or
representation (other than statements or representations
contained in the registration statement, prospectus or sales
literature of the Fund not supplied by the Insurer or persons
under its control) or wrongful conduct of the Insurer or any
of its affiliates, employees or agents with respect to the
sale or distribution of the Variable Contracts issued by the
Insurer or the Fund shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a
registration statement, prospectus, or advertisement or sales
literature of the Fund or any amendment thereof or supplement
thereto 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 a statement
or omission was made in reliance upon information furnished to
the Fund by or on behalf of the Insurer; or
(iv) arise out of or result from any material breach
of any representation and/or warranty made by the Insurer in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Insurer; except to
the extent provided in Sections 7.1(b) and 7.1(c) hereof.
7.1(b) The Insurer shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation expenses to which an Indemnified Party would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of the Indemnified Party's duties or by reason of
the Indemnified Party's reckless disregard of obligations or duties under this
Agreement or to the Fund.
7.1(c) The Insurer shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Party shall have notified the Insurer in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Party shall have received notice of such
service on any designated agent), but failure to notify the Insurer of any such
claim shall not relieve the Insurer from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than on account
of this indemnification provision. In case any such action is brought against
the Indemnified Parties, the Insurer shall be entitled to participate, at its
own expense, in the defense of such action. The Insurer also shall be entitled
to assume the defense thereof, with counsel satisfactory to the party named in
the action. After notice from the Insurer to such party of the Insurer's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Insurer
will not be liable to such 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.
7.1(d) The Indemnified Parties shall promptly notify the
Insurer of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund shares or the Variable
Contracts issued by the Insurer or the operation of the Fund.
7.2 Indemnification By the Distributor
7.2(a) The Distributor agrees to indemnify and hold harmless
the Insurer, the principal underwriter of the Variable Contracts, and each of
their directors and officers and any affiliated person of the Insurer within
the meaning of Section 2(a)(3) of the 1940 Act (collectively, the "Indemnified
Parties" for purposes of this Section 7.2) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Distributor) or litigation expenses (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute
or regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or litigation expenses are related to the sale or
acquisition of the Fund's shares or the Variable Contracts issued by the
Insurer and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in the registration statement or prospectus or
advertisement or sales literature of the Fund (or any
amendment or supplement to any of the foregoing), 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 agreement to indemnify 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 in
conformity with information furnished to the Distributor or
the Fund or the designee of either by or on behalf of the
Insurer for use in the registration statement or prospectus
for the Fund or in advertisements or sales literature (or any
amendment or supplement) or otherwise for use in the
registration statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Variable Contracts
issued by the Insurer or Fund shares; or
(ii) arise out of or as a result of any statement or
representations (other than statements or representations
contained in the registration statement, prospectus or sales
literature for the Variable Contracts not supplied by the
Distributor or any employees or agents thereof) or wrongful
conduct of the Fund or Distributor, or the affiliates,
employees, or agents of the Fund or the Distributor with
respect to the sale or distribution of the Variable Contracts
issued by the Insurer or Fund shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a
registration statement, prospectus, or advertisement or sales
literature covering the Variable Contracts issued by the
Insurer, or any amendment thereof or supplement thereto, or
the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statement or statements therein not misleading, if such
statement or omission was made in reliance upon information
furnished to the Insurer by or on behalf of the Fund or the
Distributor; or
(iv) arise out of or result from the provision by or
on behalf of the Fund of insufficient or incorrect information
regarding the purchase or sale of Fund shares, or the failure
by the Fund or the Distributor to execute or process orders to
buy or sell Fund shares submitted by the Insurer at the price
or within the time limits specified in this Agreement, unless
such failure is due to a cause permitted under Article 1, or
is due to a cause beyond the control of the Fund or the
Distributor.
(v) arise out of or result from any material breach
of any representation and/or warranty made by the Distributor
or the Fund in this Agreement or arise out of or result from
any other material breach of this Agreement by the Distributor
or the Fund; except to the extent provided in Sections 7.2(b)
and 7.2(c) hereof.
7.2(b) The Distributor shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation expenses to which an Indemnified Party would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence in
the performance of the Indemnified Party's duties or by reason of the
Indemnified Party's reckless disregard of obligations or duties under this
Agreement or to the Insurer or the Separate Accounts.
7.2(c) The Distributor shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Party shall have notified the Distributor in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Party shall have received notice of such
service on any designated agent), but failure to notify the Distributor of any
such claim shall not relieve the Distributor from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Distributor will be entitled to
participate, at is own expense, in the defense thereof. The Distributor also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Distributor to such party
of the Distributor's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Distributor will not be liable to such party under this Agreement for
any legal or other expense subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
7.2(d) The Insurer shall promptly notify the Distributor of
the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Variable
Contracts issued by the Insurer or the operation of the Separate Accounts.
7.3 Indemnification by the Fund
7.3(a) The Fund agrees to indemnify and hold harmless the
Insurer, the affiliated principal underwriter of the Variable Contracts, and
each of their directors and officers and any affiliated person of the Insurer
within the meaning of Section 2(a)(3) of the 1940 Act (collectively, the
"Indemnified Parties" for purposes of this Section 7.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation expenses (including legal and
other expenses) to which the Indemnified Parties may become subject under any
statute or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or litigation expenses are related to the sale or
acquisition of the Fund's shares or the Variable Contracts issued by the Insurer
and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in the registration statement or prospectus or
advertisement or sales literature of the Fund (or any
amendment or supplement to any of the foregoing), 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 agreement to indemnify 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 in
conformity with information furnished to the Distributor or
the Fund or the designee of either by or on behalf of the
Insurer for use in the registration statement or prospectus
for the Fund or advertisements or in sales literature (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Variable Contracts issued by the Insurer
or Fund shares; or
(ii) arise out of or as a result of any statement or
representation (other than statements or representations
contained in the registration statement, prospectus or sales
literature for the Variable Contracts not supplied by the
Distributor or any employees or agents thereof) or wrongful
conduct of the Fund, or the affiliates, employees, or agents
of the Fund, with respect to the sale or distribution of the
Variable Contracts issued by the Insurer or Fund shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a
registration statement, prospectus or advertisement or sales
literature covering the Variable Contracts issued by the
Insurer, or any amendment thereof or supplement thereto, or
the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statement or statements therein not misleading, if such
statement or omission was made in reliance upon information
furnished to the Insurer by or on behalf of the Fund; or
(iv) arise out of or result from any material breach
of any representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
except to the extent provided in Sections 7.3(b) and 7.3(c) hereof.
7.3(b) The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
expenses to which an Indemnified Party would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of the
Indemnified Party's duties or by reason of the Indemnified Party's reckless
disregard of obligations or duties under this Agreement or to the Insurer or the
Separate Accounts.
7.3(c) The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such party shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon such Indemnified Party (or after such
Party shall have received notice of such service on any designated agent), but
failure to notify the Fund of any such claim shall not relieve the Fund from any
liability which it may have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification provision. In case any
such action is brought against the Indemnified Parties, the Fund will be
entitled to participate, at its own expense, in the defense thereof. The Fund
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from the Fund to such party of
the Fund's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Fund will not be liable to such 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.
7.3(d) The Insurer shall promptly notify the Fund of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Contracts
issued by the Insurer or the sale of the Fund's shares.
ARTICLE VIII. Applicable Law
8.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Pennsylvania.
8.2 This Agreement shall be subject to the provisions of the 1933,
1934, and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant (including, but not limited to, the Mixed and Shared Funding Exemptive
Order), and the terms hereof shall be interpreted and construed in accordance
therewith.
ARTICLE IX. Termination
9.1 This Agreement shall terminate:
(a) at the option of any party upon 180 days advance written
notice to the other parties; or
(b) at the option of the Insurer if shares of the Portfolios
are not reasonably available to meet the requirements of the Variable Contracts
issued by the Insurer, as determined by the Insurer, and upon prompt notice by
the Insurer to the other parties; or
(c) at the option of the Fund or the Distributor upon
institution of formal proceedings against the Insurer or the principal
underwriter of the Variable Contracts by the NASD, the SEC, or any state
securities or insurance department or any other regulatory body regarding the
Insurer's duties under this Agreement or related to the sale of the Variable
Contracts issued by the Insurer, the operation of the Separate Accounts, or the
purchase of the Fund shares; or
(d) at the option of the Insurer upon institution of formal
proceedings against the Fund or the Distributor by the NASD, the SEC, or any
state securities or insurance department or any other regulatory body; or
(e) upon receipt of any requisite regulatory approvals or
requisite vote of the Variable Contract Owners having an interest in the
Separate Accounts (or any subaccounts thereof) of a substitution of the shares
of another investment company for the corresponding shares of the Fund or a
Portfolio in accordance with the terms of the Variable Contracts for which those
shares had been selected or serve as the underlying investment media; or
(f) in the event any of the shares of a Portfolio are not
registered, issued or sold in accordance with applicable state and/or federal
law, or such law precludes the use of such shares as the underlying investment
media of the Variable Contracts issued or to be issued by the Insurer; or
(g) by any party to the Agreement upon a determination by a
majority of the Trustees of the Fund, or a majority of its disinterested
Trustees, that an irreconcilable conflict, as described in Article IV hereof,
exists; or
(h) at the option of the Insurer if the Fund or a Portfolio
fails to meet the requirements under Subchapter M of the Code for qualification
as a Regulated Investment Company specified in Section 3.2 hereof or the
diversification requirements specified in Section 3.3 hereof; or
(i) at the option of the Insurer if the Fund or the
Distributor has suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or is the
subject of substantial allegations of fraud or other violation of law, upon 10
business days notice by the Insurer to the Fund or Distributor; or
(j) at the option of the Insurer upon the sale, acquisition
or a change of control of the adviser to the Fund; or
(k) at the option of the Fund, the Distributor or the Insurer
upon a material breach of this Agreement by the other party, upon 10 business
days notice by the non-breaching party to the breaching party; or
(l) at the option of the Fund or Distributor if the Insurer
has suffered a material adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is the subject of
substantial allegations of fraud or other violation of law, upon 10 business
days notice by the Fund or Distributor to the Insurer; or
(m) at the option of the Fund or Distributor upon the sale,
acquisition or a change of control of the Insurer.
9.2 Each party to this Agreement shall promptly notify the other
parties to the Agreement of the institution against such party of any such
formal proceedings as described in Sections 9.1(c) and (d) hereof. The Insurer
shall give 60 days prior written notice to the Fund of the date of any proposed
vote of Variable Contract Owners to replace the Fund's shares as described in
Section 9.1(e) hereof.
9.3 Except as necessary to implement Variable Contract Owner initiated
transactions or effect Contract transactions, or as required by state insurance
laws or regulations, or to resolve a conflict as contemplated by Article VII
hereof, the Insurer shall not redeem Fund shares attributable to the Variable
Contracts issued by the Insurer (as opposed to Fund shares attributable to the
Insurer's assets held in the Separate Accounts), and the Insurer shall not
prevent Variable Contract Owners from allocating payments to a Portfolio, until
30 days after the Insurer shall have notified the Fund or Distributor of its
intention to do so.
9.4 Notwithstanding any termination of this Agreement, the Fund and the
Distributor shall at the option of the Insurer continue to make available
additional shares of the Fund pursuant to the terms and conditions of this
Agreement, for all Variable Contracts in effect on the effective date of
termination of this Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, based upon instructions from the owners of the
Existing Contracts, the Separate Accounts shall be permitted to reallocate
investments in the Portfolios of the Fund and redeem investments in the
Portfolios, and shall be permitted to invest in the Portfolios in the event that
owners of the Existing Contracts make additional purchase payments under the
Existing Contracts. If this Agreement terminates, the parties agree that
Sections 3.10, 7.1, 7.2, 7.3, 8.1, and 8.2, and, to the extent that all or a
portion of the assets of the Separate Accounts continue to be invested in the
Fund or any Portfolio of the Fund, Articles I, II, and IV and Sections 5.5 and
5.6 will remain in effect after termination.
ARTICLE X. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail, postage prepaid, return receipt requested, or by overnight
courier, charges prepaid, with evidence of delivery, 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, and such notice shall
be effective upon delivery.
If to the Fund:
Federated Insurance Series
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Attn.: John W. McGonigle
If to the Distributor:
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Attn.: John W. McGonigle
If to the Insurer:
Continental Assurance Company
Valley Forge Life Insurance Company
Variable Life Insurance Products - 34 South
CNA Plaza
Chicago, Illinois 60685
Attn: Kevin Hogan
ARTICLE XI: Miscellaneous
11.1 The Fund and the Insurer agree that if and to the extent Rule 6e-2
or Rule 6e-3(T) under the 1940 Act is amended or if Rule 6e-3 is adopted in
final form, to the extent applicable, the Fund and the Insurer shall each take
such steps as may be necessary to comply with the Rule as amended or adopted in
final form.
11.2 A copy of the Fund's Agreement and Declaration of Trust is on file
with the Secretary of the Commonwealth of Massachusetts and notice is hereby
given that any agreements that are executed on behalf of the Fund by any Trustee
or officer of the Fund are executed in his or her capacity as Trustee or officer
and not individually. The obligations of this Agreement shall only be binding
upon the assets and property of the Fund and shall not be binding upon any
Trustee, officer or shareholder of the Fund individually.
11.3 Nothing in this Agreement shall impede the Fund's Trustees or
shareholders of the shares of the Fund's Portfolios from exercising any of the
rights provided to such Trustees or shareholders in the Fund's Agreement and
Declaration of Trust, as amended, a copy of which will be provided to the
Insurer upon request.
11.4 Administrative services to Variable Contract Owners shall be the
responsibility of Insurer. Insurer, on behalf of its separate accounts will be
the sole shareholder of record of Fund shares. Fund and Distributor recognize
that they will derive a substantial savings in administrative expense by virtue
of having a sole shareholder rather than multiple shareholders. In consideration
of the administrative savings resulting from having a sole shareholder rather
than multiple shareholders, Distributor agrees to pay to Insurer an amount
computed at an annual rate of .25 of 1% of the average daily net asset value of
shares held in subaccounts for which Insurer provides administrative services.
Distributor's payments to Insurer are for administrative services only and do
not constitute payment in any manner for investment advisory services.
11.5 It is understood that the name "Federated" or any derivative
thereof or logo associated with that name is the valuable property of the
Distributor and its affiliates, and that the Insurer has the right to use such
name (or derivative or logo) only so long as this Agreement is in effect. Upon
termination of this Agreement the Insurer shall forthwith cease to use such name
(or derivative or logo).
11.6 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.
11.7 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
11.8 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.
11.9 This Agreement may not be assigned by any party to the Agreement
except with the written consent of the other parties to the Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
FEDERATED INSURANCE
SERIES
ATTEST: BY:
Name:
Name:
Title: Title:
FEDERATED SECURITIES CORP.
ATTEST: BY:
Name: Name:
Title: Title:
CONTINENTAL ASSURANCE
COMPANY
ATTEST: BY:
Name: Name:
Title: Title:
VALLEY FORGE LIFE
INSURANCE COMPANY
ATTEST: BY:
Name: Name:
Title: Title:
Exhibit 8B
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND,
FIDELITY DISTRIBUTORS CORPORATION
and
VALLEY FORGE LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into as of the 1st day of
September, 1996 by and among VALLEY FORGE LIFE INSURANCE COMPANY, (hereinafter
the "Company"), an Pennsylvania corporation, on its own behalf and on behalf of
each segregated asset account of the Company set forth on Schedule A hereto as
may be amended from time to time (each such account hereinafter referred to as
the "Account"), and the VARIABLE INSURANCE PRODUCTS FUND, an unincorporated
business trust organized under the laws of the Commonwealth of Massachusetts
(hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into
several series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under this Agreement, as may be amended from time to time by mutual
agreement of the parties hereto (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated October 15, 1985 (File No. 812-6102), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter 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 Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management
investment company under the 1940 Act and its shares are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser")
is duly registered as an investment adviser under the federal Investment
Advisers Act of 1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain
variable life insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing
segregated asset account, established by resolution of the Board of Directors of
the Company, on the date shown for such Account on Schedule A hereto, to set
aside and invest assets attributable to the aforesaid variable annuity
contracts; and
WHEREAS, the Company has registered or will register each
Account as a unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with
the Securities and Exchange Commission ("SEC") under the Securities Exchange Act
of 1934, as amended, (hereinafter the "1934 Act"), and is a member in good
standing of the National Association of Securities Dealers, Inc. (hereinafter
"NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws
and regulations, the Company intends to purchase shares in the Portfolios on
behalf of each Account to fund certain of the aforesaid variable life and
variable annuity contracts and the Underwriter is authorized to sell such shares
to unit investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares
of the Fund which each Account orders, executing such orders on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
the order for the shares of the Fund. For purposes of this Section 1.1, the
Company shall be the designee of the Fund for receipt of such orders from each
Account and receipt by such designee shall constitute receipt by the Fund;
provided that the Fund receives notice of such order by 11:00 a.m. Boston 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 Fund calculates
its net asset value pursuant to the rules of the Securities and Exchange
Commission.
1.2. The Fund agrees to make its shares available indefinitely
for purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") 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 Board
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. The Fund will promptly notify the Company of any termination
or contemplated termination.
1.3. The Fund and the Underwriter agree that shares of the Fund
will be sold only to Participating Insurance Companies and their separate
accounts. No shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to
any insurance company or separate account unless an agreement containing
provisions substantially the same as Articles I, III, V, VII and Section 2.5 of
Article II of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's
request, any full or fractional shares of the Fund held by the Company,
executing such requests on a daily basis at the net asset value next computed
after receipt by the Fund or its designee of the request for redemption. For
purposes of this Section 1.5, the Company shall be the designee of the Fund for
receipt of requests for redemption from each Account and receipt by such
designee shall constitute receipt by the Fund; provided that the Fund receives
notice of such request for redemption by 11:00 a.m. Boston time on the next
following Business Day.
1.6. The Company agrees that purchases and redemptions of
Portfolio shares offered by the then current prospectus of the Fund shall be
made in accordance with the provisions of such prospectus. The Company agrees
that all net amounts available under the variable annuity contracts with the
form number(s) which are listed on Schedule A attached hereto and incorporated
herein by this reference, as such Schedule A may be amended from time to time
hereafter by mutual written agreement of all the parties hereto, (the
"Contracts") shall be invested in the Fund, in such other Funds advised by the
Adviser as may be mutually agreed to in writing by the parties hereto, or in the
Company's general account, provided that such amounts may also be invested in an
investment company other than the Fund if (a) the Company gives the Fund and the
Underwriter 45 days written notice of its intention to make such other
investment company available as a funding vehicle for the Contracts; or (b) such
other investment company was available as a funding vehicle for the Contracts
prior to the date of this Agreement and the Company so informs the Fund and
Underwriter prior to their signing this Agreement (a list of such funds
appearing on Schedule C to this Agreement); or (c) the Fund or Underwriter
consents to the use of such other investment company.
1.7. The Company shall pay for Fund shares on the next Business
Day after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted
by wire. For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the
federal funds so wired, such funds shall cease to be the responsibility of the
Company and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book
entry only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or
telephone, followed by written confirmation) to the Company of any income,
dividends or capital gain distributions payable on the Fund's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on the Portfolio shares in additional shares of
that Portfolio. The Company reserves the right to revoke this election and to
receive all such income dividends and capital gain distributions in cash. The
Fund shall notify the Company of the number of shares so issued as payment of
such dividends and distributions.
1.10. The Fund 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 (normally by 6:30
p.m. Boston time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Boston time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts are
or will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal and
State laws and that the Company will require all persons involved in the sale of
the Contracts to comply with any specific suitability requirements under state
insurance regulations. The Company further represents and warrants that it is an
insurance company duly organized and in good standing under applicable law and
that it has legally and validly established each Account prior to any issuance
or sale thereof as a segregated asset account under the applicable provisions of
the Pennsylvania Insurance Code and has registered or, prior to any issuance or
sale of the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with the laws of the State of
Pennsylvania and all applicable federal and state securities laws and that the
Fund is and shall remain registered under the 1940 Act. The Fund shall amend the
Registration Statement for its shares 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 Fund shall register and qualify the shares for sale in accordance
with the laws of the various states only if and to the extent deemed advisable
by the Fund or the Underwriter.
2.3. The Fund represents that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended, (the "Code") and that it will make every effort to maintain
such qualification (under Subchapter M or any successor or similar provision)
and that it will notify the Company immediately upon having a reasonable basis
for believing that it has ceased to so qualify or that it might not so qualify
in the future.
2.4. Subject to the Fund's compliance with applicable
diversification requirements, the Company represents that the Contracts are
currently treated as life, endowment or annuity insurance contracts, under
applicable provisions of the Code and that it will make every effort to maintain
such treatment and that it will notify the Fund and the Underwriter immediately
upon having a reasonable basis for believing that the Contracts have ceased to
be so treated or that they might not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although it may make such payments in the future. The Fund has
adopted a "no fee" or "defensive" Rule 12b-1 Plan under which it makes no
payments for distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have a
board of trustees, a majority of whom are not interested persons of the Fund,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
2.6. The Fund makes no representation as to whether any aspect
of its operations (including, but not limited to, fees and expenses and
investment policies) complies with the insurance laws or regulations of the
various states except that the Fund represents that the Fund's investment
policies, fees and expenses are and shall at all times remain in compliance with
the laws of the State of Pennsylvania and the Fund and the Underwriter represent
that their respective operations are and shall at all times remain in material
compliance with the laws of the State of Pennsylvania to the extent required to
perform this Agreement. If the Company shall at any time during the term of this
Agreement request in writing, the Fund shall provide sufficient information to
the Company with respect to the Fund to enable the Company to determine whether
any of the Portfolios may be offered for sale as part of the Accounts in any
state.
2.7. The Underwriter represents and warrants that it is a member
in good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter represents that it is duly organized and in good standing under
the laws of the Commonwealth of Massachusetts. The Underwriter further
represents that it will sell and distribute the Fund shares in accordance with
the laws of the State of Pennsylvania and all applicable state and federal
securities laws, including without limitation the 1933 Act, the 1934 Act, and
the 1940 Act.
2.8. The Fund represents that it is lawfully organized and
validly existing under the laws of the Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is
and shall remain duly registered in all material respects under all applicable
federal and state securities laws and that the Adviser shall perform its
obligations for the Fund in compliance in all material respects with the laws of
the State of Pennsylvania and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of
their directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
covered by a blanket fidelity bond or similar coverage for the benefit of the
Fund, and that said bond is issued by a reputable bonding company, includes
coverage for larceny and embezzlement, and is in an amount not less than $5
million. The Company agrees to make all reasonable efforts to see that this bond
or another bond containing these provisions is always in effect, and agrees to
notify the Fund and the Underwriter in the event that such coverage no longer
applies.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company with as many
printed copies of the Fund's current prospectus and Statement of Additional
Information as the Company may reasonably request. If requested by the Company
in lieu thereof, the Fund shall provide camera-ready film containing the Fund's
prospectus and Statement of Additional Information, and such other assistance as
is reasonably necessary in order for the Company once each year (or more
frequently if the prospectus and/or Statement of Additional Information for the
Fund is amended during the year) to have the prospectus for the Contracts and
the Fund's prospectus printed together in one document, and to have the
Statement of Additional Information for the Fund and the Statement of Additional
Information for the Contracts printed together in one document. Alternatively,
the Company may print the Fund's prospectus and/or its Statement of Additional
Information in combination with other fund companies' prospectuses and
statements of additional information. Except as provided in the following three
sentences, all expenses of printing and distributing Fund prospectuses and
Statements of Additional Information shall be the expense of the Company. For
prospectuses and Statements of Additional Information provided by the Company to
its existing owners of Contracts in order to update disclosure as required by
the 1933 Act and/or the 1940 Act, the cost of printing shall be borne by the
Fund. If the Company chooses to receive camera-ready film in lieu of receiving
printed copies of the Fund's prospectus, the Fund will reimburse the Company in
an amount equal to the product of A and B where A is the number of such
prospectuses distributed to owners of the Contracts, and B is the Fund's per
unit cost of typesetting and printing the Fund's prospectus. The same procedures
shall be followed with respect to the Fund's Statement of Additional
Information.
The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the Fund's
expenses do not include the cost of printing any prospectuses or Statements of
Additional Information other than those actually distributed to existing owners
of the Contracts.
3.2. The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter or the
Company (or in the Fund's discretion, the Prospectus shall state that such
Statement is available from the Fund).
3.3. The Fund, at its expense, shall provide the Company with
copies of its proxy statements, reports to shareholders, and other
communications (except for prospectuses and Statements of Additional
Information, which are covered in Section 3.1) to shareholders in such quantity
as the Company shall reasonably require for distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have
been received in a particular separate account in
the same proportion as Fund shares of such
portfolio for which instructions have been received
in that separate account,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. Participating Insurance Companies shall be responsible for assuring that
each of their separate accounts participating in the Fund calculates voting
privileges in a manner consistent with the standards set forth on Schedule B
attached hereto and incorporated herein by this reference, which standards will
also be provided to the other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the Securities and Exchange Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with respect
thereto.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished,
to the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser or the Underwriter is
named, at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or
shall cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used if the Company or its designee reasonably objects
to such use within fifteen Business Days after receipt of such material.
Notwithstanding that the Company did not initially object, the Company reserves
the right to object at any time thereafter to the continued use of any such
sales literature or other promotional material in which the Company is named,
and no such material shall be used thereafter if the Company so objects.
4.4. The Fund and the Underwriter shall not give any information
or make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete
copy of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and
notices order or responses relating thereto, and all supplements and amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with, or the issuance of such documents by, the
Securities and Exchange Commission or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete
copy of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, contemporaneously with the filing of such document
with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales
literature or other promotional material" includes, but is not limited to, any
of the following that refer to the Fund or any affiliate of the Fund:
advertisements (such as material published, or designed for use in, a newspaper,
magazine, or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, telephone directories
(other than routine listings) electronic or other public media), sales
literature (i.e., any written or electronic communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, performance reports or summaries, form
letters, telemarketing scripts, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, and registration statements, prospectuses,
Statements of Additional Information, shareholder reports, and proxy materials.
4.8 The Fund will provide the Company with as much notice as is
reasonably practicable of any proxy solicitation for any Portfolio, and of any
material change in the Fund's registration statement or prospectus, particularly
for any change resulting in a change to the registration statement or prospectus
for any Account. The Fund will work with the Company so as to enable the Company
to solicit proxies from Contract owners, or to make changes to its registration
statement or prospectus in an orderly manner. The Fund will make reasonable
efforts to attempt to have changes affecting Contract prospectuses become
effective simultaneously with the annual updates for such prospectuses.
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other
compensation to the Company under this agreement, except that if the Fund or any
Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance
distribution expenses, then the Underwriter may make payments to the Company or
to the underwriter for the Contracts if and in amounts agreed to by the
Underwriter in writing and such payments will be made out of existing fees
otherwise payable to the Underwriter, past profits of the Underwriter or other
resources available to the Underwriter. No such payments shall be made directly
by the Fund. Currently, no such payments are contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall be responsible for ensuring
that all its shares are registered and authorized for issuance in accordance
with applicable federal law and, if and to the extent deemed advisable by the
Fund, in accordance with applicable state laws prior to their sale. The Fund
shall bear the expenses for the cost of registration and qualification of the
Fund's shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the
Fund's prospectus, proxy materials and reports to owners of Contracts issued by
the Company.
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Contracts
in such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without limiting
the scope of the foregoing, the Fund will at all times comply with Section
817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance with the grace period
afforded by Regulation 1.817-5.
ARTICLE VII. Potential Conflicts
7.1. The Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the contract owners of
all separate accounts investing in the Fund. 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 Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts
of which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a
majority of its disinterested trustees, that a material irreconcilable conflict
exists, the Company and other Participating Insurance Companies shall, at their
expense and to the extent reasonably practicable (as determined by a majority of
the disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether 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 (2), establishing a new
registered management investment company or managed separate account.
7.4. 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 Fund's election, to withdraw the affected
Account's investment in the Fund 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 members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. 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 Fund and terminate this
Agreement with respect to such Account within six months after the Board informs
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 members
of the Board. Until the end of the foregoing six month period, the Underwriter
and Fund shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement,
a majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 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 Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs 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 members of the Board.
7.7. 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 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of
this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a). The Company agrees to indemnify and hold harmless the
Fund and each trustee of the Board and officers and each person, if any, who
controls the Fund within the meaning of Section 15 of the 1933 Act (excluding
any Participating Insurance Company) (collectively, the "Indemnified Parties"
for purposes of this Section 8.1) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Company) or litigation (including legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of the Fund's shares or the Contracts and:
(i) 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 Contracts or
contained in the Contracts or sales literature for the Contracts
(or any amendment or supplement to any of the foregoing), 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 agreement to indemnify 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 in conformity with information furnished to the Company by
or on behalf of the Fund for use in the Registration Statement
or prospectus for the Contracts or in the Contracts or
advertisement or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of
the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement, prospectus or sales
literature of the Fund not supplied by the Company, or persons
under its control) or wrongful conduct of the Company or persons
under its control, with respect to the sale or distribution of
the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or advertisements or sales literature of
the Fund or any amendment thereof or supplement thereto 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 a statement or
omission was made in reliance upon information furnished to the
Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to
provide the services and furnish the materials under the terms
of this Agreement; or
(v) 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, as limited by and in
accordance with the provisions of Sections 8.1(b) and 8.1(c)
hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed against
an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross 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 or to the Fund, whichever is
applicable.
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against
an Indemnified Party unless such Indemnified Party shall have
notified the Company in writing within a reasonable time after
the summons or other first legal process giving information of
the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but
failure to notify the Company of any such claim shall not
relieve the Company from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any
such action is brought against the Indemnified Parties, the
Company shall be entitled to participate, at its own expense, in
the defense of such action. The Company also shall be entitled
to assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from the Company to such
party of the Company's election to assume the defense thereof,
the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Company will not be
liable to such 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.
8.1(d). The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings
against them in connection with the issuance or sale of the Fund
Shares or the Contracts or the operation of the Fund.
8.2. Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold harmless
the Company and each of its directors and officers 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 Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained
in the Registration Statement or prospectus or sales
literature of the Fund (or any amendment or supplement to
any of the foregoing), 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
agreement to indemnify 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 in
conformity with information furnished to the Underwriter or
Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in
sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the Registration
Statement, prospectus or sales literature for the
Contracts not supplied by the Underwriter or persons
under its control) or wrongful conduct of the Fund,
Adviser or Underwriter or persons under their
control, with respect to the sale or distribution of
the Contracts or Fund shares; or
(iii)arise out of any untrue statement or alleged untrue
statement of a material fact contained in a
Registration Statement, prospectus, or sales
literature covering the Contracts, or any amendment
thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact
required to be stated therein or necessary to make
the statement or statements therein not misleading,
if such statement or omission was made in reliance
upon information furnished to the Company by or on
behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to
provide the services and furnish the materials under
the terms of this Agreement (including a failure,
whether unintentional or in good faith or otherwise,
to comply with the diversification requirements
specified in Article VI of this Agreement or to
qualify as a regulated investment company under
Subchapter M of the Code); or
(v) arise out of or result from any material breach of
any representation and/or warranty made by the
Underwriter in this Agreement or arise out of or
result from any other material breach of this
Agreement by the Underwriter; as limited by and in
accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such 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.
8.2(d). The Company agrees promptly to notify the Underwriter of
the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Contracts
or the operation of each Account.
8.3. Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the
Company, and each of its directors and officers 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 Section 8.3)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Fund) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
result from the gross negligence, bad faith or willful misconduct of the Board
or any member thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to
provide the services and furnish the materials under
the terms of this Agreement (including a failure to
comply with the diversification requirements
specified in Article VI of this Agreement or to
qualify as a regulated investment company under
"Subchapter M of the Code); or
(ii) arise out of or result from any material breach of
any representation and/or warranty made by the Fund
in this Agreement or arise out of or result from any
other material breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such 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.
8.3(d). The Company and the Underwriter agree promptly to notify
the Fund of the commencement of any litigation or proceedings against it or any
of its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the
1933, 1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect
until the first to occur of:
(a) termination by any party for any reason by one hundred
twenty (120) days advance written notice delivered to the
other parties; or
(b) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Portfolio based
upon the Company's determination that shares of such
Portfolio are not reasonably available to meet the
requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Portfolio in the
event any of the Portfolio's shares are not registered,
issued or sold in accordance with applicable state and/or
federal law or such law precludes the use of such shares
as the underlying investment media of the Contracts issued
or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Portfolio in the
event that such Portfolio ceases to qualify as a Regulated
Investment Company under Subchapter M of the Code or under
any successor or similar provision, or if the Company
reasonably believes that the Fund may fail to so qualify;
or
(e) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Portfolio in the
event that such Portfolio fails to meet the
diversification requirements specified in Article VI
hereof; or
(f) termination by either the Fund or the Underwriter by
written notice to the Company, if either one or both of
the Fund or the Underwriter respectively, shall determine,
in their sole judgment exercised in good faith, that the
Company and/or its affiliated companies has suffered a
material adverse change in its business, operations,
financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(g) termination by the Company by written notice to the Fund
and the Underwriter, if the Company shall determine, in
its sole judgment exercised in good faith, that either the
Fund, the Adviser or the Underwriter has suffered a
material adverse change in its business, operations,
financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(h) termination by the Company by written notice upon the
sale, acquisition or change of control of the Adviser or
the Fund; or
(i) termination by the Company, the Fund or the Underwriter by
written notice to the other parties upon a material breach
of the terms of this Agreement.
10.2. Effect of Termination. Notwithstanding any termination of
this Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.3 The Company shall not redeem Fund shares attributable to
the Contracts (as opposed to Fund shares attributable to the Company's assets
held in the Account) except (i) as necessary to implement Contract Owner
initiated or approved transactions, or other Contract transactions or to resolve
a conflict as contemplated by Article VII hereof, or (ii) as required by state
and/or federal laws or regulations or judicial or other legal precedent of
general application (hereinafter referred to as a "Legally Required Redemption")
or (iii) as permitted by an order of the SEC pursuant to Section 26(b) of the
1940 Act. Upon request, the Company will promptly furnish to the Fund and the
Underwriter the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund and the Underwriter) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
the Company shall not prevent Contract Owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Underwriter 60 days notice of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered
or certified mail, postage prepaid, or by nationally recognized overnight
courier, charges prepaid, 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, and such notice shall be effective upon delivery.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
Valley Forge Life Insurance Company
Variable Life Insurance Products - 34 South
CNA Plaza
Chicago, IL 60685
Attention: Kevin Hogan
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3 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.
12.4 This Agreement may be executed simultaneously in two or
more counterparts, each of which taken together shall constitute one and the
same instrument.
12.5 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.
12.6 Each party hereto shall cooperate with each other party and
all appropriate governmental authorities (including without limitation the SEC,
the NASD 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,
to the extent practicable and except when cooperation would require waiver of
any privilege or any valuable right against the other party. Notwithstanding the
generality of the foregoing, each party hereto further agrees to furnish the
California Insurance Commissioner with any information or reports in connection
with services provided under this Agreement which such Commissioner may request
in order to ascertain whether the insurance operations of the Company are being
conducted in a manner consistent with the California Insurance Regulations and
any other applicable law or regulations.
12.7 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.
12.8. This Agreement or any of the rights and obligations
hereunder may not be assigned by any party without the prior written consent of
all parties hereto; provided, however, that the Underwriter may assign this
Agreement or any rights or obligations hereunder to any affiliate of or company
under common control with the Underwriter, if such assignee is duly organized,
licensed and registered to perform the obligations of the Underwriter under this
Agreement.
12.9. The Company shall furnish, or shall cause to be furnished,
to the Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under
statutory accounting principles) and annual report
(prepared under generally accepted accounting
principles ("GAAP"), if any), as soon as practical
and in any event within 90 days after the end of
each fiscal year;
(b) the Company's quarterly statements (statutory)
(and GAAP, if any), as soon as practical and in
any event within 45 days after the end of each
quarterly period:
(c) any financial statement, proxy statement, notice
or report of the Company sent to stockholders
and/or policyholders, as soon as practical after
the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and
financial reports of the Company filed with the
Securities and Exchange Commission or any state
insurance regulator, as soon as practical after
the filing thereof;
(e) any other report submitted to the Company by
independent accountants in connection with any
annual, interim or special audit made by them of
the books of the Company, as soon as practical
after the receipt thereof, provided, however, that
any such report shall be held by the Fund in
confidence, and shall not be redisclosed.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
VALLEY FORGE LIFE INSURANCE COMPANY
By: _________________________
Name: _________________________
Title: _________________________
VARIABLE INSURANCE PRODUCTS FUND
By: ________________________
J. Gary Burkhead
Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: _______________________
Neal Litvack
President
<PAGE>
Schedule A
Separate Accounts and Associated Contracts
Name of Separate Account and Policy Form Numbers of Contracts Funded
Date Established by Board of Directors By Separate Account
Valley Forge Life Insurance Company Variable
Annuity Separate Account
(October 18, 1995)
Valley Forge Life Insurance Company Variable Life
Separate Account
(October 18, 1995)
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter
as early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At
this time the Underwriter will inform the Company of the Record, Mailing
and Meeting dates. This will be done verbally approximately two months
before meeting.
2. Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number
of units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in
the number of Customers to Fidelity, as soon as possible, but no later
than two weeks after the Record Date.
3. The Fund's Annual Report no longer needs to be sent to each Customer by
the Company either before or together with the Customers' receipt of a
proxy statement. Underwriter will provide the last Annual Report to the
Company pursuant to the terms of Section 3.3 of the Agreement to which
this Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense,
shall produce and personalize the Voting Instruction Cards. The Legal
Department of the Underwriter or its affiliate ("Fidelity Legal") must
approve the Card before it is printed. Allow approximately 2-4 business
days for printing information on the Cards. Information commonly found
on the Cards includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and
verification of votes (already on Cards as printed by the
Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
5. During this time, Fidelity Legal will develop, produce, and the Fund
will pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to Company for
insertion into envelopes (envelopes and return envelopes are provided
and paid for by the Insurance Company). Contents of envelope sent to
Customers by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed
to the Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a
small, single sheet of paper that requests Customers to
vote as quickly as possible and that their vote is
important. One copy will be supplied by the Fund.)
e. cover letter - optional, supplied by Company and
reviewed and approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but not
including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process used.
An often used procedure is to sort Cards on arrival by proposal into
vote categories of all yes, no, or mixed replies, and to begin data
entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal procedure
and has not been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, If the account registration is under "Bertram C.
Jones, Trustee," then that is the exact legal name to be printed on the
Card and is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter, a new Card and return envelope. The mutilated or illegible Card
is disregarded and considered to be not received for purposes of vote
tabulation. Any Cards that have "kicked out" (e.g. mutilated, illegible)
of the procedure are "hand verified," i.e., examined as to why they did
not complete the system. Any questions on those Cards are usually
remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur.
This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) Fidelity
Legal must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston
time. Fidelity Legal may request an earlier deadline if required to
calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
<PAGE>
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
<PAGE>
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Exhibit 8C
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this _____ day of ______________ , 1996, by and
among The Alger American Fund (the "Trust"), an open-end management investment
company organized as a Massachusetts business trust, Valley Forge Insurance
Company, a life insurance company organized as a corporation under the laws of
the State of Pennsylvania, (the "Company"), on its own behalf and on behalf of
each segregated asset account of the Company set forth in Schedule A, as may be
amended from time to time (the "Accounts"), and Fred Alger and Company,
Incorporated, a Delaware corporation, the Trust's distributor (the
"Distributor").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the Trust and the Distributor desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, shares of beneficial interest in the Trust are divided into
the following series which are available for purchase by the Company for the
Accounts: Alger American Small Capitalization Portfolio, Alger American Growth
Portfolio, Alger American Income & Growth Portfolio, Alger American Balanced
Portfolio, Alger American MidCap Growth Portfolio, and Alger American Leveraged
AllCap Portfolio;
WHEREAS, the Trust has received an order from the Commission, dated
February 17, 1989 and amended September 14, 1995 (File No. 812-7076), 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 Portfolios of the Trust to be sold to and held by (i)
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and (ii) qualified pension
and retirement plans (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and variable annuity contracts to be
issued by the Company under which the Portfolios are to be made available as
investment vehicles (the "Contracts");
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised;
WHEREAS, the Company desires to use shares of one or more Portfolios as
investment vehicles for the Accounts;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
<PAGE>
ARTICLE I.
Purchase and Redemption of Trust Portfolio Shares
1.1. For purposes of this Article I, the Company shall be the Trust's agent
for the receipt from each Account of purchase orders and requests for
redemption pursuant to the Contracts relating to each Portfolio,
provided that the Company notifies the Trust of such purchase orders
and requests for redemption by 9:30 a.m. Eastern time on the next
following Business Day, as defined in Section 1.3.
1.2. The Trust shall make shares of the Portfolios available to the Accounts
at the net asset value next computed after receipt of a purchase order by
the Trust (or its agent), as established in accordance with the provisions
of the then current prospectus of the Trust describing Portfolio purchase
procedures. To the extent practicable, thirty Business Days' prior written
notice of a change in Portfolio purchase procedures shall be furnished by
the Trust to the Company to enable the Company to adopt any necessary
modifications to its fund transfer procedures. The Company will transmit
orders from time to time to the Trust for the purchase and redemption of
shares of the Portfolios. 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 if, 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, such
action is deemed in the best interests of the shareholders of such
Portfolio (it being understood that for this purpose, "shareholders" means
Contract Owners and plan participants). To the extent practicable, ten
business days' prior written notice of election to suspend or terminate
shall be furnished by the Trust to the Company in order to allow the
Company adequate time to take appropriate action in response to such
suspension or termination.
1.3. The Company shall pay for the purchase of shares of a Portfolio on
behalf of an Account with federal funds to be transmitted by wire to
the Trust, with the reasonable expectation of receipt by the Trust by
2:00 p.m. Eastern time on the next Business Day after the Trust (or its
agent) receives the purchase order. Upon receipt by the Trust of the
federal funds so wired, such funds shall cease to be the responsibility
of the Company and shall become the responsibility of the Trust for
this purpose. "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 Commission.
1.4. The Trust will redeem for cash 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 describing Portfolio
redemption procedures. The Trust shall make payment for such shares in the
manner established from time to time by the Trust. Proceeds of redemption
with respect to a Portfolio will normally be paid to the Company for an
Account in federal funds transmitted by wire to the Company by order of the
Trust with the reasonable expectation of receipt by the Company by 2:00
p.m. Eastern time on the next Business Day after the receipt by the Trust
(or its agent) of the request for redemption. Such payment may be delayed
if, for example, the Portfolio's cash position so requires or if
extraordinary market conditions exist, but in no event shall payment be
delayed for a greater period than is permitted by the 1940 Act. The Trust
reserves the right to suspend the right of redemption, consistent with
Section 22(e) of the 1940 Act and any rules thereunder.
1.5. Payments for the purchase of shares of the Trust's Portfolios by the
Company under Section 1.3 and payments for the redemption of shares of
the Trust's Portfolios under Section 1.4 on any Business Day may be
netted against one another for the purpose of determining the amount of
any wire transfer.
1.6. Issuance and transfer of the Trust's Portfolio shares will be by book
entry only. Stock certificates will not be issued to the Company or the
Accounts. Portfolio Shares purchased from the Trust will be recorded in
the appropriate title for each Account or the appropriate subaccount of
each Account.
1.7. The Trust shall furnish, on or before the ex-dividend date, notice to
the Company of any income dividends or capital gain distributions
payable on the shares of any Portfolio of the Trust. 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.
1.8. The Trust shall calculate the net asset value of each Portfolio on each
Business Day, as defined in Section 1.3. The Trust shall make the net asset
value per share for each Portfolio available to the Company or its designated
agent 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 to the Company by 6:30 p.m. Eastern time each Business
Day. If the Trust is unable to meet the 6:30 p.m. time stated herein, it shall
provide additional time to the Company, in an amount equal to the delay by the
Trust, to place orders for the purchase and redemption of Shares and to make any
applicable purchase payments. If the Trust provides materially incorrect net
asset value per share information, the Company, on behalf of an affected
Account, shall be entitled to an adjustment to reflect the correct net asset
value per share. Any error in the calculation or reporting of net asset value
per share shall be reported to the Company immediately upon discovery.
1.9. The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their segregated asset accounts,
to Fred Alger & Company, Incorporated or its affiliates and to such
other entities, including qualified pension and retirement plans, as
may be permitted by Section 817(h) of the Code, the regulations
hereunder, or judicial or administrative interpretations thereof. No
shares of any Portfolio will be sold directly to the general public.
The Company agrees that it will use Trust shares only for the purposes
of funding the Contracts through the Accounts listed in Schedule A, as
amended from time to time.
1.10. The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding materially to those contained in
Section 2.9 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
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 shares of the
Portfolios, 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. The Company shall distribute such prospectuses, proxy statements and
periodic reports of the Trust to the Contract owners as required to be
distributed to such Contract owners under applicable federal or state
law.
2.3. The Trust shall provide such documentation (including a final copy of
the Trust's prospectus as set in type or in camera-ready copy) and
other assistance as is reasonably necessary in order for the Company to
print together in one document the current prospectus for the Contracts
issued by the Company and the current prospectus for the Trust. The
Trust shall bear the expense of printing copies of its current
prospectus that will be distributed to existing Contract owners, and
the Company shall bear the expense of printing copies of the Trust's
prospectus that are used in connection with offering the Contracts
issued by the Company.
2.4. The Trust and the Distributor shall provide (1) at the Trust's expense,
one copy of the Trust's current Statement of Additional Information
("SAI") to the Company and to any Contract owner who requests such SAI,
(2) at the Company's expense, such additional copies of the Trust's
current SAI as the Company shall reasonably request and that the
Company shall require in accordance with applicable law in connection
with offering the Contracts issued by the Company.
2.5. The Trust, at its expense, shall provide the Company with copies of its
proxy material, periodic reports to shareholders and other communications
to shareholders in such quantity as the Company shall reasonably require
for purposes of distributing to Contract owners. The Trust, at the
Company's expense, shall provide the Company with copies of its periodic
reports to shareholders and other communications to shareholders in such
quantity as the Company shall reasonably request for use in connection with
offering the Contracts issued by the Company. If requested by the Company
in lieu thereof, the Trust shall provide such documentation (including a
final copy of the Trust's proxy materials, periodic reports to shareholders
and other communications to shareholders, as set in type or in camera-ready
copy) and other assistance as reasonably necessary in order for the Company
to print such shareholder communications for distribution to Contract
owners.
2.6. The Company agrees and acknowledges that the Distributor is the sole
owner of the name and mark "Alger" and that all use of any designation
comprised in whole or part of such name or mark under this Agreement
shall inure to the benefit of the Distributor. Except as provided in
Sections 2.5 and 2.7, the Company shall not use any such name or 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 the Distributor. Upon termination of this Agreement
for any reason, the Company shall cease all use of any such name or
mark as soon as reasonably practicable.
2.7. The Company shall furnish, or cause to be furnished, to the Trust or
its designee a copy of each Contract prospectus and/or statement of
additional information describing the Contracts, each report to Contract
owners, proxy statement, application for exemption or request for no-action
letter in which the Trust or the Distributor is named contemporaneously
with the filing of such document with the 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 the Distributor is named, at least five Business Days prior to its use.
No such material shall be used if the Trust or its designee reasonably
objects to such use within three Business Days after receipt of such
material. Notwithstanding any initial approval, the Trust and the
Distributor reserve the right to object at a later date to the continued
use of any such sales literature or other promotional material in which the
Trust or Distributor are named, and no such material shall be used
thereafter if the Trust or the Distributor so objects and reimburses the
Company for costs incurred in complying with such objection.
The Trust shall furnish, or cause to be furnished, to the Company or
its designee a copy of each registration statement, prospectus,
statement of additional information describing the Trust, each report
to shareholders, proxy statement, application for exemption or request
for no-action letter, any of which pertain to the Trust
contemporaneously with the filing of such document with the Commission.
The Trust shall furnish, or shall cause to be furnished, to the Company
or its designee each piece of sales literature or other promotional
material in which the Company, the Accounts or the Contracts are named,
at least 5 business days prior to its use. No such material shall be
used if the Company or its designee reasonably objects to such use
within 3 business days after receipt of such material. Notwithstanding
any initial approval, the Company reserves the right to object at a
later date to the continued use of any such sales literature or other
promotional material in which the Company, the Accounts or the
Contracts are so named, and no such material shall be used thereafter
if the Company reasonably so objects and reimburses the Distributor for
costs incurred in complying with such objection.
For purposes of this Agreement, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements
(such as material published or deisgned for use in a newspaper,
magazine, or other periodical, radio, television, telephone or tape
recording, video tape display, signs or billboard, motion pictures or
other public media), and sales literature (any written or electronic
communications distributed or generally made available to customers or
the public such as brochures, circulars, research reports, market
letters, performance reports or seminars, form letters, telemarketing
scripts, seminar text, reprints or excerpts or any other advertisement,
sales literature, or published articles), distributed or made generally
available to customers or the public, educational or training materials
or communications distributed or made generally available to some or
all agents or employees.
2.8. The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or the
Distributor 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), annual and semi-annual 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 prior written permission of the
Trust, the Distributor or their respective designees. The Trust and the
Distributor agree to respond to any request for approval on a prompt and
timely basis. The Company shall adopt and implement procedures reasonably
designed to ensure that "broker only" materials including information
therein about the Trust or the Distributor are not distributed to existing
or prospective Contract owners.
2.9. The Trust shall use its best efforts to provide the Company, on a
timely basis, with such information about the Trust, the Portfolios and the
Distributor, in such form as the Company may reasonably require, as the
Company shall reasonably request in connection with the preparation of
registration statements, prospectuses and annual and semi-annual reports
pertaining to the Contracts. The Trust will provide the Company with as
much notice as is reasonably practicable of any proxy solicitation for any
Portfolio of the Trust, and of any material change in the Trust's
registration statement or prospectus, particularly any change resulting in
a change to the registration statement or prospectus for any Account. The
Trust will assist the Company so as to enable the Company to solicit
proxies from Contract Owners, or to make changes to the Company's
prospectus and registration statement for the Accounts, in an orderly and
reasonable manner. The Trust will make reasonable efforts to attempt to
have changes affecting Contract prospectuses become effective
simultaneously with the annual updates for such prospectuses.
2.10. The Trust and the Distributor shall not give, and agree that no
affiliate of either of them shall 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 prior written permission of
the Company. The Company agrees to respond to any request for approval on a
prompt and timely basis.
2.11. So long as, and to the extent that, the Commission interprets the 1940
Act to require pass-through voting privileges for Contract owners, the
Company will provide pass-through voting privileges to Contract owners
whose cash values are invested, through the registered Accounts, in shares
of one or more Portfolios 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 registered Account, the Company will vote
shares of each Portfolio of the Trust held by a registered Account and for
which no timely voting instructions from Contract owners are received 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 Portfolio shares held to
fund the Contacts without the prior written consent of the Trust, which
consent may be withheld in the Trust's sole discretion. The Company
reserves the right, to the extent permitted by law, to vote shares held in
any Account in its sole discretion.
2.12. The Trust will provide to the Company information about the results of
any regulatory examination relating to the Trust, including relevant
portions of any deficiency letter and any response thereto. The Company
will provide to the Trust information about the results of any
regulatory examination relating to the Accounts and the purchase, sale
or allocation of interests therein, including relevant portions of any
deficiency letter and any response thereto.
2.13. No compensation shall be paid by the Trust to the Company, or by the
Company to the Trust, under this Agreement (except for specified
expense reimbursements). However, nothing herein shall prevent the
parties hereto from otherwise agreeing to perform, and arranging for
appropriate compensation for, other services relating to the Trust, the
Accounts or both.
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
Pennsylvania and that it has legally and validly established each
Account as a segregated asset account under such law as of the date set
forth in Schedule A, and that CNA Investor Services, Inc., the
principal underwriter for the Contracts, is registered and will remain
registered during the term of this Agreement as a broker-dealer under
the Securities Exchange Act of 1934 and will remain during the term of
this Agreement a member in good standing of the National Association of
Securities Dealers, Inc.
3.2. The Company represents and warrants that it has registered or, prior to
any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act
and cause each Account to remain so registered to serve as a segregated
asset account for the Contracts, unless an exemption from registration
is available.
3.3. The Company represents and warrants that the Contracts will be
registered under the 1933 Act unless an exemption from registration is
available prior to any issuance or sale of the Contracts; the Contracts
will be issued and sold in compliance in all material respects with all
applicable federal and state laws; and the Company will require all
persons involved in the sale of the Contracts to comply in all material
respects with any applicable investor suitability requirements under
state insurance laws.
3.4. The Trust represents and warrants that it is duly organized and validly
existing under the laws of the Commonwealth of Massachusetts and that
it does and will comply in all material respects with the 1940 Act and
the rules and regulations thereunder.
3.5. The Trust and the Distributor represent and warrant that the Portfolio
shares offered and sold pursuant to this Agreement will be registered
under the 1933 Act and sold in accordance with all applicable federal
and state laws, and the Trust shall be registered under the 1940 Act
prior to and at the time of 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.
3.6. The Trust represents and warrants that the investments of each
Portfolio currently and will continue to comply with the
diversification requirements for variable annuity, endowment or life
insurance contracts set forth in Section 817(h) of the Internal Revenue
Code of 1986, as amended (the "Code"), and the rules and regulations
thereunder, including without limitation Treasury Regulation 1.817-5,
and the Trust will notify the Company immediately upon having a
reasonable basis for believing any Portfolio has ceased to comply or
might not so comply and will immediately take all reasonable steps to
adequately diversify the Portfolio to achieve compliance within the
grace period afforded by Regulation 1.817-5.
3.7. The Trust represents and warrants that it is currently qualified as a
"regulated investment company" under Subchapter M of the Code, that it
will make every effort to maintain such qualification and will notify
the Company immediately upon having a reasonable basis for believing it
has ceased to so qualify or might not so qualify in the future.
3.8. The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of
a Portfolio shall at all times be covered by a blanket fidelity bond or
similar coverage for the benefit of the Trust in an amount not less
than the minimum coverage required by Rule 17g-1 or other applicable
regulations under the 1940 Act. Such bond shall include coverage for
larceny and embezzlement and be issued by a reputable bonding company.
3.9. The Distributor represents that it is duly organized and validly
existing under the laws of the State of Delaware and that it is registered,
and will remain registered, during the term of this Agreement, as a
broker-dealer under the Securities Exchange Act of 1934 and is and will
remain during the term of this Agreement a member in good standing of the
National Association of Securities Dealers, Inc. The Trust and the
Distributor respresent and warrant that the Trust's investment advisor is
Fred Alger Management, Inc., a corporation duly organized and validly
existing under the laws of the State of Delaware and that it is registered,
and will remain registered, during the term of this Agreement, as an
investment adviser under the Investment Advisers Act of 1940 and will
comply in all material respects with the Investment Advisers Act of 1940
and the rules and regulations thereunder.
<PAGE>
ARTICLE IV.
Potential Conflicts
4.1. The parties acknowledge that a Portfolio'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. A material irreconcilable 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 Trust shall
promptly inform the Company of any determination by the Trustees that a
material irreconcilable conflict exists and of the implications thereof.
4.2. The Company agrees to report promptly 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 Shared
Funding Exemptive Order by providing the Trustees with all information
reasonably necessary for and requested by 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. All communications from the Company to the Trustees may
be made in care of the Trust.
4.3. If it is determined by a majority of the Trustees, or a majority of the
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 own expense and to the extent reasonably practicable (as
determined by the Trustees) take whatever steps are necessary to remedy or
eliminate the material irreconcilable 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 the Trust has determined that such
decision has created a material irreconcilable 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 Section 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any material irreconcilable conflict, but in no event
will the Trust be required to establish a new funding medium for any
Contract. The Company shall not 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 material
irreconcilable conflict. In the event that the Trustees determine that any
proposed action does not adequately remedy any material irreconcilable
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 Shared Funding Exemptive Order, and said reports, materials and
data shall be submitted more frequently if reasonably deemed
appropriate by the Trustees.
4.8. If and to the extent that Rule 6e-3(T) is 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 Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared
Funding Exemptive Order, then the Trust and/or the Participating
Insurance Companies, as appropriate, shall take such steps as may be
necessary to comply with Rule 6e-3(T), as amended, or Rule 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 Distributor, 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 Section
5.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Company, which consent shall not be unreasonably withheld) 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 are related to the sale or acquisition of the Contracts or
Trust shares and:
(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 or other
promotional material for 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; or
(f) arise out of or result from the provision by the Company
to the Trust of insufficient or incorrect information
regarding the purchase or sale of shares of any Portfolio, or
the failure of the Company to provide such information on a
timely basis.
5.2. Indemnification by the Distributor. The Distributor 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 the purposes of this Section 5.2) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Distributor, which consent shall
not be unreasonably withheld) 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 are related to the sale or acquisition of the
Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the registration statement, prospectus or sales literature or
other promotional material for the Trust (or any amendment or
supplement to any of the foregoing) (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 Distributor or 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 and; or
(b) arise out of or result from statements or representations
(other than statements or representations contained in and
accurately derived form Company Documents) or wrongful conduct
of the Distributor or persons under its control, with respect
to the sale or acquisition of the Contracts or Portfolio
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
Distributor or 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 Distributor or the
Trust in this Agreement or arise out of or result from any
other material breach of this Agreement by the Distributor or
the Trust.
(f) arise out of or result from the provision by or on behalf
of the Trust of insufficient or incorrect information
regarding the purchase or sale of shares of any Portfolio, or
the pricing of such shares, or the failure of the Trust to
provide such information on a timely basis.
5.3. None of the Company, the Trust or the Distributor 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. None of the Company, the Trust or the Distributor 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 an Indemnified Party, 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 shall terminate:
(a) at the option of any party upon 120 days advance
written notice to the other parties,
unless a shorter time is agreed to by the parties;
(b) at the option of the Trust or the Distributor if the
Contracts issued by the Company cease to qualify as annuity
contracts or life insurance contracts, as applicable, under
the Code or if the Contracts are not registered, issued or
sold in accordance with applicable state and/or federal law;
or
(c) at the option of any party upon a determination by a
majority of the Trustees of the
Trust, or a majority of its disinterested Trustees, that a
material irreconcilable conflict exists; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust or the Distributor by the NASD,
the SEC, or any state securities or insurance department or
any other regulatory body regarding the Trust's or the
Distributor's duties under this Agreement or related to the
sale of Trust shares or the operation of the Trust; or
(e) at the option of the Company if the Trust or a
Portfolio fails to meet the diversification requirements
specified in Section 3.6 hereof; or.
(f) at the option of the Company if shares of the Series are
not reasonably available to meet the requirements of the
Variable Contracts issued by the Company, as determined by the
Company, and upon prompt notice by the Company to the other
parties; or
(g) at the option of the Company in the event any of the
shares of the Portfolio are not registered, issued or sold in
accordance with applicable state and/or federal law, or such
law precludes the use of such shares as the underlying
investment media of the Variable Contracts issued or to be
issued by the Company; or
(h) at the option of the Company, if the Portfolio fails
to qualify as a Regulated Investment Company under Subchapter
M of the Code; or
(i) at the option of the Distributor if it shall determine in
its sole judgment exercised in good faith, that the Company
and/or its affiliated companies has suffered a material
adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is
the subject of material adverse publicity; or
(j) at the option of the Company, the Trust or the Adviser
upon the receipt of any necessary regulatory approvals and/or
vote of the Contract owners having an interest in the Accounts
(or any subaccounts) to substitute the shares of another
investment company for the corresponding Portfolio shares in
accordance with the terms of the Contracts for which the
Portfolio shares had been selected to serve as the underlying
investment media. The Company will give thirty (30) days'
prior written notice to the Trust of the Date of any proposed
vote or other action taken to replace the shares; or
(k) upon the assignment of this Agreement (as defined in
the 1940 Act), unless made with
the written consent of each other party; or
(l) at the option of the Company by written notice to the
Trust upon the sale, acquisition
or change in control of the Adviser; or
(m) at the option of the Company if it shall determine in its
sole judgment exercised in good faith that the Trust, the
Distributor, the Adviser and/or any of their affiliated
companies has suffered a material adverse change in its
business, oprations,financial condition or prospects since the
date of this Agreement or is the subject of material adverse
publicity; or
(n) at the option of any party to this Agreement, upon
another party's material breach of
any provision of this Agreement.
6.2. Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares
of any Portfolio and redeem shares of 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.
6.3. The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.9 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, postage prepaid, return receipt requested, or by nationally
recognized overnight courier, charges prepaid with evidence of delivery 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, and such notice shall be effective upon delivery.
If to the Trust or its Distributor:
Fred Alger Management, Inc.
30 Montgomery Street
Jersey City, NJ 07302
Attn: Gregory S. Duch
If to the Company:
Valley Forge Life Insurance Company
Variable Life Insurance Products-34 South
CNA Plaza
Chicago, Illinois 60611
Attention: Kevin Hogan
<PAGE>
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 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 the State of New York. It
shall also be subject to the provisions of the federal securities laws
and the rules and regulations thereunder and to any orders of the
Commission granting exemptive relief therefrom and the conditions of
such orders. Copies of any such orders shall be promptly forwarded by
the Trust to the Company.
8.5. 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 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 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. 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.
8.11. Each party hereto shall, except as required by law or otherwise
permitted by this Agreement, treat as confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto, and
shall not disclose such confidential information without the written
consent of the affected party unless such information has become
publicly available.
<PAGE>
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.
Fred Alger and Company, Incorporated
By: S/GREGORY S. DUCH
Name: Gregory S. Duch
Title: Executive Vice President
The Alger American Fund
By:_________________________________
Name: Gregory S. Duch
Title: Treasurer
Valley Forge Life Insurance Company
By:_________________________________
Name:
Title:
SCHEDULE A
To
PARTICIPATION AGREEMENT
Between
THE ALGER AMERICAN FUND
and
VALLEY FORGE LIFE INSURANCE COMPANY
The segregated asset accounts of Valley Forge Life Insurance Company that are
included under this Participation Agreement are:
Valley Forge Life Insurance Company Variable Annuity Separate Account,
established October 18, 1995.
Valley Forge Life Insurance Company Variable Life Separate Account,
established October 18, 1995.
Exhibit 8(D)
PARTICIPATION AGREEMENT
AMONG
MFS VARIABLE INSURANCE TRUST,
VALLEY FORGE LIFE INSURANCE COMPANY
AND
MASSACHUSETTS FINANCIAL SERVICES COMPANY
THIS AGREEMENT, made and entered into this 1st day of July 1996, by and
among MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), VALLEY FORGE LIFE INSURANCE COMPANY, a Pennsylvania stock insurance
company (the "Company"), on its own behalf and on behalf of each of the
segregated asset accounts of the Company set forth in Schedule A hereto, as may
be amended from time to time (the "Accounts"), and MASSACHUSETTS FINANCIAL
SERVICES COMPANY, a Delaware corporation ("MFS").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares are registered or will be registered under the Securities Act of
1933, as amended (the "1933 Act");
WHEREAS, shares of beneficial interest of the Trust are divided into
several series of shares, each representing the interests in a particular
managed pool of securities and other assets;
WHEREAS, the series of shares of the Trust offered by the Trust to the
Company and the Accounts are set forth on Schedule A attached hereto (each, a
"Portfolio," and, collectively, the "Portfolios");
WHEREAS, MFS is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
law, and is the Trust's investment adviser;
WHEREAS, the Company will issue certain variable annuity and/or
variable life insurance contracts (individually, the "Policy" or, collectively,
the "Policies") which, if required by applicable law, will be registered under
the 1933 Act;
WHEREAS, the Accounts are duly organized, validly existing segregated
asset accounts, established by resolution of the Board of Directors of the
Company, to set aside and invest assets attributable to the aforesaid variable
annuity and/or variable life insurance contracts that are allocated to the
Accounts (the Policies and the Accounts covered by this Agreement, and each
corresponding Portfolio covered by this Agreement in which the Accounts invest,
is specified in Schedule A attached hereto as may be modified from time to
time);
WHEREAS, the Company has registered or will register the Accounts as
unit investment trusts under the 1940 Act (unless exempt therefrom);
WHEREAS, MFS Fund Distributors, Inc. (the "Underwriter") is registered
as a broker-dealer with the Securities and Exchange Commission (the "SEC") under
the Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"),
and is a member in good standing of the National Association of Securities
Dealers, Inc. (the "NASD");
WHEREAS, CNA Investor Services, Inc., the underwriter for the
individual variable annuity and the variable life policies, is registered as a
broker-dealer with the SEC under the 1934 Act and is a member in good standing
of the NASD; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios specified in Schedule A attached hereto (the "Shares") on behalf of
the Accounts to fund the Policies, and the Trust intends to sell such Shares to
the Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Trust,
MFS, and the Company agree as follows:
ARTICLE I. SALE OF TRUST SHARES
1.1. The Trust agrees to sell to the Company those Shares which the
Accounts order (based on orders placed by Policy holders on that
Business Day, as defined below) and which are available for purchase by
such Accounts, executing such orders on a daily basis at the net asset
value next computed after receipt by the Trust or its designee of the
order for the Shares. For purposes of this Section 1.1, the Company
shall be the designee of the Trust for receipt of such orders from
Policy owners and receipt by such designee shall constitute receipt by
the Trust; provided that the Trust receives notice of such orders by
9:30 a.m. New York time on the next following Business Day. "Business
Day" shall mean any day on which the New York Stock Exchange, Inc. (the
"NYSE") is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the SEC.
1.2. The Trust agrees to make the Shares available indefinitely for
purchase at the applicable net asset value per share by the Company and
the Accounts on those days on which the Trust calculates its net asset
value pursuant to rules of the SEC and the Trust shall calculate such
net asset value on each day which the NYSE is open for trading.
Notwithstanding the foregoing, the Board of Trustees of the Trust (the
"Board") may refuse to sell any Shares to the Company and the Accounts,
or suspend or terminate the offering of the Shares if such action is
required by law or by regulatory authorities having jurisdiction or is,
in the sole discretion of the Board acting in good faith and in light
of its fiduciary duties under federal and any applicable state laws,
necessary in the best interest of the Shareholders of such Portfolio
(it being understood that, for this purpose, Shareholders means Policy
owners). Notice of election to suspend or terminate shall be furnished
by the Trust, said notification to be effective when possible 10 days
after receipt of such notice by the Company in order to give the
Company sufficient time to take appropriate steps in response to such
suspension or termination.
1.3. The Trust and MFS agree that the Shares will be sold only to
insurance companies which have entered into participation agreements
with the Trust and MFS (the "Participating Insurance Companies") and
their separate accounts, qualified pension and retirement plans and MFS
or its affiliates. The Trust and MFS will not sell Trust shares to any
insurance company or separate account unless an agreement containing
provisions substantially the same as Articles III and VII of this
Agreement is in effect to govern such sales. The Company will not
resell the Shares except to the Trust or its agents.
1.4. The Trust agrees to redeem for cash, on the Company's request, any
full or fractional Shares held by the Accounts (based on orders placed
by Policy holders on that Business Day), executing such requests on a
daily basis at the net asset value next computed after receipt by the
Trust or its designee of the request for redemption. For purposes of
this Section 1.4, the Company shall be the designee of the Trust for
receipt of requests for redemption from Policy owners and receipt by
such designee shall constitute receipt by the Trust; provided that the
Trust receives notice of such request for redemption by 9:30 a.m. New
York time on the next following Business Day.
1.5. Each purchase, redemption and exchange order placed by the Company
shall be placed separately for each Portfolio and shall not be netted
with respect to any Portfolio. However, with respect to payment of the
purchase price by the Company and of redemption proceeds by the Trust,
the Company and the Trust shall net purchase and redemption orders with
respect to each Portfolio and shall transmit one net payment for all of
the Portfolios in accordance with Section 1.6 hereof.
1.6. In the event of net purchases, the Company shall pay for the
Shares by 2:00 p.m. New York time on the next Business Day after an
order to purchase the Shares is made in accordance with the provisions
of Section 1.1. hereof. In the event of net redemptions, the Trust
shall pay the redemption proceeds by 2:00 p.m. New York time on the
next Business Day after an order to redeem the shares is made in
accordance with the provisions of Section 1.4. hereof. All such
payments shall be in federal funds transmitted by wire.
1.7. Issuance and transfer of the Shares will be by book entry only.
Stock certificates will not be issued to the Company or the Accounts.
The Shares ordered from the Trust will be recorded in an appropriate
title for the Accounts or the appropriate subaccounts of the Accounts.
1.8. The Trust shall furnish same day notice (by wire or telephone
followed by written confirmation) to the Company of any dividends or
capital gain distributions payable on the Shares. The Company hereby
elects to receive all such dividends and 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.
1.9. The Trust or its custodian shall make the net asset value per
share for each Portfolio available to the Company on each Business Day
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 6:30 p.m. New York time. In the event that the
Trust is unable to meet the 6:30 p.m. time stated herein, it shall
provide additional time for the Company to place orders for the
purchase and redemption of Shares. Such additional time shall be equal
to the additional time which the Trust takes to make the net asset
value available to the Company. If the Trust provides materially
incorrect share net asset value information, the Trust shall make an
adjustment to the number of shares purchased or redeemed for the
Accounts to reflect the correct net asset value per share. Any material
error in the calculation or reporting of net asset value per share,
dividend or capital gains information shall be reported promptly upon
discovery to the Company.
ARTICLE II. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. The Company represents and warrants that the Policies are or will
be registered under the 1933 Act or are exempt from or not subject to
registration thereunder, and that the Policies will be issued, sold,
and distributed in compliance in all material respects with all
applicable state and federal laws, including without limitation the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934
Act"), and the 1940 Act. The Company further represents and warrants
that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established
the Account as a segregated asset account under applicable law and has
registered or, prior to any issuance or sale of the Policies, will
register the Accounts as unit investment trusts in accordance with the
provisions of the 1940 Act (unless exempt therefrom) to serve as
segregated investment accounts for the Policies, and that it will
maintain such registration for so long as any Policies are outstanding.
The Company shall amend the registration statements under the 1933 Act
for the Policies and the registration statements under the 1940 Act for
the Accounts from time to time as required in order to effect the
continuous offering of the Policies for as long as the Company desires
to offer the Policies (it being understood that the Company reserves
the right, in its sole discretion, to suspend, terminate or resume the
offering of the Policies in any state at any time for any reason) or as
may otherwise be required by applicable law. The Company shall register
and qualify the Policies for sales in accordance with the securities
laws of the various states only if and to the extent deemed necessary
by the Company.
2.2. The Company represents and warrants that the Policies are
currently and at the time of issuance will be treated as life
insurance, endowment or annuity contract under applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), subject to
the Trust's compliance with applicable diversification requirements set
forth in Article VI hereof, that it will maintain such treatment and
that it will notify the Trust or MFS immediately upon having a
reasonable basis for believing that the Policies have ceased to be so
treated or that they might not be so treated in the future.
2.3. The Company represents and warrants that CNA Investor Services,
Inc., the underwriter for the individual variable annuity and the
variable life policies, is a member in good standing of the NASD and is
a registered broker-dealer with the SEC. The Company represents and
warrants that the Company and CNA Investor Services, Inc. will sell and
distribute such policies in accordance in all material respects with
all applicable state and federal securities laws, including without
limitation the 1933 Act, the 1934 Act, and the 1940 Act.
2.4. The Trust and MFS represent and warrant that the Shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with the laws of The
Commonwealth of Massachusetts and all applicable federal and state
securities laws and that the Trust is and shall remain registered under
the 1940 Act. The Trust shall amend the registration statement for its
Shares 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 the Shares for sale in accordance with
the laws of the various states only if and to the extent deemed
necessary by the Trust.
2.5. MFS represents and warrants that the Underwriter is a member in
good standing of the NASD and is registered as a broker-dealer with the
SEC. The Trust and MFS represent that the Trust and the Underwriter
will sell and distribute the Shares in compliance in all material
respects with all applicable state and federal securities laws,
including without limitation the 1933 Act, the 1934 Act, and the 1940
Act.
2.6. The Trust represents that it is lawfully organized and validly
existing under the laws of The Commonwealth of Massachusetts and that
it does and will comply in all material respects with the 1940 Act and
any applicable regulations and SEC orders issued to the Trust
thereunder.
2.7. MFS represents and warrants that it: (i) is the Trust's investment
adviser; (ii) is and shall remain duly registered under all applicable
federal securities laws; and (iii) shall perform its obligations for
the Trust in compliance in all material respects with any applicable
federal securities laws and with the securities laws of The
Commonwealth of Massachusetts. MFS represents and warrants that it is
not subject to state securities laws other than the securities laws of
The Commonwealth of Massachusetts and that it is exempt from
registration as an investment adviser under the securities laws of The
Commonwealth of Massachusetts.
2.8. No less frequently than annually, the Company shall submit to the
Board such reports, material or data as the Board may reasonably
request so that it may carry out fully the obligations imposed upon it
by the conditions contained in the exemptive application pursuant to
which the SEC has granted exemptive relief to permit mixed and shared
funding (the "Mixed and Shared Funding Exemptive Order").
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. At least annually, the Trust or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios listed in Schedule A hereto) for the
Shares as the Company may reasonably request for distribution to
existing Policy owners whose Policies are funded by such Shares. The
Trust or its designee shall provide the Company, at the Company's
expense, with as many copies of the current prospectus for the Shares
as the Company may reasonably request for distribution to prospective
purchasers of Policies. If requested by the Company in lieu thereof,
the Trust or its designee shall provide such documentation (including a
"camera ready" copy of the new prospectus as set in type or, at the
request of the Company, as a diskette in the form sent to the financial
printer) and other assistance as is reasonably necessary in order for
the parties hereto once each year (or more frequently if the prospectus
for the Shares is supplemented or amended) to have the prospectus for
the Policies and the prospectus for the Shares printed together in one
document; the expenses of such printing to be apportioned between (a)
the Company and (b) the Trust or its designee in proportion to the
number of pages of the Policy and Shares' prospectuses, taking account
of other relevant factors affecting the expense of printing, such as
covers, columns, graphs and charts; the Trust or its designee to bear
the cost of printing the Shares' prospectus portion of such document
for distribution to owners of existing Policies funded by the Shares
and the Company to bear the expenses of printing the portion of such
document relating to the Accounts; provided, however, that the Company
shall bear all printing expenses of such combined documents where used
for distribution to prospective purchasers or to owners of existing
Policies not funded by the Shares. In the event that the Company
requests that the Trust or its designee provides the Trust's prospectus
in a "camera ready" or diskette format, the Trust shall be responsible
for providing the prospectus in the format in which it or MFS is
accustomed to formatting prospectuses and shall bear the expense of
providing the prospectus in such format (e.g., typesetting expenses),
and the Company shall bear the expense of adjusting or changing the
format to conform with any of its prospectuses.
3.2. The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Trust or
its designee. The Trust or its designee, at its expense, shall print
and provide such statement of additional information to the Company (or
a master of such statement suitable for duplication by the Company) for
distribution to any owner of a Policy funded by the Shares. The Trust
or its designee, at the Company's expense, shall print and provide such
statement to the Company (or a master of such statement suitable for
duplication by the Company) for distribution to a prospective purchaser
who requests such statement or to an owner of a Policy not funded by
the Shares.
3.3. The Trust or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Trust's
proxy materials, reports to Shareholders and other communications to
Shareholders in such quantity as the Company shall reasonably require
for distribution to Policy owners.
3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3
above, or of Article V below, the Company shall pay the expense of
printing or providing documents to the extent such cost is considered a
distribution expense. Distribution expenses would include by way of
illustration, but are not limited to, the printing of the Shares'
prospectus or prospectuses for distribution to prospective purchasers
or to owners of existing Policies not funded by such Shares.
3.5. The Trust hereby notifies the Company that it may be appropriate
to include in the prospectus pursuant to which a Policy is offered
disclosure regarding the potential risks of mixed and shared funding.
The Trust shall include disclosure in its prospectus in accordance with
SEC guidelines with respect to mixed and shared funding.
3.6. If and to the extent required by law, the Company shall:
(a) solicit voting instructions from Policy owners;
(b) vote the Shares in accordance with instructions
received from Policy owners; and
(c) vote the Shares for which no instructions have been
received in the same proportion as the Shares of such
Portfolio for which instructions have been received
from Policy owners;
so long as and to the extent that the SEC continues to interpret the
1940 Act to require pass through voting privileges for variable
contract owners. Subject to applicable legal requirements, the Company
will in no way recommend action in connection with or oppose or
interfere with the solicitation of proxies for the Shares held for such
Policy owners. The Company reserves the right to vote shares held in
any segregated asset account in its own right, to the extent permitted
by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts holding Shares calculates
voting privileges in the manner required by the Mixed and Shared
Funding Exemptive Order. The Trust and MFS will notify the Company of
any changes of interpretations or amendments to the Mixed and Shared
Funding Exemptive Order.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. 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, MFS, any other investment
adviser to the Trust, or any affiliate of MFS are named, at least five
(5) Business Days prior to its use. No such material shall be used if
the Trust, MFS, or their respective designees reasonably objects to
such use within five (5) Business Days after receipt of such material.
Notwithstanding initial approval or lack of objection by the Trust, MFS
or their respective designees to sales literature or other promotional
material, the Trust, MFS and their respective designees reserve the
right to object at a later date to the continued use of any such sales
literature or other promotional material in which the Trust, MFS or
their respective designees is named, and no such material shall be used
thereafter if the Trust, MFS or their respective designees so objects.
4.2. The Company shall not give any information or make any
representations or statement on behalf of the Trust, MFS, any other
investment adviser to the Trust, or any affiliate of MFS or concerning
the Trust or any other such entity in connection with the sale of the
Policies other than the information or representations contained in the
registration statement, prospectus or statement of additional
information for the Shares, as such registration statement, prospectus
and statement of additional information may be amended or supplemented
from time to time, or in reports or proxy statements for the Trust, or
in sales literature or other promotional material approved by the
Trust, MFS or their respective designees, except with the permission of
the Trust, MFS or their respective designees. The Trust, MFS or their
respective designees each agrees to respond to any request for approval
on a prompt and timely basis. The Company shall adopt and implement
procedures reasonably designed to ensure that information concerning
the Trust, MFS or any of their affiliates which is intended for use
only by brokers or agents selling the Policies (i.e., information that
is not intended for distribution to Policy holders or prospective
Policy holders) is so used, and neither the Trust, MFS nor any of their
affiliates shall be liable for any losses, damages or expenses relating
to the improper use of such broker only materials.
4.3. The Trust or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or
the Accounts is named, at least five (5) Business Days prior to its
use. No such material shall be used if the Company or its designee
reasonably objects to such use within five (5) Business Days after
receipt of such material. Notwithstanding initial approval or lack of
objection by the Company to sales literature or other promotional
material, the Company reserves the right to object at a later date to
the continued use of any such sales literature or other promotional
material in which the Company is named, and no such material shall be
used thereafter if the Company or its designee so objects.
4.4. The Trust and MFS shall not give, and agree that the Underwriter
shall not give, any information or make any representations on behalf
of the Company or concerning the Company, the Accounts, or the Policies
in connection with the sale of the Policies other than the information
or representations contained in a registration statement, prospectus,
or statement of additional information for the Policies, as such
registration statement, prospectus and statement of additional
information may be amended or supplemented from time to time, or in
reports for the Accounts, or in sales literature or other promotional
material approved by the Company or its designee, except with the
permission of the Company. The Company or its designee agrees to
respond to any request for approval on a prompt and timely basis. The
parties hereto agree that this Section 4.4. is neither intended to
designate nor otherwise imply that MFS is an underwriter or distributor
of the Policies.
4.5. The Company and the Trust (or its designee in lieu of the Company
or the Trust, as appropriate) will each provide to the other at least
one complete copy of all registration statements, prospectuses,
statements of additional information, any supplements thereto, reports,
proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Policies, or to the
Trust or its Shares, prior to or contemporaneously with the filing of
such document with the SEC or other regulatory authorities. The Company
and the Trust shall also each promptly inform the other or the results
of any examination by the SEC (or other regulatory authorities) that
relates to the Policies, the Trust or its Shares, and the party that
was the subject of the examination shall provide the other party with a
copy of relevant portions of any "deficiency letter" or other
correspondence or written report regarding any such examination.
4.6. The Trust and MFS will provide the Company with as much notice as
is reasonably practicable of any proxy solicitation for any Portfolio,
and of any material change in the Trust's registration statement,
particularly any change resulting in change to the registration
statement or prospectus or statement of additional information for any
Account. The Trust and MFS will cooperate with the Company so as to
enable the Company to solicit proxies from Policy owners or to make
changes to its prospectus, statement of additional information or
registration statement, in an orderly manner. The Trust and MFS will
make reasonable efforts to attempt to have changes affecting Policy
prospectuses become effective simultaneously with the annual updates
for such prospectuses.
4.7. For purpose of this Article IV and Article VIII, the phrase "sales
literature or other promotional material" includes but is not limited
to advertisements (such as material published, or designed for use in,
a newspaper, magazine, or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards,
motion pictures, or other public media), and sales literature (such as
brochures, circulars, research reports, market letters, performance
reports or seminars, form letters, telemarketing scripts, seminar
texts, reprints or excerpts or any other advertisement, sales
literature, or published articles), distributed or made generally
available to customers or the public, educational or training materials
or communications distributed or made generally available to some or
all agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1. The Trust shall pay no fee or other compensation to the Company
under this Agreement, and the Company shall pay no fee or other
compensation to the Trust, except that if the Trust or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act
to finance distribution and Shareholder servicing expenses, then,
subject to obtaining any required exemptive orders or regulatory
approvals, the Trust may make payments to the Company or to the
underwriter for the Policies if and in amounts agreed to by the Trust
in writing. Each party, however, shall, in accordance with the
allocation of expenses specified in Articles III and V hereof,
reimburse other parties for expenses initially paid by one party but
allocated to another party. In addition, nothing herein shall prevent
the parties hereto from otherwise agreeing to perform, and arranging
for appropriate compensation for, other services relating to the Trust
and/or to the Accounts.
5.2. The Trust or its designee shall bear the expenses for the cost of
registration and qualification of the Shares under all applicable
federal and state laws, including preparation and filing of the Trust's
registration statement, and payment of filing fees and registration
fees; preparation and filing of the Trust's proxy materials and reports
to Shareholders; setting in type and printing its prospectus and
statement of additional information (to the extent provided by and as
determined in accordance with Article III above); setting in type and
printing the proxy materials and reports to Shareholders (to the extent
provided by and as determined in accordance with Article III above);
the preparation of all statements and notices required of the Trust by
any federal or state law with respect to its Shares; all taxes on the
issuance or transfer of the Shares; and the costs of distributing the
Trust's prospectuses and proxy materials to owners of Policies funded
by the Shares and any expenses permitted to be paid or assumed by the
Trust pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act.
The Trust shall not bear any expenses of marketing the Policies.
5.3. The Company shall bear the expenses of distributing the Shares'
prospectus or prospectuses in connection with new sales of the Policies
and of distributing the Trust's Shareholder reports and proxy materials
to Policy owners. The Company shall bear all expenses associated with
the registration, qualification, and filing of the Policies under
applicable federal securities and state insurance laws; the cost of
preparing, printing and distributing the Policy prospectus and
statement of additional information; and the cost of preparing,
printing and distributing annual individual account statements for
Policy owners as required by state insurance laws.
ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
6.1. The Trust and MFS represent and warrant that they will use their
best efforts to ensure that each Portfolio will meet the
diversification requirements of Section 851 of the Code ("Section 851
Diversification Requirements") and Section 817(h)(1) of the Code and
Treas. Reg. 1.817-5 relating to the diversification requirements for
variable annuity, endowment, or life insurance contracts ("Section
817(h)(1) Diversification Requirements"), as they may be amended from
time to time (and any revenue rulings, revenue procedures, notices, and
other published announcements of the Internal Revenue Service
interpreting these sections) (collectively, "Diversification
Requirements"). In the event that any Portfolio is not so diversified
at the end of any applicable quarter, the Trust and MFS will make every
effort to adequately diversify the Portfolio so as to achieve
compliance within the grace periods afforded by Treas. Reg. 1.817-5 and
Section 851(d) of the Code (the "Grace Periods"). In the event that any
Portfolio is not so diversified at the end of any applicable Grace
Period, the Trust or MFS will promptly notify the Company of such
non-diversification, such notification to be provided in no event later
than 20 days after the end of the applicable Grace Period.
6.2. The Trust and MFS represent that each Portfolio will elect to be
qualified as a Regulated Investment Company under Subchapter M of the
Code and that they will use their best efforts to ensure the
maintenance of such qualification (under Subchapter M or any successor
or similar provision) and that the Trust or its designee will notify
the Company promptly in the event that any Portfolio has ceased to so
qualify, such notification to be provided in no event later than 20
days after the end of the period for which a Portfolio is not so
qualified.
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1. The Trust agrees that the Board, constituted with a majority of
disinterested trustees, will monitor each Portfolio of the Trust for
the existence of any material irreconcilable conflict between the
interests of the variable annuity contract owners and the variable life
insurance policy owners of the Company and/or affiliated companies
("contract owners") investing in the Trust. The Board shall have the
sole authority to determine if a material irreconcilable conflict
exists, and such determination shall be binding on the Company only if
approved in the form of a resolution by a majority of the Board, or a
majority of the disinterested trustees of the Board. The Board will
give prompt notice of any such determination to the Company.
7.2. The Company agrees that it will be responsible for assisting the
Board in carrying out its responsibilities under the conditions set
forth in the Trust's exemptive application pursuant to which the SEC
has granted the Mixed and Shared Funding Exemptive Order by providing
the Board, as it may reasonably request, with all information necessary
for the Board to consider any issues raised and agrees that it will be
responsible for promptly reporting any potential or existing conflicts
of which it is aware to the Board including, but not limited to, an
obligation by the Company to inform the Board whenever contract owner
voting instructions are disregarded. The Company also agrees that, if a
material irreconcilable conflict arises, it will at its own cost remedy
such conflict up to and including (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 to a
vote of all affected contract owners whether to withdraw assets from
the Trust or any Portfolio and reinvesting such assets in a different
investment medium and, as appropriate, segregating the assets
attributable to any appropriate group of contract owners that votes in
favor of such segregation, or offering to any of the affected contract
owners the option of segregating the assets attributable to their
contracts or policies, and (b) establishing a new registered management
investment company and segregating the assets underlying the Policies,
unless a majority of Policy owners materially adversely affected by the
conflict have voted to decline the offer to establish a new registered
management investment company.
7.3. A majority of the disinterested trustees of the Board shall
determine whether any proposed action by the Company adequately
remedies any material irreconcilable conflict. In the event that the
Board determines that any proposed action does not adequately remedy
any material irreconcilable conflict, the Company will withdraw from
investment in the Trust each of the Accounts designated by the
disinterested trustees and terminate this Agreement within six (6)
months after the Board informs the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination
shall be limited to the extent required to remedy any such material
irreconcilable conflict as determined by a majority of the
disinterested trustees of the Board.
7.4. 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 shares funding (as defined in the Mixed and Shared Funding
Exemptive Order) on terms and conditions materially different from
those contained in the Mixed Shared Funding Exemptive Order, then (a)
the Trust and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rule 6e-2 and
6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable; and (b) Sections 3.5, 3.6, 7.1, 7.2, 7.3 and 7.4
of this Agreement shall continue in effect only to the extent that
terms and conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. Indemnification by the Company
The Company agrees to indemnify and hold harmless the Trust,
MFS, any affiliates of MFS, and each of their respective
directors/trustees, officers and each person, if any, who controls MFS
within the meaning of Section 15 of the 1933 Act, and any agents or
employees of the foregoing (each an "Indemnified Party," or
collectively, the "Indemnified Parties" for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Company) or expenses (including reasonable counsel fees) to which an
Indemnified Party may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Shares or the Policies
and:
(a) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained
in the registration statement, prospectus or statement of
additional information for the Policies or contained in the
Policies or advertisements or sales literature or other
promotional material for the Policies (or any amendment or
supplement to any of the foregoing), 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 agreement to indemnify shall not apply as
to any -------- Indemnified Party if such statement or
omission or such alleged statement or omission was made in
reasonable reliance upon and in conformity with information
furnished to the Company or its designee by or on behalf of
the Trust or MFS for use in the registration statement,
prospectus or statement of additional information for the
Policies or in the Policies or advertisements or sales
literature or other promotional material (or any amendment
or supplement) or otherwise for use in connection with the
sale of the Policies or Shares; or
(b) arise out of or as a result of statements or
representations (other than statements or
representations contained in the registration
statement, prospectus, statement of additional
information or advertisements or sales literature or
other promotional material of the Trust not supplied
by the Company or this designee, or persons under its
control and on which the Company has reasonably
relied) or wrongful conduct of the Company or persons
under its control, with respect to the sale or
distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the
registration statement, prospectus, statement of
additional information, advertisements or sales
literature or other promotional literature of the
Trust, or any amendment thereof or supplement
thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein
or necessary to make the statement or statements
therein not misleading, if such statement or omission
was made in reliance upon information furnished to
the Trust by or on behalf of the Company; or
(d) 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; or
(e) arise as a result of any failure by the Company to
provide the services and furnish the materials under
the terms of this Agreement;
as limited by and in accordance with the provisions of this Article
VIII.
8.2. Indemnification by the Trust
The Trust agrees to indemnify and hold harmless the Company,
the underwriter for the Policies and each of their respective directors
and officers and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act, and any agents or employees
of the foregoing (each an "Indemnified Party," or collectively, the
"Indemnified Parties" for purposes of this Section 8.2) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Trust) or expenses
(including reasonable counsel fees) to which any Indemnified Party may
become subject under any statute, at common law or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition
of the Shares or the Policies and:
(a) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained
in the registration statement, prospectus, statement of
additional information or advertisement or sales literature
or other promotional material of the Trust (or any amendment
or supplement to any of the foregoing), 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 statement therein not misleading,
provided that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or
such alleged -------- statement or omission was made in
reasonable reliance upon and in conformity with information
furnished to the Trust, MFS, the Underwriter or their
respective designees by or on behalf of the Company for use
in the registration statement, prospectus or statement of
additional information for the Trust or in advertisements or
sales literature or other promotional material for the Trust
(or any amendment or supplement) or otherwise for use in
connection with the sale of the Policies or Shares; or
(b) arise out of or as a result of statements or
representations (other than statement or
representations contained in the registration
statement, prospectus, statement of additional
information or advertisements or sales literature or
other promotional material for the Policies not
supplied by the Trust, MFS, the Underwriter or any of
their respective designees or persons under their
respective control and on which any such entity has
reasonably relied) or wrongful conduct of the Trust
or persons under its control, with respect to the
sale or distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the
registration statement, prospectus, statement of
additional information, advertisements or sales
literature or other promotional literature of the
Company, any amendment or supplement thereto, or the
omission or alleged omission to state a material fact
required to be stated therein or to make the
statement or statements therein not misleading, if
such statement or omission was made in reliance upon
information forwarded to the Company by or on behalf
of the Trust, MFS or the Underwriter; or
(d) arise out of or result from any material breach of
any representation and/or warranty made by the Trust
in this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to
comply with the diversification or qualification
requirements specified in Article VI of this
Agreement) or arise out of or result from any other
material breach of this Agreement by the Trust; or
(e) arise out of or result from the materially incorrect
or untimely calculation or reporting of the daily net
asset value per share or dividend or capital gain
distribution rate; or
(f) arise as a result of any failure by the Trust to
provide the services and furnish the materials under
the terms of the Agreement;
as limited by and in accordance with the provisions of this Article
VIII.
<PAGE>
8.3. In no event shall the Trust be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including without limitation, the Company, or any Participating
Insurance Company or any Policy holder, with respect to any losses,
claims, damages, liabilities or expenses that arise out of or result
from (i) a breach of any representation, warranty, and/or covenant made
by the Company hereunder or by any Participating Insurance Company
under an agreement containing substantially similar representations,
warranties and covenants; (ii) the failure by the Company or any
Participating Insurance Company to maintain its segregated asset
account (which invests in any Portfolio) as a legally and validly
established segregated asset account under applicable state law and as
a duly registered unit investment trust under the provisions of the
1940 Act (unless exempt therefrom); or (iii) the failure by the Company
or any Participating Insurance Company to maintain its variable annuity
and/or variable life insurance contracts (with respect to which any
Portfolio serves as an underlying funding vehicle) as life insurance,
endowment or annuity contracts under applicable provisions of the Code.
8.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions contained in this Agreement with respect to
any losses, claims, damages, liabilities or expenses to which an
Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, willful misconduct, or gross
negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations
and duties under this Agreement.
8.5. Promptly after receipt by an Indemnified Party under this Section
8.5. of commencement of action, such Indemnified Party will, if a claim
in respect thereof is to be made against the indemnifying party under
this section, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any Indemnified
Party otherwise than under this section. In case any such action is
brought against any Indemnified Party, and it notified the indemnifying
party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish,
assume the defense thereof, with counsel satisfactory to such
Indemnified Party. After notice from the indemnifying party of its
intention to assume the defense of an action, the Indemnified Party
shall bear the expenses of any additional counsel obtained by it, and
the indemnifying party shall not be liable to such Indemnified Party
under this section for any legal or other expenses subsequently
incurred by such Indemnified Party in connection with the defense
thereof other than reasonable costs of investigation.
8.6. Each of the parties agrees promptly to notify the other parties of
the commencement of any litigation or proceeding against it or any of
its respective officers, directors, trustees, employees or 1933 Act
control persons in connection with the Agreement, the issuance or sale
of the Policies, the operation of the Accounts, or the sale or
acquisition of Shares.
8.7. A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this
Article VIII. The indemnification provisions contained in this Article
VIII shall survive any termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions
hereof interpreted under and in accordance with the laws of The
Commonwealth of Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings
thereunder, including such exemptions from those statutes, rules and
regulations as the SEC may grant and the terms hereof shall be
interpreted and construed in accordance therewith.
ARTICLE X. NOTICE OF FORMAL PROCEEDINGS
The Trust, MFS, and the Company agree that each such party shall promptly
notify the other parties to this Agreement, in writing, of the institution of
any formal proceedings brought against such party or its designees by the NASD,
the SEC, or any insurance department or any other regulatory body regarding such
party's duties under this Agreement or related to the sale of the Policies, the
operation of the Accounts, or the purchase of the Shares.
ARTICLE XI. TERMINATION
11.1. This Agreement shall terminate with respect to the Accounts,
or one, some, or all Portfolios:
(a) at the option of any party upon six (6) months'
advance written notice to the other parties; or
(b) at the option of the Company to the extent that the
Shares of Portfolios are not reasonably available to
meet the requirements of the Policies or are not
"appropriate funding vehicles" for the Policies, as
reasonably determined by the Company. Without
limiting the generality of the foregoing, the Shares
of a Portfolio would not be "appropriate funding
vehicles" if, for example, such Shares did not meet
the diversification or other requirements referred to
in Article VI hereof; or if the Company would be
permitted to disregard Policy owner voting
instructions pursuant to Rule 6e-2 or 6e-3(T) under
the 1940 Act. Prompt notice of the election to
terminate for such cause and an explanation of such
cause shall be furnished to the Trust by the Company;
or
(c) at the option of the Trust or MFS upon institution of
formal proceedings against the Company by the NASD,
the SEC, or any insurance department or any other
regulatory body regarding the Company's duties under
this Agreement or related to the sale of the
Policies, the operation of the Accounts, or the
purchase of the Shares; or
(d) at the option of the Company upon institution of
formal proceedings against the Trust, MFS or the
Underwriter by the NASD, the SEC, or any state
securities or insurance department or any other
regulatory body regarding the Trust's or MFS' duties
under this Agreement or related to the sale of the
Shares; or
(e) at the option of the Company, the Trust or MFS upon
receipt of any necessary regulatory approvals and/or
the vote of the Policy owners having an interest in
the Accounts (or any subaccounts) to substitute the
shares of another investment company for the
corresponding Portfolio Shares in accordance with the
terms of the Policies for which those Portfolio
Shares had been selected to serve as the underlying
investment media. The Company will give thirty (30)
days' prior written notice to the Trust of the Date
of any proposed vote or other action taken to replace
the Shares; or
(f) termination by either the Trust or MFS by written
notice to the Company, if either one or both of the
Trust or MFS respectively, shall determine, in their
sole judgment exercised in good faith, that the
Company has suffered a material adverse change in its
business, operations, financial condition, or
prospects since the date of this Agreement or is the
subject of material adverse publicity; or
(g) termination by the Company by written notice to the
Trust and MFS, if the Company shall determine, in its
sole judgment exercised in good faith, that the Trust
or MFS has suffered a material adverse change in its
business, operations, financial condition or
prospects since the date of this Agreement or is the
subject of material adverse publicity; or
(h) termination by the Company or by the Trust by written
notice to the other party upon a determination by the
majority of the Trust's Board that a material
irreconcilable conflict exists among the interests of
(i) the owners of shares of all of the separate
accounts in the Trust or (ii) the interests of the
Participating Insurance Companies; or
(i) at the option of any party to this Agreement, upon
another party's material breach of any provision of
this Agreement; or
(j) upon assignment of this Agreement, unless made with
the written consent of the parties hereto; or
(k) termination by the Company by written notice to the
Trust and MFS upon the sale, acquisition or change in
control of the investment adviser to the Trust.
11.2. The notice shall specify the Portfolio or Portfolios, Policies
and, if applicable or effect Policy transactions, the Accounts as to
which the Agreement is to be terminated.
11.3. It is understood and agreed that the right of any party
hereto to terminate this Agreement pursuant to Section
11.1(a) may be exercised for cause or for no cause.
11.4. Except as necessary to implement Policy owner initiated
transactions, or as required by state insurance laws or regulations or
to resolve a conflict contemplated by Article VII hereof,, the Company
shall not redeem the Shares attributable to the Policies (as opposed to
the Shares attributable to the Company's assets held in the Accounts),
and the Company shall not prevent Policy owners from allocating
payments to a Portfolio that was otherwise available under the
Policies, until thirty (30) days after the Company shall have notified
the Trust of its intention to do so.
11.5. Notwithstanding any termination of this Agreement, the Trust and
MFS shall, at the option of the Company, continue to make available
additional shares of the Portfolios pursuant to the terms and
conditions of this Agreement, for all Policies in effect on the
effective date of termination of this Agreement (the "Existing
Policies"), except as otherwise provided under Article VII of this
Agreement. Specifically, without limitation, the owners of the Existing
Policies shall be permitted to transfer or reallocate investment under
the Policies, redeem investments in any Portfolio and/or invest in the
Trust upon the making of additional purchase payments under the
Existing Policies.
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail, postage prepaid, return receipt requested, or by nationally
recognized overnight courier, charges prepaid, with evidence of delivery, 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, and such notice shall be effective upon delivery.
If to the Trust:
MFS Variable Insurance Trust
500 Boylston Street
Boston, Massachusetts 02116
Attn: Stephen E. Cavan, Secretary
If to the Company:
Valley Forge Life Insurance Company
Variable Life Insurance Products - 34 South
CNA Plaza
Chicago, IL 60685
Attn: Kevin Hogan
If to MFS:
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
Attn: Stephen E. Cavan, General Counsel
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirement of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Policies and all information reasonably
identified as confidential in writing by any other party hereto and,
except as permitted by this Agreement or as otherwise required by
applicable law or regulation, shall not disclose, disseminate or
utilize such names and addresses and other confidential information
without the express written consent of the affected party until such
time as it may come into the public domain.
13.2. 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.
13.3. This Agreement may be executed simultaneously in one or more
counterparts, each of which taken together shall constitute one and the
same instrument.
13.4. 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.
13.5. The Schedule attached hereto, as modified from time to time, is
incorporated herein by reference and is part of this Agreement.
13.6. Each party hereto shall cooperate with each other party in
connection with inquiries by appropriate governmental authorities
(including without limitation the SEC, the NASD, and state insurance
regulators) relating to this Agreement or the transactions contemplated
hereby to the extent practicable and except when cooperation would
require waiver of any privilege or any valuable right against the other
party.
13.7. 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.
13.8. A copy of the Trust's Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Company
acknowledges that the obligations of or arising out of this instrument
are not binding upon any of the Trust's trustees, officers, employees,
agents or shareholders individually, but are binding solely upon the
assets and property of the Trust in accordance with its proportionate
interest hereunder. The Company further acknowledges that the assets
and liabilities of each Portfolio are separate and distinct and that
the obligations of or arising out of this instrument are binding solely
upon the assets or property of the Portfolio on whose behalf the Trust
has executed this instrument. The Company also agrees that the
obligations of each Portfolio hereunder shall be several and not joint,
in accordance with its proportionate interest hereunder, and the
Company agrees not to proceed against any Portfolio for the obligations
of another Portfolio.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified above.
VALLEY FORGE LIFE INSURANCE COMPANY
By its authorized officer,
By: _______________________________
Title: ____________________________
MFS VARIABLE INSURANCE TRUST, on behalf of the Portfolios
By its authorized officer and not individually,
By: _______________________________
A. Keith Brodkin
Chairman
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By its authorized officer,
By: _______________________________
Stephen E. Cavan
Secretary
<PAGE>
As of July 1, 1996
SCHEDULE A
<TABLE>
<CAPTION>
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
<S> <C> <C>
|--------------------------------------------|-----------------------------------------|-------------------------|
| Name of Separate | | |
| Account and Date | Policies Funded | Portfolios |
| Established by Board of Directors | by Separate Account | Applicable to Policies |
| | | |
|--------------------------------------------|-----------------------------------------|-------------------------|
| | | |
|Valley Forge Life Insurance Company Variable| Flexible Premium Deferred | Emerging Growth Series |
| Annuity Separate Account | Variable Annuity Contract | Growth w/Income Series |
| October 18, 1995 | | Limited Maturity Series |
| | | Research Series |
| | | Total Return Series |
| | | |
| ~ ~ | ~ ~ | ~ ~ |
| | | |
| Valley Forge Life Insurance Company |Flexible Premium Variable and Fixed Life | Same as above |
| Variable Life Separate Account | Insurance Contract | |
| October 18, 1995 | | |
| | | |
| | | |
| | | |
|--------------------------------------------|-----------------------------------------|-------------------------|
</TABLE>
Exhibit 8E
PARTICIPATION AGREEMENT
Among
VALLEY FORGE LIFE INSURANCE COMPANY,
SOGEN VARIABLE FUNDS, INC.,
and
SOCIETE GENERALE SECURITIES CORPORATION
THIS AGREEMENT, dated as of the 17th day of July, 1996 by and among
Valley Forge Life Insurance Company (the "Company"), a Pennsylvania stock
insurance company, on its own behalf and on behalf of each segregated asset
account of the Company set forth on Schedule A hereto as may be amended from
time to time (each account hereinafter referred to as the "Account"), SoGen
Variable Funds, Inc. (the "Fund"), a corporation organized under the laws of
Maryland, and Societe Generale Securities Corporation (the "Underwriter"), a New
York corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is or will be available to act as the investment vehicle
for separate accounts established for variable life insurance and variable
annuity contracts (the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
Underwriter ("Participating Insurance Companies");
WHEREAS, the shares of common stock of the Fund are divided into
several series of shares, each designated a "Portfolio" and representing the
interest in a particular managed portfolio of securities and other assets;
WHEREAS, the Fund will, to the extent necessary, obtain by September 1,
1996, or as soon thereafter as practicable, an order from the Securities and
Exchange Commission (the "SEC") granting Participating Insurance Companies and
variable annuity and variable life insurance separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment
Company Act of 1940, as amended, (the "1940 Act") and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, if and to the extent necessary to permit shares of
the Fund to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
(the "Mixed and Shared Funding Exemptive Order");
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under
the Securities Act of 1933, as amended (the "1933 Act");
WHEREAS, Societe Generale Asset Management Corp. (the "Adviser"), which
serves as investment adviser to the Fund, is duly registered as an investment
adviser under the federal Investment Advisers Act of 1940, as amended, and any
applicable state securities laws;
WHEREAS, the Company has issued or will issue certain variable life
insurance and/or variable annuity contracts supported wholly or partially by the
Account (the "Contracts"), and said Contracts are listed in Schedule A hereto,
as it may be amended from time to time by mutual written agreement;
WHEREAS, the Account is duly established and maintained as a segregated
asset account, duly established by the Company, on the date shown for such
Account on Schedule A hereto, to set aside and invest assets attributable to the
aforesaid Contracts;
WHEREAS, the Underwriter, which serves as distributor to the Fund, is
registered as a broker dealer with the SEC under the Securities Exchange Act of
1934, as amended (the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios") on behalf of the Account to fund the
aforesaid Contracts, and the Underwriter is authorized to sell such shares to
the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Fund has granted to the Underwriter
exclusive authority to distribute the Fund's shares,and has agreed to instruct,
and has so instructed, the Underwriter to make available to the Company for
purchase on behalf of the Account Fund shares of those Designated Portfolios
selected by the Underwriter. Pursuant to such authority and instructions, and
subject to Article X hereof, the Underwriter agrees to make available to the
Company for purchase on behalf of the Account, shares of those Designated
Portfolios listed on Schedule A to this Agreement, such purchases to be effected
at net asset value in accordance with Section 1.3 of this Agreement.
Notwithstanding the foregoing, (i) Fund series (other than those listed on
Schedule A) in existence now or that may be established in the future will be
made available to the Company only as the Underwriter may so provide, and (ii)
the Board of Directors of the Fund (the "Board") may suspend or terminate the
offering of Fund shares of any Designated Portfolio or class thereof, if such
action is required by law or by regulatory authorities having jurisdiction or
if, in the sole discretion of the Board acting in good faith and in light of its
fiduciary duties under federal and any applicable state laws, suspension or
termination is necessary in the best interests of the shareholders of such
Designated Portfolio (it being understood that for this purpose shareholders
means Contract owners). Notice of election to suspend or terminate shall be
furnished by the Fund, said termination to be effective 10 Business Days after
receipt of such notice by the Company in order to give the Company sufficient
time to take appropriate steps in response to such suspension or termination.
1.2 The Fund shall redeem, at the Company's
request, any full or fractional Designated Portfolio shares held by the Company
on behalf of the Account, such redemptions to be effected at net asset value in
accordance with Section 1.3 of this Agreement. Notwithstanding the foregoing,
(i) the Company shall not redeem Fund shares attributable to Contract owners
except in the circumstances permitted in Section 10.3 of this Agreement, and
(ii) the Fund may delay redemption of Fund shares of any Designated Portfolio to
the extent permitted by the 1940 Act, any rules, regulations or orders
thereunder.
1.3 Purchase and Redemption Procedures
(a) The Fund hereby appoints the
Company as an agent of the Fund for the limited purpose of receiving
purchase and redemption requests on behalf of the Account (but not
with respect to any Fund shares that may be held in the general
account of the Company) for shares of those Designated Portfolios made
available hereunder, based on allocations of amounts to the Account or
subaccounts thereof under the Contracts and other transactions
relating to the Contracts or the Account. Receipt of any such request
(or relevant transactional information therefor) on any day the New
York Stock Exchange is open for trading and on which the Fund
calculates it's net asset value pursuant to the rules of the SEC (a
"Business Day") by the Company as such limited agent of the Fund prior
to the time that the Fund calculates its net asset value as described
from time to time in the Fund Prospectus (which as of the date of
execution of this Agreement is 4:00 p.m. Eastern Time) shall
constitute receipt by the Fund on that same Business Day, provided
that the Fund receives notice of such request by 9:30 a.m. Eastern
Time on the next following Business Day.
(b) The Company shall pay for shares
of each Designated Portfolio on the same day that it notifies the Fund
of a purchase request for such shares. Payment for Designated
Portfolio shares shall be made in federal funds transmitted to the
Fund by wire to be received by the Fund by 4:00 p.m. Eastern Time on
the day the Fund is notified of the purchase request for Designated
Portfolio shares (unless the Fund determines and so advises the
Company that sufficient proceeds are available from redemption of
shares of other Designated Portfolios effected pursuant to redemption
requests tendered by the Company on behalf of the Account). If federal
funds are not received on time, such funds will be invested, and
Designated Portfolio shares purchased thereby will be issued, as soon
as practicable and the Company shall promptly, upon the Fund's
request, reimburse the Fund for any reasonable charges, costs, fees,
interest or other expenses incurred by the Fund in connection with any
advances to, or borrowing or overdrafts by, the Fund, or any similar
expenses incurred by the Fund, as a result of portfolio transactions
effected by the Fund based upon such purchase request. Upon receipt of
federal funds so wired, such funds shall cease to be the
responsibility of the Company and shall become the responsibility of
the Fund.
(c) Payment for Designated Portfolio
shares redeemed by the Account or the Company shall be made in federal
funds transmitted by wire to the Company or any other designated
person on the next Business Day after the Fund is properly notified of
the redemption order of such shares (unless redemption proceeds are to
be applied to the purchase of shares of other Designated Portfolio in
accordance with Section 1.3(b) of this Agreement), except that the
Fund reserves the right to redeem Designated Portfolio shares in
assets other than cash and to delay payment of redemption proceeds to
the extent permitted under Section 22(e) of the 1940 Act and any Rules
thereunder. The Fund shall not bear any responsibility whatsoever for
the proper disbursement or crediting of redemption proceeds by the
Company, the Company alone shall be responsible for such action.
(d) Any purchase or redemption request
for Designated Portfolio shares held or to be held in the Company's
general account shall be effected at the net asset value per share
next determined after the Fund's receipt of such request, provided
that, in the case of a purchase request, payment for Fund shares so
requested is received by the Fund in federal funds prior to close of
business for determination of such value, as defined from time to time
in the Fund Prospectus. Prior written notice of a change in the Fund's
purchase and sale procedures shall be furnished by the Fund to the
Company no fewer than thirty (30) business days prior to its scheduled
implementation date to enable the Company to adopt any necessary
modifications to its fund transfer procedures.
1.4 The Fund shall use its best efforts to make
the net asset value per share for each Designated Portfolio available to the
Company by 6:30 p.m. Eastern Time each Business Day, and in any event, as soon
as reasonably practicable after the net asset value per share for such
Designated Portfolio is calculated, and shall calculate such net asset value in
accordance with the Fund's Prospectus. Neither the Fund, any Designated
Portfolio, the Underwriter, nor any of their affiliates shall be liable for any
information provided to the Company pursuant to this Agreement which information
is based on incorrect information supplied by the Company or any other
Participating Insurance Company to the Fund or the Underwriter.
1.5 The Fund shall furnish notice (by wire
or telephone followed by written confirmation) to the Company as soon as
reasonably practicable of any income dividends or capital gain distributions
payable on any Designated Portfolio shares. The Company, on its behalf and on
behalf of the Account, hereby elects to receive all such dividends and
distributions as are payable on any Designated Portfolio shares in the form of
additional shares of that Designated Portfolio. The Company reserves the right,
on its behalf and on behalf of the Account, to revoke this election and to
receive all such dividends and capital gain distributions in cash. The Fund
shall notify the Company promptly of the number of Designated Portfolio shares
so issued as payment of such dividends and distributions.
1.6. Issuance and transfer of Fund shares shall
be by book entry only. Stock certificates will not be issued to the Company
or the Account. Purchase and redemption orders for Fund shares shall be recorded
in an appropriate ledger for the Account or the appropriate subaccount of the
Account.
1.7. (a) The parties hereto acknowledge that the
arrangement contemplated by this Agreement is not exclusive; the Fund's
shares may be sold to other insurance companies (subject to Section 1.8
hereof) and the cash value of the Contracts may be invested in other
investment companies, provided, however, that until this Agreement is
terminated pursuant to Article X, the Company shall give equivalent
prominence to the Designated Portfolios as the Company provides to
other funding vehicles available under the Contracts in promotional
materials that describe funding vehicles available under the Contracts
and are published by the Company. Funding vehicles other than those
listed on Schedule A to this Agreement may be available for the
investment of the cash value of the Contract, provided, however, (i)
the Company gives the Fund and the Underwriter 45 days written notice
of its intention to make such other investment vehicle available as a
funding vehicle for the Contracts; or (ii) unless such other investment
company was available as a Funding vehicle for the Contracts prior to
the date of this Agreement and the Company has so informed the Fund and
the Underwriter prior to their signing this Agreement, the Fund or
Underwriter consents in writing to the use of such other vehicle, such
consent not to be unreasonably withheld.
(b) The Company shall not, without prior
notice to the Underwriter (unless otherwise required by applicable law) take any
action to operate the Account as a management investment company under the 1940
Act.
(c) The Company shall not, without
prior notice to the Underwriter (unless otherwise required by applicable law),
induce Contract owners to change or modify the Fund or change the Fund's
distributor or investment adviser.
1.8. The Underwriter and the Fund shall sell Fund
shares only to Participating Insurance Companies and their separate accounts
and to persons or plans ("Qualified Persons") that qualify to purchase shares of
the Fund under Section 817(h) of the Internal Revenue Code of 1986, as amended
(the "Code") and the regulations thereunder without impairing the ability of the
Account to consider the portfolio investments of the Fund as constituting
investments of the Account for the purpose of satisfying the diversification
requirements of Section 817(h). The Underwriter and the Fund shall not sell Fund
shares to any insurance company or separate account unless an agreement
complying with Article VI of this Agreement is in effect to govern such sales.
The Company hereby represents and warrants that it and the Account are Qualified
Persons. The Fund reserves the right to cease offering shares of any Designated
Portfolio in the discretion of the Fund.
<PAGE>
ARTICLE II. Representations and Warranties
2.1 The Company represents and warrants that
the Contracts (a) are or, prior to issuance, will be registered under the 1933
Act or, alternatively (b) are not registered because they are exempt from
registration under the 1933 Act or will be offered exclusively in transactions
that are exempt from registration under the 1933 Act. The Company further
represents and warrants (i) that it will impose and enforce to the best of its
ability requirements upon all persons involved in the sale of the Contracts to
comply with any applicable specific suitability requirements under state
insurance regulations and with state insurance laws, and (ii) that the Contracts
will be issued and sold in accordance with all applicable federal and state
securities laws. The Company further represents and warrants that it is an
insurance company duly organized and in good standing under applicable law, that
it has legally and validly established the Account prior to any issuance or sale
thereof as a segregated asset account under Pennsylvania insurance laws, and
that it (a) has registered or, prior to any issuance or sale of the Contracts,
will register the Account as a unit investment trust in accordance with the
provisions of the 1940 Act to serve as a segregated investment account for the
Contracts, or alternatively (b) has not registered the Account in proper
reliance upon an exclusion from registration under the 1940 Act. The Company
shall register and qualify the Contracts or interests therein as securities in
accordance with the laws of the various states only if and to the extent deemed
advisable by the Company.
2.2 The Fund represents and warrants that Fund
shares sold pursuant to this Agreement shall be registered under the 1933 Act,
duly authorized for issuance and sold in compliance with the laws of the State
of Pennsylvania and applicable federal securities laws and that the Fund is and
shall remain registered under the 1940 Act. The Fund shall amend the
registration statement for its shares 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 Fund shall register and qualify the shares for sale in accordance
with the laws of the various states only if and to the extent deemed advisable
by the Fund or the Underwriter.
2.3 The Fund intends to make payments to
finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act.Prior to
financing distribution expenses pursuant to Rule 12b-1, the Fund will have the
Board, a majority of whom are not interested persons of the Fund, formulate and
approve the Fund's plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses.
2.4 The Fund makes no representations as to
whether any aspect of its operations, including, but not limited to, investment
policies, fees and expenses, complies with the insurance and other applicable
laws of the various states, except that the Fund represents that the Fund's
investment policies, fees and expenses are and shall at all times remain in
compliance with the laws of the States of California and Pennsylvania to the
extent required to perform this Agreement, provided, however, that the Company
shall notify the Fund with respect to any additional requirements that are
specifically directed to the Company by state insurance departments.
2.5 The Fund represents and warrants that it
is lawfully organized and validly existing under the laws of the State of
Maryland and that it does and will comply in all material respects with the 1940
Act.
2.6 The Underwriter represents and warrants
that it is a corporation lawfully organized and validly existing under the laws
of the State of New York, and that it is and will remain a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Pennsylvania and any applicable
state and federal securities laws.
2.7 The Underwriter represents and warrants
that the Adviser is and shall remain duly registered under all applicable
federal and state securities laws and that the Adviser shall perform its
obligations for the Fund in compliance in all material respects with the laws of
the State of New York and any applicable state and federal securities laws.
2.8 The Fund and the Underwriter represent and
warrant that all of their directors, officers, employees, investment advisers,
and other individuals or entities dealing with the money and/or securities of
the Fund are and shall continue to be at all times covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund in an amount not less than
the minimum coverage as required currently by Rule 17g-1 of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.9 The Company represents and warrants that
all of its directors, officers, employees, investment advisers, and other
individuals/entities employed or controlled by the Company dealing with the
money and/or securities of the Account are covered by a blanket fidelity bond or
similar coverage for the benefit of the Account, in an amount not less than $5
million. The aforesaid bond includes coverage for larceny and embezzlement and
is issued by a reputable bonding company.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1 The Underwriter shall provide the Company
with as many copies of the Fund's current prospectus (describing only the
Designated Portfolios listed on Schedule A) as the Company may reasonably
request. The Company shall bear the expense of printing copies of the current
prospectus for the Contracts that will be distributed to existing Contract
owners, and the Company shall bear the expense of printing copies of the Fund's
prospectus that are used in connection with offering the Contracts issued by the
Company. The Fund shall bear the expense of printing copies of its current
prospectus that will be distributed to existing Contract owners. If requested by
the Company in lieu thereof, the Fund shall provide such documentation
(including a final copy of the new prospectus on diskette at the Fund's expense)
and other assistance as is reasonably necessary in order for the Company once
each year (or more frequently if the prospectus for the Fund is amended) to have
the prospectus for the Contracts and the Fund's prospectus printed together in
one document (such printing to be at the Company's expense).
3.2 The Fund's prospectus shall state that the
current Statement of Additional Information ("SAI") for the Fund is available,
and the Underwriter (or the Fund), at its expense, shall provide a reasonable
number of copies of such SAI free of charge to the Company for itself and for
any owner of a Contract who requests such SAI.
3.3 The Fund, at its expense, shall provide the
Company with copies of its proxy material, reports to shareholders, and other
communications to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.4 The Company shall:
(i) solicit voting instructions from
Contract owners;
(ii) vote the Fund shares in accordance
with instructions received from .
Contract owners; and
(iii) vote Fund shares for which no
instructions have been received in
the same proportion as Fund shares
of such portfolio for which
instructions have been received.
The Company will vote Fund shares held in any segregated asset account in the
same proportion as Fund shares of such portfolio for which voting instructions
have been received from Contract owners, to the extent permitted by law.
3.5 Participating Insurance Companies shall be
responsible for assuring that each of their separate accounts participating in a
Designated Portfolio calculates voting privileges as required by the Shared
Funding Exemptive Order and consistent with any reasonable standards that the
Fund may adopt and provide in writing. The Fund hereby confirms that the manner
in which the Company currently calculates voting privileges is consistent with
the manner in which other Participating Insurance Companies are required to
calculate voting privileges. The Fund and the Underwriter will notify the
Company if either becomes aware that another Participating Insurance Company has
changed the manner in which it so calculates voting privileges.
3.6 The Fund will provide the Company with as
much notice as is reasonably practicable of any proxy solicitation for any
Designated Portfolio, and of any material change in the Fund's registration
statement or prospectus, particularly any change that will result in a change to
the prospectus for any Account. The Fund will work with the Company so as to
enable the Company to solicit proxies from Contract owners, or to make changes
to the prospectus and registration statement for the Accounts in an orderly
manner. The Fund will make reasonable efforts or attempt to have changes
affecting Contract prospectuses become effective simultaneously with the annual
updates for such prospectuses.
ARTICLE IV. Sales Material and Information
4.1 The Company shall furnish, or shall cause to
be furnished, to the Fund or its designee, each piece of sales literature or
other promotional material that the Company develops and in which the Fund (or a
Designated Portfolio thereof) or the Adviser or the Underwriter is named. No
such material shall be used until approved by the Fund or its designee, and the
Fund will use its best efforts for it or its designee to review such sales
literature or promotional material within ten Business Days after receipt of
such material. The Fund or its designee reserves the right to reasonably object
to the continued use of any such sales literature or other promotional material
in which the Fund (or a Designated Portfolio thereof) or the Adviser or the
Underwriter is named, and no such material shall be used if the Fund or its
designee so object.
4.2 The Company shall not give any information
or make any representations or statements on behalf of the Fund or concerning
the Fund in connection with the sale of the Contracts other than the information
or representations contained in the registration statement or prospectus or SAI
for the Fund shares, as such registration statement and prospectus or SAI may be
amended or supplemented from time to time, or in reports or proxy statements for
the Fund, or in sales literature or other promotional material approved by the
Fund or its designee or by the Underwriter, except with the permission of the
Fund or the Underwriter or the designee of either.
4.3 The Fund and the Underwriter, or their
designee, shall furnish, or shall cause to be, furnished, to the Company, each
piece of sales literature or other promotional material that it develops and in
which the Company and/or its Account is, or the Contracts are, named. No such
material shall be used until approved by the Company, and the Company will use
its best efforts to review such sales literature or promotional material within
ten Business Days after receipt of such material. The Company reserves the right
to reasonably object to the continued use of any such sales literature or other
promotional material in which the Company and/or its Account is, or the
Contracts are, named, and no such material shall be used if the Company so
objects. Notwithstanding the fact that the Company may not initially object, the
Company reserves the right to object at a later date to the continued use of any
such sales literature or other promotional material in which the Company is
named, and no such material shall be used if the Company so objects.
4.4. The Fund and the Underwriter shall not
give any information or make any representations on behalf of the Company or
concerning the Company, the Account, or the Contracts other than the information
or representations contained in a registration statement, prospectus (which
shall include an offering memorandum, if any, if the Contracts issued by the
Company or interests therein are not registered under the 1933 Act), or SAI for
the Contracts, as such registration statement, prospectus, or SAI may be amended
or supplemented from time to time, or in published reports for the Account which
are in the public domain or approved by the Company for distribution to Contract
owners, or in sales literature or other promotional material approved by the
Company or its designee, except with the permission of the Company.
4.5 The Fund will provide to the Company at
least one complete copy of all registration statements, prospectuses, SAIs,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, notices, orders and
responses, and all amendments to any of the above, that relate to the Fund or
its shares, contemporaneously with the filing of such document(s) with, or the
release of such documents by, the SEC or other regulatory authorities.
4.6 The Company will provide to the Fund at
least one complete copy of all registration statements, prospectuses (which
shall include an offering memorandum, if any, if the Contracts issued by the
Company or interests therein are not registered under the 1933 Act), SAIs,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no-action
letters, notices, orders and responses, and all amendments to any of the above,
that relate to the Contracts or the Account, contemporaneously with the filing
of such document(s) with, or the release of such documents by, the SEC or other
regulatory authorities. The Company shall provide to the Fund and the
Underwriter any complaints received from the Contract owners pertaining to the
Fund or the Designated Portfolio.
4.7 The Fund will provide the Company with as
much notice as is reasonably practicable of any proxy solicitation for any
Designated Portfolio, and of any material change in the Fund's registration
statement, particularly any change resulting in a change to the registration
statement or prospectus for any Account. The Fund will work with the Company so
as to enable the Company to solicit proxies from Contract owners, or to make
changes to its prospectus or registration statement, in an orderly manner. The
Fund will make reasonable efforts to attempt to have changes affecting Contract
prospectuses become effective simultaneously with the annual updates for such
prospectuses.
4.8 For purposes of this Article IV, the phrase
"sales literature and other promotional materials" includes, but is not limited
to, any of the following that refer to the Fund or any affiliate of the Fund:
advertisements (such as material published, or designed for use in, a newspaper,
magazine, or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other public media),
and sales literature (i.e., any written or electronic communication distributed
or made generally available to customers or the public, including brochures,
circulars, reports, market letters, form letters, telemarketing scripts, seminar
texts, reprints or excerpts of any other advertisement, sales literature, or
published article) distributed or made generally available to customers or the
public, educational or training materials or other communications distributed or
made generally available to some or all agents or employees, and registration
statements, prospectuses, SAIs, shareholder reports, proxy materials, and any
other communications distributed or made generally available with regard to the
Fund.
ARTICLE V. Fees and Expenses
5.1 The Fund and the Underwriter shall pay no
fee or other compensation to the Company under this Agreement, except that if
the Fund or any Portfolio adopts and implements a plan pursuant to Rule 12b-1 to
finance distribution expenses, then the Underwriter may make payments to the
Company or to the underwriter for the Contracts if and in amounts agreed to by
the Underwriter in writing, and such payments will be made out of existing fees
otherwise payable to the Underwriter, past profits of the Underwriter, or other
resources available to the Underwriter. No such payments shall be made directly
by the Fund.
5.2 All expenses incident to performance by
the Fund under this Agreement shall be paid by the Fund. The Fund shall see to
it that all its shares are registered and authorized for issuance in accordance
with applicable federal law and, if and to the extent deemed advisable by the
Fund, in accordance with applicable state laws prior to their sale. The Fund
shall bear the expenses for the cost of registration and qualification of the
Fund's shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3 The Company shall bear the expenses of
distributing the Fund's prospectus to owners of Contracts issued by the Company
and of distributing the Fund's proxy materials and reports to such Contract
owners.
ARTICLE VI. Diversification and Qualification
6.1 The Fund will invest its assets in such
a manner as to ensure that the Contracts will be treated as annuity or life
insurance contracts, whichever is appropriate, under the Code and the
regulations issued thereunder (or any successor provisions). Without limiting
the scope of the foregoing, each Designated Portfolio has complied and will
continue to comply with Section 817(h) of the Code and Treasury Regulation
ss.1.817-5, and any Treasury interpretations thereof, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts, and any amendments or other modifications or successor provisions to
such Section or Regulations. In the event of a breach of this Article VI by the
Fund, it will take all reasonable steps (a) to notify the Company of such breach
and (b) to adequately diversify the Fund so as to achieve compliance within the
grace period afforded by Regulation 817.5.
6.2 The Fund represents that it is or will be
qualified as a Regulated Investment Company under Subchapter M of the Code, and
that it will make every effort to maintain such qualification (under Subchapter
M or any successor or similar provisions) and that it will notify the Company
immediately upon having a reasonable basis for believing that it has ceased to
so qualify or that it might not so qualify in the future.
6.3 Subject to the Fund's compliance with
applicable diversification requirements, the Company represents that the
Contracts are currently, and at the time of issuance shall be, treated as life
insurance or annuity insurance contracts, under applicable provisions of the
Code, and that it will make every effort to maintain such treatment, and that it
will notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing the Contracts have ceased to be so treated or that they
might not be so treated in the future. The Company agrees that any prospectus
offering a contract that is a "modified endowment contract" as that term is
defined in Section 7702A of the Code (or any successor or similar provision),
shall identify such contract as a modified endowment contract.
ARTICLE VII. Potential Conflicts
The following provisions shall apply only upon issuance of the Mixed and Shared
Funding Order and the sale of shares of the Fund to variable life insurance
separate accounts.
7.1 The Board will monitor the Fund for the
existence of any material irreconcilable conflict between the interests of the
Contract owners of all separate accounts investing in the Fund. 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 Board shall promptly
inform the Company if it determines that an irreconcilable material conflict
exists and the implications thereof.
7.2. The Company will report any potential or
existing conflicts of which it is aware to the Board. The Company will assist
the Board in carrying out its responsibilities under the Mixed and Shared
Funding Exemptive Order, by providing the Board with all information reasonably
necessary for the Board to consider any issues raised. This includes, but is not
limited to, an obligation by the Company to inform the Board whenever Contract
owner voting instructions are disregarded.
7.3 If it is determined by a majority of
the Board, or a majority of its disinterested members, that a material
irreconcilable conflict exists, the Company and other Participating Insurance
Companies shall, at their expense (to be allocated as near as practicable in
proportion to such parties' respective responsibilities for such conflict) and
to the extent reasonably practicable (as determined by a majority of the
disinterested Board members), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether 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 (2) establishing a new
registered management investment company or managed separate account.
7.4 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 Fund's election, to
withdraw the Account's investment in the Fund and terminate this Agreement with
respect to each 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 members of the Board.
Any such withdrawal and termination must take place within six (6) months after
the Fund gives written notice that this provision is being implemented, and
until the end of that six month period the Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5 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 Fund and
terminate this Agreement with respect to such Account within six months after
the Board informs 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 members of the Board. Until the end of the foregoing six month
period, the Fund shall continue to accept and implement orders by the Company
for the purchase (and redemption) of shares of the Fund.
7.6 For purposes of Section 7.3 through 7.6 of
this Agreement, a majority of the disinterested members of the Board shall
determine whether any proposed action adequately remedies any irreconcilable
material conflict, but in no event will the Fund be required to establish a new
funding medium for the Contracts. The Company shall not be required by Section
7.3 to establish a new funding medium for the Contract 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 Board
determines that any proposed action does not adequately remedy any
irreconcilable material conflict, then the Company will withdraw the Account's
investment in the Fund and terminate this Agreement within six (6) months after
the Board informs 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 members of the Board.
7.7 If and to the extent the Mixed and Shared
Funding Exemption Order or any amendment thereto contains terms and conditions
different from Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and 7.5 of this
Agreement, then the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with the Mixed
and Shared Funding Exemptive Order, and Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3,
7.4 and 7.5 of this Agreement shall continue in effect only to the extent that
terms and conditions substantially identical to such Sections are contained in
the Mixed and Shared Funding Exemptive Order or any amendment thereto, provided,
however, that if the terms and conditions of such Order or amendment are
materially different from the provisions of this Agreement, then the Company
shall have the right to terminate this Agreement upon written notice to the
Fund. 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 Mixed and Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Mixed and Shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable; and (b) Sections 3.4, 3.5, 7.1., 7.2, 7.3, 7.4, and 7.5 of
this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1 Indemnification By the Company
8.1(a). The Company agrees to indemnify and hold
harmless the Fund, the Underwriter and the Adviser and each of their respective
directors and officers, and each person, if any, who controls the Underwriter
within the meaning of Section 15 of the 1933 Act or who is under common control
with the Underwriter (collectively, the "Indemnified Parties" for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements:
(i) arise out of or are based upon any
untrue statement or alleged untrue statements of any
material fact contained in the registration statement,
prospectus (which shall include an offering memorandum, if
any), or SAI for the Contracts or contained in the Contracts
or advertisements or sales literature for the Contracts (or
any amendment or supplement to any of the foregoing), 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 agreement to indemnify
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 in conformity with information
furnished to the Company by or on behalf of the Fund for use
in the registration statement, prospectus or SAI for the
Contracts or in the Contracts or advertisements or sales
literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the
registration statement, prospectus, SAI, or
sales literature of the Fund not supplied by
the Company or persons under its control) or
wrongful conduct of the Company or its
agents or persons under the Company's
authorization or control, with respect to
the sale or distribution of the Contracts or
Fund Shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact
contained in a registration statement,
prospectus, SAI, or advertisements or sales
literature of the Fund or any amendment
thereof or supplement thereto 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 a
statement or omission was made in reliance
upon information furnished to the Fund by or
on behalf of the Company; or
(iv) arise as a result of any material failure by
the Company to provide the services and
furnish the materials under the terms of
this Agreement (including a failure, whether
unintentional or in good faith or otherwise,
to comply with the qualification
requirements specified in Article VI of this
Agreement); or
(v) 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,
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under
this indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of its obligations or
duties under this Agreement.
8.1(c). The Company shall not be liable under
this indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the Company
in writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon such Indemnified Party (or after such Indemnified Party shall have received
notice of such service on any designated agent), but failure to notify the
Company of any such claim shall not relieve the Company from any liability which
it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case any such
action is brought against an Indemnified Party, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The Company also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Company to such party of
the Company's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Company will not be liable to such 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.
8.1(d). The Indemnified Parties will promptly
notify the Company of the commencement of any litigation or proceedings against
them in connection with the issuance or sale of the Fund shares or the Contracts
or the operation of the Fund.
8.2 Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and
hold harmless the Company and the underwriter for the Contracts and each of
their respective directors and officers 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 Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Underwriter) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute
or regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements:
(i) arise out of or are based upon any
untrue statement or alleged untrue statement of any material
fact contained in the registration statement or prospectus
or SAI or advertisements or sales literature of the Fund (or
any amendment or supplement to any of the foregoing), 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 agreement to indemnify
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 in conformity with information
furnished to the Underwriter or Fund by or on behalf of the
Company for use in the registration statement, prospectus or
SAI for the Fund or in advertisements or sales literature
(or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the
registration statement, prospectus, SAI or
sales literature for the Contracts not
supplied by the Underwriter or persons under
its control) or wrongful conduct of the Fund
or Underwriter or persons under their
control, with respect to the sale or
distribution of the Contracts or Fund
shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact
contained in a registration statement,
prospectus, SAI or advertisements or sales
literature covering the Contracts, or any
amendment thereof or supplement thereto, or
the omission or alleged omission to state
therein a material fact required to be
stated therein or necessary to make the
statement or statements therein not
misleading, if such statement or omission
was made in reliance upon information
furnished to the Company by or on behalf of
the Fund or the Underwriter; or
(iv) arise as a result of any failure by the Fund
or the Underwriter to provide the services
and furnish the materials under the terms of
this Agreement (including a failure of the
Fund, whether unintentional or in good faith
or otherwise, to comply with the
diversification and other qualification
requirements specified in Article VI of this
Agreement); or
(v) arise out of or result from the provision by
or on behalf of the Fund of insufficient or
incorrect information regarding the purchase
or sale of Fund shares, to the extent
consistent with prevailing industry
practice, or the failure by the Fund or
Underwriter to execute or process orders to
buy or sell Fund shares submitted by the
Company or its administrator at the price or
within the time limits specified in this
Agreement, unless such failure is due to a
cause permitted under Article I or is due to
a cause beyond the control of the Fund or
the Underwriter; or
(vi) arise out of or result from any material
breach of any representation and/or warranty
made by the Underwriter or the Fund in this
Agreement or arise out of or result from any
other material breach of this Agreement by
the Underwriter or the Fund;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance or such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Party, the Underwriter will be entitled to participate,
at its own expense, in the defense thereof. The Underwriter also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Underwriter to such party of the
Underwriter's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Underwriter will not be liable to such 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.
8.2(d). The Company agrees promptly to notify the
Underwriter of the commencement of any litigation or proceedings against it or
any of its officers or directors in connection with the issuance or sale of the
Contracts or the operation of the Account.
ARTICLE IX. Applicable Law
9.1 This Agreement shall be construed and the
provisions hereof interpreted under and in accordance with the laws of the
State of New York.
9.2 This Agreement shall be subject to the
provisions of the 1933, 1934 and 1940 Acts, and the rules and regulations and
rulings thereunder, including such exemptions from those statutes, rules and
regulations as the SEC may grant (including, but not limited to, any Mixed and
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith. If, in the future, the Mixed and Shared
Funding Exemptive Order should no longer be necessary under applicable law, then
Article VII shall no longer apply.
ARTICLE X. Termination
10.1 This Agreement shall continue in full force and
effect until the first to occur of:
(a) termination by any party, for any reason
with respect to some or all Designated Portfolios, by 120
days advance written notice delivered to the other parties;
or
(b) termination by the Company by written notice
to the Fund and the Underwriter based upon
the Company's determination that shares of
the Fund are not reasonably available to
meet the requirements of the Contracts; or
(c) termination by the Company by written notice
to the Fund and the Underwriter in the event
any of the Designated Portfolio's shares are
not registered, issued or sold in accordance
with applicable state and/or federal law or
such law precludes the use of such shares as
the underlying investment media of the
Contracts issued or to be issued by the
Company; or
(d) termination by the Fund or Underwriter in
the event that formal administrative
proceedings are instituted against the
Company by the NASD, the SEC, the Insurance
Commissioner or like official of any state
or any other regulatory body regarding the
Company's duties under this Agreement or
related to the sale of the Contracts, the
operation of any Account, or the purchase of
the Fund's shares; provided, however, that
the Fund or Underwriter determines in its
sole judgment exercised in good faith, that
any such administrative proceedings will
have a material adverse effect upon the
ability of the Company to perform its
obligations under this Agreement; or
(e) termination by the Company in the event that
formal administrative proceedings are
instituted against the Fund or Underwriter
by the NASD, the SEC, or any state
securities or insurance department or any
other regulatory body; provided, however,
that the Company determines in its sole
judgment exercised in good faith, that any
such administrative proceedings will have a
material adverse effect upon the ability of
the Fund or Underwriter to perform its
obligations under this Agreement; or
(f) termination by the Company by written notice
to the Fund and the Underwriter with respect
to any Designated Portfolio in the event
that such Portfolio ceases to qualify as a
Regulated Investment Company under
Subchapter M or fails to comply with the
Section 817(h) diversification requirements
specified in Article VI hereof, or if the
Company reasonably believes that such
Portfolio may fail to so qualify or comply;
or
(g) termination by the Fund or Underwriter
by written notice to the Company in the
event that the Contracts fail to meet the
qualifications specified in Article VI
hereof; or
(h) termination by either the Fund or the
Underwriter by written notice to the
Company, if either one or both of the Fund
or the Underwriter respectively, shall
determine, in their sole judgment exercised
in good faith, that the Company has suffered
a material adverse change in its business,
operations, financial condition, or
prospects since the date of this Agreement
or is the subject of material adverse
publicity; or
(i) termination by the Company by written notice
to the Fund and the Underwriter, if the
Company shall determine, in its sole
judgment exercised in good faith, that the
Fund, Adviser, or the Underwriter has
suffered a material adverse change in its
business, operations, financial condition or
prospects since the date of this Agreement
or is the subject of material adverse
publicity; or
(j) termination by the Company upon any
substitution of the shares of another
investment company or series thereof for
shares of a Designated Portfolio of the Fund
in accordance with the terms of the
Contracts, provided that the Company has
given at least 45 days prior written notice
to the Fund and Underwriter of the date of
substitution; or
(k) termination by any party in the event that
the Fund's Board of Directors determines
that a material irreconcilable
conflict exists as provided in Article VII;
or
(l) termination by any party upon the
"assignment" of this Agreement (as defined
under the 1940 Act), unless made with the
written consent of each other party,
provided, however, that the Underwriter may
assign this Agreement to the Adviser or a
company controlled by the Adviser,
consistent with applicable broker-dealer
regulations; or
(m) termination by the Company by written notice
to the Fund and the Underwriter upon the
sale, acquisition or change of control of
the Adviser unless effected with the written
consent of the Company; or
(n) termination by any party to this Agreement,
upon another party's material breach of any
provision of this Agreement.
10.2 Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"), unless the Underwriter elects to compel a substitution of other
securities for the shares of the Designated Portfolios. Specifically, the owners
of the Existing Contracts may be permitted to reallocate investments in the
Fund, redeem investments in the Fund and/or invest in the Fund upon the making
of additional purchase payments under the Existing Contracts (subject to any
such election by the Underwriter). The parties agree that this Section 10.2
shall not apply to any terminations under Article VII and the effect of such
Article VII terminations shall be governed by Article VII of this Agreement. The
parties further agree that this Section 10.2 shall not apply to any terminations
under Section 10.1(g) of this Agreement.
10.3 The Company shall not redeem Fund shares
attributable to the Contracts (as opposed to Fund shares attributable to the
Company's assets held in the Account) except (i) as necessary to implement
Contract owner initiated or approved transactions or other Contract transactions
or pursuant to Article VII, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), (iii) as permitted
by an order of the SEC pursuant to Section 26(b) of the 1940 Act, but only if a
substitution of other securities for the shares of the Designated Portfolios is
consistent with the terms of the Contracts, or (iv) as permitted under the terms
of the Contract. Upon request, the Company will promptly furnish to the Fund and
the Underwriter reasonable assurance that any redemption pursuant to clause (ii)
above is a Legally Required Redemption. Furthermore, except in cases where
permitted under the terms of the Contacts, the Company shall not prevent
Contract owners from allocating payments to a Portfolio that was otherwise
available under the Contracts without first giving the Fund or the Underwriter
45 days notice of its intention to do so.
<PAGE>
10.4 Notwithstanding any termination of this
Agreement, each party's obligation under Article VIII to indemnify the other
parties shall survive.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by
registered or certified mail, postage prepaid, return receipt requested, or by
nationally recognized overnight courier, charges prepaid, with evidence of
delivery, 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 parties, and such notice shall be effective upon delivery.
If to the Fund:
SoGen Variable Funds, Inc.
1221 Avenue of the Americas
New York, NY 10020
Attention: Jean-Marie Eveillard
If to the Company:
Valley Forge Life Insurance Company
Variable Life Insurance Products - 34 South
CNA Plaza
Chicago, Illinois 60685
Attention: Kevin Hogan
If to Underwriter:
Societe Generale Securities Corporation
1221 Avenue of the Americas
New York, NY 10020
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look
solely to the property of the Fund, and in the case of a series company, the
respective Designated Portfolios listed on Schedule A hereto as though each such
Designated Portfolio had separately contracted with the Company and the
Underwriter for the enforcement of any claims against the Fund. The parties
agree that neither the Board, officers, agents or shareholders of the Fund
assume any personal liability or responsibility for obligations entered into by
or on behalf of the Fund.
12.2 Subject to the requirements of legal process
and regulatory authority, each party hereto shall treat as confidential the
names and addresses of the owners of the Contracts and all information
reasonably identified as confidential in writing by any other party hereto and,
except as permitted by this Agreement, shall not disclose, disseminate or
utilize such names and addresses and other confidential information without the
express written consent of the affected party until such time as such
information has come into the public domain.
12.3 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.
12.4 This Agreement may be executed simultaneously
in two or more counterparts, each of which taken together shall constitute
one and the same instrument.
12.5 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.
12.6 Each party hereto shall cooperate with each
other party and all appropriate governmental authorities (including without
limitation the SEC, the NASD, 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 except when cooperation would require waiver of any
privilege or valuable right against the other party. Notwithstanding the
generality of the foregoing, each party hereto further agrees to furnish the
Pennsylvania Insurance Commissioner with any information or reports in
connection with services provided under this Agreement which such Commissioner
may request in order to ascertain whether the variable annuity operations of the
Company are being conducted in a manner consistent with the Pennsylvania
variable annuity laws and regulations and any other applicable law or
regulations.
12.7 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.
12.8 This Agreement or any of the rights and
obligations hereunder may not be assigned by any party without the prior
written consent of all parties hereto.
12.9 The Company shall furnish, or shall cause
to be furnished, to the Fund or its designee copies of the Company's annual
statement (prepared under statutory accounting principles) and annual report
(prepared under generally accepted accounting principles) filed with any state
or federal regulatory body or otherwise made available to the public, as soon as
practicable and in any event within 90 days after the end of each fiscal year.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
COMPANY: VALLEY FORGE LIFE INSURANCE COMPANY
By its authorized officer
By:_______________________________________
Title:______________________________________
Date:______________________________________
FUND: SOGEN VARIABLE FUNDS, INC.
By its authorized officer
By:_______________________________________
Title:______________________________________
Date:_____________________________________
UNDERWRITER: SOCIETE GENERALE SECURITIES CORPORATION
By its authorized officer
By:_______________________________________
Title:______________________________________
Date:_____________________________________
<PAGE>
SCHEDULE A
Segregated Asset Accounts of the Company
Contracts to be Issued by the Company
Designated Portfolio Shares to be Purchased
SoGen Overseas Variable Fund
Other Funding Vehicles Available Under the Contracts
Exhibit 8F
FUND PARTICIPATION AGREEMENT
Continental Assurance Company, an Illinois stock insurance company and Valley
Forge Life Insurance Company, a Pennsylvania stock insurance company ("Insurance
Companies"), Van Eck Worldwide Insurance Trust ("Trust") and the Trust's
investment adviser, Van Eck Associates Corporation ("Adviser") hereby agree as
of the __th day of _________, 1996, that shares of the series of the Trust as
listed on Exhibit A, as it may from time to time be amended ("Portfolios"),
shall be made available to serve as an underlying investment medium for
Individual Deferred Variable Annuity Contracts and Individual Variable and Fixed
Life Insurance Contracts ("Contracts") to be offered by Insurance Companies
subject to the following provisions:
1. Insurance Companies represent that they have established the Continental
Assurance Company and Valley Forge Life Insurance Company Variable Annuity
Separate Accounts and Variable Life Separate Accounts ("Variable Accounts") as a
separate account under Illinois and Pennsylvania law, and have registered them
as unit investment trusts under the Investment Company Act of 1940 ("1940 Act")
to serve as an investment vehicle for the Contracts. The Contracts provide for
the allocation of net amounts received by the Insurance Companies to separate
series of the Variable Account for investment in the shares of specified
investment companies selected among those companies available through the
Variable Account to act as underlying investment media. Selection of a
particular investment company is made by the Contract owner who may change such
selection from time to time in accordance with the terms of the applicable
Contract.
2. The Insurance Companies represent and warrant that the Contracts are or will
be registered under the Securities Act of 1933 ("1933 Act"); and that the
Contracts will be issued in compliance in all material respects with all
applicable federal and state laws. The Insurance Companies further represent and
warrant that the contracts will be sold in compliance in all material respects
with all applicable federal laws and, as it applies to the Insurance Companies
as sponsor of the Contracts, state laws. The Insurance Companies will impose
requirements upon agents and brokers selling the Contracts under which such
agents and brokers will agree to comply with specific suitability requirements
of applicable state laws. The Insurance Companies further represent and warrant
that they are insurance companies duly organized and in good standing under
applicable law.
3. The Trust represents and warrants that Portfolio shares sold pursuant to this
Agreement shall be registered under the 1933 Act, duly authorized for issuance
and sold to the Insurance Company in compliance with the laws of the
Commonwealth of Massachusetts and the laws of each Insurance Company's state of
domicile and all applicable federal and state securities laws, and that the
Trust is and shall remain, while Portfolio shares are offered for sale,
registered under the 1940 Act. The Trust shall amend the Registration Statement
for its shares 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 Portfolio shares for sale in accordance with the laws of
the various states if and to the extent required by applicable law.
4. The Trust represents that it is currently qualified as a Regulated Investment
Company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and that it will make every effort to maintain such qualification
(under Subchapter M or any successor or similar provision), and that it will
notify the Insurance Companies immediately in the event that there is a
reasonable basis for believing that the Trust has ceased to so qualify or that
it might not so qualify in the future.
5. Subject to Section 20 hereof, the Insurance Companies represent that the
Contracts are currently treated as endowment, life insurance, or annuity
contracts under applicable provisions of the Code, and that they will make every
effort to maintain such treatment, and that they will notify the Trust
immediately upon having a reasonable basis for believing that the Contracts have
ceased to be so treated or that they might not be so treated in the future.
6. The Trust currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. To the extent that it decides
to finance distribution expenses pursuant to a Rule 12b-1 plan, the Trust
undertakes to have the Board of Trustees, a majority of whom are not interested
persons of the Trust, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses. In the event that the Trust determines to finance
distribution expenses pursuant to a Rule 12b-1 plan, the Trust shall immediately
notify the Insurance Companies.
7. The Trust and the Adviser have provided the Insurance Companies certain
written information requested by the Insurance Companies and represent that the
information is accurate in all material respects as of the date provided;
further, the Trust represents and warrants that its investment policies, fees
and expenses are and shall at all times remain in compliance with insurance and
other applicable laws of each Insurance Company's state of domicile and any
other applicable state, to the extent such laws are specifically identified to
Trust and Adviser in writing from time to time by Insurance Companies.
8. The Adviser represents and warrants that it is a corporation duly organized
and in good standing under the laws of Delaware, that it is and shall remain
duly registered under all applicable federal and state securities laws and that
it shall perform its obligations to the Trust in compliance in all material
respects with the securities laws of the Commonwealth of Massachusetts and any
applicable state and federal securities laws.
9. The Trust represents that it is lawfully organized and validly existing under
the laws of the Commonwealth of Massachusetts and that it does and will comply
in all material respects with the 1940 Act.
10. The Adviser represents and warrants that the Trust's principal underwriter,
Van Eck Securities Corporation ("Underwriter"), is a corporation duly organized
and in good standing under the laws of Delaware, that it is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC") and is a
member in good standing of the National Association of Securities Dealers, Inc.
("NASD"). The Adviser further represents and warrants that the Underwriter is
and shall remain duly registered in all material respects under all applicable
federal and state securities laws and that the Underwriter shall perform its
obligations to the Trust in compliance in all material respects with the
securities laws of each Insurance Company's state of domicile and any applicable
state and federal securities laws.
11. Insurance Companies agree to make every reasonable effort to market their
Contracts for so long as the Insurance Companies shall offer the Contracts (it
being understood that the Insurance Companies reserve the right, in their sole
discretion, to suspend, terminate or resume the offering of the Contracts in any
state at any time for any reason). Insurance Companies will use their best
efforts to give substantially equivalent exposure to shares of the Trust as is
given to other underlying investments of the Variable Account. In marketing
their Contracts, Insurance Companies will comply with all applicable federal
laws and, as it applies to the Insurance Companies and their non-independent
agents, state laws. Insurance Companies will impose requirements upon agents and
brokers selling the Contracts under which such agents and brokers will agree to
comply with specific marketing and advertising/promotional requirements of
applicable state laws.
<PAGE>
12. The Trust or the Adviser will provide closing net asset value, dividend and
capital gain information at the close of trading each business day (in any
event, by 6:30 p.m. Eastern time) to Insurance Companies. Insurance Companies
will use this data to calculate unit values, which will in turn be used to
process that same business day's Variable Account unit values. Any error in the
calculation of the Trust's net asset value per share shall be reported
immediately to the Insurance Companies. The Variable Account processing will be
done the same evening, and orders will be placed the morning of the following
business day. Orders will be sent directly to the Trust or its specified agent.
The Trust will sell to Insurance Companies those shares of the Portfolios which
the Variable Accounts order at the applicable net asset value next computed
pursuant to the rules of the SEC; provided, however, that the Trust reserves the
right to reject a purchase order if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion of the
Trust's officers, 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 the Portfolio (it being understood that for this purpose
shareholders, with respect to the Variable Accounts, means Contract owners).
Notice of election to suspend or terminate shall be furnished by the Trust, said
termination to be effective 10 Business Days after receipt of such notice by the
Company in order to give the Company sufficient time to take appropriate steps
in response to such suspension or termination. For purposes of this Section, the
Insurance Companies shall be the designee of the Trust for receipt of purchase
orders, and receipt by such designee shall constitute receipt by the Trust.
"Business day" shall mean any day on which the New York Stock Exchange is open
for trading and on which the Trust calculates the net asset value of the
Portfolios pursuant to the rules of the SEC. Dividends and capital gains
distributions shall be reinvested in additional shares at the ex-date net asset
value.
13. The Trust agrees to redeem for cash, on either Insurance Company's request,
any full or fractional shares of the Portfolios, executing such requests on a
daily basis at the net asset value next computed after receipt by the Trust or
its designee of the request for redemption. For purposes of this Section, the
Insurance Companies shall be the designee of the Trust for receipt of requests
for redemption and receipt by such designee shall constitute receipt by the
Trust.
14. Insurance Companies shall pay for Portfolio shares on the next Business Day
after an order to purchase Trust shares is received in accordance with the
provisions of Section 12 hereof. Payment shall be in federal funds transmitted
by wire and/or by a credit for any shares redeemed the same day as the purchase.
15. The Trust shall pay and transmit the proceeds of redemptions of Portfolio
shares within 7 Business Days after a redemption order is received in accordance
with Section 13 hereof and it will use its best efforts to pay and transmit such
proceeds on the next Business Day after a redemption order is so received.
Payment shall be in federal funds transmitted by wire and/or a credit for any
shares purchased the same day as the redemption.
16. All expenses incident to the performance by the Trust under this Agreement
shall be paid by the Trust. The Trust shall pay the cost of registration of
Trust shares with the SEC. The Trust shall distribute to the Variable Accounts,
sufficient quantities of Trust proxy material, periodic Trust reports to
shareholders and other material the Trust may be required to send to Contract
owners. The Trust shall pay the cost of qualifying Trust shares in states where
required. The Trust shall provide to the Insurance Companies on printer-ready
diskette the Trust's current prospectus(es) describing only the Portfolios
listed on Exhibit A hereto (a "Stand-Alone Prospectus") in order for the
Insurance Companies once each year (or more frequently if the prospectus for the
Trust is amended more frequently) to have the prospectus for the Contracts and
the Stand-Alone Prospectus printed together in one document. The Trust shall
provide the Insurance Companies with a copy of the Trust's Statement of
Additional Information suitable for duplication. The Trust or the Adviser shall
bear the expense of printing or reproducing copies of the Stand-Alone
Prospectus(es) and the Trust's statement of additional information that will be
distributed to existing Contract owners who are also beneficial owners of the
Trust's shares (provided, however, that the per unit expense of printing or
reproducing the Stand-Alone Prospectus(es) that is borne by the Trust or the
Adviser shall not exceed the per unit expense of printing the Trust's standard
printed prospectus), and the Insurance Companies shall bear any excess, and the
expense of printing or reproducing copies of the Stand-Alone Prospectus(es) and
the Trust's statement of additional information that are used in connection with
offering the Contracts.
17. The Insurance Companies shall not make and shall prohibit its agents from
making representations concerning the Trust or Trust shares except those
contained in the then current Registration Statement, prospectus(es), or
statement of additional information of the Trust, as such Registration Statement
or prospectus or statement of additional information may be amended or
supplemented from time to time, or in current printed sales literature or
promotional material (in accordance with any limitation contained therein)
approved by the Adviser, the Trust, or their respective designee, except with
the written permission of the Adviser or the Trust.
18. The Trust, the Adviser, and their respective agents shall make no
representations concerning the Insurance Companies, the Variable Account, or the
Contracts, except those contained in the then-current Registration Statement,
prospectus(es), or statement of additional information for the Contracts and the
Variable Account, as such Registration Statement or prospectus or statement of
additional information may be amended or supplemented from time to time, or in
current printed sales literature or advertising material (in accordance with any
limitation contained therein) approved by the Insurance Companies or their
respective designee, except with the written permission of the Insurance
Companies or their designee.
19. Administrative services to Contract owners shall be the responsibility of
the Insurance Companies, and shall not be the responsibility of the Trust or the
Adviser. The Trust and Adviser recognize that the Insurance Companies will be
the sole shareholder of Trust shares issued pursuant to the Contracts. Such
arrangement will result in multiple share orders.
20. The Trust and the Adviser represent and warrant that each Portfolio of the
Trust complies, and shall continue to comply, with Sections 817(h) and 851 of
the Internal Revenue Code of 1986, if applicable, Subchapter M of the Code, and
the regulations thereunder, and the applicable provisions of the 1940 Act
relating to the diversification requirements for variable annuity, endowment,
and life insurance contracts. Upon request, the Trust shall provide the
Insurance Companies with a letter from the appropriate Trust officer certifying
the Trust's compliance with the diversification requirements and qualification
as a regulated investment company.
21. The Trust or Adviser will notify the Insurance Companies immediately upon
having a reasonable basis for believing that the Trust or any Portfolio has
ceased to comply with the aforesaid Section 817(h) diversification or Subchapter
M qualification requirements or might not so comply in the future.
22. Insurance Companies agree to inform the Board of Trustees of the Trust of
the existence of, or any potential for, any material irreconcilable conflict of
interest between the interests of the Contract owners of the Variable Accounts
investing in the Trust and/or any other separate account of any other insurance
company investing in the Trust.
The Board of Trustees of the Trust shall monitor the Trust for the existence of
any material irreconcilable conflict between the interests of the Contract
owners of all separate accounts investing in the Trust. A material
irreconcilable conflict may arise for a variety of reasons, including:
(a) an action by any state insurance or other regulatory authority;
(b) a change in applicable federal or state insurance, tax or
securities laws or regulations, or a public ruling, private letter
ruling, 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 Contract owners and
variable annuity insurance contract owners or by variable annuity or
life insurance contract owners of different life insurance companies
utilizing the Trust; or
(f) a decision by the Insurance Companies to disregard the voting
instructions of contract owners.
The Insurance Companies will be responsible for assisting the Board of Trustees
of the Trust in carrying out its responsibilities by providing the Board with
all information reasonably necessary for the Board to consider any issue raised,
including information as to a decision by the Insurance Companies to disregard
voting instructions of Contract owners.
It is agreed that if it is determined by a majority of the members of the Board
of Trustees of the Trust or a majority of its disinterested Trustees that a
material irreconcilable conflict exists affecting the Insurance Companies, the
Insurance Companies shall, at their own expense, take whatever steps are
necessary to remedy or eliminate the irreconcilable material conflict, which
steps may include, but are not limited to:
(a) withdrawing the assets allocable to some or all of the Variable
Accounts from the Trust or any Portfolio and reinvesting such assets in
a different investment medium, including another Portfolio of the Trust
or submitting the questions of whether such segregation should be
implemented to a vote of all affected Contract owners and, as
appropriate, segregating the assets of any particular group (i.e.,
annuity Contract owners, life insurance Contract owners or qualified
Contract owners) that votes in favor of such segregation, or offering
to the affected Contract owners the option of making such a change; or
(b) establishing a new registered management investment company or
managed separate account.
If a material irreconcilable conflict arises because of an Insurance Company's
decision to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Insurance
Companies may be required, at the Trust's election, to withdraw the Variable
Account's investment in the Trust. No charge or penalty will be imposed against
the Variable Account as a result of such withdrawal. The Insurance Companies
agree that any remedial action taken by it in resolving any material conflicts
of interest will be carried out with a view only to the interests of Contract
owners.
For purposes hereof, a majority of the disinterested members of the Board of
Trustees of the Trust shall determine whether any proposed action adequately
remedies any material irreconcilable conflict. In no event will the Trust be
required to establish a new funding medium for any Contracts. The Insurance
Companies shall not be required by the terms hereof to establish a new funding
medium for any Contracts if an offer to do so has been declined by vote of a
majority of Contract owners adversely affected by the irreconcilable material
conflict.
The Trust will undertake to promptly make known to the Insurance Companies the
Board of Trustees' determination of the existence of a material irreconcilable
conflict and its implications.
23. (a) This Agreement may be terminated as to the sale and issuance of new
Contracts:
(1) at the option of the Insurance Companies, the Adviser or the Trust,
upon 120 days' advance written notice to the other parties;
(2) at the option of the Insurance Companies, if Trust shares are not
available for any reason to meet the requirements of Contracts as
determined by the Insurance Companies; reasonable advance notice of
election to terminate shall be furnished by the Insurance Companies;
(3) at the option of the Insurance Companies, the Adviser or the Trust,
upon institution of formal proceedings against the Broker-Dealer or
Broker-Dealers marketing the Contracts, the Variable Account, the
Insurance Companies, the Adviser, the Underwriter or the Trust by the
NASD, the SEC or any other regulatory body;
(4) upon a decision by either Insurance Company, subject to compliance
with applicable regulations of the SEC or obtaining any necessary SEC
approval, to substitute such Trust shares with the shares of another
investment company for Contracts for which the Trust shares have been
selected to serve as the underlying investment medium. The Insurance
Companies will give 60 days' written notice to the Trust and the
Adviser of any proposed action to replace Trust shares;
(5) upon assignment of this Agreement unless made with the written
consent of each other party;
(6) in the event Trust shares are not registered, issued or sold in
conformance with federal law or such law precludes the use of Trust
shares as an underlying investment medium of Contracts issued or to be
issued by the Insurance Companies, prompt notice shall be given by a
party to each other party in the event the conditions of this provision
occur.
(7) at the option of the Insurance Companies by written notice to the
Trust and Adviser, with respect to any Portfolio in the event that such
Portfolio fails to meet the Section 817(h) diversification requirements
or Subchapter M qualifications specified in Section 20 hereof or if the
Insurance Companies reasonably believes that the Portfolio may fail to
meet either of those requirements;
(8) at the option of the Insurance Companies by written notice to the
Trust and Adviser, if the Insurance Companies shall determine, in their
sole judgment exercised in good faith that the Trust, Underwriter or
Adviser has suffered a material adverse change in its business,
operations, financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity;
(9) at the option of the Trust or Adviser by written notice to the
Insurance Companies, if the Trust or Adviser shall determine, in its
sole judgment exercised in good faith, that the Insurance Company has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or is
the subject of material adverse publicity; or
(10) at the option of any party to this Agreement upon another party's
material breach of any provision of this Agreement.
(b) This Agreement may be terminated as to existing Contracts:
(1) at the option of the Insurance Companies, the Adviser, or the
Trust, upon six months' advance written notice to the other parties,
provided that such termination shall not be effective unless and until
all regulatory approvals necessary in light of such termination,
including any necessary order of the SEC pursuant to Section 26(b) of
the 1940 Act, have been obtained by the Insurance Companies;
(2) in accordance with the terms of Section 22 of this Agreement; or
(3) as required by state and/or federal laws or regulations or judicial
or other legal precedent of general application.
24. (a) Termination of this Agreement with respect to the sale and issuance of
new Contracts only shall not affect the Trust's obligation to furnish Trust
shares for Contracts then in force for which the shares of the Trust serve or
may serve as an underlying medium. Specifically, and without limitation, the
owners of Contracts then in force shall be permitted to reallocate investments
in the Trust, redeem investments in the Trust and/or invest in the Trust upon
the making of additional purchase payments under the Contracts then in force.
The purchase and redemption of Trust shares pursuant to this Section 24 shall be
effected in accordance with the terms of this Agreement. The parties agree that
this section shall not apply to any terminations under Section 22 and the effect
of such Section 22 terminations shall be governed by Section 22 of this
Agreement. Termination of this Agreement with respect to existing Contracts
shall not affect the Trust's obligation to furnish shares in connection with the
reinvestment of dividends and other distributions with respect to existing
Portfolio shares.
(b) Notwithstanding any termination of this Agreement, each party's obligation
under Section 28 to indemnify other parties shall survive and not be affected by
any termination of this Agreement. A successor by law of the parties to this
Agreement shall be entitled to the benefits of the indemnification contained in
Section 28.
25. Each notice required by this Agreement shall be given by facsimile and
confirmed in writing to:
Continental Insurance Company
Valley Forge Life Insurance Company
Variable Life Insurance Products - 34 South
CNA Plaza
Chicago, Illinois 60685
Fax #: 312-822-1186
Attn: Kevin Hogan
Van Eck Worldwide Insurance Trust
99 Park Avenue
New York, New York 10016
Fax #: 212-687-5248
Attn: President
Van Eck Associates Corporation
99 Park Avenue
New York, New York 10016
Fax #: 212-687-5248
Attn: President
26. Advertising and sales literature with respect to the Trust prepared by the
Insurance Companies or their agents for use in marketing their Contracts will be
submitted to the Trust for review before such material is submitted to the SEC
or NASD for review. The Trust shall review such material and shall communicate
any objections within 10 days after receipt. Advertising and sales literature
that refers to the Insurance Companies, the Variable Accounts, or the Contracts
that is prepared by the Trust, the Adviser, or any affiliate thereof, will be
submitted to the Insurance Companies for review and approval before such
material is submitted to the NASD or SEC for review. Notwithstanding the fact
that a party may not initially object, it reserves the right to reasonably
object thereafter to the continued use of any such sales literature or other
promotional material in which such party, the Variable Accounts or the Contracts
are named, and no such material shall be used if the party or its designee shall
so object in writing. For purposes of this Agreement, the phrase "advertising
and sales literature" includes but is not limited to advertisements (such as
material published or designed for use in a newspaper, magazine or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures or other public media) and sales literature
(any written or electronic communication distributed or made generally available
to customers or the public such as brochures, circulars, research reports,
market letters, performance reports or seminars, form letters, telemarketing
scripts, seminar texts, reprints or excerpts or any other advertisement, sales
literature or published articles) distributed or made generally available to
customers or the public, educational or training materials or communications
distributed or made generally available to some or all agents or employees.
27. The Trust will provide the Insurance Companies with as much notice as is
reasonably practicable of any proxy solicitation for any Portfolio and of any
material change in the Trust's registration statement or prospectus,
particularly any change resulting in a change to the registration statement or
prospectus of any Variable Account. The Trust will work in an orderly manner
with the Insurance Companies to enable the Insurance Companies to solicit
proxies from Contract owners or to make changes to the Insurance Company's
registration statement or prospectus. The Trust will make reasonable efforts to
attempt to have changes affecting Portfolio prospectuses become effective
simultaneously with the annual updates to such prospectuses. The Insurance
Companies will distribute all proxy material furnished by the Trust and will
vote Trust shares in accordance with instructions received from the Contract
owners of such Trust shares. Insurance Companies shall vote the Trust shares for
which no instructions have been received in the same proportion as Trust shares
for which said instructions have been received from Contract owners so long as
and to the extent that the SEC continues to interpret the 1940 Act to require
pass-through voting privileges for Contract owners. The Insurance Companies
reserve the right to vote Trust shares held in any segregated asset account in
its own right, if and to the extent permitted by law. Subject to any legal
requirements, the Insurance Companies and their agents will in no way recommend
action in connection with or oppose or interfere with the solicitation of
proxies for the Trust shares held for such Contract owners.
28. (a) Insurance Companies agree to indemnify and hold harmless the Trust, the
Adviser, the Underwriter and each of their respective trustees, directors,
officers, employees, agents and each person, excluding another participating
insurance company, if any, who controls the Trust within the meaning of the
Securities Act of 1933 (the "Act") (the Trust and such persons collectively,
"Trust Indemnified Person") against any losses, claims, damages or liabilities
to which a Trust Indemnified Person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof):
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in written information
furnished by the Insurance Companies specifically for use in the
Registration Statement or prospectus of the Trust, or in the
Registration Statement or prospectus for the Variable Accounts, 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;
(ii) arise out of or as a result of conduct, statements or
representations (other than statements or representations contained in
the Trust's registration statement, prospectus, statement of additional
information, advertisement or sales literature of theTrust prepared by
the Trust or its designee) of the Insurance Companies or their agents
with respect to the sale and distribution of Contracts for which Trust
shares are an underlying investment; or
(iii) arise out of an Insurance Company's material breach of this
Agreement;
and the Insurance Companies will reimburse any legal or other expenses
reasonably incurred by a Trust Indemnified Person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Insurance Companies will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or omission or alleged omission made in the
Registration Statement or prospectus for the Contracts and the Variable Account
or in the Registration Statement or prospectus or sales literature of the Trust
in conformity with written information furnished to the Insurance Companies by
the Trust or their designee specifically for use therein or in the Insurance
Companies-prepared sales literature. This indemnity agreement will be in
addition to any liability which the Insurance Companies may otherwise have.
(b) The Trust agrees to indemnify and hold harmless the Insurance Companies, the
underwriter for the Contracts and each of their respective directors, officers,
employees, agents and each person, if any, who controls the Insurance Companies
within the meaning of the Act (Insurance Company and such persons collectively,
"Insurance Company Indemnified Person") against any losses, claims, damages or
liabilities to which an Insurance Company Indemnified Person may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect there of):
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in written information
furnished by the Trust or its designee specifically for use in the
Registration Statement or prospectus for the Contracts and the Variable
Accounts, or in the Registration Statement or prospectus or sales
literature of the Trust, 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; or
(ii) arise out of or as a result of conduct, statements or
representations of the Trust or its agents
with respect to sales of Trust shares; or
(iii) arise out of or are based upon the failure to keep the Trust
and each of the Portfolios fully diversified and qualified as a
regulated investment company as required by the applicable provisions
of the Internal Revenue Code, the 1940 Act and any other law or
regulation; or
(iv) arise out of Trust's material breach of this Agreement;
and the Trust will reimburse any legal or other expenses reasonably
incurred by an Insurance Company Indemnified Person in connection
with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Trust will not be
liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue
statement or omission or alleged omission made in the Registration
Statement or prospectus for the Trust or in the Registration
Statement or prospectus or sales literature of the Contracts and the
Variable Accounts in conformity with written information furnished to
the Trust by the Insurance Companies specifically for use therein or
in Trust-prepared sales literature. This indemnity agreement will be
in addition to any liability which the Trust may otherwise have.
(c) The Adviser agrees to indemnify and hold harmless each Insurance Company
Indemnified Person against any losses, claims, damages or liabilities to which
an Insurance Company Indemnified Person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect there of):
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in written
information furnished by the Trust or its designee specifically for
use in the Registration Statement or prospectus for the Contracts and
the Variable Accounts, or in the Registration Statement or prospectus
or sales literature of the Trust, 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; or
(ii) arise out of or as a result of conduct, statements or
representations of the Adviser or its agents with respect to sales
of Trust shares; or
(iii) arise out of or are based upon the failure of the Trust and
each Portfolio to remain fully diversified and qualified as a
regulated investment company as required by the applicable provisions
of the Internal Revenue Code, the 1940 Act, and any other law or
regulation; or
(iv) arise out of the Adviser's or the Trust's material breach of
this Agreement;
and the Adviser will reimburse any legal or other expenses reasonably incurred
by each Insurance Company Indemnified Person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Adviser will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or omission or alleged omission made in the Registration Statement or
prospectus for the Trust or in the Registration Statement or prospectus or sales
literature of the Contracts and the Variable Accounts in conformity with written
information furnished to the Adviser by the Insurance Companies specifically for
use therein or in Trust- or Adviser-prepared sales literature. This indemnity
agreement will be in addition to any liability which the Adviser may otherwise
have.
(d) The Trust and the Adviser shall indemnify and hold the Insurance Companies
harmless against any and all liability, loss, damages, costs or expenses which
the Insurance Companies may incur, suffer or be required to pay directly due to
the Trust's or Adviser's (or their designated agent's) (i) incorrect calculation
of the daily net asset value, dividend rate or capital gain distribution rate;
(ii) incorrect reporting of the daily net asset value, dividend rate or capital
gain distribution rate; or (iii) untimely reporting of the net asset value,
dividend rate or capital gain distribution rate. Any gain accruing to the
Insurance Companies attributable to the Trust's or Adviser's (or their
designated agent's) incorrect calculation or reporting of the daily net asset
value shall be returned to the Trust by the Insurance Companies upon receipt of
notice from the Trust or the Adviser regarding such incorrect calculation or
reporting.
(e) Promptly after receipt by an indemnified party under this paragraph of
notice of the commencement of action, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party under this
paragraph, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
paragraph. In case any such action is brought against any indemnified party, and
it notified the indemnifying party of the commencement thereof, the indemnifying
party at its expense will be entitled to participate therein and, to the extent
that it may wish, assume the defense thereof, with counsel satisfactory to such
indemnified party. After notice from the indemnifying party to such indemnified
party of indemnifying party's election to assume the defense thereof, 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 such party
under this paragraph for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation.
(f) The indemnifying party shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an indemnified party would otherwise be subject by reason of 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 or to
the indemnifying party, whichever is applicable.
(g) Each indemnified party will promptly notify the indemnifying party of the
commencement of any litigation or proceedings against it in connection with the
issuance or sale of the Trust shares or the Contracts or the operation or
existence of the Trust or the Variable Account.
(h) Nothing herein shall entitle an indemnified party to special, consequential
or exemplary damages or damages of like kind or nature, and with respect to
Section 28(d) hereof, all liability, loss and damages shall be limited to the
amount required to correct the value of the accounts as if there had been no
incorrect calculation or reporting or untimely reporting of net asset value,
dividend rate or capital gain distribution rate.
29. The term "Van Eck Worldwide Insurance Trust" means and refers to the
Trustees from time to time serving under the Master Trust Agreement of the Trust
dated January 7, 1986 as the same may subsequently thereto have been, or
subsequently hereto be, amended. It is expressly agreed that the obligations of
the Trust hereunder shall not be binding upon any Trustees, shareholders,
nominees, officers, agents or employees of the Trust, personally, but bind only
the assets and property of the Trust, as provided in the Amended and Restated
Master Trust Agreement of the Trust.
CONTINENTAL INSURANCE COMPANY CONTINENTAL INSURANCE COMPANY
ATTEST:
By:
By:
Name: Name:
Title:
Title:
VALLEY FORGE LIFE INSURANCE VALLEY FORGE LIFE INSURANCE
COMPANY COMPANY
ATTEST:
By:
By:
Name: Name:
Title:
Title:
VAN ECK WORLDWIDE INSURANCE VAN ECK WORLDWIDE INSURANCE
TRUST TRUST
ATTEST:
By:
By:
Name: Name:
Title:
Title:
VAN ECK ASSOCIATES CORPORATION VAN ECK ASSOCIATES CORPORATION
ATTEST:
By:
By:
Name: Name:
Title:
Title:
<PAGE>
15
EXHIBIT A
Van Eck Gold and Natural Resource Fund
Van Eck Worldwide Balanced Fund
SERVICE AGREEMENT
THIS AGREEMENT, made as of the _________ day of , (the "Effective Date" by and
between Continental Assurance Company and Valley Forge Life Insurance Company
(collectively, the "Customer"), having its principal office and place of
business at ___________________________________, and Financial Administrative
Services, Inc. ("FAS"), having its principal office and place of business at 95
Bridge Street, Haddam, Connecticut 06438.
WHEREAS, Customer desires to appoint FAS as Recordkeeping Service Agent
for certain of Customer's insurance policies/certificates described hereinafter
("the Policies"); and
WHEREAS, FAS desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows;
SECTION 1
TERMS OF APPOINTMENT
1.01 Subject to the provisions set forth in this Agreement , customer hereby
appoints FAS as Recordkeeping Services Agent for the Policies. The
Policies are described in Exhibit A.
1.02 FAS hereby accepts such appointment and agrees that on and after the
Effective Date, it will act as Customer's Recordkeeping Service Agent
for Policies.
1.03 FAS agrees to provide the necessary facilities, equipment, systems and
personnel to perform its duties and obligations hereunder, and to
perform such duties and obligations in accordance with customary
insurance third party administrator practices and standards, and with
requirements of the Investment Company Act of 1940 and regulations
issued thereunder which apply to the tasks allocated to FAS by this
Agreement. The facilities of FAS are referred to hereinafter as the
"FAS Facilities" and the systems of FAS are referred to hereinafter as
the "FAS Systems".
1.04 FAS agrees that it will perform, at the direction of Customer, those
Recordkeeping Service Agent Functions set forth in Exhibit B attached.
1.05 FAS agrees to use its best efforts to modify its systems and procedures
to comply with changes in requirements of the Investment Company Act of
1940 and regulations issued thereunder and with other federal or state
statute and regulations pertaining to the administration and servicing
of policies under this Agreement and to make such changes effective as
of the effective date of such statutory or regulatory changes, provided
however, that if the quantity or nature of the services provided by FAS
are required to be changed as a result of new federal or state
requirements, FAS reserves the right to modify its fees at any time
within ninety (90) days notice to the Customer, to reflect its
reasonable cost of complying with such changes. Customer will use its
best efforts to notify FAS of its knowledge of any changes to state and
federal regulations pertaining to this Agreement.
SECTION 2
TERM
2.01 Subject to earlier termination as hereinafter provided, this Agreement
shall remain in full force and effect with respect to the variable
annuity and variable life products of Customer commencing on the date
hereof and continuing thereafter for a period of four (4) years (the
Initial Annuity/Life Term" of this Agreement) and with respect to the
PEP product for a period of three (3) years (the "Initial PEP Term").
Except as otherwise provided in this Agreement, during the Initial
Annuity/Life Term and the Initial PEP Term, the charges of FAS for
performance of work hereunder shall not be subject to increase.
On or before a date 210 days prior to the end of the Initial
Annuity/Life Term and on or before a date 210 days prior to the end of
the first renewal Annuity/Life Term, FAS shall give written notice to
Customer of any changes (including fee changes) to be applicable during
the next renewal term of this Agreement. On or before a date 180 days
prior to the end of the Initial Annuity/Life Term and on or before 180
days prior to the end of the first renewal Annuity/Life Term, Customer
shall notify FAS of its election to continue this Agreement for a two
year renewal term. After two renewal Annuity/Life Terms of two years,
this Agreement may be extended for additional Annuity/Life terms of one
year by the mutual consent of the parties upon such terms and
conditions as they may agree.
On or before a date 210 days prior to the end of the Initial PEP Term,
FAS shall give written notice to Customer of any changes (including fee
changes) to be applicable during the PEP renewal term of this
Agreement. On or before a date 180 days prior to the end of the Initial
PEP Term, Customer shall notify FAS of its election to continue this
Agreement for a three year renewal term. Thereafter this Agreement may
be extended for additional PEP terms of one year by the mutual consent
of the parties upon such terms and conditions as they may agree.
2.02 In the event that this Agreement is terminated, FAS agrees that, in
order to assist in providing uninterrupted service to Customer, FAS
shall offer reasonable assistance to Customer in converting the records
of Customer from the FAS System to whatever service or system is
selected by Customer (subject to reimbursement of FAS for such
assistance at its standard rates and fees in effect at that time).
SECTION 3
FEES AND EXPENSES
3.01 During the initial term of this Agreement, Customer shall pay FAS,
within thirty (30) days after receipt of an FAS statement, the fees
and charges in the amounts as set out in Exhibit C annexed hereto and
made a part hereof.
3.02 Customer shall also reimburse FAS for all out-of-pocket expenses
incurred by FAS in the performance of this Agreement. FAS hereby
agrees that the expenses referred to in this Section shall be only
those charges directly incurred by FAS as set forth in Exhibit C and
such other expenses as may be authorized by Customer.
3.03 For each additional term of this Agreement, FAS shall be entitled to
receive such fees and charges as shall be agreed upon in writing by
the parties prior to commencement of each term, pursuant to Section
9.02 hereof.
3.04 In no event will any fee under Section 3.03 above exceed the like fee
changed during the previous term by more than fifteen percent (15%),
unless the quantity or nature of the related service changes.
3.05 Payment terms hereunder are net thirty (30) days with interest at one
and one half (1 1/2%) percent per month (but in no event more than the
highest rate allowable by law) assessed on all amounts owing more
than thirty (30) days.
3.06 The parties agree the Model Office testing being conducted, as of the
date of this Agreement, shall constitute the acceptance test for the
FAS Systems, procedures, and facilities. FAS agrees that acceptance
testing shall be completed by September 13, 1996. Customer shall notify
FAS as errors are detected during the Model Office testing process, but
shall notify FAS of all errors on or before September 18, 1996. FAS
agrees to provide Customer a status report on September 23, 1996 and
will correct all material errors by September 27, 1996. Upon correction
of material errors by FAS, Customer will accept the performance of FAS'
Model Office. In the event all material errors are not corrected by
September 27, 1996, the parties agree that such failure will constitute
a material breach of this Agreement.
(Notwithstanding the above language of this Section 3.06, in no event shall a
material systems error, whereby FAS provides a manual solution by September 27,
1996, be considered a material error, provided such material systems error is
corrected by February 1, 1997. Still under discussion.)
SECTION 4
REPRESENTATIONS AND WARRANTIES OF FAS
FAS represents and warrants to Customer as follows:
4.01 It is a corporation duly organized and existing and in good standing
under the laws of the State of Connecticut.
4.02 It is empowered under applicable laws and by its charter and bylaws to
enter into and perform the services contemplated in this Agreement.
4.03 All requisite corporate proceedings have been taken to authorize it to
enter into and perform the services contemplated in this Agreement.
4.04 It has, and will continue to have and maintain, the necessary
facilities, equipment, and personnel to perform its duties and
obligations under this Agreement.
4.05 It is and will continue to be qualified to do business in those
jurisdictions in which it is required by applicable law to be qualified
as a foreign corporation, and it possesses effective licenses and
permits that may be required by the laws of any of the fifty states and
the District of Columbia, with the exception of the State of Arizona.
Its license in Arizona is pending, and FAS will use its best efforts to
conclude the licensing process in Arizona.
4.06 It shall comply with all laws and regulations applicable to its
performance of the services contemplated by this agreement (provided,
however, that Customer shall be responsible for compliance of the
policies and marketing thereof with applicable laws and regulations).
SECTION 5
REPRESENTATIONS AND WARRANTIES OF CUSTOMER
Customer represents and warrants to FAS as follows:
5.01 Continental Assurance Company is a corporation existing and in good
standing under the laws of the State of Illinois, and Valley Forge Life
Insurance Company is a corporation existing and in good standing under
the laws of the State of Pennsylvania.
5.02 Customer is empowered under the applicable laws and regulations and by
its charter and bylaws to enter into and perform this Agreement.
5.03 All requisite corporate proceedings have been taken to authorize
Customer to enter into and perform this Agreement.
5.04 Prior to being offered for sale to the public, all of the Prospectuses,
Policies and other forms provided to FAS by Customer shall have been
approved by all regulatory authorities whose approval is needed and
required and shall remain in compliance with all applicable federal,
state and local laws and regulations.
5.05 Customer has complied and will continue to comply in all material
respects with all applicable laws and it has and will continue to
make all required filings with regulatory authorities in
connection with the offer, sale or administration of the Policies.
5.06 Those persons identified on Exhibit D, as amended from time to time,
are authorized to act for Customer with respect to matters involving
this Agreement and FAS shall be entitled to rely on their
instructions.
5.07 The representations and warranties of Customer shall continue to be
true and correct during the Initial Term and any additional term of
this Agreement.
SECTION 6
LIABILITY
6.01 During the term of this Agreement, FAS shall maintain an errors and
omissions policy, identifying Customer and FAS as the insureds.
("Liability Policy"). The Liability Policy shall be approved by the
Customer prior to issuance. The Liability Policy shall contain a
deductible of no more than $10,000 per occurrence and policy limits of
not less than $1,000,000 for any individual claim in a single policy
year and not less than $1,000,000 for all claims in the aggregate in a
single policy year. FAS shall provide Customer with the insurer's
certificate evidencing such insurance and shall notify Customer
immediately if the Liability Policy is cancelled or not renewed for any
reason. In the event the Liability Policy is cancelled or not renewed,
FAS shall secure within 30 days a replacement liability policy
providing the terms and coverage outlined in this paragraph.
Notwithstanding any other provisions of this Agreement, in the event
FAS fails to secure and maintain the coverage outlined in this
paragraph, Customer may terminate this Agreement upon five (5) days
written notice. Should Customer terminate under this Section, the
parties agree the termination fee outlined under Section 9.02 shall not
apply.
6.02 For individual Losses amounting to $10,000 or less per occurrence,
Customer shall absorb the cost. The term "Losses" in this Section 6
shall be defined to include all actual liabilities, losses, and damages
incurred, expenses reasonably incurred (including fees of expert
witnesses and advisors) and judgments, settlements, and court costs.
6.03 Any other provisions of the Agreement to the contrary notwithstanding,
Customer and FAS agree that the liability of either party to the other
for Losses due to acts or omissions of the other party in connection
with their performance of this Agreement, including, without
limitation, third party claims, shall be limited to payments made by
the insurer under the Liability Policy described in Section 6.01,
unless the act or omission complained of constitutes willful or
intentional misconduct. Customer agrees to pay the deductible on all
claims settled under the Liability Policy.
6.04 At any time FAS may apply for instructions from a person identified in
Exhibit D with respect to any matter arising in connection with this
Agreement. FAS shall be entitled to rely upon instructions, information
and documentation supplied by Customer to FAS during the course of
performance by FAS of its obligations under this Agreement.
6.05 In the event malfunction of the FAS System causes error or mistake in
any record, report, data, information or output under the terms of this
Agreement, FAS shall at its expense correct and reprocess such records;
provided, Customer promptly notifies FAS in writing of each error or
mistake.
SECTION 7
COVENANTS
7.01 FAS shall establish and maintain facilities and procedures for the
safekeeping of policy forms, check forms and facsimile signature
imprinting devices, if any, and all other documents, reports, records,
books, files, and other materials relative to this Agreement.
7.02 Upon reasonable notice to FAS, Customer shall have access, during
ordinary business hours, to all documents, records, reports, books,
files and other materials relative to this Agreement and maintained by
FAS, subject to the reasonable security concerns of FAS.
7.03 It is expressly understood and agreed that all documents, reports,
records, books, files and other materials relative to this Agreement
shall be the sole property of Customer and that such property shall be
held by FAS as agent, during the effective terms of this Agreement.
7.04 FAS shall maintain appropriate back-up computer files to permit file
recovery in the event of destruction of normal processing files.
Customer may review the procedures in effect upon demand.
7.05 FAS agrees than in administering the policies under this Agreement, FAS
will use the processing system described in Exhibit G to this
Agreement. FAS agrees that no replacement of processing system will be
made without the advance written consent of Customer.
7.06 Customer shall, in a timely fashion, provide FAS with all information
necessary for the timely and proper administration of the Policies,
including but not limited to: policy forms; lists of all states of
license, agents and representatives authorized to sell Customer's
policies; rate books; cash value and reserve factors; data records;
actuarial support; mortality rates and verified client files or
facsimile, such as microfilm or microfiche.
7.07 All information furnished by Customer to FAS, hereunder is confidential
and FAS shall not disclose any such information, directly or
indirectly, to any third party except: (a) to the extent that FAS is
required by law to make such disclosure; or (b) to the extent
necessarily resulting from provision by any of its affiliates of
services required by FAS in order to perform its obligations under this
Agreement. FAS agrees to safeguard the confidentiality of such
information using procedures at least as rigorous as those employed by
third party administrators operating in accordance with customary third
party administrator standards and practices.
7.08 Customer acknowledges that FAS and certain other persons have
proprietary rights in and to the FAS System and that the FAS System
constitutes confidential material and trade secrets of FAS, its
affiliates or unrelated persons; and Customer agrees to maintain the
confidentiality of the FAS System.
7.09 Customer acknowledges that this Agreement in no way gives Customer any
rights in or to the FAS System or FAS Facilities.
7.10 All premiums, loan repayments and other receipts with respect to the
Policies shall be directed to a Customer-owned lock box for deposit in
a Customer-owned account. In the event that any monies are received by
FAS, the documents accompanying the payment will be date stamped by
FAS (to ensure proper interest from the effective date) and forwarded
with payment for deposit in any customer account identified by
Customer for such purposes (if other than the aforementioned
Customer-owned account) or, if none is so identified, then simply
forwarded to Customer's offices.
7.11 Customer acknowledges its responsibility to provide actuarial and legal
support for policy and agent administration and financial reporting.
7.12 Any policies, certificates, booklets, termination notices, or other
written communications delivered by the Customer to FAS for delivery
to its policyholders shall be delivered by FAS promptly after receipt
of instructions from the Customer to do so.
7.13 The payment to FAS of any premiums or charges for insurance by or on
behalf of the Customer is considered to be received by the Customer
and the payment of return premiums or claims by the Customer to FAS is
not considered payment to the Customer until the payments are received
by the Customer.
7.14 To the extent that FAS collects premiums, all insurance charges or
premiums collected by FAS on behalf of the Customer and return
premiums received from the Customer are held by FAS in a fiduciary
capacity. These funds must be immediately remitted to the person
entitled to them must be deposited promptly in a fiduciary bank
account established and maintained by FAS. Of deposited charges or
premiums are collected on behalf of or for more than one (1) insurer,
FAS shall require the bank in which the fiduciary account is
maintained to keep records clearly recording the deposits in and
withdrawals from the account on behalf of or for each insurer. FAS
shall promptly obtain and keep copies of the records pertaining to
deposits and withdrawals on behalf of or for the insurer. FAS may not
pay a claim by withdrawals from the fiduciary account. Withdrawals
from the fiduciary account shall be made for the following: (1)
remittance to the Customer; (2) deposit in account for the Customer;
(3) transfer to or deposit in a claims paying account; (4) payment to
a group policy; (5) payment to FAS for its commission, fees, or
charges; or (6) remittance of returned premiums to the person entitled
to the premium.
7.15 To the extent that FAS adjusts and settles claims, the compensation to
FAS with regard to the policies shall in no way be contingent on claim
experience.
7.16 APPLICABLE TO CUSTOMERS DOING BUSINESS IN WYOMING, Customer
acknowledges its responsibility to provide cooperation in registering
FAS as an administrator in Wyoming. This entails completing and
authorizing a certificate of registration and a surety bond (Exhibit
F). In turn, FAS will provide a written notice, approved by the
Customer, to insured individuals, advising them of the identity of a
relationship among FAS, the policyholder, and the Customer.
SECTION 8
COMPUTER ACCESS
8.01 Provided both parties hereto have authorized such access in the space
therefor on the signature page hereof, and subject to the terms and
conditions set forth below, Customer shall be entitled to obtain
access on a "view only" basis to all data relating to the Policies
(the "Information") which is maintained on the computer(s) utilized by
on or on behalf of FAS in providing the services it provides to
Customer pursuant to this Agreement ("System Access").
8.02 Customer's access to such data shall be on Mondays through Fridays,
exclusive of holidays, between the hours of 8:00 a.m. and 5:00 p.m.,
Hartford, Connecticut time. FAS reserves the right to limit or
otherwise change those hours at any time and for any reason without
prior notice to Customer, provided, however, that Customer shall have
such access for a minimum of six hours each day, Monday through Friday,
between the hours of 8:00 a.m. and 6:00 p.m., Hartford, Connecticut
time. Furthermore, FAS makes no representations or warranties as to the
ability of Customer to successfully utilize System Access at any given
time, in light of the fact that computer facilities suffer occasional
"down-time".
8.03 Customer shall take no actions to affect or modify System Access, the
Information, or any of the hardware or software utilized by or on
behalf of FAS in conjunction with System Access. Use of System Access
to view data shall be made only through means and codes authorized by
FAS hereunder or pursuant hereto, which means and codes Customer agrees
not to divulge to any person other than those of its employees it
wishes to have use System Access. Neither FAS nor any of its affiliates
shall have responsibility for determining whether a person with the
proper procedures and codes to utilize System Access was properly
authorized to do so by Customer.
8.04 FAS shall have the right to modify or cause the modification of the
System Access program from time to time as its sole discretion without
prior notice to Customer.
8.05 In the event that Customer suspects a possible breach of security with
respect to System Access, including any unintended disclosure of
codes, or Customer obtains Information, through System Access, on any
person other than it own policyholders, then Customer shall
immediately notify FAS of such circumstances by telephone, followed by
a confirmation in writing, specify the nature of the problem. 8.06
Neither FAS nor any of its affiliates shall be liable to Customer for
any loss, cost or liability arising out of or in conjunction with
Customer's participation in System Access. Under no circumstances
shall FAS or any of its affiliates be liable to Customer for any
indirect, incidental or consequential damages arising out of or in
conjunction with Customer's participation in such system, even if
advised or the possibility therefor.
8.07 Customer shall indemnify FAS and its affiliates and hold them harmless
from all direct losses and all liabilities resulting to them, as well
as all costs and expenses (including court costs and attorney fees)
reasonably insured by them, due to Customer's failure to properly
safeguard the codes and/or passwords provided pursuant hereto for its
use. Customer shall also indemnify FAS and its affiliates and hold
them harmless to all liabilities, costs and expenses (including court
costs and attorney fees) reasonably incurred as a result of Customer's
breach of its obligations of confidentiality with respect to the
Information. Customer shall further indemnify and hold FAS and its
affiliates harmless from all liabilities, costs and expenses
(including court costs and attorney fees) reasonably incurred by them
due to any acts or omissions of Customer in its use of Information,
including but not limited to erroneous eligibility or claim coverage
determinations.
SECTION 9
TERMINATION OF AGREEMENT
9.01 Subsequent to the Initial Annuity/Life Term as defined in Section 2.01,
this Agreement may be terminated with respect to the variable annuity
and variable life products by either party by written notice to the
other party. Subsequent to the Initial PEP Term, this Agreement may be
terminated with respect to the PEP product by either party by written
notice to the other party.
9.02 On the second anniversary during the Initial Annuity/Life Term of this
agreement if the Monthly Administration Fee does not exceed the Minimum
Monthly Administration Fee as described in the attached Exhibit C
either party has the option to terminate the Agreement upon thirty (30)
days written notice to the other. Notice must be received by the
non-terminating party no later than thirty (30) days after such
anniversary. If Customer is the terminating party, notice to FAS must
be accompanied by a termination fee twenty-five thousand ($25,000)
dollars. FAS will continue to provide service under the agreement for
up to one hundred twenty (120) days at the Customers option after
receipt of notice by Customer or FAS of the other's intention to
terminate. Payment for Services provided by FAS after the second
anniversary but prior to any termination will be governed by Section 3
of this Agreement.
9.03 If Customer is more than sixty (60) days late in fulfilling its
obligations under Section 3, FAS may terminate its services upon
thirty (30) days' notice to Customer.
9.04 If either of the parties hereto shall materially breach this Agreement
or be materially in default in the performance of any of its duties
and obligations hereunder (the "Defaulting Party"), other than
Customer's obligation of payment, the other party hereto may be given
written notice thereof to the Defaulting Party and if such default or
breach shall not have been redeemed within ninety (90) days after such
written notice is given, then the party giving such written notice may
terminate this Agreement by giving ninety (90) days' written notice of
such termination to the Defaulting Party, provided, however, that if
FAS elects to terminate this Agreement for other than non-payment of
fees and charges and if Customer shall so request in writing, FAS
shall continue to provide the services described herein to Customer
for such period of time as Customer may request, not to exceed three
(3) months following the date on which this Agreement otherwise have
terminated, such service to be provided in accordance with the terms
of this Agreement and at one hundred twenty-five (125%) percent of the
fees in effect for the term immediately preceding such period.
Termination of this Agreement by default or breach by Customer shall
not constitute a waiver of any rights of FAS in reference to services
performed prior to such termination or rights of FAS to be reimbursed
for out-of-pocket expenditures; termination of this Agreement by
default or breach by FAS shall not constitute a waiver by Customer of
any other rights it might have under this Agreement.
SECTION 10
CHANGES AND MODIFICATIONS
10.01 FAS shall have the right, at any time, and from time to time, to alter
and modify any system, programs, procedures or facilities used or
employed in performing its duties and obligations hereunder, provided
that no such alterations or modifications shall, without the consent of
Customer, materially change or affect the operations and procedures of
Customer in using or employing the FAS System or FAS Facilities
hereunder.
SECTION 11
ASSIGNMENT
11.01 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party hereto without the prior written consent of
the other, which consent shall not be unreasonably withheld. The
forgoing notwithstanding, FAS may assigned its rights and obligations
hereunder without Customer's prior written approval: (a) to affiliated
companies; or (b) by operations of law in the event of a merger.
11.02 This Agreement shall inure to the benefit of, and be binding upon, the
parties hereto and their respective successors and assignees.
Notwithstanding the foregoing, the Customer may terminate this
Agreement within sixty (60) days of Customers receipt of notice of any
change of control of FAS. For the purposes of this paragraph, a change
of control includes any ownership change due to merger, assignment,
purchase of stock, or sale of substantially all the assets of FAS. FAS
agrees to give written notice of any change of control to Customer
within five (5) business days of the effective date of such change of
control. Customer agrees that no damages for breach of contract shall
be recoverable by Customer in the event of a change in control or
termination of this Agreement by Customer as a result thereof. Should
Customer terminate under this Section, the parties agree the
termination fee outlined under Section 9.02 shall not apply.
SECTION 12
DISPUTE RESOLUTION
12.01 The parties to this Agreement understand and agree that the
implementation of this Agreement will be enhanced by the timely and
open resolution of any disputes or disagreements between such parties.
Each party hereto agrees to use its best efforts to cause any disputes
or disagreements between such parties to be considered, negotiated in
good faith and resolved as soon as possible.
12.02 In the event that any dispute or disagreement between the parties
cannot be resolved to the satisfaction of the parties administrative
personnel within twenty (20) days after either party has notified the
other in writing of the need to resolve the specific dispute or
disagreement shall immediately referred in writing to President of FAS
and Senior Vice President , Life Operations of CNA Insurance Companies
(or their respect successors) for consideration. Such person shall
meet in person or by conference telephone call in an attempt to
resolve the dispute within twenty (20) days after a party has received
the notice provided under this Section. The requirement of Section 12
to submit to the dispute resolution procedure described herein shall
not bar any party from exercising any other remedy available to it
under this Agreement or according to law after twenty (20) days have
elapsed from the meeting or conference call referred to in this
Section. The parties may extend any of the time periods described in
this Section by mutual written agreement.
SECTION 13
MISCELLANEOUS
13.01 Access - Customer and its duly authorized independent auditors shall
have the right upon reasonable notice to FAS and at reasonable
frequencies under this Agreement during FAS' normal business hours to
perform on-site audits of records and accounts directly pertaining to
the policies. At the request of Customer, FAS will make available to
Customer's auditors and representatives of regulatory agencies all
reasonably requested records, data, and access to operating
procedures.
13.02 Confidentiality - The parties hereto agree that all tapes, books,
reference manuals, instructions, records, information and data
pertaining to the business of the other party, the FAS System and the
identity of the policy owners served by FAS hereunder which are
exchanged or received pursuant to the negotiation of and/or the
implementation of this Agreement shall remain confidential and shall
not be voluntarily disclosed to any other person and that all such
tapes, books, reference manuals, instructions, records, information
and data in the possession of each of the parties hereto shall be
returned to the party from whom it was obtained upon the termination
or expiration of this Agreement.
13.03 Independent Contractor - It is understood and agreed that all services
performed hereunder by FAS shall be as an independent contractor and
not as an employee of Customer.
13.04 Definitions - For the purpose of this Agreement the terms "policies",
"certificate", "certificates contract" and "contracts" are
interchangeable where appropriate and refer to the primary coverage
documents for each insured and not to master Policy(s) or other
agreements that govern the insurance coverage of each group.
13.05 Entire Agreement, Amendment - This Agreement constitutes the entire
agreement between the parties hereto and supersedes all prior
agreements with respect to the subject matter hereof, whether oral or
written. This Agreement may not modified and no provisions hereof may
be waived except in a written instrument executed by both of the
parties hereto. The waiver by either party hereto of any provisions of
this Agreement on any one or more occasions shall not be construed to
constitute a waiver of that or any other provision on any other
occasion.
13.06 Survival - The representations, warranties and covenants contained
herein shall survive the execution of the Agreement and the
performance of services hereunder.
13.07 Governing Law - This Agreement shall be governed by the laws of the
------------- State of Connecticut.
13.08 Exhibits - The Exhibits and Schedules referred to herein and delivered
pursuant hereto, including any agreed upon amendments thereto, shall
be deemed a part of this Agreement. The terms used in such Exhibits
and Schedules shall have the same meaning as the terms have in this
Agreement, unless the contrary intention is clearly manifested
therein.
13.09 Severability - Any provisions of this Agreement which is invalid or
unenforceable in any jurisdiction shall be in effective to the extent
of such invalidity or unenforceability without invalidating or
rendering unenforceable the remaining provisions hereof, and any such
invalidity or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction. If any provisions is declared invalid or unenforceable,
the parties agree to work together in good faith to amend this
Agreement to cure such invalidity or unenforceability so that this
Agreement may be performed as consistently as possible with this
Agreement's general intent and purpose.
13.10 Records Retention - FAS agrees to maintain and make available to
Customer complete books and records of all transactions performed on
behalf of Customer. The books and records shall be maintained in
accordance with prudent standards of insurance record keeping and must
be maintained for a period of not less than seven (7) years from the
date of their creation. All books and records of transactions performed
by FAS pursuant to this Agreement shall be and shall remain the
exclusive property of Customer. Prior to discarding or destroying any
such books and records FAS shall provide at least sixty (60) days'
prior written notice to Customer. Such books and records shall be
delivered to Customer without additional charge upon any termination of
this Agreement or upon the request of Customer at the time FAS proposes
to discard or destroy such records. Customer shall provide copies to
FAS, at no charge, of any records returned by FAS to the Customer and
needed by FAS to perform its obligations under the Agreement. Any trade
secrets contained in the books and records, including but not limited
to the identity and addresses of policyholders and certificate holders,
are confidential, except the Commissioner of Insurance may have access
to such books and records for the purpose of examination, audit,
inspection, and use in any proceedings instituted against FAS.
13.11 Approval of Advertising - FAS may use only such advertising pertaining
to the business underwritten by the Customer as is approved by the
Customer in advance of its use.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their behalf by and through their duly authorized officers as of the day and
year first above written.
{CUSTOMER'S LEGAL NAME}
Attest:_________________________ By:__________________________
FINANCIAL ADMINISTRATIVE
SERVICES, INC.
Attest:__________________________ By:___________________________
System Access Authorized
FAS: By:____________________________
CUSTOMER: By:_____________________
DATE:______________________________
<PAGE>
EXHIBIT A
POLICIES
The policies issued by Customer to be administered by FAS under this agreement
include:
VFL Variable Annuity Policy VFL Variable Universal Life Policy VFL Equity Index
Annuity Policy CAC Variable Annuity Policy CAC Variable Universal Life Policy
CAC Equity Index Annuity Policy
Other policies may be added from time to time by Customer, upon reasonable
notice to FAS.
<PAGE>
EXHIBIT B
RECORDKEEPING SERVICE AGENT FUNCTIONS PERFORMED BY FAS
A. The issuance of a policy to the insured in cases of New Business and
Plan/Benefit changes in accordance with the attached Client company
Standards for Financial Administrative Performance.
B. Generation of billing for, and the posting of, premium received in
accordance with the attached Client Company Standards for Financial
Administrative Performance.
C. Answering of any inquiries from clients or approved agents via
telephone or correspondence in accordance with the attached Client
Company Standards for Financial Administrative Performance.
D. Computation in accordance with Customer product specifications
containing formulas and rates of the correct valuation of all policies
as approved by Customer.
E. Calculation of death benefits payable to beneficiaries in accordance
with Customer product specifications containing formulas and rates. The
disbursement of such payments by FAS shall be made pursuant to written
approval/notification of same by Client Company in accordance with the
attached Client Company Standards for Financial Administrative
Performance.
F. Handling and distribution of general information to insureds, agents or
financial institutions in accordance with mutually agreed upon Client
Company's Procedure Documentation and in accordance with the attached
Client Company Standards for Financial Administrative Performance.
G. Providing Customer, in accordance with Exhibit E, mutually agreed upon
information required to fulfill its actuarial, financial, and
regulatory obligations and the records to support all of the
transactions.
H. Maintenance of appropriate administrative controls over all activities,
correspondence and data in accordance with Client Company's Procedure
Documentation (to be incorporated at a later date) and the attached
Client Company Standards for Financial Administrative Performance.
I. Advising Customer of regulatory inquiries, complaints, claims, and all
threatened or filed lawsuits a ssoon as they are received by FAS.
J. Providing all standard forms necessary for proper administration under
this Agreement as directed by Client Company.
K. Providing Client Company with the data necessary per the record layout
provided to FAS by Client Company for preparation of Company Annual
Statement Exhibits and Schedules, Federal and State Premium Tax and
Income Tax Reports. Providing data feeds to interface with the
Company's General Ledger, reserve, Client/Alpha, Commission Payroll,
Commission Production, Licensing, Premium Tax and 1099 Systems.
L. Mailing of Account Statements to policyholders on an Annual or
Quarterly basis unless otherwise agreed to by both parties.
M. Providing the management reports listed below pursuant to agreed upon
times and procedures.
N. Administration of the life insurance policies to comply with the
guideline premium/death benefit corridor requirements of the Internal
Revenue Code. Testing should be performed each time a premium is
applied or a distribution is made. The guideline premium must be
recalculated following a policy change transaction . Changes in future
benefits require recompilation of guideline premium limits and possible
required distributions.
O. Administration of the life insurance policies to recognize any payment
or transaction which would result in modified endowment contract
(MECCA) status, and to act according to procedures specified by the
Client Company. Testing requirements are analogous to those for the
guideline premium test.
P. Process loans and other distributions on Mecca's in accordance with the
Internal Revenue Code requirements regarding information reporting and
determination of "investment in contract".
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT B
(continued)
<S> <C> <C> <C>
|=========================|==========================|======================|=============================|
| Daily Reports | Notices | Interfaces | Management Reports |
| | | | (on request) |
|=========================|==========================|======================|=============================|
|=========================|--------------------------|----------------------|=============================|
|Error Listing |Confirmations |New Business |New Business |
| | | | |
|=========================|--------------------------|----------------------|=============================|
|Financial Activity |Billing Notices |Alpha |Agent New Business |
|=========================|--------------------------|----------------------|=============================|
|Withdrawals |Lapse Pending Notices |General Ledger |Activity by Product |
|=========================|--------------------------|----------------------|=============================|
|Adjustments |Pre-Authorized Check (PAC)|Reserve |Activity by State |
| |Recap | | |
|=========================|--------------------------|----------------------|=============================|
|Suspense Report |List Bills |Commission |Activity by Plan |
|=========================|--------------------------|----------------------|=============================|
|Disbursement Suspense |Window Notices |Commission Production |Policy Exhibit |
|=========================|--------------------------|----------------------|=============================|
|Loans |Lapse Processing Notice |Licensing |1099R Report |
|=========================|--------------------------|----------------------|=============================|
|Death Notification | |Premium Tax |5498 Report |
|=========================|--------------------------|----------------------|=============================|
|Non-Forfeiture Processing| |1099 |FASB 97 Reporting |
|=========================|--------------------------|----------------------|=============================|
|Expired Policies | | |Paid New Business |
|=========================|--------------------------|----------------------|=============================|
|Controls | | |Mini Policy Print |
|=========================|--------------------------|----------------------|=============================|
|Remittances | | |Premium vs. Accumulated Value|
|=========================|--------------------------|----------------------|=============================|
|Canceled Policies | | |Activity by Line of Business |
|=========================|--------------------------|----------------------|=============================|
|Paid New Business | | |Accumulated Value by Agency |
|=========================|--------------------------|----------------------|=============================|
|Issue Report | | |Accumulated Value by Agent |
|=========================|--------------------------|----------------------|=============================|
|Issue Cancels | | |Tax Reporting |
|=========================|--------------------------|----------------------|=============================|
|Surrenders | | |Full Policy Status |
|=========================|--------------------------|----------------------|=============================|
|Fund Transfers | | | |
|=========================|--------------------------|----------------------|=============================|
| | | | |
|=========================|==========================|======================|=============================|
| | | | |
|=========================|==========================|======================|=============================|
</TABLE>
<PAGE>
STANDARDS FOR FINANCIAL ADMINISTRATIVE
SERVICES, INC.
New Business Issue Department
Submit and Issue:
Timeliness
Standard 100% of applications received in good order
with money are processed on the
Administrative System within two (2) days of
receipt.
Any money received with application not in
good order will be refunded after five (5)
days or held if customer agrees.
Quality
Standard 98% to 100% of all issues are processed
error free.
Replacement/1035 Exchange/Rollovers/Direct Rollovers/Transfers:
Timeliness
Standard 100% are processed in two (2) days.
Quality
Standard 98% to 100% are processed error free.
Policy Assembly and Mailing:
Timeliness
Standard 100% of all issues will be assembled and
mailed within five (5) days of receipt of
complete requirements.
Quality
Standard 98% to 100% of all issues are assembled and
mailed error free.
Decline:
Timeliness
Standard 100% of all declines are processed within
three (3) days.
Quality
Standard 98% - 100% of all declines are processed
error free.
<PAGE>
Cancel/Not Taken/Free Look:
Timeliness
Standard 100% are processed in five (5) days
Quality
Standard 98% to 100% are processed error free.
Customer Service
Telephone:
Speed Average speed of answer is 30 Sec or less.
Abandon rate is 3% or less.
Telephone Greeting:
Standard Good Morning/Afternoon. This is ______,
You are speaking on a recorded line. How
may I help you?
Professionalism:
Quality
Standard Caller is greeted with courtesy, patience,
clarity, moderate volume and proper speed.
Style
Standard During the telephone conversation the
Policyowner Service Rep. uses caller's name,
sounds alert and shows interest regarding
the call. At the end of the call
Policyowner Service Rep. summarizes the
call. Asks if they can help with anything
else.
CORRESPONDENCE
Written Response:
Timeliness
Standard Letter mailed to inquirer within five (5)
days or when promised to the customer.
Quality
Standard 98% to 100% of all responses to the inquirer
are error free.
<PAGE>
Follow-ups:
Timeliness
Standard 100% of follow-ups for additional
requirements are completed within twenty
(20) days.
Quality
Standard 98% to 100% of all follow-ups are processed
error free.
Policy Change
Change of Owner, Beneficiary, Name, Address and Assignments:
Timeliness
Standard 100% of all changes are processed and
confirmed within five (5) days of receipt.
Quality
Standard 98% to 100 % of all changes are processed
error free.
Follow Up to Policy Change:
Timeliness
Standard 100% of follow-ups for additional
requirements are completed within twenty
(20) days.
Complaints
Timeliness
Standard 100% of all complaints with supporting
documentation will be sent to Client Company
within two (2) days.
Quality
Standard 100% of all applicable documentation will be
forwarded to Client Company on all
complaints.
Billing and Collection
Timeliness
Standard 100% of all collections will be applied
to the policy within two (2) days.
Quality
Standard 98% to 100% of the transactions are
processed error free.
<PAGE>
PAC/EFT Processing:
Timeliness
Standard 100 % of all returned PAC/EFT will be
processed within five (5) business days.
Quality
Standard 98% to 100% of the transactions are
processed error free.
Bad Checks:
Timeliness
Standard Processing completed will be within
five (5) days following notification of
bad check.
Quality
Standard 98% to 100% of the transactions are
processed error free.
Processing Fund Transfers:
Timeliness
Standard 100% of all fund transfers processed within
two (2) days.
Quality
Standard 98% to 100% of the transactions are
processed error free.
Processing Group Bills:
Timeliness
Standard 100% of group bills are mailed within two
(2) days of printing.
Quality
Standard 98% to 100% of the transactions are
processed error free.
Processing Automatic Reminder Notices:
Timeliness
Standard 100% of notices are mailed within two (2)
days of printing.
Quality
Standard 98% to 100% of the transactions are
processed error free.
<PAGE>
Processing Non-Financial Changes:
(Mode Changes, Bank Changes, Additions or Deletions from Group)
Timeliness
Standard 100% of changes completed within five (5)
days following receipt.
Quality
Standard 98% to 100% of the transactions are
processed error free.
Disbursements
Cash Loan/Partial Withdrawals:
Timeliness
Standard 100% of all cash loans/partial withdrawals
will be processed within five (5) days of
receipt.
Quality
Standard 98% to 100% of transactions are processed
error free.
Cash Surrenders/1035's:
Timeliness
Standard 100% of all surrenders/1035's will be
processed within five (5) days of receipt.
Quality
Standard 98% to 100% of transactions are processed
error free.
<PAGE>
EXHIBIT C
Compensation
I. Set Up Phase
A. $225,000 one time Set Up Fee for 3 products; EIA Annuity,
Variable Annuity, Variable Universal Life.
B. Modifications are requested and approved on separate Service
Requests and are in addition to the above Set Up Fee.
II. Administration Phase:
Commencing on September 1, 1996, the following fees shall be payable on
the first day of the month following service.
A. Issue and Assembly Fees
-Inforce Policy Count-
|-----------------------|---------|--------|---------|---------|----------|
| Product Type| 5,000 | 10,000 | 15,000 | 20,000 | 20,000 + |
| |---------|--------|---------|---------|----------|
|-----------------------|---------|--------|---------|---------|----------|
|EIA Annuities | $ 13.00 | $ 12.50| $ 12.00 | $ 11.50 | $ 11.00 |
|-----------------------|---------|--------|---------|---------|----------|
|-----------------------|---------|--------|---------|---------|----------|
|Variable Annuities | $ 14.00 | $ 13.50| $ 13.00 | $ 12.50 | $ 12.00 |
|-----------------------|---------|--------|---------|---------|----------|
|-----------------------|---------|--------|---------|---------|----------|
|Variable UL | $ 15.00 | $ 14.50| $ 14.00 | $ 13.50 | $ 13.00 |
|-----------------------|---------|--------|---------|---------|----------|
B. Monthly Policy Administrative Fees
-Inforce Policy Count-
|-----------------------|--------|---------|---------|---------|---------|
| Product Type| 5,000 | 10,000 | 15,000 | 20,000 | 20,000 +|
| |--------|---------|---------|---------|---------|
|-----------------------|--------|---------|---------|---------|---------|
|EIA Annuities | $ 2.25 | $ 2.20 | $ 2.15 | $ 2.10 | $ 2.05 |
|-----------------------|--------|---------|---------|---------|---------|
|-----------------------|--------|---------|---------|---------|---------|
|Variable Annuities | $ 3.50 | $ 3.45 | $ 3.40 | $ 3.35 | $ 3.30 |
|-----------------------|--------|---------|---------|---------|---------|
|-----------------------|--------|---------|---------|---------|---------|
|Variable UL | $ 3.70 | $ 3.65 | $ 3.60 | $ 3.55 | $ 3.50 |
|-----------------------|--------|---------|---------|---------|---------|
* Rates apply on a banded basis. 15,000 in-force, variable UL policies
would be billed $3.70 for the first 5,000 policies, $3.65 for the next
5,000 policies and $3.60 for the remaining 5,000.
Inactive Policies
$ .50 per month per policy.
Minimum Monthly Administrative Fees = $7,000
Policy issue fees are not subject to the minimum monthly administrative fee.
C. Additional Costs To Customer
Telephones
F A long distance 800 number to dial in or out, is
an additional charge. AT&T and SNET are billed to
FAS and then billed to the client customer by
FAS.
F Optional Dial-In Service, which will allow client
customer to inquire against policy, insured and
agent information is available from FAS at $500
per month. The installation and monthly phone
line maintenance charges are the customer's
responsibility. FAS will maintain the software,
hardware components, file maintenance and file
updates. A P/C with a modem is required on
customer's site.
Freight And Postage
F US Mail, postage charges for the mailing of the
new policies. welcome kits, bills, commission
statements, periodic statements, sales mailers,
etc., are passed through to customer at 100%. No
service charge applies.
F Express delivery charges are customer's
responsibility. FAS uses Airborne Express air or
ground service daily, with pickup guaranteed
after 5:00 PM.
Insurance
* Half the annual cost of the insurance as referenced
in Section 6.03.
Miscellaneous
* Additional costs for miscellaneous items and
service will be passed along to customer without
a service charge. Such items include, but are not
limited to:
* Envelopes, stationery, policy forms, welcome
kits, etc. The customer has the option of
printing their own forms and shipping them to FAS
or we can have them printed locally and bill the
cost to the client customer.
* Custom programming for unique policy provisions,
special reports, etc., is available at FAS' then
current rates.
* Travel expenses, including lodging if travel is
authorized by the customer. On-site consulting is
billable to the client at FAS' then current
rates.
* Automated Policy Assembly to include policy
forms, welcome letters, and other items included
in the issue kit.
* Voice Response Unit functions:
* Standard Script $12,000
* Allocated Charges$ 5,000
* Transfers $ 5,000
<PAGE>
PENALTY/REWARDS PROGRAM
The document attached outlines the details of this Program; however, all details
listed can be changed at anytime during the contract as long as both parties
mutually agree to these changes.
It has been agreed that during the first six months of production, both parties
will monitor the processes listed; however, no penalties or rewards will be
payable to either party. During this period of time, mutually agreed upon
adjustments/changes to this grid can be made. Six months from the production
go-live date, this Program will go into effect and penalties or rewards will be
payable to the respective party.
The Reward/Penalty Percentage will be based on the Monthly Maintenance Fee.
Although the processes will be monitored at least monthly, rewards or penalties
will be paid out based on a 90 day review period or at the end of each calendar
quarter.
The measurement of days will be based on business versus calendar days. One day
is determined by the receipt day to the next business day.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Reward/Penalty Below ABOVE
PROCESS MEASUREMENT Percentage Standard STANDARD STANDARD
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Collections Applied 1%
--Timliness Within 2 Days less than 100% 100% n/a
Within 1 Day n/a n/a 95%
--Quality Error Free less than 95% 98 - 100 % n/a
Fund Transfers 1%
--Timliness Within 2 Days less than 100% 100% n/a
Same Day n/a n/a 85%
-- Quality Error Free less than 95% 98 - 100 % n/a
VUL Assemble & Mail 2%
--Timliness Within 3 Days less than 100% 100% n/a
Within 1 Day n/a n/a 85%
--Quality Error Free less than 95% 98 - 100 % n/a
VA/EIA Submit & Issue 2%
--Timliness Within 2 Days less than 100% 100% n/a
Same Day n/a n/a 85%
--Quality Error Free less than 95% 98 - 100 % n/a
VA/EIA Assemble & Mail Performance will be
--Timliness Within 5 Days measured with VUL less than 100% 100% n/a
Within 3 Days Assemble & Mail & n/a n/a 85%
--Quality Error Free reward/penalty paid less than 95% 98 - 100 % n/a
on combined results
Process Withdrawals/ 2%
Surrenders/Loans
--Timliness Within 5 days less than 100% 100% n/a
Within 3 days n/a n/a 85%
--Quality Error Free less than 95% 98 - 100 % n/a
Telephone Average 2%
Speed of Answer 30 Seconds or less less than 100% 100% n/a
20 Seconds or less n/a n/a 100%
Telephone Abandon Rate Performance will be
Excluded from each of 3% or less measured with Speed less than 100% 100% n/a
these measurements would 2% or less of answer & reward/ n/a n/a 100%
be abandoned calls under penalty paid on
20 seconds combined results
</TABLE>
NOTE: A reward is contingent on timliness being above standard and quality
being standard. A penalty will take effect if either timliness or
quality is below standard. The percentage will be based on the
monthly maintenance fee. We will monitor breakage over the first six
months and will look for opportunities to include a breakage measure
at some point in the future.
<PAGE>
EXHIBIT D
AUTHORIZED PERSONNEL
Alan S. Lurty Kevin M. Hogan
Vice President Assistant Vice President
Specialty Operations Variable Products
333 S. Wabash, 34S 333 S. Wabash, 34S
Chicago, IL. 60685 Chicago, IL. 60685
Telephone: (312) 822-4780 Telephone: (312) 822-7590
Fax: (312) 822-4671 Fax: (312) 822-4671
Jackie Jeske Robert Teske
Manager, Variable Products Group Vice President
100 CNA Drive LHP Administration
Nashville, TN. 37214 100 CNA Drive
(615) 871-1774 Nashville, TN. 37214
(615) 871-1441 (615) 871-1777
(615) 871- 1430
<PAGE>
EXHIBIT E
STATEMENT OF ACTUARIAL REQUIREMENTS
FAS provides information to the client through machine readable files that can
be input to the customer's valuation system.
1. Customer is responsible for identifying information necessary
to be extracted from the Customer's data base.
2. Given the requirements from the Customer, FAS will provide
valuation information to the Customer's system.
3. Customer is responsible for actual calculation of reserves
from the information received by FAS.
The above requirements will be performed by FAS on a best efforts basis. FAS
does not accept any responsibility for reserve reporting or regulatory reporting
other than that specifically stated in this exhibit.
In no event and under no circumstances will FAS be liable for any actuarial,
personnel or processing cost a related to reserve or regulatory reporting
incurred by Customer, should Customer decide to use information other than that
provided by FAS for this purpose.
<PAGE>
EXHIBIT F
WYOMING ADMINISTRATORS
A. Application for certificate of registration
B. Bond - The amount of the bond shall not be less than 10% of the amount
of total funds handled. No bond may be for less than one thousand dollars
($1,000) nor more than five hundred thousand dollars ($500,000).
(chapter 4 of Wyoming Insurance Department regulations)
C. Copy of administrative agreement between the Customer and FAS.
<PAGE>
EXHIBIT G
The processing system used by FAS in support of the Customer's policies is the
Administration Leverage System (ALS) and the Leverage Commission System (LCS),
authored by the Leverage Group located in Glastonbury, Connecticut.
<PAGE>
WYOMING INSURANCE DEPARTMENT
THIRD PARTY ADMINISTRATOR
APPROVAL CHECKLIST
INSURER'S NAME:
ADMINISTRATOR'S NAME:
The following is a list of items that must be stated in the contract between
Administrator and Insurer. Even though each item may be addressed in the
contract the request may be denied for other reasons.
______A. Payments received by the administrator for insurance
on behalf of the insured shall be deemed received by
the insurer.
______B. The insurer shall require the administrator to maintain
adequate books and records of all transactions between
administrator, insurer and insured for the duration of the
contract and three years thereafter.
______C. Administrators may only use advertising which has been
approved in writing by the insurer.
______D. The agreement shall specify underwriting standards of the
insurer.
______E. All charges or premiums received by the administrator shall be
held by the administrator in a fiduciary capacity and shall be
promptly remitted to the person entitled to it or deposited in
a fiduciary account.
_______F. Bank account records must be furnished to The insurer when
requested. The administrator is not authorized to pay any
claims for such an account.
_______G. Withdrawals from the account shall be made for the following
items and shall be set forth in the agreement.
a. remittance to insurer.
b. deposit into account for insurer.
c. transfer to or deposit in claims paying account.
d. payment to group policy.
e. payment to administrator for its commission.
f. remittance of returned premiums to persons.
H. Claims shall be paid on drafts of insurer or as
authorized.
I. Compensation to administrators shall not be
contingent on claims experience. Must be based on
premiums.
J. Administrator may only act in the capacity in which
licensed.
K. When an administrators is utilized, the insurer shall
require the administrator to provide notice to
insured.
<PAGE>
Please indicate the location of each item in the space provided by each
requirements. All of these requirements can be found in Chapter IV of the
Wyoming Insurance Regulations.
DATE APPROVED REJECTED
------------------------ ----------------- ----------------
Comments:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Exhibit 9
Board of Directors
CNA INSURANCE COMPANIES
CNA Plaza, Chicago, Illinois 60685
August 30, 1996
Board of Directors
Valley Forge Life Insurance Company
CNA Plaza, 43-S
Chicago, Illinois 60685
Directors:
I have acted as counsel to Valley Forge Life Insurance Company (the
"Company"), a Pennsylvania insurance company, and Valley Forge Life Insurance
Company Variable Annuity Separate Account (the "Account") in connection with the
registration of an indefinite amount of securities in the form of flexible
premium variable annuity insurance contracts (the "Contracts") with the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
I have examined such documents (including the Form N-4 registration statement)
and reviewed such questions of law as I considered necessary and appropriate,
and on the basis of such examination and review, it is my opinion that:
1. The Company is a corporation duly organized and
validly existing as a stock life insurance company
under the laws of the Commonwealth of Pennsylvania
and is duly authorized to by the Insurance Department
of the Commonwealth of Pennsylvania to issue the
Contracts.
2. The Account is a duly authorized and existing separate
account established pursuant to the provisions of
Section 40-37-109 of the Pennsylvania Unconsolidated
Statutes.
3. To the extent so provided under the Contracts, that
portion of the assets of the Account equal to the
reserves and other contract liabilities with respect
to the Account will not be chargeable with
liabilities arising out of any other business that
the Company may conduct.
4. The Contracts, when issued as contemplated by the
Form N-4 registration statement, will constitute
legal, validly issued and binding obligations of the
Company.
I hereby consent to the filing of this opinion as an exhibit
to the Form N-4 registration statement for the Contracts and the Account.
Sincerely,
S/LYNNE GUGENHEIM
Lynne Gugenheim
Vice President and
Associate General Counsel
Exhibit 10A
(Sutherland, Asbill & Brennan)
August 28, 1996
Board of Directors
Valley Forge Life Insurance Company
CNA Plaza
Chicago, IL 60685
Directors:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the prospectus filed as part of the pre-effective amendment Number 1
to the Registration Statement on Form N-4 filed by Valley Forge Life Insurance
Company and Valley Forge Life Insurance Company Variable Annuity Separate
Account (Reg. File No. 333-1087) with the Securities and Exchange Commission. In
giving this consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
Sutherland, Asbill & Brennan
By: /S/ STEPHEN E. ROTH
Exhibit 10B
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. 1 to Registration
Statement No. 333-01087 on Form N-4 of Valley Forge Life Insurance Company
Variable Annuity Separate Account of our report dated June 21, 1996,
accompanying the financial statements of Valley Forge Life Insurance Company,
appearing in the Prospectus, which is part of such Registration Statement, and
to the reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Chicago, Illinois
September 4, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001007009
<NAME> VALLEY FORGE LIFE INSURANCE CO.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 42,103 4,260
<SECURITIES> 462,650 526,663
<RECEIVABLES> 59,429 70,627
<ALLOWANCES> 175 300
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 624,820 687,795
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
<COMMON> 2,500 2,500
0 0
0 0
<OTHER-SE> 192,972 185,438
<TOTAL-LIABILITY-AND-EQUITY> 624,820 687,795
<SALES> 0 0
<TOTAL-REVENUES> 346,748 179,834
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 312,038 167,376
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 34,710 12,458
<INCOME-TAX> 12,200 4,366
<INCOME-CONTINUING> 22,510 8,092
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 22,510 8,092
<EPS-PRIMARY> 450.20 161.84
<EPS-DILUTED> 450.20 161.84
</TABLE>
