Registration No. 333-48988
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO.1
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Valley Forge Life Insurance Company Variable Life Separate Account
(Exact Name of Trust)
B. Valley Forge Life Insurance Company
(Name of Depositor)
C. CNA Plaza, 43 South
Chicago, Illinois 60685
(Complete address of depositor's principal executive offices)
D. Name and complete address of agent for service:
Jonathan D. Kantor
Senior Vice President, General Counsel and Secretary
Valley Forge Life Insurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
<PAGE>
Copies to:
Judith A. Hasenauer
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
E. Flexible Premium Variable Life Insurance Policies and
Flexible Premium Variable Last to Die Life Insurance Policies
(Title and amount of securities being registered)
F. Proposed maximum aggregate offering price to the public of the
securities being registered:
Continuous offering
G. Amount of Filing Fee: Not Applicable
H. Approximate date of proposed public offering:
As soon as practicable after the effective date of this filing.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 Item Caption in Prospectus
------------ ------------------------------
1(a) Other Information
(b) The Variable Life Insurance Policies
2 The Company
3 Not Applicable
4 Other Information
5 Other Information
6(a) Not Applicable
<PAGE>
(b) Not Applicable
7 Not Applicable
8 Not Applicable
9 Legal Proceedings
10 Purchases; Investment Choices; Access to Your Money
11 Investment Choices
12 Investment Choices
13 Expenses
14 Purchases
15 Purchases
16 Purchases; Investment Choices
17 Access to Your Money
18 Access to Your Money
19 Reports to Owners
20 Not Applicable
21 Access to Your Money
22 Not Applicable
23 Not Applicable
24 Other Information
25 The Company
26 Expenses
27 The Company
28 Executive Officers and Directors
29 The Company
30 The Company
<PAGE>
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 Other Information
36 Not Applicable
37 Not Applicable
38 Other Information
39 Other Information
40 Not Applicable
41 Not Applicable
42 Not Applicable
43 Not Applicable
44 Purchases
45 Investment Choices; Other Information
46 Purchases; Access to Your Money
47 Not Applicable
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 Other Information; Purchases; The Company; The Variable
Life Insurance Policies
52 Investment Choices
53 Other Information
54 Not Applicable
55 Not Applicable
<PAGE>
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
<PAGE>
FLEXIBLE PREMIUM VARIABLE AND FIXED LIFE INSURANCE POLICY
AND
FLEXIBLE PREMIUM VARIABLE AND FIXED LAST TO DIE
LIFE INSURANCE POLICY
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT
AND
VALLEY FORGE LIFE INSURANCE COMPANY
This prospectus describes the Flexible Premium Variable and Fixed Life Insurance
Policy and the Flexible Premium Variable and Fixed Last to Die Life Insurance
Policy that we (Valley Forge Life Insurance Company) are offering.
The policies are variable benefit policies. We have designed the policies for
use in estate and retirement planning and other insurance needs of individuals.
You, the policyowner, have a number of investment choices in the policy you
purchase. These investment choices include fixed account options as well as
several investment options described below. When you buy a policy and allocate
funds to the investment options you are subject to investment risk. This means
that the value of your policy may increase or decrease depending upon the
investment performance of the investment option(s) you select. Under some
circumstances, the death benefit and the duration of your policy (how long a
policy will remain in force) will also increase or decrease depending upon
investment performance.
Federated Insurance Series
Advised by Federated Investment Management
Company
Federated High Income Bond Fund II
Federated Prime Money Fund II
Federated Utility Fund II
The Alger American Fund
Advised by Fred Alger Management, Inc.
Alger American Growth Portfolio
Alger American Mid-Cap Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Leveraged AllCap Portfolio
Variable Insurance Products Fund (VIP), Initial Class and
Variable Insurance Products Fund II
<PAGE>
(VIP II), Initial Class
Advised by Fidelity Management & Research Company
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Contrafund(R) Portfolio
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Index 500 Portfolio
MFS Variable Insurance Trust
Advised by MFS Investment Management
MFS Emerging Growth Series
MFS Growth With Income Series
MFS Research Series
MFS Total Return Series
Janus Aspen Series, Service Shares
Advised by Janus Capital Corporation
Janus Aspen Series Capital Appreciation Portfolio
Janus Aspen Series Growth Portfolio
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Flexible Income Portfolio
Janus Aspen Series International Growth Portfolio
Janus Aspen Series Worldwide Growth Portfolio
Alliance Variable Products Series Fund, Class B
Shares
Advised by Alliance Capital Management, L.P.
Alliance Premier Growth Portfolio
Alliance Growth and Income Portfolio
American Century Variable Portfolios, Inc.
Advised by American Century Investment
Management, Inc.
American Century VP Income & Growth Fund
American Century VP Value Fund
Franklin Templeton Variable Insurance Products
Trust, Class 2 Shares
Templeton Developing Markets Securities Fund
(formerly, Templeton Developing Markets Fund)
Advised by Templeton Asset Management Ltd.
Templeton Asset Strategy Fund (formerly, Templeton Asset Allocation Fund)
Advised by Templeton Investment Counsel, LLC
Lazard Retirement Series
Advised by Lazard Asset Management
Lazard Retirement Equity Portfolio
<PAGE>
Lazard Retirement Small Cap Portfolio
The Universal Institutional Funds, Inc. (formerly Morgan Stanley Dean Witter
Universal Funds, Inc.)
Advised by Morgan Stanley Asset Management
Morgan Stanley International Magnum Portfolio
Morgan Stanley Emerging Markets Equity Portfolio
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Flexible Premium Variable
and Fixed Life Insurance Policy and Flexible Premium Variable and Fixed Last to
Die Life Insurance Policy. The Securities and Exchange Commission (SEC)
maintains a Web site (http://www.sec.gov) that contains information regarding
companies that file electronically with the SEC.
The policies:
o are not bank deposits;
o are not federally insured;
o are not endorsed by any bank or government agency.
The policies are subject to investment risk. You may be subject to loss of
principal.
The Securities and Exchange Commission has not approved or disapproved these
securities nor has it determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
This prospectus is not an offering of the securities in any state, country, or
jurisdiction in which we are not authorized to sell the policies. You should
rely only on the information contained in this prospectus or that we have
referred you to. We have not authorized anyone to provide you with information
that is different.
Date: _______, 2001
<PAGE>
TABLE OF CONTENTS
Page
HIGHLIGHTS......................................................................
THE COMPANY.....................................................................
THE VARIABLE LIFE INSURANCE POLICIES............................................
EXPENSES........................................................................
PURCHASES.......................................................................
INVESTMENT CHOICES..............................................................
DEATH BENEFIT...................................................................
TAXES...........................................................................
ACCESS TO YOUR MONEY............................................................
OTHER INFORMATION...............................................................
MORE INFORMATION................................................................
Executive Officers and Directors.......................................
Voting ..............................................................
Disregard of Voting Instructions.......................................
Legal Opinions.........................................................
Our Right to Contest...................................................
Federal Tax Status.....................................................
Reports to Owners......................................................
Legal Proceedings......................................................
Experts ..............................................................
Financial Statements...................................................
APPENDIX A - Illustrations of Policy Values.....................................
APPENDIX B - Example of Additional Insurance Rider (AIR)........................
APPENDIX C - Rates of Return....................................................
INDEX OF SPECIAL TERMS
This prospectus is written in plain English to make it as understandable as
possible. However, by the very nature of the policies, certain technical words
or terms are unavoidable. We have identified some of these words or terms. For
some we have provided you with a definition below. For the remainder, we believe
that you will find an adequate discussion in the text. We have identified these
terms and provided you with a page number that indicates where you will find the
explanation for the word or term. The word or term on the page is in italics.
Death Proceeds: The amount of money payable to the beneficiary if the insured
(or the last insured) dies while a policy is in force.
Debt: Any amount you owe us as the result of a policy loan. This includes any
accrued loan interest.
General Account: Our assets other than those allocated to the Variable Account
or any other separate account.
<PAGE>
Investment Option: An investment choice within the Valley Forge Life Insurance
Company Variable Life Separate Account available under the policies.
Policy Loan Account: That portion of the cash value resulting from a policy
loan.
Riders: An endorsement that is incorporated into your policy.
Specified Amount: A dollar amount used to determine the death benefit of your
policy. This amount is chosen by you. The minimum specified amount is $100,000.
Page
Beneficiary, Contingent Beneficiary
Business Day
Cash Value, Net Cash Value, Cash Surrender Value
Fixed Account I, Fixed Account II
Insured
Last Insured
Monthly Date
Owner, Joint Owner, Contingent Owner
Policy Year, Policy Anniversary
Policy Date
HIGHLIGHTS
The Variable Life Insurance Policies
The variable life insurance policies are contracts between you, the owner, and
us, an insurance company. The Flexible Premium Variable and Fixed Life Insurance
Policy described in this prospectus provides for life insurance coverage on the
named insured. If you purchase the Flexible Premium Variable and Fixed Last to
Die Life Insurance Policy (Last to Die Policy) described in this prospectus
there will be two persons insured and the death benefit will be paid once the
last insured dies. Both policies have cash values, a death benefit, surrender
rights, loan privileges and other characteristics associated with traditional
and universal life insurance, and are nearly identical except for the fact that
there are two lives insured in the last to die version. Since the policies are
variable life insurance policies, the value of your policy will increase or
decrease depending upon the investment experience of the investment option(s)
you choose. Under current tax laws , the death benefit associated with
the policies are distributed free from federal income taxes to the named
beneficiary. However, estate taxes may apply. We will issue the policies as
an individual policy in most states, and as a certificate under a group life
insurance policy in other states.
<PAGE>
Expenses
The policies have both insurance and investment features, and there are costs
related to each that reduce the return on your investment. We deduct:
o a premium charge from each premium payment;
o an expense charge daily from amounts allocated to the investment options;
o a monthly deduction from the policies for the cost of insurance;
o daily investment option charges which apply to the average daily value of
the investment options.
We may assess a surrender charge if you take out money from your policy. If you
make more than 12 transfers in any policy year, unless the transfer is
pre-scheduled, we will charge a transfer processing fee. Also, for the
first 12 months after an increase in the specified amount, we will deduct $10
each month from your policy.
Upon the insured's 95th birthday, we will no longer deduct the monthly
deduction. If the policy is a Last to Die Policy, we will not deduct the
insurance related charges after the younger insured's 95th birthday. There are
also fees and expenses which are deducted from the assets of the investment
options.
Purchases
You purchase a policy by completing the proper forms. In some circumstances, we
may contact you for additional information regarding the insured(s). We may
require the insured(s) to provide us with medical records, physicians'
statements or a complete paramedical examination.
The minimum initial premium payment we accept is computed for you based on the
specified amount you request. The policies are designed for the payment of
subsequent premiums. The minimum subsequent premium payment you can make is $50.
Your registered representative can help you fill out the proper forms.
Investment Choices
You can put your money in any of the fixed account options and/or in any of the
investment options. Currently, you may invest in all investment choices at any
one time. However, we reserve the right to limit this in the future.
Death Benefit
The amount of the death benefit depends on:
o the specified amount of insurance of your policy;
<PAGE>
o any debt that you may have;
o any due and unpaid monthly deductions that are incurred as a result of
your policy; entering into a grace period;
o under some circumstances, your cash value; and
o death benefit option in effect at the time of death of the insured (or last
insured).
Taxes
Your policy has been designed to comply with the definition of life insurance in
the Internal Revenue Code. As a result, the death proceeds paid under the policy
should be excludable from the gross income of your beneficiary. Any earnings in
your policy are not taxed until you take them out. The tax treatment of the loan
proceeds and surrender proceeds will depend on whether the policy is considered
a Modified Endowment Contract (MEC). Proceeds taken out of a MEC are considered
to come from earnings first and are includible in taxable income. If you are
younger than 59 1/2 when you take money out of a MEC, you may also be subject to
a 10% federal tax penalty on the earnings withdrawn.
Access to Your Money
You can make a total surrender of your policy at any time and we will pay you
the net cash value. You may make a partial surrender at any time after the end
of your first policy year. When you make a total or partial surrender, a
surrender charge may be assessed.
You can also borrow some of your net cash value.
Other Information
Free Look. You can cancel the policy within 10 days after you receive it (or
whatever period is required in your state). We will refund an amount equal to
the cash value plus fees or charges deducted from the premium payments less any
debt (or we will refund an amount equal to all premiums paid less any debt if
required in your state).
Additional Features. The following additional features are offered:
o You can arrange to have a regular amount of money automatically
transferred from the dollar cost averaging account to selected
investment options each month, theoretically giving you a lower average
cost per unit over time than a single one time purchase. We call this
feature the dollar cost averaging option.
o You can arrange to have us automatically rebalance amounts in selected
investment options and Fixed Account I to return to your original
percentage allocations. We call this feature the automatic transfer
option.
o We also offer a number of additional riders that are common to life
insurance policies.
<PAGE>
These features may not be available in your state and may not be suitable for
your particular situation.
Inquiries
If you need more information about buying a policy, please contact us at:
Valley Forge Life Insurance Company
Investment Products
100 CNA Drive
Nashville, TN 37214
(800) 262-1755
THE COMPANY
Valley Forge Life Insurance Company, with its administrative office located at
100 CNA Drive, Nashville, TN 37214, is a wholly-owned subsidiary of Continental
Assurance Company ("Assurance"). Assurance is a wholly-owned subsidiary of
Continental Casualty Company ("Casualty"), which is wholly-owned by CNA
Financial Corporation ("CNA"). Loews Corporation owns approximately 86% of the
outstanding common stock of CNA as of December 31, 1999.
We are principally engaged in the sale of life insurance and annuities. We are
licensed in the District of Columbia, Guam, Puerto Rico and all states, except
New York, where we are only admitted as a reinsurer.
THE VARIABLE LIFE INSURANCE POLICIES
The variable life insurance policies offered by this prospectus are contracts of
insurance between you, the owner, and us, an insurance company. The policies
described in this prospectus are flexible premium variable life insurance
policies. The policies are "flexible" because:
o the frequency and amount of premium can vary;
o you can choose between death benefit options; and
o you can increase or decrease the amount of insurance coverage, all within
the same policy of insurance.
The policies are "variable" because the cash value, when allocated to the
investment options, may increase or decrease depending upon the investment
results of the selected investment options. Under certain circumstances, the
death benefit and the duration of your policy may also vary. The death benefit
may vary because investment performance of the selected investment options may
be sufficient to result in the death benefit being greater than the specified
amount. The duration of your policy is also affected by investment performance
because charges under the policies, when coupled with poor performance, may mean
<PAGE>
that at some time there may not be enough cash value in your policy to pay the
charges and your policy will terminate unless you make a premium payment(s).
While your policy is in force, you can surrender the policy for all, or after
the first policy year, part of its net cash value. You may also obtain a
policy loan using the policy as security and by properly assigning it to us.
We also make available a number of riders to meet a variety of your estate
planning needs. To the extent you select any of the investment options, you bear
the investment risk. If your net cash value is insufficient to pay the monthly
deductions, your policy may terminate.
Because the policies are like traditional and universal life insurance, they
provide a death benefit which is paid to your named beneficiary. The proceeds
from the death benefit should be excludable from the gross income of the
beneficiary, however estate taxes may apply. The income tax-free death proceeds
makes this an excellent way to accumulate money you do not think you will use in
your lifetime. It is also a tax-efficient way to provide for those you leave
behind. If you need access to your money, you can borrow from your policy or
make a total or partial surrender. We will issue the policy as an individual
policy in most states, and as a group certificate under a group life insurance
policy in other states. As used in this prospectus, the term policy refers to
either the individual life policy or to the certificate issued under a group
life policy.
There are two versions of the policy offered: a single life version and a last
to die version (which covers two lives). Unless otherwise indicated any
discussion applies equally to both versions of the policy.
Purchasing Considerations
The policies are designed for individuals and businesses that have a need for
death protection but who also desire to potentially increase the values in their
policies through investments in the investment options. The policies offer the
following to individuals:
o create or conserve one's estate;
o supplement retirement income; and
o access to funds through loans and surrenders.
If you currently own a variable life insurance policy on the life of the
insured(s), you should consider whether the purchase of one of the policies
described in this prospectus is appropriate. Replacement of an existing policy
with one of the policies described in this prospectus may not be advantageous to
your situation.
EXPENSES
There are charges and other expenses associated with the policies that reduce
the return on your investment in a policy. The charges and expenses are
described below.
<PAGE>
Premium Charge
We deduct a premium charge from each premium payment you make to reimburse us
for the expenses associated with selling the policy and for tax charges and
costs we incur. The premium charge is 4% of premium payments.
Monthly Deduction
Each monthly date, we will make certain deductions from the cash value of your
policy. The monthly deduction is for the cost of insurance for the following
month. The first monthly deduction will be determined as of the policy date.
We determine the monthly cost of insurance rate each year as of the policy
anniversary. The rate will be charged for the next policy year. The monthly cost
of insurance rate will not exceed the maximum guaranteed monthly cost of
insurance rate shown on the policy schedule of your policy.
The monthly cost of insurance is determined as (1) times (2) where:
(1) is the net amount at risk which is equal to the base policy death benefit
divided by the monthly equivalent of the guaranteed interest rate (currently
4%), minus the policy's cash value before charges, all divided by $1,000; and
(2) is the monthly cost of insurance rate per $1,000 of coverage on the monthly
date.
When a Last to Die version of the Policy is purchased we will determine the
monthly cost of insurance based upon the lives of both insureds.
The cost of insurance rate for a policy month will be uniform for all specified
amounts of insurance that:
o are in the same specified amount band, sex, and risk classification;
o take effect when the insureds are the same age; and
o have been in force the same length of time.
We may charge less than the maximum cost of insurance rates shown in your policy
from time to time based on our expectations as to future cost elements such as:
investment earnings, mortality, persistency, expenses and taxes. Any change we
make will apply to all specified amount portions in the same risk
classification.
Since the mortality tables used with the policies distinguish between males and
females, the cost of insurance and the benefits payable will differ between
males and females of the same age. Employers, employee plans and employee
organizations should seek legal advice to determine whether the Civil Rights Act
<PAGE>
of 1964, Title VII, or other applicable law prohibits the use of sex distinct
mortality tables. We will offer the policy based upon unisex mortality tables
where required.
Expense Charge
We deduct an expense charge from each investment option each business day. The
expense charge is currently equal to:
Policy Years 1-10: Approximately 0.90%, on an annual basis, of
the cash value of each investment option.
Policy Years 11 and later: Approximately 0.45%, on an annual basis, of
the cash value of each investment option.
This charge compensates us for some of the mortality risks we assume, and the
risk that we will experience costs above that for which we are compensated. It
also compensates us for some of the administrative costs in administering the
policy. We expect to profit from the charge.
Surrender Charges
A surrender charge may be deducted if you make a full or partial surrender. A
surrender charge may also be applicable when you reduce the specified amount.
The initial surrender charge is a charge per $1,000, multiplied by the
specified amount divided by 1000, plus a charge for any applicable riders or
substandard ratings. The charge per $1,000 varies by issue age, sex, and risk
classification. The initial surrender charge grades down to zero over 10 years -
single life; 15 years - last to die.
Single Life Policy
100% of the surrender charge in policy year 1
100% of the surrender charge in policy year 2
100% of the surrender charge in policy year 3
100% of the surrender charge in policy year 4
100% of the surrender charge in policy year 5
80% of the surrender charge in policy year 6
60% of the surrender charge in policy year 7
40% of the surrender charge in policy year 8
20% of the surrender charge in policy year 9
No surrender charge in policy years 10 and later
Last to Die Policy
100% of the surrender charge in policy years 1 - 6
80% of the surrender charge in policy year 7
70% of the surrender charge in policy year 8
60% of the surrender charge in policy year 9
50% of the surrender charge in policy year 10
40% of the surrender charge in policy year 11
<PAGE>
30% of the surrender charge in policy year 12
20% of the surrender charge in policy year 13
10% of the surrender charge in policy year 14
No surrender charge in policy years 15 and later
Free Partial Surrender Amount
Each policy year, after the first, you can surrender a portion of your cash
value free from any surrender charge. The free partial surrender amount for any
policy year, after the first policy year, is 10% of the cash value and is
determined at the time of the first partial surrender in a policy year. If the
entire free partial surrender amount for a policy year is not taken in the first
partial surrender of a policy year, the free partial surrender amount available
for any other partial surrender in a policy year is the free partial surrender
amount for that policy year less the total prior free partial surrender amounts
withdrawn in the same policy year.
Transfer Processing Fee
You may transfer values from one investment option to another, or to or from the
fixed accounts. The first 12 transfers in a policy year are free. The fee for
each additional transfer is currently $25. The transfer processing fee
is deducted from the amount which is transferred. Prescheduled dollar cost
averaging transfers or automatic transfers are not counted when we determine
transfer processing fees. Each transfer is considered to be one request
regardless of the number of investment options or any fixed account involved in
the transfer.
Monthly Specified Amount Increase Fee
If you increase the specified amount of your policy, we will deduct $10 each
month for the first 12 months following the increase.
Income Tax Charge
We do not currently assess any charge for income taxes. We reserve the right to
assess a charge for such taxes against the investment options or your cash value
if we determine that such taxes will be incurred.
Charges after the Insured's 95th birthday
Once the insured turns 95, we will no longer deduct the insurance related
charges, but we will continue to deduct the asset based charges. If the policy
is a Last to Die Policy, we will not deduct the insurance related charges after
the younger insured's 95th birthday.
Investment Option Annual Expenses
(as a percentage of average daily net assets of an investment option)
The annual expenses of the portfolios for the year ended December 31, 1999 below
are based on data provided by the respective fund groups. We have not
independently verified such data. Future expenses may be greater or less than
those shown.
<PAGE>
<TABLE>
<CAPTION>
Other Expenses Total Annual
(after waivers Expenses (after
and/or waivers and/or
reimbursements reimbursements
with respect to with respect to
certain certain
Management 12b-1 investment investment
(Advisory Fees) Fees options) options)
------------------------------------------ ------------------- ----------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Federated Insurance Series
(See Note 1)
Federated High Income Bond
Fund II . . . . . . . . . . . . . . . . 0.60% -- 0.19% 0.79%
Federated Prime Money Fund II . . . . 0.50% -- 0.23% 0.73%
Federated Utility Fund II . . . . . . . . . . 0.75% -- 0.19% 0.94%
The Alger American Fund
Alger American Growth Portfolio . . . 0.75% -- 0.04% 0.79%
Alger American Mid-Cap Growth
Portfolio . . . . . . . . . . . . . . . 0.80% -- 0.05% 0.85%
Alger American Small Capitalization 0.85%
Portfolio . . . . . . . . . . . . . . . . . . . . -- 0.05% 0.90%
Alger American Leveraged AllCap 0.85% -- 0.08% 0.93%
Portfolio (See Note 2) . . . . . . . . . .
Variable Insurance Products Fund
(VIP), Initial Class and Variable Insurance
Products Fund II (VIP II), Initial
Class (See Note 3)
Fidelity VIP II Asset Manager
Portfolio . . . . . . . . . . . . . . . . . . 0.53% -- 0.10% 0.63%
Fidelity VIP II Contrafund (R) Portfolio . . 0.58% -- 0.09% 0.67%
Fidelity VIP Equity-Income Portfolio. . 0.48% -- 0.09% 0.57%
Fidelity VIP II Index 500 Portfolio 0.24% -- 0.04% 0.28%
MFS Variable Insurance Trust (See
Note 4)
MFS Emerging Growth Series . . . . . 0.75% -- 0.09% 0.84%
MFS Growth With Income Series . . . 0.75% -- 0.13% 0.88%
MFS Research Series . . . . . . . . . . . . . 0.75% -- 0.11% 0.86%
MFS Total Return Series . . . . . . . . . . 0.75% -- 0.15% 0.90%
Janus Aspen Series, Service
Shares (See Note 5)
Janus Aspen Series Capital
Appreciation Portfolio . . . . . . . . . . 0.65 0.25% 0.04% 0.94%
Janus Aspen Series Growth Portfolio . . . . 0.65% 0.25% 0.02% 0.92%
<PAGE>
Janus Aspen Series Balanced Portfolio 0.65% 0.25% 0.02% 0.92%
Janus Aspen Series Flexible Income
Portfolio . . . . . . . . . . . . . . 0.65% 0.25% 0.07% 0.97%
Janus Aspen Series International
Growth Portfolio . . . . . . . . . . . . . 0.65% 0.25% 0.11% 1.01%
Janus Aspen Series Worldwide
Growth Portfolio . . . . . . . . . . . . . 0.65% 0.25% 0.05% 0.95%
Alliance Variable Products Series
Fund, Class B Shares
Alliance Premier Growth Portfolio . . . . . 1.00% 0.25% 0.04% 1.29%
Alliance Growth and Income
Portfolio . . . . . . . . . . . . . . 0.63% 0.25% 0.09% 0.97%
American Century Variable
Portfolios, Inc. (See Note 6) . . . .
American Century VP Income &
Growth Fund . . . . . . . . . . . . . 0.70% -- 0.00% 0.70%
American Century VP Value Fund . . . 1.00% -- 0.00% 1.00%
Franklin Templeton Variable
Insurance Products Trust, Class 2
Shares (See Note 7)
Templeton Developing Markets
Securities Fund (see Note 8) . . . . 1.25% 0.25% 0.31% 1.81%
Templeton Asset Strategy Fund (see
Note 8) . . . . . . . . . . . . . . . 0.60% 0.25% 0.18% 1.03%
Lazard Retirement Series (See
Note 9)
Lazard Retirement Equity Portfolio . . . 0.75% 0.25% 0.25% 1.25%
Lazard Retirement Small Cap
Portfolio . . . . . . . . . . . . . 0.75% 0.25% 0.25% 1.25%
The Universal Institutional Funds,
Inc. (See Note 10)
Morgan Stanley International
Magnum Portfolio . . . . . . . . . . . 0.29% -- 0.87% 1.16%
Morgan Stanley Emerging Markets
Equity Portfolio . . . . . . . . . 0.42% -- 1.37% 1.79%
</TABLE>
1. The Fund did not pay or accrue the shareholder services fee during the
fiscal year ended December 31, 1999. The Fund has no present intention of
paying or accruing the shareholder services fee during the fiscal year
ending December 31, 2000. The maximum shareholder services fee is 0.25%.
2. Included in other expenses of the Alger American Leveraged AllCap Portfolio
is .01% of interest expense.
<PAGE>
3. A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain funds,
or FMR on behalf of certain funds, custodian credits realized as a result
of uninvested cash balances were used to reduce a portion of each
applicable fund's expenses. Including these reductions, the total operating
expenses presented in the table would have been .56% for Equity-Income
Portfolio, .62% for Asset Manager Portfolio, and .65% for the Contrafund
Portfolio. FMR agreed to reimburse a portion of the Index 500 Portfolio's
expenses during the period. Without this reimbursement, the Portfolio's
management fee, other expenses and total expenses would have been .24%,
.10% and .34%, respectively.
4. Each of these funds has an expense offset arrangement which reduces its
custodian fee based upon the amount of cash it maintains with its custodian
and dividend disbursing agent, and may enter into such arrangements and
directed brokerage arrangements (which would also have the effect of
reducing its expenses). Any such fee reductions are not reflected above
under "Other Expenses" and therefore are higher than the actual expenses of
the series.
5. Expenses are based on the estimated expenses that the new service shares
class of each portfolio expects to incur in its initial fiscal year.
Expenses are stated both with and without contractual waivers by Janus
Capital. Waivers, if applicable, are first applied against the management
fee and then against other expenses, and will continue until at least the
next annual renewal of the advisory agreement. All expenses are shown
without the effect of any expense offset arrangements.
6. The funds of American Century Variable Portfolios, Inc. have a stepped fee
schedule. As a result, the funds' management fees generally decrease as the
funds' assets increase.
7. The fund's class 2 distribution plan or "rule 12b-1 plan" is described in
the fund's prospectus. While the maximum amount payable under the fund's
class 2 rule 12b-1 plan is 0.35% per year of the fund's average daily net
assets, the Board of Trustees of Franklin Templeton Variable Insurance
Products Trust has set the current rate at 0.25% per year.
8. On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with a similar fund of the Franklin Templeton Variable Insurance
Products Trust ("VIP"). VIP shareholders approved new management fees,
which apply to the combined fund effective 5/1/00. The table shows restated
total expenses based on the new fees and the assets of the fund as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses
after 5/1/00 would be estimated as: Templeton Developing Markets Securities
Fund - Management Fees 1.25%, 12b-1 fees 0.25%, Other Expenses 0.29%, and
Total Annual Expenses 1.79%; Templeton Asset Strategy Fund - Management
Fees 0.60%, 12b-1 fees 0.25%, Other Expenses 0.14% and Total Annual
Expenses 0.99%. The fund's class 2 distribution plan or "rule 12b-1 plan"
is described in the fund's prospectus.
<PAGE>
9. Effective May 1, 1999, Lazard Asset Management, the Fund's investment
adviser, has agreed to waive its fee and/or reimburse the Portfolios
through December 31, 2000 to the extent total annual portfolio expenses
exceed 1.25% of the Portfolio's average daily net assets. Absent such an
agreement, the other expenses and total annual portfolio expenses for the
year ended December 31, 1999 would have been 4.63% and 5.63% for the Lazard
Retirement Equity Portfolio and 6.31% and 7.31% for the Lazard Retirement
Small Cap Portfolio.
10. With respect to the Universal Institutional Funds, Inc. portfolios, the
investment adviser has voluntarily waived a portion or all of the
management fees and reimbursed other expenses of the portfolios to the
extent total operating expenses exceed the following percentages: Emerging
Markets Equity Portfolio 1.75%, International Magnum Portfolio 1.15%. The
adviser may terminate this voluntary waiver at any time at its sole
discretion. Absent such reductions, the "Management Fees" and "Other
Expenses" would have been as follows: 1.25% and 1.37%, respectively for the
Emerging Markets Equity Portfolio; and 0.80% and 0.87%, respectively for
the International Magnum Portfolio.
PURCHASES
Premiums
The initial premium is due on the policy date. The policy date is the date
coverage under the policy becomes effective. Other premiums may be required. All
premiums must be sent to us at our administrative office. Before we send out the
policy, the application and the premium must be in good order as determined by
our administrative rules.
Your first policy year starts on the day the coverage is effective under your
policy (the policy date). The twelve month period beginning on the policy date
and ending the day before the same date in the next calendar year (and each
succeeding twelve month period) is referred to as a policy year. Future policy
years start on the same day and month in each subsequent year. We call that date
a policy anniversary. Your monthly date is the same day as the policy date for
each succeeding month.
Subsequent Premiums
The policies are designed to allow you to make subsequent premium payments. You
can make premium payments until the policy anniversary nearest the insured's
95th birthday or until the policy anniversary nearest the younger insured's 95th
birthday under a Last to Die policy. You may change the amount and frequency of
premiums. We have the right to limit the amount of any increase. Each premium
after the initial premium must be for at least $50. Unless specified, any
payments received will be considered premiums and not loan repayments.
<PAGE>
Application for a Policy
In order to purchase a policy, you must submit an application to us that
provides information about the proposed insured(s). In some cases, we may
contact you for additional information. We may request that the insured(s)
provide us with medical records, a physician's statement or possibly require
other medical tests.
Allocation of Premium
The initial premium is due on the policy date and will be allocated to the
investment options on the latest of:
o 2 business days after the policy date;
o 2 business days after our receipt of your initial premium at our
administrative office; or
o the date our underwriters approve your policy.
Additional premium payments will be credited to your policy as of the business
day they are received.
Your premium is allocated to the available fixed accounts or one or more of the
investment options, as selected by you. This allocation is not subject to the
transfer fee provision (see "Transfer Fee"). Currently, you can select as many
investment options as you wish. However, we reserve the right to limit this in
the future. All allocation percentages must be in whole numbers and at least 1%.
You may change the allocation of future premiums by providing us with written
notice. The change will be effective on the date we receive your request at our
administrative office.
Our Right to Reject or Return a Premium Payment
In order to receive the tax treatment for life insurance under the Internal
Revenue Code (Code), a policy must initially qualify and continue to qualify as
life insurance under the Code. To maintain this qualification, we have reserved
the right under the policy to return any premiums paid which we have determined
will cause the policy to fail as life insurance. We also have the right to make
changes in the policy or to make a distribution to the extent we determine this
is necessary to continue to qualify the policy as life insurance. Such
distributions may have current income tax consequences to you.
If subsequent premiums will cause your policy to become a Modified Endowment
Contract (MEC), we will contact you prior to applying the premium to your
policy. If you elect to have the premium applied, we require that you
acknowledge in writing that you understand the tax consequences of a MEC before
we will apply the premiums.
<PAGE>
Grace Period
If the net cash value on any business day is not sufficient to cover any expense
charges which are due but unpaid, a grace period of 61 days will be allowed for
the payment of a sufficient premium to keep your policy in force. We will send
you a notice at the start of the grace period to your last known address and to
any assignee. A minimum payment of an amount equal to 2 monthly deductions must
be paid during this period to prevent your policy from terminating without
value. If the insured (or last insured) dies during the grace period, we will
pay the death proceeds. If the lapse prevention guarantee period described below
is in effect, the grace period will not apply until the beginning of the policy
year following the lapse guarantee period.
Reinstatement
If your policy terminated at the end of a grace period and you have not
surrendered it for its cash surrender value, you can request that we reinstate
it (restore your insurance coverage). To reinstate your policy you must:
o submit a written request for reinstatement at any time within 3 years after
the end of the grace period;
o submit proof of insurability satisfactory to us; o pay an amount large
enough to cover the next 2 monthly deductions;
o pay any negative cash surrender value that existed at the end of the grace
period; and
o repay or reinstate any debt which existed at the end of the grace period.
The effective date of a reinstatement is the monthly date on or following the
day we approve the request for reinstatement.
If a surrender charge was applied when the policy lapsed, the surrender charge
applied will be credited to the cash value of your policy. The surrender charge
on the date of reinstatement is equal to the surrender charge on the date of
lapse. To determine the surrender charge on any date after the effective date of
reinstatement, we will not consider the period the policy was lapsed. Unless you
tell us otherwise, the allocation of the amount of the surrender charge,
additional premiums and loan repayments will be based on the allocations in
effect at the start of the grace period.
Lapse Prevention Guarantee
We guarantee that your policy will not lapse during the selected lapse
prevention guarantee period if throughout that period, (a) equals or exceeds (b)
where:
(a) is the aggregate premium payments made less the amount of any surrenders
(including applicable surrender charges) less any loan amount; and
(b) is the minimum monthly lapse prevention guarantee premium multiplied by
the number of complete months since the policy date, including the
current month.
<PAGE>
Single Life Policy
There are six lapse prevention guarantee periods you may select:
o 5 years (the default option)
o 10 years
o 20 years
o Until you are 65
o Until you are 85
o Life Option
Last to Die Policy
There are three lapse prevention guarantee periods you may select:
o 5 years (the default option)
o 20 years
o Life Option
Cash Value
On the policy date, the cash value in each investment option is equal to the
portion of the initial premium allocated to the investment option. After the
policy date the cash value equals the sum of the value in the fixed accounts and
in the investment options you have selected, and the policy loan account.
The cash value reflects:
o net premiums paid;
o the monthly deductions;
o the investment experience of the investment options selected;
o any interest credited on any fixed account selected;
o any interest earned or interest charged on amounts allocated to the
policy loan account; and
o any deductions due as a result of a transfer or a partial surrender.
Cash Surrender Value and Net Cash Value
Your cash surrender value equals your cash value less the surrender charge. Your
net cash value equals the cash surrender value less any debt.
While your policy is in force, you may:
o take loans based on the net cash value;
o make partial surrenders (after the end of the first policy year); or
o surrender the policy for its net cash value.
Method of Determining Your Policy Account Allocated to an Investment Option
The value of your policy will go up or down depending upon the investment
performance of the investment option(s) you choose and the charges and
<PAGE>
deductions made against your cash value. In order to keep track of the value of
your cash value, we use a unit of measure we call an accumulation unit. (An
accumulation unit works like a share of a mutual fund.)
Every business day we determine the value of an accumulation unit. We do this by
multiplying the accumulation unit value for the immediately preceding business
day by a factor for the investment option for the current business day.
The factor is determined by:
o dividing the value of an investment option at the end of the current business
day by the value of the investment option for the previous business day; and
o subtracting the expense charge.
The value of an accumulation unit may go up or down from business day to
business day.
When you make a premium payment, we credit your policy with accumulation units.
The number of accumulation units credited is determined by dividing the amount
of premiums allocated to the investment option by the value of the accumulation
unit for that investment option. When we assess any charges we do so by
deducting accumulation units from your policy. When you take a loan we reduce
the number of the accumulation units in your policy and transfer the amount to
the loan account.
Our business day is each day that the New York Stock Exchange is open for
business. Our business day closes when the New York Stock Exchange closes,
usually 4:00 p.m. Eastern Time.
INVESTMENT CHOICES
The policies offer investment options which invest in various funds. The
following investment options listed below are currently available in connection
with the policies we are offering here.
You should read this prospectus and the prospectuses for the investment options
carefully before investing. Certain portfolios contained in the investment
options' prospectuses may not be available under the policies offered by this
prospectus.
The investment objectives and policies of certain investment options are similar
to the investment objectives and policies of other mutual funds that the
investment advisers manage. Although the objectives and policies may be similar,
the investment results of the investment options may be higher or lower than the
results of such other mutual funds. The investment advisers cannot guarantee,
and make no representations, that the results of similar funds will be
comparable even though the funds have the same advisers.
An investment option's performance may be affected by risks specific to certain
types of investments, such as foreign securities, derivative investments,
<PAGE>
non-investment grade debt securities, initial public offerings (IPOs) or
companies with relatively small market capitalizations. IPOs and other
investment techniques may have a magnified performance impact on an investment
option with a small asset base. An investment option may not experience similar
performance as its assets grow.
Federated Insurance Series
Advised by Federated Investment Management Company
Federated High Income Bond Fund II
Federated Prime Money Fund II
Federated Utility Fund II (seeks high current income and moderate capital
appreciation by investing in securities of utility companies)
The Alger American Fund
Advised by Fred Alger Management, Inc.
Alger American Growth Portfolio
Alger American Mid-Cap Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Leveraged AllCap Portfolio
Variable Insurance Products Fund (VIP), Initial Class and
Variable Insurance Products Fund II (VIP II),
Initial Class
Advised by Fidelity Management & Research Company
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Contrafund Portfolio (seeks long-term capital appreciation)
Fidelity VIP Equity-Income Portfolio Fidelity VIP II Index 500 Portfolio
MFS Variable Insurance Trust
Advised by MFS Investment Management
MFS Emerging Growth Series
MFS Growth With Income Series
MFS Research Series (seeks long-term capital growth and future income) MFS Total
Return Series
Janus Aspen Series, Service Shares
Advised by Janus Capital Corporation
Janus Aspen Series Capital Appreciation Portfolio
Janus Aspen Series Growth Portfolio
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Flexible Income Portfolio
Janus Aspen Series International Growth Portfolio
Janus Aspen Series Worldwide Growth Portfolio
Alliance Variable Products Series Fund, Class B Shares
Advised by Alliance Capital Management, L.P.
Alliance Premier Growth Portfolio
Alliance Growth and Income Portfolio
<PAGE>
American Century Variable Portfolios, Inc.
Advised by American Century Investment Management, Inc.
American Century VP Income & Growth Fund
American Century VP Value Fund
Franklin Templeton Variable Insurance Products Trust*, Class 2 Shares
Templeton Developing Markets Securities Fund (formerly, Templeton Developing
Markets Fund)
Advised by Templeton Asset Management Ltd.
Templeton Asset Strategy Fund (formerly, Templeton Asset Allocation Fund)
Advised by Templeton Investment Counsel, Inc.
*Effective May 1, 2000, the funds of Templeton Variable Products Series Fund
were merged into similar funds of Franklin Templeton Variable Insurance Products
Trust.
Lazard Retirement Series
Advised by Lazard Asset Management
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
The Universal Institutional Funds, Inc. (formerly,
Morgan Stanley Dean Witter Universal Funds,
Inc.)
Advised by Morgan Stanley Asset Management
Morgan Stanley International Magnum Portfolio
Morgan Stanley Emerging Markets Equity Portfolio
Shares of the investment options may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
investment options may also be sold directly to qualified plans. The funds
believe that offering their shares in this manner will not be disadvantageous to
you.
We may enter into certain arrangements under which we are reimbursed by the
investment options advisors, distributors, and/or affiliates for the
administrative services which we provide to the funds.
Substitution and Limitations on Further Investments
We may substitute one of the investment options you have selected with another
investment option. We will not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in an
investment option. We will give you notice of our intention to do this.
<PAGE>
Fixed Account Options
You may allocate premiums and cash values to one of our fixed account options.
Fixed Account I is part of our general account, and will offer a uniform
interest rate guaranteed for one policy year by us. At our discretion, we may
declare an excess interest rate for this account. Fixed Account II offers
various interest rates and time periods to select from. We have segregated our
assets in Fixed Account II from our general account. The interest rates offered
by Fixed Account II will depend on the time period you select. In certain
circumstances, if you make a surrender from Fixed Account II before the
expiration of the time period, you may be subject to an interest adjustment. The
adjustment may be positive or negative. We also offer a dollar cost averaging
option from our general account (see below).
Transfers
You can make transfers as described below. We have the right to terminate or
modify these transfer provisions.
You can make transfers by telephone or by other communication medium. If you own
the policy with a joint owner, unless we are instructed otherwise, we will
accept instructions from either you or the other owner. We will use reasonable
procedures to confirm that instructions given to us by telephone are genuine. If
we fail to use such procedures, we may be liable for any losses due to
unauthorized or fraudulent instructions. However, we will not be liable for
following telephone instructions that we reasonably believe to be genuine. We
may tape record telephone instructions.
Transfers are also subject to the following:
o Currently, you can make 12 transfers every policy year without
charge.
o We will assess a $25 transfer fee for each transfer in excess
of the free 12 transfers allowed per policy year. Transfers
made pursuant to the dollar cost averaging option and the
automatic transfer option will not be counted in determining
the application of any transfer fee.
o The minimum amount which you can transfer is $250 or your
entire value in the investment option or any fixed account
option, if it is less. This requirement is waived if the
transfer is made in connection with the dollar cost averaging
option or the automatic transfer option.
o You may transfer up to 25% of the value of Fixed Account I
from that account to any other account, subject to the $250
minimum amount of a transfer.
o You may not make a transfer until after the end of the free
look period.
o A transfer will be effected as of the end of a business day
when we receive a transfer request that contains all the
information that is necessary for us to process the request.
o We are not liable for a transfer made in accordance with your
instructions.
<PAGE>
o Your right to make transfers is subject to modification if we
determine, in our sole opinion, that the exercise of the right
by one or more owners is, or would be, to the
disadvantage of other owners. Restrictions may be applied
in any manner reasonably designed to prevent any use of the
transfer right which is considered by us to be to the
disadvantage of other owners. A modification could be
applied to transfers to, or from, one or more of the
investment options and could include, but is not limited to:
a. the requirement of a minimum time period between each
transfer;
b. not accepting a transfer request from an agent acting
under a power of attorney on behalf of more than one
owner; or
c. limiting the dollar amount that may be transferred
between investment options by an owner at any one
time.
o Transfers do not change your allocation instructions for any
future premium payments.
DOLLAR COST AVERAGING
Dollar cost averaging allows you to systematically transfer a set amount
each month from a source account to any of the investment options or Fixed
Account I. By allocating amounts on a regularly scheduled basis as opposed to
allocating the total amount at one particular time, you may be less susceptible
to the impact of market fluctuations. Dollar cost averaging may not be available
in your state.
We offer two different Dollar Cost Averaging (DCA) riders. You can have only one
DCA account at a time. When you select a DCA option, we will open a dollar cost
averaging account for you. If you select DCA Rider I, you must have at least
$1,000 in the Federated Prime Money Fund II in order to participate in the
dollar cost averaging option. The minimum amount which can be transferred each
month is $100. If you select DCA Rider II, which is only available at issue, you
must commit at least $5,000 to the DCA account. Your DCA account II is part of
our general account assets and will be credited interest. You can select either
a 6 or 12 month period when you elect DCA Rider II.
Dollar cost averaging transfers will begin on the date you request, but no
sooner than 7 business days after we receive the request provided the transfers
do not begin until 30 days after the effective date of your policy. All dollar
cost averaging transfers are made effective the same day each month. However,
this day may not be later than the 28th of each month. If the calendar day
selected is not a business day, transfers are made as of the next business day.
Dollar cost averaging will terminate when any of the following occurs:
* at the end of the selected month period you designate; or
* within 7 days of your written request to terminate these transfers.
If your DCA option is terminated, all money remaining in the dollar cost
averaging account will be transferred to the Federated Prime Money Fund II. We
<PAGE>
have the right to modify, discontinue or suspend the dollar cost averaging
option. If you participate in the dollar cost averaging option, the transfers
made under the program are not taken into account in determining any transfer
processing fee. There is no additional charge for this option.
Dollar cost averaging does not assure a profit and does not protect against
loss in declining markets. Dollar cost averaging involves continuous investment
in the selected investment option(s) regardless of fluctuating price levels of
the investment option(s). You should consider your financial ability to continue
the dollar cost averaging option through periods of fluctuating price levels.
Automatic Transfer Option
Once your money has been allocated among the investment choices, the performance
of the elected options may cause your allocation to shift. You can direct us to
automatically rebalance your cash value in selected investment options and Fixed
Account I to return to your original percentage allocations by selecting our
automatic transfer option. The automatic transfer option may not be available in
your state. There is no additional charge if you elect the Automatic Transfer
Option.
You have the choice of rebalancing quarterly, semi-annually or annually. All
transfers must take place before the 28th of the month. Allocation percentages
must be in whole numbers.
If you participate in the automatic transfer option, the transfers made under
the program are not taken into account in determining any transfer processing
fee.
You may stop the automatic transfer option at any time by written notice. We
must receive your written notice at least seven business days before the first
business day in a new period. Once automatic transfer has been elected, any
subsequent transfer instructions that differ from the then current instructions
are treated as a request to change the automatic transfer allocation. All
changes must be by written notice.
Example:
Assume that you want your initial premium split between 2 investment
options. You want 80% to be in the MFS Growth With Income Series and
20% to be in the Janus International Growth Portfolio. Over the next 2
1/2 months the domestic market does very well while the international
market performs poorly. At the end of the quarter, the MFS Growth With
Income Series now represents 86% of your holdings because of its
increase in value. If you had chosen to have your holdings rebalanced
quarterly, on the first day of the next quarter, we would sell some of
your units in the MFS Growth With Income Series to bring its value back
to 80% and use the money to buy more units in the Janus International
Growth Portfolio to increase those holdings to 20%.
<PAGE>
DEATH BENEFIT
The amount of the death benefit depends on the total specified amount of
insurance, and under some circumstances, your cash value on the date of the
insured's (or last insured's) death and the death benefit option (Option 1 or
Option 2) in effect at that time. The initial specified amount and the insured
person or persons whose life is covered by your policy are shown on the schedule
page of your policy. If you purchase the Last to Die Policy, there will be two
insured persons and the death benefit proceeds will be paid as soon as we
receive due proof that the death of the last insured occurred. The insured(s)
are named on the schedule page of your policy. The actual amount we pay the
beneficiary will be reduced by any outstanding debt and any due and unpaid
charges.
The death benefit option in effect on the policy date (the date when the
insured(s) life is covered under the policy) is shown on the schedule page of
your policy.
Option 1. The amount of the death benefit under Option 1 is the greater of:
o the specified amount; or
o the applicable percentage of the cash value on the date of the
insured's (or last insured's) death.
Option 2. The amount of the death benefit under Option 2 is the greater of:
o the specified amount plus the cash value on the date of death of the
insured (or last insured); or
o the applicable percentage of the cash value on the date of the
insured's (or last insured's) death.
Death Proceeds
The death proceeds equal:
o the death benefit provided by your policy; plus o any insurance that may be
provided by riders to your policy; less
o any debt; less
o any due and unpaid monthly deductions during the Grace Period.
We will pay the death proceeds after we receive due proof of death and any other
information that we reasonably require. The death proceeds may be adjusted under
certain conditions.
Change in Specified Amount
You may change the specified amount after this policy has been in force for 1
year subject to the following:
o You must request the change in writing.
o A decrease will be applied first against prior increases, if any, on a
<PAGE>
last-in, first-out basis, then against the initial specified amount. A
decrease in specified amount will not reduce the specified amount lower than
$100,000. A prorata share of any applicable surrender charge may apply.
o An increase in specified amount will require proof of insurability.
o Any change in the specified amount must be for at least $25,000.
If you increase the specified amount, we will deduct a $10.00 monthly specified
amount increase fee for the first 12 months after the increase.
A change will be effective on the monthly date following our approval or
recording of the change. We will show the effective date of any change in
specified amount in a supplemental policy schedule we will send you.
Change in Death Benefit Option
You may change the death benefit option subject to the following:
o You must request the change in writing.
o If you want to change death benefit Option 1 to Option 2, you must
submit proof of insurability satisfactory to us. The specified amount
will be reduced by the amount of cash value so that the death benefit
is not increased as of the date of change.
o If you want to change death benefit Option 2 to Option 1, the specified
amount will be increased by the amount of cash value.
RIDERS
Additional Insurance Rider
You can elect the additional insurance rider. This rider provides that we will
pay the additional insurance death benefit when we receive due written proof of
the death of the insured. The additional insurance death benefit will be the
additional insurance specified amount shown on the schedule page of your policy
less the excess, if any, of 1 over 2 or 3, where:
1. is the cash value on the date of death times the applicable percentage of
cash value shown on the schedule page of your policy;
2. is the specified amount, if death benefit option 1 is shown on the schedule
page of your policy; and
3. is the specified amount plus the cash value, if death benefit option 2 is
shown on the schedule page of your policy.
To help you understand how this benefit works, we have set out some examples in
Appendix B.
This rider terminates when you give us written notice to terminate it; or on the
policy anniversary on or after the insured's age 95; or when the policy
terminates.
<PAGE>
We require an additional premium for this rider as shown on the schedule page of
your policy.
THE ADDITIONAL INSURANCE RIDER IS ONLY AVAILABLE ON THE FLEXIBLE PREMIUM
VARIABLE AND FIXED LIFE INSURANCE POLICY, AND NOT ON THE LAST TO DIE POLICY.
Term Insurance on Children Rider
You can elect the term insurance on children rider pursuant to our underwriting
guidelines and state laws. This rider provides that we will pay the beneficiary
an amount per unit of coverage if a covered child's (as defined in the rider)
death occurs while the rider is in force within a certain period as described
below:
o $250 per unit if the covered child's death occurs after he/she is 14
days old and before he/she is 6 months old; or
o $1,000 per unit if the covered child's death occurs on or after he/she
turns 6 months old and before the policy anniversary nearest the
covered child's 22nd birthday.
You can apply for 1 to 20 units of coverage under this rider. Each unit provides
a benefit amount of coverage, which depends on the age of the insured child at
time of death, as described above. We charge a monthly rider charge for each
unit of coverage.
If the policy terminates because the insured dies , existing coverage on
any child under this rider will be continued as fully paid-up insurance until
the child's 22nd birthday. At age 22, conversion will be allowed as provided
in the rider.
This rider terminates when you give us written notice to terminate it and
send us the policy to show the change; or on the policy anniversary on or
nearest the insured's age 65; or when the policy terminates.
The cost for this rider, as shown on the schedule page of your policy, will be
added to the monthly deduction.
THE TERM INSURANCE ON CHILDREN RIDER IS ONLY AVAILABLE ON THE FLEXIBLE PREMIUM
VARIABLE AND FIXED LIFE INSURANCE POLICY, AND NOT ON THE LAST TO DIE POLICY.
Accelerated Benefit Rider
You can elect the accelerated benefit rider. There is no additional charge
if you elect the accelerated benefit rider. This rider provides that you may
elect to receive an advance of the death benefit proceeds of the policy if the
insured is terminally ill, as defined in the rider. Receipt of an accelerated
death benefit may be a taxable event. You should contact your personal tax or
financial adviser for specific information.
<PAGE>
The maximum accelerated death benefit advance will be the lesser of:
(1) 75% of the policy death benefit on the day we receive the request; or
(2) $250,000 from all policies in force with us.
If payments are made in other than a lump sum, the minimum amount of any
payment will be $500. Surrender charges will not be assessed against any
benefits paid under this rider.
We will charge interest on the amount of the benefit advance. Interest will
accrue daily at an interest rate which is not larger than the greater of:
o the yield of a 90-day Treasury Bill as of the latest quote on the bills;
o the maximum adjustable loan rate allowable by law; or
o 6%.
This rider terminates on the earliest of: the date the policy terminates;
or the date you give us written notice to terminate this rider; or the date that
the benefit advance plus accrued interest equals the policy death benefit less
all debt.
Death benefits, cash values, and loan values, if any, will be reduced if a
benefit is paid pursuant to this rider. Also, the receipt of an accelerated
death benefit amount may adversely affect the recipient's eligibility for
Medicaid or other government benefits or entitlements.
THE ACCELERATED BENEFIT RIDER IS ONLY AVAILABLE ON THE FLEXIBLE PREMIUM VARIABLE
AND FIXED LIFE INSURANCE POLICY, AND NOT ON THE LAST TO DIE POLICY.
Accidental Death Benefit Rider
You can elect the accidental death benefit rider. This rider provides that
if the insured dies accidentally (as defined in the rider), we will pay the
accidental benefit amount shown on the schedule page of your policy. The injury
that caused death must occur after attained age one and before the policy
anniversary on or immediately following the insured's 70th birthday.
This rider terminates on the policy anniversary on or after the insured's
age 70; or if you give us written notice to terminate it; or when the policy
terminates.
THE ACCIDENTAL DEATH BENEFIT RIDER IS ONLY AVAILABLE ON THE FLEXIBLE PREMIUM
VARIABLE AND FIXED LIFE INSURANCE POLICY, AND NOT ON THE LAST TO DIE POLICY.
Other Insured Term Insurance Rider
You can elect the other insured term insurance rider. This rider provides
that we will pay the other insured (unless changed, the other insured is the
person named in the application for this rider) specified amount shown on the
schedule page of your policy as soon as we receive proof of the other insured's
death.
Under certain conditions, you can change the other insured's specified
amount at any time after this rider is one year old by written notice to us.
<PAGE>
This rider terminates at the earliest of: the policy date on or after the
other insured's 70th birthday; the date you give us written notice to terminate
it; or the date the policy terminates.
We require an additional premium for this rider as shown on your Policy
Schedule.
THE OTHER INSURED TERM INSURANCE RIDER IS ONLY AVAILABLE ON THE FLEXIBLE PREMIUM
VARIABLE AND FIXED LIFE INSURANCE POLICY, AND NOT ON THE LAST TO DIE POLICY.
Total Disability Waiver of Premium Rider
You can elect the total disability waiver of premium rider. This rider
provides that during a period of total disability, we will credit a premium to
this policy. The amount of monthly premium to be credited will be the lesser of:
o one-twelfth of the waiver of premium amount shown in the schedule page
of your policy; or
o the monthly average of premiums paid on this policy over the last
thirty-six policy months.
Benefits will begin on the latest date when:
o we have been notified of the onset of total disability; and o we
have received due proof of total disability;
o total disability has continued for six consecutive months.
No benefits will be paid after the insured ceases to be totally
disabled or after the policy has terminated.
This rider terminates: on the first policy anniversary on or after the
insured attains age 65; if you give us written notice to terminate it; or when
the policy terminates.
We require an additional premium for this rider as shown on the
schedule page of your policy.
If you elect this rider in connection with the Last to Die Policy, each
insured under the policy must have his/her own rider in order to qualify.
Waiver of Monthly Deduction Rider
If you choose the waiver of monthly deduction rider, we will waive monthly
deductions if an insured becomes totally disabled, as defined in the rider. The
waiver will begin on the latest date when:
o we have been notified of the onset of a total disability;
o we have received due proof of total disability; and
o total disability has continued for 6 consecutive months.
If you choose this feature, the monthly cost of this rider is shown on your
policy schedule. The rider will terminate:
<PAGE>
o on the first policy anniversary on or after the insured 65th birthday;
o if you give us written notice to terminate it; or o when the policy
terminates.
This benefit may not be available in your state and is not available in
conjunction with Total Disability Waiver of Premium Rider.
If you own the Last to Die Policy, and choose the waiver of monthly deduction
rider, each insured must qualify for his/her own rider.
Four Year Term Rider
You can elect the four year term rider. This rider provides that we will
pay the Four Year Term Rider death benefit shown on the schedule page of your
policy if the death of the last insured to die occurs within the first four
years following the policy date. This rider must be in effect at the time of the
death of the last insured to die.
This rider terminates: on the fourth policy anniversary; if you give
us written notice to terminate it; or when the policy terminates.
We require an additional premium for this rider as shown on the Policy
Schedule.
If you elect this rider in connection with the Last to Die Policy, the
rider will be issued on both insureds under the policy.
THE FOUR YEAR TERM RIDER IS ONLY AVAILABLE ON THE LAST TO DIE POLICY, AND NOT ON
THE FLEXIBLE PREMIUM VARIABLE AND FIXED LIFE POLICY.
Split Policy Option Rider
You can elect the split policy option rider. This rider provides that we
will exchange the original policy without evidence of insurability for two new
policies, one on the life of each of the insureds. The exchange is subject to
the terms of the rider and rules with regard to insurable interest. There are
certain specified conditions which must be met in order for the policy to be
exchanged, as well as certain terms which will apply to the new policy.
We will allow an exchange of the policy if:
o A final decree of divorce is issued terminating a marriage of the two insureds
to each other; or
o There is a change in the federal estate tax law which results in either:
(a) an end to the unlimited marital deduction available to the insureds
if they were to die; or
<PAGE>
(b) a 50% or more reduction in the maximum federal estate tax rate.
The exercise of this option, to split the policy, may under certain
circumstances, result in adverse tax consequences. Please consult your tax
adviser before exercising any options under this rider.
This rider terminates on the earliest of: the date of death of either
insured; the date the original policy is exchanged under the terms of this
rider; the date the policy terminates; and the monthly date following receipt by
us of your written notice canceling this rider.
We require an additional premium for this rider as shown on the schedule
page of your policy.
If you elect this rider in connection with the Last to Die Policy, the
rider will be issued on both insureds under the policy.
THE SPLIT POLICY OPTION RIDER IS ONLY AVAILABLE ON THE LAST TO DIE POLICY, AND
NOT ON THE FLEXIBLE PREMIUM VARIABLE AND FIXED LIFE POLICY.
YOU SHOULD READ THE RIDERS CAREFULLY FOR THE TERMS AND CONDITIONS OF EACH
SPECIFIC RIDER.
Settlements
When your policy becomes a claim because of the death of the insured (or last
insured to die ), settlement will be made upon due proof of death. If
the proceeds are not paid within 30 days of receipt of due proof of death, the
payment will include interest at the legal rate from the date of death of
the insured (or last insured) until the date the claim is paid.
Proceeds may be paid in a lump sum, or under any other mutually agreed upon
payment option.
TAXES
Note: We have prepared the following information on federal income taxes as a
general discussion of the subject. It is not intended as tax advice. You should
consult your tax adviser about your own circumstances. We have included an
additional discussion regarding taxes under the section "More Information."
Life Insurance in General
Life insurance, such as this policy, is a means of providing for death
protection and setting aside money for future needs. Congress recognized the
importance of such planning and provided special rules in the Internal Revenue
Code (Code) for life insurance.
Simply stated, these rules provide that you will not be taxed on the earnings on
<PAGE>
the money held in your life insurance policy until you take the money out.
Beneficiaries generally are not taxed when they receive the death proceeds upon
the death of the insured (or last insured). However, estate taxes may apply.
Taking Money Out of Your Policy
You, as the owner, will not be taxed on increases in the value of your policy
until a distribution occurs either as a surrender or as a loan. However, if your
policy is a MEC, any loans or surrenders from the policy will be treated as
first coming from earnings which are included in income and then from your
investment in the policy. Consequently, these distributed earnings are included
in taxable income.
The Code also provides that any amount received from a MEC which is included in
income may be subject to a 10% penalty. The penalty will not apply if the income
received is:
1) paid on or after the taxpayer reaches age 59 1/2;
2) paid if the taxpayer becomes totally disabled (as that term is defined
in the Code); or
3) in a series of substantially equal payments made annually (or more
frequently) for the life or life expectancy of the taxpayer.
If your policy is not a MEC, any surrender proceeds will be treated as first a
recovery of the investment in the policy and to that extent will not be included
in taxable income. Furthermore, any loan will be treated as indebtedness under
the policy and not as a taxable distribution. See "Federal Tax Status" in the
section "More Information" for more details including an explanation of whether
your policy is a MEC.
Diversification
The Code provides that the underlying investments for a variable life policy
must satisfy certain diversification requirements in order to be treated as a
life insurance contract. We believe that the investment options are being
managed so as to comply with such requirements.
Under current federal tax law, it is unclear as to the circumstances under which
you, because of the degree of control you exercise over the underlying
investments, and not us would be considered the owner of the shares of the
investment options. If you are considered the owner of the investments, it will
result in the loss of the favorable tax treatment for the policy. It is unknown
to what extent owners are permitted to select investment options, to make
transfers among the investment options or the number and type of
investment options owners may select from without being considered the owner of
the shares. If guidance from the Internal Revenue Service is provided which is
considered a new position, the guidance would generally be applied
prospectively. However, if such guidance is considered not to be a new position,
it may be applied retroactively. This would mean that you, as the owner of the
policy, could be treated as the owner of the investment options. Due to the
uncertainty in this area, we reserve the right to modify the policy in an
attempt to maintain favorable tax treatment.
ACCESS TO YOUR MONEY
Policy Loans
You may obtain a loan at any time while your policy is in force. Your request
for a loan must be in writing. The amount of the loan and all existing loans may
not be more than 90% of the net cash value as of the date of the loan. The
amount of the loan may not be less than $500. A loan will only be made upon the
proper assignment of your policy to us with the policy as the sole security for
the loan.
When you take a policy loan, we will transfer an amount equal to the policy loan
from the investment option(s) or Fixed Account I to the policy loan account.
Unless you state otherwise, transfers from the investment options to the policy
loan account will be on a pro-rata basis as of the loan date. The amount
transferred from each investment option and the fixed account will equal the
ratio of the values each bears to the total unloaned cash value multiplied by
the amount of the loan. If you do not have a sufficient amount in the
investment option(s), we will transfer any remaining amount from Fixed Account
I. We will also transfer any loan interest that becomes due and unpaid in the
same manner. Amounts transferred to the policy loan account will earn interest
daily from the date of transfer. Policy loans may also have federal tax
consequences (see "Federal Tax Status").
Effect of a Loan
Policy loans will have a permanent effect on any death benefit and cash
surrender value of your policy. The effect may be favorable or unfavorable. If
loans are not repaid, the debt will reduce the amount of any death proceeds.
Loans have a permanent effect on the policy because the amount transferred to
the policy loan account will not share in the investment results of the
investment options while the loan is outstanding. If the policy loan account
earnings rate is less than the performance of the selected investment options
and/or Fixed Account I, the values and benefits under the policy will be reduced
(and the policy may even terminate) as a result of the loan.
Loan Interest
The loan interest rate charged is currently 8%. The loan interest credited to
your policy is currently 6%. Interest is charged daily and is payable at the end
of each policy year. Unpaid interest will be added to the existing debt as of
the due date and will be charged interest at the same rate as the rest of the
loan.
We will credit a higher effective annual interest rate in the following
circumstances:
o for amounts borrowed up to an amount equal to cash value less the
<PAGE>
aggregate premium payments made to date (preferred loans); and
o for all loans against policies that are in the 11th policy year or
later.
Preferred loans include the amount of any outstanding policy loan transferred in
a tax-free exchange.
Repaying Policy Debt
The debt, or any part, may be repaid at any time as long as the policy is in
force. Any debt outstanding will be deducted before any benefit proceeds are
paid. When you repay part or all of the loan, we will transfer an amount equal
to the amount you repay from the policy loan account to an investment option or
to any fixed account.
If a policy loan is outstanding, any payments received will be considered
premiums and not loan repayments unless otherwise specified. If total debt
equals or exceeds the cash value less the surrender charge, your policy will
terminate without value. A termination of the policy with a loan outstanding may
have federal income tax consequences (see "More Information - Federal Tax
Status").
Partial Surrenders
You may make a partial surrender at any time after the first policy year by
written notice.
When you make a partial surrender, we will reduce the cash value by the partial
surrender amount and any surrender charges. We will require that any partial
surrender amounts be first deducted from the cash value in the investment
options proportionately among all accounts unless the owner specifically
requests otherwise. We will also reduce the specified amount. The reduction in
specified amount will be a dollar for dollar reduction in cash value due to the
partial surrender.
The minimum partial surrender amount is currently $500. We may assess a
surrender charge on the amount surrendered. See "Surrender Charges" above.
Partial surrenders will be allowed only if the policy continues to qualify as a
contract of life insurance under the Code. We will also limit the maximum amount
of all partial surrenders you can make in a policy year to the greater of:
o 10% of the total premium payments; or
o cash value less total premiums paid less any policy debt.
Full Surrenders
You may completely surrender your policy and receive the net cash value at any
time while the policy is in force. If you make a full surrender, we may require
that you return your policy.
<PAGE>
The date of surrender will be the date we receive your written request. The net
cash value will be determined as of the end of the business day during which
your written request is received. All coverage will end on the date of
surrender.
Partial and full surrenders may have federal tax consequences (see "Federal Tax
Status").
For your protection, a request for surrender, policy loan, or a change in
ownership must be by written notice. We may require the signature to be
guaranteed by a member firm of the New York, Boston, Midwest, Philadelphia, or
Pacific Stock Exchanges or by a commercial bank (not a savings bank), which is a
member of the Federal Deposit Insurance Corporation. In some cases, we may
require additional documentation of a customary nature.
OTHER INFORMATION
The Variable Account
We established a variable account, Valley Forge Life Insurance Company Variable
Life Separate Account (Variable Account), to hold the assets that underlie the
policies. Our Board of Directors adopted a resolution to establish the Variable
Account under Illinois insurance law on February 12, 1996. We have registered
the Variable Account with the Securities and Exchange Commission as a unit
investment trust under the Investment Company Act of 1940.
The assets of the Variable Account are held in our name on behalf of the
Variable Account and legally belong to us. However, those assets that underlie
the policies, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from these assets are credited to or charged against the
contracts and not against any other contracts we may issue.
We reserve the right to modify the structure or operation of the Variable
Account. However, we guarantee that a modification will not affect the value of
your policy.
Distributor
The policy is sold by licensed insurance agents, where the policy may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
CNA Investor Services, Inc. ("CNA/ISI") serves as the distributor for the
policies. CNA/ISI is located at CNA Plaza, Chicago, Illinois 60685.
Broker-dealers will be paid commissions on the sale of the policies.
<PAGE>
Suspension of Payments or Transfers
We may be required to suspend or postpone any payments or transfers for any
period when:
1) the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2) trading on the New York Stock Exchange is restricted;
3) an emergency exists as a result of which disposal of shares of the
portfolios is not reasonably practicable or we cannot reasonably value the
shares of the portfolios;
4) during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
We have the right to defer payment of any surrender or transfer of any fixed
account value for not more than 6 months from the date we receive your written
notice, unless otherwise provided by your state.
Ownership
Owner. You, as the owner of the policy or certificate, have all of the rights
under the policy while the insured (or last insured) is living. Your rights in
the policy belong to your estate if you die before the insured (or last insured)
dies and there is no joint owner or contingent owner.
Joint Owner. The policy can be owned by joint owners. Joint owners have equal
ownership rights. Authorization of both joint owners is required for all policy
changes except for transfers and allocations.
Contingent Owner. The contingent owner, if any, is named in the application,
unless changed. You may name a contingent owner at any time while the insured is
living by providing us with written notice. Once recorded, the designation will
be effective as of the date the written notice was signed. Such change will not
affect any payment we make or action we take before it was recorded.
The contingent owner, if any, will become the owner if the named owner dies
before the date of the insured's (or last insured's) death. If there are joint
owners, the contingent owner will become the owner if both named joint owners
die before the insured (or last insured).
Beneficiary. The beneficiary is the person or entity you name to receive any
death proceeds. The primary beneficiary is the person who will be paid death
proceeds when the insured (or last insured) dies. The contingent beneficiary, if
any, will become the beneficiary if no primary beneficiary is living on the date
of the insured's (or last insured's) death. More than one primary and contingent
beneficiary can be named. If there is more than one primary beneficiary alive
when the insured (or last insured) dies, we will pay the primary beneficiaries
<PAGE>
in equal shares unless you provide otherwise.
The primary beneficiary and contingent beneficiary on the policy date are named
in the application. While the insured is alive, you may change any beneficiary.
Any change must be by written notice. Once recorded, the change will take effect
as of the date you signed it. Such change will not affect any payment we make or
action we take before it was recorded. An irrevocable beneficiary must consent
in writing to any change in beneficiary.
If any beneficiary dies before the insured (or last insured), that beneficiary's
interest in the death benefit will end. If any beneficiary dies at the same time
as the insured (or last insured), or within 30 days of the insured (or last
insured), that beneficiary's interest in the death benefit will end if no
benefits have been paid to that beneficiary. If the interest of all designated
beneficiaries has ended when the insured (or last insured) dies, we will pay the
death benefit to you, or your estate if you are not living.
Proceeds payable to a beneficiary will be free from the claims of creditors, to
the extent allowed by law.
Assignment
You can assign any or all rights under your policy while the insured (or last
insured) is living. Assignment of all rights is a change of ownership. An
irrevocable beneficiary must consent in writing to any assignment. We are not
responsible for the sufficiency or validity of any assignment. An assignment
will not affect any payments or actions we have taken before we received notice
of the assignment.
An assignment may be a taxable event. You should consult a tax adviser if you
wish to assign the policy.
MORE INFORMATION
Executive Officers and Directors
The name, age, positions and office, term as director, and business experience
during the past five years for VFL's directors executive offices are listed in
the following table:
<TABLE>
<CAPTION>
Officers of VFL
Position(s)
Held Principal Occupation(s)
Name and Address Age With VFL During Past Five Years
----------------------------------- ---------- ----------------- ------------------------------------------------------
<S> <C> <C> <C>
Bernard L. Hengesbaugh.... 52 Director, Chairman of the Board and Chief Executive
CNA Plaza Chairman of Officer of CNA since February, 1999. Prior
Chicago, IL 60685 the Board thereto, Mr. Hengesbaugh was Executive Vice
and Chief President and Chief Operating Officer of CNA
Executive since February, 1998. Prior thereto, Mr.
Officer Hengesbaugh was Senior Vice President of CNA
since November, 1990. Mr. Hengesbaugh has
served as a Director of VFL since February, 1999.
Jonathan D. Kantor . . . . . . . . . 43 Senior Vice Senior Vice President, Secretary and General
CNA Plaza President, Counsel of CNA since April, 1997. Group Vice
Chicago, IL 60685 Secretary, President of CNA General since April, 1994. Prior
General thereto, Mr. Kantor was a partner at the law firm
Counsel and of Shea & Gould.* Mr. Kantor has served as a
Director Director of VFL Since April, 1997.
Robert V. Deutsch . . . . . . . . . 39 Senior Vice Senior Vice President, Chief Financial Officer, and
CNA Plaza President, Director since August 16, 1998. Prior thereto,
Chicago, IL 60685 Chief Officer for Executive Risk, Inc.
Financial
Officer,
Director
Thomas Pontarelli . . . . . . . . . 51 Senior Vice Senior Vice President, Human Resources since
CNA Plaza President, April, 2000. Prior thereto, Group Vice President,
Chicago, IL 60685 Director Human Resources. From May 1974 to December,
1997, series of positions the position of
Chairman, culminating in CEO and President of Washington
National Insurance Company.
Donald P. Lofe, Jr. . . . . . . . . . 42 Group Vice Group Vice President, Corporate Finance
CNA Plaza President, Department since October, 1998. Prior thereto,
Chicago, IL 60685 Director partner-in-charge of PricewaterhouseCoopers LLP.
Thomas F. Taylor. . . . . . . . . . 49 Executive Executive Vice President of CNA since 1992.
CNA Plaza Vice Director since October 1999.
Chicago, IL 60685 President,
Director
-----------------------------------
* Shea & Gould declared bankruptcy in 1995.
</TABLE>
<PAGE>
Each director is elected to serve until the next annual meeting of stockholders
or until his or her successor is elected and shall have qualified. Some
directors hold various executive positions with insurance company affiliates of
Valley Forge. Executive officers serve at the discretion of the Board of
Directors.
Voting
Pursuant to our view of present applicable law, we will vote the shares of the
portfolios at special meetings of shareholders in accordance with instructions
received from all owners having a voting interest. We will vote shares for which
we have not received instructions and any shares that are ours in the same
proportion as the shares for which we have received instructions.
If the Investment Company Act of 1940 or any regulation thereunder is amended or
if the present interpretation of the Act changes so as to permit us to vote the
shares in our own right, we may elect to do so.
Disregard of Voting Instructions
We may, when required to do so by state insurance authorities, vote shares of
the portfolios without regard to instructions from owners. We will do this if
such instructions would require the shares to be voted to cause a portfolio to
make, or refrain from making, investments which would result in changes in the
sub-classification or investment objectives of the portfolio. We may also
disapprove changes in the investment policy initiated by owners or
trustees/directors of the portfolios, if such disapproval:
o is reasonable and is based on a good faith determination by us that the change
would violate state or federal law;
o the change would not be consistent with the investment objectives of the
portfolios; or
o which varies from the general quality and nature of investments and investment
techniques used by other portfolios with similar investment objectives
underlying other variable contracts offered by us or of an affiliated company.
In the event we do disregard voting instructions, a summary of this action and
the reasons for such action will be included in the next semi-annual report to
owners.
Legal Opinions
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the federal securities and income tax laws in
connection with the policies.
Our Right to Contest
<PAGE>
We cannot contest your policy after it has been in force during the lifetime of
the insured (each insured under the Last to Die Policy) for two years from the
policy date; nor can we contest any increased benefit or reinstatement after it
has been in force, while the insured (or last insured) is alive, for two years
after the effective date of such increase or reinstatement.
We cannot contest this policy, any reinstatement or any increase in benefits
after the effective date of the policy, reinstatement, or increase in benefits
unless:
o an answer in the application for the policy, reinstatement or increase in
benefits was not true or complete; and
o if we had known the truth, we would not have issued or reinstated the
policy as we did or increased the benefits.
Any statement made by the insured(s) will not be used in any contest unless a
copy is furnished to the beneficiary.
Federal Tax Status
Note: The following description is based upon our understanding of current
federal income tax law applicable to life insurance in general. We cannot
predict the probability that any changes in such laws will be made. Purchasers
are cautioned to seek competent tax advice regarding the possibility of such
changes. Section 7702 of the Internal Revenue Code of 1986, as amended ("Code"),
defines the term "life insurance contract" for purposes of the Code. We believe
that the policies to be issued will qualify as "life insurance contracts" under
section 7702. We do not guarantee the tax status of the policies. Purchasers
bear the complete risk that the policies may not be treated as "life insurance"
under federal income tax laws. Purchasers should consult their own tax advisers.
It should be further understood that the following discussion is not exhaustive
and that special rules not described in this prospectus may be applicable in
certain situations.
Introduction. The discussion contained herein is general in nature and is not
intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
Moreover, the discussion herein is based upon our understanding of current
federal income tax laws as they are currently interpreted. No representation is
made regarding the likelihood of continuation of those current federal income
tax laws or of the current interpretations by the Internal Revenue Service.
We are taxed as a life insurance company under the Code. For federal income tax
purposes, the Variable Account is not a separate entity from us and its
operations form a part of us.
Diversification. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance policy will not be treated as life
<PAGE>
insurance for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the policy as a life insurance contract would result in imposition of federal
income tax to the owner with respect to earnings allocable to the policy prior
to the receipt of payments under the policy. The Code contains a safe harbor
provision which provides that life insurance policies, such as these policies,
will meet the diversification requirements if, as of the close of each quarter,
the underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five (55%) percent of the total assets
consist of cash, cash items, U.S. Government securities and securities of other
regulated investment companies. There is an exception for securities issued by
the U.S. Treasury in connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.Section
1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts such as the policies. The regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the Regulations, an investment portfolio will be deemed adequately
diversified if:
(i) no more than 55% of the value of the total assets of the portfolio is
represented by any one investment;
(ii) no more than 70% of the value of the total assets of the portfolio is
represented by any two investments;
(iii)no more than 80% of the value of the total assets of the portfolio is
represented by any three investments; and
(iv) no more than 90% of the value of the total assets of the portfolio is
represented by any four investments. For purposes of these regulations, all
securities of the same issuer are treated as a single investment. The Code
provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate
issuer." We intend that each portfolio underlying the policies will be
managed by the investment managers in such a manner as to comply with these
diversification requirements.
The Treasury Department has indicated that the diversification regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the separate account will cause the owner to be treated as the
owner of the assets of the separate account, thereby resulting in the loss of
favorable tax treatment for the policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of owner control which may be exercised under the policy is different
in some respects from the situations addressed in published rulings issued by
the Internal Revenue Service in which it was held that the policyowner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the owner to be
considered the owner of the assets of the Variable Account.
<PAGE>
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in you being retroactively
determined to be the owner of the assets of the separate account.
Due to the uncertainty in this area, we reserve the right to modify the policy
in an attempt to maintain favorable tax treatment.
Tax Treatment of the Policy. The policy has been designed to comply with the
definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. Section 7702 of the Code
requires the use of reasonable mortality and other expense charges. In
establishing these charges, we have relied on the interim guidance provided in
IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a policy issued on a substandard risk basis
and thus it is even less clear whether a policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While we have attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not concur with our interpretations of Section 7702 that were made
in determining such compliance. In the event the policy is determined not to so
comply, it would not qualify for the favorable tax treatment usually accorded
life insurance policies. You should consult your own tax advisers with respect
to the tax consequences of purchasing the policy.
Policy Proceeds. The tax treatment accorded to loan proceeds and/or surrender
payments from the policies will depend on whether the policy is considered to be
a MEC. (See "Tax Treatment of Loans and Surrenders.") Otherwise, we believe that
the policy should receive the same federal income tax treatment as any other
type of life insurance. As such, the death benefit thereunder is excludable from
the gross income of the beneficiary under Section 101(a) of the Code. Also, you
are not deemed to be in constructive receipt of the net cash value, including
increments thereon, under a policy until there is a distribution of such
amounts.
Federal, state and local, estate, inheritance and other tax consequences of
ownership, or receipt of policy proceeds, depend on the circumstances of each
owner or beneficiary.
Tax Treatment of Loans And Surrenders. Section 7702A of the Code sets forth the
rules for determining when a life insurance policy will be deemed to be a MEC. A
MEC is a contract which is entered into or materially changed on or after June
21, 1988 and fails to meet the 7-pay test. A policy fails to meet the 7-pay test
when the cumulative amount paid under the policy at any time during the first 7
policy years exceeds the sum of the net level premiums which would have been
paid on or before such time if the policy provided for paid-up future benefits
after the payment of seven (7) level annual premiums. A material change would
<PAGE>
include any increase in the future benefits or addition of qualified additional
benefits provided under a policy unless the increase is attributable to: (1) the
payment of premiums necessary to fund the lowest death benefit and qualified
additional benefits payable in the first seven policy years; or (2) the
crediting of interest or other earnings (including policyholder dividends) with
respect to such premiums.
Furthermore, any policy received in exchange for a policy classified as a MEC
will be treated as a MEC regardless of whether it meets the 7-pay test. However,
an exchange under Section 1035 of the Code of a life insurance policy entered
into before June 21, 1988 for the policy will not cause the policy to be treated
as a MEC if no additional premiums are paid.
Due to the flexible premium nature of the policy, the determination of whether
it qualifies for treatment as a MEC depends on the individual circumstances of
each policy.
If the policy is classified as a MEC, then surrenders and/or loan proceeds are
taxable to the extent of income in the policy. Such distributions are deemed to
be on a last-in, first-out basis, which means the taxable income is distributed
first. Loan proceeds and/or surrender payments, including those resulting from
the lapse of the policy, may also be subject to an additional 10% federal income
tax penalty applied to the income portion of such distribution. The penalty
shall not apply, however, to any distributions: (1) made on or after the date on
which the taxpayer reaches age 59 1/2; (2) which are attributable to the
taxpayer becoming disabled (within the meaning of Section 72(m)(7) of the Code);
or (3) which ares part of a series of substantially equal periodic payments made
not less frequently than annually for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of such taxpayer and
his beneficiary.
If a policy is not classified as a MEC, then any surrenders shall be treated
first as a recovery of the investment in the policy which would not be received
as taxable income. However, if a distribution is the result of a reduction in
benefits under the policy within the first fifteen years after the policy is
issued in order to comply with Section 7702, such distribution will, under rules
set forth in Section 7702, be taxed as ordinary income to the extent of income
in the policy.
Any loans from a policy which is not classified as a MEC, will be treated as
indebtedness of the owner and not a distribution. Upon complete surrender or
lapse of the policy, if the amount received plus loan indebtedness exceeds the
total premiums paid that are not treated as previously surrendered by the policy
owner, the excess generally will be treated as ordinary income.
Personal interest payable on a loan under a policy owned by an individual is
generally not deductible. Furthermore, no deduction will be allowed for interest
on loans under policies covering the life of any employee or officer of the
taxpayer or any person financially interested in the business carried on by the
taxpayer to the extent the indebtedness for such employee, officer or
<PAGE>
financially interested person exceeds $50,000. The deductibility of interest
payable on policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policy owners should seek competent tax advice on the tax consequences of taking
loans, distributions, exchanging or surrendering any policy.
Tax Treatment of Settlement Options. Under the Code, a portion of the settlement
option payments which are in excess of the death benefit proceeds are included
in the beneficiary's taxable income. Under a settlement option payable for the
lifetime of the beneficiary, the death benefit proceeds are divided by the
beneficiary's life expectancy and proceeds received in excess of these prorated
amounts are included in taxable income. The value of the death benefit proceeds
is reduced by the value of any period certain or refund guarantee. Under a fixed
payment or fixed period option, the death benefit proceeds are prorated by
dividing the proceeds over the payment period under the option. Any payments in
excess of the prorated amount will be included in taxable income.
Multiple Policies. The Code further provides that multiple MECs which are issued
within a calendar year period to the same owner by one company or its affiliates
are treated as one MEC for purposes of determining the taxable portion of any
loans or distributions. Such treatment may result in adverse tax consequences
including more rapid taxation of the loans or distributed amounts from such
combination of contracts. You should consult a tax adviser prior to purchasing
more than one MEC in any calendar year period.
Tax Treatment of Assignments. An assignment of a policy or the change of
ownership of a policy may be a taxable event. You should therefore consult a
competent tax adviser should you wish to assign or change the owner of your
policy.
Qualified Plans. The policies may be used in conjunction with certain Qualified
Plans. Because the rules governing such use are complex, you should not do so
until you have consulted a competent Qualified Plans consultant.
Income Tax Withholding. All distributions or the portion thereof which is
includible in gross income of the policy owner are subject to federal income tax
withholding. However, in most cases you may elect not to have taxes withheld.
You may be required to pay penalties under the estimated tax rules, if
withholding and estimated tax payments are insufficient.
Reports to Owners
At least once every policy year, we will send you a report showing current cash
values and other information required by laws and regulations. We will mail this
report to you at your last known address.
Legal Proceedings
<PAGE>
There are no legal proceedings to which the Variable Account or the Distributor
is a party or to which the assets of the Variable Account are subject. We are
not involved in any litigation that is of material importance in relation to our
total assets or that relates to the Variable Account.
Experts
The financial statements for Valley Forge Life Insurance Company as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 included in this Prospectus, which is part of this registration
statement, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The financial statements for each of the subaccounts that comprise the Valley
Forge Life Insurance Company Variable Life Separate Account as of and for the
year ended December 31, 1999 (for the two years ended December 31, 1999 with
respect to the statements of changes in net assets) included in this Prospectus
which is part of this registration statement, and have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
Actuarial matters included in this prospectus have been examined by
Rodney E. Rishel, Jr., FSA, MAAA whose opinion is filed as an
exhibit to the registration statement.
Financial Statements
The financial statements of Valley Forge Life Insurance Company included herein
should be considered only as bearing upon our ability to meet our obligations
under the policies.
<PAGE> 1
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
<TABLE>
<CAPTION>
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY
PRIME FEDERATED INCOME EQUITY- ASSET FIDELITY FIDELITY
MONEY UTILITY BOND INCOME MANAGER INDEX 500 CONTRAFUND
SEPTEMBER 30, 2000 FUND II FUND II FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------ --------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value (see
supplemental cost information below) $768,399 $134,294 $126,667 $619,356 $280,141 $2,681,104 $1,540,946
-------- -------- -------- -------- -------- ---------- ----------
TOTAL ASSETS 768,399 134,294 126,667 619,356 280,141 2,681,104 1,540,946
-------- -------- -------- -------- -------- ---------- ----------
LIABILITIES:
Payable for fund withdrawals and
surrenders -- -- -- -- -- -- --
-------- -------- -------- -------- -------- ---------- ----------
TOTAL LIABILITIES -- -- -- -- -- -- --
-------- -------- -------- -------- -------- ---------- ----------
NET ASSETS $768,399 $134,294 $126,667 $619,356 $280,141 $2,681,104 $1,540,946
======== ======== ======== ======== ======== ========== ==========
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $771,793 $142,090 $150,335 $692,162 $293,141 $2,597,832 $1,643,245
======== ======== ======== ======== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
JANUS
JANUS JANUS ASPEN
VAN ECK ASPEN JANUS JANUS ASPEN JANUS ASPEN WORLD
EMERGING CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WIDE
MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
SEPTEMBER 30, 2000 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------ -------- ------------ --------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value (see
supplemental cost information below) $133,702 $584,939 $484,591 $141,397 $24,377 $302,121 $378,007
-------- -------- -------- -------- ------- -------- --------
TOTAL ASSETS 133,702 584,939 484,591 141,397 24,377 302,121 378,007
-------- -------- -------- -------- ------- -------- --------
LIABILITIES:
Payable for fund withdrawals and
surrenders -- -- -- -- -- -- --
-------- -------- -------- -------- ------- -------- --------
TOTAL LIABILITIES -- -- -- -- -- -- --
-------- -------- -------- -------- ------- -------- --------
NET ASSETS $133,702 $584,939 $484,591 $141,397 $24,377 $302,121 $378,007
======== ======== ======== ======== ======= ======== ========
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $110,073 $514,701 $463,604 $146,322 $24,290 $327,193 $385,572
======== ======== ======== ======== ======= ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 2
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
ALGER ALGER ALGER MFS
AMERICAN ALGER AMERICAN AMERICAN MFS GROWTH
SMALL AMERICAN MIDCAP LEVERAGED EMERGING MFS WITH
CAPITALIZATION GROWTH GROWTH ALLCAP GROWTH RESEARCH INCOME
SEPTEMBER 30, 2000 PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES
------------------ -------------- --------- --------- --------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value (see
supplemental cost information below) $676,494 $2,064,532 $1,098,584 $12,784 $1,358,609 $625,078 $511,026
-------- ---------- ---------- ------- ---------- -------- --------
TOTAL ASSETS 676,494 2,064,532 1,098,584 12,784 1,358,609 625,078 511,026
-------- ---------- ---------- ------- ---------- -------- --------
LIABILITIES:
Payable for fund withdrawals and
surrenders -- -- -- -- -- -- --
-------- ---------- ---------- ------- ---------- -------- --------
TOTAL LIABILITIES -- -- -- -- -- -- --
-------- ---------- ---------- ------- ---------- -------- --------
NET ASSETS $676,494 $2,064,532 $1,098,584 $12,784 $1,358,609 $625,078 $511,026
======== ========== ========== ======= ========== ======== ========
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $757,855 $1,779,688 $ 808,475 $13,363 $1,239,871 $453,060 $443,001
======== ========== ========== ======= ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FIRST EAGLE VAN ECK ALLIANCE
MFS SOGEN WORLDWIDE ALLIANCE GROWTH AMERICAN
LIMITED MFS TOTAL OVERSEAS HARD PREMIER AND CENTURY
MATURITY RETURN VARIABLE ASSETS GROWTH INCOME INCOME &
SEPTEMBER 30, 2000 SERIES SERIES FUND FUND PORTFOLIO PORTFOLIO GROWTH FUND
------------------ -------- --------- ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value (see
supplemental cost information below) $62,474 $425,150 $346,677 $30,295 $48,121 $11,228 $ --
------- -------- -------- ------- ------- ------- ----
TOTAL ASSETS 62,474 425,150 346,677 30,295 48,121 11,228 --
------- -------- -------- ------- ------- ------- ----
LIABILITIES:
Payable for fund withdrawals and
surrenders -- -- -- -- -- -- --
------- -------- -------- ------- ------- ------- ----
TOTAL LIABILITIES -- -- -- -- -- -- --
------- -------- -------- ------- ------- ------- ----
NET ASSETS $62,474 $425,150 $346,677 $30,295 $48,121 $11,228 $ --
======= ======== ======== ======= ======= ======= ====
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $65,568 $418,725 $284,431 $24,733 $53,887 $11,248 $ --
======= ======== ======== ======= ======= ======= ====
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 3
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN
TEMPLETON MORGAN STANLEY
DEVELOPING TEMPLETON LAZARD LAZARD STANLEY EMERGING
AMERICAN MARKETS ASSET RETIREMENT RETIREMENT INTERNATIONAL MARKETS
CENTURY SECURITIES STRATEGY EQUITY SMALL CAP MAGNUM EQUITY
SEPTEMBER 30, 2000 VALUE FUND FUND FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------ ---------- ---------- --------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value (see
supplemental cost information
below) $ -- $ 17 $ -- $ -- $1,234 $ 63 $3,451
---- ---- ---- ---- ------ ---- ------
TOTAL ASSETS -- 17 -- -- 1,234 63 3,451
---- ---- ---- ---- ------ ---- ------
LIABILITIES:
Payable for fund withdrawals and
surrenders -- -- -- -- -- -- --
---- ---- ---- ---- ------ ---- ------
TOTAL LIABILITIES -- -- -- -- -- -- --
---- ---- ---- ---- ------ ---- ------
NET ASSETS $ -- $ 17 $ -- $ -- $1,234 $ 63 $3,451
==== ==== ==== ==== ====== ==== ======
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $ -- $ 32 $ -- $ -- $1,234 $ 66 $3,974
==== ==== ==== ==== ====== ==== ======
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 4
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY
PRIME FEDERATED INCOME EQUITY- ASSET FIDELITY FIDELITY
FOR THE NINE MONTH PERIOD MONEY UTILITY BOND INCOME MANAGER INDEX 500 CONTRAFUND
ENDED SEPTEMBER 30, 2000 FUND II FUND II FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- --------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 22,178 $ 5,913 $ 9,300 $ 47,764 $ 28,101 $ 28,974 $149,840
-------- -------- -------- -------- -------- --------- --------
22,178 5,913 9,300 47,764 28,101 28,974 149,840
-------- -------- -------- -------- -------- --------- --------
Expenses:
Mortality and expense risk charges 6,213 854 720 4,116 1,837 14,808 8,635
Policy fees/Cost of insurance 67,220 11,099 9,965 45,294 18,890 147,914 88,260
-------- -------- -------- -------- -------- --------- --------
73,433 11,953 10,685 49,410 20,727 162,722 96,895
-------- -------- -------- -------- -------- --------- --------
NET INVESTMENT INCOME (LOSS) (51,255) (6,040) (1,385) (1,646) 7,374 (133,748) 52,945
-------- -------- -------- -------- -------- --------- --------
Investment gains and (losses):
Net realized gains (losses) -- (600) (1,797) (2,945) (1,471) 61,879 (1,204)
Net unrealized gains (losses) (3,394) (8,187) (21,387) (64,502) (31,583) 142,854 438,721
-------- -------- -------- -------- -------- --------- --------
NET REALIZED AND UNREALIZED INVESTMENT GAINS
(LOSSES) (3,394) (8,787) (23,184) (67,447) (33,054) 204,733 437,517
-------- -------- -------- -------- -------- --------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $(54,649) $(14,827) $(24,569) $(69,093) $(25,680) $ 70,985 $490,462
======== ======== ======== ======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
VAN ECK
WORLDWIDE JANUS ASPEN JANUS ASPEN JANUS ASPEN JANUS ASPEN
EMERGING CAPITAL JANUS ASPEN JANUS ASPEN FLEXIBLE INTERNATIONAL WORLDWIDE
FOR THE NINE MONTH PERIOD MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
ENDED SEPTEMBER 30, 2000 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- --------- ------------ ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ -- $ 3,163 $27,945 $12,511 $ 86 $ 15,487 $ 24,887
------- -------- ------- ------- ----- -------- --------
-- 3,163 27,945 12,511 86 15,487 24,887
------- -------- ------- ------- ----- -------- --------
Expenses:
Mortality and expense risk
charges 640 2,728 2,154 623 23 1,611 1,738
Policy fees/Cost of insurance 7,661 31,673 22,415 6,546 684 14,522 19,038
------- -------- ------- ------- ----- -------- --------
8,301 34,401 24,569 7,169 707 16,133 20,776
------- -------- ------- ------- ----- -------- --------
NET INVESTMENT INCOME (LOSS) (8,301) (31,238) 3,376 5,342 (621) (646) 4,111
------- -------- ------- ------- ----- -------- --------
Investment gains and (losses):
Net realized gains (losses) 7,849 48,954 15,531 (3,102) (54) 7,111 19,129
Net unrealized gains (losses) (1,345) 30,979 4,674 (5,966) 86 (29,942) (25,360)
------- -------- ------- ------- ----- -------- --------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) 6,504 79,933 20,205 (9,068) 32 (22,831) (6,231)
------- -------- ------- ------- ----- -------- --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $(1,797) $ 48,695 $23,581 $(3,726) $(589) $(23,477) $ (2,120)
======= ======== ======= ======= ===== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 5
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
ALGER ALGER ALGER MFS
AMERICAN ALGER AMERICAN AMERICAN MFS GROWTH
SMALL AMERICAN MIDCAP LEVERAGED EMERGING MFS WITH
FOR THE NINE MONTH PERIOD CAPITALIZATION GROWTH GROWTH ALLCAP GROWTH RESEARCH INCOME
ENDED SEPTEMBER 30, 2000 PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES
------------------------- -------------- --------- --------- --------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 155,559 $199,050 $ 71,634 $ -- $ 58,635 $ 167 $ 5,693
--------- -------- -------- ------- --------- -------- --------
155,559 199,050 71,634 -- 58,635 167 5,693
--------- -------- -------- ------- --------- -------- --------
Expenses:
Mortality and expense risk charges 3,027 10,501 4,257 11 7,826 3,192 3,077
Policy fees/Cost of insurance 28,764 114,084 37,765 309 77,127 35,569 36,969
--------- -------- -------- ------- --------- -------- --------
31,791 124,585 42,022 320 84,953 38,761 40,046
--------- -------- -------- ------- --------- -------- --------
NET INVESTMENT INCOME (LOSS) 123,768 74,465 29,612 (320) (26,318) (38,594) (34,353)
--------- -------- -------- ------- --------- -------- --------
Investment gains and (losses):
Net realized gains (losses) 4,953 18,573 19,530 (2) 41,486 28,019 16,489
Net unrealized gains (losses) (119,065) 154,134 223,940 (579) (110,468) 94,287 30,505
--------- -------- -------- ------- --------- -------- --------
NET REALIZED AND UNREALIZED INVESTMENT
GAINS (LOSSES) (114,112) 172,707 243,470 (581) (68,982) 122,306 46,994
--------- -------- -------- ------- --------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 9,656 $247,172 $273,082 $ (901) $ (95,300) $ 83,712 $ 12,641
========= ======== ======== ======= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
FIRST VAN
EAGLE ECK ALLIANCE AMERICAN
MFS MFS SOGEN WORLDWIDE ALLIANCE GROWTH CENTURY
LIMITED TOTAL OVERSEAS HARD PREMIER AND INCOME
FOR THE NINE MONTH PERIOD MATURITY RETURN VARIABLE ASSETS GROWTH INCOME & GROWTH
ENDED SEPTEMBER 30, 2000 SERIES SERIES FUND FUND PORTFOLIO PORTFOLIO FUND
------------------------- -------- ------ -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ -- $18,266 $ -- $ 259 $ 1,414 $ -- $--
------- ------- -------- ------- ------- ----- --
-- 18,266 -- 259 1,414 -- --
------- ------- -------- ------- ------- ----- --
Expenses:
Mortality and expense risk charges 464 2,546 1,970 179 101 4 --
Policy fees/Cost of insurance 6,207 25,546 22,703 2,177 1,027 109 --
------- ------- -------- ------- ------- ----- --
6,671 28,092 24,673 2,356 1,128 113 --
------- ------- -------- ------- ------- ----- --
NET INVESTMENT INCOME (LOSS) (6,671) (9,826) (24,673) (2,097) 286 (113) --
------- ------- -------- ------- ------- ----- --
Investment gains and (losses):
Net realized gains (losses) (1,047) (255) 24,722 1,020 (39) 1 --
Net unrealized gains (losses) (952) 27,533 19,614 4,536 (5,766) (21) --
------- ------- -------- ------- ------- ----- --
NET REALIZED AND UNREALIZED INVESTMENT GAINS
(LOSSES) (1,999) 27,278 44,336 5,556 (5,805) (20) --
------- ------- -------- ------- ------- ----- --
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $(8,670) $17,452 $ 19,663 $ 3,459 $(5,519) $(133) $--
======= ======= ======== ======= ======= ===== ==
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 6
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN
TEMPLETON MORGAN STANLEY
AMERICAN DEVELOPING TEMPLETON LAZARD LAZARD STANLEY EMERGING
CENTURY MARKETS ASSET RETIREMENT RETIREMENT INTERNATIONAL MARKETS
FOR THE NINE MONTH PERIOD VALUE SECURITIES STRATEGY EQUITY SMALL CAP MAGNUM EQUITY
ENDED SEPTEMBER 30, 2000 FUND FUND FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- -------- ---------- --------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ -- $ -- $ -- $ -- $ -- $ -- $ 20
---- ----- ---- ---- ---- ---- -----
-- -- -- -- -- -- 20
---- ----- ---- ---- ---- ---- -----
Expenses:
Mortality and expense risk charges -- -- -- -- 1 -- 5
Policy fees/Cost of insurance -- 14 -- -- 22 24 113
---- ----- ---- ---- ---- ---- -----
-- 14 -- -- 23 24 118
---- ----- ---- ---- ---- ---- -----
NET INVESTMENT INCOME (LOSS) -- (14) -- -- (23) (24) (98)
---- ----- ---- ---- ---- ---- -----
Investment gains and (losses):
Net realized gains (losses) -- (12) -- -- -- (1) (5)
Net unrealized gains (losses) -- (3) -- -- -- (3) (535)
---- ----- ---- ---- ---- ---- -----
NET REALIZED AND UNREALIZED INVESTMENT
GAINS (LOSSES) -- (15) -- -- -- (4) (540)
---- ----- ---- ---- ---- ---- -----
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ -- $ (29) $ -- $ -- $(23) $(28) $(638)
==== ===== ==== ==== ==== ==== =====
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 7
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY
PRIME FEDERATED INCOME EQUITY- ASSET FIDELITY FIDELITY
FOR THE NINE MONTH PERIOD MONEY UTILITY BOND INCOME MANAGER INDEX 500 CONTRAFUND
ENDED SEPTEMBER 30, 2000 FUND II FUND II FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- --------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (51,255) $ (6,040) $ (1,385) $ (1,646) $ 7,374 $ (133,748) $ 52,945
Net realized and unrealized investment
gains (losses) (3,394) (8,787) (23,184) (67,447) (33,054) 204,733 437,517
----------- -------- -------- -------- -------- ---------- ----------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS (54,649) (14,827) (24,569) (69,093) (25,680) 70,985 490,462
----------- -------- -------- -------- -------- ---------- ----------
From capital transactions:
Net premiums/deposits 1,482,364 37,043 47,348 151,847 40,169 97,622 408,879
Surrenders and withdrawals (40,122) (3,370) (364) (6,409) (2,383) (22,063) (16,419)
Transfers in (out of) subaccounts,
net -- Note 1 (1,930,166) (7,396) (3,060) (72,465) 2,025 714,910 118,288
----------- -------- -------- -------- -------- ---------- ----------
CHANGE IN NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS (487,924) 26,277 43,924 72,973 39,811 790,469 510,748
----------- -------- -------- -------- -------- ---------- ----------
Increase in net assets (542,573) 11,450 19,355 3,880 14,131 861,454 1,001,210
Net assets at beginning of period 1,310,972 122,844 107,312 615,476 266,010 1,819,650 539,736
----------- -------- -------- -------- -------- ---------- ----------
NET ASSETS AT END OF PERIOD $ 768,399 $134,294 $126,667 $619,356 $280,141 $2,681,104 $1,540,946
=========== ======== ======== ======== ======== ========== ==========
NET ASSET VALUE PER UNIT AT END OF PERIOD $ 1.00 $ 13.58 $ 9.10 $ 24.54 $ 16.64 $ 162.22 $ 25.41
=========== ======== ======== ======== ======== ========== ==========
UNITS OUTSTANDING AT END OF PERIOD 768,399 9,889 13,919 25,239 16,835 16,528 60,643
=========== ======== ======== ======== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
VAN ECK JANUS JANUS
WORLDWIDE JANUS ASPEN JANUS JANUS ASPEN JANUS ASPEN ASPEN
EMERGING CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WORLDWIDE
FOR THE NINE MONTH PERIOD MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
ENDED SEPTEMBER 30, 2000 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- --------- ------------ --------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (8,301) $ (31,238) $ 3,376 $ 5,342 $ (621) $ (646) $ 4,111
Net realized and unrealized
investment gains (losses) 6,504 79,933 20,205 (9,068) 32 (22,831) (6,231)
--------- ------------ --------- --------- --------- ------------- ---------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS (1,797) 48,695 23,581 (3,726) (589) (23,477) (2,120)
--------- ------------ --------- --------- --------- ------------- ---------
From capital transactions:
Net premiums/deposits 36,201 128,439 155,783 46,996 2,733 195,571 111,195
Surrenders and withdrawals (744) (672) (7,434) -- (237) (5,927) (197)
Transfers in (out of) subaccounts,
net -- Note 1 14,234 176,823 193,810 85,985 22,254 104,564 174,133
--------- ------------ --------- --------- --------- ------------- ---------
CHANGE IN NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 49,691 304,590 342,159 132,981 24,750 294,208 285,131
--------- ------------ --------- --------- --------- ------------- ---------
Increase in net assets 47,894 353,285 365,740 129,255 24,161 270,731 283,011
Net assets at beginning of period 85,808 231,654 118,851 12,142 216 31,390 94,996
--------- ------------ --------- --------- --------- ------------- ---------
NET ASSETS AT END OF PERIOD $ 133,702 $ 584,939 $ 484,591 $ 141,397 $ 24,377 $ 302,121 $ 378,007
========= ============ ========= ========= ========= ============= =========
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 10.78 $ 32.61 $ 31.93 $ 25.13 $ 11.32 $ 35.58 $ 42.46
========= ============ ========= ========= ========= ============= =========
UNITS OUTSTANDING AT END OF PERIOD 12,403 17,937 15,177 5,627 2,153 8,491 8,903
========= ============ ========= ========= ========= ============= =========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 8
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
ALGER ALGER ALGER
AMERICAN ALGER AMERICAN AMERICAN MFS
SMALL AMERICAN MIDCAP LEVERAGED EMERGING MFS MFS GROWTH
FOR THE NINE MONTH PERIOD CAPITALIZATION GROWTH GROWTH ALLCAP GROWTH RESEARCH WITH INCOME
ENDED SEPTEMBER 30, 2000 PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES
------------------------- -------------- --------- --------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 123,768 $ 74,465 $ 29,612 $ (320) $ (26,318) $(38,594) $ (34,353)
Net realized and unrealized
investment gains (losses) (114,112) 172,707 243,470 (581) (68,982) 122,306 46,994
--------- ---------- ---------- ------- ---------- -------- ---------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS 9,656 247,172 273,082 (901) (95,300) 83,712 12,641
--------- ---------- ---------- ------- ---------- -------- ---------
From capital transactions:
Net premiums/deposits 222,202 469,057 184,842 13,656 400,999 118,897 104,607
Surrenders and withdrawals (11,711) (31,631) (7,746) -- (8,606) (6,340) (22,254)
Transfers in (out of)
subaccounts, net -- Note 1 164,891 20,114 194,297 29 146,130 2,531 (85,837)
--------- ---------- ---------- ------- ---------- -------- ---------
CHANGE IN NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 375,382 457,540 371,393 13,685 538,523 115,088 (3,484)
--------- ---------- ---------- ------- ---------- -------- ---------
Increase in net assets 385,038 704,712 644,475 12,784 443,223 198,800 9,157
Net assets at beginning of period 291,456 1,359,820 454,109 -- 915,386 426,278 501,869
--------- ---------- ---------- ------- ---------- -------- ---------
NET ASSETS AT END OF PERIOD $ 676,494 $2,064,532 $1,098,584 $12,784 $1,358,609 $625,078 $ 511,026
========= ========== ========== ======= ========== ======== =========
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 29.29 $ 55.41 $ 34.10 $ 49.70 $ 35.65 $ 23.80 $ 21.58
========= ========== ========== ======= ========== ======== =========
UNITS OUTSTANDING AT END OF PERIOD 23,096 37,259 32,217 257 38,110 26,264 23,681
========= ========== ========== ======= ========== ======== =========
</TABLE>
<TABLE>
<CAPTION>
FIRST EAGLE ALLIANCE
MFS SOGEN VAN ECK ALLIANCE GROWTH AMERICAN
LIMITED MFS TOTAL OVERSEAS WORLDWIDE PREMIER AND CENTURY
FOR THE NINE MONTH PERIOD MATURITY RETURN VARIABLE HARD ASSETS GROWTH INCOME INCOME &
ENDED SEPTEMBER 30, 2000 SERIES SERIES FUND FUND PORTFOLIO PORTFOLIO GROWTH FUND
------------------------- -------- --------- ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (6,671) $ (9,826) $(24,673) $(2,097) $ 286 $ (113) $ --
Net realized and unrealized investment
gains (losses) (1,999) 27,278 44,336 5,556 (5,805) (20) --
-------- -------- -------- ------- ------- ------- -----
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS (8,670) 17,452 19,663 3,459 (5,519) (133) --
-------- -------- -------- ------- ------- ------- -----
From capital transactions:
Net premiums/deposits 12,535 59,386 91,928 7,456 16,764 887 --
Surrenders and withdrawals (508) (1,791) (5,057) (947) -- -- --
Transfers in (out of) subaccounts,
net -- Note 1 (14,392) 8,490 (48,592) (3,038) 36,876 10,474 --
-------- -------- -------- ------- ------- ------- -----
CHANGE IN NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS (2,365) 66,085 38,279 3,471 53,640 11,361 --
-------- -------- -------- ------- ------- ------- -----
Increase in net assets (11,035) 83,537 57,942 6,930 48,121 11,228 --
Net assets at beginning of period 73,509 341,613 288,735 23,365 -- -- --
-------- -------- -------- ------- ------- ------- -----
NET ASSETS AT END OF PERIOD $ 62,474 $425,150 $346,677 $30,295 $48,121 $11,228 $ --
======== ======== ======== ======= ======= ======= =====
NET ASSET VALUE PER UNIT AT END OF PERIOD $ 10.25 $ 18.54 $ 14.71 $ 11.78 $ 37.09 $ 22.55 $7.65
======== ======== ======== ======= ======= ======= =====
UNITS OUTSTANDING AT END OF PERIOD 6,095 22,931 23,567 2,572 1,297 498 --
======== ======== ======== ======= ======= ======= =====
</TABLE>
<PAGE> 9
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
TEMPLETON MORGAN
DEVELOPING TEMPLETON LAZARD LAZARD STANLEY MORGAN STANLEY
AMERICAN MARKETS ASSET RETIREMENT RETIREMENT INTERNATIONAL EMERGING
FOR THE NINE MONTH PERIOD CENTURY SECURITIES STRATEGY EQUITY SMALL CAP MAGNUM MARKETS
ENDED SEPTEMBER 30, 2000 VALUE FUND FUND FUND PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO
------------------------- ---------- ---------- --------- ---------- ---------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ -- $ (14) $ -- $ -- $ (23) $ (24) $ (98)
Net realized and unrealized
investment gains (losses) -- (15) -- -- -- (4) (540)
----- ----- ------ ------ ------ ------ ------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS -- (29) -- -- (23) (28) (638)
----- ----- ------ ------ ------ ------ ------
From capital transactions:
Net premiums/deposits -- 46 -- -- -- 91 4,089
Surrenders and withdrawals -- -- -- -- -- -- --
Transfers in (out of)
subaccounts, net -- Note 1 -- -- -- -- 1,257 -- --
----- ----- ------ ------ ------ ------ ------
CHANGE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS -- 46 -- -- 1,257 91 4,089
----- ----- ------ ------ ------ ------ ------
Increase in net assets -- 17 -- -- 1,234 63 3,451
Net assets at beginning of
period -- -- -- -- -- -- --
----- ----- ------ ------ ------ ------ ------
NET ASSETS AT END OF PERIOD $ -- $ 17 $ -- $ -- $1,234 $ 63 $3,451
===== ===== ====== ====== ====== ====== ======
NET ASSET VALUE PER UNIT AT END
OF PERIOD $5.90 $5.66 $18.78 $11.54 $11.26 $12.29 $10.61
===== ===== ====== ====== ====== ====== ======
UNITS OUTSTANDING AT END OF
PERIOD -- 3 -- -- 110 5 325
===== ===== ====== ====== ====== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 10
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(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. The assets of the Variable Account are
segregated from VFL's general account and its other separate accounts. VFL is a
wholly-owned subsidiary of Continental Assurance Company ("Assurance").
Assurance is a wholly-owned subsidiary of Continental Casualty Company
("Casualty"), which is wholly-owned by CNA Financial Corporation ("CNA"). Loews
Corporation owns approximately 87% 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 35* 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 INVESTMENT MANAGEMENT COMPANY:
Federated Prime Money Fund II
Federated Utility Fund II
Federated High Income Bond Fund II
FIDELITY MANAGEMENT & RESEARCH COMPANY:
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Index 500 Portfolio
Fidelity VIP II Contrafund Portfolio
FRED ALGER MANAGEMENT, INC.:
Alger American Small Capitalization Portfolio
Alger American Growth Portfolio
Alger American MidCap Growth Portfolio
Alger American Leveraged AllCap Portfolio
MFS INVESTMENT MANAGEMENT:
MFS Emerging Growth Series
MFS Research Series
MFS Growth with Income Series
MFS Limited Maturity Series (Closed to new investments)
MFS Total Return Series
ASB ADVISORS:
First Eagle SoGen Overseas Variable Fund
VAN ECK ASSOCIATES CORPORATION:
Van Eck Worldwide Hard Assets Fund
Van Eck Worldwide Emerging Markets Fund
<PAGE> 11
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 1. ORGANIZATION -- (CONTINUED)
INVESTMENT ADVISOR:
Fund/subaccount
JANUS CAPITAL CORPORATION:
Janus Aspen Series Capital Appreciation Portfolio
Janus Aspen Series Growth Portfolio
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Flexible Income Portfolio
Janus Aspen Series International Growth Portfolio
Janus Aspen Series Worldwide Growth Portfolio
ALLIANCE CAPITAL MANAGEMENT, L.P.:
Alliance Premier Growth Portfolio
Alliance Growth and Income Portfolio
AMERICAN CENTURY INVESTMENT
MANAGEMENT, INC.:
American Century VP Income & Growth Fund
American Century VP Value Fund
TEMPLETON ASSET MANAGEMENT, LTD.:
Templeton Developing Markets Securities Fund
TEMPLETON INVESTMENT COUNSEL, INC.:
Templeton Asset Strategy Fund
LAZARD ASSET MANAGEMENT:
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
MORGAN STANLEY ASSET MANAGEMENT:
Morgan Stanley International Magnum Portfolio
Morgan Stanley Emerging Markets Equity Portfolio
-------------------------
* The MFS Limited Maturity Series subaccount is no longer available for new
allocations as of May 1, 1999.
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).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS -- Investments in the Variable Account consist of
shares of the Funds and are stated at 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 accompanying financial statements.
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 first-in first-out cost method.
FEDERAL INCOME TAXES -- Net investment income and realized gains and losses
on investments of the Variable Account are taxable to contractholders generally
upon distribution. Accordingly, no provision for income taxes has been recorded
in the accompanying financial statements.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles ("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
<PAGE> 12
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
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). Net premiums after
these deductions are invested in the mutual funds.
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 4. 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 mutual
funds satisfy the diversification requirement of the regulations.
NOTE 5. OTHER EVENTS
On October 6, 2000 CNAF, issued a press release announcing the sale of its
life reinsurance business to Munich American Reassurance Company, the U.S.
subsidiary of Munich RE. A portion of the life reinsurance business is conducted
through VFL as part of a Reinsurance Pooling Agreement. The transfer of this
business is not expected to have a material impact on results of operations or
equity of the Variable Life Separate Account or those of VFL.
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
To the Contractholders of Valley Forge Life Insurance Company Variable Universal
Life Separate Account and the Board of Directors of Valley Forge Life Insurance
Company:
We have audited the accompanying statement of assets and liabilities of the
subaccounts of Valley Forge Life Insurance Company Variable Life Separate
Account (the "Account") as of December 31, 1999, the statements of operations
for the year ended December 31, 1999, and changes in net assets for the two
years ended December 31, 1999. The subaccounts that collectively comprise the
Account are the Federated Prime Money Fund II, Federated Utility Fund II,
Federated High Income Bond Fund II, Fidelity Variable Insurance Products Fund
Equity-Income Portfolio, Fidelity Variable Insurance Products Fund II Asset
Manager Portfolio, Fidelity Variable Insurance Products Fund II Index 500
Portfolio, Fidelity Variable Insurance Products Fund II Contrafund Portfolio,
The Alger American Fund Small Capitalization Portfolio, The Alger American
Growth Portfolio, The Alger American MidCap Growth Portfolio, MFS Emerging
Growth Series, MFS Research Series, MFS Growth with Income Series, MFS Limited
Maturity Series, MFS Total Return Series, SoGen Overseas Variable Fund, Van Eck
Worldwide Hard Assets, Van Eck Emerging Markets Fund, Janus Aspen Capital
Appreciation Portfolio, Janus Aspen Growth Portfolio, Janus Aspen Balanced
Portfolio, Janus Aspen Flexible Income Portfolio, Janus Aspen International
Growth Portfolio and Janus Aspen World Wide Growth Portfolio. These financial
statements are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1999. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of each of the subaccounts that comprise the
Account as of December 31, 1999, the results of their operations for the year
ended December 31, 1999, and the changes in their net assets for the two years
ended December 31, 1999, are in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Chicago, Illinois
February 24, 2000
1
<PAGE> 2
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
FEDERATED FEDERATED FIDELITY FIDELITY
PRIME FEDERATED HIGH EQUITY- ASSET FIDELITY
MONEY UTILITY INCOME BOND INCOME MANAGER INDEX 500
DECEMBER 31, 1999 FUND II FUND II FUND II PORTFOLIO PORTFOLIO PORTFOLIO
----------------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value
(see supplemental cost
information below) $1,337,536 $123,711 $107,312 $628,527 $266,010 $1,819,650
---------- -------- -------- -------- -------- ----------
TOTAL ASSETS 1,337,536 123,711 107,312 628,527 266,010 1,819,650
---------- -------- -------- -------- -------- ----------
LIABILITIES:
Payable for fund withdrawals and
surrenders (26,564) (867) -- (13,051) -- --
---------- -------- -------- -------- -------- ----------
TOTAL LIABILITIES (26,564) (867) -- (13,051) -- --
---------- -------- -------- -------- -------- ----------
NET ASSETS $1,310,972 $122,844 $107,312 $615,476 $266,010 $1,819,650
========== ======== ======== ======== ======== ==========
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $1,310,972 $122,453 $109,593 $623,780 $247,427 $1,879,231
========== ======== ======== ======== ======== ==========
<CAPTION>
FIDELITY
CONTRAFUND
DECEMBER 31, 1999 PORTFOLIO
----------------- ----------
<S> <C>
ASSETS:
Investments, at market value
(see supplemental cost
information below) $1,141,432
----------
TOTAL ASSETS 1,141,432
----------
LIABILITIES:
Payable for fund withdrawals and
surrenders (601,696)
----------
TOTAL LIABILITIES (601,696)
----------
NET ASSETS $ 539,736
==========
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $1,080,717
==========
</TABLE>
<TABLE>
<CAPTION>
VAN ECK JANUS ASPEN JANUS ASPEN
EMERGING CAPITAL JANUS ASPEN JANUS ASPEN FLEXIBLE
MARKETS APPRECIATION GROWTH BALANCED INCOME
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------- -------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value (see
supplemental cost information
below) $85,808 $231,654 $118,851 $12,165 $217
------- -------- -------- ------- ----
TOTAL ASSETS 85,808 231,654 118,851 12,165 217
------- -------- -------- ------- ----
LIABILITIES:
Payable for fund withdrawals and
surrenders -- -- -- (23) (1)
------- -------- -------- ------- ----
TOTAL LIABILITIES -- -- -- (23) (1)
------- -------- -------- ------- ----
NET ASSETS $85,808 $231,654 $118,851 $12,142 $216
======= ======== ======== ======= ====
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $60,834 $192,395 $102,538 $11,102 $215
======= ======== ======== ======= ====
<CAPTION>
JANUS ASPEN JANUS ASPEN
INTERNATIONAL WORLD WIDE
GROWTH GROWTH
DECEMBER 31, 1999 PORTFOLIO PORTFOLIO
----------------- ------------- -----------
<S> <C> <C>
ASSETS:
Investments, at market value (see
supplemental cost information
below) $31,404 $94,996
------- -------
TOTAL ASSETS 31,404 94,996
------- -------
LIABILITIES:
Payable for fund withdrawals and
surrenders (14) --
------- -------
TOTAL LIABILITIES (14) --
------- -------
NET ASSETS $31,390 $94,996
======= =======
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $26,521 $77,201
======= =======
</TABLE>
See accompanying Notes to Financial Statements.
2
<PAGE> 3
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES -- (CONTINUED)
<TABLE>
<CAPTION>
ALGER
ALGER AMERICAN ALGER AMERICAN MFS MFS
SMALL AMERICAN MIDCAP EMERGING MFS MFS GROWTH LIMITED
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH WITH MATURITY
DECEMBER 31, 1999 PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES INCOME SERIES SERIES
----------------- -------------- --------- --------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value (see
supplemental cost information
below) $306,155 $1,359,820 $457,509 $915,394 $428,976 $502,242 $ 77,690
-------- ---------- -------- -------- -------- -------- --------
TOTAL ASSETS 306,155 1,359,820 457,509 915,394 428,976 502,242 77,690
-------- ---------- -------- -------- -------- -------- --------
LIABILITIES:
Payable for fund withdrawals and
surrenders (14,699) -- (3,400) (8) (2,698) (373) (4,181)
-------- ---------- -------- -------- -------- -------- --------
TOTAL LIABILITIES (14,699) -- (3,400) (8) (2,698) (373) (4,181)
-------- ---------- -------- -------- -------- -------- --------
NET ASSETS $291,456 $1,359,820 $454,109 $915,386 $426,278 $501,869 $ 73,509
======== ========== ======== ======== ======== ======== ========
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $253,752 $1,193,861 $387,900 $686,138 $348,548 $466,568 $ 77,882
======== ========== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SOGEN VAN ECK
MFS TOTAL OVERSEAS WORLDWIDE
DECEMBER 31, 1999 RETURN SERIES VARIABLE FUND HARD ASSETS FUND
----------------- ------------- ------------- ----------------
<S> <C> <C> <C>
ASSETS:
Investments, at market value (see
supplemental cost information below) $341,613 $288,735 $23,391
-------- -------- -------
TOTAL ASSETS $341,613 288,735 23,391
-------- -------- -------
LIABILITIES:
Payable for fund withdrawals and
surrenders -- -- (26)
-------- -------- -------
TOTAL LIABILITIES -- -- (26)
-------- -------- -------
NET ASSETS $341,613 $288,735 $23,365
======== ======== =======
SUPPLEMENTAL COST INFORMATION:
Investments, at cost $350,610 $247,934 $22,339
======== ======== =======
</TABLE>
See accompanying Notes to Financial Statements.
3
<PAGE> 4
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY
PRIME FEDERATED INCOME EQUITY- ASSET FIDELITY
FOR THE YEAR ENDED MONEY UTILITY BOND INCOME MANAGER INDEX 500
DECEMBER 31, 1999 FUND II FUND II FUND II PORTFOLIO PORTFOLIO PORTFOLIO
------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 34,277 $ 5,412 $ 6,010 $ 18,590 $13,097 $ 8,382
-------- ------- -------- -------- ------- ---------
34,277 5,412 6,010 18,590 13,097 8,382
-------- ------- -------- -------- ------- ---------
Expenses:
Mortality and expense risk charges 6,667 803 750 4,465 1,936 9,965
Policy fees/Cost of insurance 75,698 10,867 12,804 52,685 20,302 135,236
-------- ------- -------- -------- ------- ---------
82,365 11,670 13,554 57,150 22,238 145,201
-------- ------- -------- -------- ------- ---------
NET INVESTMENT INCOME (LOSS) (48,088) (6,258) (7,544) (38,560) (9,141) (136,819)
-------- ------- -------- -------- ------- ---------
Investment gains and (losses):
Net realized gains (losses) -- 750 (2,687) 4,507 6,698 69,785
Net unrealized gains (losses) -- (3,365) (2,743) (22,236) 11,758 (105,956)
-------- ------- -------- -------- ------- ---------
NET REALIZED AND UNREALIZED INVESTMENT GAINS
(LOSSES) -- (2,615) (5,430) (17,729) 18,456 (36,171)
-------- ------- -------- -------- ------- ---------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $(48,088) $(8,873) $(12,974) $(56,289) $ 9,315 $(172,990)
======== ======= ======== ======== ======= =========
<CAPTION>
FIDELITY
FOR THE YEAR ENDED CONTRAFUND
DECEMBER 31, 1999 PORTFOLIO
------------------ ----------
<S> <C>
Investment income:
Dividend income $ 16,984
---------
16,984
---------
Expenses:
Mortality and expense risk charges 6,231
Policy fees/Cost of insurance 78,259
---------
84,490
---------
NET INVESTMENT INCOME (LOSS) (67,506)
---------
Investment gains and (losses):
Net realized gains (losses) 142,245
Net unrealized gains (losses) (584,391)
---------
NET REALIZED AND UNREALIZED INVESTMENT GAINS
(LOSSES) (442,146)
---------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $(509,652)
=========
</TABLE>
<TABLE>
<CAPTION>
JANUS JANUS
VAN ECK ASPEN JANUS JANUS ASPEN
EMERGING CAPITAL ASPEN ASPEN FLEXIBLE
FOR THE YEAR ENDED MARKETS APPRECIATION GROWTH BALANCED INCOME
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------ -------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------ ----
-- -- -- -- --
------- ------- ------- ------ ----
Expenses:
Mortality and expense risk charges 167 453 133 12 --
Policy fees/Cost of insurance 6,146 1,330 684 137 38
------- ------- ------- ------ ----
6,313 1,783 817 149 38
------- ------- ------- ------ ----
NET INVESTMENT INCOME (LOSS) (6,313) (1,783) (817) (149) (38)
------- ------- ------- ------ ----
Investment gains and (losses):
Net realized gains (losses) 6,510 23,381 (237) 11 --
Net unrealized gains (losses) 25,767 39,259 16,313 1,040 1
------- ------- ------- ------ ----
NET REALIZED AND UNREALIZED INVESTMENT
GAINS (LOSSES) 32,277 62,640 16,076 1,051 1
------- ------- ------- ------ ----
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $25,964 $60,857 $15,259 $ 902 $(37)
======= ======= ======= ====== ====
<CAPTION>
JANUS
JANUS ASPEN
ASPEN WORLD
INTERNATIONAL WIDE
FOR THE YEAR ENDED GROWTH GROWTH
DECEMBER 31, 1999 PORTFOLIO PORTFOLIO
------------------ ------------- ---------
<S> <C> <C>
Investment income:
Dividend income $ -- $ --
------- -------
-- --
------- -------
Expenses:
Mortality and expense risk charges 58 157
Policy fees/Cost of insurance 293 651
------- -------
351 808
------- -------
NET INVESTMENT INCOME (LOSS) (351) (808)
------- -------
Investment gains and (losses):
Net realized gains (losses) 11,007 11,697
Net unrealized gains (losses) 4,869 17,795
------- -------
NET REALIZED AND UNREALIZED INVESTMENT
GAINS (LOSSES) 15,876 29,492
------- -------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $15,525 $28,684
======= =======
</TABLE>
See accompanying Notes to Financial Statements.
4
<PAGE> 5
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
ALGER ALGER MFS
AMERICAN ALGER AMERICAN MFS GROWTH MFS
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED
FOR THE YEAR ENDED CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY
DECEMBER 31, 1999 PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES
------------------ -------------- --------- --------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $16,693 $ 62,822 $38,874 $ -- $ 2,935 $ 1,986 $ 4,218
------- -------- ------- -------- -------- -------- -------
16,693 62,822 38,874 -- 2,935 1,986 4,218
------- -------- ------- -------- -------- -------- -------
Expenses:
Mortality and expense risk charges 1,619 7,580 2,650 4,133 3,363 3,016 586
Policy fees/Cost of insurance 21,221 90,363 30,100 58,872 36,824 39,310 8,706
------- -------- ------- -------- -------- -------- -------
22,840 97,943 32,750 63,005 40,187 42,326 9,292
------- -------- ------- -------- -------- -------- -------
NET INVESTMENT INCOME (LOSS) (6,147) (35,121) 6,124 (63,005) (37,252) (40,340) (5,074)
------- -------- ------- -------- -------- -------- -------
Investment gains and (losses):
Net realized gains (losses) 23,168 77,813 9,208 23,492 10,097 5,229 (210)
Net unrealized gains (losses) 27,800 122,720 43,822 188,807 59,131 18,997 (3,124)
------- -------- ------- -------- -------- -------- -------
NET REALIZED AND UNREALIZED INVESTMENT
GAINS (LOSSES) 50,968 200,533 53,030 212,299 69,228 24,226 (3,334)
------- -------- ------- -------- -------- -------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $44,821 $165,412 $59,154 $149,294 $ 31,976 $(16,114) $(8,408)
======= ======== ======= ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
SOGEN VAN ECK
FOR THE YEAR ENDED MFS TOTAL OVERSEAS WORLDWIDE
DECEMBER 31, 1999 RETURN SERIES VARIABLE FUND HARD ASSETS FUND
------------------ ------------- ------------- ----------------
<S> <C> <C> <C>
Investment income:
Dividend income $ 12,074 $ 3,304 $ 190
-------- ------- -------
12,074 3,304 190
-------- ------- -------
Expenses:
Mortality and expense risk charges 2,243 2,004 154
Policy fees/Cost of insurance 26,801 31,183 2,422
-------- ------- -------
29,044 33,187 2,576
-------- ------- -------
NET INVESTMENT INCOME (LOSS) (16,970) (29,883) (2,386)
-------- ------- -------
Investment gains and (losses):
Net realized gains (losses) 4,670 38,990 760
Net unrealized gains (losses) (14,859) 42,033 1,839
-------- ------- -------
NET REALIZED AND UNREALIZED INVESTMENT
GAINS (LOSSES) (10,189) 81,023 2,599
-------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $(27,159) $51,140 $ 213
======== ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
5
<PAGE> 6
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY
PRIME FEDERATED INCOME EQUITY- ASSET FIDELITY FIDELITY
FOR THE YEAR ENDED MONEY UTILITY BOND INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1999 FUND II FUND II FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------ --------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income
(loss) $ (48,088) $ (6,258) $ (7,544) $(38,560) $ (9,141) $ (136,819) $ (67,506)
Net realized and
unrealized investment
gains (losses) -- (2,615) (5,430) (17,729) 18,456 (36,171) (442,146)
---------- -------- -------- -------- -------- ---------- ---------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS (48,088) (8,873) (12,974) (56,289) 9,315 (172,990) (509,652)
---------- -------- -------- -------- -------- ---------- ---------
From capital transactions:
Net premiums/deposits 1,215,907 85,733 78,714 410,539 148,962 1,212,597 672,068
Surrenders and
withdrawals (1,542) 19 (941) 1,122 (523) (9,452) (3,707)
Transfers in (out of)
subaccounts,
net -- Note 1 (702,832) (3,776) (22,988) (39,350) 22,540 369,492 53,687
---------- -------- -------- -------- -------- ---------- ---------
CHANGE IN NET ASSETS
RESULTING FROM CAPITAL
TRANSACTIONS 511,533 81,976 54,785 372,311 170,979 1,572,637 722,048
---------- -------- -------- -------- -------- ---------- ---------
Increase in net assets 463,445 73,103 41,811 316,022 180,294 1,399,647 212,396
Net assets at beginning of
period 847,527 49,741 65,501 299,454 85,716 420,003 327,340
---------- -------- -------- -------- -------- ---------- ---------
NET ASSETS AT END OF PERIOD $1,310,972 $122,844 $107,312 $615,476 $266,010 $1,819,650 $ 539,736
========== ======== ======== ======== ======== ========== =========
NET ASSET VALUE PER UNIT AT
END OF PERIOD $ 1.00 $ 14.35 $ 10.24 $ 25.71 $ 18.67 $ 167.41 $ 29.15
========== ======== ======== ======== ======== ========== =========
UNITS OUTSTANDING AT END OF
PERIOD 1,310,972 8,561 10,480 23,939 14,248 10,869 18,516
========== ======== ======== ======== ======== ========== =========
</TABLE>
<TABLE>
<CAPTION>
ALGER ALGER
AMERICAN ALGER AMERICAN
SMALL AMERICAN MIDCAP
FOR THE YEAR ENDED CAPITALIZATION GROWTH GROWTH
DECEMBER 31, 1999 PORTFOLIO PORTFOLIO PORTFOLIO
------------------ -------------- --------- ---------
<S> <C> <C> <C>
From operations:
Net investment income (loss) $ (6,147) $ (35,121) $ 6,124
Net realized and unrealized
investment gains (losses) 50,968 200,533 53,030
-------- ---------- --------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS 44,821 165,412 59,154
-------- ---------- --------
From capital transactions:
Net premiums/deposits 149,226 813,146 190,974
Surrenders and withdrawals (1,485) (25,742) (972)
Transfers in (out of)
subaccounts, net -- Note 1 (32,320) 126,761 36,116
-------- ---------- --------
CHANGE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS 115,421 914,165 226,118
-------- ---------- --------
Increase in net assets 160,242 1,079,577 285,272
Net assets at beginning of
period 131,214 280,243 168,837
-------- ---------- --------
NET ASSETS AT END OF PERIOD $291,456 $1,359,820 $454,109
======== ========== ========
NET ASSET VALUE PER UNIT AT END
OF PERIOD $ 55.15 $ 64.38 $ 32.23
======== ========== ========
UNITS OUTSTANDING AT END OF
PERIOD 5,285 21,122 14,090
======== ========== ========
<CAPTION>
MFS EMERGING MFS MFS GROWTH MFS LIMITED
FOR THE YEAR ENDED GROWTH RESEARCH WITH MATURITY
DECEMBER 31, 1999 SERIES SERIES INCOME SERIES SERIES
------------------ ------------ -------- ------------- -----------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $(63,005) $(37,252) $(40,340) $ (5,074)
Net realized and unrealized
investment gains (losses) 212,299 69,228 24,226 (3,334)
-------- -------- -------- --------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS 149,294 31,976 (16,114) (8,408)
-------- -------- -------- --------
From capital transactions:
Net premiums/deposits 344,008 187,325 301,314 42,954
Surrenders and withdrawals (3,708) (1,274) (2,829) (315)
Transfers in (out of)
subaccounts, net -- Note 1 139,533 2,955 8,922 (14,192)
-------- -------- -------- --------
CHANGE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS 479,833 189,006 307,407 28,447
-------- -------- -------- --------
Increase in net assets 629,127 220,982 291,293 20,039
Net assets at beginning of
period 286,259 205,296 210,576 53,470
-------- -------- -------- --------
NET ASSETS AT END OF PERIOD $915,386 $426,278 $501,869 $ 73,509
======== ======== ======== ========
NET ASSET VALUE PER UNIT AT END
OF PERIOD $ 37.94 $ 23.34 $ 21.31 $ 9.81
======== ======== ======== ========
UNITS OUTSTANDING AT END OF
PERIOD 24,127 18,264 23,551 7,493
======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
6
<PAGE> 7
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<TABLE>
<CAPTION>
VAN ECK
MFS SOGEN WORLDWIDE VAN ECK JANUS ASPEN JANUS JANUS
TOTAL OVERSEAS HARD EMERGING CAPITAL ASPEN ASPEN
FOR THE YEAR ENDED RETURN VARIABLE ASSET MARKETS APPRECIATION GROWTH BALANCED
DECEMBER 31, 1999 SERIES FUND FUND FUND PORTFOLIO PORTFOLIO PORTFOLIO
------------------ ------ -------- --------- -------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income
(loss) $(16,970) $(29,883) $(2,386) $(6,313) $ (1,783) $ (817) $ (149)
Net realized and
unrealized investment
gains (losses) (10,189) 81,023 2,599 32,277 62,640 16,076 1,051
-------- -------- ------- ------- -------- -------- -------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS (27,159) 51,140 213 25,964 60,857 15,259 902
-------- -------- ------- ------- -------- -------- -------
From capital transactions:
Net premiums/deposits 243,333 94,031 14,568 40,337 170,800 103,592 11,240
Surrenders and
withdrawals (547) 2,448 (75) (1,098) -- -- --
Transfers in (out of)
subaccounts, net --
Note 1 (2,322) 6,797 (1,744) 1,766 (3) -- --
-------- -------- ------- ------- -------- -------- -------
CHANGE IN NET ASSETS
RESULTING FROM CAPITAL
TRANSACTIONS 240,464 103,276 12,749 41,005 170,797 103,592 11,240
-------- -------- ------- ------- -------- -------- -------
Increase in net assets 213,305 154,416 12,962 66,969 231,654 118,851 12,142
Net assets at beginning of
period 128,308 134,319 10,403 18,839 -- -- --
-------- -------- ------- ------- -------- -------- -------
NET ASSETS AT END OF PERIOD $341,613 $288,735 $23,365 $85,808 $231,654 $118,851 $12,142
======== ======== ======= ======= ======== ======== =======
NET ASSET VALUE PER UNIT AT
END OF PERIOD $ 17.75 $ 14.18 $ 10.96 $ 14.26 $ 33.17 $ 33.65 $ 27.92
======== ======== ======= ======= ======== ======== =======
UNITS OUTSTANDING AT END OF
PERIOD 19,245 20,362 2,132 6,017 6,984 3,532 435
======== ======== ======= ======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN JANUS ASPEN JANUS ASPEN
FOR THE YEAR ENDED FLEXIBLE INCOME INTERNATIONAL WORLD WIDE
DECEMBER 31, 1999 PORTFOLIO GROWTH PORTFOLIO GROWTH PORTFOLIO
------------------ --------------- ---------------- ----------------
<S> <C> <C> <C>
From operations:
Net investment income (loss) $ (38) $ (351) $ (808)
Net realized and unrealized investment
gains (losses) 1 15,876 29,492
------ ------- -------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS (37) 15,525 28,684
------ ------- -------
From capital transactions:
Net premiums/deposits 253 15,865 66,312
Surrenders and withdrawals -- -- --
Transfers in (out of) subaccounts,
net -- Note 1 -- -- --
------ ------- -------
CHANGE IN NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 253 15,865 66,312
------ ------- -------
Increase in net assets 216 31,390 94,996
Net assets at beginning of period -- -- --
------ ------- -------
NET ASSETS AT END OF PERIOD $ 216 $31,390 $94,996
====== ======= =======
NET ASSET VALUE PER UNIT AT END OF PERIOD $11.42 $ 38.67 $ 47.75
====== ======= =======
UNITS OUTSTANDING AT END OF PERIOD 19 812 1,989
====== ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
7
<PAGE> 8
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<TABLE>
<CAPTION>
FEDERATED
FEDERATED FEDERATED HIGH INCOME FIDELITY
FOR THE YEAR ENDED PRIME MONEY UTILITY BOND EQUITY-INCOME
DECEMBER 31, 1998 FUND II FUND II FUND II PORTFOLIO
------------------ ----------- --------- ----------- -------------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $(14,476) $(3,056) $(5,532) $(22,666)
Net realized and unrealized
investment gains (losses) -- 3,330 192 11,559
-------- ------- ------- --------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS (14,476) 274 (5,340) (11,107)
-------- ------- ------- --------
From capital transactions:
Net premiums/deposits 1,100,864 36,000 58,181 263,891
Surrenders and withdrawals (572) (83) (165) (2,423)
Transfers in (out of) subaccounts,
net -- Note 1 (303,884) (229) 8,694 22,472
-------- ------- ------- --------
CHANGE IN NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 796,408 35,688 66,710 283,940
-------- ------- ------- --------
Increase (decrease) in net assets 781,932 35,962 61,370 272,833
Net assets at beginning of period 65,595 13,779 4,131 26,621
-------- ------- ------- --------
NET ASSETS AT END OF PERIOD $847,527 $49,741 $65,501 $299,454
======== ======= ======= ========
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 1.00 $ 15.27 $ 10.92 $ 25.42
======== ======= ======= ========
UNITS OUTSTANDING AT END OF PERIOD 847,527 3,257 5,998 11,780
======== ======= ======= ========
<CAPTION>
FIDELITY
ASSET FIDELITY FIDELITY
FOR THE YEAR ENDED MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1998 PORTFOLIO PORTFOLIO PORTFOLIO
------------------ --------- --------- ----------
<S> <C> <C> <C>
From operations:
Net investment income (loss) $(6,180) $(38,788) $(22,765)
Net realized and unrealized
investment gains (losses) 6,583 46,453 46,063
------- -------- --------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS 403 7,665 23,298
------- -------- --------
From capital transactions:
Net premiums/deposits 61,909 327,244 246,088
Surrenders and withdrawals (129) (6,058) (1,201)
Transfers in (out of) subaccounts,
net -- Note 1 16,042 50,804 36,435
------- -------- --------
CHANGE IN NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 77,822 371,990 281,322
------- -------- --------
Increase (decrease) in net assets 78,225 379,655 304,620
Net assets at beginning of period 7,491 40,348 22,720
------- -------- --------
NET ASSETS AT END OF PERIOD $85,716 $420,003 $327,340
======= ======== ========
NET ASSET VALUE PER UNIT AT END OF
PERIOD $ 18.16 $ 141.25 $ 24.44
======= ======== ========
UNITS OUTSTANDING AT END OF PERIOD 4,720 2,973 13,394
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED
FOR THE YEAR ENDED CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY
DECEMBER 31, 1998 PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES
------------------ -------------- --------- --------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (3,424) $ (6,097) $ (9,436) $(22,642) $(15,787) $(18,580) $(4,763)
Net realized and unrealized investment
gains (losses) 4,449 44,836 22,499 40,816 18,836 12,276 (499)
-------- -------- -------- -------- -------- -------- -------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS 1,025 38,739 13,063 18,174 3,049 (6,304) (5,262)
-------- -------- -------- -------- -------- -------- -------
From capital transactions:
Net premiums/deposits 88,005 171,948 119,140 214,349 173,364 141,269 47,751
Surrenders and withdrawals (313) (1,636) (1,360) (734) (2,718) (2,367) (363)
Transfers in (out of) subaccounts,
net -- Note 1 26,949 37,058 26,519 27,749 11,059 51,081 (7)
-------- -------- -------- -------- -------- -------- -------
CHANGE IN NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 114,641 207,370 144,299 241,364 181,705 189,983 47,381
-------- -------- -------- -------- -------- -------- -------
Increase (decrease) in net assets 115,666 246,109 157,362 259,538 184,754 183,679 42,119
Net assets at beginning of period 15,548 34,134 11,475 26,721 20,542 26,897 11,351
-------- -------- -------- -------- -------- -------- -------
NET ASSETS AT END OF PERIOD $131,214 $280,243 $168,837 $286,259 $205,296 $210,576 $53,470
======== ======== ======== ======== ======== ======== =======
NET ASSET VALUE PER UNIT AT END OF PERIOD $ 43.97 $ 53.22 $ 28.87 $ 21.47 $ 19.05 $ 20.11 $ 10.16
======== ======== ======== ======== ======== ======== =======
UNITS OUTSTANDING AT END OF PERIOD 2,984 5,266 5,848 13,333 10,777 10,471 5,263
======== ======== ======== ======== ======== ======== =======
</TABLE>
See accompanying Notes to Financial Statements.
8
<PAGE> 9
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<TABLE>
<CAPTION>
VAN ECK
MFS SOGEN WORLDWIDE VAN ECK
TOTAL OVERSEAS HARD EMERGING
FOR THE YEAR ENDED RETURN VARIABLE ASSETS MARKETS
DECEMBER 31, 1998 SERIES FUND FUND FUND
------------------ ------ -------- --------- --------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (5,524) $(14,549) $ (417) $(3,614)
Net realized and unrealized investment gains
(losses) 6,093 (3,210) (3,800) (3,708)
-------- -------- ------- -------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 569 (17,759) (4,217) (7,322)
-------- -------- ------- -------
From capital transactions:
Net premiums/deposits 97,181 135,934 9,690 20,390
Surrenders and withdrawals (194) (2,482) (156) (296)
Transfers in (out of) subaccounts, net -- Note 1 28,785 5,437 (816) (690)
-------- -------- ------- -------
CHANGE IN NET ASSETS RESULTING FROM CAPITAL
TRANSACTIONS 125,772 138,889 8,718 19,404
-------- -------- ------- -------
Increase (decrease) in net assets 126,341 121,130 4,501 12,082
Net assets at beginning of period 1,967 13,189 5,902 6,757
-------- -------- ------- -------
NET ASSETS AT END OF PERIOD $128,308 $134,319 $10,403 $18,839
======== ======== ======= =======
NET ASSET VALUE PER UNIT AT END OF PERIOD $ 18.12 $ 10.07 $ 9.20 $ 7.12
======== ======== ======= =======
UNITS OUTSTANDING AT END OF PERIOD 7,081 13,339 1,131 2,646
======== ======== ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
9
<PAGE> 10
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
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 24 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")
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
JANUS CAPITAL CORPORATION--
INSTITUTIONAL CLASS
Janus Aspen Capital Appreciation Portfolio
Janus Aspen Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Flexible Income Portfolio
Janus Aspen International Growth Portfolio
Janus Aspen World Wide Growth Portfolio
10
<PAGE> 11
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. ORGANIZATION -- (CONTINUED)
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 first-in first-out cost method.
FEDERAL INCOME TAXES -- Net investment income and realized gains and losses
on investments of the Variable Account are taxable to contractholders generally
upon distribution. Accordingly, no provision for income taxes has been recorded
in the accompanying financial statements.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles ("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.
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
11
<PAGE> 12
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. CHARGES AND DEDUCTIONS -- (CONTINUED)
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). Net premiums after
these deductions are invested in the mutual funds.
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 4. 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 mutual
funds satisfy the diversification requirement of the regulations.
12
<PAGE> 1
VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2000 1999
(In thousands of dollars, except share data) (Unaudited)
---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale (amortized cost:
$523,375 and $548,444) $ 517,451 $ 530,512
Equity securities available-for-sale (cost: $9,994 and $0
) 10,037 51
Policy loans 98,081 93,575
Other invested assets 141 433
Short-term investments 122,125 24,714
---------- ----------
TOTAL INVESTMENTS 747,835 649,285
Cash 12,842 3,529
Receivables:
Reinsurance 2,653,587 2,414,553
Premium and other 51,873 82,852
Less allowance for doubtful accounts (34) (12)
Deferred acquisition costs 138,398 127,297
Accrued investment income 9,971 11,066
Receivables for securities sold 5,230 2,426
Federal income tax recoverable (from Assurance) -- 4,316
Other assets 7,400 4,883
Separate Account business 487,570 209,183
---------------------------------------------------------------------------------------------
TOTAL ASSETS $4,114,672 $3,509,378
=============================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Insurance reserves:
Future policy benefits $2,964,252 $2,751,396
Claims and claim expense 116,306 139,653
Policyholders' funds 45,670 43,466
Payables for securities purchased 30,283 2,421
Federal income taxes payable (to Assurance) 1,093 --
Deferred income taxes 10,508 2,694
Due to affiliates 55,468 12,435
Commissions and other payables 129,842 95,976
Separate Account business 487,570 209,183
---------- ----------
TOTAL LIABILITIES 3,840,992 3,257,224
---------- ----------
Commitments and contingent liabilities
Stockholder's Equity:
Common stock ($50 par value; Authorized 200,000 shares;
Issued 50,000 shares) 2,500 2,500
Additional paid-in capital 69,150 69,150
Retained earnings 205,858 191,464
Accumulated other comprehensive loss (3,828) (10,960)
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 273,680 252,154
---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $4,114,672 $3,509,378
=============================================================================================
</TABLE>
See accompanying Notes to Condensed Financial Statements (Unaudited).
<PAGE> 2
VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(IN THOUSANDS OF DOLLARS) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums $67,535 $74,272 $221,751 $232,596
Net investment income 11,309 10,130 33,443 28,238
Realized investment gains (losses) 87 (1,149) (4,149) (19,051)
Other 1,512 253 5,914 5,515
------- ------- -------- --------
80,443 83,506 256,959 247,298
------- ------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits 61,939 71,052 205,446 222,054
Amortization of deferred acquisition costs 3,563 4,450 10,675 10,515
Other operating expenses 6,552 3,994 18,506 17,708
------- ------- -------- --------
72,054 79,496 234,627 250,277
------- ------- -------- --------
Income (loss) before income tax and cumulative
effect of change in accounting principle 8,389 4,010 22,332 (2,979)
Income tax expense (benefit) 2,987 1,757 7,938 (1,236)
------- ------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle 5,402 2,253 14,394 (1,743)
Cumulative effect of change in accounting principle,
net of taxes -- -- -- (234)
----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 5,402 $ 2,253 $ 14,394 $ (1,977)
====================================================================================================
</TABLE>
See accompanying Notes to Condensed Financial Statements (Unaudited).
<PAGE> 3
VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 2000 1999
(In thousands of dollars)
----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 14,394 $ (1,977)
Adjustments to reconcile net income to net cash flows from
operating activities:
Deferred income tax provision 3,998 (5,030)
Net realized investment losses, pre-tax 4,149 19,051
Accretion of bond discount (2,650) (1,969)
Changes in:
Receivables, net (208,034) (200,187)
Deferred acquisition costs (12,389) (9,833)
Accrued investment income 1,095 (384)
Due (to) from affiliates 43,033 2,512
Federal income taxes payable and recoverable 5,409 (5,481)
Insurance reserves 220,240 290,528
Commissions and other payables and other 31,586 14,465
--------- -----------
Total adjustments 86,437 103,672
--------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 100,831 101,695
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities (479,527) (1,332,210)
Proceeds from fixed maturities:
Sales 474,167 1,222,475
Maturities, calls and redemptions 52,524 49,453
Purchases of equity securities (9,994) --
Proceeds from sale of equity securities -- 2,648
Change in short-term investments (95,548) 5,574
Change in policy loans (4,506) (1,176)
Change in other invested assets (107) 214
--------- -----------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (62,991) (53,022)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for investment contracts credited to policyholder
accounts 7,569 9,268
Return of policyholder account balances on investment
contracts (36,096) (26,932)
--------- -----------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (28,527) (17,664)
--------- -----------
NET CASH FLOWS 9,313 31,009
Cash at beginning of period 3,529 3,750
----------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 12,842 $ 34,759
========================================================================================
Supplemental disclosures of cash flow information:
Federal income taxes refunds received $ (1,924) $ --
========================================================================================
</TABLE>
See accompanying Notes to Condensed Financial Statements (Unaudited).
<PAGE> 4
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Valley Forge Life Insurance Company (VFL) was incorporated under the laws
of the Commonwealth of Pennsylvania on August 9, 1956. VFL is a wholly-owned
subsidiary of Continental Assurance Company (Assurance). Assurance is a
wholly-owned subsidiary of Continental Casualty Company (Casualty) which is
wholly-owned by CNA Financial Corporation (CNAF). CNAF is a holding company
whose primary subsidiaries consist of property/casualty and life insurance
companies, collectively CNA. As of September 30, 2000, Loews Corporation owns
approximately 87% of the outstanding common stock of CNAF.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term and universal life
insurance policies and individual annuities. Group insurance products include
life insurance, retirement services and accident and health insurance consisting
primarily of major medical and hospitalization. VFL also markets a portfolio of
variable separate account products, including annuity and universal life
products. These products offer policyholders the option of allocating payments
to one or more variable separate accounts or to a guaranteed income account or
both. Payments allocated to the variable separate accounts are invested in
corresponding investment portfolios where the investment risk is borne by the
policyholder while payments allocated to the guaranteed income account earn a
minimum guaranteed rate of interest for a specified period of time for annuity
contracts and for one year for life products.
The operations, premiums and liabilities of VFL and its parent, Assurance,
are managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as
amended on July 1, 1996, VFL cedes all of its business, excluding its separate
account business, to its parent, Assurance. This ceded business is then pooled
with the business of Assurance, which excludes Assurance's participating
contracts and separate account business, and 10% of the combined pool is assumed
by VFL.
The accompanying condensed financial statements are unaudited and have been
prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP). Certain financial information that is normally
included in annual financial statements, including financial statement
footnotes, prepared in accordance with GAAP, but that is not required for
interim reporting purposes, has been condensed or omitted. These statements
should be read in conjunction with the financial statements and notes thereto
included in VFL's Form 10-K filed with the Securities and Exchange Commission
for the year ended December 31, 1999. In the opinion of management, these
statements include all adjustments (consisting of normal recurring accruals)
that are necessary for the fair presentation of the financial position, results
of operations and cash flows. The operating results for the interim periods are
not necessarily indicative of the results to be expected for the full year.
NOTE 2. REINSURANCE
The ceding of insurance does not discharge the primary liability of VFL.
VFL places reinsurance with other carriers only after careful review of the
nature of the contract and a thorough assessment of the reinsurers' credit
quality and claim settlement performance. For carriers that are not authorized
reinsurers in VFL's state of domicile, VFL receives collateral, primarily in the
form of bank letters of credit.
<PAGE> 5
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 2. REINSURANCE -- (CONTINUED)
In the table below, the majority of life premium revenue is from long
duration contracts, while the majority of accident and health insurance premiums
are from short duration contracts. The effects of reinsurance on premium
revenues are shown in the following table:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
PREMIUMS
NINE MONTHS ENDED SEPTEMBER 30 -------------------------------------------- ASSUMED/NET
(IN THOUSANDS OF DOLLARS) DIRECT ASSUMED CEDED NET %
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Life $546,498 $88,848 $575,053 $ 60,293 147%
Accident and Health 6,862 161,458 6,862 161,458 100
-------- -------- -------- -------- ---
TOTAL PREMIUMS $553,360 $250,306 $581,915 $221,751 113%
======== ======== ======== ========
1999
Life $473,440 $70,620 $488,650 $ 55,410 127%
Accident and Health 4,508 177,186 4,508 177,186 100
-------- -------- -------- -------- ---
TOTAL PREMIUMS $477,948 $247,806 $493,158 $232,596 107%
=====================================================================================================
</TABLE>
Transactions with Assurance, as part of the Pooling Agreement described in
Note 1, are reflected in the above table. The table includes eight months of
year 2000 premiums for the Federal Employee Health Benefit Plan which were
transferred to another CNA entity September 1, 2000. Premium revenues ceded to
non-affiliated companies were $344.5 million for the nine months ended September
30, 2000, and $283.8 million for the nine months ended September 30, 1999.
Additionally, benefits and expenses for insurance claims and policyholder
benefits are net of reinsurance recoveries from non-affiliated companies of
$242.1 million for the period ended September 30, 2000, and $188.7 million for
the same period in 1999.
Reinsurance receivables reflected on the balance sheets are amounts
recoverable from reinsurers who have assumed a portion of the Company's
insurance reserves. These balances are principally due from Assurance pursuant
to the Reinsurance Pooling Agreement.
NOTE 3. LEGAL PROCEEDINGS
VFL is party to litigation arising in the ordinary course of business. The
outcome of this litigation will not, in the opinion of management, materially
affect the results of operations or stockholder's equity of VFL.
<PAGE> 6
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 4. COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes to stockholder's equity,
including net income, except those changes resulting from contributions from and
distributions to the stockholder. The components of comprehensive income are
shown below.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(IN THOUSANDS OF DOLLARS) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 5,402 $ 2,253 $14,394 $ (1,977)
Other comprehensive income:
Change in unrealized gains (losses) on investments
Holding gains (losses) arising during the period 5,554 (3,686) 1,888 (9,009)
Less: Unrealized gains (losses) at beginning of
period included in realized gains (losses)
during the period (2,156) 1,168 (9,085) 4,019
------- ------- ------- --------
Other comprehensive income (loss), before tax 7,710 (4,854) 10,973 (13,028)
Deferred income tax (expense) benefit related to
other comprehensive income (loss) (2,747) 2,251 (3,841) 5,100
------- ------- ------- --------
Other comprehensive income (loss), net of tax 4,963 (2,603) 7,132 (7,928)
------- ------- ------- --------
TOTAL COMPREHENSIVE INCOME (LOSS) $10,365 $ (350) $21,526 $ (9,905)
====================================================================================================
</TABLE>
NOTE 5. BUSINESS SEGMENTS
VFL operates in one reportable segment, the business of which is to market
and underwrite insurance products designed to satisfy the life, health and
retirement needs of individuals and groups. VFL products are distributed
primarily in the United States. Premium revenues earned outside the United
States are not material.
The operations, premiums and liabilities of VFL and its parent, Assurance,
are managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as
amended, VFL cedes all of its business, excluding its separate account business,
to Assurance which is then pooled with the business of Assurance, excluding
Assurance's participating contracts and separate account business, and 10% of
the combined pool is assumed by VFL.
The following presents net premiums by product group for the nine month
period ending September 30, 2000 and September 30, 1999.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30
(IN THOUSANDS OF DOLLARS) 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Life $ 60,293 $ 55,410
Accident and Health 161,458 177,186
------------------------------------------------------------------------------------
TOTAL $221,751 $232,596
====================================================================================
</TABLE>
NOTE 6. ACCOUNTING PRONOUNCEMENTS
In the first quarter of 2000, VFL adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) 98-7, "Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk."
Adoption of the SOP did not have a material impact on the financial position or
results of operations of VFL.
<PAGE> 7
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 6. ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)
In the first quarter of 1999, VFL adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." SOP 97-3
requires that insurance companies recognize liabilities for insurance-related
assessments when an assessment is probable and will be imposed, when it can be
reasonably estimated, and when the event obligating an entity to pay an imposed
or probable assessment has occurred. Adoption of the SOP resulted in an after
tax charge of $234,000 ($360,000, pretax) as a cumulative effect of a change in
accounting principle for the nine months ended September 30, 1999.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101. "Revenue Recognition in Financial
Statements". This bulletin summarizes certain of the SEC Staff's view in
applying generally accepted accounting principles to revenue recognition in
financial statements. This bulletin, through its subsequent revised releases SAB
No. 101A and No. 101B, is effective for registrants no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. Adoption of
this bulletin, which occurred on October 1, 2000, will not have a significant
impact on the results of operations or equity of VFL.
The company is required to adopt Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133), effective January 1, 2001. FAS 133 requires than an
entity recognize all derivative instruments in the balance sheet and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge of the Company's (a) exposure to changes
in the fair value of a recognized asset or liability or of an unrecognized firm
commitment, (b) exposure to variable cash flows of a forecasted transaction, or
(c) foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on its intended use and the resulting
hedge designation, if any. The transaction adjustment resulting from adoption of
FAS 133 must be reported in net income or other comprehensive income, as
appropriate, as the effect of a change in accounting principle. VFL does not
expect adoption of FAS 133 to have a material impact on the results of
operations or equity.
Effective January 1, 2001, the Company is required to adopt statutory basis
accounting changes related to the National Association of Insurance
Commissioners codification of Statutory Accounting Practices. VFL does not
expect these statutory accounting changes to have a significant impact on the
Company's operations or statutory capital and surplus.
NOTE 7. OTHER EVENTS
The Federal Employee Health Benefit Plan (FEHBP) business formerly written
by Assurance and assumed by VFL as part of the Reinsurance Pooling Agreement was
transferred to another insurance entity owned by CNA on September 1, 2000. All
assets and liabilities of this business were transferred through a novation
agreement, and VFL was relieved of any ongoing direct or contingent liability
with respect to this business. The transfer of this business resulted in no gain
or loss to VFL in the transaction and did not have a material impact on results
of its operations or equity.
On October 6, 2000 CNAF, issued a press release announcing the sale of its
life reinsurance business to Munich American Reassurance Company, the U.S.
subsidiary of Munich RE. A portion of the life reinsurance business is conducted
through VFL as part of a Reinsurance Pooling Agreement. The transfer of this
business is not expected to have a material impact on results of operations or
equity of VFL.
<PAGE> 8
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 7. OTHER EVENTS -- (CONTINUED)
The following table summarizes the premiums, income (loss) before income
tax and total assets for FEHBP and life reinsurance business.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(IN THOUSANDS OF DOLLARS) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL EMPLOYEE HEALTH BENEFIT PLAN:
Premiums $37,527 $50,403 $137,917 $158,683
Income (loss) before income tax 518 858 1,529 (574)
LIFE REINSURANCE:
Premiums $ 6,662 $ 4,599 $ 17,234 $ 12,050
Income before income tax 667 578 2,266 2,002
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL ASSETS:
FEDERAL EMPLOYEE HEALTH BENEFIT PLAN* $ -- $35,283
LIFE REINSURANCE 28,458 27,669
=============================================================================================
</TABLE>
* FEHBP business transferred September 1, 2000.
<PAGE>
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Valley Forge Life Insurance Company
We have audited the accompanying balance sheets of Valley Forge Life
Insurance Company (a wholly-owned subsidiary of Continental Assurance Company,
which is a wholly-owned subsidiary of Continental Casualty Company, a wholly
owned subsidiary of CNA Financial Corporation, an affiliate of Loew's
Corporation) as of December 31, 1999 and 1998, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the financial
statement schedules listed in Item 14. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Valley Forge Life Insurance Company as of
December 31, 1999 and 1998, and the results of operations and its cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 12 to the financial statements, the Company changed
its method of accounting for liabilities for insurance-related assessments in
1999.
Deloitte & Touche LLP
Chicago, Illinois
February 23, 2000
<PAGE> 2
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
(In thousands of dollars)
----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale (amortized cost:
$548,444 and $454,635) $ 530,512 $ 460,516
Equity securities available-for-sale (cost: $0 and $981) 51 2,218
Policy loans 93,575 74,150
Other invested assets 433 485
Short-term investments 24,714 81,418
---------- ----------
TOTAL INVESTMENTS 649,285 618,787
Cash 3,529 3,750
Receivables:
Reinsurance 2,414,553 2,119,897
Premium and other 82,852 76,690
Less allowance for doubtful accounts (12) (26)
Deferred acquisition costs 127,297 111,963
Accrued investment income 11,066 7,721
Receivables for securities sold 2,426 --
Federal income tax recoverable 4,316 --
Other 4,883 902
Separate Account business 209,183 73,745
----------------------------------------------------------------------------------------
TOTAL ASSETS $3,509,378 $3,013,429
========================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Insurance reserves:
Future policy benefits $2,751,396 $2,438,305
Claims and claim expense 139,653 93,001
Policyholders' funds 43,466 42,746
Payables for securities purchased 2,421 370
Federal income taxes payable -- 6,468
Deferred income taxes 2,694 6,213
Due to affiliates 12,435 1,946
Commissions and other payables 95,976 86,815
Separate Account business 209,183 73,745
---------- ----------
TOTAL LIABILITIES 3,257,224 2,749,609
---------- ----------
Commitments and contingent liabilities
Stockholder's Equity:
Common stock ($50 par value; Authorized -- 200,000 shares;
Issued -- 50,000 shares) 2,500 2,500
Additional paid-in capital 69,150 69,150
Retained earnings 191,464 187,683
Accumulated other comprehensive income (loss) (10,960) 4,487
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 252,154 263,820
----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $3,509,378 $3,013,429
========================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 3
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
(In thousands of dollars)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums $310,719 $315,599 $332,172
Net investment income 39,148 35,539 29,913
Realized investment gains (losses) (19,081) 16,967 4,200
Other 4,545 7,959 6,872
-------- -------- --------
335,331 376,064 373,157
-------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits 291,547 301,900 307,207
Amortization of deferred acquisition costs 13,942 11,807 11,818
Other operating expenses 23,740 35,813 33,505
-------- -------- --------
329,229 349,520 352,530
-------- -------- --------
Income before income tax expense and cumulative effect of
change in accounting principle 6,102 26,544 20,627
Income tax expense 2,087 9,091 7,297
-------- -------- --------
Income before cumulative effect of change in accounting
principle 4,015 17,453 13,330
Cumulative effect of change in accounting principle, net
of tax -- Note 12 234 -- --
------------------------------------------------------------------------------------------------
NET INCOME $ 3,781 $ 17,453 $ 13,330
================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 4
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE COMPREHENSIVE TOTAL
COMMON PAID-IN INCOME RETAINED INCOME STOCKHOLDER'S
(IN THOUSANDS OF DOLLARS) STOCK CAPITAL (LOSS) EARNINGS (LOSS) EQUITY
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $2,500 $39,150 $156,900 $ 990 $199,540
Comprehensive income:
Net income -- -- $ 13,330 13,330 -- 13,330
Other comprehensive income -- -- 3,390 -- 3,390 3,390
--------
Total comprehensive income $ 16,720
------ ------- ======== -------- -------- --------
Balance, December 31, 1997 2,500 39,150 170,230 4,380 216,260
Capital Contribution from
Assurance -- 30,000 -- -- 30,000
Comprehensive income:
Net income -- -- $ 17,453 17,453 -- 17,453
Other comprehensive income -- -- 107 -- 107 107
--------
Total comprehensive income $ 17,560
------ ------- ======== -------- -------- --------
Balance, December 31, 1998 2,500 69,150 187,683 4,487 263,820
Comprehensive income (loss):
Net income -- -- $ 3,781 3,781 -- 3,781
Other comprehensive loss -- -- (15,447) -- (15,447) (15,447)
--------
Total comprehensive loss $(11,666)
------ ------- ======== -------- -------- --------
BALANCE, DECEMBER 31, 1999 $2,500 $69,150 $191,464 $(10,960) $252,154
================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 5
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998 1997
(In thousands of dollars)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,781 $ 17,453 $ 13,330
Adjustments to reconcile net income to net cash flows
from operating activities:
Deferred income tax provision 4,924 2,058 2,581
Realized investment losses (gains) 19,081 (16,967) (4,200)
Amortization of bond discount (2,999) (4,821) (2,438)
Changes in:
Receivables, net (300,832) (544,920) (269,787)
Deferred acquisition costs (13,866) (16,746) (20,765)
Accrued investment income (3,345) (2,476) (300)
Due to/from affiliates (10,489) 37,945 31,500
Federal income taxes payable and receivable (10,784) 493 2,151
Insurance reserves 380,939 541,560 221,252
Commissions and other payables and other 25,642 (18,804) 47,212
----------- --------- ---------
Total adjustments 88,271 (22,678) 7,206
----------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES 92,052 (5,225) 20,536
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities (1,512,848) (744,431) (464,361)
Proceeds from fixed maturities:
Sales 1,339,905 741,277 278,459
Maturities, calls and redemptions 58,263 33,635 45,442
Purchases of equity securities -- (5) (1,334)
Proceeds from sale of equity securities 2,647 5 2,447
Change in short-term investments 59,455 (73,233) 39,301
Change in policy loans (19,424) (7,179) (6,704)
Change in other invested assets 205 (82) (580)
Other, net -- -- --
----------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES (71,797) (50,013) (107,330)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for investment contracts credited to
policyholder accounts 15,901 30,007 111,478
Return of policyholder account balances on investment
contracts (36,377) (25,584) (24,878)
Capital contribution from Assurance -- 30,000 --
----------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES (20,476) 34,423 86,600
----------- --------- ---------
NET CASH FLOWS (221) (20,815) (194)
Cash at beginning of period 3,750 24,565 24,759
--------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 3,529 $ 3,750 $ 24,565
==================================================================================================
Supplemental disclosures of cash flow information:
Federal income taxes paid $ 8,260 $ 6,651 $ 2,488
==================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 6
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNAF). Loews Corporation owns approximately 86% of
the outstanding common stock of CNAF.
VFL markets and underwrites insurance products designed to satisfy the
life, health insurance and retirement needs of individuals and groups. Products
available in individual policy form include annuities as well as term and
universal life insurance. Products available in group policy form include life,
pension, accident and health insurance.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as
amended, VFL cedes all of its business, excluding its separate account business,
to its parent, Assurance. This ceded business is then pooled with the business
of Assurance, which excludes Assurance's participating contracts and separate
account business, and 10% of the combined pool is assumed by VFL.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). Certain amounts applicable to
prior years have been reclassified to conform to classifications followed in
1999.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INSURANCE
PREMIUM REVENUE- Revenues on universal life type contracts are comprised of
contract charges and fees which are recognized over the coverage period.
Accident and health insurance premiums are earned ratably over the terms of the
policies after provision for estimated adjustments on retrospectively rated
policies and deductions for ceded insurance. Other life insurance premiums are
recognized as revenue when due, after deductions for ceded insurance.
FUTURE POLICY BENEFIT RESERVES- Reserves for traditional life insurance
products (whole and term life products) are computed based upon the net level
premium method using actuarial assumptions as to interest rates, mortality,
morbidity, withdrawals and expenses. Actuarial assumptions include a margin for
adverse deviation and generally vary by plan, age at issue and policy duration.
Interest rates range from 3% to 9%, and mortality, morbidity and withdrawal
assumptions reflect VFL and industry experience prevailing at the time of issue.
Expense assumptions include the estimated effects of inflation and expenses to
be incurred beyond the premium paying period. Reserves for universal life-type
contracts are equal to the account balances that accrue to the benefit of the
policyholders. Interest crediting rates ranged from 4.45% to 7.25% for the three
years ended December 31, 1999.
CLAIM AND CLAIM EXPENSE RESERVES- Claim reserves include provisions for
reported claims in the course of settlement and estimates of unreported losses
based upon past experience and estimates of future expenses to be incurred in
settlement of claims.
REINSURANCE- In addition to the Reinsurance Pooling Agreement with
Assurance, VFL also assumes and cedes insurance with other insurers and
reinsurers and members of various reinsurance pools and associations. VFL
utilizes reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk and minimize exposures on larger risks. The reinsurance
coverages are tailored to the specific risk characteristics of each product line
with VFL's retained amount varying by type of coverage. VFL's reinsurance
includes
<PAGE> 7
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
coinsurance, yearly renewable term and facultative programs. Amounts recoverable
from reinsurers are estimated in a manner consistent with the claim liability
and future policy benefit reserves.
DEFERRED ACQUISITION COSTS- Cost of acquiring life insurance business are
capitalized and amortized based on assumptions consistent with those used for
computing future policy benefit reserves. Acquisition costs on traditional life
business are amortized over the assumed premium paying periods. Universal life
and annuity acquisition costs are amortized in proportion to the present value
of the estimated gross profits over the products' assumed durations. To the
extent that unrealized gains or losses on available-for-sale securities would
result in an adjustment of deferred policy acquisition costs had those gains or
losses actually been realized, the related unamortized deferred policy
acquisition costs are recorded as an adjustment to the unrealized gains or
losses included in stockholder's equity.
INVESTMENTS
VALUATION OF INVESTMENTS- VFL classifies its fixed maturities and its
equity securities as available-for-sale, and as such, they are carried at fair
value. The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and accretion
are included in net investment income.
Policy loans are carried at unpaid balances. Short-term investments, which
have an original maturity of one year or less, are carried at amortized cost
which approximates market value. VFL has no real estate or mortgage loans.
VFL records its derivative securities at fair value at the reporting date
and changes in fair value are reflected in realized investment gains and losses.
VFL's derivatives are made up of interest rate caps and purchased options and
are classified as other invested assets.
INVESTMENT GAINS AND LOSSES- All securities transactions are recorded on
the trade date. Realized investment gains and losses are determined on the basis
of the cost of the specific securities sold. Unrealized investment gains and
losses on fixed maturities and equity securities are reflected as part of
stockholder's equity, net of applicable deferred income taxes and deferred
acquisition costs. Investments are written down to estimated fair values and
losses are charged to income when a decline in value is considered to be other
than temporary.
SECURITIES LENDING ACTIVITIES- VFL lends securities to unrelated parties,
primarily major brokerage firms. Borrowers of these securities must deposit
collateral with VFL equal to 100% of the fair value of the securities if the
collateral is cash, or 102% if the collateral is securities. Cash deposits from
these transactions are invested in short term investments (primarily commercial
paper) and a liability is recognized for the obligation to return the
collateral. VFL continues to receive the interest on loaned debt securities as
beneficial owner, and accordingly, loaned debt securities are included in fixed
maturity securities. VFL had no securities on loan at December 31, 1999 or 1998.
SEPARATE ACCOUNT BUSINESS- VFL writes certain variable annuity contracts
and universal life policies. The supporting assets and liabilities of these
contracts and policies are legally segregated and reflected as assets and
liabilities of Separate Account business. Substantially all assets of the
Separate Account business are carried at fair value. Separate Account
liabilities are principally obligations due to contractholders and are carried
at contract values.
INCOME TAXES
VFL accounts for income taxes under the liability method. Under the
liability method deferred income taxes are recognized for temporary differences
between the financial statement and tax return bases of assets and liabilities.
Temporary differences primarily relate to insurance reserves, deferred
acquisition costs and net unrealized investment gains or losses.
<PAGE> 8
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. INVESTMENTS
The significant components of net investment income are presented in the
following table:
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
(In thousands of dollars)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities -- Taxable bonds $30,851 $27,150 $20,669
Equity securities 54 72 72
Policy loans 4,963 4,760 4,264
Short-term investments 2,969 3,803 4,885
Other 778 105 201
------- ------- -------
39,615 35,890 30,091
Investment expense 467 351 178
---------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $39,148 $35,539 $29,913
=============================================================================================
</TABLE>
Net realized investment gains (losses) and unrealized appreciation
(depreciation) in investments are set forth in the following table:
ANALYSIS OF INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
(In thousands of dollars)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities $(20,981) $16,907 $ 3,333
Equity securities 1,667 0 1,021
Other 233 60 (154)
-------- ------- -------
(19,081) 16,967 4,200
Income tax benefit (expense) 6,679 (5,938) (1,470)
-------- ------- -------
Net realized investment gains (losses) (12,402) 11,029 2,730
-------- ------- -------
Change in net unrealized investment gains (losses):
Fixed maturities (23,813) 441 5,806
Equity securities (1,186) (42) (607)
Adjustment to deferred policy acquisition costs related to
unrealized gains (losses) and other 1,235 (235) 20
-------- ------- -------
(23,764) 164 5,219
Deferred income tax (expense) benefit 8,317 (57) (1,829)
-------- ------- -------
Change in net unrealized investment gains (losses) (15,447) 107 3,390
----------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) $(27,849) $11,136 $ 6,120
==============================================================================================
</TABLE>
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
YEAR ENDED DECEMBER 31 FIXED EQUITY FIXED EQUITY FIXED EQUITY
(IN THOUSANDS OF DOLLARS) MATURITIES SECURITIES MATURITIES SECURITIES MATURITIES SECURITIES
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales $1,339,905 $ 2,647 $ 741,277 $ 5 $ 278,459 $ 2,447
========== ========== ========== ========== ========== ==========
Gross realized gains $ 4,399 $ 1,667 $ 17,604 $ -- $ 4,793 $ 1,113
Gross realized losses (25,380) -- (697) -- (1,460) (92)
---------------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS (LOSSES) ON
SALES $ (20,981) $ 1,667 $ 16,907 $ -- $ 3,333 $ 1,021
=====================================================================================================================
</TABLE>
<PAGE> 9
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. INVESTMENTS -- (CONTINUED)
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
(IN THOUSANDS OF DOLLARS) GAINS LOSSES NET GAINS LOSSES NET
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities $ 666 $(18,598) $(17,932) $6,926 $(1,045) $ 5,881
Equity securities 51 -- 51 1,237 -- 1,237
Adjustment to deferred policy
acquisition costs related to
unrealized gains (losses) and other 1,468 (448) 1,020 -- (215) (215)
------ -------- -------- ------ ------- -------
$2,185 $(19,046) (16,861) $8,163 $(1,260) 6,903
====== ======== ====== =======
Deferred income tax benefit (expense) 5,901 (2,416)
--------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS
(LOSSES) $(10,960) $ 4,487
========================================================================================================
</TABLE>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 1999 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS OF DOLLARS) COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries and obligations of
government agencies $253,041 $ -- $ 6,988 $246,053
Asset-backed securities 107,275 50 4,200 103,125
Corporate securities 164,140 98 6,914 157,324
Other debt securities 23,988 518 496 24,010
-------- ------ ------- --------
Total fixed maturities 548,444 666 18,598 530,512
Equity securities -- 51 -- 51
-------------------------------------------------------------------------------------------------------
TOTAL $548,444 $ 717 $18,598 $530,563
=======================================================================================================
DECEMBER 31, 1998
-------------------------------------------------------------------------------------------------------
U.S. Treasuries and obligations of
government agencies $223,743 $1,601 $ 563 $224,781
Asset-backed securities 109,207 1,163 180 110,190
Corporate securities 98,466 2,512 81 100,897
Other debt securities 23,219 1,650 221 24,648
-------- ------ ------- --------
Total fixed maturities 454,635 6,926 1,045 460,516
Equity securities 981 1,237 -- 2,218
-------------------------------------------------------------------------------------------------------
TOTAL $455,616 $8,163 $ 1,045 $462,734
=======================================================================================================
</TABLE>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES BY CONTRACTUAL MATURITY
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
DECEMBER 31, 1999 AMORTIZED FAIR
(IN THOUSANDS OF DOLLARS) COST VALUE
-------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 4,130 $ 4,115
Due after one year through five years 180,447 176,798
Due after five years through ten years 194,438 188,778
Due after ten years 62,154 57,697
Asset-backed securities not due at a single maturity date 107,275 103,124
-------------------------------------------------------------------------------------
TOTAL $548,444 $530,512
=====================================================================================
</TABLE>
<PAGE> 10
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. INVESTMENTS -- (CONTINUED)
Actual maturities may differ from contractual maturities because securities
may be called or prepaid with or without call or prepayment penalties.
There are no investments, other than equity securities, that have not
produced income for the years ended December 31, 1999 and 1998. Except for
investments in securities of the U.S. Government and its Agencies, there are no
investments in a single issuer that when aggregated exceed 10% of stockholder's
equity at December 31, 1999.
Securities with carrying values of $2.7 million and $2.8 million were
deposited by VFL under requirements of regulatory authorities as of December 31,
1999 and 1998, respectively.
NOTE 3. FINANCIAL INSTRUMENTS
In the normal course of business, VFL invests in various financial assets,
incurs various financial liabilities, and enters into agreements involving
derivative securities, including off-balance sheet financial instruments.
Fair values are required to be disclosed for all financial instruments,
whether or not recognized in the balance sheets, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values may be based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rates and estimates of future cash flows. Potential taxes
and other transaction costs have not been considered in estimating fair value.
The estimates presented herein are subjective in nature and are not necessarily
indicative of the amounts VFL could realize in a current market exchange.
All non-financial instruments such as deferred acquisition costs,
reinsurance receivables, deferred income taxes and insurance reserves are
excluded from fair value disclosure. Thus, the total fair value amounts cannot
be aggregated to determine the underlying economic value of VFL.
The carrying amounts reported in the balance sheet approximate fair value
for cash, short-term investments, accrued investment income, receivables for
securities sold, payables for securities purchased and certain other assets and
other liabilities because of their short-term nature. Accordingly, these
financial instruments are not listed in the table below. The carrying amounts
and estimated fair values of VFL's other financial instrument assets and
liabilities are listed below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
1999 1998
DECEMBER 31 CARRYING ESTIMATED CARRYING ESTIMATED
(IN THOUSANDS OF DOLLARS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Investments:
Fixed maturities $530,512 $530,512 $460,516 $460,516
Equity securities 51 51 2,218 2,218
Policy loans 93,575 87,156 74,150 72,148
Other 433 433 485 485
Separate Account business:
Fixed maturities 12,999 12,999 247 247
Equity securities (primarily mutual funds) 175,772 175,772 55,577 55,577
Other 119 119 340 340
FINANCIAL LIABILITIES
Premium deposits and annuity contracts 294,777 278,810 332,665 312,979
</TABLE>
<PAGE> 11
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. FINANCIAL INSTRUMENTS -- (CONTINUED)
The following methods and assumptions were used by VFL in estimating the
fair value amounts for financial instruments:
Fixed maturities and equity securities are based on quoted market
prices, where available. For securities not actively traded, fair values
are estimated using values obtained from independent pricing services,
costs to settle, or quoted market prices of comparable instruments.
The fair values for policy loans are estimated using discounted cash
flow analyses at interest rates currently offered for similar loans to
borrowers with comparable credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Valuation techniques to determine fair value of Separate Account
business assets consist of discounted cash flows and quoted market prices
of (a) the investments or (b) comparable instruments. The fair value of
Separate Account business liabilities approximates their carrying value.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
VFL invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk. Financial instruments used for
such purposes may include interest rate caps, put and call options, commitments
to purchase securities, futures and forwards. VFL also uses derivatives to
mitigate the risk associated with certain guaranteed annuity contracts by
purchasing certain options in a notional amount equal to the original customer
deposit. VFL generally does not hold or issue these instruments for trading
purposes.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time.
An interest rate cap consists of a guarantee given by the issuer to the
purchaser in exchange for the payment of a premium. This guarantee states that
if interest rates rise above a specified rate, the issuer will pay to the
purchaser the difference between the then current market rate and the specified
rate on the notional principal amount. The notional principal amount is not
actually borrowed or repaid.
Derivative financial instruments consist of interest rate caps in the
general account and purchased options in the Separate Accounts at December 31,
1999. The gross notional principal or contractual amounts of derivative
financial instruments in the general account at December 31, 1999 and 1998
totaled $50 million. The gross notional principal or contractual amounts of
derivative financial instruments in the Separate Accounts was $295 thousand at
December 31, 1999 and was $1.5 million at December 31, 1998 as the separate
accounts sold approximately $1.2 million of notional value in 1999. The contract
of notional amounts are used to calculate the exchange of contractual payments
under the agreements and are not representative of the potential for gain or
loss on these agreements.
The fair values associated with derivative financial instruments are
generally affected by interest rates, equity stock prices and foreign exchange
rates. The credit exposure associated with these instruments is generally
limited to the unrealized fair value of the instruments and will vary based on
the credit worthiness of the counterparties. The risk of default depends on the
creditworthiness of the counterparty to the instrument. Although VFL is exposed
to the aforementioned credit risk, it does not expect any counterparty to fail
to perform as contracted based on the creditworthiness of the counterparties.
Due to the nature of the derivative securities, VFL does not require collateral.
The fair value of derivatives generally reflects the estimated amounts that
VFL would receive or pay upon termination of the contracts at the reporting
date. Dealer quotes are available for substantially all of VFL's derivatives.
For securities not actively traded, fair values are estimated using values
obtained from independent
<PAGE> 12
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. FINANCIAL INSTRUMENTS -- (CONTINUED)
pricing services, costs to settle, or quoted market prices of comparable
instruments. The fair value of derivative financial assets (liabilities) in the
general account and Separate Accounts at December 31, 1999 totaled $0.4 million
and $0.1 million, respectively, and compares to $0.1 million and $0.5 million,
respectively, at December 31, 1998. Net realized gains (losses) on derivative
financial instruments at December 31, 1999 totaled $0.4 million in the general
account and ($0.1) million in the Separate Accounts. At December 31, 1998, net
realized losses on derivative financial instruments held in the general account
totaled $0.2 million and net realized gains on derivatives in the Separate
Accounts were $0.1 million.
NOTE 4. STATUTORY CAPITAL AND SURPLUS (UNAUDITED)
Statutory capital and surplus and net income for VFL are determined in
accordance with accounting practices prescribed or permitted by the Pennsylvania
Insurance Department. Prescribed statutory accounting practices are set forth in
a variety of publications of the National Association of Insurance Commissioners
as well as state laws, regulations, and general administrative rules. VFL has no
material permitted accounting practices. VFL had statutory net income of $8.3
million for the year ended December 31, 1999 and statutory net losses of $8.1
million, and $1.0 million for the years ended December 31, 1998, and 1997
respectively. The statutory net losses for 1998 and 1997 were primarily due to
the immediate expensing of acquisition costs which were substantial and related
sales of individual life and annuity products. Under GAAP, such costs are
capitalized and amortized to income over the duration of these contracts.
Statutory capital and surplus for VFL was $153.1 million, 147.1 million, and
$125.3 million at December 31, 1999, 1998, and 1997, respectively.
The payment of dividends by VFL to Assurance without prior approval of the
Pennsylvania Insurance Department is limited to formula amounts. As of December
31, 1999, dividends of approximately $15.7 million were not subject to prior
Insurance Department approval.
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes to stockholder's equity,
including net income, except those changes resulting from investments by, and
distributions to, the stockholder. Other comprehensive income (loss) is
comprehensive income exclusive of net income. The change in the components of
accumulated other comprehensive income (loss) are shown in the following tables.
<PAGE> 13
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
TAX
YEAR ENDED DECEMBER 31 PRE-TAX (EXPENSE) NET
(IN THOUSANDS OF DOLLARS) AMOUNT BENEFIT AMOUNT
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the
period $(19,684) $ 6,889 $(12,795)
Adjustment for (gains) losses included in net income (4,080) 1,428 (2,652)
-------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSSES) $(23,764) $ 8,317 $(15,447)
=================================================================================================
1998
Net unrealized gains on investment securities:
Net unrealized holding gains (losses) arising during the
period $ 3,756 $(1,314) $ 2,442
Adjustment for (gains) losses included in net income (3,592) 1,257 (2,335)
-------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME $ 164 $ (57) $ 107
=================================================================================================
1997
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the
period $ 6,447 $(2,256) $ 4,191
Adjustment for (gains) losses included in net income (1,228) 427 (801)
-------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME $ 5,219 $(1,829) $ 3,390
=================================================================================================
</TABLE>
NOTE 6. BENEFIT PLANS
VFL has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of
CNAF, all Casualty employees are covered by CNAF's Benefit Plans. The plans are
discussed below.
PENSION PLAN
CNAF has noncontributory pension plans covering all full-time employees age
21 or over that have completed at least one year of service. While the benefits
for the plans vary, they are generally based on years of credited service and
the employee's highest sixty consecutive months of compensation. Casualty is
included in the CNA Employees' Retirement Plan and VFL is allocated a share of
these expenses. The net pension cost allocated to VFL was $1.0 million, $1.1
million and $4.0 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
CNAF provides certain health and dental care benefits for eligible retirees
through age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired persons. CNAF funds benefit costs principally
on the basis of current benefit payments. Net postretirement benefit cost
allocated to VFL was $0.3 million, $0.5 million and $2.1 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
<PAGE> 14
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. BENEFIT PLANS -- (CONTINUED)
SAVINGS PLAN
Casualty is included in the CNA Employees' Savings Plan, which is a
contributory plan that allows employees to make regular contributions of up to
16% of their salary subject to limitations prescribed by the Internal Revenue
Service. VFL is allocated a share of CNA Employees' Savings Plan expenses. CNAF
contributes an amount equal to 70% of the first 6% of salary contributed by the
employee. CNAF contributions allocated to and expensed by VFL for the Savings
Plan were $0.2 million in each year 1999, 1998 and 1997.
NOTE 7. INCOME TAXES
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included along with Assurance,
its parent company, which is ultimately included in the consolidated Federal
income tax return of Loews. The Federal income tax provision of VFL generally is
computed on a stand-alone basis, as if VFL was filing its own separate tax
return.
VFL maintains a special tax memorandum account designated as the
"Shareholder's Surplus Account." Dividends from this account may be distributed
to the shareholder without resulting in any additional tax. The amount in the
Shareholder's Surplus Account was $151.6 million and $156.3 million at December
31, 1999 and 1998, respectively. Another tax memorandum account, defined as the
"Policyholders' Surplus Account," totaled $5.4 million at both December 31, 1999
and 1998. No further additions to this account are allowed. Amounts accumulated
in the Policyholders' Surplus Account are subject to income tax if distributed
to the stockholder. VFL has no plans for such a distribution and as a result,
has not provided for such a tax.
Significant components of VFL's net deferred tax liabilities as of December
31, 1999 and 1998 are shown in the table below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
(In thousands of dollars)
------------------------------------------------------------------------------------
<S> <C> <C>
Insurance reserves $ 20,715 $ 26,880
Deferred acquisition costs (45,457) (37,729)
Investment valuation 4,166 3,693
Net unrealized gains 5,901 (2,416)
Annuity deposits and other 9,349 1,009
Other, net 2,632 2,350
------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITIES $ (2,694) $ (6,213)
====================================================================================
</TABLE>
At December 31, 1999, gross deferred tax assets and liabilities amounted to
$44.3 million and $47.0 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1998, amounted to $35.5 million and $41.7 million,
respectively.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
(In thousands of dollars)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense (benefit) $(2,837) $7,033 $4,716
Deferred tax expense 4,924 2,058 2,581
-------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 2,087 $9,091 $7,297
===========================================================================================
</TABLE>
<PAGE> 15
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES -- (CONTINUED)
A reconciliation of the statutory federal income tax rate on income is as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
% OF % OF % OF
YEAR ENDED DECEMBER 31 PRETAX PRETAX PRETAX
(IN THOUSANDS OF DOLLARS) 1999 INCOME 1998 INCOME 1997 INCOME
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income taxes at statutory rates $2,136 35.0 $9,290 35.0 $7,219 35.0
Other (49) (0.8) (199) (0.8) 78 0.4
--------------------------------------------------------------------------------------------------------
INCOME TAX AT EFFECTIVE RATES $2,087 34.2 $9,091 34.2 $7,297 35.4
========================================================================================================
</TABLE>
NOTE 8. REINSURANCE
The ceding of insurance does not discharge primary liability of VFL. VFL
places reinsurance with other carriers only after careful review of the nature
of the contract and a thorough assessment of the reinsurers' credit quality and
claim settlement performance. For carriers that are not authorized reinsurers in
VFL's state of domicile, VFL receives collateral, primarily in the form of bank
letters of credit.
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health insurance
premiums is from short duration contracts. The effects of reinsurance on premium
revenues are shown in the following table:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
PREMIUMS
YEAR ENDED DECEMBER 31 -------------------------------------------- ASSUMED/NET
(IN THOUSANDS OF DOLLARS) DIRECT ASSUMED CEDED NET %
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Life $633,764 $109,964 $666,003 $ 77,725 141%
Accident and Health 6,539 232,994 6,539 232,994 100
-------- -------- -------- -------- ---
TOTAL PREMIUMS $640,303 $342,958 $672,542 $310,719 110%
======== ======== ======== ========
1998
Life $687,644 $ 78,156 $690,541 $ 75,259 104%
Accident and Health 4,158 240,340 4,158 240,340 100
-------- -------- -------- -------- ---
TOTAL PREMIUMS $691,802 $318,496 $694,699 $315,599 101%
======== ======== ======== ========
1997
Life $564,891 $ 81,502 $567,217 $ 79,176 103%
Accident and Health 2,776 252,996 2,776 252,996 100
-------- -------- -------- -------- ---
TOTAL PREMIUMS $567,667 $334,498 $569,993 $332,172 101%
=====================================================================================================
</TABLE>
Transactions with Assurance, as part of the Pooling Agreement described in
Note 1, are reflected in the above table. Premium revenues ceded to
non-affiliated companies were $395.2 million, $263.4 million and $116.2 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
Additionally, benefits and expenses for insurance claims and policyholder
benefits are net of reinsurance recoveries from non-affiliated companies of
$263.4 million, $203.4 million and $77.8 million for the years ended December
31, 1999, 1998 and 1997, respectively.
Reinsurance receivables reflected on the balance sheets are amounts
recoverable from reinsurers who have assumed a portion of the Company's
insurance reserves. These balances are principally due from Assurance pursuant
the Reinsurance Pooling Agreement.
<PAGE> 16
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. REINSURANCE -- (CONTINUED)
The impact of reinsurance, including transactions with Assurance, on life
insurance in force is shown in the following schedule:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE
------------------------------------------ ASSUMED/NET
(IN MILLIONS OF DOLLARS) DIRECT ASSUMED CEDED NET %
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1999 $267,102 $42,629 $281,883 $27,848 153.1%
December 31, 1998 $224,615 $32,253 $230,734 $26,134 123.4
December 31, 1997 $166,308 $25,557 $168,353 $23,512 108.7
</TABLE>
NOTE 9. RELATED PARTIES
As discussed in Note 1, VFL is party to a Reinsurance Pooling Agreement
with its parent, Assurance. In addition, VFL is party to the CNA Intercompany
Expense Agreement whereby expenses incurred by CNAF and each of its subsidiaries
are allocated to the appropriate companies. All acquisition and underwriting
expenses allocated to VFL are further subject to the Reinsurance Pooling
Agreement with Assurance, so that acquisition and underwriting expenses
recognized by VFL are ten percent of the acquisition and underwriting expenses
of the combined pool. Pursuant to the foregoing agreements, VFL recorded
amortization of deferred acquisition costs and other operating expenses totaling
$37.5 million, $47.6 million and $45.3 million for 1999, 1998 and 1997,
respectively. Expenses of VFL exclude $5.6 million, $9.2 million and $9.9
million of general and administrative expenses incurred by VFL and allocated to
CNAF for the years ended December 31, 1999, 1998 and 1997 respectively. At
December 31, 1999 VFL had a payable of $12.4 million to affiliated companies and
a $1.9 million payable at December 31, 1998.
There are no interest charges on intercompany receivables or payables. In
1998, Assurance made a $30.0 million capital contribution to VFL.
NOTE 10. LEGAL
VFL is party to litigation arising in the ordinary course of business. The
outcome of this litigation will not, in the opinion of management, materially
affect the results of operations or stockholder's equity of VFL.
NOTE 11. BUSINESS SEGMENTS
VFL operates in one reportable segment, the business of which is to market
and underwrite insurance products designed to satisfy the life, health and
retirement needs of individuals and groups. VFL products are distributed
primarily in the United States. Premium revenues earned outside the United
States are not material.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as
amended, VFL cedes all of its business, excluding its Separate Account business,
to Assurance which is then pooled with the business of Assurance, excluding
Assurance's participating contracts and separate account business, and 10% of
the combined pool is assumed by VFL.
<PAGE> 17
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. BUSINESS SEGMENTS -- (CONTINUED)
The following presents premiums by product group for each of the years in
the three years ended December 31, 1999:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
(In thousands of dollars)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life $ 77,725 $ 75,259 $ 79,176
Accident and Health 232,994 240,340 252,996
------------------------------------------------------------------------------------------------
TOTAL $310,719 $315,599 $332,172
================================================================================================
</TABLE>
Assurance provides health insurance benefits to postal and other federal
employees under the Federal Employees Health Benefit Plan (FEHBP). Premiums
under this contract totaled $2.1 billion, $2.0 billion and $2.1 billion for the
years ended December 31, 1999, 1998 and 1997, respectively, and the portion of
these premiums assumed by VFL under the Reinsurance Pooling Agreement totaled
$209 million, $202 million and $212 million for the years ended December 31,
1999, 1998 and 1997 respectively.
NOTE 12. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999, VFL adopted Statement of Position 97-3
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3). SOP 97-3 requires that insurance companies recognize
liabilities for insurance-related assessments when an assessment is probable and
will be imposed, when it can be reasonably estimated, and when the event
obligating the entity to pay or probable assessment has occurred on or before
the date of the financial statements. Adoption of SOP 97-3 resulted in an after
tax charge of $234 thousand ($360 thousand, pretax) as a cumulative effect of a
change in accounting principle. The pro forma effect of adoption on reported
results for prior periods is not significant.
APPENDIX A
ILLUSTRATIONS OF POLICY VALUES
The following tables have been prepared to illustrate hypothetically how certain
values under a policy change with investment performance over an extended period
of time. The tables illustrate how policy values, cash surrender values and
death benefits under a policy covering an insured (or joint insureds in the case
of Last to Die Policy) of a given age on the policy date, would vary over time
and the return on the assets in each portfolio with an assumed uniform gross
annual rate of 0%, 6% and 12%. The values would be different from those shown if
the returns averaged 0%, 6% or 12 % but fluctuated over and under those averages
throughout the years shown. The tables assume that only a single premium has
been paid. The tables also show the single premium accumulated at 5% interest
compounded annually. The hypothetical investment rates of return are
illustrative only and should not be considered a representation of past or
future investment rates of return. Actual rates of return for a particular
policy may be more or less than the hypothetical investment rates of return
illustrated and will depend on a number of factors including the investment
allocations you make and prevailing rates. These illustrations assume that the
premium is allocated equally among the 31 investment options available under the
policy, and that no amounts are allocated to the fixed account options.
The illustrations reflect the fact that the net investment returns on the assets
held in the investment options is lower than the gross after tax return of the
selected underlying portfolios. The tables assume a simple arithmetic average
annual expense ratio of 0.95% of the average daily net assets of the
portfolios available. The tables also assume that the waivers and/or
reimbursements, if any, for the available portfolios will continue for the
periods shown.
In addition, the illustrations reflect a daily charge assessed against the
investment options for assuming certain mortality and expense risks (expense
charges), which are equivalent to an effective annual charge of 0.90% during
policy years 1-10 and 0.45% during policy years 11 and later. After deduction of
portfolio expenses and the mortality and expense charges, the illustrated gross
annual investment rates of return 0%, 6% and 12% would correspond to approximate
net annual rates of -1.85%, 4.15%, and 10.15% , respectively during
policy years 1-10 and 1.40%, 4.60%, and 10.60% during policy years 11
and later.
The illustration also reflects the deduction of the monthly deduction for the
hypothetical insured. The surrender charge is reflected in the cash surrender
value column. Our current cost of insurance charges and the guaranteed maximum
cost of insurance charges that we have a contractual right to charge, are
reflected in separate illustrations on each of the following pages. All the
<PAGE>
illustrations reflect the fact that no charges for federal or state income taxes
are currently made against the Variable Account and assumes no loan amount or
partial withdrawals/ surrenders or charges for supplemental and/or rider
benefits.
The illustrations are based on our Preferred Nonsmoker risk class. Upon request,
you will be furnished with a comparable illustration based on the proposed
insured's individual circumstances. Such illustrations may assume different
hypothetical rates of return than those illustrated in the following tables.
<TABLE>
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE POLICY
Male Issue Age 45
Preferred Non-Smoker
3,073 Annual Planned Premium
250,000 Specified Amount
Level Death Benefit Option
Using GUARANTEED Cost of Insurance
Target Premium is $3072.50
Hypothetical 0% Hypothetical 6% Hypothetical 12%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,226 2,083 0 250,000 2,233 0 250,000 2,383 0 250,000
2 6,614 4,070 320 250,000 4,497 747 250,000 4,943 1,193 250,000
3 10,170 5,956 2,206 250,000 6,791 3,041 250,000 7,698 3,948 250,000
4 13,905 7,741 3,991 250,000 9,112 5,362 250,000 10,662 6,912 250,000
5 17,826 9,417 5,667 250,000 11,452 7,702 250,000 13,851 10,101 250,000
6 21,944 10,982 7,982 250,000 13,811 10,811 250,000 17,286 14,286 250,000
7 26,267 12,422 10,172 250,000 16,173 13,923 250,000 20,977 18,727 250,000
8 30,807 13,724 12,224 250,000 18,524 17,024 250,000 24,940 23,440 250,000
9 35,573 14,877 14,127 250,000 20,852 20,102 250,000 29,193 28,443 250,000
10 40,578 15,863 15,863 250,000 23,138 23,138 250,000 33,752 33,752 250,000
11 45,833 16,748 16,748 250,000 25,486 25,486 250,000 38,820 38,820 250,000
12 51,351 17,440 17,440 250,000 27,774 27,774 250,000 44,288 44,288 250,000
13 57,144 17,930 17,930 250,000 29,994 29,994 250,000 50,202 50,202 250,000
14 63,228 18,204 18,204 250,000 32,127 32,127 250,000 56,608 56,608 250,000
15 69,615 18,233 18,233 250,000 34,148 34,148 250,000 63,553 63,553 250,000
16 76,322 17,992 17,992 250,000 36,026 36,026 250,000 71,092 71,092 250,000
17 83,364 17,449 17,449 250,000 37,730 37,730 250,000 79,292 79,292 250,000
18 90,759 16,560 16,560 250,000 39,214 39,214 250,000 88,223 88,223 250,000
19 98,523 15,273 15,273 250,000 40,421 40,421 250,000 97,968 97,968 250,000
20 106,675 13,530 13,530 250,000 41,291 41,291 250,000 108,629 108,629 250,000
21 115,235 11,271 11,271 250,000 41,761 41,761 250,000 120,335 120,335 250,000
<PAGE>
22 124,223 8,444 8,444 250,000 41,769 41,769 250,000 133,256 133,256 250,000
23 133,660 4,982 4,982 250,000 41,240 41,240 250,000 147,591 147,591 250,000
24 143,569 813 813 250,000 40,093 40,093 250,000 163,588 163,588 250,000
25 * 153,974 0 0 0 38,216 38,216 250,000 181,550 181,550 250,000
26 164,898 0 0 0 35,457 35,457 250,000 201,844 201,844 250,000
27 176,369 0 0 0 31,482 31,482 250,000 224,903 224,903 252,131
28 188,414 0 0 0 26,293 26,293 250,000 250,731 250,731 276,101
29 201,061 0 0 0 19,432 19,432 250,000 279,271 279,271 301,978
30 214,340 0 0 0 10,505 10,505 250,000 310,872 310,872 329,964
--------------------------------------------------------------------------------------------- --------- ---------------------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been made.
(2) Assumes that the planned premium is paid in the beginning of each year.
Values would be different if premiums are paid with a different frequency
or in different amounts.
</TABLE>
The hypothetical investment rates shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment results. Actual rates of return may be more or less than those
shown and will depend on a number of factors including the investment
allocations by you, prevailing rates and rates of inflation. The death benefit
and cash values for a policy would be different from those shown if the actual
rates of return averaged 0%, 6% or 12% over a period of years but also
fluctuated above or below those averages for individual policy years. No
representation can be made by us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
<TABLE>
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE POLICY
Male Issue Age 45
Preferred Non-Smoker
3,073 Annual Planned Premium
250,000 Specified Amount
Level Death Benefit Option
Using CURRENT Cost of Insurance
Target Premium is $3072.50
Hypothetical 0% Hypothetical 6% Hypothetical 12%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,226 2,363 0 250,000 2,522 0 250,000 2,680 0 250,000
2 6,614 4,520 770 250,000 4,979 1,229 250,000 5,458 1,708 250,000
3 10,170 6,471 2,721 250,000 7,368 3,618 250,000 8,342 4,592 250,000
4 13,905 8,276 4,526 250,000 9,743 5,993 250,000 11,403 7,653 250,000
5 17,826 9,982 6,232 250,000 12,151 8,401 250,000 14,709 10,959 250,000
6 21,944 11,628 8,628 250,000 14,633 11,633 250,000 18,327 15,327 250,000
7 26,267 13,198 10,948 250,000 17,174 14,924 250,000 22,271 20,021 250,000
8 30,807 14,729 13,229 250,000 19,814 18,314 250,000 26,615 25,115 250,000
<PAGE>
9 35,573 16,227 15,477 250,000 22,563 21,813 250,000 31,406 30,656 250,000
10 40,578 17,668 17,668 250,000 25,403 25,403 250,000 36,669 36,669 250,000
11 45,833 19,103 19,103 250,000 28,431 28,431 250,000 42,613 42,613 250,000
12 51,351 20,393 20,393 250,000 31,484 31,484 250,000 49,094 49,094 250,000
13 57,144 21,545 21,545 250,000 34,570 34,570 250,000 56,185 56,185 250,000
14 63,228 22,580 22,580 250,000 37,714 37,714 250,000 63,979 63,979 250,000
15 69,615 23,537 23,537 250,000 40,957 40,957 250,000 72,595 72,595 250,000
16 76,322 24,195 24,195 250,000 44,097 44,097 250,000 81,954 81,954 250,000
17 83,364 24,774 24,774 250,000 47,338 47,338 250,000 92,331 92,331 250,000
18 90,759 25,236 25,236 250,000 50,653 50,653 250,000 103,825 103,825 250,000
19 98,523 25,657 25,657 250,000 54,117 54,117 250,000 116,627 116,627 250,000
20 106,675 26,054 26,054 250,000 57,756 57,756 250,000 130,905 130,905 250,000
21 115,235 26,447 26,447 250,000 61,597 61,597 250,000 146,842 146,842 250,000
22 124,223 26,619 26,619 250,000 65,465 65,465 250,000 164,537 164,537 250,000
23 133,660 26,548 26,548 250,000 69,349 69,349 250,000 184,223 184,223 250,000
24 143,569 26,210 26,210 250,000 73,238 73,238 250,000 206,178 206,178 250,000
25 153,974 25,576 25,576 250,000 77,122 77,122 250,000 230,647 230,647 265,373
26 164,898 24,617 24,617 250,000 80,988 80,988 250,000 257,642 257,642 293,879
27 176,369 23,303 23,303 250,000 84,827 84,827 250,000 287,449 287,449 322,173
28 188,414 21,605 21,605 250,000 88,632 88,632 250,000 320,382 320,382 352,724
29 201,061 19,482 19,482 250,000 92,390 92,390 250,000 356,796 356,796 385,729
30 214,340 16,882 16,882 250,000 96,084 96,084 250,000 397,091 397,091 421,405
------------------------ ------------------------------------------------------- -------------------------------------------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been made.
(2) Assumes that the planned premium is paid in the beginning of each year.
Values would be different if premiums are paid with a different
frequency or in different amounts.
</TABLE>
The hypothetical investment rates shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment results. Actual rates of return may be more or less than those
shown and will depend on a number of factors including the investment
allocations by you, prevailing rates and rates of inflation. The death benefit
and cash values for a policy would be different from those shown if the actual
rates of return averaged 0%, 6% or 12% over a period of years but also
fluctuated above or below those averages for individual policy years. No
representation can be made by us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
<TABLE>
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE POLICY
Male Issue Age 45
Preferred Non-Smoker
11,879 Annual Planned Premium
250,000 Specified Amount
Increasing Death Benefit Option
Using GUARANTEED Cost of Insurance
Target Premium is $3072.50
<PAGE>
Hypothetical Hypothetical 6% Hypothetical 12%
0%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12,473 10,373 6,623 260,459 11,025 7,275 261,057 11,677 7,927 261,653
2 25,569 20,489 16,739 270,596 22,434 18,684 272,433 24,456 20,706 274,337
3 39,320 30,347 26,597 280,475 34,236 30,486 284,203 38,444 34,694 288,219
4 53,759 39,947 36,197 290,096 46,445 42,695 296,377 53,756 50,006 303,416
5 68,919 49,283 45,533 299,454 59,065 55,315 308,962 70,516 66,766 320,049
6 84,838 58,356 55,356 308,549 72,109 69,109 321,970 88,862 85,862 338,258
7 101,553 67,153 64,903 317,368 85,576 83,326 335,401 108,937 106,687 358,182
8 119,103 75,662 74,162 325,901 99,466 97,966 349,255 130,896 129,396 379,977
9 137,531 83,873 83,123 334,137 113,780 113,030 363,533 154,912 154,162 403,814
10 156,880 91,770 91,770 342,059 128,513 128,513 378,231 181,168 181,168 429,875
11 177,197 99,795 99,795 350,075 144,321 144,321 393,947 210,828 210,828 459,236
12 198,529 107,507 107,507 357,812 160,645 160,645 410,226 243,404 243,404 491,557
13 220,928 114,897 114,897 365,229 177,496 177,496 427,032 279,190 279,190 527,064
14 244,448 121,953 121,953 372,313 194,879 194,879 444,370 318,508 318,508 566,073
15 269,143 128,648 128,648 379,038 212,789 212,789 462,235 361,697 361,697 608,924
16 295,073 134,958 134,958 385,380 231,217 231,217 480,620 409,134 409,134 655,991
17 322,299 140,856 140,856 391,312 250,156 250,156 499,515 461,234 461,234 707,684
18 350,886 146,301 146,301 396,795 269,580 269,580 518,898 518,441 518,441 764,446
19 380,903 151,247 151,247 401,782 289,458 289,458 538,737 581,238 581,238 826,756
20 412,421 155,645 155,645 406,225 309,753 309,753 558,997 650,158 650,158 895,141
21 445,515 159,452 159,452 410,081 330,432 330,432 579,643 725,792 725,792 970,190
22 480,264 162,634 162,634 413,314 351,470 351,470 600,651 808,809 808,809 1,052,563
23 516,749 165,150 165,150 415,886 372,833 372,833 621,986 899,936 899,936 1,142,982
24 555,060 166,964 166,964 417,758 394,488 394,488 643,616 999,981 999,981 1,242,250
25 595,285 168,021 168,021 418,878 416,385 416,385 665,492 1,109,824 1,109,824 1,351,238
26 637,522 168,237 168,237 419,164 438,435 438,435 687,529 1,230,399 1,230,399 1,470,877
27 681,871 167,357 167,357 418,375 460,372 460,372 709,476 1,362,565 1,362,565 1,602,032
28 728,437 165,554 165,554 416,648 482,355 482,355 731,455 1,507,714 1,507,714 1,746,048
29 777,332 162,520 162,520 413,715 504,056 504,056 753,180 1,666,887 1,666,887 1,903,998
30 828,671 158,109 158,109 409,419 525,296 525,296 774,460 1,841,403 1,841,403 2,077,176
------------------------ ---------------------------------------------------------------- ---------- --------------------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been made.
(2) Assumes that the planned premium is paid in the beginning of each year.
Values would be different if premiums are paid with a different
frequency or in different amounts.
</TABLE>
The hypothetical investment rates shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment results. Actual rates of return may be more or less than those
shown and will depend on a number of factors including the investment
allocations by you, prevailing rates and rates of inflation. The death benefit
and cash values for a policy would be different from those shown if the actual
rates of return averaged 0%, 6% or 12% over a period of years but also
fluctuated above or below those averages for individual policy years. No
representation can be made by us or the funds that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of years.
<PAGE>
<TABLE>
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE POLICY
Male Issue Age 45
Preferred Non-Smoker
11,879 Annual Planned Premium
250,000 Specified Amount
Increasing Death Benefit Option
Using CURRENT Cost of Insurance
Target Premium is $3072.50
Hypothetical Hypothetical 6% Hypothetical 12%
0%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12,473 10,656 6,906 260,718 11,316 7,566 261,324 11,977 8,227 261,927
2 25,569 20,945 17,195 271,037 22,921 19,171 272,904 24,977 21,227 274,838
3 39,320 30,867 27,117 280,989 34,819 31,069 284,777 39,095 35,345 288,858
4 53,759 40,485 36,735 290,633 47,081 43,331 297,008 54,502 50,752 304,154
5 68,919 49,850 46,100 300,019 59,767 56,017 309,658 71,378 67,628 320,901
6 84,838 59,006 56,006 309,192 72,936 69,936 322,786 89,910 86,910 339,290
7 101,553 67,937 65,687 318,142 86,588 84,338 336,397 110,246 107,996 359,468
8 119,103 76,686 75,186 326,905 100,781 99,281 350,544 132,606 131,106 381,652
9 137,531 85,260 84,510 335,493 115,543 114,793 365,258 157,199 156,449 406,051
10 156,880 93,636 93,636 343,887 130,871 130,871 380,538 184,223 184,223 432,864
11 177,197 102,243 102,243 352,474 147,413 147,413 396,976 214,851 214,851 463,175
12 198,529 110,584 110,584 360,838 164,563 164,563 414,075 248,557 248,557 496,612
13 220,928 118,670 118,670 368,944 182,355 182,355 431,811 285,672 285,672 533,429
14 244,448 126,523 126,523 376,817 200,838 200,838 450,236 326,576 326,576 574,003
15 269,143 134,189 134,189 384,498 220,087 220,087 469,420 371,714 371,714 618,771
16 295,073 141,424 141,424 391,769 239,883 239,883 489,170 421,271 421,271 667,943
17 322,299 148,475 148,475 398,835 260,501 260,501 509,717 475,970 475,970 722,194
18 350,886 155,300 155,300 405,679 281,930 281,930 531,077 536,306 536,306 782,038
19 380,903 161,986 161,986 412,377 304,297 304,297 553,365 602,965 602,965 848,145
20 412,421 168,555 168,555 418,956 327,663 327,663 576,646 676,632 676,632 921,202
21 445,515 175,031 175,031 425,439 352,098 352,098 600,989 758,072 758,072 1,001,963
22 480,264 181,171 181,171 431,606 377,398 377,398 626,216 847,848 847,848 1,091,012
23 516,749 186,953 186,953 437,419 403,578 403,578 652,321 946,812 946,812 1,189,175
24 555,060 192,356 192,356 442,853 430,649 430,649 679,317 1,055,906 1,055,906 1,297,386
25 595,285 197,354 197,354 447,884 458,621 458,621 707,212 1,176,169 1,176,169 1,416,674
26 637,522 201,922 201,922 452,488 487,505 487,505 736,018 1,308,748 1,308,748 1,548,179
27 681,871 206,037 206,037 456,640 517,311 517,311 765,746 1,454,913 1,454,913 1,693,160
28 728,437 209,679 209,679 460,321 548,056 548,056 796,411 1,616,074 1,616,074 1,853,012
29 777,332 212,818 212,818 463,502 579,745 579,745 828,019 1,793,776 1,793,776 2,029,272
30 828,671 215,417 215,417 466,146 612,378 612,378 860,572 1,989,724 1,989,724 2,223,628
<PAGE>
------------------------ -------- ----------------------------------------------------------------------------------------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been made.
(2) Assumes that the planned premium is paid in the beginning of each year.
Values would be different if premiums are paid with a different
frequency or in different amounts.
</TABLE>
The hypothetical investment rates shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment results. Actual rates of return may be more or less than those
shown and will depend on a number of factors including the investment
allocations by you, prevailing rates and rates of inflation. The death benefit
and cash values for a policy would be different from those shown if the actual
rates of return averaged 0%, 6% or 12% over a period of years but also
fluctuated above or below those averages for individual policy years. No
representation can be made by us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
<TABLE>
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE POLICY
Female Issue Age 45
Preferred Non-Smoker
2,460 Annual Planned Premium
250,000 Specified Amount
Level Death Benefit Option
Using GUARANTEED Cost of Insurance
Target Premium is $2460.00
Hypothetical Hypothetical 6% Hypothetical 12%
0%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,583 1,585 0 250,000 1,702 0 250,000 1,820 0 250,000
2 5,295 3,097 0 250,000 3,429 0 250,000 3,776 26 250,000
3 8,143 4,533 783 250,000 5,178 1,428 250,000 5,880 2,130 250,000
4 11,133 5,889 2,139 250,000 6,945 3,195 250,000 8,141 4,391 250,000
5 14,273 7,165 3,415 250,000 8,730 4,980 250,000 10,576 6,826 250,000
6 17,569 8,353 5,353 250,000 10,524 7,524 250,000 13,193 10,193 250,000
7 21,031 9,450 7,200 250,000 12,324 10,074 250,000 16,009 13,759 250,000
8 24,665 10,449 8,949 250,000 14,122 12,622 250,000 19,037 17,537 250,000
9 28,482 11,337 10,587 250,000 15,905 15,155 250,000 22,286 21,536 250,000
10 32,489 12,114 12,114 250,000 17,671 17,671 250,000 25,780 25,780 250,000
11 36,696 12,838 12,838 250,000 19,504 19,504 250,000 29,680 29,680 250,000
12 41,114 13,447 13,447 250,000 21,326 21,326 250,000 33,912 33,912 250,000
13 45,753 13,944 13,944 250,000 23,135 23,135 250,000 38,517 38,517 250,000
14 50,623 14,334 14,334 250,000 24,940 24,940 250,000 43,547 43,547 250,000
15 55,737 14,611 14,611 250,000 26,732 26,732 250,000 49,048 49,048 250,000
16 61,107 14,759 14,759 250,000 28,497 28,497 250,000 55,064 55,064 250,000
<PAGE>
17 66,746 14,753 14,753 250,000 30,210 30,210 250,000 61,639 61,639 250,000
18 72,666 14,555 14,555 250,000 31,834 31,834 250,000 68,814 68,814 250,000
19 78,882 14,115 14,115 250,000 33,319 33,319 250,000 76,632 76,632 250,000
20 85,409 13,389 13,389 250,000 34,617 34,617 250,000 85,152 85,152 250,000
21 92,263 12,351 12,351 250,000 35,698 35,698 250,000 94,462 94,462 250,000
22 99,459 10,974 10,974 250,000 36,531 36,531 250,000 104,668 104,668 250,000
23 107,015 9,248 9,248 250,000 37,096 37,096 250,000 115,907 115,907 250,000
24 114,949 7,166 7,166 250,000 37,377 37,377 250,000 128,341 128,341 250,000
25 123,279 4,693 4,693 250,000 37,333 37,333 250,000 142,145 142,145 250,000
26 132,026 1,760 1,760 250,000 36,888 36,888 250,000 157,515 157,515 250,000
27 * 141,210 0 0 0 35,935 35,935 250,000 174,681 174,681 250,000
28 150,854 0 0 0 34,318 34,318 250,000 193,922 193,922 250,000
29 160,980 0 0 0 31,843 31,843 250,000 215,603 215,603 250,000
30 171,612 0 0 0 28,294 28,294 250,000 240,176 240,176 254,897
------------------------ -----------------------------------------------------------------------------------------------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been made.
(2) Assumes that the planned premium is paid in the beginning of each year.
Values would be different if premiums are paid with a different
frequency or in different amounts.
</TABLE>
The hypothetical investment rates shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment results. Actual rates of return may be more or less than those
shown and will depend on a number of factors including the investment
allocations by you, prevailing rates and rates of inflation. The death benefit
and cash values for a policy would be different from those shown if the actual
rates of return averaged 0%, 6% or 12% over a period of years but also
fluctuated above or below those averages for individual policy years. No
representation can be made by us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
<TABLE>
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE POLICY
Female Issue Age 45
Preferred Non-Smoker
2,460 Annual Planned Premium
250,000 Specified Amount
Increasing Death Benefit Option
Using CURRENT Cost of Insurance
Target Premium is $2460.00
Hypothetical 0% Hypothetical 6% Hypothetical 12%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,583 1,807 0 250,000 1,931 0 250,000 2,055 0 250,000
2 5,295 3,478 0 250,000 3,835 85 250,000 4,209 459 250,000
3 8,143 5,039 1,289 250,000 5,738 1,988 250,000 6,497 2,747 250,000
<PAGE>
4 11,133 6,531 2,781 250,000 7,677 3,927 250,000 8,974 5,224 250,000
5 14,273 7,931 4,181 250,000 9,632 5,882 250,000 11,637 7,887 250,000
6 17,569 9,316 6,316 250,000 11,680 8,680 250,000 14,583 11,583 250,000
7 21,031 10,672 8,422 250,000 13,812 11,562 250,000 17,828 15,578 250,000
8 24,665 12,000 10,500 250,000 16,030 14,530 250,000 21,403 19,903 250,000
9 28,482 13,254 12,504 250,000 18,292 17,542 250,000 25,296 24,546 250,000
10 32,489 14,448 14,448 250,000 20,615 20,615 250,000 29,554 29,554 250,000
11 36,696 15,656 15,656 250,000 23,107 23,107 250,000 34,375 34,375 250,000
12 41,114 16,772 16,772 250,000 25,644 25,644 250,000 39,648 39,648 250,000
13 45,753 17,823 17,823 250,000 28,255 28,255 250,000 45,452 45,452 250,000
14 50,623 18,861 18,861 250,000 30,994 30,994 250,000 51,894 51,894 250,000
15 55,737 19,878 19,878 250,000 33,862 33,862 250,000 59,039 59,039 250,000
16 61,107 20,719 20,719 250,000 36,714 36,714 250,000 66,829 66,829 250,000
17 66,746 21,540 21,540 250,000 39,700 39,700 250,000 75,477 75,477 250,000
18 72,666 22,349 22,349 250,000 42,836 42,836 250,000 85,086 85,086 250,000
19 78,882 23,147 23,147 250,000 46,129 46,129 250,000 95,763 95,763 250,000
20 85,409 23,929 23,929 250,000 49,583 49,583 250,000 107,625 107,625 250,000
21 92,263 24,701 24,701 250,000 53,212 53,212 250,000 120,808 120,808 250,000
22 99,459 25,364 25,364 250,000 56,936 56,936 250,000 135,404 135,404 250,000
23 107,015 25,909 25,909 250,000 60,756 60,756 250,000 151,579 151,579 250,000
24 114,949 26,327 26,327 250,000 64,670 64,670 250,000 169,525 169,525 250,000
25 123,279 26,606 26,606 250,000 68,677 68,677 250,000 189,459 189,459 250,000
26 132,026 26,731 26,731 250,000 72,773 72,773 250,000 211,630 211,630 250,000
27 141,210 26,679 26,679 250,000 76,951 76,951 250,000 236,278 236,278 264,797
28 150,854 26,424 26,424 250,000 81,200 81,200 250,000 263,534 263,534 290,114
29 160,980 25,932 25,932 250,000 85,505 85,505 250,000 293,666 293,666 317,457
30 171,612 25,164 25,164 250,000 89,851 89,851 250,000 326,989 326,989 346,990
------------------------ ---------------------------------------------- ------------------------------------------------ ---------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been made.
(2) Assumes that the planned premium is paid in the beginning of each year.
Values would be different if premiums are paid with a different
frequency or in different amounts.
</TABLE>
The hypothetical investment rates shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment results. Actual rates of return may be more or less than those
shown and will depend on a number of factors including the investment
allocations by you, prevailing rates and rates of inflation. The death benefit
and cash values for a policy would be different from those shown if the actual
rates of return averaged 0%, 6% or 12% over a period of years but also
fluctuated above or below those averages for individual policy years. No
representation can be made by us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
<TABLE>
<PAGE>
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE POLICY
Female Issue Age 45
Preferred Non-Smoker
9,423 Annual Planned Premium
250,000 Specified Amount
Increasing Death Benefit Option
Using GUARANTEED Cost of Insurance
Target Premium is $2460.00
Hypothetical 0% Hypothetical 6% Hypothetical 12%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,894 8,141 4,391 258,215 8,655 4,905 258,688 9,169 5,419 259,158
2 20,282 16,082 12,332 266,173 17,613 13,863 267,621 19,207 15,457 269,121
3 31,190 23,823 20,073 273,931 26,884 23,134 276,865 30,196 26,446 280,027
4 42,644 31,362 27,612 281,486 36,474 32,724 286,428 42,227 38,477 291,967
5 54,670 38,700 34,950 288,841 46,394 42,644 296,319 55,401 51,651 305,041
6 67,297 45,832 42,832 295,990 56,647 53,647 306,544 69,822 66,822 319,355
7 80,556 52,755 50,505 302,931 67,241 64,991 317,110 85,612 83,362 335,025
8 94,477 59,465 57,965 309,658 78,182 76,682 328,021 102,898 101,398 352,180
9 109,095 65,949 65,199 316,161 89,467 88,717 339,276 121,812 121,062 370,953
10 124,444 72,211 72,211 322,441 101,107 101,107 350,887 142,518 142,518 391,503
11 140,560 78,604 78,604 328,823 113,628 113,628 363,332 165,939 165,939 414,686
12 157,482 84,793 84,793 335,030 126,604 126,604 376,270 191,711 191,711 440,252
13 175,250 90,782 90,782 341,035 140,056 140,056 389,681 220,081 220,081 468,395
14 193,906 96,578 96,578 346,847 154,011 154,011 403,594 251,328 251,328 499,392
15 213,495 102,177 102,177 352,462 168,485 168,485 418,024 285,749 285,749 533,535
16 234,064 107,560 107,560 357,864 183,481 183,481 432,975 323,656 323,656 571,139
17 255,661 112,707 112,707 363,030 198,996 198,996 448,446 365,393 365,393 612,542
18 278,337 117,578 117,578 367,924 215,012 215,012 464,419 411,318 411,318 658,101
19 302,148 122,124 122,124 372,497 231,496 231,496 480,864 461,817 461,817 708,202
20 327,149 126,303 126,303 376,706 248,422 248,422 497,752 517,324 517,324 763,272
21 353,401 130,093 130,093 380,528 265,783 265,783 515,076 578,340 578,340 823,807
22 380,965 133,476 133,476 383,945 283,574 283,574 532,830 645,421 645,421 890,359
23 409,907 136,451 136,451 386,953 301,808 301,808 551,027 719,202 719,202 963,556
24 440,296 139,021 139,021 389,557 320,504 320,504 569,683 800,387 800,387 1,044,095
25 472,205 141,165 141,165 391,737 339,655 339,655 588,796 889,733 889,733 1,132,729
26 505,709 142,830 142,830 393,441 359,221 359,221 608,326 988,037 988,037 1,230,251
27 540,888 143,933 143,933 394,591 379,129 379,129 628,205 1,096,152 1,096,152 1,337,511
28 577,826 144,351 144,351 395,065 399,261 399,261 648,318 1,214,980 1,214,980 1,455,405
29 616,611 143,945 143,945 394,728 419,474 419,474 668,524 1,345,499 1,345,499 1,584,904
30 657,336 142,580 142,580 393,442 439,622 439,622 688,677 1,488,791 1,488,791 1,727,082
------------------------ -----------------------------------------------------------------------------------------------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been made.
(2) Assumes that the planned premium is paid in the beginning of each year.
Values would be different if premiums are paid with a different
frequency or in different amounts.
</TABLE>
<PAGE>
The hypothetical investment rates shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment results. Actual rates of return may be more or less than those
shown and will depend on a number of factors including the investment
allocations by you, prevailing rates and rates of inflation. The death benefit
and cash values for a policy would be different from those shown if the actual
rates of return averaged 0%, 6% or 12% over a period of years but also
fluctuated above or below those averages for individual policy years. No
representation can be made by us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
<TABLE>
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE POLICY
Female Issue Age 45
Preferred Non-Smoker
9,423 Annual Planned Premium
250,000 Specified Amount
Level Death Benefit Option
Using CURRENT Cost of Insurance
Target Premium is $2460.00
Hypothetical Hypothetical 6% Hypothetical 12%
0%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,894 8,364 4,614 258,420 8,885 5,135 258,899 9,406 5,656 259,375
2 20,282 16,466 12,716 266,544 18,023 14,273 268,015 19,643 15,893 269,540
3 31,190 24,334 20,584 274,431 27,449 23,699 277,417 30,819 27,069 280,634
4 42,644 32,010 28,260 282,123 37,214 33,464 287,153 43,069 39,319 292,790
5 54,670 39,475 35,725 289,606 47,307 43,557 297,218 56,475 52,725 306,095
6 67,297 46,808 43,808 296,949 57,820 54,820 307,695 71,234 68,234 320,737
7 80,556 53,998 51,748 304,152 68,757 66,507 318,596 87,469 85,219 336,843
8 94,477 61,048 59,548 311,213 80,134 78,634 329,936 105,326 103,826 354,559
9 109,095 67,911 67,161 318,091 91,919 91,169 341,687 124,919 124,169 374,001
10 124,444 74,604 74,604 324,798 104,144 104,144 353,874 146,434 146,434 395,349
11 140,560 81,500 81,500 331,678 117,357 117,357 367,003 170,839 170,839 419,500
12 157,482 88,214 88,214 338,407 131,086 131,086 380,688 197,728 197,728 446,172
13 175,250 94,777 94,777 344,982 145,385 145,385 394,938 227,393 227,393 475,595
14 193,906 101,243 101,243 351,457 160,334 160,334 409,832 260,184 260,184 508,113
15 213,495 107,608 107,608 357,830 175,955 175,955 425,396 296,422 296,422 544,051
16 234,064 113,703 113,703 363,948 192,105 192,105 441,501 336,292 336,292 583,604
17 255,661 119,699 119,699 369,952 208,979 208,979 458,313 380,354 380,354 627,300
18 278,337 125,607 125,607 375,867 226,622 226,622 475,890 429,060 429,060 675,601
19 302,148 131,426 131,426 381,694 245,066 245,066 494,267 482,901 482,901 728,994
20 327,149 137,155 137,155 387,430 264,345 264,345 513,475 542,412 542,412 788,010
21 353,401 142,800 142,800 393,082 284,503 284,503 533,558 608,199 608,199 853,250
22 380,965 148,253 148,253 398,550 305,467 305,467 554,453 680,807 680,807 925,263
23 409,907 153,504 153,504 403,818 327,261 327,261 576,177 760,945 760,945 1,004,744
24 440,296 158,544 158,544 408,876 349,911 349,911 598,754 849,394 849,394 1,092,469
25 472,205 163,362 163,362 413,712 373,443 373,443 622,211 947,017 947,017 1,189,292
<PAGE>
26 505,709 167,942 167,942 418,312 397,876 397,876 646,567 1,054,762 1,054,762 1,296,154
27 540,888 172,262 172,262 422,653 423,226 423,226 671,839 1,173,671 1,173,671 1,414,089
28 577,826 176,293 176,293 426,708 449,502 449,502 698,036 1,304,890 1,304,890 1,544,234
29 616,611 180,003 180,003 430,445 476,709 476,709 725,164 1,449,680 1,449,680 1,687,841
30 657,336 183,352 183,352 433,824 504,845 504,845 753,221 1,609,428 1,609,428 1,846,284
------------------------- --------------------------------------------------------------- --------------------------------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been made.
(2) Assumes that the planned premium is paid in the beginning of each year.
Values would be different if premiums are paid with a different
frequency or in different amounts.
</TABLE>
The hypothetical investment rates shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment results. Actual rates of return may be more or less than those
shown and will depend on a number of factors including the investment
allocations by you, prevailing rates and rates of inflation. The death benefit
and cash values for a policy would be different from those shown if the actual
rates of return averaged 0%, 6% or 12% over a period of years but also
fluctuated above or below those averages for individual policy years. No
representation can be made by us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of
years.
<TABLE>
Illustration of Policy Values
Valley Forge Life Insurance Company
Male Issue Age 55/Female Issue Age 55
Preferred Plus/Preferred Non-Smoker
9,210 Annual Planned Premium
1,000,000 Specified Amount
Level Death Benefit Option
Using GUARANTEED Cost of Insurance
Hypothetical 0% Hypothetical 6% Hypothetical 12%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,671 8,632 0 1,000,000 9,156 0 1,000,000 9,680 0 1,000,000
2 19,825 16,997 0 1,000,000 18,577 0 1,000,000 20,219 0 1,000,000
3 30,486 25,076 0 1,000,000 28,249 292 1,000,000 31,678 3,722 1,000,000
4 41,681 32,852 4,895 1,000,000 38,159 10,202 1,000,000 44,127 16,170 1,000,000
5 53,436 40,299 12,342 1,000,000 48,287 20,330 1,000,000 57,635 29,678 1,000,000
6 65,778 47,386 19,429 1,000,000 58,605 30,648 1,000,000 72,273 44,317 1,000,000
7 78,737 54,075 31,709 1,000,000 69,077 46,712 1,000,000 88,115 65,749 1,000,000
8 92,345 60,309 40,739 1,000,000 79,649 60,079 1,000,000 105,224 85,654 1,000,000
9 106,632 66,016 49,242 1,000,000 90,246 73,472 1,000,000 123,657 106,883 1,000,000
10 121,635 71,106 57,127 1,000,000 100,775 86,797 1,000,000 143,466 129,487 1,000,000
11 137,387 75,831 64,648 1,000,000 111,646 100,463 1,000,000 165,460 154,278 1,000,000
12 153,927 79,749 71,362 1,000,000 122,304 113,917 1,000,000 189,138 180,751 1,000,000
13 171,293 82,747 77,155 1,000,000 132,631 127,040 1,000,000 214,606 209,015 1,000,000
14 189,529 84,702 81,907 1,000,000 142,500 139,705 1,000,000 241,995 239,199 1,000,000
15 208,675 85,463 85,463 1,000,000 151,750 151,750 1,000,000 271,442 271,442 1,000,000
16 228,780 84,813 84,813 1,000,000 160,157 160,157 1,000,000 303,076 303,076 1,000,000
17 249,889 82,384 82,384 1,000,000 167,351 167,351 1,000,000 336,959 336,959 1,000,000
18 272,054 77,940 77,940 1,000,000 173,075 173,075 1,000,000 373,324 373,324 1,000,000
19 295,327 70,895 70,895 1,000,000 176,746 176,746 1,000,000 412,246 412,246 1,000,000
20 319,764 60,645 60,645 1,000,000 177,748 177,748 1,000,000 453,914 453,914 1,000,000
21 345,423 46,525 46,525 1,000,000 175,393 175,393 1,000,000 498,644 498,644 1,000,000
22 372,365 27,773 27,773 1,000,000 168,884 168,884 1,000,000 546,905 546,905 1,000,000
23 400,653 3,527 3,527 1,000,000 157,301 157,301 1,000,000 599,383 599,383 1,000,000
24 * 430,357 0 0 0 139,546 139,546 1,000,000 657,031 657,031 1,000,000
25 461,545 0 0 0 114,179 114,179 1,000,000 721,115 721,115 1,000,000
26 494,293 0 0 0 79,208 79,208 1,000,000 793,328 793,328 1,000,000
27 528,678 0 0 0 31,895 31,895 1,000,000 876,015 876,015 1,000,000
28 * 564,782 0 0 0 0 0 0 972,401 972,401 1,012,810
29 602,692 0 0 0 0 0 0 1,080,463 1,080,463 1,125,416
30 642,497 0 0 0 0 0 0 1,198,690 1,198,690 1,248,628
------------------------- -------------------------------------------- ---------- ----------------------------------------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been
made.
(2) Assumes that the planned premium is paid in the beginning of each
year. Values would be different if premiums are paid with a different
frequency or in different amounts.
The hypothetical investment rates shown above and elsewhere in this prospectus
are illustrative only and should not be deemed a representation of past or
future investment results. Actual rates of return may be more or less than those
shown and will depend on a number of factors including the investment
allocations by you, prevailing rates and rates of inflation. The death benefit
and cash values for a policy would be different from those shown if the actual
rates of return averaged 0%, 6% or 12% over a period of years but also
fluctuated above or below those averages for individual policy years. No
representation can be made by us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
</TABLE>
<TABLE>
Illustration of Policy Values
Valley Forge Life Insurance Company
Male Issue Age 55/Female Issue Age 55
Preferred Plus/Preferred Non-Smoker
9,210 Annual Planned Premium
1,000,000 Specified Amount
Level Death Benefit Option
Using CURRENT Cost of Insurance
Hypothetical 0% Hypothetical 6% Hypothetical 12%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,671 8,665 0 1,000,000 9,190 0 1,000,000 9,715 0 1,000,000
2 19,825 17,124 0 1,000,000 18,710 0 1,000,000 20,359 0 1,000,000
3 30,486 25,356 0 1,000,000 28,547 590 1,000,000 31,995 4,039 1,000,000
4 41,681 33,345 5,388 1,000,000 38,694 10,737 1,000,000 44,707 16,750 1,000,000
5 53,436 41,060 13,103 1,000,000 49,128 21,171 1,000,000 58,563 30,606 1,000,000
6 65,778 48,485 20,528 1,000,000 59,841 31,884 1,000,000 73,662 45,705 1,000,000
7 78,737 55,586 33,221 1,000,000 70,805 48,439 1,000,000 90,090 67,725 1,000,000
8 92,345 62,345 42,775 1,000,000 82,007 62,437 1,000,000 107,961 88,391 1,000,000
9 106,632 68,765 51,991 1,000,000 93,458 76,684 1,000,000 127,426 110,652 1,000,000
10 121,635 74,802 60,823 1,000,000 105,120 91,142 1,000,000 148,603 134,625 1,000,000
11 137,387 80,758 69,575 1,000,000 117,469 106,286 1,000,000 172,390 161,208 1,000,000
12 153,927 86,293 77,906 1,000,000 130,063 121,676 1,000,000 198,407 190,020 1,000,000
13 171,293 91,425 85,833 1,000,000 142,932 137,341 1,000,000 226,923 221,332 1,000,000
14 189,529 96,080 93,285 1,000,000 156,021 153,225 1,000,000 258,159 255,363 1,000,000
15 208,675 100,465 100,465 1,000,000 169,541 169,541 1,000,000 292,610 292,610 1,000,000
16 228,780 104,044 104,044 1,000,000 183,008 183,008 1,000,000 330,205 330,205 1,000,000
17 249,889 107,094 107,094 1,000,000 196,690 196,690 1,000,000 371,561 371,561 1,000,000
18 272,054 110,144 110,144 1,000,000 211,093 211,093 1,000,000 417,519 417,519 1,000,000
19 295,327 112,833 112,833 1,000,000 225,925 225,925 1,000,000 468,347 468,347 1,000,000
20 319,764 115,551 115,551 1,000,000 241,562 241,562 1,000,000 524,859 524,859 1,000,000
21 345,423 118,755 118,755 1,000,000 258,447 258,447 1,000,000 587,923 587,923 1,000,000
22 372,365 121,320 121,320 1,000,000 275,660 275,660 1,000,000 657,678 657,678 1,000,000
23 400,653 123,143 123,143 1,000,000 293,150 293,150 1,000,000 734,930 734,930 1,000,000
24 430,357 124,103 124,103 1,000,000 310,855 310,855 1,000,000 820,620 820,620 1,000,000
25 461,545 124,066 124,066 1,000,000 328,707 328,707 1,000,000 915,859 915,859 1,000,000
26 494,293 122,878 122,878 1,000,000 346,633 346,633 1,000,000 1,021,750 1,021,750 1,063,947
27 528,678 120,367 120,367 1,000,000 364,553 364,553 1,000,000 1,138,737 1,138,737 1,185,773
28 564,782 116,344 116,344 1,000,000 382,388 382,388 1,000,000 1,267,898 1,267,898 1,320,277
29 602,692 110,590 110,590 1,000,000 400,052 400,052 1,000,000 1,410,470 1,410,470 1,468,751
30 642,497 102,839 102,839 1,000,000 417,440 417,440 1,000,000 1,567,812 1,567,812 1,632,608
--------------------------------------------------------------- ------------------------------------------------------------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been made.
(2) Assumes that the planned premium is paid in the beginning of each year. Values would be different if premiums are paid
with a different frequency or in different amounts.
The hypothetical investment rates shown above and elsewhere in this prospectus are illustrative only and should not be deemed a
representation of past or future investment results. Actual rates of return may be more or less than those shown and will depend on
a number of factors including the investment allocations by you, prevailing rates and rates of inflation. The death benefit and cash
values for a policy would be different from those shown if the actual rates of return averaged 0%, 6% or 12% over a period of years
but also fluctuated above or below those averages for individual policy years. No representation can be made by us or the funds
that these hypothetical rates of return can be achieved for any one year or sustained over any period of years.
</TABLE>
<TABLE>
Illustration of Policy Values
Valley Forge Life Insurance Company
Male Issue Age 55/Female Issue Age 55
Preferred Plus/Preferred Non-Smoker
48,749 Annual Planned Premium
1,000,000 Specified Amount
Level Death Benefit Option
Using GUARANTEED Cost of Insurance
Hypothetical 0% Hypothetical 6% Hypothetical 12%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 51,187 45,890 17,933 1,045,965 48,671 20,715 1,048,512 51,453 23,496 1,051,048
2 104,933 90,825 62,868 1,090,979 99,227 71,270 1,098,908 107,959 80,002 1,107,114
3 161,366 134,796 106,840 1,135,030 151,717 123,760 1,151,234 170,001 142,044 1,168,674
4 220,621 177,795 149,838 1,178,109 206,193 178,236 1,205,541 238,104 210,147 1,236,250
5 282,839 219,805 191,848 1,220,200 262,702 234,745 1,261,878 312,843 284,886 1,310,411
6 348,167 260,802 232,846 1,261,282 321,284 293,328 1,320,284 394,840 366,883 1,391,777
7 416,762 300,755 278,390 1,301,321 381,972 359,607 1,380,793 484,770 462,405 1,481,016
8 488,787 339,612 320,042 1,340,268 444,779 425,210 1,443,421 583,357 563,787 1,578,849
9 564,413 377,301 360,527 1,378,054 509,698 492,924 1,508,160 691,371 674,597 1,686,043
10 643,821 413,733 399,754 1,414,589 576,700 562,721 1,574,985 809,643 795,664 1,803,422
11 727,198 450,853 439,670 1,451,654 648,683 637,501 1,646,541 943,344 932,161 1,935,765
12 814,745 486,634 478,247 1,487,546 723,115 714,728 1,720,765 1,090,280 1,081,893 2,081,546
13 906,669 520,954 515,362 1,521,987 799,963 794,372 1,797,407 1,251,699 1,246,108 2,241,702
14 1,003,189 553,686 550,890 1,554,851 879,185 876,390 1,876,428 1,428,973 1,426,178 2,417,594
15 1,104,535 584,671 584,671 1,585,981 960,705 960,705 1,957,752 1,623,585 1,623,585 2,610,693
16 1,210,949 613,688 613,688 1,615,160 1,044,372 1,044,372 2,041,237 1,837,105 1,837,105 2,822,564
17 1,322,683 640,358 640,358 1,642,025 1,129,870 1,129,870 2,126,578 2,071,099 2,071,099 3,054,772
18 1,440,004 664,460 664,460 1,666,339 1,217,020 1,217,020 2,213,588 2,327,464 2,327,464 3,309,186
19 1,563,191 685,421 685,421 1,687,560 1,305,272 1,305,272 2,301,746 2,607,920 2,607,920 3,587,541
20 1,692,537 702,689 702,689 1,705,134 1,394,064 1,394,064 2,390,492 2,914,385 2,914,385 3,891,737
21 1,828,350 715,708 715,708 1,718,505 1,482,796 1,482,796 2,479,230 3,248,970 3,248,970 4,223,869
22 1,970,955 723,910 723,910 1,727,106 1,570,824 1,570,824 2,567,317 3,613,993 3,613,993 4,586,237
23 2,120,689 726,739 726,739 1,730,380 1,657,475 1,657,475 2,654,086 4,012,023 4,012,023 4,981,388
24 2,277,910 723,647 723,647 1,727,778 1,742,048 1,742,048 2,738,836 4,445,905 4,445,905 5,412,143
25 2,442,992 713,971 713,971 1,718,648 1,823,688 1,823,688 2,820,724 4,918,664 4,918,664 5,881,511
26 2,616,329 696,843 696,843 1,702,137 1,901,273 1,901,273 2,898,655 5,433,423 5,433,423 6,392,605
27 2,798,332 671,179 671,179 1,677,179 1,973,405 1,973,405 2,971,250 5,993,407 5,993,407 6,948,644
28 2,989,435 635,640 635,640 1,642,458 2,038,341 2,038,341 3,036,798 6,601,912 6,601,912 7,552,916
29 3,190,093 588,684 588,684 1,596,448 2,094,032 2,094,032 3,093,276 7,262,367 7,262,367 8,208,839
30 3,400,785 528,897 528,897 1,537,723 2,138,449 2,138,449 3,138,652 7,978,695 7,978,695 8,920,292
------------------------- ----------------------------------------------------------------------------------------------------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been made.
(2) Assumes that the planned premium is paid in the beginning of each year. Values would be different if premiums are paid
with a different frequency or in different amounts.
The hypothetical investment rates shown above and elsewhere in this prospectus are illustrative only and should not be deemed a
representation of past or future investment results. Actual rates of return may be more or less than those shown and will depend on
a number of factors including the investment allocations by you, prevailing rates and rates of inflation. The death benefit and cash
values for a policy would be different from those shown if the actual rates of return averaged 0%, 6% or 12% over a period of years
but also fluctuated above or below those averages for individual policy years. No representation can be made by us or the funds
that these hypothetical rates of return can be achieved for any one year or sustained over any period of years.
</TABLE>
<TABLE>
Illustration of Policy Values
Valley Forge Life Insurance Company
Male Issue Age 55/Female Issue Age 55
Preferred Plus/Preferred Non-Smoker
48,749 Annual Planned Premium
1,000,000 Specified Amount
Level Death Benefit Option
Using CURRENT Cost of Insurance
Hypothetical 0% Hypothetical 6% Hypothetical 12%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
End of Accumulated Cash Cash Cash s
Policy At 5% Cash Surrender Death Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 51,187 45,923 17,967 1,045,996 48,706 20,749 1,048,544 51,488 23,531 1,051,080
2 104,933 90,954 62,997 1,091,100 99,362 71,405 1,099,035 108,101 80,144 1,107,247
3 161,366 135,082 107,125 1,135,302 152,021 124,065 1,151,524 170,325 142,368 1,168,983
4 220,621 178,301 150,344 1,178,597 206,744 178,787 1,206,071 238,702 210,745 1,236,824
5 282,839 220,590 192,633 1,220,963 263,573 235,616 1,262,722 313,808 285,851 1,311,344
6 348,167 261,943 233,986 1,262,393 322,573 294,616 1,321,537 396,295 368,339 1,393,189
7 416,762 302,331 279,966 1,302,861 383,785 361,419 1,382,561 486,858 464,492 1,483,048
8 488,787 341,745 322,175 1,342,355 447,270 427,701 1,445,854 586,276 566,706 1,581,696
9 564,413 380,196 363,422 1,380,886 513,119 496,345 1,511,502 695,436 678,662 1,690,008
10 643,821 417,644 403,666 1,418,417 581,365 567,386 1,579,544 815,254 801,276 1,808,899
11 727,198 456,091 444,908 1,456,782 654,987 643,804 1,652,706 951,015 939,832 1,943,256
12 814,745 493,619 485,232 1,494,387 731,586 723,199 1,729,052 1,100,695 1,092,308 2,091,722
13 906,669 530,251 524,660 1,531,093 811,307 805,716 1,808,507 1,265,772 1,260,180 2,255,456
14 1,003,189 565,910 563,114 1,566,832 894,201 891,405 1,891,131 1,447,775 1,444,979 2,435,983
15 1,104,535 600,827 600,827 1,601,811 980,638 980,638 1,977,266 1,648,723 1,648,723 2,635,279
16 1,210,949 634,409 634,409 1,635,503 1,070,158 1,070,158 2,066,524 1,869,975 1,869,975 2,854,760
17 1,322,683 666,970 666,970 1,668,149 1,163,207 1,163,207 2,159,274 2,113,988 2,113,988 3,096,787
18 1,440,004 699,108 699,108 1,700,322 1,260,549 1,260,549 2,256,250 2,383,782 2,383,782 3,364,333
19 1,563,191 730,425 730,425 1,731,707 1,361,963 1,361,963 2,357,318 2,681,648 2,681,648 3,659,751
20 1,692,537 761,363 761,363 1,762,676 1,468,081 1,468,081 2,463,035 3,011,008 3,011,008 3,986,364
21 1,828,350 792,449 792,449 1,793,750 1,579,654 1,579,654 2,574,145 3,375,734 3,375,734 4,348,006
22 1,970,955 822,409 822,409 1,823,803 1,695,623 1,695,623 2,689,740 3,778,216 3,778,216 4,747,194
23 2,120,689 851,131 851,131 1,852,627 1,816,057 1,816,057 2,809,794 4,222,303 4,222,303 5,187,652
24 2,277,910 878,485 878,485 1,880,095 1,941,012 1,941,012 2,934,364 4,712,234 4,712,234 5,673,585
25 2,442,992 904,326 904,326 1,906,062 2,070,525 2,070,525 3,063,489 5,252,680 5,252,680 6,209,625
26 2,616,329 928,496 928,496 1,930,370 2,204,620 2,204,620 3,197,195 5,848,785 5,848,785 6,800,875
27 2,798,332 950,820 950,820 1,952,846 2,343,306 2,343,306 3,335,490 6,506,221 6,506,221 7,452,962
28 2,989,435 971,111 971,111 1,973,306 2,486,576 2,486,576 3,478,371 7,231,248 7,231,248 8,172,094
29 3,190,093 989,169 989,169 1,991,548 2,634,406 2,634,406 3,625,813 8,030,769 8,030,769 8,965,117
30 3,400,785 1,004,752 1,004,752 2,007,337 2,786,728 2,786,728 3,777,753 8,912,376 8,912,376 9,839,565
------------------------ ---------------------------------------------------------------------------------------------------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no surrenders have been made.
(2) Assumes that the planned premium is paid in the beginning of each year. Values would be different if premiums are paid
with a different frequency or in different amounts.
The hypothetical investment rates shown above and elsewhere in this prospectus are illustrative only and should not be deemed a
representation of past or future investment results. Actual rates of return may be more or less than those shown and will depend on
a number of factors including the investment allocations by you, prevailing rates and rates of inflation. The death benefit and cash
values for a policy would be different from those shown if the actual rates of return averaged 0%, 6% or 12% over a period of years
but also fluctuated above or below those averages for individual policy years. No representation can be made by us or the funds
that these hypothetical rates of return can be achieved for any one year or sustained over any period of years.
</TABLE>
APPENDIX B
Example of Additional Insurance Rider (AIR)
(AVAILABLE ONLY ON THE FLEXIBLE PREMIUM VARIABLE AND FIXED LIFE
POLICY, AND NOT ON THE LAST TO DIE POLICY)
Definitions
Excess Calculation under Death Benefit Option 1
Cash Value * Applicable Percentage less Specified Amount
Excess Calculation under Death Benefit Option 2
Cash Value * Applicable Percentage less Specified Amount plus Cash Value.
General
For purposes of administrative processing, excess is subtracted first from the
AIR rider specified amount and then from the base policy specified amount, to
the extent necessary.
Examples
(A) Example without Excess
Insured's Age = 57
<PAGE>
Death Benefit = Option 2
Base Policy Specified Amount = $100,000
Additional Insured Specified Amount = $50,000
Cash Value = $75,000
Cash Value * Applicable Percentage (1.42) = $106,500
Additional Insurance Death Benefit will be the Additional Insured Specified
Amount less the excess, if any, of (1) over (3), where:
(1) . . . . . . . . . . $106,500 - cash value * applicable percentage
(3) . . . . . . . . . . $175,000 - base policy specified amount + cash value
(1) less (3) . . . . . -$68,000 (No Excess)
Therefore, the Additional Insurance Death Benefit = $50,000
(B) Example with Excess - Death Benefit Option 1
Insured's Age = 58
Death Benefit = Option: 1
Base Policy Specified Amount = $100,000
Additional Insurance Specified Amount = $25,000
Cash Value = $75,000
Cash Value * Applicable Percentage (1.38) = $103,500
Additional Insurance Death Benefit will be the Additional Insured Specified
Amount less the excess, if any, of (1) over (2) where:
(1) . . . . . . . . . . . $103,500 - cash value * applicable percentage
(2) . . . . . . . . . . . $100,000 - base policy specified amount
(1) less (2) . . . . . . $3,500 (Amount of Excess)
Therefore, the Additional Insurance Death Benefit = $25,000 - $3,500 = $21,500.
(C) Example with Excess - Death Benefit Option 2
Insured's Age = 70
Death Benefit Option: 2
Base Policy Specified Amount = $100,000
Additional Insurance Specified Amount = $75,000
Cash Value = $1,000,000
Cash Value * Applicable Percentage (1.15) = $1,150,000
Additional Insurance Death Benefit will be the Additional Insured Specified
Amount less the excess, if any, of (1) over (3), where:
(1) . . . . . . . . . $1,150,000 - cash value * applicable percentage
(3) . . . . . . . . . $1,100,000 - base policy specified amount + cash value
(1) less (3) . . . . $50,000 (Amount of Excess)
Therefore, the Additional Insurance Death Benefit = $75,000 - $50,000 = $25,000.
<PAGE>
APPENDIX C
RATES OF RETURN
From time to time, we may report different types of historical performance for
the investment options available under the policy. We may report the average
annual total returns of the funds over various time periods. Such returns will
reflect the operating expenses (including management fees) of the funds, but not
deductions at the Variable Account or policy level for the expense charge and
other policy expenses, which if included, would reduce performance.
At the request of a purchaser, Valley Forge Life Insurance Company will
accompany the returns of the funds with at least one of the following: (i)
returns, for the same periods as shown for the funds, which include deductions
under the Variable Account for the expense charge in addition to the deductions
of fund expenses, but does not include other charges under the policy; or (ii)
an illustration of cash values and cash surrender values as of the performance
reporting date for a hypothetical insured of given age, gender, risk
classification, premium level and initial specified amount. The illustration
will be based either on actual historic fund performance or on a hypothetical
investment return between 0% and 12% as requested by the purchaser. The cash
surrender value figures will assume all fund charges, the expense charge, and
all other policy charges are deducted. The cash value figures will assume all
charges except the surrender charge are deducted.
We may also distribute sales literature comparing the percentage change in the
net asset values of the funds or in the accumulation unit values for any of the
investment options to established market indices, such as the Standard & Poor's
500 Composite Stock Price Index and the Dow Jones Industrial Average. We may
also make comparisons to the percentage change in values of other mutual funds
with investment objectives similar to those of the investment options being
compared.
The chart below shows the Effective Annual Rates of Return of the funds based on
the actual investment performance (after the deduction of investment management
fees and direct operating expenses of the funds). These rates do not reflect the
expense charge assessed. The rates do not reflect deductions from premiums or
Monthly Deductions assessed against the cash value of the policy, nor do they
reflect the policy's surrender charges. Therefore, these rates are illustrative
of how actual investment performance will affect the benefits under the policy.
These rates of return shown are not indicative of future performance. These
rates of return may be considered, however, in assessing the competence and
performance of the investment advisers.
Returns for the periods ended 12/31/99:
<TABLE>
10
Portfolio Years/Since
Investment Option Inception Date 1 Year 5 Years Inception
<PAGE>
<S> <C> <C> <C> <C> <C> <C>
Federated Insurance Series
Federated High Income Bond
Fund II . . . . . . . . . . . . . . . . . . . . . . . . 03/01/1994 2.31 10.48 8.22
Federated Prime Money Fund II . . . . . . . . . . . . . 11/21/1994 4.63 4.89 4.88
Federated Utility Fund II . . . . . . . . . . . . . . . 2/10/1994 1.69 15.25 12.15
The Alger American Fund
Alger American Growth Portfolio . . . . . . . . . . . . 1/ 9 /1989 33.74 30.94 23.05
Alger American Mid-Cap Growth Portfolio . . . . . . . . 5/ 3 /1993 31.85 26.14 24.72
Alger American Small Capitalization
Portfolio . . . . . . . . . . . . . . . . . . . . 9/21/1988 43.42 22.64 20.86
Alger American Leveraged AllCap Portfolio . . . . . . 01/25/1995 78.06 NA 46.44
Variable Insurance Products Fund (VIP), Initial Class &
Variable Insurance Products Fund II
(VIP II), Initial Class
Fidelity VIP II Asset Manager Portfolio . . . . . . . . 9/6/1989 11.09 15.63 13.14
Fidelity VIP II Contrafund(R)Portfolio . . . . . . . . . 1/3/1995 24.25 NA 27.73
Fidelity VIP Equity-Income Portfolio . . . . . . . . . . 10/9/1986 6.33 18.61 14.49
Fidelity VIP II Index 500 Portfolio . . . . . . . . . . 8/27/1992 20.52 28.16 21.07
MFS Variable Insurance Trust
MFS Emerging Growth Series . . . . . . . . . . . . . . 7/24/1995 76.71 NA 36.44
MFS Growth With Income Series . . . . . . . . . . . . . 10/9/1995 6.69 NA 21.12
MFS Research Series . . . . . . . . . . . . . . . . . . 7/26/1995 24.05 NA 22.86
MFS Total Return Series . . . . . . . . . . . . . . . . 1/3/1995 3.08 NA 15.42
Janus Aspen Series, Service Shares
Janus Aspen Series Capital Appreciation
Portfolio . . . . . . . . . . . . . . . . . . . . 5/1/1997 66.75 NA 56.93
Janus Aspen Series Balanced Portfolio . . . . . . . . . 9/13/1993 26.51 24.43 20.37
Janus Aspen Series Growth Portfolio . . . . . . . . . . 9/13/1993 43.73 29.64 24.03
Janus Aspen Series Flexible Income
Portfolio . . . . . . . . . . . . . . . . . . . . 9/13/1993 1.35 10.63 8.25
Janus Aspen Series International Growth
Portfolio . . . . . . . . . . . . . . . . . . . . 5/2/1994 82.02 33.00 27.94
Janus Aspen Series Worldwide Growth
Portfolio . . . . . . . . . . . . . . . . . . . . 9/13/1993 64.20 33.35 29.46
Alliance Variable Products Series Fund,
Class B Shares
Alliance Premier Growth Portfolio . . . . . . . . . . . 06/26/1992 32.32 36.03 26.31
Alliance Growth and Income Portfolio . . . . . . . . . 01/14/1991 11.37 23.91 15.48
American Century Variable Portfolios, Inc.
American Century VP Income & Growth
Fund . . . . . . . . . . . . . . . . . . . . . . . 10/30/1997 18.02 NA 16.96
American Century VP Value Fund . . . . . . . . . . . . . 05/01/1996 -0.85 NA 11.10
<PAGE>
Franklin Templeton Variable Insurance
Products Trust, Class 2 Shares
Templeton Developing Markets Securities
Fund . . . . . . . . . . . . . . . . . . . . . . . 03/04/1996 53.27 NA -5.45
Templeton Asset Strategy Fund . . . . . . . . . . . . . 05/01/1997 22.54 16.92 13.01
Lazard Retirement Series
Lazard Retirement Equity Portfolio . . . . . . . . . . 3/18/1998 8.16 NA 10.68
Lazard Retirement Small Cap Portfolio . . . . . . . . 11/04/1997 5.13 NA 0.13
The Universal Institutional Funds, Inc.
Morgan Stanley International Magnum
Portfolio . . . . . . . . . . . . . . . . . . . . 01/02/1997 25.19 NA 13.57
Morgan Stanley Emerging Markets Equity
Portfolio . . . . . . . . . . . . . . . . . . . . 10/1/1996 95.68 NA 12.31
</TABLE>
PART II
UNDERTAKING TO FILE REPORTS
a. Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority confined in that section.
b. Pursuant to Investment Company Act Section 26(e), Valley Forge Life Insurance
Company ("Company") hereby represents that the fees and charges deducted under
the Policy described in the Prospectus, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by the Company.
INDEMNIFICATION
Insofar as indemnification for liability arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
<PAGE>
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The registrant has no officers, directors or employees. The depositor and the
registrant do not indemnify the officers, directors or employees of the
depositor. CNA Financial Corporation, ("CNAFC") a parent of the depositor,
indemnifies the depositor's officers, directors and employees in their capacity
as such.
CNAFC indemnifies any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of CNAFC) by reason of the fact that he is or was a director,
officer, employee or agent of CNAFC, or was serving at the request of CNAFC as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of CNAFC, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
CNAFC indemnifies any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of CNAFC to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of CNAFC, or was serving at the
request of CNAFC as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of CNAFC. No indemnification is made, however, in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to CNAFC
unless and only to the extent that a court determines that, despite the
adjudication of liability but in view of all of the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the court deems proper.
To the extent that any person referred to above is successful on the merits or
otherwise in defense of any action, suit or proceeding referred to above, or in
defense of any claim, issue or matter, therein, CNAFC will indemnify such person
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection therewith. CNAFC may advance to such a person, expenses
incurred in defending a civil or criminal action, suit or proceeding as
authorized by CNAFC's board of directors upon receipt of an undertaking by (or
on behalf of) such person to repay the amount advanced unless it is ultimately
determined that he is entitled to be indemnified.
<PAGE>
Indemnification and advancement of expenses described above (unless pursuant to
a court order) is only made as authorized in the specific case upon a
determination that such indemnification or advancement of expenses is proper in
the circumstances because he has met the applicable standard of conduct. Such
determination must be made by a majority vote of a quorum of CNAFC's board of
directors who are not parties to the action, suit or proceeding or by
independent legal counsel in a written opinion or by CNAFC's stockholders.
CONTENTS OF REGISTRATION STATEMENT
The Registration Statement comprises the papers and documents:
The facing sheet.
The Prospectus consisting of 70 pages.
Undertakings to file reports.
The signatures.
The following exhibits.
1.A. Copies of all exhibits required by paragraph A of instructions for Exhibits
in Form N-8B-2.
1. Resolution of the Board of Directors of Valley Forge Life Insurance
Company (the "Company") establishing Valley Forge Life Insurance
Company Variable Life Separate Account (the "Variable Account")**
2. Copy of Agreement for Lockbox Services*
3.(a) Not Applicable
(b) Form of underwriting/distribution agreement between the Company
and CNA Investor Services, Inc.##
(c) Broker-Dealer sales Agreement##
(d) Wholesale Sales Agreement##
(e) Wholesale Broker-Dealer Schedule of Compensation Standard and Plus
Options##
(f) Wholesale Broker-Dealer Schedule of Compensation##
(g) Retail Broker-Dealer Schedule of Compensation##
4. Not applicable
5. (a) Flexible Premium Variable and Fixed Life Insurance Policy$
(b) Flexible Premium Variable and Fixed Last to Die Life
Insurance Policy$
(c) Form of Accelerated Benefit Rider$
(d) Form of Accidental Death Benefit Rider$
(e) Form of Additional Insurance Rider$
(f) Form of Term Insurance on Children Rider$
(g) Form of Other Insured Term Insurance Rider$
(h) Form of Total Disability Waiver of Premium Rider$
(i) Form of Waiver of Monthly Deduction Rider$
(j) Form of Four Year Term Rider$
<PAGE>
(k) Form of Split Policy Option Rider$
(l) Form of Automatic Transfer Rider#
(m) Form of Dollar Cost Averaging Rider I#
(n) Form of Dollar Cost Averaging Rider II#
6. (a) Amended and restated Articles of Incorporation of the Company**
(b) By-laws of the Company**
7. Not applicable
8. (a) Form of participation agreement between The Alger American
Fund and the Company*
(b) Form of participation agreement between Variable Insurance
Products Fund and the Company*
(c) Form of participation agreement between Variable Insurance
Products Fund II and the Company*
(d) Form of participation agreement between MFS Variable
Insurance Trust and the Company*
(e) Form of participation agreement between Insurance
Management Series and the Company*
(f) Form of participation agreement between Janus Aspen Series
and the Company.****
(g) Form of participation agreement among the Company, CNA
Investor Services, Inc., Lazard Asset Management and Lazard
Retirement Series, Inc.****
(h) Form of participation agreement among Templeton Variable
Products Series Fund, Franklin Templeton Distributors, Inc.
and the Company.****
(i) Form of participation agreement among the Company, CNA
Investor Services, Inc., Alliance Capital Management L.P.
and Alliance Fund Distributors, Inc.****
(j) Form of participation agreement between the Company and
American Century Investment Management, Inc.****
(k) Form of participation agreement between the Company and
Morgan Stanley Dean Witter Universal Funds, Inc.****
9. Not applicable
10. Form of Policy Application##
11. Description of issuance, transfer and redemption procedures***
B. Not applicable
C. Not applicable
2. Opinion and Consent of Counsel
3. Not applicable
4. Not applicable
5. Not Applicable
6. Consent of Actuary
<PAGE>
7. Consent of Independent Auditors
* Incorporated by reference to the Form N-4 Registration Statement filed
electronically with the Securities and Exchange Commission on September 4,
1996 (File No.333-1087).
** Incorporated by reference to the N-4 Registration Statement filed
electronically with the Securities and Exchange Commission on February 20,
1996 (File No. 333-1087)
*** Incorporated by reference to the registrant's Pre-Effective Amendment No.1
filing electronically on Form S-6 on September 4, 1996 (File No.
333-01949).
****Incorporated by reference to the registrant's Post-Effective Amendment No.7
on Form S-6 on April 25, 2000 (File No. 333-01949).
$ Incorporated by reference to the registrant's initial Registration
Statement filed electronically with the Securiites and Exchnage Commission on
October 31, 2000 (File No. 333-48988).
# Incorporated by reference to the initial registration on Form S-6 Registration
Statement filed electronically with the Securities and Exchange Commission on
October 2, 2000 (File No. 333-47106).
## Incorporated by reference to Pre-effective amendment no 1 to Form S-6
Registration Statement filed electronically with the Securities and Exchange
Commission (File No. 333-47106).
SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized in the City of Chicago, State of Illinois, on this day of 28
December, 2000.
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
(Registrant)
By: /s/DONALD P. LOFE, JR.
-----------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
<PAGE>
Attest:/s/WILLIAM K. BORLAND By:/s/DONALD P. LOFE, JR.
------------------------------ ------------------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/BERNARD L. HENGESBAUGH Chairman of the Board, 12-21-00
------------------------------ Chief Executive Officer and ---------
Bernard L. Hengesbaugh Director
/s/ROBERT V. DEUTSCH Chief Financial Officer and 12-29-00
----------------------------- Director ---------
Robert V. Deutsch
/s/JONATHAN D. KANTOR Senior Vice President, General 12-29-00
------------------------------ Counsel, Secretary, ---------
Jonathan D. Kantor Director
/s/ DONALD P. LOFE, JR 12-28-00
---------------------------- Director ---------
Donald P. Lofe, Jr.
/s/THOMAS F. TAYLOR Executive Vice President 12-27-00
---------------------------- Director ---------
Thomas F. Taylor
/s/THOMAS PONTARELLI Senior Vice President 12-26-00
---------------------------- Director ---------
Thomas Pontarelli
</TABLE>
INDEX TO EXHIBITS
EX-99.C.2. Opinion and Consent of Counsel
<PAGE>
EX-99.C.6. Actuarial Opinion and Consent
EX-99.C.7. Independent Auditors' Consent
