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CNA Capital
Select(SM)
Variable Annuity
Annual Report
FLEXIBLE PREMIUM DEFERRED
VARIABLE ANNUITY
ISSUED BY THE
VALLEY FORGE LIFE INSURANCE
COMPANY
DECEMBER 31, 1997
CNA
FOR ALL THE COMMITMENTS YOU MAKE(R)
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Dear Contractholder:
- --------------------------------------------------------------------------------
Thank you for including the CNA Capital Select family of products in your
portfolio of long-range financial planning vehicles. Enclosed is the Annual
Report for the CNA Capital Select Variable Annuity, which is issued by Valley
Forge Life Insurance Company, one of the CNA insurance companies. This report
summarizes investments (from inception through December 31, 1997) under each of
the 18 variable fund subaccounts available through the CNA Capital Select
Variable Annuity.* The subaccounts are offered by six widely recognized fund
managers:
- Federated Advisors
- Fidelity Management & Research Company
- Fred Alger Management, Inc.
- Massachusetts Financial Services Company (MFS)
- Societe Generale Asset Management Corporation (SoGen)
- Van Eck Associates Corporation
The full list of funds is found in the Notes to Financial Statements, Note
1. Organization, included within this report.
This year we will be adding (at no additional cost to contractholders)
enhancements that make our variable annuity an even more attractive product.
These will include an improved Guaranteed Minimum Death Benefit, a Dollar Cost
Averaging interest bonus and a more flexible free partial withdrawal schedule.**
And you still get the full complement of benefits that have helped distinguish
our annuity from the beginning:
- Tax deferral allows all of your money to work for you (instead of just an
after-tax portion);
- Free transfers (up to a total of 12 per year) are available among
subaccounts and fixed accounts (four of the 12 free transfers can apply
to fixed accounts);
- Product flexibility that allows you to change the amount and frequency of
premium payments according to your changing needs -- plus there's a low
minimum of just $100 for subsequent contributions;
- Features like Automatic Subaccount Rebalancing and Dollar Cost Averaging
allows you to maintain the kind of fund mix you prefer.
If you need more information, please refer to your prospectus. If you can't
find it or need an additional copy, your agent will be happy to order one for
you. If you have other needs, as well as questions or suggestions, call your
agent -- or let us hear from you directly. We'll do everything we can to help,
because we want our ongoing relationship to be as positive for you as it is for
us. Again, thank you for purchasing a CNA Capital Select Variable Annuity, one
of the many quality products available through the CNA family of products.
Sincerely,
ALAN S. LURTY
Alan S. Lurty, FLMI
Senior Vice President and
Chief Operating Officer, Annuities
* Although guaranteed-interest options are available in connection with the CNA
Capital Select Variable Annuity, financial reports regarding these
fixed-interest funds are not included in this report.
** It's important to remember that any withdrawals prior to age 59 1/2 can
result in government-imposed taxes and tax penalties.
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1
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STATEMENT OF ASSETS AND LIABILITIES
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
================================================================================
<TABLE>
<CAPTION>
FEDERATED FEDERATED FEDERATED FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY- ASSET FIDELITY FIDELITY
DECEMBER 31, 1997 FUND II FUND II BOND FUND II INCOME MANAGER INDEX 500 CONTRAFUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value:
Federated Insurance Series $861,084 $50,683 $190,479
Variable Insurance Products Fund $495,969
Variable Insurance Products Fund II $267,366 $562,885 $329,066
The Alger American Fund
MFS Variable Insurance Trust
SoGen Variable Funds, Inc.
Van Eck Worldwide Insurance Trust
-------- ------- -------- -------- -------- -------- --------
TOTAL INVESTMENTS 861,084 50,683 190,479 495,969 267,366 562,885 329,066
-------- ------- -------- -------- -------- -------- --------
TOTAL ASSETS 861,084 50,683 190,479 495,969 267,366 562,885 329,066
-------- ------- -------- -------- -------- -------- --------
LIABILITIES - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS $861,084 $50,683 $190,479 $495,969 $267,366 $562,885 $329,066
=================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements
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2
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<TABLE>
<CAPTION>
MFS SOGEN VAN ECK VAN ECK
ALGER ALGER MFS GROWTH MFS MFS OVERSEAS WORLDWIDE WORLDWIDE
SMALL ALGER MID-CAP EMERGING MFS WITH LIMITED TOTAL VARIABLE HARD EMERGING
CAP GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN FUND ASSETS MARKETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$195,731 $249,383 $42,427
$141,648 $156,415 $219,017 $81,706 $259,844
$752,892
$9,037 $16,890
- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------ -------
195,731 249,383 42,427 141,648 156,415 219,017 81,706 259,844 752,892 9,037 16,890
- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------ -------
195,731 249,383 42,427 141,648 156,415 219,017 81,706 259,844 752,892 9,037 16,890
- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------ -------
- - - - - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------
$195,731 $249,383 $42,427 $141,648 $156,415 $219,017 $81,706 $259,844 $752,892 $9,037 $16,890
========================================================================================================================
<CAPTION>
TOTAL
- ----------
<S><C>
$1,102,246
495,969
1,159,317
487,541
858,630
752,892
25,927
- ----------
4,882,522
- ----------
4,882,522
- ----------
-
$4,882,522
</TABLE>
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3
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STATEMENT OF OPERATIONS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
================================================================================
<TABLE>
<CAPTION>
FEDERATED FEDERATED FEDERATED FIDELITY
FOR THE PERIOD FROM INCEPTION TO PRIME MONEY UTILITY HIGH INCOME FIDELITY ASSET FIDELITY FIDELITY
DECEMBER 31, 1997 FUND II FUND II BOND FUND II EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAR. 4, MAR. 17, MAY 1, FEB. 21, FEB. 21, MAR. 17, FEB. 21,
INCEPTION DATE 1997 1997 1997 1997 1997 1997 1997
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<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $21,053 $ 82 $1,192 $- $ - $ - $-
------- ------ ------ ------- ------- ------- ------
21,053 82 1,192 - - - -
------- ------ ------ ------- ------- ------- ------
Expenses:
Mortality and expense risk and
administration charges 5,938 150 647 1,842 1,397 1,805 917
------- ------ ------ ------- ------- ------- ------
5,938 150 647 1,842 1,397 1,805 917
------- ------ ------ ------- ------- ------- ------
NET INVESTMENT INCOME (LOSS) 15,115 (68) 545 (1,842) (1,397) (1,805) (917)
------- ------ ------ ------- ------- ------- ------
Investment gains (losses):
Net realized gains (losses) - 85 1,461 18,226 11,160 9,302 3,732
Net unrealized gains (losses) - 4,190 3,915 6,272 1,593 19,813 4,074
------- ------ ------ ------- ------- ------- ------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) - 4,275 5,376 24,498 12,753 29,115 7,806
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $15,115 $4,207 $5,921 $22,656 $11,356 $27,310 $6,889
=================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements
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4
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<TABLE>
<CAPTION>
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=================================================================================================================================
MFS SOGEN VAN ECK VAN ECK
ALGER ALGER MFS GROWTH MFS MFS OVERSEAS WORLDWIDE WORLDWIDE
SMALL ALGER MID-CAP EMERGING MFS WITH LIMITED TOTAL VARIABLE HARD EMERGING
CAP GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN FUND ASSETS MARKETS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
APR. 3, JUN. 17, FEB 21, FEB. 21, FEB. 21, MAR. 13, MAY 1, FEB. 21, FEB. 3, APR. 3, APR. 11,
1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------------
$ 51 $ - $ 89 $ - $ - $ 5,132 $ 3,140 $ - $ - $- $ - $30,739
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
51 - 89 - - 5,132 3,140 - - - - 30,739
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
661 621 199 692 969 792 470 1,259 8,364 20 94 26,837
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
661 621 199 692 969 792 470 1,259 8,364 20 94 26,837
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
(610) (621) (110) (692) (969) 4,340 2,670 (1,259) (8,364) (20) (94) 3,902
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
5,548 732 1,490 122 3,145 2,986 1,202 5,264 7,592 11 (404) 71,654
(13,637) (8,997) (1,453) 3,958 5,519 5,310 (1,986) 11,648 (34,846) (189) (4,665) 519
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
(8,089) (8,265) 37 4,080 8,664 8,296 (784) 16,912 (27,254) (178) (5,069) 72,173
- ---------------------------------------------------------------------------------------------------------------------------------
$ (8,699) $(8,886) $ (73) $3,388 $7,695 $12,636 $ 1,886 $15,653 $(35,618) $(198) $(5,163) $76,075
=================================================================================================================================
</TABLE>
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5
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STATEMENT OF CHANGES IN NET ASSETS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
================================================================================
<TABLE>
<CAPTION>
FEDERATED FEDERATED FEDERATED FIDELITY FIDELITY
FOR THE PERIOD FROM INCEPTION TO PRIME MONEY UTILITY HIGH INCOME EQUITY- ASSET FIDELITY FIDELITY
DECEMBER 31, 1997 FUND II FUND II BOND FUND II INCOME MANAGER INDEX 500 CONTRAFUND
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAR. 4, MAR. 17, MAY 1, FEB. 21, FEB. 21, MAR. 17, FEB. 21,
INCEPTION DATE 1997 1997 1997 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 15,115 $ (68) $ 545 $ (1,842) $ (1,397) $ (1,805) $ (917)
Net realized gains (losses) - 85 1,461 18,226 11,160 9,302 3,732
Net unrealized gains (losses) - 4,190 3,915 6,272 1,593 19,813 4,074
----------- -------- --------- --------- --------- -------- ---------
Change in net assets resulting from
operations 15,115 4,207 5,921 22,656 11,356 27,310 6,889
From capital transactions:
Net premiums/deposits 3,534,379 22,534 116,421 427,889 186,728 444,865 146,548
Withdrawals (6,610) - (507) (701) (12) (704) -
Transfers among sub-accounts and with
the Guaranteed Interest Option
Separate
Account -- net (2,681,800) 23,942 68,644 46,125 69,294 91,414 175,629
----------- -------- --------- --------- --------- -------- ---------
Change in net assets resulting from
capital transactions 845,969 46,476 184,558 473,313 256,010 535,575 322,177
Increase in net assets 861,084 50,683 190,479 495,969 267,366 562,885 329,066
Net assets at beginning of period - - - - - - -
----------- -------- --------- --------- --------- -------- ---------
NET ASSETS AT END OF PERIOD $ 861,084 $ 50,683 $ 190,479 $ 495,969 $ 267,366 $562,885 $ 329,066
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 1.00 $ 14.29 $ 10.95 $ 24.28 $ 18.01 $ 114.39 $ 19.94
=================================================================================================================================
UNITS OUTSTANDING AT END OF PERIOD 861,083.8 3,546.7 17,395.3 20,427.1 14,845.4 4,920.8 16,502.8
=================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements
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6
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
==============================================================================================================================
ALGER ALGER MFS GROWTH MFS MFS OVERSEAS WORLDWIDE WORLDWIDE
SMALL ALGER MID-CAP EMERGING MFS WITH LIMITED TOTAL VARIABLE HARD EMERGING
CAP GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN FUND ASSETS MARKETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
APR. 3, JUN. 17, FEB. 21, FEB. 21, FEB. 21, MAR. 13, MAY 1, FEB. 21, FEB. 3, APR. 3, APR. 11,
1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------
$ (610) $ (621) $ (110) $ (692) $ (969) $ 4,340 $ 2,670 $ (1,259) $ (8,364) $ (20) $ (94)
5,548 732 1,490 122 3,145 2,986 1,202 5,264 7,592 11 (404)
(13,637) (8,997) (1,453) 3,958 5,519 5,310 (1,986) 11,648 (34,846) (189) (4,665)
- -------- -------- ------- --------- --------- --------- --------- --------- ---------- ------ -------
(8,699) (8,886) (73) 3,388 7,695 12,636 1,886 15,653 (35,618) (198) (5,163)
186,908 203,646 38,097 99,654 121,533 124,921 75,938 186,723 819,873 4,326 19,999
- - - - - - (960) (786) (959) - -
17,522 54,623 4,403 38,606 27,187 81,460 4,842 58,254 (30,404) 4,909 2,054
- -------- -------- ------- --------- --------- --------- --------- --------- ---------- ------ -------
204,430 258,269 42,500 138,260 148,720 206,381 79,820 244,191 788,510 9,235 22,053
195,731 249,383 42,427 141,648 156,415 219,017 81,706 259,844 752,892 9,037 16,890
- - - - - - - - - - -
- -------- -------- ------- --------- --------- --------- --------- --------- ---------- ------ -------
$195,731 $249,383 $42,427 $ 141,648 $ 156,415 $ 219,017 $ 81,706 $ 259,844 $ 752,892 $9,037 $16,890
- ------------------------------------------------------------------------------------------------------------------------------
$ 43.75 $ 42.76 $24.18 $ 16.14 $ 15.79 $ 16.44 $ 10.01 $ 16.63 $ 9.77 $15.72 $ 11.00
==============================================================================================================================
4,473.8 5,832.2 1,754.7 8,776.2 9,906.0 13,322.2 8,162.4 15,625.0 77,061.7 574.9 1,535.5
==============================================================================================================================
<CAPTION>
- ----------
==========
TOTAL
- ----------
<S><C>
$ 3,902
71,654
519
- ----------
76,075
6,760,982
(11,239)
(1,943,296)
- ----------
4,806,447
4,882,522
-
- ----------
$4,882,522
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
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NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO DECEMBER 31, 1997
================================================================================
NOTE 1. ORGANIZATION
- --------------------------------------------------------------------------------
Valley Forge Life Insurance Company Variable Annuity Separate Account
("Variable Account"), a unit investment trust registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, is a separate
account of Valley Forge Life Insurance Company ("VFL"). The Variable Account
began operations on February 3, 1997. The assets of the Variable Account are
segregated from VFL's general account and its other separate accounts. VFL is a
wholly-owned subsidiary of Continental Assurance Company ("Assurance").
Assurance is a wholly-owned subsidiary of Continental Casualty Company
("Casualty"), which is wholly-owned by CNA Financial Corporation ("CNA"). Loews
Corporation owns approximately 84% of the outstanding common stock of CNA.
The Variable Account currently offers 18 sub-accounts each of which invests
in shares of a corresponding fund (i.e., investment portfolios), wherein the
contractholders bear all of the investment risk. Each fund 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 advisor. The
sub-accounts are as follows:
FEDERATED INSURANCE SERIES:
Federated Prime Money
Fund II
Federated Utility Fund II
Federated High Income
Bond Fund II
FIDELITY VARIABLE INSURANCE
PRODUCTS FUND (VIP):
Fidelity VIP Equity-
Income Portfolio
FIDELITY VARIABLE INSURANCE
PRODUCTS FUND II (VIP II):
Fidelity VIP II Asset
Manager Portfolio
Fidelity VIP II Index 500
Portfolio
Fidelity VIP II Contrafund
Portfolio
ALGER AMERICAN FUND:
Alger American Small
Capitalization Portfolio
Alger American Growth
Portfolio
Alger American Mid-Cap
Growth Portfolio
MFS VARIABLE INSURANCE TRUST:
MFS Emerging Growth
Series
MFS Research Series
MFS Growth With Income
Series
MFS Limited Maturity
Series
MFS Total Return Series
SOGEN VARIABLE FUNDS, INC.:
SoGen Overseas Variable Fund
VAN ECK WORLDWIDE INSURANCE
TRUST:
Van Eck Worldwide Hard
Assets Fund
Van Eck Worldwide
Emerging Markets Fund
The Guaranteed Interest Option Separate Account ("GIO Account") is also a
separate account of VFL, that supports the values and benefits under the
Guaranteed Interest Option. Through the Guaranteed Interest Option, VFL offers
specified effective annual rates of interest that are credited daily and
available for specified periods of time. Contractholders choosing the Guaranteed
Interest Option do not participate in the investment performance of the GIO
Account and this performance does not determine the Guaranteed Interest Option
value or benefits relating thereto. The assets of the GIO Account are held
separately from other VFL assets and from the General Account of VFL. The GIO
Account, however, unlike the Variable Account, is not registered as an
investment company under the 1940 Act. As a result, the accompanying financial
statements do not reflect financial results of the GIO Account.
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8
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NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO DECEMBER 31, 1997
================================================================================
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
VALUATION OF INVESTMENTS -- Investments in the Variable Account consist of
shares in the portfolios of the funds and are stated at fair value based on
quoted market prices.
RECOGNITION OF INVESTMENT INCOME -- Investment income consists of dividends
declared by the portfolios of the funds which are recognized on the date of
record.
REALIZED GAINS AND LOSSES -- Realized investment gains and losses in the
Variable Account represent the difference between the proceeds from sales of
shares by the Variable Account and the cost of such shares, which are determined
using the average cost method.
CONTRACTHOLDER VARIABLE ACCOUNT ACTIVITY -- Variable Account activity is
reflected in individual contractholder accounts on a daily basis.
FEDERAL INCOME TAXES -- Net investment income and realized gains and losses
on investments of the Variable Account are taxable to contractholders generally
upon distribution. Accordingly, no provision for income taxes has been recorded.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles ("GAAP") requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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9
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NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO DECEMBER 31, 1997
================================================================================
NOTE 3. INVESTMENTS
- --------------------------------------------------------------------------------
At December 31, 1997, the investments of the respective subaccounts of the
Variable Annuity Separate Account are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INSURANCE SERIES:
Federated Prime Money Fund II 861,084 $861,084 $861,084
Federated Utility Fund II 3,547 46,493 50,683
Federated High Income Bond Fund II 17,395 186,564 190,479
VARIABLE INSURANCE PRODUCTS FUND:
Equity-Income 20,427 489,697 495,969
VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager 14,845 265,773 267,366
Index 500 4,921 543,072 562,885
Contrafund 16,503 324,992 329,066
THE ALGER AMERICAN FUND:
Small Capitalization 4,474 209,368 195,731
Growth 5,832 258,380 249,383
MidCap Growth 1,755 43,880 42,427
MFS VARIABLE INSURANCE TRUST:
Emerging Growth 8,776 137,690 141,648
Research 9,906 150,896 156,415
Growth With Income 13,322 213,707 219,017
Limited Maturity 8,162 83,692 81,706
Total Return 15,625 248,196 259,844
SOGEN VARIABLE FUNDS, INC.:
Overseas 77,062 787,738 752,892
VAN ECK WORLDWIDE INSURANCE TRUST:
Hard Assets 575 9,226 9,037
Emerging Markets 1,536 21,555 16,890
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE> 12
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO DECEMBER 31, 1997
================================================================================
- --------------------------------------------------------------------------------
NOTE 4. INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
The aggregate cost of purchases and proceeds from sales of Insurance
Series, VIP Fund, VIP Fund II, Alger American Fund, MFS Variable Insurance
Trust, SoGen Variable Funds, Inc. and Van Eck Worldwide Insurance Trust shares
from the date of inception to December 31, 1997, were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PURCHASES SALES
- -------------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE SERIES:
Federated Prime Money Fund II $3,550,031 $2,710,000
Federated Utility Fund II 131,884 85,557
Federated High Income Bond Fund II 226,400 42,489
VARIABLE INSURANCE PRODUCTS FUND:
Equity-Income 675,097 203,626
VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager 429,770 175,157
Index 500 646,677 112,906
Contrafund 366,624 45,364
THE ALGER AMERICAN FUND:
Small Capitalization 327,651 123,882
Growth 391,931 134,284
MidCap Growth 55,923 13,622
MFS VARIABLE INSURANCE TRUST:
Emerging Growth 319,665 182,097
Research 181,534 33,784
Growth With Income 231,099 25,510
Limited Maturity 135,099 55,749
Total Return 466,510 223,577
SOGEN VARIABLE FUNDS, INC.:
Overseas 994,765 214,619
VAN ECK WORLDWIDE INSURANCE TRUST:
Hard Assets 10,106 892
Emerging Markets 26,885 4,925
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE> 13
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO DECEMBER 31, 1997
================================================================================
NOTE 5. CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
VFL deducts a daily charge from the assets of the Variable Account to
compensate it for mortality and expense risks that it assumes under the
Contract. The daily charge is approximately equal to an annual rate of 1.25% of
the net assets of the Variable Account.
An annual administration fee of $30 is deducted from contracts in both the
Variable and GIO Accounts if the contract value is below $50,000 at the time of
the deduction. This fee is to cover a portion of VFL's administrative expenses
related to the contracts.
VFL deducts a daily administration charge from the assets of the Variable
Account to compensate it for a portion of the expenses it incurs in
administering the contracts. The daily charge is approximately equal to an
annual rate of 0.15% of the net assets of the Variable Account.
VFL permits 12 free transfers among and between the sub-accounts within the
Variable Account (four of which can be applied to the GIO Account) per contract
year. For each additional transfer, VFL charges $25 at the time each such
transfer is processed. The fee is deducted from the amount being transferred.
- --------------------------------------------------------------------------------
NOTE 6. DIVERSIFICATION REQUIREMENTS
- --------------------------------------------------------------------------------
Under the provisions of Section 817(h) of the Internal Revenue Code of 1986
(the Code), a variable annuity contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
an annuity contract for Federal tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of the Treasury. VFL believes, based on the funds'
prospectuses, that the funds satisfy the requirement of the regulations.
- --------------------------------------------------------------------------------
12
<PAGE> 14
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Contractholders of Valley Forge Life Insurance Company Variable Annuity
Separate Account and
The Board of Directors of Valley Forge Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of
Valley Forge Life Insurance Company Variable Annuity Separate Account (a
separate account of the Valley Forge Life Insurance Company, which is a
wholly-owned subsidiary of Continental Assurance Company, which is a
wholly-owned subsidiary of Continental Casualty Company, which is wholly-owned
by CNA Financial Corporation, an affiliate of Loews Corporation) as of December
31, 1997, and the related statements of operations and changes in net assets for
the period from inception through December 31, 1997. These financial statements
are the responsibility of management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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. Our procedures included
confirmation of securities held at December 31, 1997. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Valley Forge Life
Insurance Company Variable Annuity Separate Account as of December 31, 1997, and
the results of its operations and the changes in its net assets for the period
from inception through December 31, 1997, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 23, 1998
- --------------------------------------------------------------------------------
13
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The principal underwriter of this product is CNA Investor Services, Inc., a
registered broker-dealer and member of the National Association of Securities
Dealers. CNA Investor Services, Inc. is an affiliate of CNA Financial
Corporation. CNA Capital Select Variable Annuity is issued by the Valley
Forge Life Insurance Company, one of the CNA insurance companies.
CNA is a registered service mark of CNA Financial Corporation. The policy form
numbers for this product are: V100-1128-A Series, V100-1129-A Series,
P4-119913-A and P4-119914-A Series. The CNA Capital Select Variable Annuity is
not available in all states.
MAILING ADDRESS:
CNA Insurance Companies
Variable Product Team
P.O. Box 305139
Nashville TN 37230-5139
CNA
FOR ALL THE COMMITMENTS YOU MAKE (R)
AG-127395--B 2/98 Printed in USA
