<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY
AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY
SEPARATE ACCOUNT
THIS STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 2000 IS NOT A
PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 2000 FOR THE VALLEY FORGE LIFE
INSURANCE COMPANY FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT WHICH IS
REFERRED TO HEREIN.
THE PROSPECTUS SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR SHOULD
KNOW BEFORE PURCHASING A CONTRACT. FOR A COPY OF THE PROSPECTUS, SEND A WRITTEN
REQUEST TO THE SERVICE CENTER AT P.O. BOX 305153, NASHVILLE, TENNESSEE
37230-5153 OR BY TELEPHONE 1-800-262-1755.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
COMPANY..................................................... 3
EXPERTS..................................................... 3
LEGAL OPINIONS.............................................. 3
PERFORMANCE INFORMATION..................................... 3
Money Market Subaccount Yields............................ 3
Other Subaccount Yields................................... 4
Average Annual Total Returns.............................. 5
Other Total Returns....................................... 6
Effect of the Annual Administration Fee on Performance
Data................................................... 6
Performance Information................................... 6
VARIABLE ANNUITY PAYMENTS................................... 11
Annuity Unit Value........................................ 11
Illustration of Calculation of Annuity Unit Value......... 11
Illustration of Variable Annuity Payments................. 11
VALUATION DAYS.............................................. 12
OTHER INFORMATION........................................... 12
FINANCIAL STATEMENTS........................................ 12
</TABLE>
2
<PAGE> 3
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 it is 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
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
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, Director and Senior
Counsel.
PERFORMANCE INFORMATION
From time to time, Valley Forge Life Insurance Company ("VFL" or "the
Company") may disclose yields, total returns, and other performance data
pertaining to the Contracts for a Subaccount. Such performance data will be
computed, or accompanied by performance data computed, in accordance with the
standards defined by the SEC.
Because of the charges and deductions imposed under a Contract, the yield
for the Subaccounts will be lower than the yield for their respective Funds. The
calculation of yields, total returns and other performance data do not reflect
the effect of any premium tax that may be applicable to a particular Contract.
Premium taxes currently range generally from 0% to 3.5% of the annuity
considerations (purchase payments) based on the jurisdiction is which the
Contract is sold.
MONEY MARKET SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of the Money Market Subaccount for a seven-day period in a
manner that does not take into consideration any realized or unrealized gains or
losses on shares of the Money Market Fund or on that Fund's portfolio
securities.
3
<PAGE> 4
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) at the end of the seven-day period in the value
of a hypothetical account under a Contract having a balance of one unit of the
Money Market Subaccount at the beginning of the period, dividing such net change
in account value by the value of the hypothetical account at the beginning of
the period to determine the base period return, and annualizing this quotient on
a 365-day basis. The net change in account value reflects: 1) net income from
the Subaccount attributable to the hypothetical account; and 2) charges and
deductions imposed under the Contract that are attributable to the hypothetical
account. The charges and deductions include the per unit charges for the
hypothetical account for: 1) the annual administration fee; 2) the mortality and
expense risk charge; and 3) the asset-based administration charge. For purposes
of calculating current yields for a Contract, an average per unit annual
administration fee is used based on the $30 annual administration fee deducted
for the prior Contract Year of the Contract Anniversary. Current Yield is
calculated according to the following formula:
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
<TABLE>
<S> <C> <C>
NCS = the net change in the value of the Money Market Subaccount
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and depreciation) for
the seven-day period
attributable to a hypothetical account having a balance of 1
Subaccount unit.
ES = Per unit expenses attributable to the hypothetical account
for the seven-day period.
UV = The unit value for the first day of the seven-day period.
</TABLE>
Effective Yield = (1 + (NCS - ES)/UV) 365/7 - 1
Where:
<TABLE>
<S> <C> <C>
NCS = the net change in the value of the Money Market Subaccount
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and depreciation) for
the seven-day period
attributable to a hypothetical account having a balance of 1
Subaccount unit.
ES = per unit expenses attributable to the hypothetical account
for the seven-day period.
UV = the unit value for the first day of the seven-day period.
</TABLE>
Because of the charges and deductions imposed under the Contract, the yield
for the Money Market Subaccount is lower than the yield for the Money Market
Fund.
The current and effective yields on amounts held in the Money Market
Subaccount normally fluctuate on a daily basis. THEREFORE, THE DISCLOSED YIELD
FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
YIELDS OR RATES OF RETURN. The Money Market Subaccount's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the Money Market Fund, the types and quality of portfolio
securities held by the Fund and the Fund's operating expenses. Yields on amounts
held in the Money Market Subaccount may also be presented for periods other than
a seven-day period.
Yield calculations do not take into account the surrender charge under the
Contract equal to 4% to 7% of certain purchase payments during the five full
years between the date of receipt of the purchase payment and the date of
surrender or withdrawal.
OTHER SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of one or more of the Subaccounts (except the Money Market
Subaccount) for a Contract for 30-day or one-month periods. The annualized yield
of a Subaccount refers to income generated by the Subaccount during a 30-day or
one-month period and is assumed to be generated each period over a 12-month
period.
The yield is computed by 1) dividing the net investment income of the Fund
attributable to the Subaccount units less Subaccount expenses for the period; by
2) the maximum offering price per unit on the last day of the period times the
daily average number of units outstanding for the period; by 3) compounding
4
<PAGE> 5
that yield for a six-month period; and by 4) multiplying that result by 2.
Expenses attributable to the Subaccount include the annual administration fee,
the asset-based administration charge and the mortality and expense risk charge.
The yield calculation assumes an annual administration fee of $30 per year per
Contract deducted for the prior Contract Year as of the Contract Anniversary.
For purposes of calculating the 30-day or one-month yield, an average
administration fee based on the average Variable Account Value is used to
determine the amount of the charge attributable to the Subaccount for the 30-day
or one-month period. The 30-day or one-month yield is calculated according to
the following formula:
Yield = 2 X (((NI - ES)/(U X UV) + 1) 6 - 1)
Where:
<TABLE>
<S> <C> <C>
NI = net income of the Fund for the 30-day or one-month period
attributable to the Subaccount's units.
ES = expenses of the Subaccount for the 30-day or one-month
period.
U = the average number of units outstanding.
UV = the unit value at the close (highest) of the last day in the
30-day or one-month period.
</TABLE>
Because of the charges and deductions imposed under the Contracts, the
yield for the Subaccount is lower than the yield for the corresponding Fund.
The yield on the amounts held in the Subaccounts normally fluctuates over
time. THEREFORE, THE DISCLOSED YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN
INDICATION OR REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. A subaccount's
actual yield is affected by the types and quality of the securities held by the
corresponding Fund and that Fund's operating expenses.
Yield calculations do not take into account the surrender charge under the
Contract equal to 4% to 7% of certain purchase payments during the five full
years between the date of receipt of the purchase payment and the date of
surrender or withdrawal.
AVERAGE ANNUAL TOTAL RETURNS
From time to time, sales literature or advertisements may quote standard
average annual total returns for one or more of the Subaccounts for various
periods of time.
When a Subaccount or Fund has been in operation for 1, 5, and 10 years,
respectively, the standard average annual total return for these periods will be
provided. Average annual total returns for other periods of time may, from time
to time, also be disclosed.
Standard average annual total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods. The ending date for each period for which total return
quotations are provided will be for the most recent calendar quarter-end
practicable, considering the type of the communication and the media through
which it is communicated.
Standard average annual total returns are calculated using Subaccount unit
values which the Company calculates on each Valuation Day based on the
performance of the Subaccount's underlying Fund, the deductions for the
mortality and expense risk charge, and the deductions for the asset-based
administration charge and the annual administration fee. The calculation assumes
that the annual administration fee is $30 per year per Contract deducted for the
prior Contract Year as of the Contract Anniversary. For purposes of calculating
standard average annual total return, an average per-dollar per-day annual
administration fee attributable to the hypothetical account for the period is
used. The calculation also assumes surrender of the Contract at the end of the
period for the return quotation. Standard average annual total returns will
therefore
5
<PAGE> 6
reflect a deduction of the surrender charge for any period less than six years.
The standard average annual total return is calculated according to the
following formula:
<TABLE>
<CAPTION>
TR = ((ERV/P 1/N) - 1)
<S> <C>
Where:
TR = the average annual total return net of Subaccount recurring
charges.
ERV = the ending redeemable value (net of any applicable surrender
charge) of the hypothetical account at the end of the
period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
</TABLE>
From time to time, sales literature or advertisements any quote standard
average annual total returns for periods prior to the date the Variable Account
commenced operations. Such performance information for the Subaccounts is
calculated based on the performance of the various Funds and the assumption that
the Subaccounts were in existence for the same periods as those indicated for
the Funds, with the level of Contract charges that were in effect at the
inception of the Subaccounts.
Fund total return information used to calculate the standard average annual
total returns of the Subaccounts for periods prior to the inception of the
Subaccounts has been provided by the Funds. The Funds are not affiliated with
the Company. While the Company has no reason to doubt the accuracy of these
figures provided by the Funds, the Company has not independently verified the
accuracy of these figures.
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote
average annual total returns that do not reflect the surrender charge. These are
calculated in exactly the same way as standard average annual total returns
described above, except that the ending redeemable value of the hypothetical
account for the period is replaced with an ending value for the period that does
not take into account any charges on amounts surrendered or withdrawn.
The Company may disclose cumulative total returns in conjunction with the
standard formats described above. The cumulative total returns will be
calculated using the following formula:
<TABLE>
<CAPTION>
<S> <C> <C>
<S> <C> <C>
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of subaccount recurring
charges for the period.
ERV = The ending redeemable value of the hypothetical investment
at the end of the period.
P = A hypothetical single payment of $1,000.
</TABLE>
EFFECT OF THE ANNUAL ADMINISTRATION FEE ON PERFORMANCE DATA
The Contract provides for a $30 annual administration fee to be deducted
annually for each prior Contract Year as of the Contract Anniversary, from the
Subaccount Values and Guarantee Amounts based on the proportion that each bears
to the Contract Value. For purposes of reflecting the change in yield and total
return quotations, the charge is converted into a per-dollar per-day charge
based on the average Subaccount Value and Guarantee Amount of all Contracts on
the last day of the period for which quotations are provided. The per-dollar
per-day average charge will then be adjusted to reflect the basis upon which the
particular quotation is calculated.
PERFORMANCE INFORMATION
The following charts reflect performance information for the Subaccounts of
the Variable Account for the periods shown. Chart 1 reflects performance
information commencing from the date the Subaccounts of the Variable Account
first invested in the underlying Portfolio. Chart 2 reflects performance
information
6
<PAGE> 7
commencing from the inception date of the underlying Portfolio (which dates may
precede the inception dates of the corresponding Subaccount).
There is no performance shown in Chart 1 below for the Alger American
Leveraged AllCap; Alliance Premier Growth; Alliance Growth and Income; American
Century VP Income & Growth; American Century VP Value; Templeton Developing
Markets Securities; Templeton Asset Strategy; Lazard Retirement Equity; Lazard
Retirement Small Cap; Morgan Stanley International Magnum; and Morgan Stanley
Emerging Markets Equity Subaccounts because they were not available under the
Contract until the date of this prospectus.
CHART 1 TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999:
<TABLE>
<CAPTION>
COLUMN A (REFLECTS ALL CHARGES)
-------------------------------------------
SUBACCOUNT
INCEPTION SINCE
DATE 1 YEAR 3 YEARS INCEPTION
---------- ------ ------- ---------
<S> <C> <C> <C> <C>
Federated High Income Bond Fund II.................... 11/04/96 (6.24)% (1.68)% (2.49)%
Federated Prime Money Fund II......................... 11/04/96 (4.60)% (3.05)% (4.14)%
Federated Utility Fund II............................. 11/04/96 (6.80)% 5.26% 4.05%
Fidelity VIP Equity -- Income......................... 11/04/96 (2.55)% 7.11% 4.69%
Fidelity VIP II Asset Manager......................... 11/04/96 1.81% 8.39% 5.95%
Fidelity VIP II Contrafund............................ 11/04/96 13.88% 16.89% 14.14%
Fidelity VIP II Index 500............................. 11/04/96 10.44% 17.80% 14.45%
Alger American Growth................................. 11/04/96 22.57% 25.56% 21.26%
Alger American MidCap Growth.......................... 11/04/96 20.83% 16.25% 12.91%
Alger American Small Capitalization................... 11/04/96 31.44% 13.63% 11.09%
MFS Emerging Growth................................... 11/04/96 61.96% 31.95% 26.49%
MFS Growth With Income................................ 11/04/96 (2.22)% 10.42% 7.90%
MFS Research.......................................... 11/04/96 13.69% 13.53% 10.65%
MFS Total Return...................................... 11/04/96 (5.53)% 3.72% 1.77%
First Eagle SoGen Overseas Variable................... 11/04/96 33.10% 4.83% 3.16%
Van Eck Worldwide Emerging Markets.................... 11/04/96 83.56% (3.06)% (3.94)%
Van Eck Worldwide Hard Assets......................... 11/04/96 10.89% (12.24)% (12.64)%
Janus Aspen Series Capital Appreciation............... 08/31/99 NA NA 165.10%
Janus Aspen Series Growth............................. 08/31/99 NA NA 87.99%
Janus Aspen Series Balanced........................... 08/31/99 NA NA 45.88%
Janus Aspen Series Flexible Income.................... 08/31/99 NA NA (1.79)%
Janus Aspen Series International Growth............... 08/31/99 NA NA 278.10%
Janus Aspen Series Worldwide Growth................... 08/31/99 NA NA 178.83%
</TABLE>
7
<PAGE> 8
CHART 2 TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999:
<TABLE>
<CAPTION>
COLUMN A (REFLECTS ALL CHARGES)
--------------------------------------------------------------------------
PORTFOLIO
INCEPTION SINCE
DATE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
--------- ------ ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Federated High Income Bond Fund
II................................ 03/01/94 (6.24)% (1.68)% 4.50% NA (0.82)%
Federated Prime Money Fund II....... 11/21/94 (4.60)% (3.05)% (0.99)% NA (4.10)%
Federated Utility Fund II........... 02/10/94 (6.80)% 5.26% 9.02% NA 3.05%
Fidelity VIP Equity-Income.......... 10/09/86 (2.55)% 7.11% 12.70% 13.14% 4.43%
Fidelity VIP II Asset Manager....... 09/06/89 1.81% 8.39% 10.35% 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% 21.33% NA 11.02%
Alger American Growth............... 01/09/89 22.57% 25.56% 23.90% 21.21% 12.85%
Alger American MidCap Growth........ 05/03/93 20.83% 16.25% 19.35% NA 14.32%
Alger American Small
Capitalization.................... 09/21/88 31.44% 13.63% 16.03% 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% 9.20% NA 5.80%
First Eagle 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)% (3.32)% 1.92% (4.53)%
Janus Aspen Series Capital
Appreciation...................... 05/02/97 53.05% NA NA NA 44.13%
Janus Aspen Series Growth........... 09/13/93 31.96% 23.99% 22.88% NA 13.89%
Janus Aspen Series Balanced......... 09/13/93 16.17% 18.22% 17.96% NA 10.54%
Janus Aspen Series Flexible
Income............................ 09/13/93 (6.88)% (0.51)% 4.90% NA (0.56)%
Janus Aspen Series International
Growth............................ 05/02/94 67.05% 26.27% 26.07% NA 17.47%
Janus Aspen Series Worldwide
Growth............................ 09/13/93 50.72% 27.22% 26.40% NA 18.86%
Alliance Premier Growth............. 06/26/92 19.48% 27.00% 19.91% NA 10.38%
Alliance Growth and Income.......... 01/14/91 (8.56)% 1.84% 6.85% 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)% 2.37% 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>
8
<PAGE> 9
CHART 2 TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999 (CONTINUED):
<TABLE>
<CAPTION>
COLUMN B (REFLECTS ALL CHARGES EXCEPT SURRENDER CHARGE)
-------------------------------------------------------------
SINCE
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
------ ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Federated High Income Bond Fund II............. 0.82% 4.60% 8.86% NA 6.64%
Federated Prime Money Fund II.................. 2.59% 3.14% 3.13% NA 3.11%
Federated Utility Fund II...................... 0.21% 11.98% 13.56% NA 10.81%
Fidelity VIP Equity-Income..................... 4.78% 13.94% 17.39% 13.14% 12.29%
Fidelity VIP II Asset Manager.................. 9.48% 15.31% 14.94% 12.09% 11.75%
Fidelity VIP II Contrafund..................... 22.45% 24.35% NA NA 26.30%
Fidelity VIP II Index 500...................... 18.76% 25.32% 26.39% NA 19.37%
Alger American Growth.......................... 31.80% 33.58% 29.07% 21.21% 21.35%
Alger American MidCap Growth................... 29.93% 23.67% 24.32% NA 22.92%
Alger American Small Capitalization............ 41.33% 20.88% 20.86% 16.50% 19.09%
Alger American Leveraged AllCap................ 38.04% 20.60% NA NA 67.17%
MFS Emerging Growth............................ 74.15% 40.37% NA NA 34.43%
MFS Growth With Income......................... 5.14% 17.47% NA NA 19.67%
MFS Research................................... 22.24% 20.78% NA NA 21.09%
MFS Total Return............................... 1.58% 10.34% 13.75% NA 13.76%
First Eagle SoGen Overseas Variable............ 43.12% 11.52% NA NA 11.92%
Van Eck Worldwide Emerging Markets............. 97.37% 3.12% NA NA 8.14%
Van Eck Worldwide Hard Assets.................. 19.24% (6.63)% 0.71% 1.92% 2.65%
Janus Aspen Series Capital Appreciation........ 64.57% NA NA NA 54.98%
Janus Aspen Series Growth...................... 41.89% 31.90% 28.00% NA 22.46%
Janus Aspen Series Balanced.................... 24.92% 25.77% 22.88% NA 18.86%
Janus Aspen Series Flexible Income............. 0.13% 5.85% 9.27% NA 6.92%
Janus Aspen Series International Growth........ 79.63% 34.33% 31.32% NA 26.32%
Janus Aspen Series Worldwide Growth............ 62.06% 35.34% 31.66% NA 27.81%
Alliance Premier Growth........................ 28.47% 35.10% 24.90% NA 18.69%
Alliance Growth and Income..................... (1.67)% 8.34% 11.30% NA 7.49%
American Century VP Income & Growth............ 16.28% NA NA NA 22.05%
American Century VP Value...................... (12.87)% 0.68% NA NA 3.04%
Templeton Developing Markets Securities*....... 48.98% (7.73)% NA NA (7.84)%
Templeton Asset Strategy**..................... 2.47% 1.85% 6.63% 5.64% 6.16%
Lazard Retirement Equity....................... 2.83% NA NA NA 5.44%
Lazard Retirement Small Cap.................... 1.66% NA NA NA (2.74)%
Morgan Stanley International Magnum............ 21.89% NA NA NA 10.02%
Morgan Stanley Emerging Markets................ 92.81% 10.83% NA NA 9.09%
</TABLE>
9
<PAGE> 10
CHART 2 TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999 (CONTINUED)
<TABLE>
<CAPTION>
COLUMN C
ANNUAL PERCENTAGE CHANGE
CALENDAR YEAR RETURN
------------------------
1998 1999
------ ------
<S> <C> <C>
Federated High Income Bond Fund II.......................... 1.19% 0.82%
Federated Prime Money Fund II............................... 3.41% 2.59%
Federated Utility Fund II................................... 12.26% 0.21%
Fidelity VIP Equity-Income.................................. 10.48% 4.78%
Fidelity VIP II Asset Manager............................... 15.67% 9.48%
Fidelity VIP II Contrafund.................................. 28.23% 22.45%
Fidelity VIP II Index 500................................... 26.47% 18.76%
Alger American Growth....................................... 45.91% 31.80%
Alger American MidCap Growth................................ 28.40% 29.93%
Alger American Small Capitalization......................... 13.85% 41.33%
Alger American Leveraged AllCap............................. 48.43% 17.94%
MFS Emerging Growth......................................... 32.21% 74.15%
MFS Growth With Income...................................... 20.54% 5.14%
MFS Research................................................ 21.60% 22.24%
MFS Total Return............................................ 10.62% 1.58%
First Eagle SoGen Overseas Variable......................... 0.66% 43.12%
Van Eck Worldwide Emerging Markets.......................... (36.22)% 97.37%
Van Eck Worldwide Hard Assets............................... (29.71)% 19.24%
Janus Aspen Series Capital Appreciation..................... 55.82% 64.57%
Janus Aspen Series Growth................................... 33.69% 41.89%
Janus Aspen Series Balanced................................. 32.34% 24.92%
Janus Aspen Series Flexible Income.......................... 7.53% 0.13%
Janus Aspen Series International Growth..................... 15.54% 79.63%
Janus Aspen Series Worldwide Growth......................... 27.05% 62.06%
Alliance Premier Growth..................................... 45.69% 28.47%
Alliance Growth and Income.................................. 8.00% (1.67)%
American Century VP Income & Growth......................... 23.97% 16.28%
American Century VP Value................................... (4.29)% (12.87)%
Templeton Developing Markets Securities*.................... (23.78)% 48.98%
Templeton Asset Strategy**.................................. (1.18)% 2.47%
Lazard Retirement Equity.................................... NA 2.83%
Lazard Retirement Small Cap................................. (4.65)% 1.66%
Morgan Stanley International Magnum......................... 6.62% 21.89%
Morgan Stanley Emerging Markets............................. (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.
10
<PAGE> 11
VARIABLE ANNUITY PAYMENTS
ANNUITY UNIT VALUE
The value of an Annuity Unit is calculated at the same time that the value
of an Accumulation Unit is calculated and is based on the same values for Fund
shares and other assets and liabilities. (See "Annuity Payments" in the
Prospectus.) The Annuity Unit Value for each Subaccount's first Valuation Period
was set at $10. The Annuity Unit Value for a Subaccount for each subsequent
Valuation Period is equal to (a) multiplied by (b) divided by (c) where:
(a) is the Net Investment Factor for the Valuation Period for which
the Annuity Unit Value is being calculated;
(b) is the Annuity Unit Value for the preceding Valuation Period; and
(c) is a daily Benchmark Rate of Return factor (for the 3% benchmark
rate of return) adjusted for the number of days in the Valuation Period.
The Benchmark Rate of Return factor is equal to one plus 3%, or 1.03. The
annual factor can be translated into a daily factor of 1.00008098.
The following illustrations show, by use of hypothetical examples, the
method of determining the Annuity Unit Value and the amount of several Variable
Annuity Payments based on one Subaccount.
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
<TABLE>
<C> <S> <C>
1. Annuity Unit Value for immediately preceding Valuation
Period...................................................... 10.00000000
2. Net Investment factor....................................... 1.00036164
3. Daily factor to compensate for Benchmark Rate of Return of
3%.......................................................... 1.00008099
4. Adjusted Net Investment Factor (2)/(3)...................... 1.00028063
5. Annuity Unit Value for current Valuation Period (4)X(1)..... 10.00280630
</TABLE>
ILLUSTRATION OF VARIABLE ANNUITY PAYMENTS
(ASSUMING NO PREMIUM TAX IS APPLICABLE)
<TABLE>
<C> <S> <C>
1. Number of Accumulation Units at Annuity Date................ 1,000.00
2. Accumulation Unit Value..................................... 12.55548000
3. Adjusted Contract Value (1)X(2)............................. $ 12,555.48
4. First monthly Annuity Payment per $1,000 of adjusted
Contract Value.............................................. 9.63
5. First monthly Annuity Payment (3)X(4)/1,000................. $ 120.91
6. Annuity Unit Value.......................................... 10.00280630
7. Number of Annuity Units (5)/(6)............................. 12.08760785
8. Assume Annuity Unit value for second month equal to......... 10.04000000
9. Second Monthly Annuity Payment (7)X(8)...................... $ 121.36
10. Assume Annuity Unit Value for third month equal to.......... 10.05000000
11. Third Monthly Annuity Payment (7)X(10)...................... $ 121.48
</TABLE>
11
<PAGE> 12
VALUATION DAYS
As defined in the prospectus, for each Subaccount a Valuation Day is each
day on which the New York Stock Exchange is open for business, except for
certain holidays listed in the prospectus and days that a Subaccount's
corresponding Fund does not value its shares.
OTHER INFORMATION
A registration statement has been filed with the SEC under the Securities
Act of 1933, as amended, with respect to the Contracts discussed in this
Statement of Additional Information. Not all the information set forth in the
registration statement, amendments and exhibits thereto has been included in
this Statement of Additional Information. Statements contained in this Statement
of Additional Information concerning the content of the Contracts and other
legal instruments are summaries. For a complete statement of the terms of these
documents, reference should be made to the instruments filed with the SEC.
FINANCIAL STATEMENTS
The financial statements for Valley Forge Life Insurance Company Variable
Annuity Separate Account and VFL follow.
12
<PAGE> 13
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
13
<PAGE> 14
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
FEDERATED FIDELITY
PRIME FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
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>
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>
THE ALGER
AMERICAN
SMALL
CAPITALIZATION
DECEMBER 31, 1999 PORTFOLIO
- ----------------- --------------
<S> <C>
ASSETS:
Investments, at
market value (See
Supplemental cost
information
below)............. $ 3,931,611
-----------
Total
Assets..... 3,931,611
-----------
LIABILITIES:
Payable for fund
withdrawals and
surrenders......... --
-----------
Total
liabilities.. --
-----------
Net assets... $ 3,931,611
===========
Supplemental cost
information:
Investments, at
cost:............ $ 2,998,780
===========
</TABLE>
<TABLE>
<CAPTION>
JANUS JANUS
JANUS ASPEN JANUS JANUS ASPEN JANUS ASPEN ASPEN
VAN ECK SERIES ASPEN ASPEN SERIES SERIES SERIES VAN ECK
EMERGING CAPITAL SERIES SERIES FLEXIBLE INTERNATIONAL WORLD WIDE WORLDWIDE
MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH HARD ASSETS
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND
- ----------------- ---------- ------------ ---------- ---------- --------- ------------- ---------- -----------
<S> <C> <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 $ 410,436
---------- ---------- ---------- ---------- -------- -------- ---------- ----------
Total
assets..... 1,085,079 8,222,654 2,866,575 3,580,814 260,415 724,430 2,733,573 410,436
---------- ---------- ---------- ---------- -------- -------- ---------- ----------
LIABILITIES:
Payable for fund
withdrawals and
surrenders......... (1,990) -- (863) -- (54,538) (91) (78) (46,638)
---------- ---------- ---------- ---------- -------- -------- ---------- ----------
Total
liabilities.. (1,990) -- (863) -- (54,538) (91) (78) (46,638)
---------- ---------- ---------- ---------- -------- -------- ---------- ----------
Net assets... $1,083,089 $8,222,654 $2,865,712 $3,580,814 $205,877 $724,339 $2,733,495 $ 363,798
========== ========== ========== ========== ======== ======== ========== ==========
Supplemental cost
information:
Investments, at
cost:............ $ 621,316 $6,460,434 $2,564,139 $3,357,450 $202,939 $618,384 $2,394,255 $ 328,321
========== ========== ========== ========== ======== ======== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
<TABLE>
<CAPTION>
THE ALGER MFS
THE ALGER AMERICAN MFS GROWTH MFS SOGEN
AMERICAN MIDCAP EMERGING MFS WITH LIMITED MFS TOTAL OVERSEAS
GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE
PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND
----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments, at
market value (See
Supplemental cost
information
below)............. $19,149,543 $3,883,853 $10,768,176 $4,694,705 $5,275,194 $2,127,072 $5,011,714 $3,323,165
----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Total Assets......... 19,149,543 3,883,853 10,768,176 4,694,705 5,275,194 2,127,072 5,011,714 3,323,165
----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Payable for fund
withdrawals and
surrenders......... (25,509) (20,216) -- (33,341) (42,329) (142,042) (151,324) --
----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Total liabilities.... (25,509) (20,216) -- (33,341) (42,329) (142,042) (151,324) --
----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Net assets........... $19,124,034 $3,863,637 $10,768,176 $4,661,364 $5,232,865 $1,985,030 $4,860,390 $3,323,165
=========== ========== =========== ========== ========== ========== ========== ==========
Supplemental cost
information:
Investments, at
cost:.............. $16,042,433 $3,187,774 $ 7,168,784 $3,838,648 $4,985,879 $2,034,696 $4,927,674 $2,632,373
=========== ========== =========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
15
<PAGE> 16
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
FOR THE YEAR 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
======== ======== ========= ======== ======== ========== ==========
<CAPTION>
THE ALGER
AMERICAN SMALL
FOR THE YEAR ENDED CAPITALIZATION
DECEMBER 31, 1999 PORTFOLIO
------------------ ---------------
<S> <C>
Investment income:
Dividend income........... $ 240,850
----------
240,850
----------
Expenses:
Mortality and expense risk
and administration
charges................. 31,029
----------
31,029
----------
Net investment
income (loss)...... 209,821
----------
Investment gains and
(losses):
Net realized gains
(losses)................ (27,093)
Net unrealized gains
(losses)................ 904,672
----------
Net realized and
unrealized
investment gains
(losses)........... 877,579
----------
Net increase
(decrease) in net
assets resulting
from operations.... $1,087,400
==========
</TABLE>
<TABLE>
<CAPTION>
JANUS JANUS JANUS
VAN ECK ASPEN JANUS JANUS ASPEN ASPEN
WORLDWIDE VAN ECK SERIES ASPEN ASPEN SERIES SERIES
HARD EMERGING CAPITAL SERIES SERIES FLEXIBLE INTERNATIONAL
ASSETS MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH
FOR THE YEAR ENDED DECEMBER 31, 1999 FUND FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------ --------- -------- ------------ --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income... $ 2,253 -- -- -- -- -- --
------- -------- ---------- -------- -------- ------ --------
2,253 -- -- -- -- -- --
------- -------- ---------- -------- -------- ------ --------
Expenses:
Mortality and expense risk and
administration charges... 2,921 $ 8,211 $ 19,876 $ 5,105 $ 4,713 $ 324 $ 664
------- -------- ---------- -------- -------- ------ --------
2,921 8,211 19,876 5,105 4,713 324 664
------- -------- ---------- -------- -------- ------ --------
Net investment income
(loss)... (668) (8,211) (19,876) (5,105) (4,713) (324) (664)
------- -------- ---------- -------- -------- ------ --------
Investment gains and (losses):
Net realized gains (losses)... (1,568) (10,144) 17,638 3,441 41 (829) 1,668
Net unrealized gains (losses)... 49,925 526,239 1,762,220 301,573 223,364 2,938 105,955
------- -------- ---------- -------- -------- ------ --------
Net realized and unrealized
investment gains
(losses)... 48,357 516,095 1,779,858 305,014 223,405 2,109 107,623
------- -------- ---------- -------- -------- ------ --------
Net increase (decrease) in
net assets resulting from
operations... $47,689 $507,884 $1,759,982 $299,909 $218,692 $1,785 $106,959
======= ======== ========== ======== ======== ====== ========
<CAPTION>
JANUS
ASPEN
SERIES
WORLD WIDE
GROWTH
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO
- ------------------------------------ ----------
<S> <C>
Investment income:
Dividend income... --
--------
--
--------
Expenses:
Mortality and expense risk and
administration charges... $ 3,010
--------
3,010
--------
Net investment income
(loss)... (3,010)
--------
Investment gains and (losses):
Net realized gains (losses)... 157
Net unrealized gains (losses)... 339,240
--------
Net realized and unrealized
investment gains
(losses)... 339,397
--------
Net increase (decrease) in
net assets resulting from
operations... $336,387
========
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 17
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THE ALGER MFS
THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN
AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS
GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND
- ------------------------------------ ---------- --------- ---------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income.................... $ 958,176 $220,841 -- $32,893 $ 23,662 $112,682 $ 143,153 $ 34,501
---------- -------- ---------- -------- -------- -------- --------- --------
958,176 220,841 -- 32,893 23,662 112,682 143,153 34,501
---------- -------- ---------- -------- -------- -------- --------- --------
Expenses:
Mortality and expense risk and
administration charges........... 161,061 29,020 $ 70,170 43,888 56,667 $23,473 51,054 37,217
---------- -------- ---------- -------- -------- -------- --------- --------
161,061 29,020 70,170 43,888 56,667 23,473 51,054 37,217
---------- -------- ---------- -------- -------- -------- --------- --------
Net investment income (loss)..... 797,115 191,821 (70,170) (10,995) (33,005) 89,209 92,099 (2,716)
---------- -------- ---------- -------- -------- -------- --------- --------
Investment gains and (losses):
Net realized gains (losses):....... 335,913 21,690 245,537 107,121 122,217 (6,655) 14,997 140,440
Net unrealized gains (losses)...... 2,287,237 529,227 3,087,888 655,276 47,625 (25,526) (127,595) 796,693
---------- -------- ---------- -------- -------- -------- --------- --------
Net realized and unrealized
investment gains (losses)........ 2,623,150 550,917 3,333,425 762,397 169,842 (32,181) (112,598) 937,133
---------- -------- ---------- -------- -------- -------- --------- --------
Net increase (decrease) in net
assets resulting from
operations....................... $3,420,265 $742,738 $3,263,255 $751,402 $136,837 $57,028 $ (20,499) $934,417
========== ======== ========== ======== ======== ======== ========= ========
</TABLE>
See accompanying Notes to Financial Statements.
17
<PAGE> 18
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY
PRIME FEDERATED INCOME EQUITY- ASSET FIDELITY
MONEY UTILITY BOND INCOME MANAGER INDEX 500
FOR THE YEAR ENDED DECEMBER 31, 1999 FUND II FUND II FUND II PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------ ------------ ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss)........ $ 488,502 $ 112,913 $ 252,191 $ 124,454 $ 132,967 $ (45,601)
Net realized and unrealized gains
(losses).......................... -- (78,940) (309,577) 65,060 360,225 3,443,825
------------ ---------- ---------- ---------- ---------- -----------
Change in net assets resulting
from operations................. 488,502 33,973 (57,386) 189,514 493,192 3,398,224
------------ ---------- ---------- ---------- ---------- -----------
From capital transactions:
Net premiums/deposits............... 33,173,793 831,090 1,266,165 2,220,476 1,838,108 7,195,871
Death benefits...................... -- (159,614) (191,732) (58,842) (115,043) (114,424)
Surrenders.......................... (1,163,352) (29,199) (116,987) (310,647) (1,668) (621,921)
Withdrawals......................... (335,752) (50,907) (83,712) (131,986) (50,538) (357,810)
Transfers into (out of) subaccounts,
net -- Note 1..................... (8,057,071) 928,843 874,120 1,788,608 1,464,890 4,065,763
------------ ---------- ---------- ---------- ---------- -----------
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
------------ ---------- ---------- ---------- ---------- -----------
Increase in net assets................ 24,106,120 1,554,186 1,690,468 3,697,123 3,628,941 13,565,703
Net assets at beginning of period..... 5,562,204 1,693,662 3,166,765 4,264,468 2,258,023 10,689,980
------------ ---------- ---------- ---------- ---------- -----------
Net assets at end of period... $ 29,668,324 $3,247,848 $4,857,233 $7,961,591 $5,886,964 $24,255,683
------------ ---------- ---------- ---------- ---------- -----------
Net asset value per unit at
end
of period................... $ 1.00 $ 14.35 $ 10.24 $ 25.71 $ 18.67 $ 167.41
============ ========== ========== ========== ========== ===========
Units outstanding at end of
period...................... 29,668,324 226,331 474,339 309,669 315,317 144,888
============ ========== ========== ========== ========== ===========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)........ $ 207,113 $ 3,202 $ (9,420) $ 8,287 $ 19,013 $ (22,378)
Net realized and unrealized gains
(losses).......................... 634 97,354 (26,804) 186,584 141,214 1,288,532
------------ ---------- ---------- ---------- ---------- -----------
Change in net assets resulting
from operations................. 207,747 100,556 (36,224) 194,871 160,227 1,266,154
------------ ---------- ---------- ---------- ---------- -----------
From capital transactions:
Net premiums/deposits............... 24,848,283 1,307,253 2,301,701 2,167,250 1,237,984 6,238,184
Death benefits...................... (15,275) (19,978) (13,846) (7,421) -- --
Surrenders.......................... (198,856) (15,885) (12,264) (37,904) (1,620) (50,773)
Withdrawals......................... (112,539) (77,318) (93,235) (31,134) (22,890) (110,964)
Transfers into (out of) subaccounts,
net -- Note 1..................... (20,028,240) 348,351 830,154 1,482,837 616,956 2,784,494
------------ ---------- ---------- ---------- ---------- -----------
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
------------ ---------- ---------- ---------- ---------- -----------
Increase in net assets................ 4,701,120 1,642,979 2,976,286 3,768,499 1,990,657 10,127,095
Net assets at beginning of period..... 861,084 50,683 190,479 495,969 267,366 562,885
------------ ---------- ---------- ---------- ---------- -----------
Net assets at end of period... $ 5,562,204 $1,693,662 $3,166,765 $4,264,468 $2,258,023 $10,689,980
------------ ---------- ---------- ---------- ---------- -----------
Net asset value per unit at
end
of period................... $ 1.00 $ 15.27 $ 10.92 $ 25.42 $ 18.16 $ 141.25
============ ========== ========== ========== ========== ===========
Units outstanding at end of
period...................... 5,562,204 110,914 289,997 167,760 124,340 75,681
============ ========== ========== ========== ========== ===========
<CAPTION>
THE ALGER
AMERICAN
FIDELITY SMALL
CONTRAFUND CAPITALIZATION
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO PORTFOLIO
- ------------------------------------ ----------- --------------
<S> <C> <C>
From operations:
Net investment income (loss)........ $ 62,252 $ 209,821
Net realized and unrealized gains
(losses).......................... 1,676,921 877,579
----------- ----------
Change in net assets resulting
from operations................. 1,739,173 1,087,400
----------- ----------
From capital transactions:
Net premiums/deposits............... 4,291,826 1,066,895
Death benefits...................... (120,178) --
Surrenders.......................... (225,432) (13,535)
Withdrawals......................... (115,676) (33,248)
Transfers into (out of) subaccounts,
net -- Note 1..................... 2,549,528 222,844
----------- ----------
Change in net assets resulting
from capital transactions....... 6,380,068 1,242,956
----------- ----------
Increase in net assets................ 8,119,241 2,330,356
Net assets at beginning of period..... 3,710,438 1,601,255
----------- ----------
Net assets at end of period... $11,829,679 $3,931,611
----------- ----------
Net asset value per unit at
end
of period................... $ 29.15 $ 55.15
=========== ==========
Units outstanding at end of
period...................... 405,821 71,289
=========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)........ $ 3,442 $ 115,699
Net realized and unrealized gains
(losses).......................... 507,452 2,409
----------- ----------
Change in net assets resulting
from operations................. 510,894 118,108
----------- ----------
From capital transactions:
Net premiums/deposits............... 1,114,162 1,012,659
Death benefits...................... (10,449) (3,193)
Surrenders.......................... (23,821) (27,136)
Withdrawals......................... (23,659) (16,711)
Transfers into (out of) subaccounts,
net -- Note 1..................... 1,814,245 321,797
----------- ----------
Change in net assets resulting
from capital transactions....... 2,870,478 1,287,416
----------- ----------
Increase in net assets................ 3,381,372 1,405,524
Net assets at beginning of period..... 329,066 195,731
----------- ----------
Net assets at end of period... $ 3,710,438 $1,601,255
----------- ----------
Net asset value per unit at
end
of period................... $ 24.44 $ 43.97
=========== ==========
Units outstanding at end of
period...................... 151,818 36,417
=========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
18
<PAGE> 19
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<TABLE>
<CAPTION>
THE ALGER MFS
THE ALGER AMERICAN MFS GROWTH MFS
AMERICAN MIDCAP EMERGING MFS WITH LIMITED
GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES
- ------------------------------------ ----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss)............. $ 797,115 $ 191,821 $ (70,170) $ (10,995) $ (33,005) $ 89,209
Net realized and unrealized gains
(losses)............................... 2,623,150 550,917 3,333,425 762,397 169,842 (32,181)
----------- ---------- ----------- ---------- ---------- ----------
Change in net assets resulting from
operations........................... 3,420,265 742,738 3,263,255 751,402 136,837 57,028
----------- ---------- ----------- ---------- ---------- ----------
From capital transactions:
Net premiums/deposits.................... 5,221,581 1,384,117 2,740,437 1,024,522 1,191,276 261,437
Death benefits........................... (52,193) (9,196) (5,257) (33,341) -- (11,410)
Surrenders............................... (246,417) (30,775) (31,310) (36,878) (26,140) (77,142)
Withdrawals.............................. (208,410) (38,843) (34,437) (35,053) (59,788) (22,640)
Transfers into (out of) subaccounts,
net -- Note 1.......................... 5,544,308 642,592 1,911,677 1,312,541 1,605,262 746,199
----------- ---------- ----------- ---------- ---------- ----------
Change in net assets resulting from
capital transactions................. 10,258,869 1,947,895 4,581,110 2,231,791 2,710,610 896,444
----------- ---------- ----------- ---------- ---------- ----------
Increase in net assets..................... 13,679,134 2,690,633 7,844,365 2,983,193 2,847,447 953,472
Net assets at beginning of period.......... 5,444,900 1,173,004 2,923,811 1,678,171 2,385,418 1,031,558
----------- ---------- ----------- ---------- ---------- ----------
Net assets at end of period........ $19,124,034 $3,863,637 $10,768,176 $4,661,364 $5,232,865 $1,985,030
----------- ---------- ----------- ---------- ---------- ----------
Net asset value per unit at end
of period........................ $ 64.38 $ 32.23 $ 37.94 $ 23.34 $ 21.31 $ 9.81
=========== ========== =========== ========== ========== ==========
Units outstanding at end of
period........................... 297,049 119,877 283,821 199,716 245,559 202,348
=========== ========== =========== ========== ========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)............. $ 307,440 $ 18,386 $ (10,989) $ (1,475) $ (16,356) $ (7,862)
Net realized and unrealized gains
(losses)............................... 766,562 131,442 548,478 172,413 234,577 (11,034)
----------- ---------- ----------- ---------- ---------- ----------
Change in net assets resulting from
operations........................... 1,074,002 149,828 537,489 170,938 218,221 (18,896)
----------- ---------- ----------- ---------- ---------- ----------
From capital transactions:
Net premiums/deposits.................... 2,385,652 456,073 845,164 586,011 1,164,678 743,654
Death benefits........................... -- (3,436) -- -- (4,023) (7,699)
Surrenders............................... (13,467) -- (9,089) (1,253) -- (6,502)
Withdrawals.............................. (33,198) (1,155) (24,319) (11,140) (17,911) (6,087)
Transfers into (out of) subaccounts,
net -- Note 1.......................... 1,782,528 529,267 1,432,918 777,200 805,436 245,382
----------- ---------- ----------- ---------- ---------- ----------
Change in net assets resulting from
capital transactions................. 4,121,515 980,749 2,244,674 1,350,818 1,948,180 968,748
----------- ---------- ----------- ---------- ---------- ----------
Increase in net assets..................... 5,195,517 1,130,577 2,782,163 1,521,756 2,166,401 949,852
Net assets at beginning of period.......... 249,383 42,427 141,648 156,415 219,017 81,706
----------- ---------- ----------- ---------- ---------- ----------
Net assets at end of period........ $ 5,444,900 $1,173,004 $ 2,923,811 $1,678,171 $2,385,418 $1,031,558
----------- ---------- ----------- ---------- ---------- ----------
Net asset value per unit at end
of period........................ $ 53.22 $ 28.87 $ 21.47 $ 19.05 $ 20.11 $ 10.16
=========== ========== =========== ========== ========== ==========
Units outstanding at end of
period........................... 102,309 40,631 136,181 88,093 118,618 101,531
=========== ========== =========== ========== ========== ==========
<CAPTION>
SOGEN
MFS TOTAL OVERSEAS
RETURN VARIABLE
FOR THE YEAR ENDED DECEMBER 31, 1999 SERIES FUND
- ------------------------------------ ---------- ----------
<S> <C> <C>
From operations:
Net investment income (loss)............. $ 92,099 $ (2,716)
Net realized and unrealized gains
(losses)............................... (112,598) 937,133
---------- ----------
Change in net assets resulting from
operations........................... (20,499) 934,417
---------- ----------
From capital transactions:
Net premiums/deposits.................... 1,432,338 411,295
Death benefits........................... (175,729) --
Surrenders............................... (82,248) (87,477)
Withdrawals.............................. (61,388) (73,467)
Transfers into (out of) subaccounts,
net -- Note 1.......................... 1,874,729 99,935
---------- ----------
Change in net assets resulting from
capital transactions................. 2,987,702 350,286
---------- ----------
Increase in net assets..................... 2,967,203 1,284,703
Net assets at beginning of period.......... 1,893,187 2,038,462
---------- ----------
Net assets at end of period........ $4,860,390 $3,323,165
---------- ----------
Net asset value per unit at end
of period........................ $ 17.75 $ 14.18
========== ==========
Units outstanding at end of
period........................... 273,825 234,356
========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)............. $ 12,833 $ (24,005)
Net realized and unrealized gains
(losses)............................... 69,285 (64,492)
---------- ----------
Change in net assets resulting from
operations........................... 82,118 (88,497)
---------- ----------
From capital transactions:
Net premiums/deposits.................... 968,524 1,098,070
Death benefits........................... -- (3,348)
Surrenders............................... (7,865) (16,724)
Withdrawals.............................. (11,868) (21,157)
Transfers into (out of) subaccounts,
net -- Note 1.......................... 602,434 317,226
---------- ----------
Change in net assets resulting from
capital transactions................. 1,551,225 1,374,067
---------- ----------
Increase in net assets..................... 1,633,343 1,285,570
Net assets at beginning of period.......... 259,844 752,892
---------- ----------
Net assets at end of period........ $1,893,187 $2,038,462
---------- ----------
Net asset value per unit at end
of period........................ $ 18.12 $ 10.07
========== ==========
Units outstanding at end of
period........................... 104,481 202,429
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
19
<PAGE> 20
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<TABLE>
<CAPTION>
JANUS JANUS
VAN ECK ASPEN JANUS JANUS ASPEN
WORLDWIDE VAN ECK SERIES ASPEN ASPEN SERIES
HARD EMERGING CAPITAL SERIES SERIES FLEXIBLE
ASSETS MARKETS APPRECIATION GROWTH BALANCED INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999 FUND FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------ --------- ---------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss)........... $ (668) $ (8,211) $ (19,876) $ (5,105) $ (4,713) $ (324)
Net realized and unrealized gains
(losses)............................. 48,357 516,095 1,779,858 305,014 223,405 2,109
-------- ---------- ---------- ---------- ---------- --------
Change in net assets resulting from
operations......................... 47,689 507,884 1,759,982 299,909 218,692 1,785
-------- ---------- ---------- ---------- ---------- --------
From capital transactions:
Net premiums/deposits.................. 150,522 195,914 6,485,581 2,588,038 3,367,893 204,092
Death benefits......................... -- -- -- -- -- --
Surrenders............................. (8,640) -- (11,563) (9,539) -- --
Withdrawals............................ (1,989) (15,623) (11,346) (12,696) (5,771) --
Transfers into (out of) subaccounts,
net -- Note 1........................ 35,073 (6,561) -- -- -- --
-------- ---------- ---------- ---------- ---------- --------
Change in net assets resulting from
capital transactions............... 174,966 173,730 6,462,672 2,565,803 3,362,122 204,092
-------- ---------- ---------- ---------- ---------- --------
Increase in net assets................... 222,655 681,614 8,222,654 2,865,712 3,580,814 205,877
Net assets at beginning of period........ 141,143 401,475 -- -- -- --
-------- ---------- ---------- ---------- ---------- --------
Net assets at end of period...... $363,798 $1,083,089 $8,222,654 $2,865,712 $3,580,814 $205,877
-------- ---------- ---------- ---------- ---------- --------
Net asset value per unit at end
of period...................... $ 10.96 $ 14.26 $ 33.17 $ 33.65 $ 27.92 $ 11.42
======== ========== ========== ========== ========== ========
Units outstanding at end of
period......................... 33,193 75,953 247,894 85,162 128,253 18,028
======== ========== ========== ========== ========== ========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)........... $ 4,608 $ (2,674)
Net realized and unrealized gains
(losses)............................. (40,765) (109,753)
Change in net assets resulting from
operations......................... (36,157) (112,427)
-------- ----------
From capital transactions:
Net premiums/deposits.................. 128,466 348,583
Death benefits......................... -- --
Surrenders............................. (20,009) (3,769)
Withdrawals............................ (1,198) (4,392)
Transfers into (out of) subaccounts,
net -- Note 1........................ 61,004 156,590
-------- ----------
Change in net assets resulting from
capital transactions............... 168,263 497,012
-------- ----------
Increase in net assets................... 132,106 384,585
Net assets at beginning of period........ 9,037 16,890
-------- ----------
Net assets at end of period...... $141,143 $ 401,475
-------- ----------
Net asset value per unit at end
of period...................... $ 9.20 $ 7.12
======== ==========
Units outstanding at end of
period......................... 15,342 56,387
======== ==========
<CAPTION>
JANUS JANUS
ASPEN ASPEN
SERIES SERIES
INTERNATIONAL WORLD WIDE
GROWTH GROWTH
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO PORTFOLIO
- ------------------------------------ ------------- ----------
<S> <C> <C>
From operations:
Net investment income (loss)........... $ (664) $ (3,010)
Net realized and unrealized gains
(losses)............................. 107,623 339,397
-------- ----------
Change in net assets resulting from
operations......................... 106,959 336,387
-------- ----------
From capital transactions:
Net premiums/deposits.................. 617,608 2,407,678
Death benefits......................... -- --
Surrenders............................. -- (8,172)
Withdrawals............................ (228) (2,401)
Transfers into (out of) subaccounts,
net -- Note 1........................ -- 3
-------- ----------
Change in net assets resulting from
capital transactions............... 617,380 2,397,108
-------- ----------
Increase in net assets................... 724,339 2,733,495
Net assets at beginning of period........ -- --
-------- ----------
Net assets at end of period...... $724,339 $2,733,495
-------- ----------
Net asset value per unit at end
of period...................... $ 38.67 $ 47.75
======== ==========
Units outstanding at end of
period......................... 18,731 57,246
======== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)...........
Net realized and unrealized gains
(losses).............................
Change in net assets resulting from
operations.........................
From capital transactions:
Net premiums/deposits..................
Death benefits.........................
Surrenders.............................
Withdrawals............................
Transfers into (out of) subaccounts,
net -- Note 1........................
Change in net assets resulting from
capital transactions...............
Increase in net assets...................
Net assets at beginning of period........
Net assets at end of period......
Net asset value per unit at end
of period......................
Units outstanding at end of
period.........................
</TABLE>
See accompanying Notes to Financial Statements.
20
<PAGE> 21
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.
<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 MFS Growth With Income Series
COMPANY: MFS Limited Maturity Series (closed
Fidelity Variable Insurance Products to new investments)
Fund Equity-Income Portfolio ("Fidelity MFS Total Return Series
Equity-Income Portfolio") SOCIETE GENERALE ASSET MANAGEMENT
Fidelity Variable Insurance Products CORP.:
Fund II Asset Manager Portfolio SoGen Overseas Variable Fund
("Fidelity Asset Manager Portfolio") VAN ECK ASSOCIATES CORPORATION:
Fidelity Variable Insurance Products Van Eck Worldwide Hard Assets Fund
Fund II Index 500 Portfolio Van Eck Emerging Markets Fund
("Fidelity Index 500 Portfolio") JANUS CAPITAL CORPORATION --
Fidelity Variable Insurance Products INSTITUTIONAL CLASS
Fund II Contrafund Portfolio Janus Aspen Series Capital Appreciation
("Fidelity Contrafund Portfolio") Portfolio
FRED ALGER MANAGEMENT, INC.: Janus Aspen Series Growth Portfolio
The Alger American Small Janus Aspen Series Balanced Portfolio
Capitalization Portfolio Janus Aspen Series Flexible Income Portfolio
The Alger American Growth Portfolio Janus Aspen Series International Growth
The Alger American MidCap Growth Portfolio
Portfolio Janus Aspen Series World Wide Growth Portfolio
</TABLE>
The MFS Limited Maturity Series subaccount is no longer available for new
allocations as of May 1, 1999.
21
<PAGE> 22
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
22
<PAGE> 23
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
23
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Valley Forge Life Insurance Company
We have audited the accompanying balance sheets of Valley Forge Life
Insurance Company (a wholly-owned subsidiary of Continental Assurance Company,
which is a wholly-owned subsidiary of Continental Casualty Company, a wholly
owned subsidiary of CNA Financial Corporation, an affiliate of Loews
Corporation) as of December 31, 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
24
<PAGE> 25
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
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.
25
<PAGE> 26
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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.
26
<PAGE> 27
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL INCOME (LOSS) EARNINGS INCOME (LOSS) EQUITY
------ ---------- ------------- -------- ------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
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.
27
<PAGE> 28
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998 1997
- ----------- ----------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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.
28
<PAGE> 29
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.
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
29
<PAGE> 30
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
30
<PAGE> 31
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
NOTE 2. INVESTMENTS
The significant components of net investment income are presented in the
following table:
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------- ------- ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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
- ---------------------- -------- ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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>
31
<PAGE> 32
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES) FOR FIXED MATURITIES AND
EQUITY SECURITIES
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
FIXED EQUITY FIXED EQUITY FIXED EQUITY
YEAR ENDED DECEMBER 31 MATURITIES SECURITIES MATURITIES SECURITIES MATURITIES SECURITIES
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales............ $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>
1999 1998
---------------------------- --------------------------
DECEMBER 31 GAINS LOSSES NET GAINS LOSSES NET
- ----------- ------ -------- -------- ------ ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
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>
32
<PAGE> 33
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES AVAILABLE FOR
SALE
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1999 COST GAINS LOSSES FAIR VALUE
- ----------------- --------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
<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>
<CAPTION>
1999
--------------------------
AMORTIZED
DECEMBER 31 COST FAIR VALUE
- ----------- ----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
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.
33
<PAGE> 34
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
- ----------- -------- ---------- -------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
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.
34
<PAGE> 35
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Valuation techniques to determine fair value of Separate Account
business assets consist of discounted cash flows and quoted market prices
of (a) the investments or (b) comparable instruments. The fair value of
Separate Account business liabilities approximates their carrying value.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
VFL invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk. Financial instruments used for
such purposes may include interest rate caps, put and call options, commitments
to purchase securities, futures and forwards. VFL also uses derivatives to
mitigate the risk associated with certain guaranteed annuity contracts by
purchasing certain options in a notional amount equal to the original customer
deposit. VFL generally does not hold or issue these instruments for trading
purposes.
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.
35
<PAGE> 36
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
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)
======== ======= ========
</TABLE>
<TABLE>
<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
======== ======= ========
</TABLE>
<TABLE>
<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>
36
<PAGE> 37
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. BENEFIT PLANS
VFL has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of
CNAF, all Casualty employees are covered by CNAF's Benefit Plans. The plans are
discussed below.
PENSION PLAN
CNAF has noncontributory pension plans covering all full-time employees age
21 or over that have completed at least one year of service. While the benefits
for the plans vary, they are generally based on years of credited service and
the employee's highest sixty consecutive months of compensation. Casualty is
included in the CNA Employees' Retirement Plan and VFL is allocated 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.
37
<PAGE> 38
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of VFL's net deferred tax liabilities as of December
31, 1999 and 1998 are shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
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)
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------- ------- ------ ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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
======= ====== ======
</TABLE>
A reconciliation of the statutory federal income tax rate on income is as
follows:
<TABLE>
<CAPTION>
% OF % OF % OF
PRETAX PRETAX PRETAX
YEAR ENDED DECEMBER 31 1999 INCOME 1998 INCOME 1997 INCOME
- ---------------------- ------ ------ ------ ------ ------ ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
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.
38
<PAGE> 39
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 %
- ---------------------- -------- -------- -------- -------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
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
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET %
- ---------------------- -------- ------- -------- ------- -----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
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>
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,
39
<PAGE> 40
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Life................................................. $ 77,725 $ 75,259 $ 79,176
Accident and Health.................................. 232,994 240,340 252,996
-------- -------- --------
Total...................................... $310,719 $315,599 $332,172
-------- -------- --------
</TABLE>
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.
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.
40
