333-85511
File Nos. 811-7547
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 11 [X]
(Check appropriate box or boxes.)
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) (Zip Code)
Depositor's Telephone Number, including Area Code (312) 822-6597
Name and Address of Agent for Service
Jonathan D. Kantor
Senior Vice President, General
Counsel and Secretary
Valley Forge Life Insurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
Copies to:
Judith A. Hasenauer
Blazzard, Grodd & Hasenauer, P.C.
4401 West Tradewinds Avenue
Suite 207
Lauderdale by the Sea, FL 33308
(954) 771-7909
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b) of Rule 485
_X_ on May 1, 2000 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a) (1) of Rule 485
___ on (date) pursuant to paragraph (a) (1) of Rule 485
If appropriate, check the following:
___ This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
Title of Securities Registered:
Variable Annuity Contracts
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
(Required by Rule 495)
Item No. Location
- -------- --------
PART A
<S> <C>
Item 1. Cover Page Cover Page
Item 2. Definitions Index of Special of Terms
Item 3. Synopsis Highlights
Item 4. Condensed Financial Information Not Applicable
Item 5. General Description of Registrant,
Depositor, and Portfolio Companies The Company,
Investment Choices
CROSS REFERENCE SHEET (CONT'D)
(Required by Rule 495)
Item No. Location
- -------- --------
Item 6. Deductions and Expenses Expenses
Item 7. General Description of Variable The Annuity Contract
Annuity Contracts
Item 8. Annuity Period Annuity Provisions
Item 9. Death Benefit Death Benefit
Item 10. Purchases and Contract Value Purchase, Contract Value
Item 11. Redemptions Access to Your Money
Item 12. Taxes Taxes
Item 13. Legal Proceedings Not Applicable
Item 14. Table of Contents of the Statement of Other Information
Additional Information
PART B
Item 15. Cover Page Cover Page
Item 16. Table of Contents Table of Contents
Item 17. General Information and History Company
Item 18. Services Not Applicable
Item 19. Purchase of Securities Being Offered Not Applicable
Item 20. Underwriters Distribution
Item 21. Calculation of Performance Data Performance Information
Item 22. Annuity Payments Annuity Provisions
Item 23. Financial Statements Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
Item so numbered, in Part C to this Registration Statement.
PART A
VALLEY FORGE LIFE INSURANCE COMPANY
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
This prospectus describes the variable annuity contract offered by Valley Forge
Life Insurance Company (we, us, our). This is a deferred variable annuity
contract and provides for accumulation of contract values and annuity payments
on a fixed and variable basis.
The contract has a number of investment choices (fixed accounts and variable
investment options). The fixed accounts provide an investment rate guaranteed by
us. You can put your money in the fixed accounts and/or any of the following
investment options which are offered through our variable account, Valley Forge
Life Insurance Company Variable Annuity Separate Account. Some of the investment
options may not be available in your state.
FEDERATED INSURANCE SERIES
Advised by Federated Investment Management Company
Federated High Income Bond Fund II
Federated Prime Money Fund II
Federated Utility Fund II
THE ALGER AMERICAN FUND
Advised by Fred Alger Management, Inc.
Alger American Growth Portfolio
Alger American Mid-Cap Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Leveraged AllCap Portfolio
FIRST EAGLE SOGEN VARIABLE FUNDS, INC. (formerly, SoGen Variable Funds, Inc.)
Advised by Arnhold and S. Bleichroeder Advisers, Inc.
First Eagle SoGen Overseas Variable Fund (formerly, SoGen Overseas Variable
Fund)
VAN ECK WORLDWIDE INSURANCE TRUST
Advised by Van Eck Associates Corporation
Van Eck Worldwide Emerging Markets Fund
Van Eck Worldwide Hard Assets Fund
VARIABLE INSURANCE PRODUCTS FUND (VIP) and
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)
Advised by Fidelity Management & Research Company
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Contrafund Portfolio
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Index 500 Portfolio
MFS VARIABLE INSURANCE TRUST
Advised by MFS Investment Management
MFS Emerging Growth Series
MFS Growth With Income Series
MFS Research Series
MFS Total Return Series
JANUS ASPEN SERIES, Institutional Shares
Advised by Janus Capital Corporation
Janus Aspen Capital Appreciation Portfolio
Janus Aspen Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Flexible Income Portfolio
Janus Aspen International Growth Portfolio
Janus Aspen Worldwide Growth Portfolio
ALLIANCE VARIABLE PRODUCTS SERIES FUND, Class B Shares
Advised by Alliance Capital Management, L.P.
Alliance Premier Growth Portfolio
Alliance Growth and Income Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Advised by American Century Investment Management, Inc.
American Century VP Income & Growth Fund
American Century VP Value Fund
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS
TRUST, CLASS 2 SHARES*
Advised by Templeton Asset Management Ltd.
Templeton Developing Markets Securities Fund (formerly, Templeton
Developing Markets Fund)
Advised by Templeton Investment Counsel, Inc.
Templeton Asset Strategy Fund (formerly, Templeton Asset Allocation
Fund)
*Effective May 1, 2000, the funds of Templeton Variable Products Series Fund
were merged into similar funds of Franklin Templeton Variable Insurance Products
Trust.
LAZARD RETIREMENT SERIES
Advised by Lazard Asset Management
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (formerly, Morgan Stanley Dean
Witter Universal Funds, Inc.)
Advised by Morgan Stanley Asset Management Inc.
Morgan Stanley International Magnum Portfolio
Morgan Stanley Emerging Markets Equity Portfolio
Please read this Prospectus before investing. You should keep it for future
reference. It contains important information about the contract.
The expenses for a contract with immediate interest payments are higher than a
contract without immediate interest payments and the amount of the immediate
interest payments may be more than offset by the additional expenses
attributable to the immediate interest payments.
To learn more about the contract, you can obtain a copy of the Statement of
Additional Information (SAI) (dated May 1, 2000). The SAI has been filed with
the Securities and Exchange Commission (SEC) and is legally a part of this
prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains the
SAI, material incorporated by reference and other information regarding
companies that file electronically with the SEC. The Table of Contents of the
SAI is on page _ of this prospectus. For a free copy of the SAI, call us at
(800) 262-1755 or write to: Valley Forge Life, Administrative Office, 100 CNA
Drive, Nashville, TN 37214.
The Contracts:
* are not bank deposits.
* are not federally insured.
* are not endorsed by any bank or governmental agency.
* are not guaranteed and may be subject to loss of principal.
The SEC has not approved or disapproved these securities or determined that
this prospectus is accurate or complete. Any representation that it has
is a criminal offense.
May 1, 2000
TABLE OF CONTENTS
Page
INDEX OF SPECIAL TERMS
HIGHLIGHTS
TABLE OF FEES AND EXPENSES
THE COMPANY
THE ANNUITY CONTRACT
PURCHASE
INVESTMENT CHOICES
EXPENSES
CONTRACT VALUE
WITHDRAWALS
DEATH BENEFIT
ANNUITY PROVISIONS
TAXES
PERFORMANCE
OTHER INFORMATION
INDEX OF SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the contract, however, certain technical words
or terms are unavoidable. We have identified the following as some of these
words or terms. We indicated below the page in which we believe you will find
the best explanation for the word or term. These words and terms are in italics
on the indicated page.
Page
Accumulation Period
Accumulation Unit
Annuitant
Annuity Date
Annuity Payment Options
Annuity Payments
Annuity Period
Annuity Unit
Beneficiary
Investment Options
Non-Qualified
Qualified
HIGHLIGHTS
The variable annuity contract that we are offering is a contract between you,
the owner, and us, the insurance company. The contract provides a means for
investing on a tax-deferred basis in our fixed account options and investment
options. The contract is intended for retirement savings or other long-term
investment purposes. We will issue the contract as an individual contract in
most states; and as a certificate under a group annuity contract in other
states.
The contract has an immediate interest feature in which we will add an
additional 3% to each purchase payment you make during the first contract year.
The contract, as in all deferred annuity contracts, has two phases: the
accumulation period and the annuity period. During the accumulation period,
earnings accumulate on a tax-deferred basis and are taxed as income when you
make a withdrawal. If you make a withdrawal during the accumulation period, we
may also assess a withdrawal charge of up to 7%. The annuity period occurs when
you begin receiving regular payments from your contract.
You can choose to receive annuity payments on a variable basis, a fixed basis,
or a combination of both. If you choose variable payments, the amount of the
variable annuity payments will depend upon the investment performance of the
investment options you select for the annuity period. If you choose fixed
payments, the amount of the fixed annuity payments are level for the annuity
period.
Free Look. If you cancel the contract within 10 days after receiving it (or
whatever period is required in your state), we will cancel the contract without
charging a withdrawal fee. You will receive whatever your contract is worth on
the day that we receive your request. This amount may be more or less than your
original payment. We will return your original payment if required by law.
Tax Penalty. The earnings in your contract are not taxed until you take money
out of your contract. If you take money out during the accumulation period, for
tax purposes any earnings are deemed to come out first. If you are younger than
59 1/2 when you take money out, you may be charged a 10% federal tax penalty on
those earnings. Payments during the annuity period are considered partly a
return of your original investment.
Inquiries. If you need more information, please contact us at:
Valley Forge Life Insurance Company
100 CNA Drive
Nashville, TN 37214
(800) 262-1755
<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES
Owner Transaction Expenses
Withdrawal Charge: (as a percentage of purchase payments withdrawn) (See Note 2)
Number of Contract Years
From Receipt of Purchase Payment Withdrawal Charge
<S> <C> <C>
1 7%
2 7%
3 6%
4 6%
5 5%
6 4%
7 3%
8 and thereafter 0%
Transfer Fee: No charge for the first 12 transfers in a
contract year during the accumulation period;
thereafter, the fee is $25 per transfer. There is
no charge for the 4 allowable transfers in a
contract year during the annuity period.
Contract Maintenance Charge: (See Note 3) $30 per contract year.
Variable Account Annual Expenses
(as a percentage of average variable account value)
Product Expense Charge (mortality and expense
risk charge and administrative charge): (See Note 4) 1.40%
</TABLE>
<TABLE>
<CAPTION>
Investment Option Expenses: (as a percentage of the average daily net assets of
an investment option)
Other Total Annual
Expenses (after Expenses (after
waivers and/or waivers and/or
reimbursements reimbursements
with respect with respect
to certain to certain
Management 12b-1 investment investment
(Advisory Fees) Fees options) options)
--------------- ---- -------- --------
Federated Insurance Series (See Note 6)
<S> <C> <C> <C>
Federated High Income Bond Fund II 0.60% 0.19% 0.79%
Federated Prime Money Fund II 0.50% 0.23% 0.73%
Federated Utility Fund II 0.75% 0.19% 0.94%
The Alger American Fund
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Mid-Cap Growth Portfolio 0.80% 0.05% 0.85%
Alger American Small Capitalization Portfolio 0.85% 0.05% 0.90%
Alger American Leveraged AllCap Portfolio (See Note 7) 0.85% 0.08% 0.93%
First Eagle SoGen Variable Funds, Inc. (See Note 8)
First Eagle SoGen Overseas Variable Fund 0.75% 0.75% 1.50%
Van Eck Worldwide Insurance Trust
Van Eck Worldwide Emerging Markets Fund (See Note 9) 1.00% 0.34% 1.34%
Van Eck Worldwide Hard Assets Fund 1.00% 0.26% 1.26%
Variable Insurance Products Fund (VIP) and Variable
Insurance Products Fund II (VIP II), Initial Class (See Note 10)
Fidelity VIP II Asset Manager Portfolio 0.53% 0.09% 0.62%
Fidelity VIP II Contrafund 0.58% 0.07% 0.65%
Fidelity VIP Equity-Income 0.48% 0.08% 0.56%
Fidelity VIP Index 500 Portfolio 0.24% 0.04% 0.28%
MFS Variable Insurance Trust (See Note 11)
MFS Emerging Growth Series 0.75% 0.09% 0.84%
MFS Growth With Income Series 0.75% 0.13% 0.88%
MFS Research Series 0.75% 0.11% 0.86%
MFS Total Return Series 0.75% 0.15% 0.90%
Janus Aspen Series, Institutional Shares (See Note 12)
Janus Aspen Capital Appreciation Portfolio 0.65% 0.04% 0.69%
Janus Aspen Growth Portfolio 0.65% 0.02% 0.67%
Janus Aspen Balanced Portfolio 0.65% 0.02% 0.67%
Janus Aspen Flexible Income Portfolio 0.65% 0.07% 0.72%
Janus Aspen International Growth Portfolio 0.65% 0.11% 0.76%
Janus Aspen Worldwide Growth Portfolio 0.65% 0.05% 0.70%
Alliance Variable Products Series Fund, Class B Shares
Alliance Premier Growth Portfolio 1.00% 0.25% 0.04% 1.29%
Alliance Growth and Income Portfolio 0.63% 0.25% 0.09% 0.97%
American Century Variable Portfolios, Inc. (See Note 13)
American Century VP Income & Growth Fund 0.70% - 0.00% 0.70%
American Century VP Value Fund 1.00% - 0.00% 1.00%
Franklin Templeton Variable Insurance
Products Trust, Class 2 Shares (See Note 14)
Templeton Developing Markets Securities
Fund (see Note 15) 1.25% 0.25% 0.31% 1.81%
Templeton Asset Strategy Fund (see Note 15) 0.60% 0.25% 0.18% 1.03%
Lazard Retirement Series (See Note 16)
Lazard Retirement Equity Portfolio 0.75% 0.25% 0.25% 1.25%
Lazard Retirement Small Cap Portfolio 0.75% 0.25% 0.25% 1.25%
The Universal Institutional Funds, Inc. (See Note 17)
Morgan Stanley International Magnum Portfolio 0.29% - 0.87% 1.16%
Morgan Stanley Emerging Markets Equity Portfolio 0.42% - 1.37% 1.79%
</TABLE>
Examples
The examples below are designed to help you to understand the expenses in a
contract. You should not consider these examples to represent the actual
expenses you would pay. The actual expenses may be greater or less than those
shown.
If you surrendered your contract after the end of the specified time period, you
would pay the following aggregate expenses on a $1,000 investment, assuming a 5%
annual return:
<TABLE>
<CAPTION>
Investment Option 1 Year 3 Years 5 Years 10 Years
- ----------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Federated High Income Bond Fund II $ 96 $140 $186 $290
Federated Prime Money Fund II $ 95 $138 $183 $284
Federated Utility Fund II $ 98 $145 $194 $306
Alger American Growth Portfolio $ 96 $140 $186 $290
Alger American Mid-Cap Growth Portfolio $ 97 $142 $190 $296
Alger American Small Capitalization Portfolio $ 97 $143 $192 $302
Alger American Leveraged AllCap Portfolio $ 97 $144 $194 $305
First Eagle SoGen Overseas Variable Fund $103 $162 $223 $363
Van Eck Worldwide Emerging Markets Fund $102 $157 $215 $347
Van Eck Worldwide Hard Assets Fund $101 $155 $211 $339
Fidelity VIP Equity-Income Portfolio $ 94 $133 $174 $265
Fidelity VIP II Asset Manager Portfolio $ 94 $134 $177 $272
Fidelity VIP II Contrafund $ 95 $135 $179 $275
Fidelity VIP II Index 500 Portfolio $ 91 $124 $159 $234
MFS Emerging Growth Series $ 97 $141 $189 $295
MFS Growth With Income Series $ 97 $143 $191 $300
MFS Research Series $ 97 $142 $190 $297
MFS Total Return Series $ 97 $143 $192 $302
Janus Aspen Capital Appreciation Portfolio $ 95 $137 $181 $279
Janus Aspen Growth Portfolio $ 95 $136 $180 $277
Janus Aspen Balanced Portfolio $ 95 $136 $180 $277
Janus Aspen Flexible Income Portfolio $ 95 $138 $183 $283
Janus Aspen International Growth Portfolio $ 96 $139 $185 $287
Janus Aspen Worldwide Growth Portfolio $ 95 $137 $182 $280
Alliance Premier Growth Portfolio $101 $156 $213 $342
Alliance Growth and Income Portfolio $ 98 $146 $196 $309
American Century VP Income & Growth Fund $ 95 $137 $182 $280
American Century VP Value Fund $ 98 $146 $197 $312
Templeton Developing Markets Securities Fund, Class 2 $107 $172 $239 $393
Templeton Asset Strategy Fund, Class 2 $ 99 $147 $199 $315
Lazard Retirement Equity Portfolio $101 $154 $210 $338
Lazard Retirement Small Cap Portfolio $101 $154 $210 $338
Morgan Stanley International Magnum Portfolio $100 $152 $206 $329
Morgan Stanley Emerging Markets Equity Portfolio $106 $171 $238 $391
</TABLE>
If you do not surrender your contract after the end of the specified time period
or if you begin receiving annuity payments you would pay the following aggregate
expenses on the same investment:
<TABLE>
<CAPTION>
Investment Option 1 Year 3 Years 5 Years 10 Years
- ----------------- ------ ------- ------- -----
<S> <C> <C> <C> <C>
Federated High Income Bond Fund II $26 $ 80 $136 $290
Federated Prime Money Fund II $25 $ 78 $133 $284
Federated Utility Fund II $28 $ 85 $144 $306
Alger American Growth Portfolio $26 $ 80 $136 $290
Alger American Mid-Cap Growth Portfolio $27 $ 82 $140 $296
Alger American Small Capitalization Portfolio $27 $ 83 $142 $302
Alger American Leveraged AllCap Portfolio $27 $ 84 $144 $305
First Eagle SoGen Overseas Variable Fund $33 $102 $173 $363
Van Eck Worldwide Emerging Markets Fund $32 $ 97 $165 $347
Van Eck Worldwide Hard Assets Fund $31 $ 95 $161 $339
Fidelity VIP Equity-Income Portfolio $24 $ 73 $124 $265
Fidelity VIP II Asset Manager Portfolio $24 $ 74 $127 $272
Fidelity VIP II Contrafund $25 $ 75 $129 $275
Fidelity VIP II Index 500 Portfolio $21 $ 64 $109 $234
MFS Emerging Growth Series $27 $ 81 $139 $295
MFS Growth With Income Series $27 $ 83 $141 $300
MFS Research Series $27 $ 82 $140 $297
MFS Total Return Series $27 $ 83 $142 $302
Janus Aspen Capital Appreciation Portfolio $25 $ 77 $131 $279
Janus Aspen Growth Portfolio $25 $ 76 $130 $277
Janus Aspen Balanced Portfolio $25 $ 76 $130 $277
Janus Aspen Flexible Income Portfolio $25 $ 78 $133 $283
Janus Aspen International Growth Portfolio $26 $ 79 $135 $287
Janus Aspen Worldwide Growth Portfolio $25 $ 77 $132 $280
Alliance Premier Growth Portfolio $31 $ 96 $163 $342
Alliance Growth and Income Portfolio $28 $ 86 $146 $309
American Century VP Income & Growth Fund $25 $ 77 $132 $280
American Century VP Value Fund $28 $ 86 $147 $312
Templeton Developing Markets Securities Fund, Class 2 $37 $112 $189 $393
Templeton Asset Strategy Fund, Class 2 $29 $ 87 $149 $315
Lazard Retirement Equity Portfolio $31 $ 94 $160 $338
Lazard Retirement Small Cap Portfolio $31 $ 94 $160 $338
Morgan Stanley International Magnum Portfolio $30 $ 92 $156 $329
Morgan Stanley Emerging Markets Equity Portfolio $36 $111 $188 $391
<FN>
Notes to Table of Fees and Expenses and Examples
1. The purpose of the Table of Fees and Expenses is to assist you in
understanding the various costs and expenses that you will incur directly
or indirectly. The Table reflects expenses of the separate account as well
as the investment options.
2. There are circumstances under which we will waive or reduce the withdrawal
charge.
3. During the accumulation period we will waive this charge if your contract
value is $50,000 or more at the time the deduction is to be made.
4. The Fee Table and contract refer to a Product Expense Charge. This charge
is equivalent to the aggregate charges that until recently were referred to
as a Mortality and Expense Risk Charge and an Administrative Charge by many
companies issuing variable annuity contracts. Throughout this prospectus we
will refer to this charge as a Product Expense Charge. Under certain
circumstances we may reduce the charge.
5. The tables do not reflect any premium taxes, which generally range from 0%
to 4% depending upon the state or jurisdiction.
6. The Fund did not pay or accrue the shareholder services fee during the fiscal
year ended December 31, 1999. The Fund has no present intention of paying or
accruing the shareholder services fee during the fiscal year ending December
31, 2000. The maximum shareholder services fee is 0.25%.
7. Included in other expenses of the Alger American Leveraged AllCap Portfolio
is .01% of interest expense.
8. The annualized ratios of operating expenses to average net assets for the
period ended December 31, 1999 would have been 3.32% without the effect of
the investment advisory fee waiver and expense reimbursement provided
by the advisor.
9. For the year ended December 31, 1999, Van Eck Associates Corporation
(Adviser) agreed to waive its management fees and assume all expenses of
the Fund except interest, taxes, brokerage commissions and extraordinary
expenses exceeding 1.5% of average daily net assets for the period
January 1, 1999 to May 12, 1999. For the period May 13, 1999 to December
31, 1999, the Adviser agreed to waive its management fees and assume all
expenses of the Fund except interest, taxes, brokerage commissions and
extraordinary expenses exceeding 1.30% of average daily net assets.
Without such waivers and assumption of expenses, for the year ended
December 31, 1999, other expenses were .54% and total annual expenses were
1.54%
10. A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain
funds', or FMR on behalf of certain funds', custodian credits realized as a
result of uninvested cash balances were used to reduce a portion of each
applicable fund's expenses. Without these reductions, the total operating
expenses presented in the table would have been .57% for Equity-Income
Portfolio, .63% for Asset Manager Portfolio, and .71% for Contrafund
Portfolio. FMR agreed to reimburse a portion of the Index 500 Portfolio's
expenses during the period. Without this reimbursement, the Portfolio's
management fee, other expenses and total expenses would have been .24%,
.10% and .34%, respectively.
11. Each of these funds has an expense offset arrangement which reduces its
custodian fee based upon the amount of cash it maintains with its custodian
and dividend disbursing agent, and may enter into such arrangements and
directed brokerage arrangements (which would also have the effect of
reducing its expenses). Any such fee reductions are not reflected above
under "Other Expenses" and therefore are higher than the actual expenses of
the series.
12. Expenses are based upon expenses for the fiscal year ended December 31,
1999, restated to reflect a reduction in the management fee for the Growth,
Capital Appreciation, International Growth, Worldwide Growth, and Balanced
Portfolios. All expenses are shown without the effect of expense offset
arrangements.
13. The funds of American Century Variable Portfolios, Inc. have a stepped fee
schedule. As a result, the funds' management fees generally decrease as
the funds' assets increase.
14. The fund's class 2 distribution plan or "rule 12b-1 plan" is described in
the fund's prospectus. While the maximum amount payable under the fund's
class 2 rule 12b-1 plan is 0.35% per year of the fund's average daily
net assets, the Board of Trustees of Franklin Templeton Variable Insurance
Products Trust has set the current rate at 0.25% per year.
15. On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with a similar fund of the Franklin Templeton Variable Insurance
Products Trust ("VIP"). VIP shareholders approved new management fees, which
apply to the combined fund effective 5/1/00. The table shows restated
total expenses based on the new fees and the assets of the fund as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses
after 5/1/00 would be estimated as: Templeton Developing Markets Securities
Fund - Management Fees 1.25%, 12b-1 fees 0.25%, Other Expenses 0.29%, and
Total Annual Expenses 1.79%; Templeton Asset Strategy Fund - Management Fees
0.60%, 12b-1 fees 0.25%, Other Expenses 0.14% and Total Annual Expenses
0.99%. The fund's class 2 distribution plan or "rule 12b-1 plan" is
described in the fund's prospectus.
16. Effective May 1, 1999, Lazard Asset Management, the Fund's investment adviser,
has agreed to waive its fee and/or reimburse the Portfolios through December
31, 2000 to the extent total annual portfolio expenses exceed 1.25% of the
Portfolio's average daily net assets. Absent such an agreement, the other
expenses and total annual portfolio expenses for the year ended December 31,
1999 would have been 4.63% and 5.63% for the Lazard Retirement Equity
Portfolio and 6.31% and 7.31% for the Lazard Retirement Small Cap Portfolio.
17. With respect to the Universal Institutional Funds, Inc. portfolios, the
investment adviser has voluntarily waived a portion or all of the management
fees and reimbursed other expenses of the portfolios to the extent total
operating expenses exceed the following percentages: Emerging Markets Equity
Portfolio 1.75%, International Magnum Portfolio 1.15%. The adviser may
terminate this voluntary waiver at any time at its sole discretion. Absent
such reductions, the "Management Fees" and "Other Expenses" would have been
as follows: 1.25% and 1.37%, respectively for the Emerging Markets Equity
Portfolio; and 0.80% and 0.87%, respectively for the International Magnum
Portfolio.
</FN>
</TABLE>
THE COMPANY
Valley Forge Life Insurance Company, with its administrative office located at
100 CNA Drive, Nashville, TN 37214, 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 86% of the
outstanding common stock of CNA as of December 31, 1999.
We are principally engaged in the sale of life insurance and annuities. We are
licensed in the District of Columbia, Guam, Puerto Rico and all states except
New York, where we are only admitted as a reinsurer.
THE ANNUITY CONTRACT
This prospectus describes the variable annuity contract that we are offering. An
annuity is a contract between you, the owner, and us, the insurance company, in
which we promise to pay you an income, in the form of annuity payments,
beginning on a designated date in the future. Until you decide to begin
receiving annuity payments, your annuity is in the accumulation period. Once
you begin receiving annuity payments, your contract is in the annuity period.
We will issue the contract as an individual annuity contract in most states, and
as a certificate under a group annuity contract in other states. As used in this
prospectus, the term contract refers to either: the individual annuity contract,
or to a certificate issued under a group annuity contract.
The contract benefits from tax deferral. Tax deferral means that you are not
taxed on earnings or appreciation of the assets in your contract until you take
money out of your contract. The contract is called a variable annuity because
you can choose among the investment options, and depending upon market
conditions, you can gain or lose money in any of these options. If you elect
the variable annuity portion of the contract, the amount of money you are able
to accumulate in your contract during the accumulation period depends upon the
investment performance of the investment option(s) you elect.
You can choose to receive annuity payments on a variable basis, a fixed basis or
a combination of both. If you choose variable payments, the amount of the
annuity payments you receive will depend upon the investment performance of the
investment option(s) you select for the annuity period. If you select to receive
payments on a fixed basis, the payments you receive will remain level.
The contract was intended to be sold as a non-qualified contract to individuals
seeking retirement savings or other long-term investment purposes. It can also
be purchased pursuant to standard IRA, Roth IRA and 403(b) qualified plans.
However, if the contract is issued pursuant to a 403(b) plan, it can only be
done as a rollover.
PURCHASE
Purchase Payments
A purchase payment is the money you give us to buy the contract. The minimum
initial purchase payment amount we will accept is $10,000 for non-qualified
contracts, and $2,000 for qualified contracts. Each subsequent purchase payment
must be at least $1,000. If you participate in the Electronic Fund Transfer
program, the minimum subsequent payment is $100. Unless we agree otherwise, the
maximum total of all purchase payments we will accept for the contract is
$1,000,000.
Immediate Interest Payments
We will add an additional 3% to each purchase payment you make during the first
contract year. We refer to these amounts as immediate interest payments.
Immediate interest payments will be allocated in the same way as your purchase
payment.
If you make a withdrawal anytime during the first contract year, including an
exercise of your Free Look Right, (except for withdrawals pursuant to the
systematic withdrawal program which are not subject to the withdrawal charge),
we will deduct (recapture) pro-rata the immediate interest payments from the
amount you withdraw. However, we will not deduct any earnings that resulted from
the immediate interest payments. After the first contract year, the immediate
interest payments will vest and can be withdrawn at any time.
We reserve the right to limit immediate interest payments in the future. The
immediate interest payments are subject to certain state insurance laws and may
not be available in your state. An immediate interest payment and any of its
investment earnings are treated as taxable income.
Contract charges are deducted from contract value. Therefore, when we credit
your contract with immediate interest payments, your contract incurs expenses on
the total contract value, which includes the immediate interest payment amount.
If you make a withdrawal any time during the first contract year, including an
exercise of the Free Look Right, you will forfeit (we will recapture) your
immediate interest payments. Since the charges associated with your contract
will have been assessed during the first year against the higher amount (that
is, the purchase payments plus the immediate interest payment amounts), it is
possible that upon surrender, particularly in a declining market, you will
receive less money back than you would have if you had not received the
immediate interest payment. We intend to profit from the Product Expense Charge
assessed under the contract, including the Product Expense Charges assessed
against contract value attributable to immediate interest payments.
We have applied to the Securities and Exchange Commission for an exemption from
certain provisions of the Investment Company Act of 1940 so that we can
recapture any immediate interest payments applied to a contract as described
above. Until such time as we receive approval of our exemption request, we will
not recapture any immediate interest payments.
Allocation of Purchase Payments
When you purchase a contract, you choose how we will apply your purchase
payments among the investment options and the fixed account options. You may
change the allocation of purchase payments by written notice to us. Any
additional purchase payments will be allocated according to the allocation
schedule in effect unless accompanied by written notice requesting a different
allocation. Only whole percentages may be applied.
Free Look. If you change your mind about owning this contract, you can cancel it
within 10 days after receiving it (or the period required in your state, which
is shown on page 1 of your contract). When you cancel the contract within this
time period, we will not assess a withdrawal charge. You will generally receive
back whatever your contract is worth on the day we receive your request less
y immediate interest payment.
In certain states, or if you have purchased the contract as an IRA, we may be
required to give you back your purchase payment if you decide to cancel your
contract within 10 days after receiving it (or whatever period is required in
your state). We reserve the right to allocate your purchase payment to a money
market fund, or similar investment option, for 15 days before we allocate your
first purchase payment to the investment option(s) you have selected. (In some
states, the period may be longer.) If you exercise your free look right, we will
return the greater of your contract value less any immediate interest payments
or your purchase payments.
Allocation. Once we receive your purchase payment and the necessary information,
we will issue your contract and allocate your first purchase payment within 2
business days except as described in the paragraph before this one. If you do
not give us all of the information we need, we will contact you to get it. If
for some reason we are unable to complete this process within 5 business days,
we will either send back your money or get your permission to keep it until we
get all of the necessary information. If you add more money to your contract by
making additional purchase payments, we will credit those amounts to your
contract within one business day. Our business day closes when the New York
Stock Exchange's normal business day ends, usually 4:00 p.m. Eastern time.
INVESTMENT CHOICES
The contract offers you the choice of allocating purchase payments to one of our
fixed account options or to one or more of the investment options which are
listed below. Additional investment options may be available in the future.
You should read the prospectuses for these funds carefully before investing.
Copies of these prospectuses are attached to this prospectus. Certain investment
options contained in the fund prospectuses may not be available with your
contract. Also, some of the investment options may not be available in your
state.
FEDERATED INSURANCE SERIES
Advised by Federated Investment Management Company
Federated High Income Bond Fund II
Federated Prime Money Fund II
Federated Utility Fund II (seeks high current income and moderate
capital appreciation by investing in securities of utility companies)
THE ALGER AMERICAN FUND
Advised by Fred Alger Management, Inc.
Alger American Growth Portfolio
Alger American Mid-Cap Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Leveraged All Cap Portfolio
FIRST EAGLE SOGEN VARIABLE FUNDS, INC. (formerly, SoGen Variable Funds, Inc.)
Advised by Arnhold and S. Bleichroeder Advisers, Inc. (Prior to December 31,
1999, Societe Generale Asset Management Corp. was the adviser)
First Eagle SoGen Overseas Variable Fund (formerly, SoGen Overseas Variable
Fund)
VAN ECK WORLDWIDE INSURANCE TRUST
Advised by Van Eck Associates Corporation
Van Eck Worldwide Emerging Markets Fund
Van Eck Worldwide Hard Assets Fund
VARIABLE INSURANCE PRODUCTS FUND (VIP) and
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)
Advised by Fidelity Management & Research Company
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Contrafund Portfolio (long-term capital appreciation)
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Index 500 Portfolio
MFS VARIABLE INSURANCE TRUST
Advised by MFS Investment Management
MFS Emerging Growth Series
MFS Growth With Income Series
MFS Research Series (seeks long-term capital growth and future income)
MFS Total Return Series
JANUS ASPEN SERIES, Institutional Shares
Advised by Janus Capital Corporation
Janus Aspen Capital Appreciation Portfolio
Janus Aspen Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Flexible Income Portfolio
Janus Aspen International Growth Portfolio
Janus Aspen Worldwide Growth Portfolio
ALLIANCE VARIABLE PRODUCTS SERIES FUND, Class B Shares
Advised by Alliance Capital Management L.P.
Alliance Premier Growth Portfolio
Alliance Growth and Income Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Advised by American Century Investment Management, Inc.
American Century VP Income & Growth Fund
American Century VP Value Fund
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST*, Class 2 Shares
Advised by Templeton Asset Management Ltd.
Templeton Developing Markets Securities Fund (formerly, Templeton
Developing Markets Fund)
Advised by Templeton Investment Counsel, Inc.
Templeton Asset Strategy Fund (formerly, Templeton Asset Allocation
Fund)
*Effective May 1, 2000, the funds of Templeton Variable Products Series
Fund were merged into similar funds of Franklin Templeton Variable
Insurance Products Trust.
LAZARD RETIREMENT SERIES
Advised by Lazard Asset Management
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (formerly, Morgan Stanley Dean
Witter Universal Funds, Inc.)
Advised by Morgan Stanley Asset Management Inc.
Morgan Stanley International Magnum Portfolio
Morgan Stanley Emerging Markets Equity Portfolio
The investment objectives and policies of certain investment options are similar
to the investment objectives and policies of other mutual funds that the
investment advisers manage. Although the objectives and policies may be similar,
the investment results of the investment options may be higher or lower than the
results of such other mutual funds. The investment advisers cannot guarantee,
and make no representation, that the investment results of similar funds will be
comparable even though the funds have the same advisers.
An investment option's performance may be affected by risks specific to
certain types of investments, such as foreign securities, derivative
investments, non-investment grade debt securities, initial public offerings
(IPOs) or companies with relatively small market capitalizations. IPOs and
other investment techniques may have a magnified performance impact on an
investment option with a small asset base. An investment option may not
experience similar performance as its assets grow.
Shares of the investment options may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
investment options may also be sold directly to qualified plans. The funds
believe that offering their shares in this manner will not be disadvantageous to
you.
We may enter into certain arrangements under which we are reimbursed by the
investment options' advisers, distributors and/or affiliates for the
administrative services which we provide to the funds.
Fixed Account Options
During the accumulation period, you may allocate purchase payments and contract
values to one of our fixed account options. Fixed Account I is part of our
general account, and will offer a uniform interest rate guaranteed by us. At our
discretion, we may declare an excess interest rate for this account.
Fixed Account II offers various interest rates and time periods from which to
select. We have segregated our assets in Fixed Account II from our General
Account. The interest rates offered by Fixed Account II will depend on the time
period you select. In certain circumstances, if you withdraw your money from the
account before the expiration of the time period you may be subject to an
interest adjustment. The adjustment may be positive or negative.
Fixed Account I and II are not available in all states.
Transfers
You can make transfers as described below. We have the right to terminate or
modify these transfer provisions.
You can make transfers by telephone. If you own the contract with a joint owner,
unless we are instructed otherwise, we will accept instructions from either you
or the other owner. We will use reasonable procedures to confirm that
instructions given to us by telephone are genuine. If we fail to use such
procedures, we may be liable for any losses due to unauthorized or fraudulent
instructions. However, we will not be liable for following telephone
instructions that we reasonably believe to be genuine. We may tape record
telephone instructions.
Transfers are subject to the following:
1. Currently, during the accumulation period, you can make 12 transfers
every contract year without charge.
2. We will assess a $25 transfer fee for each transfer during the
accumulation period in excess of the free 12 transfers allowed per
contract year. Transfers made at the end of the Free Look Period by us
and any transfers made pursuant to the Dollar Cost Averaging Option
and the Automatic Transfer Option will not be counted in determining
the application of any transfer fee.
3. The minimum amount which you can transfer is $500 or your entire value
in the investment option or any fixed account option, if it is less.
This requirement is waived if the transfer is made in connection with
the Dollar Cost Averaging Option or the Automatic Transfer Option.
4. You may not make a transfer until after the end of the Free Look
Period.
5. A transfer will be effected as of the end of the business day when we
receive an acceptable transfer request containing all required
information. The required information includes the amount which is to
be transferred, and the investment option(s) and/or the fixed account
affected.
6. We are not liable for a transfer made in accordance with your
instructions.
7. We reserve the right to restrict transfers between investment options
to a maximum of 12 per contract year and to restrict transfers from
being made on consecutive business days. We also reserve the right to
restrict transfers into and out of any fixed account option.
8. Your right to make transfers is subject to modification if we
determine, in our sole opinion, that the exercise of the right by one
or more owners is, or would be, to the disadvantage of other owners.
Restrictions may be applied in any manner reasonably designed to
prevent any use of the transfer right which is considered by us to be
to the disadvantage of other owners. A modification could be applied
to transfers to, or from, one or more of the investment options and
could include, but is not limited to:
a. the requirement of a minimum time period between each transfer;
b. not accepting a transfer request from an agent acting under a
power of attorney on behalf of more than one owner; or
c. limiting the dollar amount that may be transferred between
investment options by an owner at any one time.
9. Transfers do not change your allocation instructions for future
purchase payments.
10. Transfers made during the annuity period are also subject to the
following:
a. you may make 4 transfers each contract year between investment
options or from the investment options to the general account;
b. you may not make a transfer from the general account to an
investment option; and
c. you may not make a transfer within 3 business days of the annuity
payment date.
Dollar Cost Averaging Option
We offer two Dollar Cost Averaging Options (Program I and Program II). A Dollar
Cost Averaging Option allows you to systematically transfer a set amount from
our dollar cost averaging account to any investment option or Fixed Account I.
If you select Dollar Cost Averaging, we will open a dollar cost averaging
account for you. (You can only have one Dollar Cost Averaging account in
operation at one time.) By allocating amounts on a regular schedule as opposed
to allocating the total amount at one particular time, you may be less
susceptible to the impact of market fluctuations. Dollar Cost Averaging is
available only during the accumulation period.
Under Program I, you must have at least $1,000 allocated to dollar cost
averaging. The funds allocated will be placed in the Money Market Fund. The
minimum amount which can be transferred each month is $100. We guarantee that
the interest we credit to your dollar cost averaging account will be at least
equal to that credited to Fixed Account I. We may, at our discretion, credit
excess interest greater than that credited to Fixed Account I.
Under Program II, you must have at least $5,000 in the dollar cost averaging
account. Transfers must occur for a period of 6 or 12 months. We guarantee that
the interest we credit to your dollar cost averaging account will be at least
equal to that credited to Fixed Account I. We may, at our discretion, credit
excess interest greater than that credited to Fixed Account I.
We have the right to modify, terminate or suspend the Dollar Cost Averaging
Option. If you participate in the Dollar Cost Averaging Option, the transfers
made under the program are not taken into account in determining any transfer
fee. There is no additional charge for this option. If this option is
terminated, all money remaining in the dollar cost averaging account will be
transferred to Fixed Account I or into the Money Market Fund if Fixed Account I
is not available.
Dollar Cost Averaging does not assure a profit and does not protect against loss
in declining markets. Dollar Cost Averaging involves continuous investment in
the selected investment option(s) regardless of fluctuating price levels of the
investment option(s). You should consider your financial ability to continue the
Dollar Cost Averaging Option through periods of fluctuating price levels.
If you participate in a Dollar Cost Averaging option, you may not also
participate in the Systematic Withdrawal Program or the Automatic Transfer
Option.
Automatic Transfer Option
Once your money has been allocated among the investment choices, the performance
of the elected options may cause your allocation to shift. You can direct us to
automatically rebalance amounts in selected investment options and Fixed Account
I to return to your original percentage allocations by selecting our Automatic
Transfer Option.
The Automatic Transfer Option is available only during the accumulation period.
You have the choice of rebalancing quarterly, semi-annually or annually.
Allocation percentages must be in whole numbers and are subject to the minimums
stated in your contract.
If you participate in the Automatic Transfer Option, the transfers made under
the program are not taken into account in determining any transfer fee. You may
not participate in the Dollar Cost Averaging Option or Systematic Withdrawal
Program if you participate in the Automatic Transfer Option.
Example:
Assume that you want your initial purchase payment split between 2
investment options. You want 80% to be in the MFS Growth With Income Series
and 20% to be in the Janus International Growth Portfolio. Over the next 2
1/2 months the domestic market does very well while the international
market performs poorly. At the end of the quarter, the MFS Growth With
Income Series now represents 86% of your holdings because of its increase
in value. If you had chosen to have your holdings rebalanced quarterly, on
the first day of the next quarter, we would sell some of your units in the
MFS Growth With Income Series to bring its value back to 80% and use the
money to buy more units in the Janus International Growth Portfolio to
increase those holdings to 20%.
Substitution and Limitation on Further Investment
We may be substitute one of the investment options you have elected with another
investment option. We would not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in an
investment option. We will give you notice of our intent to take either of these
actions.
EXPENSES
There are charges and other expenses associated with the contract that reduce
the return on your investment in the contract. These charges and expenses are:
Contract Maintenance Charge
Every year on the anniversary of the date when your contract was issued, we
deduct a $30 contract maintenance charge from your contract. We reserve the
right to change the charge but it will never be more than $50 per year. This
charge may be increased only for contracts sold after we amend the prospectus.
The charge is deducted pro rata from your selected investment options and fixed
account options. This charge is for administrative expenses associated with your
contract.
During the accumulation period, we will not deduct this charge if the value of
your contract is $50,000 or more. If you make a total withdrawal on a day other
than a contract anniversary and your contract value for the business day when
the total withdrawal is made is less than $50,000, the full contract maintenance
will be deducted at the time of the total withdrawal.
Product Expense Charge
Each business day we make a deduction for our Product Expense Charge. The
Product Expense Charge is equal to 1.40% (on an annual basis).
This charge is included in part of our calculation of the value of the
accumulation units and the annuity units. This charge is for the guarantee of
annuity rates, the death benefit, for certain expenses of the contract, and for
assuming the risk (expense risk) that the current charges will be insufficient
in the future to cover the cost of administering the contract. If the charges
under the contract are not sufficient, then we will bear the loss. We do,
however, expect to profit from this charge. We may use any profits we make from
this charge to pay for the costs of distributing the contract.
Withdrawal Charge
During the accumulation period, you can make withdrawals from your contract. We
keep track of each purchase payment. Subject to the free withdrawal amount and
other waivers discussed below, if you make a withdrawal and it has been fewer
than the stated number of years since you made your purchase payment, we will
assess a withdrawal charge.
Withdrawal Charge: (as a percentage of purchase payments withdrawn)
Contract Year
Since Receipt of Purchase Payment Withdrawal Charge
-------------------------------- -----------------
1 7%
2 7%
3 6%
4 6%
5 5%
6 4%
7 3%
8 and thereafter 0%
Each purchase payment has its own withdrawal charge period. When the
withdrawal is for only part of the value of your contract, the withdrawal
charge is deducted first from any earnings, and then from any purchase
payments in your contract.
Waiver and Reduction of the Withdrawal Charge
Free Partial Withdrawals. We do not apply a withdrawal charge against the
earnings withdrawn from your contract. Also, after the first contract year
(and during the first year under our Systematic Withdrawal Program) you may
withdraw each contract year free from any withdrawal charge an amount equal
to 10% of the greater of the following:
* your total purchase payments, less prior withdrawals, as of the
first business day of the contract year;
* or your contract value as of the business day we receive your written
notice for the withdrawal.
This right is non-cumulative and we reserve the right to limit the number of
free partial withdrawals in any contract year.
For purposes of determining whether a withdrawal charge applies, we take out
amounts from your contract in the following order:
1. the 10% free partial withdrawal amount described above;
2. purchase payments from oldest to newest; and then
3. earnings in excess of 1 and 2 above.
Waiver of Withdrawal Charges Under Terminal Illness-Confinement Benefit. Under
the conditions set out in the waiver of withdrawal charge for Terminal Illness
or Confinement Rider to your contract, if you were 75 or younger on the contract
date we will waive 100% of the withdrawal charge (25% if you were 76 or older on
the contract date) when:
* you become confined for at least 30 consecutive days; or
* you have been diagnosed with a terminal illness after the contract is
issued (which means you are not expected to live more than 12 months).
You can elect this benefit only if the contract is at least 30 days old. This
benefit varies from state to state and may not be available in your state.
Tax Charges
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. We are responsible for the payment of these
taxes and will make a deduction from the value of your contract for them. Some
of these taxes are due when the contract is issued, and others are due when
annuity payments begin. Premium taxes generally range from 0% to 4%, depending
on the state.
Transfer Fee
We will charge $25 for each additional transfer in excess of the 12 free
transfers permitted. The transfer fee is deducted from the amount which is
transferred. Transfers made at the end of the Free Look Period by us and any
transfers made pursuant to the Dollar Cost Averaging Option or Automatic
Transfer Option will not be counted in determining the application of any
transfer fee.
Income Taxes
We will deduct from your contract for any income taxes which we incur because of
the contract. At the present time, we are not making any such deductions.
Investment Option Expenses
There are deductions from and expenses paid out of the assets of the various
investment options which are described in the attached fund prospectuses.
CONTRACT VALUE
Your contract value is the sum of your interest in the various investment
options and our available fixed account options. Your interest in the investment
option(s) will vary depending upon the performance of the investment options you
choose.
Accumulation Units
In order to keep track of your contract value, we use a unit of measure called
an accumulation unit. During the annuity period of your contract we call the
unit an annuity unit. Every business day we determine the value of an
accumulation unit and an annuity unit. We do this by:
1. determining the change in investment experience (including any
charges) for the investment option from the previous business day to
the current business day;
2. subtracting our product expense charge and any other charges such as
taxes we have deducted; and
3. multiplying the previous business day's accumulation unit (or annuity
unit) value by this result.
When you make a purchase payment, we credit your contract with accumulation
units. The number of accumulation units credited is determined by dividing the
amount of the purchase payment allocated to an investment option by the value of
the accumulation unit for that investment option. When you make a withdrawal, we
debit from your contract accumulation units representing the withdrawal. We also
debit accumulation units when we deduct certain charges under the contract.
We calculate the value of an accumulation unit for each investment option after
the New York Stock Exchange closes each day and the result is reflected in the
value of your contract.
Example:
On Monday we receive an additional purchase payment of $5,000 from you. You
have told us you want this to go to the MFS Growth With Income Series. When
the New York Stock Exchange closes on that Monday, we determine that the
value of an accumulation unit for the MFS Growth With Income Series is
$13.90. We then divide $5,000 by $13.90 and credit your contract on Monday
night with 359.71 accumulation units for the MFS Growth With Income Series.
ACCESS TO YOUR MONEY
You can have access to the money in your contract:
* by making a withdrawal (either a partial or a complete withdrawal); or
* by electing to receive annuity payments; or
* by receiving a death benefit.
Withdrawals Made During the Accumulation Period
You may withdraw all, or part, of your contract value at any time during the
accumulation period. If you make a withdrawal you will receive the value of your
contract on the day you made the withdrawal, less any applicable charges.
Unless you instruct us otherwise, any partial withdrawal will be made pro-rata
from all the investment options and any fixed account option(s) you elected.
Under most circumstances, the amount of any partial withdrawal must be for at
least $500, or your entire interest in any fixed account or investment option.
We require that you have a contract value of $1,000 in any investment option or
$500 in any fixed account option after any partial withdrawal. We require that
you leave at least $10,000 in the contract after a partial withdrawal for
non-qualified contracts and $2,000 for qualified contracts. We may terminate
your contract and pay you the withdrawal value (contract value less any charges
and applicable interest adjustment for Fixed Account II) if you make a
withdrawal before the annuity date of an amount which results in your contract
value falling below the minimum amount. We will notify you of our intent to
terminate the contract. The contract will automatically terminate unless we
receive additional purchase payments in excess of the minimum amount within 30
days.
Income taxes, tax penalties and certain restrictions may apply to any withdrawal
you make.
There are limits to the amount you can withdraw from a qualified plan referred
to as a 403(b) plan (TSA). For a more complete explanation see the discussion in
the Taxes Section and the discussion in the Statement of Additional Information.
Systematic Withdrawal Program
We will make payments (deposited directly to your checking account) to you
periodically at your election (currently: monthly, quarterly, semi-annually or
annually). Withdrawals may be made from any investment option or Fixed Account
I.
Each payment must be at least $100. If there are insufficient funds in the
selected investment options or Fixed Account I, we will take amounts from
remaining investment options and fixed account options. These payments may be
subject to the withdrawal charges. See "Expenses - Withdrawal Charge."
Minimum Distribution Option. If your contract has been issued as an IRA, TSA or
other qualified plan, you may elect the Systematic Withdrawal Program. Under
this program, we will make payments to you that are designed to meet the
applicable minimum distribution requirements imposed by the Internal Revenue
Code on such qualified plans.
Income taxes, tax penalties and certain restrictions may apply to systematic
withdrawals.
DEATH BENEFIT
Death of Contract Owner During the Accumulation Period
If you or your joint owner die during the accumulation period, a death benefit
will be paid to your primary beneficiary. Upon the death of a joint owner, the
surviving joint owner, if any, will be treated as the primary beneficiary. Any
other beneficiary designation on record at the time of death will be treated as
a contingent beneficiary.
Death Benefit Amount During the Accumulation Period
The minimum guaranteed death benefit amount provided in your contract is the
greater of:
1. the total amount of purchase payments made, less any adjusted
withdrawals and applicable withdrawal charges; or
2. your contract value as of the end of the normal business day during
which we receive both due proof of death and election for the payment
method.
The adjusted withdrawal amount depends upon the relationship between the
contract value and the minimum guaranteed death benefit. If the contract value
equals or exceeds the minimum guaranteed death benefit at the time of
withdrawal, the adjusted withdrawal will equal 100% of the actual withdrawal
amount. If the contract value is less than the minimum guaranteed death benefit
at the time of withdrawal, the adjusted withdrawal will equal the actual
withdrawal times the ratio of the minimum guaranteed death benefit to the
contract value.
<TABLE>
<CAPTION>
The following examples illustrate the effect of an adjusted withdrawal under
element 1 as described above:
<S> <C> <C>
1) Purchase Payment : $200,000
Contract Value : $250,000
Minimum Guaranteed Death Benefit : $200,000
(under element 1)
Partial Withdrawal : $ 30,000
Since at the time of the partial withdrawal, the contract value ($250,000) equals
or exceeds the minimum guaranteed death benefit ($200,000), then the adjusted
withdrawal will equal the actual withdrawal ($30,000) resulting in a new minimum
guaranteed death benefit under element 1 of $170,000 ($200,000-$30,000).
2) Purchase Payments: : $200,000
Contract Value : $150,000
Minimum Guaranteed Death Benefit : $200,000
(under element 1)
Partial Withdrawal : $ 30,000
</TABLE>
Since at the time of the partial withdrawal, the contract value ($150,000)
is less then the minimum guaranteed death benefit ($200,000), then the
reduction will equal the actual withdrawal ($30,000) times the ratio of
the minimum guaranteed death benefit to the contract value
($30,000 x 200,000 = $40,000)
150,000
resulting in a new minimum guaranteed death benefit under element 1 of
$160,000 ($200,000 - $40,000).
Contract value for purposes of the death benefits is determined as of the end of
the business day during which we receive both due proof of death and an election
for the payment method. It remains in an investment option and/or any fixed
account option until distribution begins. From the time the death benefit is
determined until complete distribution is made, any amount in an investment
option will be subject to investment risk which is borne by the beneficiary.
Death Benefit Options During the Accumulation Period
Unless already selected by you, a beneficiary must elect the death benefit to be
paid under one of the following options in the event of your death during the
accumulation period. If the beneficiary is the spouse of the owner, he or she
may elect to continue the contract in his or her own name and exercise all the
owner's rights under the contract. In this event, the contract value will be
adjusted to equal the death benefit.
Option 1 - lump sum payment of the death benefit; or
Option 2 - the payment of the entire death benefit within 5 years of the date of
death of the owner or any joint owner; or
Option 3 - payment of the death benefit under an annuity option over the
lifetime of the beneficiary or over a period not extending beyond the life
expectancy of the beneficiary with distribution beginning within 1 year of the
date of your death or of any joint owner.
Any portion of the death benefit not applied under Option 3 within 1 year of the
date of your death, or that of a joint owner, must be distributed within 5 years
of the date of death.
If a lump sum payment is requested, the amount will be paid within 7 days,
unless the suspension of payments provision is in effect.
Payment to the beneficiary, in any form other than a lump sum, may only be
elected during the 60 day period beginning with the date of receipt by us of
proof of death.
Death of Contract Owner During the Annuity Period
If you or a joint owner, who is not the annuitant, dies during the annuity
period, any remaining payments under the annuity option elected will continue to
be made at least as rapidly as under the method of distribution in effect at the
time of your death. Upon your death during the annuity period, the beneficiary
becomes the owner.
Death of Annuitant
Upon the death of the annuitant, who is not the owner, during the accumulation
period, you automatically become the annuitant. You may designate a new
annuitant subject to our underwriting rules then in effect. If the owner is a
non-natural person, the death of the annuitant will be treated as the death of
the owner and a new annuitant may not be designated.
Upon the death of the annuitant during the annuity period, the death benefit, if
any, will be as specified in the annuity option elected. Death benefits will be
paid at least as rapidly as under the method of distribution in effect at the
annuitant's death.
ANNUITY PROVISIONS
Under the contract you can receive regular income payments. You can choose the
day, month and year in which those payments begin. We call that date the annuity
date. The annuity date cannot be after the 28th of any month. You can also
choose among income plans. We call those annuity payments.
Your annuity date must be at least 1 contract year from the date you purchase
the contract. Annuity payments must begin by the annuitant's 95th birthday or
earlier if required by law. The annuitant is the person whose life we look to
when we make annuity payments.
During the annuity period, you have the same investment choices you had just
before the start of the annuity period. If you do not tell us otherwise, your
annuity payments will be based on the investment allocations that were in place
on the annuity date.
General Account
During the annuity period, you can elect to have your annuity payments paid out
of our general account. We guarantee a specified interest rate used in
determining the payments. If you elect this option, the payments you receive
will remain level. This option is only available during the annuity period.
Annuity Payment Amount
If you choose to have your payments come from the General Account, the payment
will not vary. If you choose to have any portion of your annuity payment come
from the investment option(s), the dollar amount of your payment from the
investment option(s) will depend upon four things:
* the value of your contract in the investment option(s) on the annuity
date;
* the 3% assumed investment rate used in the annuity table for the
contract;
* the performance of the investment options you selected; and
* if permitted in your state and under the type of contract you have
purchased, the age and sex of the annuitant(s).
If the actual performance exceeds the 3% assumed investment rate plus the
deductions for expenses, your annuity payments will increase. Similarly, if the
actual performance is less than 3% plus the amount of the deductions, your
annuity payments will decrease.
Annuity Payment Options
You can choose one of the following annuity payment options. Annuity payments
start at least 30 days from the annuity date, provided the annuitant is alive.
Once annuity payments begin, you cannot change the annuity payment option. All
annuity payments are made to you unless you direct us otherwise. If you do not
choose an annuity payment option at the time you purchase the contract, we will
assume that you selected Option 4 with a 10 year period certain.
Option 1 - Payment Certain. Under this option we pay you the value of your
contract applied to the option in equal installments, as specified by you. The
minimum time period over which you can elect this option is 6 years. The total
payments in a year must be at least 5% of the value you apply to this option.
You may request a single lump sum payment, which is the sum of the annuity value
plus or minus any losses or gains since the annuity date, less any annuity
payments made and charges assessed during the annuity period.
Option 2 - Period Certain. Under this option we make equal payments over a
designated period between 6 and 30 years, as chosen by you. You may request a
single lump sum payment, which is the sum of the annuity value plus or minus any
losses or gains since the annuity date, less any annuity payments made and
charges assessed during the annuity period.
Option 3 - Life Annuity. Under this option we make monthly payments during the
lifetime of the annuitant and terminating with the last payment preceding
his/her death.
Option 4 - Life Annuity with a Period Certain. Under this option we make monthly
annuity payments until the later of the death of the annuitant or a designated
period between 6 and 30 years, as chosen by you. We guarantee that if, at the
death of the annuitant, payments have been made for less than a stated period,
the monthly payments will continue during the remainder of the stated period. If
the annuitant dies before we have made all of the payments within the selected
period, you may request a single lump sum payment, which is the sum of the
annuity value plus or minus any losses or gains since the annuity date, less any
annuity payments made and charges assessed during the annuity period.
Option 5 - Joint Life and Survivor Annuity. Under this option we make monthly
payments during the joint lifetime of the annuitant and another named individual
and thereafter during the lifetime of the survivor. Payments cease with the last
payment due prior to the death of the survivor.
Additional Options. We may make other options available.
TAXES
Note: We have prepared the following information on taxes as a general
discussion of the subject. It is not intended as tax advice to any individual.
You should consult your own tax adviser about your own circumstances. We have
included a more comprehensive discussion regarding taxes in the Statement of
Additional Information.
Annuity Contracts in General
Annuity contracts are a means of setting aside money for future needs - usually
retirement. Congress recognized how important saving for retirement was and
provided special rules in the Internal Revenue Code (Code) for annuities.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your annuity contract until you take the money out. This is
referred to as tax deferral. There are different rules as to how you are taxed
depending on how you take the money out and the type of contract - qualified or
non-qualified (see following sections).
Under non-qualified contracts, you, as the owner, are not taxed on increases in
the value of your contract until a distribution occurs - either as a withdrawal
or as annuity payments. When you make a withdrawal, you are taxed on the amount
of the withdrawal that is earnings. For annuity payments, different rules apply.
A portion of each annuity payment is treated as a partial return of your
purchase payments and is not taxed. The remaining portion of the annuity payment
is treated as ordinary income. How the annuity payment is divided between
taxable and non-taxable portions depends upon the period over which the annuity
payments are expected to be made. Annuity payments received after you have
received all of your purchase payments are fully includible in income.
When a non-qualified contract is owned by a non-natural person (e.g.,
corporation or certain other entities other than a trust holding the contract as
an agent for a natural person), the contract will generally not be treated as an
annuity for tax purposes.
Qualified and Non-Qualified Contracts
If you purchase the contract as an individual and not under any pension plan,
specially sponsored program or an individual retirement annuity, your contract
is referred to as a non-qualified contract.
If you purchase the contract under a pension plan, specially sponsored program,
or an individual retirement annuity, your contract is referred to as a qualified
contract. Examples of qualified plans are: Individual Retirement Annuities
(IRAs), Tax-Sheltered Annuities (sometimes referred to as 403(b) contracts), and
pension and profit-sharing plans, which include 401(k) plans and H.R. 10 Plans.
A variable annuity contract will not provide any additional tax deferral if it
is used to fund a qualified plan that is tax deferred. However, the contract has
features and benefits other than tax deferral that may make it an appropriate
investment for a qualified plan. You should consult your tax adviser regarding
these features and benefits prior to purchasing a qualified contract.
Withdrawals - Non-Qualified Contracts
If you make a withdrawal from your contract, the Code treats such a withdrawal
as first coming from earnings and then from your purchase payments. Such
withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract which
is included in income may be subject to a penalty. The amount of the penalty is
equal to 10% of the amount that is includible in income. Some withdrawals will
be exempt from the penalty. They include any amounts:
(1) paid on or after the taxpayer reaches age 59 1/2;
(2) paid after you die;
(3) paid if the taxpayer becomes totally disabled (as that term is defined
in the Code);
(4) paid in a series of substantially equal payments made annually (or
more frequently) for life or a period not exceeding life expectancy;
(5) paid under an immediate annuity; or
(6) which come from purchase payments made prior to August 14, 1982.
Withdrawals - Qualified Contracts
If you make a withdrawal from your qualified contract, a portion of the
withdrawal is treated as taxable income. This portion depends on the ratio of
the pre-tax purchase payments to the after-tax purchase payments in your
contract. If all of your purchase payments were made with pre-tax money then the
full amount of any withdrawal is includible in taxable income. Special rules may
apply to withdrawals from certain types of qualified contracts.
The Code also provides that any amount received under a qualified contract which
is included in income may be subject to a penalty. The amount of the penalty is
equal to 10% of the amount that is includible in income. (The penalty is
increased to 25% for withdrawals from SIMPLE IRAs during the first two years.)
Some withdrawals will be exempt from the penalty. They include any amounts:
(1) paid on or after you reach age 59 1/2;
(2) paid after you die;
(3) paid if you become totally disabled (as that term is defined in the
Code);
(4) paid to you after leaving your employment in a series of substantially
equal payments made annually (or more frequently) under a lifetime
annuity;
(5) paid to you after you have attained age 55 and left your employment;
(6) paid for certain allowable medical expenses (as defined in the Code);
(7) paid pursuant to a qualified domestic relations order;
(8) paid on account of an IRS levy upon the qualified contract;
(9) paid from an IRA for medical insurance (as defined in the Code);
(10) paid from an IRA for qualified higher education expenses; or
(11) up to $10,000 for qualified first time home buyer expenses (as defined
in the Code).
The exceptions in (5) and (7) above do not apply to IRAs. The exception in (4)
above applies to IRAs but without the requirement of leaving employment.
We have provided a more complete discussion in the Statement of Additional
Information.
Withdrawals - Tax-Sheltered Annuities
The Code limits the withdrawal of amounts attributable to purchase payments
made under a salary reduction agreement by owners from Tax-Sheltered Annuities.
Withdrawals can only be made when an owner:
(1) reaches age 59 1/2;
(2) leaves his/her job;
(3) dies;
(4) becomes disabled (as that term is defined in the Code); or
(5) in the case of hardship.
However, in the case of hardship, the owner can only withdraw the purchase
payments and not any earnings.
Diversification
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order to be treated as an
annuity contract. We believe that the investment options are managed so as to
comply with the requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to date
provide guidance as to the circumstances under which you, because of the degree
of control you exercise over the underlying investments, are considered the
owner of the shares of the investment options. If you are considered owner of
the shares, it will result in the loss of the favorable tax treatment for the
contract. It is unknown to what extent owners are permitted to select investment
options, to make transfers among the investment options or the number and type
of investment options owners may select from without being considered owner of
the shares. If any guidance is provided which is considered a new position, then
the guidance is generally applied prospectively. However, if such guidance is
considered not to be a new position, it may be applied retroactively. This would
mean that you, as the owner of the contract, could be treated as the owner of
the investment options.
Due to the uncertainty in this area, we reserve the right to modify the contract
in an attempt to maintain favorable tax treatment.
PERFORMANCE
We periodically advertise performance of the various investment options. We will
calculate performance by determining the percentage change in the value of an
accumulation unit by dividing the increase (decrease) for that unit by the value
of the accumulation unit at the beginning of the period. This performance number
reflects the deduction of the product expense charge and the fees and expenses
of the investment options. It does not reflect the deduction of any contract
maintenance charge or withdrawal charge. The deduction of any contract
maintenance charge or withdrawal charge would reduce the percentage increase or
make greater any percentage decrease. Any advertisement will also include
average annual total return figures which reflect the deduction of the product
expense charge, contract maintenance charge and withdrawal charges and the fees
and expenses of the investment options.
The performance will be based on the historical performance of the corresponding
investment options for the periods commencing from the date on which the
particular investment option was made available through the contracts. In
addition, for certain investment options performance may be shown for the period
commencing from the inception date of the investment option. These figures
should not be interpreted to reflect actual historical performance of the
Variable Account.
We may, from time to time, include in our advertising and sales materials, tax
deferred compounding charts and other hypothetical illustrations, which may
include comparisons of currently taxable and tax deferred investment programs,
based on selected tax brackets.
OTHER INFORMATION
The Variable Account
We established a variable account, Valley Forge Life Insurance Company Variable
Annuity Separate Account (Variable Account), to hold the assets that underlie
the contracts. Our Board of Directors adopted a resolution to establish the
Variable Account under Pennsylvania insurance law on February 12, 1996. We have
registered the Variable Account with the Securities and Exchange Commission as a
unit investment trust under the Investment Company Act of 1940.
The assets of the Variable Account are held in our name on behalf of the
Variable Account and legally belong to us. However, those assets that underlie
the contracts, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from these assets are credited to or charged against the
contracts and not against any other contracts we may issue.
Voting Rights
We are the legal owner of the investment option shares. However, we believe that
when an investment option solicits proxies in conjunction with a vote of
shareholders, it is required to obtain from you and other owners instructions as
to how to vote those shares. When we receive those instructions, we will vote
all of the shares we own in proportion to those instructions. This will also
include any shares that we own on our own behalf. Should we determine that we
are no longer required to comply with the above, we will vote the shares in our
own right.
Distributor
CNA Investor Services, Inc. ("CNAISI") serves as the distributor for the
contracts. CNAISI is located at CNA Plaza, Chicago, Illinois 60685.
Commissions will be paid to agents and broker-dealers who sell the contracts.
Such agents and broker-dealers will be paid commissions up to 6% of purchase
payments and may be paid an additional annual trail commission of up to 1% of
contract value.
Ownership
Owner. You, as the owner of the individual contract or as a certificate owner
under a group contract, have all the rights under the contract. The owner
is as designated at the time the contract is issued, unless changed. You can
change the owner at any time. A change will automatically revoke any prior
owner designation. The change request must be in writing.
Joint Owner. The contract can be owned by joint owners. Any joint owner must be
the spouse of the other owner (except where not permitted under state law). Upon
the death of either joint owner, the surviving joint owner will be the
designated beneficiary. Any other beneficiary designation at the time the
contract was issued or as may have been later changed will be treated as a
contingent beneficiary unless otherwise indicated in a written notice.
Beneficiary
The following information applies to the beneficiary:
* the beneficiary is the person(s) or entity you name to receive any
death benefit;
* the beneficiary is named at the time the contract is issued unless
changed at a later date;
* unless an irrevocable beneficiary has been named, you can change the
beneficiary at any time before you die.
Annuitant
The following information applies to the annuitant:
* you choose the annuitant at the time you buy the contract;
* you may change the annuitant prior to the annuity date;
* any change of annuitant is subject to our consent; and
* you cannot change the annuitant in a contract which is owned by a
non-individual.
Assignment
You can assign the contract at any time during your lifetime. We will not be
bound by the assignment until we receive written notice of the assignment. We
will not be liable for any payment or other action we take in accordance with
the contract before we receive notice of the assignment. An assignment may be a
taxable event.
If the contract is issued pursuant to a qualified plan, there may be limitations
on your ability to assign the contract.
Suspension of Payments or Transfers
We may be required to suspend or postpone payments for withdrawals or transfers
for any period when:
1. the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
investment options is not reasonably practicable or we cannot
reasonably value the shares of the investment options;
4. during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of owners.
We have reserved the right to defer payment for a withdrawal or transfer from
any fixed account option for the period permitted by law but not for more than
six months.
Financial Statements
Our financial statements and the financial statements of the Variable Account
have been included in the Statement of Additional Information.
Additional Information
For further information about the contract you may obtain a Statement of
Additional Information. You can call the telephone number indicated on the cover
page or you can write to us. For your convenience we have included a post card
for that purpose.
The Table of Contents of this statement is as follows:
Company
Experts
Legal Opinion
Distribution
Calculation of Performance Information
Federal Tax Status
Annuity Provisions
Financial Statements
VALLEY FORGE LIFE INSURANCE COMPANY
ATTN:
____________________________________________________________________________
Please send me, at no charge, the Statement of Additional Information
dated May 1, 2000 for the Annuity Contract issued by Valley Forge Life
Insurance Company.
(Please print or type and fill in all information)
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City State Zip Code
- --------------------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE AND
FIXED ANNUITY CONTRACT
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
AND
VALLEY FORGE LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 2000, FOR THE INDIVIDUAL
FLEXIBLE PREMIUM DEFERRED VARIABLE AND FIXED ANNUITY CONTRACT WHICH IS DESCRIBED
HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT: 100 CNA DRIVE, NASHVILLE, TN 37214, (800) 262-1755.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 2000.
TABLE OF CONTENTS
Page
COMPANY .......................................................................
EXPERTS ........................................................................
LEGAL OPINIONS..................................................................
DISTRIBUTION....................................................................
Reduction of the Withdrawal Charge.....................................
CALCULATION OF PERFORMANCE INFORMATION..........................................
Total Return...........................................................
Historical Unit Values.................................................
Reporting Agencies.....................................................
Performance Information................................................
FEDERAL TAX STATUS..............................................................
Diversification........................................................
Multiple Contracts.....................................................
Partial 1035 Exchanges.................................................
Contracts Owned by Other than Natural Persons..........................
Tax Treatment of Assignments...........................................
Income Tax Withholding.................................................
Death Benefits.........................................................
Tax Treatment of Withdrawals - Non-Qualified Contracts.................
Qualified Plans........................................................
Tax Treatment of Withdrawals - Qualified Contracts.....................
Tax-sheltered Annuities - Withdrawal Limitations.......................
ANNUITY PROVISIONS..............................................................
Variable Annuity.......................................................
Fixed Annuity..........................................................
Annuity Unit...........................................................
Net Investment Factor..................................................
Expense Guarantee......................................................
FINANCIAL STATEMENTS............................................................
COMPANY
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 86% of the outstanding common stock of CNA as of December 31,
1999.
The Company is principally engaged in the sale of life insurance and annuities.
It is licensed in the District of Columbia, Guam, Puerto Rico and all states
except New York, where we are only admitted as a reinsurer.
The Company is a Pennsylvania corporation that provides life and health
insurance, retirement plans, and related financial services to individuals and
groups.
EXPERTS
The financial statements for Valley Forge Life Insurance Company as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 included in the Statement of Additional Information which is part of
this registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements for each of the subaccounts that comprise the
Valley Forge Life Insurance Company Variable Annuity Separate Account as of and
for the year ended December 31, 1999 (for the two years ended December 31, 1999
with respect to the statements of changes in net assets) included in the
Statement of Additional Information which is part of this registration statement
and have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report appearing in the registration statement, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the federal securities and income tax laws in
connection with the Contracts.
All matters relating to Pennsylvania law pertaining to the Contracts, including
the validity of the Contracts and the Company's authority to issue Contracts,
have been passed upon by G. Stephen Wastek, Esquire, Director and Senior
Counsel.
DISTRIBUTION
CNA Investor Services, Inc. ("CNAISI") acts as the distributor. CNAISI is an
affiliate of the Company. The offering is on a continuous basis.
REDUCTION OF THE WITHDRAWAL CHARGE. The amount of the withdrawal charge on the
contracts may be reduced or eliminated when sales of the contracts are made to
individuals or to a group of individuals in a manner that results in savings of
sales expenses. The entitlement to reduction of the withdrawal charge will be
determined by the Company after examination of all the relevant factors such as:
1. The size and type of group to which sales are to be made. Generally,
the sales expenses for a larger group are less than for a smaller
group because of the ability to implement large numbers of contracts
with fewer sales contacts.
2. The total amount of purchase payments to be received. Per contract
sales expenses are likely to be less on larger purchase payments than
on smaller ones.
3. Any prior or existing relationship with the Company. Per contract
sales expenses are likely to be less when there is a prior existing
relationship because of the likelihood of implementing the contract
with fewer sales contacts.
4. Other circumstances, of which the Company is not presently aware,
which could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines that
there will be a reduction in sales expenses, the Company may provide for a
reduction of the withdrawal charge.
The withdrawal charge may be eliminated when the contracts are issued to an
officer, director or employee of the Company or any of its affiliates.
In no event will any reduction or elimination of the withdrawal charge be
permitted where the reduction or elimination will be unfairly discriminatory to
any person.
CALCULATION OF PERFORMANCE INFORMATION
TOTAL RETURN. From time to time, the Company may advertise performance data.
Such data will show the percentage change in the value of an accumulation unit
based on the performance of an investment option over a period of time, usually
a calendar year, determined by dividing the increase (decrease) in value for
that unit by the accumulation unit value at the beginning of the period.
Any such advertisement will include total return figures for the time periods
indicated in the advertisement. Such total return figures will reflect the
deduction of a 1.40% product expense charge, the contract maintenance charge,
the expenses for the underlying investment option being advertised and any
applicable withdrawal charges.
The hypothetical value of a contract purchased for the time periods described in
the advertisement will be determined by using the actual accumulation unit
values for an initial $1,000 purchase payment, and deducting any applicable
withdrawal charge to arrive at the ending hypothetical value. The average annual
total return is then determined by computing the fixed interest rate that a
$1,000 purchase payment would have to earn annually, compounded annually, to
grow to the hypothetical value at the end of the time periods described. The
formula used in these calculations is:
n
P (1 + T) = ERV
Where:
P= a hypothetical initial payment of $1,000
T= average annual total return
n= number of years
ERV= ending redeemable value at the end of the time
periods used (or fractional portion thereof) of a
hypothetical $1,000 payment made at the beginning of
the time periods used.
The Company may also advertise performance data which will be calculated in the
same manner as described above but which will not reflect the deduction of any
withdrawal charge or contract maintenance charge. The deduction of any
withdrawal charge or contract maintenance charge would reduce any percentage
increase or make greater any percentage decrease.
Owners should note that the investment results of each investment option will
fluctuate over time, and any presentation of the investment option's total
return for any period should not be considered as a representation of what an
investment may earn or what an owner's total return may be in any future period.
HISTORICAL UNIT VALUES. The Company may also show historical accumulation unit
values in certain advertisements containing illustrations. These illustrations
will be based on actual accumulation unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in accumulation unit values for any of the investment options
against established market indices such as the Standard & Poor's 500 Composite
Stock Price Index, the Dow Jones Industrial Average or other management
investment companies which have investment objectives similar to the investment
option being compared. The Standard & Poor's 500 Composite Stock Price Index is
an unmanaged, unweighted average of 500 stocks, the majority of which are listed
on the New York Stock Exchange. The Dow Jones Industrial Average is an
unmanaged, weighted average of thirty blue chip industrial corporations listed
on the New York Stock Exchange. Both the Standard & Poor's 500 Composite Stock
Price Index and the Dow Jones Industrial Average assume quarterly reinvestment
of dividends.
REPORTING AGENCIES. The Company may also distribute sales literature which
compares the performance of the Accumulation unit values of the contracts with
the unit values of variable annuities issued by other insurance companies. Such
information will be derived from the Lipper Variable Insurance Products
Performance Analysis Service, the VARDS Report or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is published
by Lipper Analytical Services, Inc., a publisher of statistical data which
currently tracks the performance of almost 4,000 investment companies. The
rankings compiled by Lipper may or may not reflect the deduction of asset-based
insurance charges. The Company's sales literature utilizing these rankings will
indicate whether or not such charges have been deducted. Where the charges have
not been deducted, the sales literature will indicate that if the charges had
been deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Roswell, Georgia and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect the
deduction of asset-based insurance charges. In addition, VARDS prepares risk
adjusted rankings, which consider the effects of market risk on total return
performance. This type of ranking may address the question as to which funds
provide the highest total return with the least amount of risk. Other ranking
services may be used as sources of performance comparison, such as
CDA/Weisenberger.
Morningstar rates a variable annuity against its peers with similar investment
objectives. Morningstar does not rate any variable annuity that has less than
three years of performance data.
PERFORMANCE INFORMATION. The Accumulation units invest in the portfolios managed
by Federated Insurance Series, The Alger American Fund, SoGen Variable Funds,
Inc., Van Eck Worldwide Insurance Trust, Variable Insurance Products Fund and
Variable Insurance Products Fund II, MFS Variable Insurance Trust, Janus Aspen
Series, Alliance Variable Products Series Fund, American Century Variable
Portfolios, Inc., Franklin Templeton Variable Insurance Product Trust, Lazard
Retirement Series and Morgan Stanley Dean Witter Universal Funds, Inc. In order
to demonstrate how the investment experience of the these portfolios affect
accumulation unit values, performance information was developed. The information
is based upon the historical experience of the portfolios and is for the periods
shown.
Future performance of the portfolios will vary and the results shown are not
necessarily representative of future results. Performance for periods ending
after those shown may vary substantially from the examples shown. The
performance of the portfolios is calculated for a specified period of time by
assuming an initial purchase payment of $1,000 allocated to the portfolio.
Performance figures for the accumulation units will reflect the product expense
charges as well as the portfolio expenses. There are also performance figures
for the accumulation units which reflect the product expense charges, contract
maintenance charge, the portfolio expenses, and assume that you make a
withdrawal at the end of the period and therefore the withdrawal charge is
reflected. The percentage increases (decreases) are determined by subtracting
the initial purchase payment from the ending value and dividing the remainder by
the beginning value. The performance may also show figures when no withdrawal is
assumed.
The following charts reflect performance information for the Investment Options
of the Variable Account for the periods shown. Chart 1 reflects performance
information commencing from the date the Variable Account first invested in the
Investment Option. Chart 2 reflects performance information commencing from the
inception date of the underlying Investment Option (which date may precede the
inception date that the Variable Account first invested in the underlying
Investment Option).
<TABLE>
<CAPTION>
Chart 1 TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999:
Column A (reflects all charges)
Variable Account
Inception
Date in
Portfolio Since
1 yr 3 yrs 5 yrs 10 yrs Inception
<S> <C> <C> <C> <C> <C>
Federated High Income
Bond Fund II 11/04/96 -6.24% -1.68% NA NA -2.49%
Federated Prime Money
Fund II 11/04/96 -4.60% -3.05% NA NA -4.14%
Federated Utility
Fund II 11/04/96 -6.80% 5.26% NA NA 4.05%
Fidelity VIP Equity-
Income 11/04/96 -2.55% 7.11% NA NA 4.69%
Fidelity VIP II Asset
Manager 11/04/96 1.81% 8.39% NA NA 5.95%
Fidelity VIP II
Contrafund 11/04/96 13.88% 16.89% NA NA 14.14%
Fidelity VIP II Index
500 11/04/96 10.44% 17.80% NA NA 14.45%
Alger American Growth 11/04/96 22.57% 25.56% NA NA 21.26%
Alger American MidCap
Growth 11/04/96 20.83% 16.25% NA NA 12.91%
Alger American Small
Capitalization 11/04/96 31.44% 13.63% NA NA 11.09%
Alger American
Leverage AllCap 05/01/00 NA NA NA NA NA
MFS Emerging Growth 11/04/96 61.96% 31.95% NA NA 26.49%
MFS Growth With Income 11/04/96 -2.22% 10.42% NA NA 7.90%
MFS Research 11/04/96 13.69% 13.53% NA NA 10.65%
MFS Total Return 11/04/96 -5.53% 3.72% NA NA 1.77%
SoGen Overseas
Variable 11/04/96 33.10% 4.83% NA NA 3.16%
Van Eck Worldwide
Emerging Markets 11/04/96 83.56% -3.06% NA NA -3.94%
Van Eck Worldwide
Hard Assets 11/04/96 NA NA NA NA -12.64%
Janus Aspen Capital
Appreciation 08/31/99 NA NA NA NA 165.10%
Janus Aspen Growth 08/31/99 NA NA NA NA 87.99%
Janus Aspen Balanced 08/31/99 NA NA NA NA 45.88%
Janus Aspen Flexible
Income 08/31/99 NA NA NA NA -1.79%
Janus Aspen Inter-
national Growth 08/31/99 NA NA NA NA 278.10%
Janus Aspen Worldwide
Growth 08/31/99 NA NA NA NA 178.83%
</TABLE>
Column B (reflects all charges except withdrawl charge)
Since
1 yr 3 yrs 5 yrs 10 yrs Inception
0.82% 4.60% NA NA 4.85%
2.59% 3.14% NA NA 3.07%
0.21% 11.98% NA NA 11.88%
4.78% 13.94% NA NA 12.57%
9.48% 15.31% NA NA 13.93%
22.45% 24.35% NA NA 22.73%
18.76% 25.32% NA NA 23.06%
31.80% 33.58% NA NA 30.39%
29.93% 23.67% NA NA 21.41%
41.33% 20.88% NA NA 19.46%
NA NA NA NA NA
74.15% 40.37% NA NA 36.01%
5.14% 17.47% NA NA 16.02%
22.24% 20.78% NA NA 18.97%
1.58% 10.34% NA NA 9.43%
43.12% 11.52% NA NA 10.92%
97.37% 3.12% NA NA 3.29%
<TABLE>
<CAPTION>
Chart 2 - TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999:
Column A (reflects all charges)
Portfolio
Inception Since
Date 1 yr 3 yrs 5 yrs 10 yrs Inception
Federated High Income
<S> <C> <C> <C> <C> <C> <C>
Bond Fund II 03/01/94 -6.24% -1.68% 3.40% NA -0.82%
Federated Prime Money
Fund II 11/21/94 -4.60% -3.05% -2.03% NA -4.10%
Federated Utility
Fund II 02/10/94 -6.80% 5.26% 7.87% NA 3.05%
Fidelity VIP Equity-
Income 10/09/86 -2.55% 7.11% 11.51% 13.14% 4.43%
Fidelity VIP II Asset
Manager 09/06/89 1.81% 8.39% 9.18% 12.09% 3.93%
Fidelity VIP II
Contrafund 01/03/95 13.88% 16.89% NA NA 17.45%
Fidelity VIP II Index
500 08/27/92 10.44% 17.80% 20.06% NA 11.02%
Alger American Growth 01/09/89 22.57% 25.56% 22.60% 21.21% 12.85%
Alger American MidCap
Growth 05/03/93 20.83% 16.25% 18.09% NA 14.32%
Alger American Small
Capitalization 09/21/88 31.44% 13.63% 14.81% 16.50% 10.76%
Alger American
Leveraged AllCap 01/25/95 33.90% 13.37% NA NA 55.50%
MFS Emerging Growth 07/24/95 61.96% 31.95% NA NA 25.02%
MFS Growth With Income 10/09/95 -2.22% 10.42% NA NA 11.29%
MFS Research 07/26/95 13.69% 13.53% NA NA 12.61%
MFS Total Return 01/03/95 -5.53% 3.72% 8.05% NA 5.80%
SoGen Overseas
Variable 02/03/97 33.10% 4.83% NA NA 4.08%
Van Eck Worldwide
Emerging Markets 12/27/95 83.56% -3.06% NA NA 0.57%
Van Eck Worldwide
Hard Assets 09/01/89 10.89% -12.24% -4.33% 1.92% -4.53%
Janus Aspen Capital
Appreciation 05/02/97 53.05% NA NA NA 44.13%
Janus Aspen Growth 09/13/93 31.96% 23.99% 21.59% NA 13.89%
Janus Aspen Balanced 09/13/93 16.17% 18.22% 16.72% NA 10.54%
Janus Aspen Flexible
Income 09/13/93 -6.88% -0.51% 3.79% NA -0.56%
Janus Aspen Inter-
national Growth 05/02/94 67.05% 26.27% 24.74% NA 17.47%
Janus Aspen Worldwide
Growth 09/13/93 50.72% 27.22% 25.07% NA 18.86%
Alliance Premier Growth 06/26/92 19.48% 27.00% 18.64% NA 10.38%
Alliance Growth and Income 01/14/91 -8.56% 1.84% 5.72% NA -0.03%
American Century VP Income &
Growth 10/30/97 8.14% NA NA NA 13.51%
American Century VP Value 05/01/96 -18.97% -5.36% NA NA -4.18%
Templeton Developing Markets
Securities* 03/01/96 38.55% -13.26% NA NA -14.29%
Templeton Asset Strategy** 08/24/88 -4.70% -4.26% 1.29% 5.64% -1.27%
Lazard Retirement Equity 03/19/98 -4.37% NA NA NA -1.94%
Lazard Retirement Small Cap 11/04/97 -5.46% NA NA NA -9.54%
Morgan Stanley International
Magnum 01/02/97 13.36% NA NA NA 2.32%
Morgan Stanley Emerging Markets 10/01/96 79.31% 4.18% NA NA 1.45%
</TABLE>
<TABLE>
<CAPTION>
Column B (reflects all charges except Column C
surrender) Annual
Percentage
Change Calendar
Year Return
Since
1 yr 3 yrs 5 yrs 10 yrs Inception 1998 1999
<S> <C> <C> <C> <C> <C> <C>
0.82% 4.60% 8.86% NA 6.64% 1.19% 0.82%
2.59% 3.14% 3.13% NA 3.11% 3.41% 2.59%
0.21% 11.98% 13.56% NA 10.81% 12.26% 0.21%
4.78% 13.94% 17.39% 13.14% 12.29% 10.48% 4.78%
9.48% 15.31% 14.94% 12.09% 11.75% 15.67% 9.48%
22.45% 24.35% NA NA 26.30% 28.23% 22.45%
18.76% 25.32% 26.39% NA 19.37% 26.47% 18.76%
31.80% 33.58% 29.07% 21.21% 21.35% 45.91% 31.80%
29.93% 23.67% 24.32% NA 22.92% 28.40% 29.93%
41.33% 20.88% 20.86% 16.50% 19.09% 13.85% 41.33%
38.04% 20.60% NA NA 67.17% 48.43% 17.94%
74.15% 40.37% NA NA 34.43% 32.21% 74.15%
5.14% 17.47% NA NA 19.67% 20.54% 5.14%
22.24% 20.78% NA NA 21.09% 21.60% 22.24%
1.58% 10.34% 13.75% NA 13.76% 10.62% 1.58%
43.12% 11.52% NA NA 11.92% 0.66% 43.12%
97.37% 3.12% NA NA 8.14% -36.22% 97.37%
19.24% -6.63% 0.71% 1.92% 2.65% -29.71% 19.24%
64.57% NA NA NA 54.98% 55.82% 64.57%
41.89% 31.90% 28.00% NA 22.46% 33.69% 41.89%
24.92% 25.77% 22.88% NA 18.86% 32.34% 24.92%
0.13% 5.85% 9.27% NA 6.92% 7.53% 0.13%
79.63% 34.33% 31.32% NA 26.32% 15.54% 79.63%
62.06% 35.34% 31.66% NA 27.81% 27.05% 62.06%
28.47% 35.10% 24.90% NA 18.69% 45.69% 28.47%
-1.67% 8.34% 11.30% NA 7.49% 8.00% -1.67%
16.28% NA NA NA 22.05% 23.97% 16.28%
-12.87% 0.68% NA NA 3.04% -4.29% -12.87%
48.98% -7.73% NA NA -7.84% -23.78% 48.98%
2.47% 1.85% 6.63% 5.64% 6.16% -1.18% 2.47%
2.83% NA NA NA 5.44% NA 2.83%
1.66% NA NA NA -2.74% -4.65% 1.66%
21.89% NA NA NA 10.02% 6.62% 21.89%
92.81% 10.83% NA NA 9.09% -25.69% 92.81%
</TABLE>
*Previously, Templeton Developing Markets Fund. Effective May 1, 2000, the
Templeton Developing Markets Securities Fund merged into the Templeton
Developing Markets Equity Fund. Performance shown reflects historical
performance and inception date of the Templeton Developing Markets Securities
Fund.
**Previously, Templeton Asset Allocation Fund. Effective May 1, 2000, the
Templeton Asset Strategy Fund merged into the Templeton Global Asset Allocation
Fund. Performance shown reflects historical performance and inception dates of
the Templeton Asset Strategy Fund.
FEDERAL TAX STATUS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY
OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF THE CONTRACTS.
PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE TREATED AS
"ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER
UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL
RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO
ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS.
GENERAL. Section 72 of the Code governs taxation of annuities in general. An
Owner is not taxed on increases in the value of a Contract until distribution
occurs, either in the form of a lump sum payment or as annuity payments under
the Annuity Option selected. For a lump sum payment received as a total
withdrawal, the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For Non-Qualified Contracts, this cost basis is
generally the purchase payments, while for Qualified Contracts there may be no
cost basis. The taxable portion of the lump sum payment is taxed at ordinary
income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includible in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Contract (adjusted for any period or refund feature) bears
to the expected return under the Contract. The exclusion amount for payments
based on a variable annuity option is determined by dividing the cost basis of
the Contract (adjusted for any period certain or refund guarantee) by the number
of years over which the annuity is expected to be paid. Payments received after
the investment in the Contract has been recovered i.e. when the total of the
excludable amount equals the investment in the Contract) are fully taxable. The
taxable portion is taxed at ordinary income tax rates. For certain types of
Qualified Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Owners, Annuitants and Beneficiaries under the Contracts
should seek competent financial advice about the tax consequences of any
distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DIVERSIFICATION. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable annuity contracts. The Code
provides that a variable annuity contract will not be treated as an annuity
contract for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the Contract as an annuity contract would result in the imposition of federal
income tax to the Owner with respect to earnings allocable to the Contract prior
to the receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contract meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the investment
options underlying variable contracts such as the Contract. The Regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the Regulations, an investment option will be deemed adequately
diversified if: (1) no more than 55% of the value of the total assets of the
option is represented by any one investment; (2) no more than 70% of the value
of the total assets of the option is represented by any two investments; (3) no
more than 80% of the value of the total assets of the option is represented by
any three investments; and (4) no more than 90% of the value of the total assets
of the option is represented by any four investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all investment options underlying the Contracts will be
managed in such a manner as to comply with these diversification requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered as the owner of the assets of the Separate
Account resulting in the imposition of federal income tax to the Owner with
respect to earnings allocable to the Contract prior to receipt of payments under
the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owners being
retroactively determined to be the owners of the assets of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS. The Code provides that multiple non-qualified annuity
contracts which are issued within a calendar year to the same contract owner by
one company or its affiliates are treated as one annuity contract for purposes
of determining the tax consequences of any distribution. Such treatment may
result in adverse tax consequences including more rapid taxation of the
distributed amounts from such combination of contracts. For purposes of this
rule, contracts received in a Section 1035 exchange will be considered issued in
the year of the exchange. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
PARTIAL 1035 EXCHANGES. Section 1035 of the Code provides that an annuity
contract may be exchanged in a tax-free transaction for another annuity
contract. Historically, it was presumed that only the exchange of an entire
contract, as opposed to a partial exchange, would be accorded tax-free status.
In 1998 in CONWAY VS. COMMISSIONER, the Tax Court held that the direct transfer
of a portion of an annuity contract into another annuity contract qualified as
a non-taxable exchange. On November 22, 1999, the Internal Revenue Service
filed an Action on Decision which indicated that it acquiesced in the Tax Court
decision in CONWAY. However, in its acquiesence with the decision of the Tax
Court, the Internal Revenue Service stated that it will challenge transactions
where taxpayers enter into a series of partial exchanges and annuitizations
as part of a design to avoid application of the 10% premature distribution
penalty or other limitations imposed on annuity contracts under the Code. In
the absence of further guidance from the Internal Revenue Service it is unclear
what specific types of partial exchange designs and transactions will be
challenged by the Internal Revenue Service. Due to the uncertainty in this
area, owners should consult their own tax advisers prior to entering into a
partial exchange of an annuity contract.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS. Under Section 72(u) of the Code,
the investment earnings on premiums for the Contracts will be taxed currently to
the Owner if the Owner is a non-natural person, e.g., a corporation or certain
other entities. Such Contracts generally will not be treated as annuities for
federal income tax purposes. However, this treatment is not applied to a
Contract held by a trust or other entity as an agent for a natural person nor to
Contracts held by Qualified Plans. Purchasers should consult their own tax
counsel or other tax adviser before purchasing a Contract to be owned by a
non-natural person.
TAX TREATMENT OF ASSIGNMENTS. An assignment, pledge, or other transfer of a
Contract may be a taxable event. Owners should therefore consult competent tax
advisers should they wish to assign, pledge, or transfer their Contracts.
DEATH BENEFITS. Any death benefits paid under the Contract are taxable to the
beneficiary. The rules governing the taxation of payments from an annuity
contract, as discussed above, generally apply to the payment of death benefits
and depend on whether the death benefits are paid as a lump sum or as annuity
payments. Estate taxes may also apply.
INCOME TAX WITHHOLDING. All distributions or the portion thereof which is
includible in the gross income of the Owner are subject to federal income tax
withholding. Generally, amounts are withheld from periodic payments at the same
rate as wages and at the rate of 10% from non-periodic payments. However, the
Owner, in most cases, may elect not to have taxes withheld or to have
withholding done at a different rate.
Certain distributions from retirement plans qualified under Section 401 or
Section 403(b) of the Code, which are not directly rolled over to another
eligible retirement plan or individual retirement account or individual
retirement annuity, are subject to a mandatory 20% withholding for federal
income tax. The 20% withholding requirement generally does not apply to: a) a
series of substantially equal payments made at least annually for the life or
life expectancy of the participant or joint and last survivor expectancy of the
participant and a designated beneficiary or for a specified period of 10 years
or more; or b) distributions which are required minimum distributions; or c) the
portion of the distributions not includible in gross income (i.e. returns of
after-tax contributions); or d) hardship distributions. Participants should
consult their own tax counsel or other tax adviser regarding withholding
requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS. Section 72 of the Code
governs treatment of distributions from annuity contracts. It provides that if
the Contract Value exceeds the aggregate purchase payments made, any amount
withdrawn will be treated as coming first from the earnings and then, only after
the income portion is exhausted, as coming from the principal. Withdrawn
earnings are includible in gross income. It further provides that a ten percent
(10%) penalty will apply to the income portion of any premature distribution.
However, the penalty is not imposed on amounts received: (a) after the taxpayer
reaches age 59 1/2; (b) after the death of the Owner; (c) if the taxpayer is
totally disabled (for this purpose disability is as defined in Section 72(m)(7)
of the Code); (d) in a series of substantially equal periodic payments made not
less frequently than annually for the life (or life expectancy) of the taxpayer
or for the joint lives (or joint life expectancies) of the taxpayer and his or
her Beneficiary; (e) under an immediate annuity; or (f) which are allocable to
purchase payments made prior to August 14, 1982.
With respect to (d) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception was used.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified Contracts.
(See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS. The Contracts offered herein are designed to be suitable for
use under various types of Qualified Plans. Taxation of participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Owners, Annuitants and Beneficiaries are cautioned that benefits
under a Qualified Plan may be subject to the terms and conditions of the plan
regardless of the terms and conditions of the Contracts issued pursuant to the
plan. Some retirement plans are subject to distribution and other requirements
that are not incorporated into the Company's administrative procedures. The
Company is not bound by the terms and conditions of such plans to the extent
such terms conflict with the terms of a Contract, unless the Company
specifically consents to be bound. Owners, Annuitants and Beneficiaries are
responsible for determining that contributions, distributions and other
transactions with respect to the Contracts comply with applicable law.
A variable annuity contract will not provide any additional tax deferral if it
is used to fund a qualified plan that is tax deferred. However, the contract has
features and benefits other than tax deferral that may make it an appropriate
investment for a qualified plan. Following are general descriptions of the types
of Qualified Plans with which the Contracts may be used. Such descriptions are
not exhaustive and are for general informational purposes only. The tax rules
regarding Qualified Plans are very complex and will have differing applications
depending on individual facts and circumstances. Each purchaser should obtain
competent tax advice prior to purchasing a Contract issued under a Qualified
Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon withdrawal or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to withdrawals from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee v.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection with
certain Qualified Plans will utilize annuity tables which do not differentiate
on the basis of sex. Such annuity tables will also be available for use in
connection with certain non-qualified deferred compensation plans.
A. TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities" by
public schools and certain charitable, educational and scientific organizations
described in Section 501(c)(3) of the Code. These qualifying employers may make
contributions to the Contracts for the benefit of their employees. Such
contributions are not includible in the gross income of the employees until the
employees receive distributions from the Contracts. The amount of contributions
to the tax-sheltered annuity is limited to certain maximums imposed by the Code.
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions, nondiscrimination and withdrawals. (See "Tax
Treatment of Withdrawals - Qualified Contracts" and "Tax-Sheltered Annuities -
Withdrawal Limitations" below.) Any employee should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
B. INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which will be deductible from the individual's taxable income. These IRAs
are subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Under certain conditions, distributions from other IRAs and other Qualified
Plans may be rolled over or transferred on a tax-deferred basis into an IRA.
Sales of Contracts for use with IRAs are subject to special requirements imposed
by the Code, including the requirement that certain informational disclosure be
given to persons desiring to establish an IRA. Purchasers of Contracts to be
qualified as Individual Retirement Annuities should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
ROTH IRAS
Section 408A of the Code provides that beginning in 1998, individuals may
purchase a new type of non-deductible IRA, known as a Roth IRA. Purchase
payments for a Roth IRA are limited to a maximum of $2,000 per year and are not
deductible from taxable income. Lower maximum limitations apply to individuals
with adjusted gross incomes between $95,000 and $110,000 in the case of single
taxpayers, between $150,000 and $160,000 in the case of married taxpayers filing
joint returns, and between $0 and $10,000 in the case of married taxpayers
filing separately. An overall $2,000 annual limitation continues to apply to all
of a taxpayer's IRA contributions, including Roth IRA and non-Roth IRAs.
Qualified distributions from Roth IRAs are free from federal income tax. A
qualified distribution requires that an individual has held the Roth IRA for at
least five years and, in addition, that the distribution is made either after
the individual reaches age 59 1/2, on the individual's death or disability, or
as a qualified first-time home purchase, subject to a $10,000 lifetime maximum,
for the individual, a spouse, child, grandchild, or ancestor. Any distribution
which is not a qualified distribution is taxable to the extent of earnings in
the distribution. Distributions are treated as made from contributions first and
therefore no distributions are taxable until distributions exceed the amount of
contributions to the Roth IRA. The 10% penalty tax and the regular IRA
exceptions to the 10% penalty tax apply to taxable distributions from a Roth
IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA. Furthermore,
an individual may make a rollover contribution from a non-Roth IRA to a Roth
IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual must
pay tax on any portion of the IRA being rolled over that represents income or a
previously deductible IRA contribution.
Purchasers of Contracts to be qualified as a Roth IRA should obtain competent
tax advice as to the tax treatment and suitability of such an investment.
SIMPLE IRAs
Section 408(p) of the Code permits certain employers (generally those with less
that 100 employees) to establish a retirement program for employees using
Savings Incentive Match Plan Retirement Annuities ("SIMPLE IRA"). SIMPLE IRA
programs can only be established with the approval of and adoption by the
employer of the Contract Owner of the SIMPLE IRA. Contributions to SIMPLE IRAs
will be made pursuant to a salary reduction agreement in which an Owner would
authorize his/her employer to deduct a certain amount from his/her pay and
contribute it directly to the SIMPLE IRA. The Owner's employer will also make
contributions to the SIMPLE IRA in amounts based upon certain elections of the
employer. The only contributions that can be made to a SIMPLE IRA are salary
reduction contributions and employer contributions as described above, and
rollover contributions from other SIMPLE IRAs. Purchasers of Contracts to be
qualified as SIMPLE IRAs should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
C. PENSION AND PROFIT-SHARING PLANS
Sections 401(a) and 401(k) of the Code permit employers, including self-employed
individuals, to establish various types of retirement plans for employees. These
retirement plans may permit the purchase of the Contracts to provide benefits
under the Plan. Contributions to the Plan for the benefit of employees will not
be includible in the gross income of the employees until distributed from the
Plan. The tax consequences to participants may vary depending upon the
particular plan design. However, the Code places limitations and restrictions on
all Plans including on such items as: amount of allowable contributions; form,
manner and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, and withdrawals. (See
"Tax Treatment of Withdrawals Qualified Contracts" below.) Purchasers of
Contracts for use with Pension or Profit Sharing Plans should obtain competent
tax advice as to the tax treatment and suitability of such an investment.
D. GOVERNMENT AND TAX-EXEMPT ORGANIZATION'S DEFERRED COMPENSATION PLAN UNDER
SECTION 457
Under Code provisions, employees and independent contractors performing services
for state and local governments and other tax-exempt organizations may
participate in Deferred Compensation Plans under Section 457 of the Code. The
amounts deferred under a Plan which meets the requirements of Section 457 of the
Code are not taxable as income to the participant until paid or otherwise made
available to the participant or beneficiary. As a general rule, the maximum
amount which can be deferred in any one year is the lesser of $8,000 or 33 1/3
percent of the participant's includible compensation. However, in limited
circumstances, the plan may provide for additional catch-up contributions in
each of the last three years before normal retirement age. Furthermore, the Code
provides additional requirements and restrictions regarding eligibility and
distributions.
All of the assets and income of a Plan established by a governmental employer
after August 20, 1996, must be held in trust for the exclusive benefit of
participants and their beneficiaries. For this purpose, custodial accounts and
certain annuity contracts are treated as trusts. Plans that were in existence on
August 20, 1996 may be amended to satisfy the trust and exclusive benefit
requirements any time prior to January 1, 1999, and must be amended not later
than that date to continue to receive favorable tax treatment. The requirement
of a trust does not apply to amounts under a Plan of a tax exempt
(non-governmental) employer. In addition, the requirement of a trust does not
apply to amounts under a Plan of a governmental employer if the Plan is not an
eligible plan within the meaning of section 457(b) of the Code. In the absence
of such a trust, amounts under the plan will be subject to the claims of the
employer's general creditors.
In general, distributions from a Plan are prohibited under section 457 of the
Code unless made after the participating employee:
attains age 70 1/2,
separates from service,
dies, or
suffers an unforeseeable financial emergency as defined in the Code.
Under present federal tax law, amounts accumulated in a Plan under section 457
of the Code cannot be transferred or rolled over on a tax-deferred basis except
for certain transfers to other Plans under section 457.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS. In the case of a withdrawal
under a Qualified Contract, a ratable portion of the amount received is taxable,
generally based on the ratio of the individual's cost basis to the individual's
total accrued benefit under the retirement plan. Special tax rules may be
available for certain distributions from a Qualified Contract. Section 72(t) of
the Code imposes a 10% penalty tax on the taxable portion of any distribution
from qualified retirement plans, including Contracts issued and qualified under
Code Sections 401 (Pension and Profit-Sharing Plans), 403(b)(Tax-Sheltered
Annuities) and 408 and 408A (Individual Retirement Annuities). This penalty is
increased to 25% instead of 10% for SIMPLE IRAs if distribution occurs within
the first two years after the Owner first participated in the SIMPLE IRA. To the
extent amounts are not includible in gross income because they have been rolled
over to an IRA or to another eligible Qualified Plan, no tax penalty will be
imposed. The tax penalty will not apply to the following distributions: (a) if
distribution is made on or after the date on which the Owner or Annuitant (as
applicable) reaches age 59 1/2; (b) distributions following the death or
disability of the Owner or Annuitant (as applicable) (for this purpose
disability is as defined in Section 72(m) (7) of the Code); (c) after separation
from service, distributions that are part of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the Owner or Annuitant (as applicable) or the joint lives (or
joint life expectancies) of such Owner or Annuitant (as applicable) and his or
her designated Beneficiary; (d) distributions to an Owner or Annuitant (as
applicable) who has separated from service after he has attained age 55; (e)
distributions made to the Owner or Annuitant (as applicable) to the extent such
distributions do not exceed the amount allowable as a deduction under Code
Section 213 to the Owner or Annuitant (as applicable) for amounts paid during
the taxable year for medical care; (f) distributions made to an alternate payee
pursuant to a qualified domestic relations order; (g) made on account of an IRS
levy upon the Qualified Contract; (h) distributions from an Individual
Retirement Annuity for the purchase of medical insurance (as described in
Section 213(d)(1)(D) of the Code) for the Owner or Annuitant (as applicable) and
his or her spouse and dependents if the Owner or Annuitant (as applicable) has
received unemployment compensation for at least 12 weeks (this exception will no
longer apply after the Owner or Annuitant (as applicable) has been re-employed
for at least 60 days); (i) distributions from an Individual Retirement Annuity
made to the Owner or Annuitant (as applicable) to the extent such distributions
do not exceed the qualified higher education expenses (as defined in Section
72(t)(7) of the Code) of the Owner or Annuitant (as applicable) for the taxable
year; and (j) distributions from an Individual Retirement Annuity made to the
Owner or Annuitant (as applicable) which are qualified first-time home buyer
distributions (as defined in Section 72(t)(8)of the Code.) The exceptions stated
in (d) and (f) above do not apply in the case of an Individual Retirement
Annuity. The exception stated in (c) above applies to an Individual Retirement
Annuity without the requirement that there be a separation from service.
With respect to (c) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years on which the exception was used.
Generally, distributions from a qualified plan must begin no later than April
1st of the calendar year following the later of (a) the year in which the
employee attains age 70 1/2 or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed. There are no required distributions from a Roth IRA prior to the
death of the owner.
TAX-SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS. The Code limits the withdrawal
of amounts attributable to contributions made pursuant to a salary reduction
agreement (as defined in Section 403(b)(11) of the Code) to circumstances only
when the Owner: (1) attains age 59 1/2; (2) separates from service; (3) dies;
(4) becomes disabled (within the meaning of Section 72(m)(7) of the Code); or
(5) in the case of hardship. However, withdrawals for hardship are restricted to
the portion of the Owner's Contract Value which represents contributions made by
the Owner and does not include any investment results. The limitations on
withdrawals became effective on January 1, 1989 and apply only to salary
reduction contributions made after December 31, 1988, to income attributable to
such contributions and to income attributable to amounts held as of December 31,
1988. The limitations on withdrawals do not affect transfers between
Tax-Sheltered Annuity Plans. Owners should consult their own tax counsel or
other tax adviser regarding any distributions.
ANNUITY PROVISIONS
VARIABLE ANNUITY. A variable annuity is an annuity with payments which: (1) are
not predetermined as to dollar amount; and (2) will vary in amount with the net
investment results of the applicable investment option(s) of the separate
account. At the annuity calculation date, the contract value in each investment
option will be applied to the applicable annuity tables. The annuity table used
will depend upon the annuity option chosen. The dollar amount of annuity
payments after the first is determined as follows:
(1) the dollar amount of the first annuity payment is divided by the value
of an annuity unit as of the annuity calculation date. This
establishes the number of annuity units for each monthly payment. The
number of annuity units remains fixed during the annuity payment
period.
(2) the fixed number of annuity units per payment in each subaccount is
multiplied by the annuity unit value as of the annuity calculation
date. This result is the dollar amount of the payment.
The total dollar amount of each variable annuity payment is the sum of all
investment option variable annuity payments.
The Company determines the amount of variable annuity payments, including the
first, no more than ten (10) business days prior to the payment date. The
payment date must be the same day each month as the date selected for the
annuity date, i.e. the first or the fifteenth.
FIXED ANNUITY. A fixed annuity is a series of payments made during the annuity
period which are guaranteed as to dollar amount by the Company and do not vary
with the investment experience of the separate account. The general account
value as of the annuity calculation date will be used to determine the fixed
annuity monthly payment. The first monthly annuity payment will be based upon
the annuity option elected and the appropriate annuity option table. Fixed
annuity payments will remain level.
ANNUITY UNIT. The value of an annuity unit for each investment option was
arbitrarily set initially at $10. This was done when the first investment option
shares were purchased. The investment option annuity unit value for any business
day is determined by multiplying the investment option annuity unit value for
the immediately preceding business day by the product of the Net Investment
Factor for the business day for which the annuity unit value is being
calculated, and an amount equivalent to the daily assumed investment factor.
NET INVESTMENT FACTOR. The Net Investment Factor for any investment option for
any business day is determined by dividing:
(a) the accumulation unit value as of the close of the current business
day, by
(b) the accumulation unit value as of the close of the immediately
preceding business day.
The Net Investment Factor may be greater or less than one, as the annuity unit
value may increase or decrease.
EXPENSE GUARANTEE. The Company guarantees that the dollar amount of each annuity
payment after the first annuity payment will not be affected by variations in
actual mortality or expense experience.
FINANCIAL STATEMENTS
The financial statements of the Company included herein should be considered
only as bearing upon the ability of the Company to meet its obligations
under the contracts. The financial statements of the Variable Account are
also included herein.
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
To 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
the subaccounts of Valley Forge Life Insurance Company Variable Annuity Separate
Account (the "Account") as of December 31, 1999, the statements of operations
for the year ended December 31, 1999, and changes in net assets for the two
years ended December 31, 1999. The subaccounts that collectively comprise the
Account are the Federated Prime Money Fund II, Federated Utility Fund II,
Federated High Income Bond Fund II, Fidelity Variable Insurance Products Fund
Equity-Income Portfolio, Fidelity Variable Insurance Products Fund II Asset
Manager Portfolio, Fidelity Variable Insurance Products Fund II Index 500
Portfolio, Fidelity Variable Insurance Products Fund II Contrafund Portfolio,
The Alger American Fund Small Capitalization Portfolio, The Alger American
Growth Portfolio, The Alger American MidCap Growth Portfolio, MFS Emerging
Growth Series, MFS Research Series, MFS Growth with Income Series, MFS Limited
Maturity Series, MFS Total Return Series, SoGen Overseas Variable Fund, Van Eck
Worldwide Hard Assets, Van Eck Emerging Markets Fund, Janus Aspen Capital
Appreciation Portfolio, Janus Aspen Growth Portfolio, Janus Aspen Balanced
Portfolio, Janus Aspen Flexible Income Portfolio, Janus Aspen International
Growth Portfolio and Janus Aspen World Wide Growth Portfolio. These financial
statements are the responsibility of the Account'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
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1999. 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 each of the subaccounts that
comprise the Account as of December 31, 1999, the results of their operations
for the year ended December 31, 1999, and the changes in their net assets for
the two years ended December 31, 1999, are in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 24, 2000
1
<PAGE> 2
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
FEDERATED FEDERATED FIDELITY FIDELITY
PRIME FEDERATED HIGH EQUITY- ASSET FIDELITY FIDELITY
MONEY UTILITY INCOME BOND INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1999 FUND II FUND II FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at
market value (See
Supplemental cost
information below) $29,703,202 $ 3,355,716 $4,861,406 $8,012,656 $ 5,992,679 $ 24,349,701 $11,949,857
----------- ----------- ---------- ---------- ----------- ------------ -----------
TOTAL ASSETS 29,703,202 3,355,716 4,861,406 8,012,656 5,992,679 24,349,701 11,949,857
----------- ----------- ---------- ---------- ----------- ------------ -----------
LIABILITIES:
Payable for fund
withdrawals and
surrenders (34,878) (107,868) (4,173) (51,065) (105,715) (94,018) (120,178)
----------- ----------- ---------- ---------- ----------- ------------ -----------
TOTAL LIABILITIES (34,878) (107,868) (4,173) (51,065) (105,715) (94,018) (120,178)
----------- ----------- ---------- ---------- ----------- ------------ -----------
NET ASSETS $29,668,324 $ 3,247,848 $4,857,233 $7,961,591 $ 5,886,964 $ 24,255,683 $11,829,679
=========== =========== ========== ========== =========== ============ ===========
SUPPLEMENTAL COST INFORMATION:
Investments, at cost:
$29,668,324 $ 3,262,612 $5,061,507 $7,724,362 $ 5,835,260 $ 20,734,923 $ 9,927,803
=========== =========== ========== ========== =========== ============ ===========
<CAPTION>
JANUS JANUS JANUS JANUS
VAN ECK ASPEN JANUS JANUS ASPEN ASPEN ASPEN
EMERGING CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WORLD WIDE
MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------- ---- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments,
at market value
(See Supplemental
cost information
below) $1,085,079 $ 8,222,654 $ 2,866,575 $3,580,814 $ 260,415 $ 724,430 $2,733,573
---------- ------------- ------------ ---------- --------- --------- ----------
TOTAL ASSETS 1,085,079 8,222,654 2,866,575 3,580,814 260,415 724,430 2,733,573
---------- ------------- ------------ ---------- --------- --------- ----------
LIABILITIES:
Payable for fund
withdrawals and
surrenders (1,990) -- (863) -- (54,538) (91) (78)
---------- ------------- ------------ ---------- --------- --------- ----------
TOTAL LIABILITIES (1,990) -- (863) -- (54,538) (91) (78)
---------- ------------- ------------ ---------- --------- --------- ----------
NET ASSETS $1,083,089 $ 8,222,654 $ 2,865,712 $3,580,814 $ 205,877 $ 724,339 $2,733,495
========== ============= ============ ========== ========= ========= ==========
SUPPLEMENTAL COST
INFORMATION:
Investments, at
cost: $ 621,316 $ 6,460,434 $ 2,564,139 $3,357,450 $ 202,939 $ 618,384 $2,394,255
========== ============= ============ ========== ========= ========= ==========
</TABLE>
See accompanying Notes to Financial Statements.
2
<PAGE> 3
<TABLE>
<CAPTION>
THE ALGER
AMERICAN THE ALGER MFS VAN ECK
SMALL THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE
CAPITALI- AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD
ZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND
- --------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$3,931,611 $19,149,543 $3,883,853 $10,768,176 $ 4,694,705 $5,275,194 $2,127,072 $5,011,714 $3,323,165 $ 410,436
- ---------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
3,931,611 19,149,543 3,883,853 10,768,176 4,694,705 5,275,194 2,127,072 5,011,714 3,323,165 410,436
- ---------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
-- (25,509) (20,216) -- (33,341) (42,329) (142,042) (151,324) -- (46,638)
- ---------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
-- (25,509) (20,216) -- (33,341) (42,329) (142,042) (151,324) -- (46,638)
- ---------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
$3,931,611 $19,124,034 $3,863,637 $10,768,176 $ 4,661,364 $5,232,865 $1,985,030 $4,860,390 $3,323,165 $ 363,798
========== =========== ========== =========== =========== ========== ========== ========== ========== =========
$2,998,780 $16,042,433 $3,187,774 $ 7,168,784 $ 3,838,648 $4,985,879 $2,034,696 $4,927,674 $2,632,373 $ 328,321
========== =========== ========== =========== =========== ========== ========== ========== ========== =========
</TABLE>
See accompanying Notes to Financial Statements.
3
<PAGE> 4
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIDELITY
FOR THE YEAR FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
ENDED PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1999 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------- ------- ------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 706,558 $ 149,669 $ 304,785 $ 216,369 $ 180,618 $ 190,903 $ 161,610
----------- ----------- ---------- ---------- ----------- ------------ -----------
706,558 149,669 304,785 216,369 180,618 190,903 161,610
----------- ----------- ---------- ---------- ----------- ------------ -----------
Expenses:
Mortality and expense
risk and
administration
charges 218,056 36,756 52,594 91,915 47,651 236,504 99,358
----------- ----------- ---------- ---------- ----------- ------------ -----------
218,056 36,756 52,594 91,915 47,651 236,504 99,358
----------- ----------- ---------- ---------- ----------- ------------ -----------
NET INVESTMENT
INCOME (LOSS) 488,502 112,913 252,191 124,454 132,967 (45,601) 62,252
----------- ----------- ---------- ---------- ----------- ------------ -----------
Investment gains and
(losses):
Net realized gains
(losses) - 10,509 (126,349) 27,187 45,050 1,086,783 251,862
Net unrealized gains
(losses) - (89,449) (183,228) 37,873 315,175 2,357,042 1,425,059
----------- ----------- ---------- ---------- ----------- ------------ -----------
NET REALIZED AND
UNREALIZED
INVESTMENT GAINS
(LOSSES) - (78,940) (309,577) 65,060 360,225 3,443,825 1,676,921
----------- ----------- ---------- ---------- ----------- ------------ -----------
NET INCREASE
(DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS $ 488,502 $ 33,973 $ (57,386) $ 189,514 $ 493,192 $ 3,398,224 $ 1,739,173
=========== =========== ========== ========== =========== ============ ===========
JANUS JANUS JANUS JANUS
VAN ECK ASPEN JANUS JANUS ASPEN ASPEN ASPEN
EMERGING CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WORLD WIDE
FOR THE YEAR ENDED MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------- ---- --------- --------- --------- --------- --------- ---------
Investment income:
Dividend income - - - - - - -
---------- ------------- ------------ ---------- --------- --------- ----------
- - - - - - -
---------- ------------- ------------ ---------- --------- --------- ----------
Expenses:
Mortality and expense
risk and
administration
charges $ 8,211 $ 19,876 $ 5,105 $ 4,713 $ 324 $ 664 $ 3,010
---------- ------------- ------------ ---------- --------- --------- ----------
8,211 19,876 5,105 4,713 324 664 3,010
---------- ------------- ------------ ---------- --------- --------- ----------
NET INVESTMENT
INCOME (LOSS) (8,211) (19,876) (5,105) (4,713) (324) (664) (3,010)
---------- ------------- ------------ ---------- --------- --------- ----------
Investment gains and
(losses):
Net realized gains
(losses) (10,144) 17,638 3,441 41 (829) 1,668 157
Net unrealized gains
(losses) 526,239 1,762,220 301,573 223,364 2,938 105,955 339,240
---------- ------------- ------------ ---------- --------- --------- ----------
NET REALIZED
AND UNREALIZED
INVESTMENT
GAINS
(LOSSES) 516,095 1,779,858 305,014 223,405 2,109 107,623 339,397
---------- ------------- ------------ ---------- --------- --------- ----------
NET INCREASE
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS $ 507,884 $ 1,759,982 $ 299,909 $ 218,692 $ 1,785 $ 106,959 $ 336,387
========== ============= ============ ========== ========= ========= ==========
</TABLE>
See accompanying Notes to Financial Statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
THE ALGER
AMERICAN THE ALGER MFS VAN ECK
SMALL THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE
CAPITALI- AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD
ZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND
- --------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 240,850 $ 958,176 $220,841 -- $ 32,893 $ 23,662 $112,682 $ 143,153 $ 34,501 $ 2,253
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
240,850 958,176 220,841 -- 32,893 23,662 112,682 143,153 34,501 2,253
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
31,029 161,061 29,020 $ 70,170 43,888 56,667 $ 23,473 51,054 37,217 2,921
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
31,029 161,061 29,020 70,170 43,888 56,667 23,473 51,054 37,217 2,921
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
209,821 797,115 191,821 (70,170) (10,995) (33,005) 89,209 92,099 (2,716) (668)
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
(27,093) 335,913 21,690 245,537 107,121 122,217 (6,655) 14,997 140,440 (1,568)
904,672 2,287,237 529,227 3,087,888 655,276 47,625 (25,526) (127,595) 796,693 49,925
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
877,579 2,623,150 550,917 3,333,425 762,397 169,842 (32,181) (112,598) 937,133 48,357
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
$1,087,400 $3,420,265 $742,738 $3,263,255 $751,402 $136,837 $ 57,028 $ (20,499) $934,417 $47,689
========== ========== ======== ========== ======== ======== ======== ========= ======== =======
</TABLE>
See accompanying Notes to Financial Statements.
5
<PAGE> 6
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
FOR THE YEAR PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
ENDED DECEMBER 31, 1999 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------- ------- ------- ------------ --------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income
(loss) $ 488,502 $ 112,913 $ 252,191 $ 124,454 $ 132,967 $ (45,601) $ 62,252
Net realized and
unrealized gains
(losses) -- (78,940) (309,577) 65,060 360,225 3,443,825 1,676,921
----------- ------------ ----------- ---------- ----------- ------------ -----------
Change in net assets
resulting from
operations 488,502 33,973 (57,386) 189,514 493,192 3,398,224 1,739,173
----------- ------------ ----------- ---------- ----------- ------------ -----------
From capital
transactions:
Net premiums/deposits 33,173,793 831,090 1,266,165 2,220,476 1,838,108 7,195,871 4,291,826
Death benefits -- (159,614) (191,732) (58,842) (115,043) (114,424) (120,178
Surrenders (1,163,352) (29,199) (116,987) (310,647) (1,668) (621,921) (225,432
Withdrawals (335,752) (50,907) (83,712) (131,986) (50,538) (357,810) (115,676
Transfers into (out of)
subaccounts,
net--Note1
(8,057,071) 928,843 874,120 1,788,608 1,464,890 4,065,763 2,549,528
----------- ------------ ----------- ---------- ----------- ------------ -----------
Change in net
assets resulting
from capital
transactions 23,617,618 1,520,213 1,747,854 3,507,609 3,135,749 10,167,479 6,380,068
----------- ------------ ----------- ---------- ----------- ------------ -----------
Increase in net assets 24,106,120 1,554,186 1,690,468 3,697,123 3,628,941 13,565,703 8,119,241
Net assets at beginning
of period 5,562,204 1,693,662 3,166,765 4,264,468 2,258,023 10,689,980 3,710,438
----------- ------------ ---------- ---------- ----------- ------------ -----------
NET ASSETS AT END
OF PERIOD $29,668,324 $ 3,247,848 $4,857,233 $7,961,591 $ 5,886,964 $ 24,255,683 $11,829,679
----------- ------------ ---------- ---------- ----------- ------------ -----------
NET ASSET VALUE PER
UNIT AT END OF
PERIOD $ 1.00 $ 14.35 $ 10.24 $ 25.71 $ 18.67 $ 167.41 $ 29.15
=========== ============ ========== ========== =========== ============ ===========
UNITS OUTSTANDING
AT END OF PERIOD 29,668,324 226,331 474,339 309,669 315,317 144,888 405,821
=========== ============ ========== ========== =========== ============ ===========
</TABLE>
6
<PAGE> 7
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
FOR THE YEAR PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
ENDED DECEMBER 31, 1998 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------- ------------ ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income
(loss) $ 207,113 $ 3,202 $ (9,420) $ 8,287 $ 19,013 $ (22,378) $ 3,442
Net realized and
unrealized gains
(losses) 634 97,354 (26,804) 186,584 141,214 1,288,532 507,452
------------ ----------- ---------- ---------- ----------- ------------ ----------
Change in net assets
resulting from
operations 207,747 100,556 (36,224) 194,871 160,227 1,266,154 510,894
From capital
transactions:
Net premiums/deposits 24,848,283 1,307,253 2,301,701 2,167,250 1,237,984 6,238,184 1,114,162
Death benefits (15,275) (19,978) (13,846) (7,421) -- -- (10,449
Surrenders (198,856) (15,885) (12,264) (37,904) (1,620) (50,773) (23,821
Withdrawals (112,539) (77,318) (93,235) (31,134) (22,890) (110,964) (23,659
Transfers into (out of)
subaccounts, net--
Note 1 (20,028,240) 348,351 830,154 1,482,837 616,956 2,784,494 1,814,245
------------ ----------- ---------- ---------- ----------- ------------ ----------
Change in net assets
resulting from
capital
transactions 4,493,373 1,542,423 3,012,510 3,573,628 1,830,430 8,860,941 2,870,478
------------ ----------- ---------- ---------- ----------- ------------ ----------
Increase in net assets 4,701,120 1,642,979 2,976,286 3,768,499 1,990,657 10,127,095 3,381,372
Net assets at beginning
of period 861,084 50,683 190,479 495,969 267,366 562,885 329,066
------------ ----------- ---------- ---------- ----------- ------------ ----------
NET ASSETS AT END
OF PERIOD $ 5,562,204 $ 1,693,662 $3,166,765 $4,264,468 $ 2,258,023 $ 10,689,980 $3,710,438
------------ ----------- ---------- ---------- ----------- ------------ ----------
NET ASSET VALUE PER
UNIT AT END OF
PERIOD $ 1.00 $ 15.27 $ 10.92 $ 25.42 $ 18.16 $ 141.25 $ 24.44
============ =========== ========== ========== =========== ============ ==========
UNITS OUTSTANDING AT
END OF PERIOD 5,562,204 110,914 289,997 167,760 124,340 75,681 151,818
============ =========== ========== ========== =========== ============ ==========
</TABLE>
See accompanying Notes to Financial Statements.
7
<PAGE> 8
<TABLE>
<CAPTION>
THE ALGER
AMERICAN THE ALGER MFS VAN ECK
SMALL THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE VAN ECK
CAPITALI- AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD EMERGING
ZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND FUND
- --------- ----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 209,821 $ 797,115 $ 191,821 $ (70,170) $ (10,995) $ (33,005) $ 89,209 $ 92,099 $ (2,716) $ (668) $ (8,211)
877,579 2,623,150 550,917 3,333,425 762,397 169,842 (32,181) (112,598) 937,133 48,357 516,095
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,087,400 3,420,265 742,738 3,263,255 751,402 136,837 57,028 (20,499) 934,417 47,689 507,884
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,066,895 5,221,581 1,384,117 2,740,437 1,024,522 1,191,276 261,437 1,432,338 411,295 150,522 195,914
-- (52,193) (9,196) (5,257) (33,341) -- (11,410) (175,729) -- -- --
(13,535) (246,417) (30,775) (31,310) (36,878) (26,140) (77,142) (82,248) (87,477) (8,640) --
(33,248) (208,410) (38,843) (34,437) (35,053) (59,788) (22,640) (61,388) (73,467) (1,989) (15,623)
222,844 5,544,308 642,592 1,911,677 1,312,541 1,605,262 746,199 1,874,729 99,935 35,073 (6,561)
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,242,956 10,258,869 1,947,895 4,581,110 2,231,791 2,710,610 896,444 2,987,702 350,286 174,966 173,730
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
2,330,356 13,679,134 2,690,633 7,844,365 2,983,193 2,847,447 953,472 2,967,203 1,284,703 222,655 681,614
1,601,255 5,444,900 1,173,004 2,923,811 1,678,171 2,385,418 1,031,558 1,893,187 2,038,462 141,143 401,475
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
$3,931,611 19,124,034 $3,863,637 $10,768,176 $4,661,364 $5,232,865 $1,985,030 $4,860,390 $3,323,165 $363,798 $1,083,089
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
$ 55.15 $ 64.38 $ 32.23 $ 37.94 $ 23.34 $ 21.31 $ 9.81 $ 17.75 $ 14.18 $ 10.96 $ 14.26
========== =========== ========== =========== ========== ========== ========== ========== ========== ======== ==========
71,289 297,049 119,877 283,821 199,716 245,559 202,348 273,825 234,356 33,193 75,953
========== =========== ========== =========== ========== ========== ========== ========== ========== ======== ==========
$ 115,699 $ 307,440 $ 18,386 $ (10,989) $ (1,475) $ (16,356) $ (7,862) $ 12,833 $ (24,005) $ 4,608 $ (2,674)
2,409 766,562 131,442 548,478 172,413 234,577 (11,034) 69,285 (64,492) (40,765) (109,753)
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
118,108 1,074,002 149,828 537,489 170,938 218,221 (18,896) 82,118 (88,497) (36,157) (112,427)
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,012,659 2,385,652 456,073 845,164 586,011 1,164,678 743,654 968,524 1,098,070 128,466 348,583
(3,193) -- (3,436) -- -- (4,023) (7,699) -- (3,348) -- --
(27,136) (13,467) -- (9,089) (1,253) -- (6,502) (7,865) (16,724) (20,009) (3,769)
(16,711) (33,198) (1,155) (24,319) (11,140) (17,911) (6,087) (11,868) (21,157) (1,198) (4,392)
321,797 1,782,528 529,267 1,432,918 777,200 805,436 245,382 602,434 317,226 61,004 156,590
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,287,416 4,121,515 980,749 2,244,674 1,350,818 1,948,180 968,748 1,551,225 1,374,067 168,263 497,012
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,405,524 5,195,517 1,130,577 2,782,163 1,521,756 2,166,401 949,852 1,633,343 1,285,570 132,106 384,585
195,731 249,383 42,427 141,648 156,415 219,017 81,706 259,844 752,892 9,037 16,890
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
$1,601,255 $ 5,444,900 $1,173,004 $ 2,923,811 $1,678,171 $2,385,418 $1,031,558 $1,893,187 $2,038,462 $141,143 $ 401,475
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
$ 43.97 $ 53.22 $ 28.87 $ 21.47 $ 19.05 $ 20.11 $ 10.16 $ 18.12 $ 10.07 $ 9.20 $ 7.12
========== =========== ========== =========== ========== ========== ========== ========== ========== ======== ==========
36,417 102,309 40,631 136,181 88,093 118,618 101,531 104,481 202,429 15,342 56,387
========== =========== ========== =========== ========== ========== ========== ========== ========== ======== ==========
</TABLE>
See accompanying Notes to Financial Statements.
8
<PAGE> 9
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
JANUS JANUS JANUS JANUS
ASPEN JANUS JANUS ASPEN ASPEN ASPEN
CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WORLD WIDE
APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (19,876) $ (5,105) $ (4,713) $ (324) $ (664) $ (3,010)
Net realized and unrealized
gains (losses) 1,779,858 305,014 223,405 2,109 107,623 339,397
---------- ----------- --------- ---------- --------- -----------
Change in net assets
resulting from operations 1,759,982 299,909 218,692 1,785 106,959 336,387
---------- ----------- --------- ---------- --------- -----------
From capital transactions:
Net premiums/deposits 6,485,581 2,588,038 3,367,893 204,092 617,608 2,407,678
Death benefits -- -- -- -- -- --
Surrenders (11,563) (9,539) -- -- -- (8,172)
Withdrawals (11,346) (12,696) (5,771) -- (228) (2,401)
Transfers into(out of)
subaccounts,
net--Note 1
-- -- -- -- -- 3
---------- ----------- --------- ---------- --------- -----------
Change in net assets resulting
from capital transactions 6,462,672 2,565,803 3,362,122 204,092 617,380 2,397,108
---------- ----------- --------- ---------- --------- -----------
Increase in net assets 8,222,654 2,865,712 3,580,814 205,877 724,339 2,733,495
Net assets at beginning of period -- -- -- -- -- --
---------- ----------- --------- ---------- --------- -----------
NET ASSETS AT END OF PERIOD $8,222,654 $ 2,865,712 $3,580,814 $ 205,877 $ 724,339 $ 2,733,495
---------- ----------- ---------- ---------- --------- -----------
NET ASSET VALUE PER UNIT AT END
OF PERIOD $ 33.17 $ 33.65 $ 27.92 $ 11.42 $ 38.67 $ 47.75
========== =========== ========= ========== ========= ===========
UNITS OUTSTANDING AT END OF PERIOD 247,894 85,162 128,253 18,028 18,731 57,246
========== =========== ========= ========== ========= ===========
</TABLE>
See accompanying Notes to Financial Statements.
9
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 operation 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 86% of the outstanding common stock of CNA.
VFL sells a wide range of life insurance products, including the
Flexible Premium Deferred Annuity Contract ("Contract"). Under the terms of the
Contract, contractholders select where the net purchase payments of the Contract
are invested. The contractholder may choose to invest in either the Variable
Account, the Guaranteed Interest Option Separate Account ("GIO Account") or both
the Variable Account and the GIO Account.
The Variable Account currently offers 24 subaccounts each of which
invests in shares of corresponding funds (Funds), in which 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 an investment advisor ("Investment Advisor") which is
registered with the Securities and Exchange Commission. The Investment Advisors
and subaccounts are identified here.
10
<PAGE> 11
NOTE 1.-(CONTINUED)
<TABLE>
<CAPTION>
INVESTMENT ADVISOR: INVESTMENT ADVISOR:
FUND/SUBACCOUNT FUND/SUBACCOUNT
- ------------------ ---------------
<S> <C>
FEDERATED ADVISERS: MASSACHUSETTS FINANCIAL SERVICES
Federated Prime Money Fund II COMPANY:
Federated Utility Fund II MFS Emerging Growth Series
Federated High Income Bond Fund II MFS Research Series
FIDELITY MANAGEMENT & RESEARCH COMPANY: MFS Growth With Income Series
Fidelity Variable Insurance Products MFS Limited Maturity Series (closed
Fund Equity-Income Portfolio ("Fidelity to new investments)
Equity-Income Portfolio") MFS Total Return Series
Fidelity Variable Insurance Products SOCIETE GENERALE ASSET MANAGEMENT
Fund II Asset Manager Portfolio CORP.:
("Fidelity Asset Manager Portfolio") SoGen Overseas Variable Fund
Fidelity Variable Insurance Products VAN ECK ASSOCIATES CORPORATION:
Fund II Index 500 Portfolio Van Eck Worldwide Hard Assets Fund
("Fidelity Index 500 Portfolio") Van Eck Emerging Markets Fund
Fidelity Variable Insurance Products JANUS CAPITAL CORPORATION-
Fund II Contrafund Portfolio INSTITUTIONAL CLASS
("Fidelity Contrafund Portfolio") Janus Aspen Capital Appreciation Portfolio
FRED ALGER MANAGEMENT, INC.: Janus Aspen Growth Portfolio
The Alger American Small Janus Aspen Balanced Portfolio
Capitalization Portfolio Janus Aspen Flexible Income Portfolio
The Alger American Growth Portfolio Janus Aspen International Growth
The Alger American MidCap Growth Portfolio
Portfolio Janus Aspen World Wide Growth Portfolio
</TABLE>
The MFS Limited Maturity Series subaccount is no longer available for new
allocations as of May 1, 1999.
The GIO Account is also a separate account of VFL. 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 GIO Account value or benefits relating thereto.
The assets of the GIO Account and the Variable Account are segregated
from other VFL assets and from the General Account of VFL. The contractholder
(before the maturity date, while the contractholder is still living or the
Contract is in force) may transfer all or part of any subaccount value to
another subaccount(s) or to the GIO Account, or transfer all or part of the GIO
Account value to any subaccounts. The GIO Account, however, unlike the Variable
Account, is not registered as an investment company under the 1940 Act. Separate
financial statements are not prepared for the GIO Account and the accompanying
financial statements do not reflect amounts invested in the GIO Account.
11
<PAGE> 12
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS--Investments in the Variable Account consist
of shares of the Funds and are stated at market value based on quoted market
prices. Changes in the difference between market value and cost are reflected as
net unrealized gains (losses) in the accompanying financial statements.
INVESTMENT INCOME--Investment income consists of dividends declared by
the Funds and 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 of the Funds held by the subaccount and the cost of such shares, which
are determined using the first-in first-out cost method.
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 in the accompanying financial statements.
USE OF ESTIMATES--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 Variable Account'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
changes in net assets in the accompanying financial statements.
12
<PAGE> 13
NOTE 3. 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 equal to an annual rate of 1.25% of the net assets
of the subaccount.
An annual administration fee of $30 is also deducted from the
subaccounts on each Contract if the contract value is below $50,000. 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
subaccounts on each Contract to compensate it for a portion of the expenses it
incurs in administering the contracts. The daily charge is equal to an annual
rate of 0.15% of the net assets of the subaccounts.
VFL permits 12 free transfers among and between the subaccounts within
the Variable Account (four of which can be applied to the GIO Account) per
contract year without an assessment of a fee. 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 4. 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
of each of the Funds that the Variable Account participates in, that the mutual
Funds satisfy the diversification requirement of the regulations.
13
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Valley Forge Life Insurance Company
We have audited the accompanying balance sheets of Valley Forge Life
Insurance Company (a wholly-owned subsidiary of Continental Assurance Company,
which is a wholly-owned subsidiary of Continental Casualty Company, a wholly
owned subsidiary of CNA Financial Corporation, an affiliate of Loew's
Corporation) as of December 31, 1999 and 1998, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1999. 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, 1999 and 1998, and the results of operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
As discussed in Note 12 to the financial statements, the Company
changed its method of accounting for liabilities for insurance-related
assessments in 1999.
Deloitte & Touche LLP
Chicago, Illinois
February 23, 2000
<PAGE> 2
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1999 1998
- ----------- ----------- -----------
<S> <C> <C>
(In thousands of dollars)
ASSETS:
Investments:
Fixed maturities available-for-sale (amortized cost: $548,444
and $454,635) $ 530,512 $ 460,516
Equity securities available-for-sale (cost: $0 and $981) 51 2,218
Policy loans 93,575 74,150
Other invested assets 433 485
Short-term investments 24,714 81,418
----------- -----------
TOTAL INVESTMENTS 649,285 618,787
Cash 3,529 3,750
Receivables:
Reinsurance 2,414,553 2,119,897
Premium and other 82,852 76,690
Less allowance for doubtful accounts (12) (26)
Deferred acquisition costs 127,297 111,963
Accrued investment income 11,066 7,721
Receivables for securities sold 2,426 --
Federal income tax recoverable 4,316 --
Other 4,883 902
Separate Account business 209,183 73,745
----------- -----------
TOTAL ASSETS $ 3,509,378 $ 3,013,429
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits $ 2,751,396 $ 2,438,305
Claims and claim expense 139,653 93,001
Policyholders' funds 43,466 42,746
Payables for securities purchased 2,421 370
Federal income taxes payable -- 6,468
Deferred income taxes 2,694 6,213
Due to affiliates 12,435 1,946
Commissions and other payables 95,976 86,815
Separate Account business 209,183 73,745
----------- -----------
TOTAL LIABILITIES 3,257,224 2,749,609
----------- -----------
Commitments and contingent liabilities
Stockholder's Equity
Common stock ($50 par value; Authorized--200,000 shares;
Issued--50,000 shares) 2,500 2,500
Additional paid-in capital 69,150 69,150
Retained earnings 191,464 187,683
Accumulated other comprehensive income (loss) (10,960) 4,487
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 252,154 263,820
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 3,509,378 $ 3,013,429
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 3
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------- --------- --------- ---------
<S> <C> <C> <C>
(In thousands of dollars)
Revenues:
Premiums $ 310,719 $ 315,599 $ 332,172
Net investment income 39,148 35,539 29,913
Realized investment gains (losses) (19,081) 16,967 4,200
Other 4,545 7,959 6,872
--------- --------- ---------
335,331 376,064 373,157
--------- --------- ---------
Benefits and expenses:
Insurance claims and policyholders' benefits 291,547 301,900 307,207
Amortization of deferred acquisition costs 13,942 11,807 11,818
Other operating expenses 23,740 35,813 33,505
--------- --------- ---------
329,229 349,520 352,530
--------- --------- ---------
Income before income tax expense and
cumulative effect of change
in accounting principle 6,102 26,544 20,627
Income tax expense 2,087 9,091 7,297
--------- --------- ---------
Income before cumulative effect of change
in accounting principle 4,015 17,453 13,330
Cumulative effect of change in accounting
principle, net of tax-Note 12 234 -- --
--------- --------- ---------
NET INCOME $ 3,781 $ 17,453 $ 13,330
========= ========= =========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 4
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Comprehensive Total
Common Paid-in Income Retained Income Stockholder's
Stock Capital (Loss) Earnings (Loss) Equity
--------- ---------- ------------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Balance, December 31, 1996 $ 2,500 $ 39,150 $ 156,900 $ 990 $ 199,540
Comprehensive income:
Net income -- -- $ 13,330 13,330 -- 13,330
Other comprehensive income -- -- 3,390 -- 3,390 3,390
---------
Total comprehensive income $ 16,720
=========
Balance, December 31, 1997 2,500 39,150 170,230 4,380 216,260
Capital Contribution from Assurance -- 30,000 -- -- 30,000
Comprehensive income:
Net income -- -- $ 17,453 17,453 -- 17,453
Other comprehensive income -- -- 107 -- 107 107
---------
Total comprehensive income $ 17,560
=========
Balance, December 31, 1998 2,500 69,150 187,683 4,487 263,820
Comprehensive income (loss):
Net income -- -- $ 3,781 3,781 -- 3,781
Other comprehensive loss -- -- (15,447) -- (15,447) (15,447)
---------
Total comprehensive loss $ (11,666)
=========
BALANCE, DECEMBER 31, 1999 $ 2,500 $ 69,150 $ 191,464 $ (10,960) $ 252,154
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 5
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31 1999 1998 1997
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,781 $ 17,453 $ 13,330
Adjustments to reconcile net income to net
cash flows from operating activities:
Deferred income tax provision 4,924 2,058 2,581
Realized investment losses (gains) 19,081 (16,967) (4,200)
Amortization of bond discount (2,999) (4,821) (2,438)
Changes in:
Receivables, net (300,832) (544,920) (269,787)
Deferred acquisition costs (13,866) (16,746) (20,765)
Accrued investment income (3,345) (2,476) (300)
Due to/from affiliates (10,489) 37,945 31,500
Federal income taxes payable and receivable (10,784) 493 2,151
Insurance reserves 380,939 541,560 221,252
Commissions and other payables and other 25,642 (18,804) 47,212
----------- ----------- -----------
Total adjustments 88,271 (22,678) 7,206
----------- ----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 92,052 (5,225) 20,536
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities (1,512,848) (744,431) (464,361)
Proceeds from fixed maturities:
Sales 1,339,905 741,277 278,459
Maturities, calls and redemptions 58,263 33,635 45,442
Purchases of equity securities -- (5) (1,334)
Proceeds from sale of equity securities 2,647 5 2,447
Change in short-term investments 59,455 (73,233) 39,301
Change in policy loans (19,424) (7,179) (6,704)
Change in other invested assets 205 (82) (580)
Other, net -- -- --
----------- ----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (71,797) (50,013) (107,330)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for investment contracts credited
to policyholder accounts 15,901 30,007 111,478
Return of policyholder account balances on investment contracts (36,377) (25,584) (24,878)
Capital contribution from Assurance -- 30,000 --
----------- ----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (20,476) 34,423 86,600
----------- ----------- -----------
NET CASH FLOWS (221) (20,815) (194)
Cash at beginning of period 3,750 24,565 24,759
----------- ----------- -----------
CASH AT END OF PERIOD $ 3,529 $ 3,750 $ 24,565
=========== =========== ===========
Supplemental disclosures of cash flow information:
Federal income taxes paid $ 8,260 $ 6,651 $ 2,488
=========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 6
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary
of Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNAF). Loews Corporation owns approximately 86% of
the outstanding common stock of CNAF.
VFL markets and underwrites insurance products designed to satisfy the
life, health insurance and retirement needs of individuals and groups. Products
available in individual policy form include annuities as well as term and
universal life insurance. Products available in group policy form include life,
pension, accident and health insurance.
The operations, assets and liabilities of VFL and its parent,
Assurance, are managed on a combined basis. Pursuant to a Reinsurance Pooling
Agreement, as amended, VFL cedes all of its business, excluding its separate
account business, to its parent, Assurance. This ceded business is then pooled
with the business of Assurance, which excludes Assurance's participating
contracts and separate account business, and 10% of the combined pool is assumed
by VFL.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles (GAAP). Certain amounts applicable
to prior years have been reclassified to conform to classifications followed in
1999.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INSURANCE
Premium revenue- Revenues on universal life type contracts are
comprised of contract charges and fees which are recognized over the coverage
period. Accident and health insurance premiums are earned ratably over the terms
of the policies after provision for estimated adjustments on retrospectively
rated policies and deductions for ceded insurance. Other life insurance premiums
are recognized as revenue when due, after deductions for ceded insurance.
Future policy benefit reserves- Reserves for traditional life insurance
products (whole and term life products) are computed based upon the net level
premium method using actuarial assumptions as to interest rates, mortality,
morbidity, withdrawals and expenses. Actuarial assumptions include a margin for
adverse deviation and generally vary by plan, age at issue and policy duration.
Interest rates range from 3% to 9%, and mortality, morbidity and withdrawal
assumptions reflect VFL and industry experience prevailing at the time of issue.
Expense assumptions include the estimated effects of inflation and expenses to
be incurred beyond the premium paying period. Reserves for universal life-type
contracts are equal to the account balances that accrue to the benefit of the
policyholders. Interest crediting rates ranged from 4.45% to 7.25% for the three
years ended December 31, 1999.
Claim and claim expense reserves- Claim reserves include provisions for
reported claims in the course of settlement and estimates of unreported losses
based upon past experience and estimates of future expenses to be incurred in
settlement of claims.
<PAGE> 7
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Reinsurance- In addition to the Reinsurance Pooling Agreement with
Assurance, VFL also assumes and cedes insurance with other insurers and
reinsurers and members of various reinsurance pools and associations. VFL
utilizes reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk and minimize exposures on larger risks. The reinsurance
coverages are tailored to the specific risk characteristics of each product line
with VFL's retained amount varying by type of coverage. VFL's reinsurance
includes coinsurance, yearly renewable term and facultative programs. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim
liability and future policy benefit reserves.
Deferred acquisition costs- Cost of acquiring life insurance business
are capitalized and amortized based on assumptions consistent with those used
for computing future policy benefit reserves. Acquisition costs on traditional
life business are amortized over the assumed premium paying periods. Universal
life and annuity acquisition costs are amortized in proportion to the present
value of the estimated gross profits over the products' assumed durations. To
the extent that unrealized gains or losses on available-for-sale securities
would result in an adjustment of deferred policy acquisition costs had those
gains or losses actually been realized, the related unamortized deferred policy
acquisition costs are recorded as an adjustment to the unrealized gains or
losses included in stockholder's equity.
INVESTMENTS
Valuation of investments- VFL classifies its fixed maturities and its
equity securities as available-for-sale, and as such, they are carried at fair
value. The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and accretion
are included in net investment income.
Policy loans are carried at unpaid balances. Short-term investments,
which have an original maturity of one year or less, are carried at amortized
cost which approximates market value. VFL has no real estate or mortgage loans.
VFL records its derivative securities at fair value at the reporting
date and changes in fair value are reflected in realized investment gains and
losses. VFL's derivatives are made up of interest rate caps and purchased
options and are classified as other invested assets.
Investment gains and losses- All securities transactions are recorded
on the trade date. Realized investment gains and losses are determined on the
basis of the cost of the specific securities sold. Unrealized investment gains
and losses on fixed maturities and equity securities are reflected as part of
stockholder's equity, net of applicable deferred income taxes and deferred
acquisition costs. Investments are written down to estimated fair values and
losses are charged to income when a decline in value is considered to be other
than temporary.
Securities lending activities- VFL lends securities to unrelated
parties, primarily major brokerage firms. Borrowers of these securities must
deposit collateral with VFL equal to 100% of the fair value of the securities if
the collateral is cash, or 102% if the collateral is securities. Cash deposits
from these transactions are invested in short term investments (primarily
commercial paper) and a liability is recognized for the obligation to return the
collateral. VFL continues to receive the interest on loaned debt securities as
beneficial owner, and accordingly, loaned debt securities are included in fixed
maturity securities. VFL had no securities on loan at December 31, 1999 or 1998.
Separate Account business- VFL writes certain variable annuity
contracts and universal life policies. The supporting assets and liabilities of
these contracts and policies are legally segregated and reflected as assets and
liabilities of Separate Account business. Substantially all assets of the
Separate Account business are carried at fair value. Separate Account
liabilities are principally obligations due to contractholders and are carried
at contract values.
INCOME TAXES
VFL accounts for income taxes under the liability method. Under the
liability method deferred income taxes are recognized for temporary differences
between the financial statement and tax return bases of assets and liabilities.
Temporary differences primarily relate to insurance reserves, deferred
acquisition costs and net unrealized investment gains or losses.
<PAGE> 8
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. INVESTMENTS
The significant components of net investment income are presented in
the following table:
NET INVESTMENT INCOME
Year Ended December 31 1999 1998 1997
- ---------------------- ------- ------- -------
(In thousands of dollars)
Fixed maturities--Taxable bonds $30,851 $27,150 $20,669
Equity securities 54 72 72
Policy loans 4,963 4,760 4,264
Short-term investments 2,969 3,803 4,885
Other 778 105 201
------- ------- -------
39,615 35,890 30,091
Investment expense 467 351 178
------- ------- -------
NET INVESTMENT INCOME $39,148 $35,539 $29,913
======= ======= =======
Net realized investment gains (losses) and unrealized appreciation
(depreciation) in investments are set forth in the following table:
ANALYSIS OF INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
(In thousands of dollars)
Realized investment gains (losses):
Fixed maturities $(20,981) $ 16,907 $ 3,333
Equity securities 1,667 0 1,021
Other 233 60 (154)
-------- -------- --------
(19,081) 16,967 4,200
Income tax benefit (expense) 6,679 (5,938) (1,470)
-------- -------- --------
Net realized investment gains (losses) (12,402) 11,029 2,730
-------- -------- --------
Change in net unrealized investment gains (losses):
Fixed maturities (23,813) 441 5,806
Equity securities (1,186) (42) (607)
Adjustment to deferred policy acquisition costs
related to unrealized gains (losses) and other 1,235 (235) 20
-------- -------- --------
(23,764) 164 5,219
Deferred income tax (expense) benefit 8,317 (57) (1,829)
-------- -------- --------
Change in net unrealized investment gains (losses) (15,447) 107 3,390
-------- -------- --------
NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) $(27,849) $ 11,136 $ 6,120
======== ======== ========
</TABLE>
<PAGE> 9
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. - (CONTINUED)
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
---- ---- ----
(In thousands of dollars) FIXED EQUITY Fixed Equity Fixed Equity
MATURITIES SECURITIES Maturities Securities Maturities Securities
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales $ 1,339,905 $ 2,647 $ 741,277 $ 5 $ 278,459 $ 2,447
============= ======== ========== ==== ========== ========
Gross realized gains $ 4,399 $ 1,667 $ 17,604 $ -- $ 4,793 $ 1,113
Gross realized losses (25,380) -- (697) -- (1,460) (92)
------------- -------- ---------- ---- ---------- --------
NET REALIZED GAINS (LOSSES)
ON SALES $ (20,981) $ 1,667 $ 16,907 $ -- $ 3,333 $ 1,021
============= ======== ========== ==== ========== ========
</TABLE>
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
December 31 1999 1998
---- ----
GAINS LOSSES NET Gains Losses Net
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Fixed maturities $ 666 $ (18,598) $ (17,932) $ 6,926 $ (1,045) $ 5,881
Equity securities 51 -- 51 1,237 -- 1,237
Adjustment to deferred policy
acquisition costs related to
unrealized gains (losses)
and other 1,468 (448) 1,020 -- (215) (215)
---------- ---------- ---------- --------- --------- --------
$ 2,185 $ (19,046) (16,861) $ 8,163 $ (1,260) 6,903
========== ========== ========= =========
Deferred income tax benefit (expense) 5,901 (2,416)
---------- --------
NET UNREALIZED INVESTMENT
GAINS (LOSSES) $ (10,960) $ 4,487
========== ========
</TABLE>
<PAGE> 10
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
(In thousands of dollars) GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 1999 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Treasuries and obligations of government agencies $253,041 $ -- $ 6,988 $246,053
Asset-backed securities 107,275 50 4,200 103,125
Corporate securities 164,140 98 6,914 157,324
Other debt securities 23,988 518 496 24,010
-------- -------- -------- --------
Total fixed maturities 548,444 666 18,598 530,512
Equity securities -- 51 -- 51
-------- -------- -------- --------
TOTAL $548,444 $ 717 $ 18,598 $530,563
======== ======== ======== ========
December 31, 1998
U.S. Treasuries and obligations of government
agencies $223,743 $ 1,601 $ 563 $224,781
Asset-backed securities 109,207 1,163 180 110,190
Corporate securities 98,466 2,512 81 100,897
Other debt securities 23,219 1,650 221 24,648
-------- -------- -------- --------
Total fixed maturities 454,635 6,926 1,045 460,516
Equity securities 981 1,237 -- 2,218
-------- -------- -------- --------
Total $455,616 $ 8,163 $ 1,045 $462,734
======== ======== ======== ========
</TABLE>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES BY CONTRACTUAL MATURITY
<TABLE>
1999
AMORTIZED FAIR
December 31 COST VALUE
- ----------- ------------ ------------
<S> <C> <C>
(In thousands of dollars)
Due in one year or less $ 4,130 $ 4,115
Due after one year through five years 180,447 176,798
Due after five years through ten years 194,438 188,778
Due after ten years 62,154 57,697
Asset-backed securities not due at a single maturity date 107,275 103,124
------------ ------------
Total $ 548,444 $ 530,512
============ ============
</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, other than equity securities, that have not
produced income for the years ended December 31, 1999 and 1998. Except for
investments in securities of the U.S. Government and its Agencies, there are no
investments in a single issuer that when aggregated exceed 10% of stockholder's
equity at December 31, 1999.
Securities with carrying values of $2.7 million and $2.8 million were
deposited by VFL under requirements of regulatory authorities as of December 31,
1999 and 1998, respectively.
<PAGE> 11
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. FINANCIAL INSTRUMENTS
In the normal course of business, VFL invests in various financial
assets, incurs various financial liabilities, and enters into agreements
involving derivative securities, including off-balance sheet financial
instruments.
Fair values are required to be disclosed for all financial instruments,
whether or not recognized in the balance sheets, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values may be based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rates and estimates of future cash flows. Potential taxes
and other transaction costs have not been considered in estimating fair value.
The estimates presented herein are subjective in nature and are not necessarily
indicative of the amounts VFL could realize in a current market exchange.
All non-financial instruments such as deferred acquisition costs,
reinsurance receivables, deferred income taxes and insurance reserves are
excluded from fair value disclosure. Thus, the total fair value amounts cannot
be aggregated to determine the underlying economic value of VFL.
The carrying amounts reported in the balance sheet approximate fair
value for cash, short-term investments, accrued investment income, receivables
for securities sold, payables for securities purchased and certain other assets
and other liabilities because of their short-term nature. Accordingly, these
financial instruments are not listed in the table below. The carrying amounts
and estimated fair values of VFL's other financial instrument assets and
liabilities are listed below:
<TABLE>
<CAPTION>
1999 1998
---- ----
CARRYING ESTIMATED Carrying Estimated
DECEMBER 31 AMOUNT FAIR VALUE Amount Fair Value
- ----------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C>
(In thousands of dollars)
FINANCIAL ASSETS
Investments:
Fixed maturities $ 530,512 $ 530,512 $ 460,516 $ 460,516
Equity securities 51 51 2,218 2,218
Policy loans 93,575 87,156 74,150 72,148
Other 433 433 485 485
Separate Account business:
Fixed maturities 12,999 12,999 247 247
Equity securities (primarily mutual funds) 175,772 175,772 55,577 55,577
Other 119 119 340 340
FINANCIAL LIABILITIES
Premium deposits and annuity contracts 294,777 278,810 332,665 312,979
========== ========== ========== ===========
</TABLE>
The following methods and assumptions were used by VFL in estimating
the fair value amounts for financial instruments:
Fixed maturities and equity securities are based on quoted
market prices, where available. For securities not actively traded,
fair values are estimated using values obtained from independent
pricing services, costs to settle, or quoted market prices of
comparable instruments.
The fair values for policy loans are estimated using discounted
cash flow analyses at interest rates currently offered for similar
loans to borrowers with comparable credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Valuation techniques to determine fair value of Separate
Account business assets consist of discounted cash flows and quoted
market prices of (a) the investments or (b) comparable instruments.
The fair value of Separate Account business liabilities approximates
their carrying value.
<PAGE> 12
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
VFL invests from time to time in certain derivative financial
instruments primarily to reduce its exposure to market risk. Financial
instruments used for such purposes may include interest rate caps, put and call
options, commitments to purchase securities, futures and forwards. VFL also uses
derivatives to mitigate the risk associated with certain guaranteed annuity
contracts by purchasing certain options in a notional amount equal to the
original customer deposit. VFL generally does not hold or issue these
instruments for trading purposes.
Options are contracts that grant the purchaser, for a premium payment,
the right, but not the obligation, to either purchase or sell a financial
instrument at a specified price within a specified period of time.
An interest rate cap consists of a guarantee given by the issuer to the
purchaser in exchange for the payment of a premium. This guarantee states that
if interest rates rise above a specified rate, the issuer will pay to the
purchaser the difference between the then current market rate and the specified
rate on the notional principal amount. The notional principal amount is not
actually borrowed or repaid.
Derivative financial instruments consist of interest rate caps in the
general account and purchased options in the Separate Accounts at December 31,
1999. The gross notional principal or contractual amounts of derivative
financial instruments in the general account at December 31, 1999 and 1998
totaled $50 million. The gross notional principal or contractual amounts of
derivative financial instruments in the Separate Accounts was $295 thousand at
December 31, 1999 and was $1.5 million at December 31, 1998 as the separate
accounts sold approximately $1.2 million of notional value in 1999. The contract
of notional amounts are used to calculate the exchange of contractual payments
under the agreements and are not representative of the potential for gain or
loss on these agreements.
The fair values associated with derivative financial instruments are
generally affected by interest rates, equity stock prices and foreign exchange
rates. The credit exposure associated with these instruments is generally
limited to the unrealized fair value of the instruments and will vary based on
the credit worthiness of the counterparties. The risk of default depends on the
creditworthiness of the counterparty to the instrument. Although VFL is exposed
to the aforementioned credit risk, it does not expect any counterparty to fail
to perform as contracted based on the creditworthiness of the counterparties.
Due to the nature of the derivative securities, VFL does not require collateral.
The fair value of derivatives generally reflects the estimated amounts
that VFL would receive or pay upon termination of the contracts at the reporting
date. Dealer quotes are available for substantially all of VFL's derivatives.
For securities not actively traded, fair values are estimated using values
obtained from independent pricing services, costs to settle, or quoted market
prices of comparable instruments. The fair value of derivative financial assets
(liabilities) in the general account and Separate Accounts at December 31, 1999
totaled $0.4 million and $0.1 million, respectively, and compares to $0.1
million and $0.5 million, respectively, at December 31, 1998. Net realized gains
(losses) on derivative financial instruments at December 31, 1999 totaled $0.4
million in the general account and ($0.1) million in the Separate Accounts. At
December 31, 1998, net realized losses on derivative financial instruments held
in the general account totaled $0.2 million and net realized gains on
derivatives in the Separate Accounts were $0.1 million.
NOTE 4. STATUTORY CAPITAL AND SURPLUS (UNAUDITED)
Statutory capital and surplus and net income for VFL are determined in
accordance with accounting practices prescribed or permitted by the Pennsylvania
Insurance Department. Prescribed statutory accounting practices are set forth in
a variety of publications of the National Association of Insurance Commissioners
as well as state laws, regulations, and general administrative rules. VFL has no
material permitted accounting practices. VFL had statutory net income of $8.3
million for the year ended December 31, 1999 and statutory net losses of $8.1
million, and $1.0 million for the years ended December 31, 1998, and 1997
respectively. The statutory net losses for 1998 and 1997 were primarily due to
<PAGE> 13
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
the immediate expensing of acquisition costs which were substantial and related
sales of individual life and annuity products. Under GAAP, such costs are
capitalized and amortized to income over the duration of these contracts.
Statutory capital and surplus for VFL was $153.1 million, $147.1 million, and
$125.3 million at December 31, 1999, 1998, and 1997, respectively.
The payment of dividends by VFL to Assurance without prior approval of
the Pennsylvania Insurance Department is limited to formula amounts. As of
December 31, 1999, dividends of approximately $15.7 million were not subject to
prior Insurance Department approval.
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes to stockholder's
equity, including net income, except those changes resulting from investments
by, and distributions to, the stockholder. Other comprehensive income (loss) is
comprehensive income exclusive of net income. The change in the components of
accumulated other comprehensive income (loss) are shown in the following tables.
<TABLE>
<CAPTION>
Pre-tax Tax (Expense) Net
Year Ended December 31, 1999 Amount Benefit Amount
- ---------------------------- ------ ------- ------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period $ (19,684) $ 6,889 $ (12,795)
Adjustment for (gains) losses included in net income (4,080) 1,428 (2,652)
------------- --------- -----------
Total Other Comprehensive Income (Losses) $ (23,764) $ 8,317 $ (15,447)
============= ========= ===========
<CAPTION>
Pre-tax Tax (Expense) Net
Year Ended December 31, 1998 Amount Benefit Amount
- ---------------------------- ------ ------- ------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains on investment securities:
Net unrealized holding gains (losses) arising during the period $ 3,756 $ (1,314) $ 2,442
Adjustment for (gains) losses included in net income (3,592) 1,257 (2,335)
------------- --------- -----------
Total Other Comprehensive Income $ 164 $ (57) $ 107
============= ========= ===========
<CAPTION>
Pre-tax Tax (Expense) Net
Year Ended December 31, 1997 Amount Benefit Amount
- ---------------------------- ------ ------- ------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period $ 6,447 $ (2,256) $ 4,191
Adjustment for (gains) losses included in net income (1,228) 427 (801)
------------- --------- -----------
Total Other Comprehensive Income $ 5,219 $ (1,829) $ 3,390
============= ========= ===========
</TABLE>
NOTE 6. BENEFIT PLANS
VFL has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of
CNAF, all Casualty employees are covered by CNAF's Benefit Plans. The plans are
discussed below.
<PAGE> 14
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
PENSION PLAN
CNAF has noncontributory pension plans covering all full-time employees
age 21 or over that have completed at least one year of service. While the
benefits for the plans vary, they are generally based on years of credited
service and the employee's highest sixty consecutive months of compensation.
Casualty is included in the CNA Employees' Retirement Plan and VFL is allocated
a share of these expenses. The net pension cost allocated to VFL was $1.0
million, $1.1 million and $4.0 million for the years ended December 31, 1999,
1998 and 1997, respectively.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
CNAF provides certain health and dental care benefits for eligible
retirees through age 64, and provides life insurance and reimbursement of
Medicare Part B premiums for all eligible retired persons. CNAF funds benefit
costs principally on the basis of current benefit payments. Net postretirement
benefit cost allocated to VFL was $0.3 million, $0.5 million and $2.1 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
SAVINGS PLAN
Casualty is included in the CNA Employees' Savings Plan, which is a
contributory plan that allows employees to make regular contributions of up to
16% of their salary subject to limitations prescribed by the Internal Revenue
Service. VFL is allocated a share of CNA Employees' Savings Plan expenses. CNAF
contributes an amount equal to 70% of the first 6% of salary contributed by the
employee. CNAF contributions allocated to and expensed by VFL for the Savings
Plan were $0.2 million in each year 1999, 1998 and 1997.
NOTE 7. INCOME TAXES
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included along with Assurance,
its parent company, which is ultimately included in the consolidated Federal
income tax return of Loews. The Federal income tax provision of VFL generally is
computed on a stand-alone basis, as if VFL was filing its own separate tax
return.
VFL maintains a special tax memorandum account designated as the
"Shareholder's Surplus Account." Dividends from this account may be distributed
to the shareholder without resulting in any additional tax. The amount in the
Shareholder's Surplus Account was $151.6 million and $156.3 million at December
31, 1999 and 1998, respectively. Another tax memorandum account, defined as the
"Policyholders' Surplus Account," totaled $5.4 million at both December 31, 1999
and 1998. No further additions to this account are allowed. Amounts accumulated
in the Policyholders' Surplus Account are subject to income tax if distributed
to the stockholder. VFL has no plans for such a distribution and as a result,
has not provided for such a tax.
Significant components of VFL's net deferred tax liabilities as of
December 31, 1999 and 1998 are shown in the table below:
December 31 1999 1998
- ----------- ---- ----
(In thousands of dollars)
Insurance reserves $ 20,715 $ 26,880
Deferred acquisition costs (45,457) (37,729)
Investment valuation 4,166 3,693
Net unrealized gains 5,901 (2,416)
Annuity deposits and other 9,349 1,009
Other, net 2,632 2,350
---------- -------------
NET DEFERRED TAX LIABILITIES $ (2,694) $ (6,213)
========== =============
<PAGE> 15
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1999, gross deferred tax assets and liabilities
amounted to $44.3 million and $47.0 million, respectively. Gross deferred tax
assets and liabilities, at December 31, 1998, amounted to $35.5 million and
$41.7 million, respectively.
The components of income tax expense are as follows:
Year Ended December 31 1999 1998 1997
- ---------------------- ---------- --------- ----------
(In thousands of dollars)
Current tax expense (benefit) $ (2,837) $ 7,033 $ 4,716
Deferred tax expense 4,924 2,058 2,581
---------- --------- ----------
TOTAL INCOME TAX EXPENSE $ 2,087 $ 9,091 $ 7,297
========== ========= ==========
<PAGE> 16
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
A reconciliation of the statutory federal income tax rate on income is
as follows:
<TABLE>
<CAPTION>
% OF % OF % OF
PRETAX PRETAX PRETAX
Year Ended December 31 1999 INCOME 1998 INCOME 1997 INCOME
- ---------------------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Income taxes at statutory rates $ 2,136 35.0 $ 9,290 35.0 $ 7,219 35.0
Other (49) (0.8) (199) (0.8) 78 0.4
-------- ------- ---------- -------- ---------- -------
INCOME TAX AT EFFECTIVE RATES $ 2,087 34.2 $ 9,091 34.2 $ 7,297 35.4
======= ======= ========= ======== ========== =======
</TABLE>
NOTE 8. REINSURANCE
The ceding of insurance does not discharge primary liability of VFL.
VFL places reinsurance with other carriers only after careful review of the
nature of the contract and a thorough assessment of the reinsurers' credit
quality and claim settlement performance. For carriers that are not authorized
reinsurers in VFL's state of domicile, VFL receives collateral, primarily in the
form of bank letters of credit.
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health insurance
premiums is from short duration contracts. The effects of reinsurance on premium
revenues are shown in the following table:
<TABLE>
<CAPTION>
PREMIUMS ASSUMED/NET
-------- -----------
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET %
- ---------------------- ------ ------- ----- --- -
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
1999
Life $ 633,764 $ 109,964 $ 666,003 $ 77,725 141%
Accident and Health 6,539 232,994 6,539 232,994 100
------------- ----------- ----------- ---------- --------
Total premiums $ 640,303 $ 342,958 $ 672,542 $ 310,719 110%
============= =========== =========== ========== ========
1998
Life $ 687,644 $ 78,156 $ 690,541 $ 75,259 104%
Accident and Health 4,158 240,340 4,158 240,340 100
------------- ----------- ----------- ---------- --------
Total premiums $ 691,802 $ 318,496 $ 694,699 $ 315,599 101%
============= =========== =========== ========== ========
1997
Life $ 564,891 $ 81,502 $ 567,217 $ 79,176 103%
Accident and Health 2,776 252,996 2,776 252,996 100
------------- ----------- ----------- ---------- --------
Total premiums $ 567,667 $ 334,498 $ 569,993 $ 332,172 101%
============= =========== =========== ========== ========
</TABLE>
Transactions with Assurance, as part of the Pooling Agreement described
in Note 1, are reflected in the above table. Premium revenues ceded to
non-affiliated companies were $395.2 million, $263.4 million and $116.2 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
Additionally, benefits and expenses for insurance claims and policyholder
benefits are net of reinsurance recoveries from non-affiliated companies of
$263.4 million, $203.4 million and $77.8 million for the years ended December
31, 1999, 1998 and 1997, respectively.
Reinsurance receivables reflected on the balance sheets are amounts
recoverable from reinsurers who have assumed a portion of the Company's
insurance reserves. These balances are principally due from Assurance pursuant
the Reinsurance Pooling Agreement.
The impact of reinsurance, including transactions with Assurance, on
life insurance in force is shown in the following schedule:
<TABLE>
<CAPTION>
LIFE INSURANCE IN FORCE ASSUMED/NET
----------------------- -----------
DIRECT ASSUMED CEDED NET %
------ ------- ----- --- ---
<S> <C> <C> <C> <C> <C>
(In millions of dollars)
December 31, 1999 $ 267,102 $ 42,629 $ 281,883 $ 27,848 153.1%
December 31, 1998 $ 224,615 $ 32,253 $ 230,734 $ 26,134 123.4
December 31, 1997 $ 166,308 $ 25,557 $ 168,353 $ 23,512 108.7
</TABLE>
<PAGE> 17
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 9. RELATED PARTIES
As discussed in Note 1, VFL is party to a Reinsurance Pooling Agreement
with its parent, Assurance. In addition, VFL is party to the CNA Intercompany
Expense Agreement whereby expenses incurred by CNAF and each of its subsidiaries
are allocated to the appropriate companies. All acquisition and underwriting
expenses allocated to VFL are further subject to the Reinsurance Pooling
Agreement with Assurance, so that acquisition and underwriting expenses
recognized by VFL are ten percent of the acquisition and underwriting expenses
of the combined pool. Pursuant to the foregoing agreements, VFL recorded
amortization of deferred acquisition costs and other operating expenses totaling
$37.5 million, $47.6 million and $45.3 million for 1999, 1998 and 1997,
respectively. Expenses of VFL exclude $5.6 million, $9.2 million and $9.9
million of general and administrative expenses incurred by VFL and allocated to
CNAF for the years ended December 31, 1999, 1998 and 1997, respectively. At
December 31, 1999 VFL had a payable of $12.4 million to affiliated companies and
a $1.9 million payable at December 31, 1998.
There are no interest charges on intercompany receivables or payables.
In 1998, Assurance made a $30.0 million capital contribution to VFL.
NOTE 10. LEGAL
VFL is party to litigation arising in the ordinary course of business.
The outcome of this litigation will not, in the opinion of management,
materially affect the results of operations or stockholder's equity of VFL.
NOTE 11. BUSINESS SEGMENTS
VFL operates in one reportable segment, the business of which is to
market and underwrite insurance products designed to satisfy the life, health
and retirement needs of individuals and groups. VFL products are distributed
primarily in the United States. Premium revenues earned outside the United
States are not material.
The operations, assets and liabilities of VFL and its parent,
Assurance, are managed on a combined basis. Pursuant to a Reinsurance Pooling
Agreement, as amended, VFL cedes all of its business, excluding its Separate
Account business, to Assurance which is then pooled with the business of
Assurance, excluding Assurance's participating contracts and separate account
business, and 10% of the combined pool is assumed by VFL.
The following presents premiums by product group for each of the years
in the three years ended December 31, 1999:
(In thousands of dollars) 1999 1998 1997
- ------------------------- ---- ---- ----
Life $ 77,725 $ 75,259 $ 79,176
Accident and Health 232,994 240,340 252,996
----------- ---------- -----------
Total $ 310,719 $ 315,599 $ 332,172
----------- ---------- -----------
Assurance provides health insurance benefits to postal and other
federal employees under the Federal Employees Health Benefit Plan (FEHBP).
Premiums under this contract totaled $2.1 billion, $2.0 billion and $2.1 billion
for the years ended December 31, 1999, 1998 and 1997, respectively, and the
portion of these premiums assumed by VFL under the Reinsurance Pooling Agreement
totaled $209 million, $202 million and $212 million for the years ended December
31, 1999, 1998 and 1997, respectively.
<PAGE> 18
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 12. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999, VFL adopted Statement of Position 97-3
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3). SOP 97-3 requires that insurance companies recognize
liabilities for insurance-related assessments when an assessment is probable and
will be imposed, when it can be reasonably estimated, and when the event
obligating the entity to pay or probable assessment has occurred on or before
the date of the financial statements. Adoption of SOP 97-3 resulted in an after
tax charge of $234 thousand ($360 thousand, pretax) as a cumulative effect of a
change in accounting principle. The pro forma effect of adoption on reported
results for prior periods is not significant.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following financial statements of the Variable Account are
included in Part B hereof:
1. Independent Auditors' Report
2. Statements of Assets and Liabilities - December 31, 1999 and
December 31, 1998
3. Statements of Operations for the Year Ended December 31, 1999
and 1998
4. Statements of Changes in Net Assets For the Years Ended December
31, 1999 and 1998
5. Notes to Financial Statements - December 31, 1999
The following financial statements of the Company are included
in Part B hereof:
1. Independent Auditors' Report
2. Balance Sheets - December 31, 1999 and 1998
3. Statements of Operations For the Year Ended December 31, 1999,
1998 and 1997
4. Statements of Stockholder's Equity
5. Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997
6. Notes to Financial Statements
(b) Exhibits
(1) Certified resolution of the board of directors of the Company
dated February 12, 1996, establishing the Variable Account.*
(2) Not applicable.
(3) Form of underwriting agreement between the Company and CNA Investor
Services, Inc. ("CNAISI").**
(4) (a) Form of Flexible Premium Deferred Variable Annuity Contract (the
"Contract").+
(b) Form of Terminal Illness and Confinement Endorsement.***
(c) Form of Tax Sheltered Annuity Endorsement.***
(d) Form of Pension/Profit Sharing Endorsement.***
(e) Form of Systematic Withdrawal Endorsement.***
(f) Form of Automatic Transfer Endorsement.***
(g) Form of Dollar Cost Averaging I Endorsement.+
(h) Form of Dollar Cost Averaging II Endorsement.+
(i) Form of Roth IRA Endorsement. ***
(j) Form of IRA Endorsement. ***
(5) Form of 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 Federated
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.**
(d) Form of Participation Agreement between the Company and MFS
Variable Insurance Trust. **
(e) Form of Participation Agreement between the Company and SoGen
Variable Funds, Inc. **
(f) Form of Participation Agreement between the Company and Van Eck
Worldwide Insurance Trust.**
(g) Form of Participation Agreement between the Company and Janus
Aspen Series.***
(h) Form of Participation Agreement among the Company, CNA Investor
Services, Inc., Lazard Asset Management and Lazard Retirement
Series, Inc.++
(i) Form of Participation Agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and the
Company.++
(j) Form of Participation Agreement among the Company, CNA Investor
Services, Inc., Alliance Capital Management L.P. and Alliance
Fund Distributors, Inc.++
(k) Form of Shareholder Services Agreement between the Company and
American Century Investment Management, Inc.++
(l) Form of Participation Agreement between the Company and Morgan
Stanley Dean Witter Universal Funds, Inc.++
(9) (a) Opinion and Consent of Counsel
(9) (b) Consent of Blazzard, Grodd & Hasenauer, P.C.
(10) Independent Auditors' Consent
(11) Not applicable.
(12) Not applicable.
(13) Calculation of Performance Information.
(14) Not applicable
* Incorporated herein by reference to the initial filing of this Form N-4
Registration on February 20, 1996.
** Incorporated herein by reference to filing of Pre-Effective Amendment
Number 1 to this Form N-4 Registration on September 4, 1996.
*** Incorporated herein by reference to Form N-4 (File No. 333-85511) as filed
electronically on August 18, 1999.
+ Incorporated herein by reference to Pre-Effective Amendment No. 1 to Form
N-4 (File No. 333-85511) as filed electronically on December 29, 1999.
++ Incorporated herein by reference to Post-Effective Amendment No. 1 to
Form N-4 (File No. 333-85511) as filed electronically on February 11,
2000.
ITEM 25. DIRECTORS AND OFFICERS OF THE COMPANY
The name, age, positions and offices, term as director, and business
experience during the past five years for Valley Forge Life Insurance Company's
("VFL") directors and executive officers are listed in the following table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
OFFICERS OF VFL
- ----------------------------------------------------------------------------------------------------
POSITION(S) HELD
NAME AND ADDRESS AGE WITH VFL PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------
Bernard L. Hengesbaugh 53 Chairman of the Chairman of the Board and Chief Executive
CNA Plaza Board, Chief Officer of CNA since February, 1999. Prior
Chicago, IL 60685 Executive thereto, Mr. Hengesbaugh served as Executive
Officer, and Vice President and Chief Operating Officer of
Director CNA since February, 1998. Prior thereto, Mr.
Hengesbaugh was Senior Vice President of CNA
since November, 1990. Mr. Hengesbaugh has
served as Director since February, 1999.
- - ----------------------------------------------------------------------------------------------------
Peter E. Jokiel 52 President and Senior Vice President of CNA since November,
CNA Plaza Chief Operating 1990. Chief Financial Officer of CNA from
Chicago, IL 60685 Officer, November, 1990 through October, 1997. Mr.
CNA Life Jokiel served as a Director of VFL from July,
1992 through October, 1997.
- ------------------------------------------------------------------------------------------------------
Jonathan D. Kantor 43 Senior Vice Senior Vice President, Secretary and General
CNA Plaza President, Counsel of CNA since April, 1997. Group Vice
Chicago, IL 60685 Secretary, President of CNA since April, 1994. Prior
General Counsel thereto, Mr. Kantor was a partner at the law
and Director firm of Shea & Gould.* Mr. Kantor has served
as a Director of VFL since April, 1997.
- - ----------------------------------------------------------------------------------------------------
Robert V. Deutsch 40 Senior Vice Senior Vice President, Chief Financial Officer
CNA Plaza President, Chief and Director since August 16, 1999. Prior
Chicago, IL 60685 Financial thereto, Chief Financial Officer for Executive
Officer, Director Risk, Inc.
- - ----------------------------------------------------------------------------------------------------
Tom Taylor 48 Executive Vice Executive Vice President, Underwriting Policy
CNA Plaza President Group since June 1999. Specialty Operations,
Chicago, IL 60685 1998-1999. President and Chief Operating
Officer, Financial Insurance, 1992-1998.
- ------------------------------------------------------------------------------------------------------
Thomas Pontarelli 51 Senior Vice Senior Vice President, Human Resources since
CNA Plaza President, April, 2000. Prior thereto, Group Vice President,
Chicago, IL 60685 Director Human Resources. From May 1974 to December 1997,
series of positions culminating in the position of
Chairman, CEO, and President of Washington
National Insurance Company.
- ------------------------------------------------------------------------------------------------------
Donald P. Lofe, Jr. 42 Group Vice Group Vice President, Corporate Finance
President, Department since October 1998. Prior thereto,
Director partner of PricewaterhouseCoopers LLP.
- -----------------------------------------------------------------------------------------------------
John M. Squarok 46 Group Vice Group Vice President of CNA since July 1998.
President Prior thereto, Mr. Squarok was Chief Financial
and Director Officer of various businesses of GE Capital from
August 1988 until July 1998. Director since
August 1998.
- ------------------------------------------------------------------------------------------------------
</TABLE>
Each director is elected to serve until the next annual meeting of
stockholders or until his or her successor is elected and shall have qualified.
Some directors hold various executive positions with insurance company
affiliates of VFL. Executive officers serve at the discretion of the Board of
Directors.
* Shea & Gould declared bankruptcy in 1995.
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. As of September 30, 1999, 86% of
the outstanding voting securities of CNA Financial Corporation are owned by
Loews Corporation, a Delaware Corporation, 667 Madison Avenue, New York, New
York 10021-8087. Loews corporation has interests in insurance, hotels, watches
and other timing devices, drilling rigs and tobacco. Laurence A. Tisch is
Co-Chairman of the Board and a director of Loews Corporation and Chief Executive
Officer and a director of CNA Financial Corporation. Preston R. Tisch is
Co-Chairman of the Board and a director of Loews Corporation and a director of
CNA Financial Corporation. James S. Tisch is President and Chief Executive
Officer and director of Loews Corporation and a director of CNA Financial
Corporation.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of April 12, 2000, there were 32 non-qualified contract owners and 20
qualified contract owners.
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 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, office, 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) CNAISI is the registrant's principal underwriter and also serves as the
principal underwriter of certain variable annuity contracts and 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) CNA Investor Services Inc.("CNAISI") is the principal underwriter for the
Policies. The following persons are the officers and directors of CNAISI.
Name and Principal Positions and Offices
Business Address with Underwriter
---------------- ----------------
Kevin Hogan President, Chief Executive Officer,
Treasurer and Director
Ronald Chapon Vice President and Director
Lynne Gugenheim Vice President, Secretary and Director
John J. Sullivan, Jr. Vice President and Director
The principal business address for each officer and director of CNAISI is CNA
Plaza, 34 South Chicago, Illinois 60685.
(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, and by CNAISI at CNA Plaza, Chicago,
Illinois 60685.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
a. Registrant hereby undertakes to 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 sixteen
(16) months old for so long as payment under the variable annuity contracts may
be accepted.
b. Registrant hereby undertakes to 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
postcard 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. Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under this
Form promptly upon written or oral request.
d. Valley Forge Life Insurance Company ("Company") hereby represents that
the fees and charges deducted under the Contracts described in the Prospectus,
in the aggregate, are reasonable in relation to the services rendered, the
expenses to be incurred and the risks assumed by the Company.
REPRESENTATIONS
The Company hereby represents that it is relying upon a No-Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including the
prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in connection with
the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase the
contract specifically to bring the redemption restrictions imposed by Section
403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b) annuity
contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restrictions on
redemption imposed by Section 403(b)(11), and (2) other investment alternatives
available under the employer's Section 403(b) arrangement to which the
participant may elect to transfer his contract value.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused
this Registration Statement to be signed on its behalf, in the City of Chicago,
and the State of Illinois, on this 19th day of April, 2000.
VALLEY FORGE LIFE INSURANCE COMPANY on
behalf of its separate account
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
(Registrant)
By:/s/DAVID L. STONE
---------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
(Depositor)
By: /s/JOEL S. FELDMAN
---------------------------------
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.
Signature Title Date
- - --------- ----- ----
/s/BERNARD L. HENGESBAUGH 4-19-00
- -------------------------- Chairman of the Board, ---------
Bernard L. Hengesbaugh Chief Executive Officer Date
and Director
/s/ROBERT V. DEUTSCH 4-19-00
- ---------------------- Chief Financial Officer ---------
Robert V. Deutsch and Director Date
/s/THOMAS PONTARELLI 4-19-00
- ---------------------- Director and Senior ---------
Thomas Pontarelli Vice President Date
/s/JONATHAN D. KANTOR 4-19-00
- ---------------------- Senior Vice President, Secretary ---------
Jonathan D. Kantor General Counsel, Director Date
/s/DONALD P. LOFE, JR. 4-18-00
- ---------------------- Group Vice President, Director ---------
Donald P. Lofe, Jr. Date
/s/JOHN M. SQUAROK 4-17-00
- ---------------------- Group Vice President, Director ---------
John M. Squarok Date
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY SEPARATE ACCOUNT
POST-EFFECTIVE AMENDMENT NO. 2 TO FORM N-4
(FILE NOS. 333-85511 and 811-7547)
INDEX TO EXHIBITS
EXHIBIT NO.
EX-99.B9(a) Opinion and Consent of Counsel
EX-99.B9(b) Consent of Blazzard, Grodd & Hasenauer, P.C.
EX-99.B10 Independent Auditors' Consent
EX-99.B13 Calculation of Performance Information
April 25, 2000
Board of Directors
Valley Forge Life Insurance Company
CNA Plaza 43 South
Chicago, IL 60685
Gentlemen:
I have acted as counsel to Valley Forge Life Insurance Company (the "Company"),
a Pennsylvania insurance company, Valley Forge Life Insurance Company Variable
Annuity Separate Account ( the "Variable Annuity Account") in connection with
the amendment to the registration under the Securities Act of 1933 (file no.
333-85511) of certain flexible premium Variable Annuity Contracts ( the
"Contract").
In rendering this opinion, I have assumed the genuineness of all signatures of
all documents I have examined, the authority of representations made to me, the
authenticity of all original documents of which copies were furnished to me, and
the conformity to original documents of all documents submitted to me as
certified, conformed or photostatic copies. I have made such examination of the
law and documents as are in my judgment necessary and appropriate.
Based upon the foregoing, I am of the opinion that:
1. The Company was organized in accordance with the laws of the
Commonwealth of Pennsylvania and is duly authorized stock life
insurance company under the laws of Pennsylvania and the laws of those
states where the Company is admitted to do business;
2. The Variable Annuity Account has been duly created and is validly
existing as a separate account pursuant to Section 40-37-109 of the
Pennsylvania Unconsolidated Statutes;
3. The Company is authorized to issue the Contracts in those states in
which it is admitted and upon compliance with applicable local law;
4. The Contract, when issued in accordance with the prospectus contained
in the aforesaid Registration Statement and upon compliance with
applicable local law, will be legal and binding obligation of the
Company in accordance with their terms.
I hereby consent to the filing of this opinion as an exhibit to the
Post-Effective Amendment No. 11 of the aforesaid registration statement and to
the reference to me under the caption "Legal Opinions" in the statement of
additional information contained in said amendment to the registration
statements.
Sincerely,
/s/G. STEPHEN WASTEK
G. Stephen Wastek
Director & Senior Counsel
CONSENT OF COUNSEL
We consent to the reference to our Firm under the caption "Legal Opinions"
in the Statement of Additional Information which forms a part of the
Registration Statement.
/S/ BLAZZARD, GRODD & HASENAUER, P.C.
Blazzard, Grodd & Hasenauer, P.C.
April 25, 2000
Westport, Connecticut
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the Post-Effective Amendment No. 2 to Registration
Statement No. 333-85511 and in the Amendment No. 11 to Registration Statement
No. 811-7547, both filed on Form N-4 of Valley Forge Life Insurance Company
Variable Annuity Separate Account of our report on the financial statements of
Valley Forge Life Insurance Company, dated February 23, 2000, and our report on
the financial statements of the Valley Forge Life Insurance Company Variable
Annuity Separate Account, dated February 24, 2000, appearing in the Registration
Statement and to the reference to us under the heading "Experts" in the
Registration Statement.
/s/DELOITTE & TOUCHE LLP
Chicago, Illinois
April 24, 2000
<TABLE>
<CAPTION>
Net Rates of Return
Federated Federated Federated Fidelity Fidelity Fidelity Fidelity Alger Alger
Prime Money Utility Bond Equity Inc. Asset Mgr Index 500 Contrafund Small Cap Growth
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 3.47% 12.32% 1.25% 10.55% 15.74% 26.54% 28.30% 13.92% 46.00%
1999 2.65% 0.27% 0.88% 4.84% 9.54% 18.83% 22.52% 41.41% 31.88%
1 Year 2.65% 0.27% 0.88% 4.84% 9.54% 18.83% 22.52% 41.41% 31.88%
3 Years 3.20% 12.04% 4.66% 14.01% 15.38% 25.39% 24.42% 20.95% 33.66%
5 Years 3.19% 13.62% 8.92% 17.46% 15.01% 26.46% N/A 20.93% 29.14%
10 Years N/A N/A N/A 13.21% 12.16% N/A N/A 16.57% 21.28%
ITD - Fund 3.17% 10.87% 6.70% 12.36% 11.81% 19.44% 26.37% 19.16% 21.42%
ITD - Sub 3.13% 11.95% 4.91% 12.64% 13.99% 23.14% 22.80% 19.52% 30.46%
Valuation Date 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99
Fund Inception 11/21/94 02/10/94 03/01/94 10/09/86 09/06/89 08/27/92 01/03/95 09/21/88 01/09/89
Sub Inception 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96
# of days - Fund 1866.00 2150.00 2131.00 4831.00 3768.00 2682.00 1823.00 4118.00 4008.00
# of days - Sub 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00
Alger MFS MFS MFS MFS MFS SoGen Van Eck Van Eck
MidCap Emerging GrowResearch Growth & IncoLtd. MaturitTotal Return Overseas Hard Assets Emerging Market
28.47% 32.29% 21.68% 20.61% 3.94% 10.69% 0.72% -29.67% -36.18%
30.01% 74.25% 22.32% 5.20% 0.83% 1.64% 43.20% 19.31% 97.49%
30.01% 74.25% 22.32% 5.20% 0.83% 1.64% 43.20% 19.31% 97.49%
23.74% 40.46% 20.85% 17.54% 3.11% 10.40% 11.59% -6.58% 3.18%
24.40% N/A N/A N/A N/A 13.81% N/A 0.77% N/A
N/A N/A N/A N/A N/A N/A N/A 1.98% N/A
23.00% 34.51% 21.16% 19.74% 3.53% 13.83% 11.98% 2.71% 8.21%
21.48% 36.09% 19.04% 16.09% 2.82% 9.50% 10.98% -6.01% 3.35%
12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99
05/03/93 07/24/95 07/26/95 10/09/95 07/31/96 01/03/95 02/03/97 09/01/89 12/27/95
11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96
2433.00 1621.00 1619.00 1544.00 1248.00 1823.00 1061.00 3773.00 1465.00
1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00
Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen AVPSF AVPSF
Capital Apprec Growth Balanced Flexible IncoInternationaWorldwide GrGrth & Inc Prem. Grth
55.91% 33.77% 32.42% 7.59% 15.60% 27.13% 8.06% 45.78%
64.67% 41.98% 24.99% 0.19% 79.73% 62.16% -1.62% 28.54%
64.67% 41.98% 24.99% 0.19% 79.73% 62.16% -1.62% 28.54%
N/A 31.98% 25.84% 5.91% 34.41% 35.41% 8.41% 35.18%
N/A 28.08% 22.95% 9.33% 31.40% 31.74% 11.37% 24.98%
N/A N/A N/A N/A N/A N/A N/A N/A
55.07% 22.53% 18.93% 6.98% 26.39% 27.88% 7.55% 18.76%
185.22% 102.26% 56.95% 5.67% 306.79% 200.00% NA NA
12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99
05/02/97 09/13/93 09/13/93 09/13/93 05/02/94 09/13/93 01/14/91 06/26/92
08/31/99 08/31/99 08/31/99 08/31/99 08/31/99 08/31/99 03/31/99 03/31/99
973.00 2300.00 2300.00 2300.00 2069.00 2300.00 3273.00 2744.00
122.00 122.00 122.00 122.00 122.00 122.00 275.00 275.00
AMCent AmCent Templeton Templeton Lazard Lazard MSDWUF MSDWUF
Inc.& Grth Value Dev. Market Asset Alloc Ret. Equity Ret Sm. Cap Emerg. Mrkt Intl. Magnum
24.04% -4.24% -23.73% -1.13% NA -4.60% -25.65% 6.68%
16.35% -12.82% 49.07% 2.53% 2.89% 1.72% 92.92% 21.97%
16.35% -12.82% 49.07% 2.53% 2.89% 1.72% 92.92% 21.97%
N/A 0.74% -7.67% 1.91% N/A N/A 10.90% N/A
N/A N/A N/A 6.70% N/A N/A N/A N/A
N/A N/A N/A 5.70% N/A N/A N/A N/A
22.12% 3.10% -7.78% 6.22% 5.50% -2.68% 9.15% 10.09%
NA NA NA NA NA NA NA NA
12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99
10/30/97 05/01/96 03/01/96 08/24/88 11/04/97 03/19/98 10/01/96 01/02/97
03/31/99 03/31/99 03/31/99 03/31/99 03/31/99 03/31/99 03/31/99 03/31/99
792.00 1339.00 1400.00 4146.00 787.00 652.00 1186.00 1093.00
275.00 275.00 275.00 275.00 275.00 275.00 275.00 275.00
Capital Select Plus Rates of Return - Assuming no Surrender
Federated Federated Federated Fidelity Fidelity Fidelity Fidelity Alger Alger
Prime Money Utility Bond Equity Inc. Asset Mgr Index 500 Contrafund Small Cap Growth
1998 3.41% 12.26% 1.19% 10.48% 15.67% 26.47% 28.23% 13.85% 45.91%
1999 2.59% 0.21% 0.82% 4.78% 9.48% 18.76% 22.45% 41.33% 31.80%
1 Year 2.59% 0.21% 0.82% 4.78% 9.48% 18.76% 22.45% 41.33% 31.80%
3 Years 3.14% 11.98% 4.60% 13.94% 15.31% 25.32% 24.35% 20.88% 33.58%
5 Years 3.13% 13.56% 8.86% 17.39% 14.94% 26.39% NA 20.86% 29.07%
10 Years NA NA NA 13.14% 12.09% NA NA 16.50% 21.21%
ITD - Fund 3.11% 10.81% 6.64% 12.29% 11.75% 19.37% 26.30% 19.09% 21.35%
ITD - Sub 3.07% 11.88% 4.85% 12.57% 13.93% 23.06% 22.73% 19.46% 30.39%
Alger MFS MFS MFS MFS MFS SoGen Van Eck Van Eck
MidCap Emerging GrowResearch Growth & IncoLtd. MaturitTotal Return Overseas Hard Assets Emerging Market
28.40% 32.21% 21.60% 20.54% 3.88% 10.62% 0.66% -29.71% -36.22%
29.93% 74.15% 22.24% 5.14% 0.77% 1.58% 43.12% 19.24% 97.37%
29.93% 74.15% 22.24% 5.14% 0.77% 1.58% 43.12% 19.24% 97.37%
23.67% 40.37% 20.78% 17.47% 3.05% 10.34% 11.52% -6.63% 3.12%
24.32% NA NA NA NA 13.75% NA 0.71% NA
NA NA NA NA NA NA NA 1.92% NA
22.92% 34.43% 21.09% 19.67% 3.47% 13.76% 11.92% 2.65% 8.14%
21.41% 36.01% 18.97% 16.02% 2.76% 9.43% 10.92% -6.07% 3.29%
Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen AVPSF AVPSF
Capital AppreciaGrowth Balanced Flexible IncoInternationaWorldwide GrGrth & Inc Prem. Grth
55.82% 33.69% 32.34% 7.53% 15.54% 27.05% 8.00% 45.69%
64.57% 41.89% 24.92% 0.13% 79.63% 62.06% -1.67% 28.47%
64.57% 41.89% 24.92% 0.13% 79.63% 62.06% -1.67% 28.47%
NA 31.90% 25.77% 5.85% 34.33% 35.34% 8.34% 35.10%
NA 28.00% 22.88% 9.27% 31.32% 31.66% 11.30% 24.90%
NA NA NA NA NA NA NA NA
54.98% 22.46% 18.86% 6.92% 26.32% 27.81% 7.49% 18.69%
185.06% 102.14% 56.86% 5.60% 306.56% 199.82% NA NA
AMCent AmCent Templeton Templeton Lazard Lazard MSDWUF MSDWUF
Inc.& Grth Value Dev. Market Asset Alloc Ret. Equity Ret Sm. Cap Emerg. Mrkt Intl. Magnum
23.97% -4.29% -23.78% -1.18% NA -4.65% -25.69% 6.62%
16.28% -12.87% 48.98% 2.47% 2.83% 1.66% 92.81% 21.89%
16.28% -12.87% 48.98% 2.47% 2.83% 1.66% 92.81% 21.89%
NA 0.68% -7.73% 1.85% NA NA 10.83% NA
NA NA NA 6.63% NA NA NA NA
NA NA NA 5.64% NA NA NA NA
22.05% 3.04% -7.84% 6.16% 5.44% -2.74% 9.09% 10.02%
NA NA NA NA NA NA NA NA
Capital Select Plus Surrender Charge Scale
Federated Federated Federated Fidelity Fidelity Fidelity Fidelity Alger Alger
Prime Money Utility Bond Equity Inc. Asset Mgr Index 500 Contrafund Small Cap Growth
1998 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
1999 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
1 Year 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
3 Years 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
5 Years 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
10 Years 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
ITD - Fund 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
ITD - Sub 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Alger MFS MFS MFS MFS MFS SoGen Van Eck
MidCap Emerging GrowResearch Growth & IncoLtd. MaturitTotal Return Overseas Hard Assets
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Van Eck Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen AVPSF
Emerging MarkeCapital ApprecGrowth Balanced Flexible IncInternationaWorldwide GroGrth & Inc
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
AVPSF AMCent AmCent Templeton Templeton Lazard Lazard MSDWUF MSDWUF
Prem. Grth Inc.& Grth Value Dev. Market Asset Alloc Ret. Equity Ret Sm. Cap Emerg. Mrkt Intl. Magnum
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Capital Select Plus Retuns - Assuming Surrender
Federated Federated Federated Fidelity Fidelity Fidelity Fidelity Alger Alger
Prime Money Utility Bond Equity Inc. Asset Mgr Index 500 Contrafund Small Cap Growth
1998 -3.83% 4.40% -5.89% 2.75% 7.57% 17.61% 19.25% 5.88% 35.70%
1999 -4.60% -6.80% -6.24% -2.55% 1.81% 10.44% 13.88% 31.44% 22.57%
1 Year -4.60% -6.80% -6.24% -2.55% 1.81% 10.44% 13.88% 31.44% 22.57%
3 Years -3.05% 5.26% -1.68% 7.11% 8.39% 17.80% 16.89% 13.63% 25.56%
5 Years -2.02% 7.88% 3.41% 11.52% 9.20% 20.07% NA 14.82% 22.61%
10 Years NA NA NA 13.14% 12.09% NA NA 16.50% 21.21%
ITD - Fund -4.10% 3.05% -0.82% 4.43% 3.93% 11.02% 17.45% 10.76% 12.85%
ITD - Sub -4.14% 4.05% -2.49% 4.69% 5.95% 14.45% 14.14% 11.09% 21.26%
Alger MFS MFS MFS MFS MFS SoGen Van Eck
MidCap Emerging GrowResearch Growth & IncoLtd. MaturitTotal Return Overseas Hard Assets
19.41% 22.96% 13.09% 12.10% -3.39% 2.88% -6.39% -34.63%
20.83% 61.96% 13.69% -2.22% -6.28% -5.53% 33.10% 10.89%
20.83% 61.96% 13.69% -2.22% -6.28% -5.53% 33.10% 10.89%
16.25% 31.95% 13.53% 10.42% -3.13% 3.72% 4.83% -12.24%
18.11% NA NA NA NA 8.06% NA -4.32%
NA NA NA NA NA NA NA 1.92%
14.32% 25.02% 12.61% 11.29% -3.78% 5.80% 4.08% -4.53%
12.91% 26.49% 10.65% 7.90% -4.44% 1.77% 3.16% -12.64%
Van Eck Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen AVPSF AVPSF
Emerging MarkeCapital ApprecGrowth Balanced Flexible IncInternationaWorldwide GroGrth & Inc Prem. Grth
-40.68% 44.91% 24.33% 23.08% 0.00% 7.45% 18.16% 0.44% 35.49%
83.56% 53.05% 31.96% 16.17% -6.88% 67.05% 50.72% -8.56% 19.48%
83.56% 53.05% 31.96% 16.17% -6.88% 67.05% 50.72% -8.56% 19.48%
-3.06% NA 23.99% 18.22% -0.51% 26.27% 27.22% 1.84% 27.00%
NA NA 21.60% 16.73% 3.80% 24.75% 25.08% 5.74% 18.66%
NA NA NA NA NA NA NA NA NA
0.57% 44.13% 13.89% 10.54% -0.56% 17.47% 18.86% -0.03% 10.38%
-3.94% 165.10% 87.99% 45.88% -1.79% 278.10% 178.83% NA NA
AMCent AmCent Templeton Templeton Lazard Lazard MSDWUF MSDWUF
Inc.& Grth Value Dev. Market Asset Alloc Ret. Equity Ret Sm. Cap Emerg. Mrkt Intl. Magnum
15.29% -10.99% -29.11% -8.10% NA -11.33% -30.90% -0.84%
8.14% -18.97% 38.55% -4.70% -4.37% -5.46% 79.31% 13.36%
8.14% -18.97% 38.55% -4.70% -4.37% -5.46% 79.31% 13.36%
NA -5.36% -13.26% -4.26% NA NA 4.18% NA
NA NA NA 1.30% NA NA NA NA
NA NA NA 5.64% NA NA NA NA
13.51% -4.18% -14.29% -1.27% -1.94% -9.54% 1.45% 2.32%
NA NA NA NA NA NA NA NA
</TABLE>
