<PAGE> 1
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February 20, 1999
- --------------------------------------------------------------------------------
Dear Contractowner:
Your CNA Capital Select Variable Universal Life Policy(SM) ("Policy") offers
both protection and investment possibilities. Your policy offers 18 variable
subaccounts, plus a fixed interest account into which you may place all or part
of your policy's cash value.
This Annual Report presents the assets, liabilities, results of operations
and changes in net assets, from inception in 1997 through December 31, 1998,
under each of the 18 variable subaccounts.* 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
The full list of subacccounts can be found in the Notes to Financial
Statements, included within this report. In addition to the quality group of
fund choices, the Policy offers a number of other benefits, including:
- Competitive cost of insurance based on our best-selling term product,
ViaTerm;
- Tax deferral of cash-value earnings;**
- Flexibility of premium payments -- you can change the amount and frequency
of your payments.
Your Policy is issued by Valley Forge Life Insurance Company ("VFL"), which
is a wholly owned subsidiary of Continental Assurance Company; together, these
companies form the life companies of CNA Financial Corporation.
If you need more information, please refer to your prospectus. If you can't
find it or you need another copy, contact your CNA representative -- or let us
hear from you directly. Thank you for making CNA Capital Select Variable
Universal Life part of your insurance and retirement planning.
Sincerely,
David M. Chermow
David M. Chermow
Senior Vice President & Chief Operating Officer, Annuities
* Although guaranteed-interest options are available in connection with CNA
Capital Select Variable Universal Life, financial reports regarding these
fixed-interest funds are not included in this report.
** It's important to remember that taxes will be due to the extent that any
earnings are withdrawn. And, in certain circumstances, withdrawals prior to age
59 1/2 can result in government-imposed penalties and other charges. Actual
investment performance results will vary, and you may have a gain or loss when
you withdraw your money.
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1
<PAGE> 2
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1998 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value: $847,527 $49,741 $65,501 $299,454 $85,716 $420,003 $327,340
-------- ------- ------- -------- ------- -------- --------
TOTAL ASSETS 847,527 49,741 65,501 299,454 85,716 420,003 327,340
-------- ------- ------- -------- ------- -------- --------
LIABILITIES - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $847,527 $49,741 $65,501 $299,454 $85,716 $420,003 $327,340
=================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1997 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value: $ 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 - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
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
<PAGE> 3
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS VAN ECK
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE VAN ECK
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD EMERGING
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND FUND
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$131,214 $280,243 $168,837 $286,259 $205,296 $210,576 $53,470 $128,308 $134,319 $10,403 $18,839
-------- -------- -------- -------- -------- -------- ------- -------- -------- ------- -------
131,214 280,243 168,837 286,259 205,296 210,576 53,470 128,308 134,319 10,403 18,839
-------- -------- -------- -------- -------- -------- ------- -------- -------- ------- -------
- - - - - - - - - - -
---------------------------------------------------------------------------------------------------------------------------------
$131,214 $280,243 $168,837 $286,259 $205,296 $210,576 $53,470 $128,308 $134,319 $10,403 $18,839
=================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS VAN ECK
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE VAN ECK
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD EMERGING
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND FUND
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,548 $ 34,134 $ 11,475 $ 26,721 $ 20,542 $ 26,897 $11,351 $ 1,967 $ 13,189 $5,902 $ 6,757
-------- -------- -------- -------- -------- -------- ------- -------- -------- ------ -------
15,548 34,134 11,475 26,721 20,542 26,897 11,351 1,967 13,189 5,902 6,757
-------- -------- -------- -------- -------- -------- ------- -------- -------- ------ -------
- - - - - - - - - - -
--------------------------------------------------------------------------------------------------------------------------------
$ 15,548 $ 34,134 $ 11,475 $ 26,721 $ 20,542 $ 26,897 $11,351 $ 1,967 $ 13,189 $5,902 $ 6,757
================================================================================================================================
</TABLE>
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3
<PAGE> 4
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
FOR THE YEAR ENDED DECEMBER 31, 1998 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 14,829 $ 1,169 $ 428 $ 2,052 $ 1,442 $ 1,936 $ 1,679
-------- ------- ------- -------- ------- -------- --------
14,829 1,169 428 2,052 1,442 1,936 1,679
-------- ------- ------- -------- ------- -------- --------
Expenses:
Mortality and expense risk charges 2,836 233 305 1,263 356 2,416 1,179
Policy fees/cost of insurance 26,469 3,992 5,655 23,455 7,266 38,308 23,265
-------- ------- ------- -------- ------- -------- --------
29,305 4,225 5,960 24,718 7,622 40,724 24,444
-------- ------- ------- -------- ------- -------- --------
NET INVESTMENT INCOME (LOSS) (14,476) (3,056) (5,532) (22,666) (6,180) (38,788) (22,765)
Investment gains and (losses):
Net realized gains (losses) - 1,039 (214) (1,500) 160 1,250 2,859
Net unrealized gains (losses) - 2,291 406 13,059 6,423 45,203 43,204
-------- ------- ------- -------- ------- -------- --------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) - 3,330 192 11,559 6,583 46,453 46,063
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $(14,476) $ 274 $(5,340) $(11,107) $ 403 $ 7,665 $ 23,298
=================================================================================================================================
FOR THE PERIOD FROM INCEPTION TO
DECEMBER 31, 1997 1-MAY-97 10-JUN-97 8-APR-97 10-JUN-97 10-JUN-97 8-APR-97 8-APR-97
- ---------------------------------------------------------------------------------------------------------------------------------
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 and (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 NET
ASSETS 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
<PAGE> 5
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<TABLE>
<CAPTION>
THE THE
ALGER THE ALGER MFS VAN ECK
AMERICAN ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE VAN ECK
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD EMERGING
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 7,871 $15,637 $ 2,887 $ 761 $ 1,263 - - $ 249 - $ 963 $ 129
------- ------- ------- -------- -------- --------- ------- ------- -------- ------- -------
7,871 15,637 2,887 761 1,263 - - 249 - 963 129
------- ------- ------- -------- -------- --------- ------- ------- -------- ------- -------
571 1,164 538 1,151 780 $ 1,182 $ 287 281 $ 660 70 96
10,724 20,570 11,785 22,252 16,270 17,398 4,476 5,492 13,889 1,310 3,647
------- ------- ------- -------- -------- --------- ------- ------- -------- ------- -------
11,295 21,734 12,323 23,403 17,050 18,580 4,763 5,773 14,549 1,380 3,743
------- ------- ------- -------- -------- --------- ------- ------- -------- ------- -------
(3,424) (6,097) (9,436) (22,642) (15,787) (18,580) (4,763) (5,524) (14,549) (417) (3,614)
(5,511) 397 (288) 692 569 (4,017) 139 281 (2,402) (3,284) (3,044)
9,960 44,439 22,787 40,124 18,267 16,293 (638) 5,812 (808) (516) (664)
------- ------- ------- -------- -------- --------- ------- ------- -------- ------- -------
4,449 44,836 22,499 40,816 18,836 12,276 (499) 6,093 (3,210) (3,800) (3,708)
- ---------------------------------------------------------------------------------------------------------------------------------
$ 1,025 $38,739 $13,063 $ 18,174 $ 3,049 $ (6,304) $(5,262) $ 569 $(17,759) $(4,217) $(7,322)
=================================================================================================================================
27-FEB-97 24-FEB-97 29-MAY-97 24-FEB-97 8-APR-97 8-APR-97 16-SEP-97 24-FEB-97 24-FEB-97 8-APR-97 2-APR-97
- ----------------------------------------------------------------------------------------------------------------------------------
$ 8 $ 1 - - - $ 623 $ 652 - - - -
------- ------- ------- -------- -------- --------- ------- ------- -------- ------- -------
8 1 - - - 623 652 - - - -
------- ------- ------- -------- -------- --------- ------- ------- -------- ------- -------
20 87 $ 18 $ 28 $ 33 30 11 $ 3 $ 31 $ 7 $ 6
1,189 2,394 678 1,704 1,669 1,328 247 315 1,799 282 612
------- ------- ------- -------- -------- --------- ------- ------- -------- ------- -------
1,209 2,481 696 1,732 1,702 1,358 258 318 1,830 289 618
------- ------- ------- -------- -------- --------- ------- ------- -------- ------- -------
(1,201) (2,480) (696) (1,732) (1,702) (735) 394 (318) (1,830) (289) (618)
(30) 889 (53) 45 (44) 199 13 19 (319) (67) (207)
(56) (1,200) (400) 317 332 11 (611) 50 (424) (297) (129)
------- ------- ------- -------- -------- --------- ------- ------- -------- ------- -------
(86) (311) (453) 362 288 210 (598) 69 (743) (364) (336)
- ---------------------------------------------------------------------------------------------------------------------------------
$(1,287) $(2,791) $(1,149) $ (1,370) $(1,414) $ (525) $ (204) $ (249) $ (2,573) $ (653) $ (954)
=================================================================================================================================
</TABLE>
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5
<PAGE> 6
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
FOR THE YEAR ENDED DECEMBER 31, 1998 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (14,476) $ (3,056) $ (5,532) $ (22,666) $ (6,180) $ (38,788) $ (22,765)
Net realized and unrealized
investment gains (losses) - 3,330 192 11,559 6,583 46,453 46,063
--------- --------- --------- ---------- --------- ---------- ----------
Change in net assets resulting from
operations (14,476) 274 (5,340) (11,107) 403 7,665 23,298
--------- --------- --------- ---------- --------- ---------- ----------
From capital transactions:
Net premiums/deposits 1,100,864 36,000 58,181 263,891 61,909 327,244 246,088
Surrenders and withdrawals (572) (83) (165) (2,423) (129) (6,058) (1,201)
Transfers into (out of)
subaccounts, net -- Note 1 (303,884) (229) 8,694 22,472 16,042 50,804 36,435
--------- --------- --------- ---------- --------- ---------- ----------
Change in net assets resulting
from capital transactions 796,408 35,688 66,710 283,940 77,822 371,990 281,322
--------- --------- --------- ---------- --------- ---------- ----------
Increase in net assets 781,932 35,962 61,370 272,833 78,225 379,655 304,620
--------- --------- --------- ---------- --------- ---------- ----------
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 $ 847,527 $ 49,741 $ 65,501 $ 299,454 $ 85,716 $ 420,003 $ 327,340
=================================================================================================================================
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 1.00 $ 15.27 $ 10.92 $ 25.42 $ 18.16 $ 141.25 $ 24.44
=================================================================================================================================
UNITS OUTSTANDING AT END OF PERIOD 847,527 3,257 5,998 11,780 4,720 2,973 13,394
=================================================================================================================================
FOR THE PERIOD FROM INCEPTION TO
DECEMBER 31, 1997 1-MAY-97 10-JUN-97 8-APR-97 10-JUN-97 10-JUN-97 8-APR-97 8-APR-97
- ---------------------------------------------------------------------------------------------------------------------------------
From operations:
Net investment income (loss) $ (1,432) $ (471) $ (231) $ (1,833) $ (437) $ (4,022) $ (1,620)
Net realized and unrealized gains
(losses) - 1,628 55 1,306 421 1,617 267
--------- --------- --------- ---------- --------- ---------- ----------
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 into (out of)
subaccounts, 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 65,595 964 377 1,096 416 353 1,139
=================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
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6
<PAGE> 7
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS VAN ECK
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE VAN ECK
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD EMERGING
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ (3,424) $ (6,097) $ (9,436) $ (22,642) $(15,787) $ (18,580) $ (4,763) $ (5,524) $(14,549) $ (417) $ (3,614)
4,449 44,836 22,499 40,816 18,836 12,276 (499) 6,093 (3,210) (3,800) (3,708)
--------- ---------- --------- ---------- --------- ---------- --------- --------- --------- -------- ---------
1,025 38,739 13,063 18,174 3,049 (6,304) (5,262) 569 (17,759) (4,217) (7,322)
--------- ---------- --------- ---------- --------- ---------- --------- --------- --------- -------- ---------
88,005 171,948 119,140 214,349 173,364 141,269 47,751 97,181 135,934 9,690 20,390
(313) (1,636) (1,360) (734) (2,718) (2,367) (363) (194) (2,482) (156) (296)
26,949 37,058 26,519 27,749 11,059 51,081 (7) 28,785 5,437 (816) (690)
--------- ---------- --------- ---------- --------- ---------- --------- --------- --------- -------- ---------
114,641 207,370 144,299 241,364 181,705 189,983 47,381 125,772 138,889 8,718 19,404
--------- ---------- --------- ---------- --------- ---------- --------- --------- --------- -------- ---------
115,666 246,109 157,362 259,538 184,754 183,679 42,119 126,341 121,130 4,501 12,082
--------- ---------- --------- ---------- --------- ---------- --------- --------- --------- -------- ---------
15,548 34,134 11,475 26,721 20,542 26,897 11,351 1,967 13,189 5,902 6,757
- ---------------------------------------------------------------------------------------------------------------------------------
$ 131,214 $ 280,243 $168,837 $ 286,259 $205,296 $ 210,576 $ 53,470 $128,308 $134,319 $ 10,403 $ 18,839
=================================================================================================================================
$ 43.97 $ 53.22 $ 28.87 $ 21.47 $ 19.05 $ 20.11 $ 10.16 $ 18.12 $ 10.07 $ 9.20 $ 7.12
=================================================================================================================================
2,984 5,266 5,848 13,333 10,777 10,471 5,263 7,081 13,339 1,131 2,646
=================================================================================================================================
27-FEB-97 24-FEB-97 29-MAY-97 24-FEB-97 8-APR-97 8-APR-97 16-SEP-97 24-FEB-97 24-FEB-97 8-APR-97 2-APR-97
- ---------------------------------------------------------------------------------------------------------------------------------
$ (1,201) $ (2,480) $ (696) $ (1,732) $ (1,702) $ (735) $ 394 $ (318) $ (1,830) $ (289) $ (618)
(86) (311) (453) 362 288 210 (598) 69 (743) (364) (336)
--------- ---------- --------- ---------- --------- ---------- --------- --------- --------- -------- ---------
(1,287) (2,791) (1,149) (1,370) (1,414) (525) (204) (249) (2,573) (653) (954)
--------- ---------- --------- ---------- --------- ---------- --------- --------- --------- -------- ---------
14,166 35,288 8,051 18,949 12,643 11,690 6,149 2,216 14,325 4,423 7,649
2,669 1,637 4,573 9,142 9,313 15,732 5,406 - 1,437 2,132 62
--------- ---------- --------- ---------- --------- ---------- --------- --------- --------- -------- ---------
16,835 36,925 12,624 28,091 21,956 27,422 11,555 2,216 15,762 6,555 7,711
--------- ---------- --------- ---------- --------- ---------- --------- --------- --------- -------- ---------
15,548 34,134 11,475 26,721 20,542 26,897 11,351 1,967 13,189 5,902 6,757
--------- ---------- --------- ---------- --------- ---------- --------- --------- --------- -------- ---------
- - - - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
$ 15,548 $ 34,134 $ 11,475 $ 26,721 $ 20,542 $ 26,897 $ 11,351 $ 1,967 $ 13,189 $ 5,902 $ 6,757
=================================================================================================================================
$ 43.75 $ 42.76 $ 24.18 $ 16.14 $ 15.79 $ 16.44 $ 10.01 $ 16.63 $ 9.77 $ 15.72 $ 11.00
=================================================================================================================================
355 798 475 1,656 1,301 1,636 1,134 118 1,350 375 614
=================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE> 8
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 85%
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 of VFL ("Fixed Account") or both the Variable Account and Fixed Account.
Policyowners who invest in the Variable Account are hereinafter referred to as
the contractholder.
The Variable Account currently offers 18 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 a registered investment advisor ("Investment
Advisor"). The Investment Advisors and subaccounts are identified in Notes 3.
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 inforce) 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).
- --------------------------------------------------------------------------------
8
<PAGE> 9
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
VALUATION OF INVESTMENTS -- Investments 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 statement of operations.
INVESTMENT INCOME -- Investment income consists of dividends declared by
the Funds that 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> 10
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS
- --------------------------------------------------------------------------------
The investments in the funds of the subaccounts of the Variable Account at
December 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
INVESTMENT ADVISOR MARKET
FUND/SUBACCOUNT SHARES COST VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERATED ADVISERS:
FEDERATED PRIME MONEY FUND II
December 31, 1998 847,527 $847,527 $847,527
December 31, 1997 65,595 $ 65,595 $ 65,595
FEDERATED UTILITY FUND II
December 31, 1998 3,257 $ 45,985 $ 49,741
December 31, 1997 964 $ 12,314 $ 13,779
FEDERATED HIGH INCOME BOND FUND II
December 31, 1998 5,998 $ 65,039 $ 65,501
December 31, 1997 377 $ 4,075 $ 4,131
FIDELITY MANAGEMENT & RESEARCH COMPANY:
FIDELITY VARIABLE INSURANCE PRODUCTS FUND EQUITY-INCOME
PORTFOLIO ("FIDELITY EQUITY-INCOME PORTFOLIO")
December 31, 1998 11,780 $285,522 $299,454
December 31, 1997 1,096 $ 25,748 $ 26,621
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II ASSET MANAGER
PORTFOLIO ("FIDELITY ASSET MANAGER PORTFOLIO")
December 31, 1998 4,720 $ 78,891 $ 85,716
December 31, 1997 416 $ 7,089 $ 7,491
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II INDEX 500
PORTFOLIO ("FIDELITY INDEX 500 PORTFOLIO")
December 31, 1998 2,973 $373,628 $420,003
December 31, 1997 353 $ 39,176 $ 40,348
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II CONTRAFUND
PORTFOLIO ("FIDELITY CONTRAFUND PORTFOLIO")
December 31, 1998 13,394 $283,930 $327,340
December 31, 1997 1,139 $ 22,514 $ 22,720
FRED ALGER MANAGEMENT, INC.:
THE ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
December 31, 1998 2,984 $121,310 $131,214
December 31, 1997 355 $ 15,604 $ 15,548
THE ALGER AMERICAN GROWTH PORTFOLIO
December 31, 1998 5,266 $237,004 $280,243
December 31, 1997 798 $ 35,334 $ 34,134
</TABLE>
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10
<PAGE> 11
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
INVESTMENT ADVISOR MARKET
FUND/SUBACCOUNT SHARES COST VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FRED ALGER MANAGEMENT, INC.:
THE ALGER AMERICAN MIDCAP GROWTH PORTFOLIO
December 31, 1998 5,848 $146,450 $168,837
December 31, 1997 475 $ 11,875 $ 11,475
MASSACHUSETTS FINANCIAL SERVICES COMPANY:
MFS EMERGING GROWTH SERIES
December 31, 1998 13,333 $245,818 $286,259
December 31, 1997 1,656 $ 26,404 $ 26,721
MFS RESEARCH SERIES
December 31, 1998 10,777 $186,697 $205,296
December 31, 1997 1,301 $ 20,210 $ 20,542
MFS GROWTH WITH INCOME SERIES
December 31, 1998 10,471 $194,272 $210,576
December 31, 1997 1,636 $ 26,886 $ 26,897
MFS LIMITED MATURITY SERIES
December 31, 1998 5,263 $ 54,719 $ 53,470
December 31, 1997 1,134 $ 11,962 $ 11,351
MFS TOTAL RETURN SERIES
December 31, 1998 7,081 $122,446 $128,308
December 31, 1997 118 $ 1,917 $ 1,967
SOCIETE GENERALE ASSET MANAGEMENT CORP.:
SOGEN OVERSEAS VARIABLE FUND
December 31, 1998 13,339 $135,551 $134,319
December 31, 1997 1,350 $ 13,613 $ 13,189
VAN ECK ASSOCIATES CORPORATION:
VAN ECK WORLDWIDE HARD ASSETS FUND
December 31, 1998 1,131 $ 11,216 $ 10,403
December 31, 1997 375 $ 6,199 $ 5,902
VAN ECK EMERGING MARKETS FUND
December 31, 1998 2,646 $ 19,632 $ 18,839
December 31, 1997 614 $ 6,886 $ 6,757
</TABLE>
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11
<PAGE> 12
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4. INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
The aggregate cost of purchases and proceeds from sales of funds in the
subaccounts for the year ended December 31, 1998 and from inception through
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
INVESTMENT ADVISOR 1998 1997
FUND/SUBACCOUNT PURCHASES SALES PURCHASES SALES
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERATED ADVISERS:
Federated Prime Money Fund II $2,481,159 $1,714,056 $145,193 $79,877
Federated Utility Fund II 49,310 17,847 18,819 6,718
Federated High Income Bond Fund II 90,509 29,759 7,919 3,845
FIDELITY MANAGEMENT & RESEARCH COMPANY:
Fidelity Equity-Income Portfolio 369,832 110,610 42,621 17,306
Fidelity Asset Manager Portfolio 93,987 23,787 7,528 458
Fidelity Index 500 Portfolio 990,469 659,203 59,865 21,134
Fidelity Contrafund Portfolio 357,616 100,738 43,658 21,205
FRED ALGER MANAGEMENT, INC.:
The Alger American Small Capitalization Portfolio 149,591 46,245 28,590 12,964
The Alger American Growth Portfolio 250,054 64,418 44,379 9,935
The Alger American MidCap Growth Portfolio 150,003 18,027 22,938 11,010
MASSACHUSETTS FINANCIAL SERVICES COMPANY:
MFS Emerging Growth Series 457,350 239,389 41,571 15,212
MFS Research Series 248,443 83,788 29,976 9,723
MFS Growth With Income Series 545,157 373,754 45,455 19,391
MFS Limited Maturity Series 71,105 28,487 26,273 14,976
MFS Total Return Series 145,064 25,065 2,345 447
SOCIETE GENERALE ASSET MANAGEMENT CORP.:
SoGen Overseas Variable Fund 213,850 89,510 19,038 5,106
VAN ECK ASSOCIATES CORPORATION:
Van Eck Worldwide Hard Assets Fund 13,942 6,604 12,851 6,585
Van Eck Emerging Markets Fund 22,311 6,650 8,457 1,364
</TABLE>
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12
<PAGE> 13
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5. 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 daily 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.
- --------------------------------------------------------------------------------
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 prospectuses of
each of the Funds that the Variable Account participates in, that the Funds
satisfy the diversification requirement of the regulations.
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13
<PAGE> 14
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Contractholders of Valley Forge Life Insurance Company Variable Life
Separate Account and the Board of Directors of Valley Forge Life Insurance
Company:
We have audited the accompanying statements of assets and liabilities of
the subaccounts of Valley Forge Life Insurance Company Variable Life Separate
Account (the "Account") as of December 31, 1998 and related 1997, and the
related statements of operations and changes in net assets for the year ended
December 31, 1998 and the period from inception through December 31, 1997. 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 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 Fund and Van Eck Emerging Markets Fund. These
financial statements are the responsibility of the Variable 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
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1998 and 1997. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our 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, 1998 and 1997, the results of their operations and
the changes in their net assets for the year ended December 31, 1998 and the
period from inception through December 31, 1997, in conformity with generally
accepted accounting principles.
Chicago, Illinois
February 23, 1999
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14
<PAGE> 15
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MANAGEMENT'S DISCUSSION OF IMPACT OF YEAR 2000 ON VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. Variable Account does not
maintain any systems. Instead, it relies on the systems of Assurance and third
party vendors. CNA, on behalf of Assurance, has a plan under which it reviews
periodically the progress that these parties are making on this issue. To date,
CNA has certified internally as Year 2000-ready all of the internal systems used
by Assurance. CNA estimates that the total cost to replace and upgrade its
systems to accommodate Year 2000 processing will be approximately $60 to $70
million. As of December 31, 1998, CNA has spent approximately $59 million on
Year 2000 readiness matters.
CNA has also received statements of Year 2000 compliance from certain of
key business partners. Variable Account management believes that the systems on
which it relies do not have any significant remaining exposure to the Year 2000
issue and, therefore, Variable Account does not have material exposure to the
Year 2000 issue. However, due to the interdependent nature of computer systems,
there may be an adverse impact on the Variable Account if its business partners
fail to successfully address the Year 2000 issue. To mitigate this impact, if
any, CNA is communicating with these various entities to coordinate Year 2000
conversion.
In addition, CNA has developed business resumption plans to ensure that it
and Variable 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 within each business unit and support organization to include
appropriate recovery processes and use of alternative vendors.
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15
<PAGE> 16
CNA
CAPITAL SELECT /SM/
VARIABLE
UNIVERSAL LIFE
================================================================================
|
| ANNUAL REPORT
| ISSUED BY THE
| VALLEY FORGE
| LIFE INSURANCE COMPANY,
| ONE OF THE CNA
| COMPANIES
|
|
|
| DECEMBER 31, 1998
|
|
|
|
[CNA LOGO]
FOR ALL THE COMMITMENTS YOU MAKE(R)
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]
FOR ALL THE COMMITMENTS YOU MAKE(R)
AG-134301-A 2/99 Printed in USA
