<PAGE> 1
CNA
CAPITAL SELECT
VARIABLE
UNIVERSAL LIFE
SEMI-ANNUAL REPORT
issued by the
VALLEY FORGE
LIFE INSURANCE COMPANY,
one of the CNA
insurance companies
June 30, 1998
[CNA LOGO]
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Dear Policyowner:
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I'm happy to present the Semi-Annual Report for CNA Capital Select(SM)
Variable Universal Life.
Your variable universal life (VUL) product was designed to provide two
primary benefits. The first is life insurance and the second is an opportunity
for tax-deferred cash accumulation. CNA Capital Select offers you choices within
a broad array of investment options. In addition to a guaranteed-interest
account, there are 18 stock-market-based accounts (referred to as subaccounts),
which are managed by six widely recognized fund managers:
- Federated Advisors
- Fidelity Management and Research Company
- Fred Alger Management, Inc.
- Massachusetts Financial Services Company (MFS)
- Societe Generale Asset Management Corporation (SoGen)
- Van Eck Associates Corporation
The full list of fund managers and subaccounts is found in the Notes to
Financial Statements, Note 1. Organization, included within this report.
This VUL product is issued by Valley Forge Life Insurance Company (VFL), one
of the CNA insurance companies. VFL is a wholly-owned subsidiary of Continental
Assurance Company (CAC) and together form the CNA life companies, which rank
among the top 25 life organizations in the country.
One important aspect of your variable universal life product is its use of
separate accounts. A separate account is a pool of assets that provides an
additional measure of assurance that VFL's liabilities and obligations to you
and other policyowners will be satisfied. This is for your protection. The
assets of a separate account, equal to its reserves and other liabilities, are
not chargeable with liabilities that arise from any other business that VFL
conducts. In other words, the separate account is legally insulated from other
creditors' claims, giving you even more protection.
This report is created to share information about financial status of the
VUL separate account. Please take some time to look through the following
sections:
- Statement of Assets and Liabilities
- Statement of Operations
- Statement of Changes in Net Assets
- Notes to Financial Statements
If you need more specific information about CNA Capital Select Variable
Universal Life, please refer to your prospectus. Additional copies are available
from your CNA representative. Thank you again for purchasing CNA Capital Select
Variable Universal Life, one of the many quality products available through the
CNA family of products.
Sincerely,
ALAN S. LURTY
Alan S. Lurty, FLMI
Senior Vice President and
Chief Operating Officer, Annuities
CNA Capital Select Variable Universal Life policies are issued by Valley
Forge Life Insurance Company (VFL), one of the CNA insurance companies. VFL and
its affiliate, Continental Assurance Company (CAC), together form the CNA life
companies. Although a guaranteed-interest option is available in connection with
CNA Capital Select Variable Universal Life, financial reports regarding these
fixed-interest funds are not included in this report. Under some conditions,
withdrawals prior to age 59 1/2 can result in government-imposed taxes and tax
penalties. See your prospectus or consult your CNA representative for more
details.
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1
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STATEMENT OF ASSETS AND LIABILITIES
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY VIP II FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME VIP ASSET VIP II VIP II
JUNE 30, 1998 (UNAUDITED) FUND II FUND II BOND FUND II EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value:
Federated Insurance Series $33,543 $19,859 $34,063
Fidelity Variable Insurance
Products Fund $140,902
Fidelity Variable Insurance
Products Fund II $36,947 $328,332 $114,396
The Alger American Fund
MFS Variable Insurance Trust
SoGen Variable Funds, Inc.
Van Eck Worldwide Insurance Trust
------- ------- ------- -------- ------- -------- --------
TOTAL INVESTMENTS 33,543 19,859 34,063 140,902 36,947 328,332 114,396
------- ------- ------- -------- ------- -------- --------
TOTAL ASSETS 33,543 19,859 34,063 140,902 36,947 328,332 114,396
LIABILITIES -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY -- NET ASSETS $33,543 $19,859 $34,063 $140,902 $36,947 $328,332 $114,396
=================================================================================================================================
</TABLE>
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<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY VIP II FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME VIP ASSET VIP II VIP II
DECEMBER 31, 1997 FUND II FUND II BOND FUND II EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value:
Federated Insurance Series $65,595 $13,779 $4,131
Variable Insurance Products Fund $26,621
Variable Insurance Products Fund
II $7,491 $40,348 $22,720
The Alger American Fund
MFS Variable Insurance Trust
SoGen Variable Funds, Inc.
Van Eck Worldwide Insurance Trust
------- ------- ------ ------- ------ ------- -------
TOTAL INVESTMENTS 65,595 13,779 4,131 26,621 7,491 40,348 22,720
------- ------- ------ ------- ------ ------- -------
TOTAL ASSETS 65,595 13,779 4,131 26,621 7,491 40,348 22,720
LIABILITIES -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY -- NET ASSETS $65,595 $13,779 $4,131 $26,621 $7,491 $40,348 $22,720
=================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
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2
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<TABLE>
<CAPTION>
ALGER ALGER MFS
AMERICAN ALGER AMERICAN MFS GROWTH
SMALL AMERICAN MID-CAP EMERGING MFS WITH
JUNE 30, 1998 (UNAUDITED) CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME
- -----------------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value:
Federated Insurance Series
Fidelity Variable Insurance
Products Fund
Fidelity Variable Insurance
Products Fund II
The Alger American Fund $78,190 $139,290 $62,286
MFS Variable Insurance Trust $183,394 $89,253 $238,062
SoGen Variable Funds, Inc.
Van Eck Worldwide Insurance Trust
------- -------- ------- -------- ------- --------
TOTAL INVESTMENTS 78,190 139,290 62,286 183,394 89,253 238,062
------- -------- ------- -------- ------- --------
TOTAL ASSETS 78,190 139,290 62,286 183,394 89,253 238,062
LIABILITIES -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY -- NET ASSETS $78,190 $139,290 $62,286 $183,394 $89,253 $238,062
=============================================================================================================
<CAPTION> <CAPTION>
VAN ECK VAN ECK
MFS MFS SOGEN WORLDWIDE WORLDWIDE
LIMITED TOTAL OVERSEAS HARD EMERGING
JUNE 30, 1998 (UNAUDITED) MATURITY RETURN VARIABLE ASSETS MARKETS TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value:
Federated Insurance Series
Fidelity Variable Insurance
Products Fund $ 87,465
Fidelity Variable Insurance 140,902
Products Fund II 479,675
The Alger American Fund 279,766
MFS Variable Insurance Trust $31,551 $18,505 560,765
SoGen Variable Funds, Inc. $79,859 79,859
Van Eck Worldwide Insurance Trust $8,026 $10,813 18,839
------- ------- ------- ------ ------- ----------
TOTAL INVESTMENTS 31,551 18,505 79,859 8,026 10,813 1,647,271
------- ------- ------- ------ ------- ----------
TOTAL ASSETS 31,551 18,505 79,859 8,026 10,813 1,647,271
LIABILITIES -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY -- NET ASSETS $31,551 $18,505 $79,859 $8,026 $10,813 $1,647,271
=========================================================================================================
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<CAPTION>
ALGER ALGER MFS
AMERICAN ALGER AMERICAN MFS GROWTH
SMALL AMERICAN MID-CAP EMERGING MFS WITH
DECEMBER 31, 1997 CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME
- -----------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value:
Federated Insurance Series
Variable Insurance Products Fund
Variable Insurance Products Fund II
The Alger American Fund $15,548 $34,134 $11,475
MFS Variable Insurance Trust $26,721 $20,542 $26,897
SoGen Variable Funds, Inc.
Van Eck Worldwide Insurance Trust
------- ------- ------- ------- ------- -------
TOTAL INVESTMENTS 15,548 34,134 11,475 26,721 20,542 26,897
------- ------- ------- ------- ------- -------
TOTAL ASSETS 15,548 34,134 11,475 26,721 20,542 26,897
LIABILITIES -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY -- NET ASSETS $15,548 $34,134 $11,475 $26,721 $20,542 $26,897
=================================================================================================================
<CAPTION>
VAN ECK VAN ECK
MFS MFS SOGEN WORLDWIDE WORLDWIDE
LIMITED TOTAL OVERSEAS HARD EMERGING
DECEMBER 31, 1997 MATURITY RETURN VARIABLE ASSETS MARKETS TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value:
Federated Insurance Series $ 83,505
Variable Insurance Products Fund 26,621
Variable Insurance Products Fund II 70,559
The Alger American Fund 61,157
MFS Variable Insurance Trust $11,351 $1,967 87,478
SoGen Variable Funds, Inc. $13,189 13,189
Van Eck Worldwide Insurance Trust $5,902 $6,757 12,659
------- ------ ------- ------ ------ --------
TOTAL INVESTMENTS 11,351 1,967 13,189 5,902 6,757 355,168
------- ------ ------- ------ ------ --------
TOTAL ASSETS 11,351 1,967 13,189 5,902 6,757 355,168
LIABILITIES -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY -- NET ASSETS $11,351 $1,967 $13,189 $5,902 $6,757 $355,168
================================================================================================================
</TABLE>
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3
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STATEMENT OF OPERATIONS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
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<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY VIP II FIDELITY FIDELITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 PRIME MONEY UTILITY HIGH INCOME VIP ASSET VIP II VIP II
(UNAUDITED) FUND II FUND II BOND FUND II EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 3,132 $1,169 $ 428 $ 2,052 $1,442 $ 1,936 $ 1,679
------- ------ ------- ------- ------ -------- -------
3,132 1,169 428 2,052 1,442 1,936 1,679
------- ------ ------- ------- ------ -------- -------
Expenses:
Mortality and expense risk charges 596 78 83 302 93 989 258
Policy fees/Cost of insurance 7,138 1,005 1,771 6,420 1,995 11,880 6,587
------- ------ ------- ------- ------ -------- -------
7,734 1,083 1,854 6,722 2,088 12,869 6,845
------- ------ ------- ------- ------ -------- -------
NET INVESTMENT INCOME (LOSS) (4,602) 86 (1,426) (4,670) (646) (10,933) (5,166)
------- ------ ------- ------- ------ -------- -------
Investment gains (losses):
Net realized gains (losses) - 314 (60) 1,741 (245) 10,619 3,320
Net unrealized gains (losses) - (571) 16 (1,361) 264 3,781 2,728
------- ------ ------- ------- ------ -------- -------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) - (257) (44) 380 19 14,400 6,048
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NET INCREASE (DECREASE) IN
PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $(4,602) $ (171) $(1,470) $(4,290) $ (627) $ 3,467 $ 882
===================================================================================================================================
FOR THE PERIOD FROM INCEPTION TO
DECEMBER 31, 1997 1-MAY-97 10-JUN-97 8-APR-97 10-JUN-97 10-JUN-97 6-APR-97 8-APR-97
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Investment income:
Dividend income $ 279 $ 51 $ 2 $- $ - $ - $ -
------- ------ ------- ------- ------ -------- -------
279 51 2 - - - -
------- ------ ------- ------- ------ -------- -------
Expenses:
Mortality and expense risk charges 48 46 6 56 28 75 27
Policy fees/Cost of insurance 1,663 476 227 1,777 409 3,947 1,593
------- ------ ------- ------- ------ -------- -------
1,711 522 233 1,833 437 4,022 1,620
------- ------ ------- ------- ------ -------- -------
NET INVESTMENT INCOME (LOSS) (1,432) (471) (231) (1,833) (437) (4,022) (1,620)
------- ------ ------- ------- ------ -------- -------
Investment gains (losses):
Net realized gains (losses) - 163 (1) 433 19 445 61
Net unrealized gains (losses) - 1,465 56 873 402 1,172 206
------- ------ ------- ------- ------ -------- -------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) - 1,628 55 1,306 421 1,617 267
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $(1,432) $1,157 $ (176) $ (527) $ (16) $ (2,405) $(1,353)
===================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
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4
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<TABLE>
<CAPTION>
ALGER ALGER MFS
AMERICAN ALGER AMERICAN MFS GROWTH
FOR THE SIX MONTHS ENDED JUNE 30, 1998 SMALL AMERICAN MID-CAP EMERGING MFS WITH
(UNAUDITED) CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME
- ----------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 7,871 $15,637 $ 2,887 $ 761 $ 1,443 $ -
------- ------- ------- ------- ------- -------
7,871 15,637 2,887 761 1,443 -
------- ------- ------- ------- ------- -------
Expenses:
Mortality and expense risk charges 180 311 128 350 192 394
Policy fees/Cost of insurance 3,859 6,866 3,155 6,787 6,331 6,252
------- ------- ------- ------- ------- -------
4,039 7,177 3,283 7,137 6,523 6,646
------- ------- ------- ------- ------- -------
NET INVESTMENT INCOME (LOSS) 3,832 8,460 (396) (6,376) (5,080) (6,646)
------- ------- ------- ------- ------- -------
Investment gains (losses):
Net realized gains (losses) (638) 848 122 5,225 4,384 5,659
Net unrealized gains (losses) (2,183) 352 2,737 4,804 373 2,489
------- ------- ------- ------- ------- -------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) (2,821) 1,200 2,859 10,029 4,757 8,148
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $ 1,011 $ 9,660 $ 2,463 3,653 $ (323) $ 1,502
================================================================================================================
FOR THE PERIOD FROM INCEPTION TO
DECEMBER 31, 1997 27-FEB-97 24-FEB-97 29-MAY-97 24-FEB-97 8-APR-97 8-APR-97
- ----------------------------------------------------------------------------------------------------------------
Investment income:
Dividend income $ 8 $ 1 $ - $ - $ - $ 623
------- ------- ------- ------- ------- -------
8 1 - - - 623
------- ------- ------- ------- ------- -------
Expenses:
Mortality and expense risk charges 20 87 18 28 33 30
Policy fees/Cost of insurance 1,189 2,394 678 1,704 1,669 1,328
------- ------- ------- ------- ------- -------
1,209 2,481 696 1,732 1,702 1,358
------- ------- ------- ------- ------- -------
NET INVESTMENT INCOME (LOSS) (1,201) (2,480) (696) (1,732) (1,702) (735)
------- ------- ------- ------- ------- -------
Investment gains (losses):
Net realized gains (losses) (30) 889 (53) 45 (44) 199
Net unrealized gains (losses) (56) (1,200) (400) 317 332 11
------- ------- ------- ------- ------- -------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) (86) (311) (453) 362 288 210
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $(1,287) $(2,791) $(1,149) $(1,370) $(1,414) $ (525)
================================================================================================================
<CAPTION>
VAN ECK VAN ECK
MFS MFS SOGEN WORLDWIDE WORLDWIDE
FOR THE SIX MONTHS ENDED JUNE 30, 1998 LIMITED TOTAL OVERSEAS HARD EMERGING
(UNAUDITED) MATURITY RETURN VARIABLE ASSETS MARKETS TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ - $ 249 $ - $ 963 $ 129 $ 41,778
------- ----- ------- ------- ------- --------
- 249 - 963 129 41,778
------- ----- ------- ------- ------- --------
Expenses:
Mortality and expense risk charges 73 37 168 30 41 4,303
Policy fees/Cost of insurance 1,461 849 4,946 572 1,737 79,611
------- ----- ------- ------- ------- --------
1,534 886 5,114 602 1,778 83,914
------- ----- ------- ------- ------- --------
NET INVESTMENT INCOME (LOSS) (1,534) (637) (5,114) 361 (1,649) (42,136)
------- ----- ------- ------- ------- --------
Investment gains (losses):
Net realized gains (losses) (265) 272 1,069 (391) (579) 31,395
Net unrealized gains (losses) 719 20 (282) (1,478) (2,043) 10,365
------- ----- ------- ------- ------- --------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) 454 292 787 (1,869) (2,622) 41,760
- ------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $(1,080) $(345) $(4,327) $(1,508) $(4,271) $ (376)
===================================================================================================================
FOR THE PERIOD FROM INCEPTION TO
DECEMBER 31, 1997 16-SEP-97 24-FEB-97 24-FEB-97 8-APR-97 2-APR-97
- -------------------------------------------------------------------------------------------------------------------
Investment income:
Dividend income $ 652 $- $ - $ - $ - $ 1,616
------- ----- ------- ------- ------- --------
652 - - - - 1,616
------- ----- ------- ------- ------- --------
Expenses:
Mortality and expense risk charges 11 3 31 7 6 560
Policy fees/Cost of insurance 247 315 1,799 282 612 22,309
------- ----- ------- ------- ------- --------
258 318 1,830 289 618 22,869
------- ----- ------- ------- ------- --------
NET INVESTMENT INCOME (LOSS) 394 (318) (1,830) (289) (618) (21,253)
------- ----- ------- ------- ------- --------
Investment gains (losses):
Net realized gains (losses) 13 19 (319) (67) (207) 1,565
Net unrealized gains (losses) (611) 50 (424) (297) (129) 1,767
------- ----- ------- ------- ------- --------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) (598) 69 (743) (364) (336) 3,332
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $ (204) $(249) $(2,573) $ (653) $ (954) $(17,921)
====================================================================================================================
</TABLE>
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5
<PAGE> 7
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STATEMENT OF CHANGES IN NET ASSETS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY VIP II FIDELITY FIDELITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 PRIME MONEY UTILITY HIGH INCOME VIP ASSET VIP II VIP II
(UNAUDITED) FUND II FUND II BOND FUND II EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (4,602) $ 86 $ (1,426) $ (4,670) $ (646) $ (10,933) $ (5,166)
Net realized gain (losses) - 314 (60) 1,741 (245) 10,619 3,320
Net unrealized gain (losses) - (571) 16 (1,361) 264 3,781 2,728
--------- --------- --------- ---------- --------- ---------- ----------
Change in net assets resulting
from operations (4,602) (171) (1,470) (4,290) (627) 3,467 882
From capital transactions:
Net premiums/deposits 421,507 6,459 31,610 113,627 28,078 138,141 89,904
Withdrawals (1) (1) 1 - 1 - (1)
Transfers among sub-accounts and
with the Fixed
Account -- net -- Note 1 (448,956) (207) (209) 4,944 2,004 146,376 891
--------- --------- --------- ---------- --------- ---------- ----------
Change in net assets resulting
from capital transactions (27,450) 6,251 31,402 118,571 30,083 284,517 90,794
Increase in net assets (32,052) 6,080 29,932 114,281 29,456 287,984 91,676
Net assets at beginning of period 65,595 13,779 4,131 26,621 7,491 40,348 22,720
--------- --------- --------- ---------- --------- ---------- ----------
NET ASSETS AT END OF PERIOD $ 33,543 $ 19,859 $ 34,063 $ 140,902 $ 36,947 $ 328,332 $ 114,396
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 1.00 $ 14.06 $ 11.06 $ 25.17 $ 17.25 $ 129.25 $ 21.95
===================================================================================================================================
UNITS OUTSTANDING AT END OF PERIOD 33,543.2 1,412.4 3,079.8 5,598.0 2,141.8 2,540.3 5,211.6
===================================================================================================================================
FOR THE PERIOD FROM INCEPTION TO
DECEMBER 31, 1997 1-MAY-97 10-JUN-97 8-APR-97 10-JUN-97 10-JUN-97 6-APR-97 8-APR-97
- -----------------------------------------------------------------------------------------------------------------------------------
From operations:
Net investment income (loss) $ (1,432) $ (471) $ (231) $ (1,833) $ (437) $ (4,022) $ (1,620)
Net realized gains (losses) - 163 (1) 433 19 445 61
Net unrealized gains (losses) - 1,465 56 873 402 1,172 206
--------- --------- --------- ---------- --------- ---------- ----------
Change in net assets resulting
from operations (1,432) 1,157 (176) (527) (16) (2,405) (1,353)
From capital transactions:
Net premiums/deposits 97,987 10,230 2,941 21,697 7,428 34,213 18,058
Transfers among sub-accounts and
with the Fixed
Account -- net -- Note 1 (30,960) 2,392 1,366 5,451 79 8,540 6,015
--------- --------- --------- ---------- --------- ---------- ----------
Change in net assets resulting
from capital transactions 67,027 12,622 4,307 27,148 7,507 42,753 24,073
Increase in net assets 65,595 13,779 4,131 26,621 7,491 40,348 22,720
Net assets at beginning of period - - - - - - -
--------- --------- --------- ---------- --------- ---------- ----------
NET ASSETS AT END OF PERIOD $ 65,595 $ 13,779 $ 4,131 $ 26,621 $ 7,491 $ 40,348 $ 22,720
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 1.00 $ 14.29 $ 10.95 $ 24.28 $ 18.01 $ 114.39 $ 19.94
===================================================================================================================================
UNITS OUTSTANDING AT END OF PERIOD 65,595.1 964.3 377.3 1,096.4 415.9 352.7 1,139.4
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
6
<PAGE> 8
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALGER ALGER MFS
AMERICAN ALGER AMERICAN MFS GROWTH
FOR THE SIX MONTHS ENDED JUNE 30, 1998 SMALL AMERICAN MID-CAP EMERGING MFS WITH
(UNAUDITED) CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME
- -------------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 3,832 $ 8,460 $ (396) $ (6,376) $ (5,080) $ (6,646)
Net realized gain (losses) (638) 848 122 5,225 4,384 5,659
Net unrealized gain (losses) (2,183) 352 2,737 4,804 373 2,489
--------- ---------- --------- ---------- --------- ----------
Change in net assets resulting
from operations 1,011 9,660 2,463 3,653 (323) 1,502
From capital transactions:
Net premiums/deposits 51,193 72,528 38,527 78,129 60,788 42,510
Withdrawals (2) (2) (2) (4) (3) (1)
Transfers among sub-accounts and
with the Fixed
Account -- net -- Note 1 10,440 22,970 9,823 74,895 8,249 167,154
--------- ---------- --------- ---------- --------- ----------
Change in net assets resulting
from capital transactions 61,631 95,496 48,348 153,020 69,034 209,663
Increase in net assets 62,642 105,156 50,811 156,673 68,711 211,165
Net assets at beginning of period 15,548 34,134 11,475 26,721 20,542 26,897
--------- ---------- --------- ---------- --------- ----------
NET ASSETS AT END OF PERIOD $ 78,190 $ 139,290 $ 62,286 $ 183,394 $ 89,253 $ 238,062
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 43.13 $ 45.66 $ 26.70 $ 19.45 $ 18.35 $ 19.09
===================================================================================================================
UNITS OUTSTANDING AT END OF PERIOD 1,812.9 3,050.6 2,332.8 9,429.1 4,863.9 12,470.5
===================================================================================================================
FOR THE PERIOD FROM INCEPTION TO
DECEMBER 31, 1997 27-FEB-97 24-FEB-97 29-MAY-97 24-FEB-97 8-APR-97 8-APR-97
- -------------------------------------------------------------------------------------------------------------------
From operations:
Net investment income (loss) $ (1,201) $ (2,480) $ (696) $ (1,732) $ (1,702) $ (735)
Net realized gains (losses) (30) 889 (53) 45 (44) 199
Net unrealized gains (losses) (56) (1,200) (400) 317 332 11
--------- ---------- --------- ---------- --------- ----------
Change in net assets resulting
from operations (1,287) (2,791) (1,149) (1,370) (1,414) (525)
From capital transactions:
Net premiums/deposits 14,166 35,288 8,051 18,949 12,643 11,690
Transfers among sub-accounts and
with the Fixed
Account -- net -- Note 1 2,669 1,637 4,573 9,142 9,313 15,732
--------- ---------- --------- ---------- --------- ----------
Change in net assets resulting
from capital transactions 16,835 36,925 12,624 28,091 21,956 27,422
Increase in net assets 15,548 34,134 11,475 26,721 20,542 26,897
Net assets at beginning of period - - - - - -
--------- ---------- --------- ---------- --------- ----------
NET ASSETS AT END OF PERIOD $ 15,548 $ 34,134 $ 11,475 $ 26,721 $ 20,542 $ 26,897
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 43.75 $ 42.76 $ 24.18 $ 16.14 $ 15.79 $ 16.44
===================================================================================================================
UNITS OUTSTANDING AT END OF PERIOD 355.4 798.3 474.6 1,655.6 1,300.9 1,636.1
===================================================================================================================
<CAPTION>
VAN ECK VAN ECK
MFS MFS SOGEN WORLDWIDE WORLDWIDE
FOR THE SIX MONTHS ENDED JUNE 30, 1998 LIMITED TOTAL OVERSEAS HARD EMERGING
(UNAUDITED) MATURITY RETURN VARIABLE ASSETS MARKETS TOTAL
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (1,534) $ (637) $ (5,114) $ 361 $ (1,649) $ (42,136)
Net realized gain (losses) (265) 272 1,069 (391) (579) $ 31,395
Net unrealized gain (losses) 719 20 (282) (1,478) (2,043) $ 10,365
--------- --------- --------- -------- --------- ----------
Change in net assets resulting
from operations (1,080) (345) (4,327) (1,508) (4,271) $ (376)
From capital transactions:
Net premiums/deposits 21,279 16,883 71,188 3,614 8,353 $1,294,318
Withdrawals 1 - 3 - 2 $ (9)
Transfers among sub-accounts and
with the Fixed
Account -- net -- Note 1 - - (194) 18 (28) $ (1,830)
--------- --------- --------- -------- --------- ----------
Change in net assets resulting
from capital transactions 21,280 16,883 70,997 3,632 8,327 $1,292,479
Increase in net assets 20,200 16,538 66,670 2,124 4,056 $1,292,103
Net assets at beginning of period 11,351 1,967 13,189 5,902 6,757 $ 355,168
--------- --------- --------- -------- --------- ----------
NET ASSETS AT END OF PERIOD $ 31,551 $ 18,505 $ 79,859 $ 8,026 $ 10,813 $1,647,271
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 10.29 $ 17.53 $ 10.51 $ 11.55 $ 8.35
===============================================================================================================
UNITS OUTSTANDING AT END OF PERIOD 3,066.2 1,055.6 7,598.4 694.9 1,294.9
===============================================================================================================
FOR THE PERIOD FROM INCEPTION TO
DECEMBER 31, 1997 16-SEP-97 24-FEB-97 24-FEB-97 8-APR-97 2-APR-97
- ---------------------------------------------------------------------------------------------------------------
From operations:
Net investment income (loss) $ 394 $ (318) $ (1,830) $ (289) $ (618) $ (21,253)
Net realized gains (losses) 13 19 (319) (67) (207) 1,565
Net unrealized gains (losses) (611) 50 (424) (297) (129) 1,767
--------- --------- --------- -------- --------- ----------
Change in net assets resulting
from operations (204) (249) (2,573) (653) (954) (17,921)
From capital transactions:
Net premiums/deposits 6,149 2,216 14,325 4,423 7,649 328,103
Transfers among sub-accounts and
with the Fixed
Account -- net -- Note 1 5,406 - 1,437 2,132 62 44,986
--------- --------- --------- -------- --------- ----------
Change in net assets resulting
from capital transactions 11,555 2,216 15,762 6,555 7,711 373,089
Increase in net assets 11,351 1,967 13,189 5,902 6,757 355,168
Net assets at beginning of period - - - - - -
--------- --------- --------- -------- --------- ----------
NET ASSETS AT END OF PERIOD $ 11,351 $ 1,967 $ 13,189 $ 5,902 $ 6,757 $ 355,168
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 10.01 $ 16.63 $ 9.77 $ 15.72 $ 11.00
===============================================================================================================
UNITS OUTSTANDING AT END OF PERIOD 1,134.0 118.3 1,350.0 375.4 614.3
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE> 9
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 -- (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION
- --------------------------------------------------------------------------------
Valley Forge Life Insurance Company Variable Life Separate Account
("Variable Account"), a unit investment trust registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, is a Separate
Account of Valley Forge Life Insurance Company ("VFL"). The Variable Account
began operations on February 24, 1997. VFL is a wholly-owned subsidiary of
Continental Assurance Company ("Assurance"). Assurance is a wholly-owned
subsidiary of Continental Casualty Company ("Casualty"), which is wholly-owned
by CNA Financial Corporation ("CNA"). Loews Corporation owns approximately 84%
of the outstanding common stock of CNA.
VFL sells a wide range of life insurance products, including the Capital
Select variable life policy. Under the terms of the Capital Select variable life
policy, policyowners' select where the net premium payments of the policy are
invested. The policyowner may choose to invest in either the Variable Account,
the Fixed Account or both the Variable and Fixed Accounts. The assets of the
Variable Account are segregated from VFL's general account and its other
separate accounts. The policyowner, (before the maturity date, while the
policyowner is still living or the policy is in force), may transfer all or part
of any subaccount value to another subaccount(s) or to the Fixed Account, or
transfer all or part of fixed policy value to any subaccount(s).
The Variable Account currently offers 18 sub-accounts each of which invests
in shares of a corresponding fund (i.e., investment portfolios), wherein the
policyowners bear all of the investment risk. Each fund is either an open-end
diversified management investment company or a separate investment portfolio of
such a company and is managed by a registered investment advisor. The
sub-accounts are as follows:
FEDERATED INSURANCE SERIES:
Federated Prime Money Fund II
Federated Utility Fund II
Federated High Income Bond Fund II
FIDELITY VARIABLE INSURANCE PRODUCTS FUND (VIP):
Fidelity VIP Equity-Income Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II (VIP II):
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Index 500 Portfolio
Fidelity VIP II Contrafund Portfolio
THE ALGER AMERICAN FUND:
Alger American Small Capitalization Portfolio
Alger American Growth Portfolio
Alger American Mid-Cap Growth Portfolio
MFS VARIABLE INSURANCE TRUST:
MFS Emerging Growth Series
MFS Research Series
MFS Growth With Income Series
MFS Limited Maturity Series
MFS Total Return Series
SOGEN VARIABLE FUNDS, INC.:
SoGen Overseas Variable Fund
VAN ECK WORLDWIDE INSURANCE
TRUST:
Van Eck Worldwide Hard Assets Fund
Van Eck Worldwide Emerging Markets Fund
The Fixed Account is part of the general account of VFL and is an
investment option available to policyowners. The Fixed Account has not been
registered under the Securities Act of 1933 nor has the Fixed Account been
registered as an investment company under the Investment Company Act of 1940. As
a result, the accompanying financial statements do not reflect amounts invested
in the Fixed Account.
- --------------------------------------------------------------------------------
8
<PAGE> 10
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 -- (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
VALUATION OF INVESTMENTS -- Investments consist of shares of the funds and
are stated at fair value based on quoted market prices.
RECOGNITION OF INVESTMENT INCOME -- Investment income consists of dividends
declared by the portfolio managers of the funds which are recognized on the date
of record.
REALIZED GAINS AND LOSSES -- Realized investment gains and losses represent
the difference between the proceeds from sales of shares by the Variable Account
and the cost of such shares, which are determined using the average cost method.
POLICYOWNER VARIABLE ACCOUNT ACTIVITY -- Variable Account activity is
reflected in individual policyowner accounts on a daily basis.
FEDERAL INCOME TAXES -- Net investment income and realized gains and losses
on investments of the Variable Account are taxable to policyowners generally
upon distribution. Accordingly, no provision for income taxes has been recorded.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles ("GAAP") requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of VFL's management, these statements include all adjustment,
consisting of normal recurring accruals, which are necessary for the fair
presentation of the financial position, results of operations and cash flows in
the accompanying financial statements.
- --------------------------------------------------------------------------------
9
<PAGE> 11
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 -- (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS
- --------------------------------------------------------------------------------
The investments in the funds of the subaccounts of the Variable Life
Separate Account at June 30, 1998 (unaudited) and December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
MARKET
SHARES COST VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERATED INSURANCE SERIES:
FEDERATED PRIME MONEY FUND II
June 30, 1998 33,543 $ 33,543 $ 33,543
December 31, 1997 65,595 65,595 65,595
FEDERATED UTILITY FUND II
June 30, 1998 1,412 18,965 19,859
December 31, 1997 964 12,314 13,779
FEDERATED HIGH INCOME BOND FUND II
June 30, 1998 3,080 33,991 34,063
December 31, 1997 377 4,075 4,131
FIDELITY VARIABLE INSURANCE PRODUCTS FUND (VIP):
FIDELITY VIP EQUITY-INCOME PORTFOLIO
June 30, 1998 5,598 141,390 140,902
December 31, 1997 1,096 25,748 26,621
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II (VIP II):
FIDELITY VIP II ASSET MANAGER PORTFOLIO
June 30, 1998 2,142 36,280 36,947
December 31, 1997 416 7,089 7,491
FIDELITY VIP II INDEX 500 PORTFOLIO
June 30, 1998 2,540 323,380 328,332
December 31, 1997 353 39,176 40,348
FIDELITY CONTRAFUND PORTFOLIO
June 30, 1998 5,212 111,460 114,396
December 31, 1997 1,139 22,514 22,720
THE ALGER AMERICAN FUND:
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
June 30, 1998 1,813 80,428 78,190
December 31, 1997 355 15,604 15,548
ALGER AMERICAN GROWTH PORTFOLIO
June 30, 1998 3,051 140,138 139,290
December 31, 1997 798 35,334 34,134
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE> 12
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 -- (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
MARKET
SHARES COST VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
THE ALGER AMERICAN FUND:
ALGER AMERICAN MID-CAP GROWTH PORTFOLIO
June 30, 1998 2,333 $ 59,948 $ 62,286
December 31, 1997 475 11,875 11,475
MFS VARIABLE INSURANCE TRUST:
MFS EMERGING GROWTH SERIES
June 30, 1998 9,429 178,276 183,394
December 31, 1997 1,656 26,404 26,721
MFS RESEARCH SERIES
June 30, 1998 4,864 88,370 89,253
December 31, 1997 1,301 20,210 20,542
MFS GROWTH WITH INCOME SERIES
June 30, 1998 12,471 235,211 238,062
December 31, 1997 1,636 26,886 26,897
MFS LIMITED MATURITY SERIES
June 30, 1998 3,066 31,442 31,551
December 31, 1997 1,134 11,962 11,351
MFS TOTAL RETURN SERIES
June 30, 1998 1,056 18,435 18,505
December 31, 1997 118 1,917 1,967
SOGEN VARIABLE FUNDS, INC.:
SOGEN OVERSEAS VARIABLE FUND
June 30, 1998 7,598 80,565 79,859
December 31, 1997 1,350 13,613 13,189
VAN ECK WORLDWIDE INSURANCE TRUST:
VAN ECK WORLDWIDE HARD ASSETS FUND
June 30, 1998 695 9,801 8,026
December 31, 1997 375 6,199 5,902
VAN ECK EMERGING MARKETS FUND
June 30, 1998 1,295 12,984 10,813
December 31, 1997 614 6,886 6,757
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE> 13
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 -- (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4. PURCHASES AND SALES
- --------------------------------------------------------------------------------
The aggregate cost of purchases and proceeds from sales of funds in the
sub-accounts for the six-month period ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
PURCHASES SALES
- ----------------------------------------------------------------------------------
<S> <C> <C>
FEDERATED INSURANCE SERIES:
Federated Prime Money Fund II $869,674 $904,861
Federated Utility Fund II 7,681 2,513
Federated High Income Bond Fund II 54,144 24,597
FIDELITY VARIABLE INSURANCE PRODUCTS FUND (VIP):
Fidelity VIP Equity-Income Portfolio 176,803 64,954
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II (VIP II):
Fidelity VIP II Asset Manager Portfolio 36,784 8,790
Fidelity VIP II Index 500 Portfolio 730,808 459,158
Fidelity VIP II Contrafund Portfolio 135,378 51,431
THE ALGER AMERICAN FUND:
Alger American Small Capitalization Portfolio 89,108 31,518
Alger American Growth Portfolio 125,813 37,493
Alger American Mid-Cap Growth Portfolio 51,319 6,255
MFS VARIABLE INSURANCE TRUST:
MFS Emerging Growth Series 277,558 131,671
MFS Research Series 110,132 47,618
MFS Growth With Income Series 397,987 195,322
MFS Limited Maturity Series 28,608 8,863
MFS Total Return Series 26,232 10,235
SOGEN VARIABLE FUNDS, INC.:
SoGen Overseas Variable Fund 115,178 49,295
VAN ECK WORLDWIDE INSURANCE TRUST:
Van Eck Worldwide Hard Assets Fund 4,906 1,877
Van Eck Emerging Markets Fund 8,918 2,370
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE> 14
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 -- (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4. INVESTMENT TRANSACTIONS (CONTINUED)
- --------------------------------------------------------------------------------
The aggregate cost of purchases and proceeds from sales of funds in the
sub-accounts from the date of inception to December 31, 1997, were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
PURCHASES SALES
- ---------------------------------------------------------------------------------
<S> <C> <C>
FEDERATED INSURANCE SERIES:
Federated Prime Money Fund II $145,193 $79,877
Federated Utility Fund II 18,819 6,718
Federated High Income Bond Fund II 7,919 3,845
FIDELITY VARIABLE INSURANCE PRODUCTS FUND (VIP):
Fidelity VIP Equity-Income Portfolio 42,621 17,306
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II (VIP II):
Fidelity VIP II Asset Manager Portfolio 7,528 458
Fidelity VIP II Index 500 Portfolio 59,865 21,134
Fidelity VIP II Contrafund Portfolio 43,658 21,205
THE ALGER AMERICAN FUND:
Alger American Small Capitalization Portfolio 28,590 12,964
Alger American Growth Portfolio 44,379 9,935
Alger American Mid-Cap Growth Portfolio 22,938 11,010
MFS VARIABLE INSURANCE TRUST:
MFS Emerging Growth Series 41,571 15,212
MFS Research Series 29,976 9,723
MFS Growth With Income Series 45,455 19,391
MFS Limited Maturity Series 26,273 14,976
MFS Total Return Series 2,345 447
SOGEN VARIABLE FUNDS, INC.:
SoGen Overseas Variable Fund 19,038 5,106
VAN ECK WORLDWIDE INSURANCE TRUST:
Van Eck Worldwide Hard Assets Fund 12,851 6,585
Van Eck Emerging Markets Fund 8,457 1,364
</TABLE>
- --------------------------------------------------------------------------------
NOTE 5. CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
A monthly deduction is made from each policy to compensate VFL for
administration expenses associated with the policies and the Variable Account.
These expenses relate to premium billing and collection, recordkeeping,
processing death benefit claims, policy loans, policy changes, reporting and
overhead costs, processing applications and establishing policy records. The
policy fee is $6.00 per month. The issue fee is $20.00 per month during the
first policy year and is $10.00 per month for the first 12 months after an
increase in specified amount. A monthly deduction is made from each policy for
the cost of insurance and any charges for supplemental riders. The cost of
- --------------------------------------------------------------------------------
13
<PAGE> 15
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 -- (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5. CHARGES AND DEDUCTIONS (CONTINUED)
- --------------------------------------------------------------------------------
insurance charge is based on the sex, attained age, issue age, risk class, and
number of years that the policy or increment of specified amount has been in
force. These monthly charges are deducted proportionately from the value of each
Variable Account sub-account and/or the Fixed Account.
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 policy.
The daily charge is approximately equal to an annual rate of 0.90% of the net
assets of the Variable Account during the first 10 policy years and an
approximate annual rate of 0.45% of the net assets of the Variable Account
during policy years 11 and thereafter.
VFL deducts an amount equal to 3.5% from each premium payment to cover
federal tax liabilities and state and local premium taxes.
VFL permits 12 free transfers between and among the sub-accounts (one of
which can be applied to the Fixed Account) per policy year. For each additional
transfer, VFL charges $25 at the time each such transfer is processed. The fee
is deducted from the amount being transferred.
- --------------------------------------------------------------------------------
NOTE 6. DIVERSIFICATION REQUIREMENTS
- --------------------------------------------------------------------------------
Under the provisions of Section 817(h) of the Internal Revenue Code of 1986
(the Code), a variable life insurance policy will not be treated as life
insurance under Section 7702 of the Code for any period for which the
investments of the segregated asset account on which the policy is based are not
adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of the Treasury. VFL believes, based on the funds'
prospectuses, that the mutual funds satisfy the requirement of the regulations.
- --------------------------------------------------------------------------------
14
<PAGE> 16
The principal underwriter of this product is CNA Investor Services, Inc., a
registered broker-dealer and member of the National Association of Securities
Dealers. CNA Investor Services, Inc., is an affiliate of the CNA Financial
Corporation. CNA Capital Select Variable Universal Life is issued by the
Valley Forge Life Insurance Company, one of the CNA insurance companies.
CNA is a registered service mark of the CNA Financial Corporation. The policy
form numbers for this product are: V100-1132-A Series, V100-1133-A Series.
CNA Capital Select Variable Universal Life is not available in all states.
MAILING ADDRESS:
CNA Insurance Companies
Variable Product Team
P.O. Box 305139
Nashville, TN 37230-5139
[CNA LOGO]
AG-132667-A 8/98 Printed in USA
