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The following is an excerpt from a 10-K SEC Filing, filed by VALLEY FORGE LIFE INSURANCE CO on 4/2/2001.
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VALLEY FORGE LIFE INSURANCE CO - 10-K - 20010402 - BUSINESS

ITEM 1. BUSINESS

Valley Forge Life Insurance Company (VFL) was incorporated under the laws of the Commonwealth of Pennsylvania in 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 December 31, 2000, Loews Corporation owned 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, pension products and accident and health insurance, consisting primarily of major medical and hospitalization insurance. VFL also markets a portfolio of variable Separate Account products, consisting primarily of 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. Cash receipts and deposits received for the variable Separate Accounts are invested in investment portfolios, as allocated by the contractholders, where the investment risk is borne by the contractholder. Cash receipts and deposits received for these products that are 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 and liabilities of VFL and its parent, Assurance, are managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as amended 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.

COMPETITION

VFL is engaged in a business that is highly competitive due to the large number of stock and mutual life insurance companies and other entities marketing competing insurance products. VFL also faces competition in the Separate Account markets from financial institutions that market mutual funds and unit investment trusts as an alternative for investors. The combined operations of VFL and Assurance compete for both producers and customers and Assurance and VFL must continuously allocate resources to refine and improve insurance products and services. There are approximately 1,500 companies selling life insurance (including health insurance and pension products) in the United States. The combined companies of VFL and Assurance rank as the thirty-sixth largest life insurance organization based on 1999 combined statutory premium volume.

REGULATION

VFL is domiciled in and is subject to the laws of the Commonwealth of Pennsylvania governing insurance companies and to the regulations of the Pennsylvania Department of Insurance (Insurance Department). VFL is licensed in 49 states and Puerto Rico.

VFL is also subject to regulation under the insurance laws of all jurisdictions in which it operates. The laws of the various jurisdictions establish supervisory agencies with broad administrative powers with respect to various matters, including licensing to transact business, overseeing trade practices, examining the affairs of insurance companies, including periodic financial and market conduct examinations, licensing agents, approving contract forms, establishing reserve requirements, establishing maximum interest rates on life insurance contract loans and minimum rates for accumulation of surrender values, prescribing the form and content of required financial information and related filings and regulating the type and amounts of investments permitted.

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Further, many states regulate affiliated groups of insurers, such as VFL and its affiliates, under insurance holding company legislation. Under such laws, inter-company transfers of assets and dividend payments from insurance subsidiaries may be subject to prior notice or approval, depending on the size of the transfer payments in relation to the financial positions of the companies involved.

Under insurance guaranty fund laws in most states, insurers doing business therein can be assessed as a result of insolvency of other insurers. The assessments are based on formulas, subject to prescribed limits, and are intended to fund the benefits and continuation of coverage for policyholders of the insolvent insurers. Most of these laws provide that an assessment may be excused or deferred if it would threaten an insurer's own solvency.

Although the Federal government generally does not directly regulate the business of insurance, Federal initiatives often have an impact on the business in a variety of ways. Certain insurance products of VFL are subject to various Federal securities laws and regulations. In addition, current and proposed Federal measures that may significantly affect the insurance business include: regulation of insurance company solvency; employee benefit regulation; permitting banks and similar financial institutions to engage in the insurance business; tax law changes affecting the taxation of insurance companies and the tax treatment of insurance products.

Increased scrutiny of state regulated insurer solvency requirements by certain members of the U.S. Congress resulted in the National Association of Insurance Commissioners (NAIC) developing, a number of years ago, the industry minimum Risk-Based Capital (RBC) requirements. The RBC requirements establish a formal state accreditation process designed to regulate for solvency more closely, thus minimizing the diversity of approved statutory accounting and actuarial practices, and to increase the annual statutory statement disclosure requirements.The RBC formulas are designed to identify an insurer's minimum capital requirements based upon the inherent risks (e.g., asset default, credit and underwriting) of its operations. In addition to the minimum capital requirements, the RBC formula and related regulations identify various levels of capital adequacy and corresponding actions that the state insurance departments should initiate. The level of capital adequacy, below which insurance departments would take action, is defined as the Company Action Level. As of December 31, 2000, VFL's capital exceeded the Company Action Level.

CERTAIN AGREEMENTS

VFL is party to a Reinsurance Pooling Agreement with Assurance which is discussed in the Note 9 to the Financial Statements, included herein in Item 8. 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. For information regarding expenses pursuant to the CNA Intercompany Expense Agreement see Note 9 to the Financial Statements, included herein in Item 8.

REINSURANCE

Information as to VFL's reinsurance activities is set forth in Note 8 to the Financial Statements, included herein in Item 8.

EMPLOYEE RELATIONS

As of December 31, 2000, VFL had no employees as it has contracted with Casualty for services provided by Casualty employees. Casualty has experienced satisfactory labor relations and has never had any work stoppages due to labor disputes.

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GOVERNMENT CONTRACTS

Assurance's premium revenue includes premium under contracts involving U.S. government employees and their dependents. VFL's share of such premium was approximately $138 million, $207 million and $201 million for the three years ended December 31, 2000, 1999, and 1998, respectively. These premiums related to the Federal Employee Health Benefit Plan (FEHBP) business formerly written by Assurance and assumed by VFL as part of the Reinsurance Pooling Agreement. The FEHBP business was transferred to another insurance entity owned by CNA effective 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. See Note 13 to the Financial Statements, included herein in Item 8.

BUSINESS SEGMENTS

Information as to VFL's business segments is set forth in Note 11 to the Financial Statements, included herein in Item 8.

INVESTMENTS

Information as to VFL's investments is set forth in Note 2 to the Financial Statements, included herein in Item 8.

BROKERAGE PARTNERS