<PAGE> 1
CNA
CAPITAL SELECT (R)
VARIABLE
UNIVERSAL LIFE
SEMI-ANNUAL REPORT
ISSUED BY THE
VALLEY FORGE
LIFE INSURANCE COMPANY,
ONE OF THE CNA
COMPANIES
JUNE 30, 1999
[CNA LOGO]
<PAGE> 2
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June 30, 1999
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Dear Contractholder:
When we created CNA Capital Select(R) Variable Universal Life (issued by
Valley Forge Life Insurance Company, one of the CNA companies), we designed it
to be competitive with some of the top products in the marketplace. But we
didn't stop there. Over time, we have added or enhanced features that we believe
have made our product even better.
For instance, one of the things we've done this past year is take a close
look at the subaccounts our variable universal life product offers. As a result,
the mix of subaccounts will be improved to provide an even broader
representation.
As we communicated previously, the MFS Limited Maturity Series was phased
out as an investment option for new contributions as of May 1, 1999. We will
soon be adding a variety of additional subaccount options, thereby increasing
your overall number of investment choices. We will communicate these changes to
you as they occur.
This Semi-Annual Report takes a look at the subaccounts that are represented
in our product. It reflects each subaccount's assets and liabilities as of June
30, 1999, results of operations for the six month period ending June 30, 1999
and changes in net assets for the six month and twelve month periods ending June
30, 1999 and December 31, 1998, respectively.*
These subaccounts are managed by six widely recognized fund managers:
- Federated Advisers
- Fidelity Management & Research Company
- Fred Alger Management, Inc.
- Massachusetts Financial Services Company (MFS)
- Societe Generale Asset Management Corp. (SoGen)
- Van Eck Associates Corporation
If you need additional information, please refer to your prospectus. If you
can't find it or need another copy, please contact your CNA representative -- or
let us hear from you directly.
Thank you, once again, for selecting CNA Capital Select Variable Universal
Life as one of the tools to help you reach your long-term goals.
Sincerely,
/s/ David M. Chernow
David M. Chernow
Senior Vice President & Chief Operating Officer, Investment Products
* Although a guaranteed-interest option is available in connection with CNA
Capital Select Variable Universal Life, financial reports regarding this
fixed-interest fund are not included in this report.
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1
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY
FEDERATED FEDERATED FEDERATED EQUITY- ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME INCOME MANAGER INDEX 500 CONTRAFUND
FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value
(cost noted below): $687,386 $ 96,936 $ 88,953 $556,534 $238,818 $1,320,174 $749,017
-------- -------- -------- -------- -------- ---------- --------
TOTAL ASSETS 687,386 96,936 88,953 556,534 238,818 1,320,174 749,017
-------- -------- -------- -------- -------- ---------- --------
LIABILITIES - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $687,386 $ 96,936 $ 88,953 $556,534 $238,818 $1,320,174 $749,017
=================================================================================================================================
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $687,386 $ 93,443 $ 91,438 $487,179 $236,291 $1,171,514 $670,834
=================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
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2
<PAGE> 4
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<TABLE>
<CAPTION>
THE ALGER THE ALGER VAN ECK
AMERICAN THE ALGER AMERICAN MFS MFS GROWTH MFS MFS SOGEN WORLDWIDE
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$207,104 $ 882,045 $ 347,001 $471,698 $ 329,081 $381,183 $ 69,542 $ 263,524 $244,720 $ 20,667
-------- --------- --------- -------- --------- -------- -------- ---------- -------- --------
207,104 882,045 347,001 471,698 329,081 381,183 69,542 263,524 244,720 20,667
-------- --------- --------- -------- --------- -------- -------- ---------- -------- --------
- - - - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
$207,104 $ 882,045 $ 347,001 $471,698 $ 329,081 $381,183 $ 69,542 $ 263,524 $244,720 $ 20,667
==============================================================================================================================
$190,321 $ 814,415 $ 323,405 $384,331 $ 285,367 $340,327 $ 69,925 $ 256,976 $209,930 $ 18,654
==============================================================================================================================
<CAPTION>
VAN ECK
EMERGING
MARKETS
FUND
- --- --------
<S> <C>
$ 34,845
--------
34,845
--------
-
- ---
$ 34,845
===
$ 27,858
===
</TABLE>
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3
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY
FEDERATED FEDERATED FEDERATED EQUITY- ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME INCOME MANAGER INDEX 500 CONTRAFUND
FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 14,527 $ 5,411 $ 6,010 $ 18,590 $ 13,097 $ 8,381 $ 16,984
-------- -------- -------- -------- -------- ---------- --------
14,527 5,411 6,010 18,590 13,097 8,381 16,984
-------- -------- -------- -------- -------- ---------- --------
Expenses:
Mortality and expense risk
charges 3,078 328 315 1,971 862 3,512 2,311
Policy fees/Cost of insurance 32,512 4,453 5,667 22,711 9,489 54,524 31,203
-------- -------- -------- -------- -------- ---------- --------
35,590 4,781 5,982 24,682 10,351 58,036 33,514
-------- -------- -------- -------- -------- ---------- --------
NET INVESTMENT INCOME (LOSS) (21,063) 630 28 (6,092) 2,746 (49,655) (16,530)
Investment gains and (losses):
Net realized gains (losses) - 110 (1,098) (1,841) 7,002 16,102 20,485
Net unrealized gains (losses) - (262) (2,947) 55,423 (4,298) 102,284 34,773
-------- -------- -------- -------- -------- ---------- --------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) - (152) (4,045) 53,582 2,704 118,386 55,258
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $(21,063) $ 478 $ (4,017) $ 47,490 $ 5,450 $ 68,731 $ 38,728
=================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
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4
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<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 16,693 $ 62,822 $ 38,874 $ - $ 2,936 $ 1,986 $ - $ 12,073 $ 1,473
-------- --------- --------- -------- --------- -------- -------- ---------- --------
16,693 62,822 38,874 - 2,936 1,986 - 12,073 1,473
-------- --------- --------- -------- --------- -------- -------- ---------- --------
605 2,569 1,020 1,522 1,063 1,225 271 988 762
8,923 30,768 12,506 24,018 14,951 16,179 4,267 10,867 12,946
-------- --------- --------- -------- --------- -------- -------- ---------- --------
9,528 33,337 13,526 25,540 16,014 17,404 4,538 11,855 13,708
-------- --------- --------- -------- --------- -------- -------- ---------- --------
7,165 29,485 25,348 (25,540) (13,078) (15,418) (4,538) 218 (12,235)
276 25,425 2,100 7,247 3,312 1,467 (170) 4,877 4,250
6,879 24,391 1,209 46,926 25,115 24,551 866 687 36,022
-------- --------- --------- -------- --------- -------- -------- ---------- --------
7,155 49,816 3,309 54,173 28,427 26,018 696 5,564 40,272
- ----------------------------------------------------------------------------------------------------------------
$ 14,320 $ 79,301 $ 28,657 $ 28,633 $ 15,349 $ 10,600 $ (3,842) $ 5,782 $ 28,037
================================================================================================================
<CAPTION>
VAN ECK
WORLDWIDE VAN ECK
HARD EMERGING
ASSETS MARKETS
FUND FUND
- ---
<S> <C> <C>
$ 190 $ -
-------- --------
190 -
-------- --------
65 109
1,044 2,229
-------- --------
1,109 2,338
-------- --------
(919) (2,338)
(356) 2,197
2,826 7,780
-------- --------
2,470 9,977
- ---
$ 1,551 $ 7,639
===
</TABLE>
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5
<PAGE> 7
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (21,063) $ 630 $ 28 $ (6,092) $ 2,746 $ (49,655)
Net realized and unrealized investment gains
(losses) - (152) (4,045) 53,582 2,704 118,386
---------- ------- -------- -------- -------- ----------
Change in net assets resulting from operations (21,063) 478 (4,017) 47,490 5,450 68,731
---------- ------- -------- -------- -------- ----------
From capital transactions:
Net premiums/deposits 288,952 50,993 51,118 250,870 123,677 563,684
Surrenders and withdrawals (407) (149) (895) (1,767) (675) (3,336)
Transfers in (out of) subaccounts, net -- Note 1 (427,623) (4,127) (22,754) (39,513) 24,650 271,092
---------- ------- -------- -------- -------- ----------
Change in net assets resulting from capital
transactions (139,078) 46,717 27,469 209,590 147,652 831,440
---------- ------- -------- -------- -------- ----------
Increase in net assets (160,141) 47,195 23,452 257,080 153,102 900,171
Net assets at beginning of period 847,527 49,741 65,501 299,454 85,716 420,003
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 687,386 $96,936 $ 88,953 $556,534 $238,818 $1,320,174
==================================================================================================================================
NET ASSET VALUE PER UNIT AT END OF PERIOD $ 1.00 $ 14.53 $ 10.27 $ 27.25 $ 17.69 $ 155.65
==================================================================================================================================
UNITS OUTSTANDING AT END OF PERIOD 687,386 6,671 8,661 20,423 13,500 8,482
==================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
From operations:
Net investment income (loss) $ (14,476) $(3,056) $ (5,532) $(22,666) $ (6,180) $ (38,788)
Net realized and unrealized investment gains
(losses) - 3,330 192 11,559 6,583 46,453
---------- ------- -------- -------- -------- ----------
Change in net assets resulting from operations (14,476) 274 (5,340) (11,107) 403 7,665
---------- ------- -------- -------- -------- ----------
From capital transactions:
Net premiums/deposits 1,100,864 36,000 58,181 263,891 61,909 327,244
Surrenders and withdrawals (572) (83) (165) (2,423) (129) (6,058)
Transfers in (out of) subaccounts, net -- Note 1 (303,884) (229) 8,694 22,472 16,042 50,804
---------- ------- -------- -------- -------- ----------
Change in net assets resulting from capital
transactions 796,408 35,688 66,710 283,940 77,822 371,990
---------- ------- -------- -------- -------- ----------
Increase (decrease) in net assets 781,932 35,962 61,370 272,833 78,225 379,655
Net assets at beginning of period 65,595 13,779 4,131 26,621 7,491 40,348
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 847,527 $49,741 $ 65,501 $299,454 $ 85,716 $ 420,003
==================================================================================================================================
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 847,527 3,257 5,998 11,780 4,720 2,973
==================================================================================================================================
<CAPTION>
FIDELITY
CONTRAFUND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) PORTFOLIO
- -------------------------------------------------- ----------
<S> <C>
From operations:
Net investment income (loss) $(16,530)
Net realized and unrealized investment gains
(losses) 55,258
--------
Change in net assets resulting from operations 38,728
--------
From capital transactions:
Net premiums/deposits 336,858
Surrenders and withdrawals (824)
Transfers in (out of) subaccounts, net -- Note 1 46,915
--------
Change in net assets resulting from capital
transactions 382,949
--------
Increase in net assets 421,677
Net assets at beginning of period 327,340
- --------------------------------------------------
NET ASSETS AT END OF PERIOD $749,017
==================================================
NET ASSET VALUE PER UNIT AT END OF PERIOD $ 26.10
==================================================
UNITS OUTSTANDING AT END OF PERIOD 28,698
==================================================
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------
From operations:
Net investment income (loss) $(22,765)
Net realized and unrealized investment gains
(losses) 46,063
--------
Change in net assets resulting from operations 23,298
--------
From capital transactions:
Net premiums/deposits 246,088
Surrenders and withdrawals (1,201)
Transfers in (out of) subaccounts, net -- Note 1 36,435
--------
Change in net assets resulting from capital
transactions 281,322
--------
Increase (decrease) in net assets 304,620
Net assets at beginning of period 22,720
- --------------------------------------------------
NET ASSETS AT END OF PERIOD $327,340
==================================================
NET ASSET VALUE PER UNIT AT END OF PERIOD $ 24.44
==================================================
UNITS OUTSTANDING AT END OF PERIOD 13,394
==================================================
</TABLE>
See accompanying Notes to Financial Statements.
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6
<PAGE> 8
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<TABLE>
<CAPTION>
THE THE
ALGER THE ALGER MFS
AMERICAN ALGER AMERICAN MFS GROWTH MFS MFS SOGEN
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 7,165 $ 29,485 $ 25,348 $(25,540) $(13,078) $(15,418) $(4,538) $ 218 $(12,235)
7,155 49,816 3,309 54,173 28,427 26,018 696 5,564 40,272
-------- -------- -------- -------- -------- -------- ------- -------- --------
14,320 79,301 28,657 28,633 15,349 10,600 (3,842) 5,782 28,037
-------- -------- -------- -------- -------- -------- ------- -------- --------
92,852 438,826 115,034 166,413 104,493 152,155 34,367 130,053 74,358
- (25,094) (5) (1,656) (1,763) (1,021) (218) (337) -
(31,282) 108,769 34,478 (7,951) 5,706 8,873 (14,235) (282) 8,006
-------- -------- -------- -------- -------- -------- ------- -------- --------
61,570 522,501 149,507 156,806 108,436 160,007 19,914 129,434 82,364
-------- -------- -------- -------- -------- -------- ------- -------- --------
75,890 601,802 178,164 185,439 123,785 170,607 16,072 135,216 110,401
131,214 280,243 168,837 286,259 205,296 210,576 53,470 128,308 134,319
- -------------------------------------------------------------------------------------------------------------
$207,104 $882,045 $347,001 $471,698 $329,081 $381,183 $69,542 $263,524 $244,720
=============================================================================================================
$ 43.58 $ 55.84 $ 27.60 $ 24.22 $ 20.48 $ 21.14 $ 10.25 $ 18.10 $ 12.47
=============================================================================================================
4,752 15,796 12,572 19,476 16,068 18,031 6,785 14,559 19,625
=============================================================================================================
- -------------------------------------------------------------------------------------------------------------
$ (3,424) $ (6,097) $ (9,436) $(22,642) $(15,787) $(18,580) $(4,763) $ (5,524) $(14,549)
4,449 44,836 22,499 40,816 18,836 12,276 (499) 6,093 (3,210)
-------- -------- -------- -------- -------- -------- ------- -------- --------
1,025 38,739 13,063 18,174 3,049 (6,304) (5,262) 569 (17,759)
-------- -------- -------- -------- -------- -------- ------- -------- --------
88,005 171,948 119,140 214,349 173,364 141,269 47,751 97,181 135,934
(313) (1,636) (1,360) (734) (2,718) (2,367) (363) (194) (2,482)
26,949 37,058 26,519 27,749 11,059 51,081 (7) 28,785 5,437
-------- -------- -------- -------- -------- -------- ------- -------- --------
114,641 207,370 144,299 241,364 181,705 189,983 47,381 125,772 138,889
-------- -------- -------- -------- -------- -------- ------- -------- --------
115,666 246,109 157,362 259,538 184,754 183,679 42,119 126,341 121,130
15,548 34,134 11,475 26,721 20,542 26,897 11,351 1,967 13,189
- -------------------------------------------------------------------------------------------------------------
$131,214 $280,243 $168,837 $286,259 $205,296 $210,576 $53,470 $128,308 $134,319
=============================================================================================================
$ 43.97 $ 53.22 $ 28.87 $ 21.47 $ 19.05 $ 20.11 $ 10.16 $ 18.12 $ 10.07
=============================================================================================================
2,984 5,266 5,848 13,333 10,777 10,471 5,263 7,081 13,339
=============================================================================================================
<CAPTION>
VAN ECK
WORLDWIDE VAN ECK
HARD EMERGING
ASSETS MARKETS
FUND FUND
- ---
<S> <C> <C>
$ (919) $(2,338)
2,470 9,977
------- -------
1,551 7,639
------- -------
10,739 12,961
(70) (59)
(1,956) (4,535)
------- -------
8,713 8,367
------- -------
10,264 16,006
10,403 18,839
- ---
$20,667 $34,845
===
$ 10.71 $ 10.39
===
1,930 3,354
===
- ---
$ (417) $(3,614)
(3,800) (3,708)
------- -------
(4,217) (7,322)
------- -------
9,690 20,390
(156) (296)
(816) (690)
------- -------
8,718 19,404
------- -------
4,501 12,082
5,902 6,757
- ---
$10,403 $18,839
===
$ 9.20 $ 7.12
===
1,131 2,646
===
</TABLE>
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7
<PAGE> 9
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 -- 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 86%
of the outstanding common stock of CNA.
VFL sells a wide range of life insurance products, including the Capital
Select variable life policy ("Policy"). Under the terms of the 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 ("Fixed Account") or both the Variable Account and Fixed Account.
Policyholders who invest in the Variable Account are hereinafter referred to as
the contractholder.
The Variable Account currently offers 17 subaccounts each of which invests
in shares of a corresponding fund ("Fund"), 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.
- ------------------------------------------------------------
INVESTMENT ADVISOR:
FUND/SUBACCOUNT
- ------------------------------------------------------------
FEDERATED ADVISERS:
Federated Prime Money Fund II
Federated Utility Fund II
Federated High Income Bond Fund II
FIDELITY MANAGEMENT & RESEARCH COMPANY:
Fidelity Variable Insurance Products Fund
Equity-Income Portfolio
("Fidelity Equity-Income Portfolio")
Fidelity Variable Insurance Products Fund II
Asset Manager Portfolio
("Fidelity Asset Manager Portfolio")
Fidelity Variable Insurance Products Fund II
Index 500 Portfolio ("Fidelity Index 500 Portfolio")
Fidelity Variable Insurance Products Fund II
Contrafund Portfolio
("Fidelity Contrafund Portfolio")
- ------------------------------------------------------------
INVESTMENT ADVISOR:
FUND/SUBACCOUNT
- ------------------------------------------------------------
FRED ALGER MANAGEMENT, INC.:
The Alger American Small Capitalization Portfolio
The Alger American Growth Portfolio
The Alger American MidCap Growth Portfolio
MASSACHUSETTS FINANCIAL SERVICES COMPANY:
MFS Emerging Growth Series
MFS Research Series
MFS Growth With Income Series
MFS Limited Maturity Series (closed to
new investments)
MFS Total Return Series
SOCIETE GENERALE ASSET MANAGEMENT CORP.:
SoGen Overseas Variable Fund
VAN ECK ASSOCIATES CORPORATION:
Van Eck Worldwide Hard Assets Fund
Van Eck Emerging Markets Fund
- --------------------------------------------------------------------------------
8
<PAGE> 10
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 -- UNAUDITED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fixed Account is part of the general account of VFL and is an
investment option available to contractholders. 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.
The accompanying financial statements do not reflect amounts invested in the
Fixed Account.
The assets of the Variable Account are segregated from VFL's general
account and other separate accounts. The contractholder (before the maturity
date, while the contractholder 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 amounts in the Fixed Account to any
subaccount(s). The MFS Limited Maturity Series subaccount is not available to
receive transfers from new participants as of May 1, 1999.
- --------------------------------------------------------------------------------
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. Changes in the
difference between market value and cost are reflected as net unrealized gains
(losses) in the statement of operations.
INVESTMENT INCOME -- Investment income consists of dividends declared by
the Funds which are recognized on the date of record.
REALIZED INVESTMENT GAINS AND LOSSES -- Realized investment gains and
losses represent the difference between the proceeds from sales of shares of the
Funds held by the Variable Account and the cost of such shares, which are
determined using the average 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 ("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 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.
- --------------------------------------------------------------------------------
9
<PAGE> 11
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 -- UNAUDITED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 3. CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
Monthly deductions are made from each contractholder's account under the
terms of the Policy to compensate VFL for certain administration expenses. The
policy fee is $6 per month. In addition, in the first year of a policy another
$20 per month is deducted. Furthermore, in the event of an increase to the death
benefit of the Policy, an additional fee of $10 per month is deducted for the
twelve months subsequent to the death benefit increase. A deduction is also made
for the cost of insurance and any charges for supplemental riders. The cost of
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. All of the foregoing charges are deducted from the contractholder's
investment in the Fixed Account and the subaccounts of the Variable Account in
proportion to the contractholder's investments in such accounts.
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 equal to an annual rate of 0.90% of the net assets of the
Variable Account during the first 10 policy years and an 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 (deposit)
made by the contractholder to cover federal tax liabilities and state and local
premium taxes. An additional deduction for sales charges is made from premium
payments (deposits). Such deduction is made under the terms of the Policy and
ranges from 2% to 4% of the premium payments (deposits).
VFL permits 12 transfers between and among the subaccounts (one of which
can be applied to the Fixed Account) per policy 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.
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NOTE 4. DIVERSIFICATION REQUIREMENTS
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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 prospectuses of
each of the Funds that the Variable Account participates in, that the mutual
funds satisfy the diversification requirement of the regulations.
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10
<PAGE> 12
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 -- UNAUDITED
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NOTE 5. MANAGEMENT'S DISCUSSION OF YEAR 2000 IMPACT ON VARIABLE ACCOUNT
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The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. Separate Account does not
maintain any systems. Instead, it relies on the systems of CNA, third party
vendors and other business partners. CNA, on behalf of Separate Account, has a
plan under which it reviews periodically the progress that these parties are
making on this issue. As of December 1, 1998, CNA had certified internally as
Year 2000-ready all of the internal systems used by Separate Account. However,
as business conditions change, CNA may respond by revising previous Year 2000
strategies or solutions affecting specific systems. In limited cases, a system
that was to have been replaced, instead, may be renovated to become Year 2000
ready prior to January 1, 2000. Separate Account does not believe these changes
will have a material impact on the Company.
CNA has also received statements of Year 2000 compliance from certain key
business partners. Separate Account management believes that the systems on
which it relies does not have any significant remaining exposure to the Year
2000 issue and, therefore Separate Account does not have a material exposure to
the Year 2000 issue. However, due to the interdependent nature of computer
systems, there may be an adverse impact on Separate Account if its business
partners fail to address the Year 2000 issue successfully. To mitigate this
impact, if any, CNA on behalf of itself and Separate Account is communicating
with its business partners to coordinate Year 2000 conversion. In addition, CNA
has developed business resumption plans to ensure that it and Separate Account
are able to continue critical processes through other means in the event that it
becomes necessary to do so. Formal strategies have been developed to include
appropriate recovery processes and use of alternative vendors.
Based on its current assessment, CNA estimates that the total cost to
replace and upgrade its systems to accommodate Year 2000 processing will be
approximately $70 million. As of June 30, 1999, CNA has spent approximately $60
million on Year 2000 readiness matter.
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11
<PAGE> 13
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 companies.
CNA is a registered service mark of 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-B 8/99 Printed in USA
