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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
FILE NOS. 33-48137 AND 811-6691
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 8
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10
CG VARIABLE ANNUITY SEPARATE ACCOUNT
(Exact Name of Registrant)
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
900 Cottage Grove Road
Hartford, Connecticut 06152 (860) 726-6000
(Name, Address and Telephone Number of Depositor)
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Mark A. Parsons, Esquire George N. Gingold, Esquire
Connecticut General Life Insurance Company 197 King Philip Drive
900 Cottage Grove Road West Hartford, CT 06117-1409
Hartford, CT 06152-2215
(Name and Address of Agent for Service) (To Receive Copy)
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Approximate Date of Proposed Public Offering: Continuous
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
previously elected to register an indefinite amount of the securities offered by
this Registration Statement.
The Rule 24f-2 Notice for the Registrant's fiscal year ended December 31, 1997
was filed February 27, 1998.
It is proposed that this filing will become effective:
- ---- immediately upon filing pursuant to paragraph (b) of Rule 485
X
- ---- on May 1, 1998, pursuant to paragraph (b) of Rule 485
- ---- 60 days after filing pursuant to paragraph (a) of Rule 485
- ---- on , pursuant to paragraph (a) of Rule 485
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PURSUANT TO RULE 481(A)
SHOWING LOCATION IN PART A (PROSPECTUS) AND
PART B (STATEMENT OF ADDITIONAL INFORMATION)
OF REGISTRATION STATEMENT OF INFORMATION REQUIRED BY FORM N-4
PART A
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ITEM OF FORM N-4 PROSPECTUS CAPTION
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1. Cover Page........................................ Cover Page
2. Definitions....................................... Definitions
3. Synopsis.......................................... Summary
4. Condensed Financial Information................... Condensed Financial Information
5. General
(a) Depositor.................................... Connecticut General Life Insurance Company
(b) Registrant................................... CG Variable Annuity Separate Account
(c) Portfolio Company............................ The AIM Variable Insurance Funds
(d) Fund Prospectus.............................. The AIM Variable Insurance Funds
(e) Voting Rights................................ Voting of Fund Shares
6. Deductions and Expenses
(a) General...................................... Contract Charges and Fees
(b) Sales Load %................................. Withdrawal Charges
(c) Special Purchase Plan........................ N/A
(d) Commissions.................................. Distribution of the Contracts
(e) Expenses -- Registrant....................... N/A
(f) Fund Expenses................................ The AIM Variable Insurance Funds
(g) Organizational Expenses...................... N/A
7. Contracts
(a) Persons with Rights.......................... Death Benefits; Surrenders; Annuity Provisions;
Election -- Change of Annuity Option; Designation
and Change of Beneficiary; Exercise of Contract
Rights; Transfer of Ownership; Death of Purchaser
Voting of Fund Shares
(b) (i) Allocation of Premium Payments......... Allocation of Premium Payments
(ii) Transfer............................... Transfer of Annuity Account Values between
Sub-Accounts
(iii) Exchanges.............................. N/A
(c) Changes...................................... Modification; Election -- Change of Annuity Option;
Designation and Change of Beneficiary
(d) Inquiries.................................... Face Page; Summary
8. Annuity Period.................................... Annuity Option
9. Death Benefit..................................... Death Benefits
10. Purchase and Contract Values
(a) Purchases.................................... Premium Payments
(b) Valuation.................................... Purchaser's Annuity Account; Variable Accumulation
Value; Fixed Accumulation Value
(c) Daily Calculation............................ Variable Accumulation Unit Value; Fixed Accumulation
Value
(d) Underwriter.................................. Distribution of the Contracts
11. Redemptions
(a) By Owners.................................... Surrender of Contracts
By Annuitant................................. N/A
(b) Texas ORP.................................... N/A
(c) Check Delay.................................. Deferral of Payment
(d) Lapse........................................ N/A
(e) Free Look.................................... Right to Examine Contracts
12. Taxes............................................. Federal Tax Matters
13. Legal Proceedings................................. N/A
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ITEM OF FORM N-4 PROSPECTUS CAPTION
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14. Table of Contents for the Statement of Additional
Information....................................... Statement of Additional Information
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PART B
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ITEM OF FORM N-4 STATEMENT OF ADDITIONAL INFORMATION CAPTION
---------------- -------------------------------------------
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15. Cover Page........................................ Cover Page
16. Table of Contents................................. Table of Contents
17. General Information and History................... (Prospectus) The Company
18. Services
(a) Fees and Expenses of Registrant.............. N/A
(b) Management Contracts......................... N/A
(c) Custodian.................................... Custody of Assets
Independent Public Account................... Experts
(d) Assets of Registrant......................... Custody of Assets
(e) Affiliated Person............................ N/A
(f) Principal Underwriter........................ Distribution of the Contracts
19. Purchase of Securities Being Offered.............. Distribution of the Contracts
Offering Sales Load............................... N/A
20. Underwriters...................................... Distribution of the Contracts;
(Prospectus) Distribution of the Contracts
21. Calculation of Performance Data................... Investment Experience, Historical Performance Data
22. Annuity Payments.................................. (Prospectus) Annuity Provisions;
(Prospectus) Determination of Annuity Payments
23. Financial Statements.............................. Financial Statements
PART C -- OTHER INFORMATION
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ITEM OF FORM N-4 PART C CAPTION
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24. Financial Statements and Exhibits................. Financial Statements and Exhibits
(a) Financial Statements......................... Financial Statements
(b) Exhibits..................................... Exhibits
25. Directors and Officers of the Depositor........... Directors and Officers of the Depositor
26. Persons Controlled By or Under Common Control with
the Depositor or Registrant....................... Persons Controlled By or Under Common Control with
Depositor or Registrant
27. Number of Owners.................................. Number of Owners
28. Indemnification................................... Indemnification
29. Principal Underwriters............................ Principal Underwriter
30. Location of Accounts and Records.................. Location of Accounts and Records
31. Management Services............................... Management Services; (SAI) Administration
32. Undertakings...................................... Undertakings
Signature Page.................................... Signatures
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PART A. PROSPECTUS
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AIM/CIGNA HERITAGE
VARIABLE ANNUITY
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CONNECTICUT GENERAL MAILING ADDRESS: LOCKBOX ADDRESS: BY MAIL LOCKBOX ADDRESS:
LIFE ANNUITY & VARIABLE LIFE CONNECTICUT GENERAL LIFE BY OVERNIGHT
INSURANCE COMPANY SERVICES INSURANCE COMPANY CONNECTICUT GENERAL LIFE
HOME OFFICE LOCATION: CENTER: ROUTING S-249 P.O. BOX 30790 INSURANCE COMPANY
900 COTTAGE GROVE ROAD HARTFORD, CT 06152-2249 HARTFORD, CT 06150 C/O FLEET BANK
BLOOMFIELD, CT TELEPHONE: (800) (552-9898) 20 CHURCH STREET
20TH FLOOR, MSN275
HARTFORD, CT 06120
ATTN: LOCKBOX 30790
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PROSPECTUS
MAY 1, 1998
This Prospectus describes the Flexible Payment Deferred Variable
Annuity Contracts with Fixed and Variable Accounts (the "Contracts")
offered by Connecticut General Life Insurance Company in individual
or group form. These Contracts are designed to aid in long-term
financial planning by individuals on a tax-deferred basis for
retirement or other long-term purposes.
The Owner may elect to have Annuity Account Values accumulate on a
fixed basis in the Fixed Account, which pays interest at the
applicable Guaranteed Interest Rate(s) for the duration of the
particular Guaranteed Period(s) selected by the Owner, or on a
variable basis in CG Variable Annuity Separate Account (the "Variable
Account"), a separate account of the Company, or a combination of the
two. The assets of the Variable Account are divided into
Sub-Accounts. Each Sub-Account invests in a specific series of AIM
Variable Insurance Funds, Inc. (the "Fund"), a mutual fund. Nine
portfolios are currently available for investment within the Variable
Account: (1) AIM V.I. Capital Appreciation Fund; (2) AIM V.I.
Diversified Income Fund; (3) AIM V.I. Government Securities Fund; (4)
AIM V.I. Growth Fund; (5) AIM V.I. International Equity Fund; (6) AIM
V.I. Money Market Fund; (7) AIM V.I. Value Fund; (8) AIM V.I. Growth
and Income Fund; and (9) AIM V.I. Global Utilities Fund.
Annuity Account Values allocated to the Variable Account will vary in
accordance with the investment performance of the Sub-Accounts
selected by the Owner. Thus, the Owner bears the entire investment
risk under the Contract for all amounts allocated to the Variable
Account. Amounts allocated to the Fixed Account are guaranteed by
Connecticut General Life Insurance Company (the "Company") and will
earn a specified rate of interest for the Guaranteed Period(s)
selected unless prematurely withdrawn or transferred, in which case a
market value adjustment will apply.
These Contracts provide for monthly annuity payments to be made by
the Company for the life of the Annuitant or for some other period,
beginning on the Annuity Date selected by the Owner. The Owner can
also elect to surrender all or a portion of the Annuity Account Value
in exchange for a cash withdrawal payment from the Company; however,
withdrawals may be taxable, and/or subject to a withdrawal charge
and/or a market value adjustment ("MVA") and/or a tax penalty and/or
a deduction for State premium taxes. Under certain circumstances, the
Owner can transfer amounts between the Accounts and the corresponding
Sub-Accounts (some restrictions may apply).
This Prospectus sets forth the information that a prospective
investor should consider before investing in these Contracts. A
Statement of Additional Information about the Contracts, dated May 1,
1998, has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. The Statement of Additional
Information is available at no cost to any person requesting a copy
by writing the Company at the address listed above or by calling the
telephone number also listed above. The table of contents of the
Statement of Additional Information is included at the end of this
Prospectus.
This Prospectus and the Statement of Additional Information generally
describe only the Contract and the Variable Account, except when the
Fixed Account is specifically mentioned.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT
PROSPECTUS OF AIM VARIABLE INSURANCE FUNDS, INC. YOU SHOULD RETAIN
THESE PROSPECTUSES FOR FUTURE REFERENCE.
ANY REFERENCE IN THIS PROSPECTUS TO RECEIVED OR RECEIPT BY THE
COMPANY MEANS RECEIPT AT ITS ANNUITY & VARIABLE LIFE SERVICES CENTER
OR LOCKBOX ADDRESS, AS NOTED ABOVE.
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TABLE OF CONTENTS
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PAGE
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DEFINITIONS............................... 2
SUMMARY................................... 5
EXPENSE DATA.............................. 7
CONDENSED FINANCIAL DATA.................. 8
THE PURPOSE OF THIS PROSPECTUS............ 9
THE COMPANY, THE FIXED ACCOUNT, THE
VARIABLE ACCOUNT AND THE FUND........... 9
The Company............................. 9
The Fixed Account....................... 9
The Variable Account.................... 9
AIM Variable Insurance Funds, Inc....... 10
PREMIUM PAYMENTS AND ANNUITY ACCOUNT
VALUES DURING ACCUMULATION PERIOD....... 11
Premium Payments........................ 11
Owner's Annuity Account................. 11
Annuity Account Continuation............ 11
Allocation of Premium Payment(s)........ 12
Fixed Accumulation Value................ 12
Guaranteed Periods................... 12
Guaranteed Interest Rates............ 12
Variable Accumulation Value............. 12
Crediting Variable Accumulation
Units.............................. 13
Variable Accumulation Unit Value..... 13
Optional Variable Account, Sub-Account
Allocation Programs.................. 13
Dollar Cost Averaging.............. 13
Automatic Rebalancing.............. 13
Transfer Privilege...................... 14
DISTRIBUTIONS UNDER THE CONTRACT.......... 14
Cash Withdrawals........................ 14
Minimum Value Requirement............... 15
Section 403(b) Annuities................ 15
DEATH BENEFITS............................ 16
Death Benefit Provided by the
Contracts............................ 16
Election and Effective Date of
Election............................. 16
Payment of Death Benefit................ 16
Amount of Death Benefit................. 16
SURRENDER OF CONTRACTS.................... 16
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ANNUITY PROVISIONS........................ 17
Annuity Date............................ 17
Election -- Change of Annuity Option.... 17
Annuity Options......................... 17
Fixed Annuity Options................... 18
Variable Annuity Options................ 18
Determination of Annuity Payments....... 19
CONTRACT CHARGES AND FEES................. 19
Withdrawal Charges...................... 19
Free Partial Withdrawal................. 20
Annuity Account Fee..................... 20
Administrative Fee...................... 20
Premium Taxes........................... 20
Charge for Mortality and Expense
Risks................................ 20
MVA..................................... 21
OTHER CONTRACT PROVISIONS................. 21
Deferral of Payment..................... 21
Designation and Change of Beneficiary... 21
Exercise of Contract Rights............. 22
Transfer of Ownership................... 22
Death of Owner.......................... 22
Voting of Fund Shares................... 22
Addition, Deletion, or Substitution of
Securities........................... 23
Change in Operation of Variable
Account.............................. 23
Modification............................ 23
Discontinuance of New Purchases......... 24
Right to Examine Contracts.............. 24
IRA Right of Revocation................. 24
Periodic Reports........................ 24
FEDERAL TAX MATTERS....................... 24
Introduction............................ 24
Taxation of Annuities................... 25
Qualified Plans......................... 26
DISTRIBUTION OF THE CONTRACTS............. 27
HISTORICAL PERFORMANCE DATA............... 27
YEAR 2000 ISSUES.......................... 28
STATEMENT OF ADDITIONAL INFORMATION....... 29
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DEFINITIONS
- --------------------------------------------------------------------------------
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATION PERIOD: The period from the Date of Issue to the Annuity Date,
the date on which the Death Benefit becomes payable, or the date on which the
Contract is surrendered or annuitized, whichever is earliest.
ACT: Investment Company Act of 1940, as amended.
ANNUITANT: The person or persons on whose life the first annuity payment is to
be made. The Owner shall identify the Annuitant whose name(s) shall be set forth
in the Contract Specifications. If prior to the Annuity Date the Annuitant
predeceases the Owner, the Owner becomes the Annuitant unless and until the
Owner designates a new Annuitant to the Company In Writing. The Owner generally
has the right to change the Annuitant prior to the Annuity Date by requesting
such a change In Writing to the Company. Any such requested change will not be
effective until recorded by the Company.
ANNUITY ACCOUNT: An account established for each Owner to which all Premium
Payments are credited. In addition, net investment results attributable to each
Premium Payment are credited to (or charged against) the Owner's Annuity
Account.
ANNUITY ACCOUNT VALUE: The variable accumulation value, if any, plus the fixed
accumulation value, if any, of an Owner's Annuity Account for any Valuation
Period.
ANNUITY DATE: The date on which annuity payments under the Contract commence.
ANNUITY OPTION: The method for making income payment(s). In the Contract, the
term "Income Payments" is synonymous with the term "annuity payments" in this
Prospectus.
2
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BENEFICIARY: The person or entity having the right to receive the death
benefit set forth in the Contract and, for Non-Qualified Contracts, who is the
"designated beneficiary" for purposes of Section 72(s) of the Code in the event
of the Owner's death.
CERTIFICATE: (For Group Contracts only) The document for each Owner which
evidences the coverage of the Owner under the Contract.
CODE: Internal Revenue Code of 1986, as amended.
COMMISSION: Securities and Exchange Commission.
COMPANY: Connecticut General Life Insurance Company.
CONTRACT: The document for each Owner which evidences the terms, conditions,
coverage, and rights of the Owner under the Contract. Thus, as used herein the
term "Contract" includes both an individual Contract and a Certificate under a
group contract.
CONTRACT APPLICATION: In states where required the document signed by the
Owner, and the Annuitant if different than the Owner, that evidences the Owner's
application for the Contract. Includes Certificate applications under a group
contract.
CONTRACT YEARS AND CONTRACT ANNIVERSARIES: All Contract Years and Contract
Anniversaries are 12-month periods measured from the Date of Issue.
DATE OF ISSUE: The date on which the Contract becomes effective.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof of death
satisfactory to the Company.
FIXED ACCOUNT: Those Sub-Account(s) associated with Guaranteed Period(s) and
Guaranteed Interest Rate(s). Fixed Account assets are general assets of the
Company and are distinguishable from those allocated to a separate account of
the Company.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar amount.
FUND: AIM Variable Insurance Funds, Inc.
GUARANTEED PERIOD AMOUNT: Any portion of an Owner's Annuity Account Value
allocated to a specific Guaranteed Period with a specified Expiration Date
(including interest earned thereon).
GUARANTEED INTEREST RATE: The rate of interest credited by the Company on a
compound annual basis during a Guaranteed Period.
GUARANTEED PERIOD: The period for which interest, at either an initial or
subsequent Guaranteed Interest Rate, will be credited to any amounts which an
Owner allocates to a Fixed Account Sub-Account. In most states in which these
Contracts are issued, this period may be one to ten years, as elected by the
Owner.
INDEX RATE: An index rate based on the Treasury Constant Maturity Series
published by the Federal Reserve Board.
IN WRITING: The term "in writing" means in a written form satisfactory to the
Company and received by the Company at its Annuity & Variable Life Service
Center Mailing Address.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which does not receive favorable federal income tax treatment under Sections
401, 403, 408, or 457 of the Code. The Owner of a Non-Qualified Contract must be
a natural person or an agent for a natural person for the Contract to receive
favorable income tax treatment as an annuity.
ORDER TO PURCHASE: A request to purchase a Contract, containing sufficient
information to permit the processing of such request and to issue the Contract.
OWNER: The person(s) entitled to the ownership rights stated in the Contract;
is the Certificate Owner under a group contract. The Owner, or the Annuitant if
the Owner is a non-natural person, may be no more than 85 years of age on the
Date of Issue.
PAYEE: A recipient of payments under the Contract.
PREMIUM PAYMENT: Any amount paid to the Company as consideration for the
benefits provided by the Contract. Premium Payment includes the initial Premium
Payment and subsequent Premium Payments.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan which
receives favorable federal income tax treatment under Sections 401, 403, 408, or
457 of the Code.
SEVEN YEAR ANNIVERSARY: The seventh Contract Anniversary and each succeeding
Contract Anniversary occurring at any seven year interval thereafter, for
example, the 14th, 21st and 28th Contract Anniversaries.
SUB-ACCOUNT: That portion of the Fixed Account associated with a specific
Guaranteed Period and Guaranteed Interest Rate and each portion of the Variable
Account which invests in shares of a specific series of AIM Variable Insurance
Funds, Inc.
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SURRENDER: When a lump sum amount representing the Owner's Annuity Account
Value (minus any applicable withdrawal charges, contract fees, or premium taxes
and plus or minus any market value adjustment) is paid to the Owner. After a
surrender, all of the Owner's rights under the Contract are terminated.
SURRENDER DATE: The date or deemed date the Owner elects a surrender of the
Contract or Certificate.
VALUATION DATE: Every day on which the New York Stock Exchange ("NYSE") is
open for business, except any day on which trading on the NYSE is restricted, or
on which an emergency exists, as determined by the Commission, so that valuation
or disposal of securities is not practicable.
VALUATION PERIOD: The period of time beginning on the day following the
Valuation Date and ending on the next Valuation Date. A Valuation Period may be
more than one day.
VARIABLE ACCOUNT: The separate account of the Company comprised of those
Sub-Account(s) associated with investments in AIM Variable Insurance Funds, Inc.
Variable Account assets are separate account assets of the Company, the
investment performance of which is kept separate from that of the general assets
of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of the
value of the variable portion of an Owner's Annuity Account.
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SUMMARY
NOTE: THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION IN THE REMAINDER OF THIS PROSPECTUS, IN THE STATEMENT OF ADDITIONAL
INFORMATION, IN THE PROSPECTUS FOR AIM VARIABLE INSURANCE FUNDS, INC., AND IN
THE CONTRACT, ALL OF WHICH SHOULD BE REFERRED TO FOR MORE INFORMATION. THIS
PROSPECTUS GENERALLY DESCRIBES ONLY THE CONTRACT AND THE VARIABLE ACCOUNT. A
SEPARATE PROSPECTUS ATTACHED HERETO DESCRIBES AIM VARIABLE INSURANCE FUNDS, INC.
THE CONTRACT. These Contracts are Flexible Payment Deferred Variable Annuity
Contracts with Fixed and Variable Accounts (the "Contracts") designed for use in
connection with retirement and tax-deferred plans, some of which may qualify as
retirement programs under Sections 401, 403, 408, or 457 of the Code or for use
on a non-tax qualified basis. The Contracts provide for the accumulation of
values on either a variable or fixed basis, or a combination fixed and variable
basis as elected by the Owner, and provide for payment of these values on a
selected future date in either one lump sum or as annuity payments.
The Contracts are offered as both individual and group annuity contracts. The
term "Contract" as used in this Prospectus refers to either an individual
annuity contract or to a Certificate under a group annuity contract, as
appropriate.
PREMIUM PAYMENTS. The Owner must generally make a minimum initial Premium
Payment of at least $2,500 ($2,000 for IRAs). The Owner may generally make
additional Premium Payments of at least $2,500 each for allocation into any
single Guaranteed Period within the Fixed Account and/or at least $100 for
allocation into any Variable Sub-Account. The prior approval of the Company is
required before it will accept a Premium Payment in excess of $1,000,000 (See
"Premium Payments").
THE ANNUITY ACCOUNTS. The Owner may elect to have Annuity Account Values
accumulate on a fixed basis in the Fixed Account, which pays interest at the
applicable Guaranteed Interest Rate(s) for the duration of the particular
Sub-Account's Guaranteed Period, or on a variable basis in CG Variable Annuity
Separate Account (the "Variable Account"), a separate account of the Company, or
a combination of them (See "The Fixed Account" and "The Variable Account").
THE FIXED ACCOUNT. The Owner may elect to have values accumulated on a fixed
basis whereby a Premium Payment is allocated to one or more Sub-Accounts
available in connection with the Fixed Account. Each Sub-Account available
within the Fixed Account has a Guaranteed Period with a duration which ranges
from one to ten years. The Fixed Account is part of the general account of the
Company (See "The Fixed Account"). The Company guarantees these amounts and
specifies various interest rates (the "Guaranteed Interest Rates") which will be
earned by amounts allocated to each particular Sub-Account within the Fixed
Account if the amounts remain in that Sub-Account for the duration of the
Sub-Account's Guaranteed Period, subject to the imposition of Annuity Account
Fees or premium taxes. The Company may not change a Guaranteed Interest Rate for
the duration of the Sub-Account's Guaranteed Period. The Company will credit
interest at a rate of not less than three percent (3%) per year, compounded
annually, to amounts allocated to the Fixed Account. Guaranteed Interest Rates
applicable to particular Guaranteed Periods cannot be predicted and will be
determined at the sole discretion of the Company. There is no assurance that
Guaranteed Interest Rates will exceed 3% per year. Amounts that are withdrawn or
transferred prior to the end of the Guaranteed Period may be subject to a
withdrawal charge and/or a MVA. The MVA could be positive or negative.
THE VARIABLE ACCOUNT. The assets of the Variable Account are also divided into
Sub-Accounts. Each Variable Sub-Account uses its assets to purchase, at their
net asset value, shares of a specific portfolio of AIM Variable Insurance Funds,
Inc. (the "Fund"), a mutual fund registered under the Act and advised by A I M
Advisors, Inc. (See "The Variable Account".) Nine portfolios are currently
available for investment within the Variable Account: (1) AIM V.I. Capital
Appreciation Fund; (2) AIM V.I. Diversified Income Fund; (3) AIM V.I. Government
Securities Fund; (4) AIM V.I. Growth Fund; (5) AIM V.I. International Equity
Fund; (6) AIM V.I. Money Market Fund; (7) AIM V.I. Value Fund; (8) AIM V.I.
Growth and Income Fund; and (9) AIM V.I. Global Utilities Fund.
TRANSFERS. Subject to certain conditions, the Owner may transfer amounts among
the Sub-Accounts available under the Contract before the Annuity Date. All
transfers are subject to the following conditions: (1) an Owner is limited to
twelve transfers each Contract Year; (2) the amount being transferred from any
Sub-Account may not be less than $100; (3) transfers to any Fixed Sub-Account
may not be less than $2,500; (4) if after the transfer the Owner's Annuity
Account Value remaining would be less than $2,500 in the applicable Fixed
Sub-Account and/or $50 in the applicable Variable Sub-Account, then the entire
Annuity Account Value within the Sub-Account must be transferred; and (5) no
transfers are permitted during the "Right to Examine Contract" period. In
addition, transfers from any Fixed Sub-Account are restricted in frequency and
amount and may also be subject to the Market Value Adjustment. After the Annuity
Date, transfers among the Variable Sub-Accounts may also be permitted, subject
to certain conditions (See "Transfer Privilege").
CASH WITHDRAWALS. At any time before the Annuity Date, the Owner may elect to
receive a cash withdrawal payment from the Company. Each cash withdrawal request
must be to receive at least $1,000. Subject to the Free Partial Withdrawal
privilege described below, a cash withdrawal of a Owner's Annuity Account Value
will be subject to any applicable withdrawal charges. A cash withdrawal will
also be subject to any applicable Market Value Adjustment, Annuity Account Fees,
or State premium taxes. After the Annuity Date, withdrawals are not permitted
under most Annuity Options (See "Cash Withdrawals").
Federal income taxes and a tax penalty may be applicable to withdrawals (See
"Federal Tax Matters").
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FREE PARTIAL WITHDRAWAL. Each Contract Year an Owner may generally withdraw,
in one or more transactions, up to 15% of the total amount of the Owner's
Premium Payments made to the Owner's Annuity Account without the imposition of a
withdrawal charge. The Company will deem all free withdrawals to have withdrawn
Premium Payments from an Owner's Annuity Account in the order in which they were
received by the Company for purposes of computing the contingent deferred sales
charge (the withdrawal charge) on amounts remaining within the Owner's Annuity
Account (I.E. oldest Premium Payment first). See "Free Partial Withdrawal".
ANNUITY PAYMENTS. Annuity Payments as elected by the Owner will begin on the
Annuity Date. The Owner selects the Annuity Date and the Annuity Option. See
"Annuity Provisions".
DEATH BENEFIT. In the event of the death of the Owner prior to the Annuity
Date, the Company will pay a death benefit to the Beneficiary. If the death of
the Owner (or Annuitant if the Owner is a non-natural person) occurs on or after
the Annuity Date, no death benefit will be payable except as may be provided
under the Annuity Option elected. The Death Benefit prior to the Annuity Date
generally equals the greatest of (1) the Annuity Account Value for the Valuation
Period during which the Death Benefit election is effective or deemed to become
effective; (2) the sum of all Premium Payments under the Contract, minus the sum
of all partial withdrawals from the Contract; (3) the Owner's Annuity Account
Value on the Seven Year Anniversary immediately preceding the date the death
benefit election is effective or is deemed to become effective, adjusted for any
subsequent Premium Payments, partial withdrawals and applicable charges; and (4)
the amount that would have been payable in the event of a full surrender of the
Contract during the Valuation Period during which the Death Benefit election is
effective or deemed to become effective, including any applicable withdrawal
charges and Market Value Adjustment. See "Death Benefit".
RIGHT TO EXAMINE CONTRACTS. If the Owner is not satisfied with a Contract it
may be returned by mailing it to the Company at the Annuity & Variable Life
Services Center mailing address listed on the cover of this Prospectus within
ten days, or longer if state law requires, after it was received by the Owner.
An Owner may not make transfers during the Right to Examine period. When the
Company receives the returned Contract it will be canceled and in most states
the Owner will receive a refund equal to the Purchaser's Annuity Account Value
at the end of the Valuation Period during which the returned Contract was
received by the Company.
Where state law requires the full amount of any initial Premium Payment and
subsequent Premium Payment(s) if any, received by the Company to be refunded,
the Company will place the Premium Payment(s) that are allocated to Sub-Accounts
of the Variable Account in the AIM V.I. Money Market Fund until the end of the
Right to Examine period. This period will be deemed to commence on the day the
Contract is mailed, and on the first business day after the end of the period,
the Premium Payments will be allocated as had been specified by the Owner.
CHARGES AND DEDUCTIONS
CONTINGENT DEFERRED SALES CHARGE. The Company does not deduct a sales charge
when it receives a Premium Payment. However, if any part of an Owner's Annuity
Account is withdrawn, a withdrawal charge (contingent deferred sales charge) may
be assessed by the Company. Subject to the Free Partial Withdrawal amount
described above, Annuity Account withdrawals derived from a Premium Payment
deposited with the Company for a period of seven years or less will be subject
to a withdrawal charge ranging from 7% to 1% of the applicable Premium Payment
(adjusted by any applicable MVA with respect to the Fixed Account). The length
of time between the Company's acceptance of a Premium Payment and the making of
a withdrawal determines the withdrawal charge percentage. The withdrawal charge
is not imposed on a Premium Payment after the end of the seventh year of its
deposit with the Company. For purposes of computing the withdrawal charge,
amounts are deemed to be withdrawn in the order in which they were received by
the Company (I.E. oldest Premium Payment first). See "Withdrawal Charges".
MARKET VALUE ADJUSTMENT. In certain situations, a cash withdrawal of amounts
from the Fixed Account will be subject to a Market Value Adjustment. See "MVA".
The MVA will reflect the relationship between an index published by the Federal
Reserve Board as to current yields on U.S. government securities of various
maturities at the time a cash withdrawal is made, and this index at the time
that the Premium Payments being withdrawn were made. Generally, if the Index
Rate at the time of withdrawal is more than .50% lower than the Index Rate at
the time the Premium Payment was allocated, then the application of the MVA will
result in a higher payment upon withdrawal. Similarly, if the Index Rate at the
time of withdrawal is higher than the Index Rate at the time the Premium Payment
was allocated (or less than 0.50% lower), the application of the MVA will
generally result in a lower payment upon withdrawal. In addition to actual cash
withdrawals, the MVA applies to transfers from the Fixed Account (unless
effective at the end of a Guaranteed Period). It may also apply to Death Benefit
payments, but only if it would increase the Death Benefit. The MVA is not
applied against a withdrawal or transfer which becomes effective upon the
Expiration Date of a Guaranteed Period or which is used to make a Death Benefit
payment.
ANNUITY ACCOUNT FEE. On the last Valuation Date of each contract year, the
Company will deduct an annual annuity account administration fee ("Annuity
Account Fee") of $35 from the Owner's Annuity Account Value. If the Contract is
surrendered, a $35 Annuity Account Fee will be deducted. After the Annuity Date,
an annual Annuity Account Fee of $35 will be deducted in approximately equal
amounts from each variable annuity payment made during the year. No Annuity
Account Fee will be deducted from fixed annuity payments. If applicable state
law requires, the $35 Annuity Account Fee will be reduced to a lesser amount.
Prior to
6
<PAGE> 11
the Annuity Date the annual Annuity Account Fee will be waived each contract
year that the Owner's Annuity Account Value equals or exceeds $100,000 on the
last Valuation Date of that year.
ADMINISTRATIVE FEE. The Company also deducts an administrative fee at the end
of each Valuation Period equal to an annual rate of 0.10% of the daily net
assets of the Variable Account for administrative expenses assumed by the
Company. See "Administrative Fees".
RISK CHARGE. The Company also deducts a mortality and expense risk charge at
the end of each Valuation Period equal to an annual rate of 1.25% of the daily
net assets of the Variable Account for mortality and expense risks assumed by
the Company. See "Charge for Mortality and Expense Risks".
TAXES. The Company may incur premium, or similar state or local taxes relating
to the Contracts. The Company will deduct any such taxes related to a particular
Contract upon an Owner's surrender, withdrawal, annuitization, or payment of
death benefits. See "Premium Taxes".
CHARGES AGAINST THE FUND. The value of the net assets of the Sub-Accounts of
the Variable Account will reflect the investment advisory fee and other expenses
incurred by the AIM Variable Insurance Funds, Inc. See "Expense Data" below.
- --------------------------------------------------------------------------------
EXPENSE DATA
The purpose of the following table and Example is to help Owners and
prospective purchasers understand the costs and expenses that are borne,
directly and indirectly, by Owners assuming that all Premium Payments are
allocated to the Variable Account. The table reflects expenses of the Variable
Account as well as of AIM Variable Insurance Funds, Inc. The information set
forth should be considered together with the information provided under the
heading "Contract Charges and Fees", and with the Fund's Prospectus. In addition
to the expenses listed below, premium taxes may be applicable.
FEE TABLE
<TABLE>
<CAPTION>
AIM
AIM V.I. V.I. AIM V.I. AIM V.I. AIM V.I. AIM V.I.
CAPITAL AIM V.I. GLOBAL GOVERNMENT AIM V.I. GROWTH AND INTER- MONEY AIM V.I.
APPRECIA- DIVERSIFIED UTILITIES SECURITIES GROWTH INCOME NATIONAL MARKET VALUE
TION FUND INCOME FUND FUND FUND FUND FUND EQUITY FUND FUND FUND
--------- ----------- --------- ---------- -------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Owner Transaction
Expenses
Sales Load on
Purchases..... 0 0 0 0 0 0 0 0 0
Maximum deferred
sales charge
on withdrawals
(as a
percentage of
Owner's
Premium
Payment)(1)... 7% 7% 7% 7% 7% 7% 7% 7% 7%
Transfer
fee(2)........ 0 0 0 0 0 0 0 0 0
Annual Annuity
Account
Fee(3)........
-------------------------------------------- ----------------------
$35 per Contract
Separate Account
Annual Expenses
(as a percentage
of average
separate account
assets)
Mortality and
Expense
Risk Fee...... 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Administrative
Fee........... 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%
Other Fees and
Expenses...... 0% 0% 0 0% 0% 0 0% 0% 0%
---- ---- ---- ---- ---- ---- ---- ---- ----
Total......... 1.35% 1.35% 1.35% 1.35% 1.35% 1.35% 1.35% 1.35% 1.35%
AIM Variable
Insurance Funds,
Inc. Annual
Expenses (as a
percentage of
Fund average net
assets)(4)
Management
Fees.......... 0.63% 0.60% 0.65% 0.50% 0.65% 0.63% 0.75% 0.40% 0.62%
Other
Expenses...... 0.05% 0.20% 0.63% 0.37% 0.08% 0.06% 0.18% 0.19% 0.08%
---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL......... 0.68% 0.80% 1.28% 0.87% 0.73% 0.69% 0.93% 0.59% 0.70%
</TABLE>
- ---------------
(1) A portion of an Owner's Annuity Account may be withdrawn once each Contract
Year without the assessment of a withdrawal charge if all Premium Payments
have not previously been withdrawn. The withdrawal charge on the remaining
portion is equal to a percentage of the Owner's Premium Payment withdrawn
and ranges from 7% to 0%, depending upon the length of time between the
Company's acceptance of the Premium Payment withdrawn and the making of a
withdrawal. After the Premium Payment has been held by the Company for seven
years such Premium Payment may be withdrawn without assessment of the
withdrawal charge.
(2) Before the Annuity Date, an Owner is limited to twelve transfers each
Contract Year unless otherwise authorized by the Company in writing.
Transfers from any Fixed Sub-Account are restricted in frequency and amount
and may also be subject to a MVA. After the Annuity Date, a Payee is limited
to three transfers per Contract Year.
(3) Waived for Annuity Account Values of $100,000 or more as determined on the
last Valuation Date of a Contract Year.
(4) A I M Advisors, Inc. ("AIM") may from time to time voluntarily waive or
reduce its respective fees. Effective May 1, 1998, the Funds reimburse AIM
in an amount up to 0.25% of the average net asset value of each Fund, for
expenses incurred in providing, or assuring that participating insurance
companies provide, certain administrative services. Currently, the fee only
applies to the average net asset value of each Fund in excess of the net
asset value of each Fund as calculated on April 30, 1998.
7
<PAGE> 12
EXAMPLES. A Owner would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets (and assuming all Premium Payments are
allocated to the Variable Account):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
1. IF THE CONTRACT IS SURRENDERED AT THE END OF THE
APPLICABLE TIME PERIOD:
AIM V.I. Capital Appreciation Fund........................ $81 $109 $139 $244
AIM V.I. Diversified Income Fund.......................... $82 $113 $145 $257
AIM V.I. Global Utilities Fund............................ $87 $127 $170 $305
AIM V.I. Government Securities Fund....................... $83 $115 $149 $264
AIM V.I. Growth Fund...................................... $81 $110 $142 $250
AIM V.I. Growth and Income Fund........................... $81 $109 $140 $246
AIM V.I. International Equity Fund........................ $84 $117 $152 $270
AIM V.I. Money Market Fund................................ $80 $106 $135 $235
AIM V.I. Value Fund....................................... $81 $109 $140 $247
2. IF THE CONTRACT IS NOT SURRENDERED OR IF IT IS
ANNUITIZED:
AIM V.I. Capital Appreciation Fund........................ $21 $ 66 $114 $244
AIM V.I. Diversified Income Fund.......................... $23 $ 70 $120 $257
AIM V.I. Global Utilities Fund............................ $28 $ 85 $144 $305
AIM V.I. Government Securities Fund....................... $23 $ 72 $124 $264
AIM V.I. Growth Fund...................................... $22 $ 68 $116 $250
AIM V.I. Growth and Income Fund........................... $22 $ 67 $114 $246
AIM V.I. International Equity Fund........................ $24 $ 74 $127 $270
AIM V.I. Money Market Fund................................ $22 $ 67 $115 $247
AIM V.I. Value Fund....................................... $22 $ 67 $115 $247
</TABLE>
The above tables are intended to assist the Owner in understanding the costs
and expenses that will be borne, directly or indirectly, by Premium Payments
allocated to the Variable Account. These include the expenses of AIM Variable
Insurance Funds, Inc. See the Fund Prospectus. In addition to the expenses
listed above, premium taxes may be applicable.
These examples reflect the annual $35 Annuity Account Fee as an annual charge
of .07% of assets, based on an anticipated average Annuity Account Value of
$50,000.
The Examples should not be considered a representation of past or future
expenses, and actual expenses may be greater or lesser than those shown.
OWNER INQUIRIES. Inquiries from Owners or prospective owners should be
directed to Annuity & Variable Life Services Center, Routing S-249, Hartford, CT
06152-2249, Telephone (800) 552-9898.
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
There follows, for each of the nine Sub-Accounts available under the Contracts
during the Variable Account's fiscal year ended December 31, 1997, information
regarding the changes in the accumulation unit values during the period ended
December 31, 1997 and the number of accumulation units outstanding at December
31, 1997. During 1995, the Account changed its fiscal year end from January 31
to December 31, effective in the year beginning January 1, 1996. Accordingly,
the information which follows includes the eleven months transition period ended
December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF
ACCUMULATION
ACCUMULATION ACCUMULATION ACCUMULATION ACCUMULATION ACCUMULATION UNITS
UNIT UNIT UNIT UNIT UNIT OUTSTANDING
ENDING VALUE ENDING VALUE ENDING VALUE ENDING VALUE ENDING VALUE AT
SUB-ACCOUNT AT 01/31/94 AT 01/31/95 AT 12/31/95 AT 12/31/96 AT 12/31/97 12/31/97
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
AIM V.I. Capital
Appreciation............... $12.380 $11.736 $15.924 $18.467 $20.678 16,027,198
AIM V.I. Diversified
Income..................... $10.749 $ 9.931 $11.585 $12.591 13.588 4,695,148
AIM V.I. Global Utilities.... $ -- $10.235 $12.508 $13.826 16.591 921,883
AIM V.I. Government
Securities................. $10.260 $ 9.775 $10.991 $11.089 11.832 1,926,036
AIM V.I. Growth.............. $11.448 $10.491 $13.978 $16.281 20.376 9,603,064
AIM V.I. Growth and Income... $ -- $10.216 $13.385 $15.835 19.639 7,046,189
AIM V.I. International
Equity..................... $12.296 $10.738 $13.156 $15.578 16.434 9,290,316
AIM V.I. Money Market........ $10.084 $10.378 $10.775 $11.156 11.571 3,829,515
AIM V.I. Value............... $11.922 $11.522 $15.505 $17.591 $21.464 18,682,024
</TABLE>
8
<PAGE> 13
- --------------------------------------------------------------------------------
THE PURPOSE OF THIS PROSPECTUS
This Prospectus contains information about the individual and group AIM/CIGNA
Heritage Variable Annuity Contract (the "Contract") which provides fixed or
variable accumulations or a combination of both, and fixed and/or variable
annuity payments starting at the Annuity Date. It describes the Contract's uses
and objectives, its benefits and costs, and the rights and privileges of the
Owner. It also contains information about the Company, the Variable Account, the
Fixed Account and the Fund. It has been carefully prepared in non-technical
language to help you decide whether the purchase of a Contract will fit your
needs. We urge you to read it carefully and retain it for future reference.
- --------------------------------------------------------------------------------
THE COMPANY, THE FIXED ACCOUNT, THE VARIABLE ACCOUNT AND THE FUND
THE COMPANY. The Company is a stock life insurance company incorporated in
Connecticut in 1865. Its Executive Office mailing address is Hartford,
Connecticut 06152, Telephone (860) 726-6000. It does business in fifty states,
the District of Columbia and Puerto Rico. The Company issues group and
individual life and health insurance policies and annuities. The Company has
various wholly-owned subsidiaries which are generally engaged in the insurance
business. The Company is a wholly-owned subsidiary of Connecticut General
Corporation, Bloomfield, Connecticut. Connecticut General Corporation is
wholly-owned by CIGNA Holdings Inc., Philadelphia, Pennsylvania which is in turn
wholly-owned by CIGNA Corporation, Philadelphia, Pennsylvania. Connecticut
General Corporation is the holding company of various insurance companies, one
of which is Connecticut General Life Insurance Company.
THE FIXED ACCOUNT. The Fixed Account is made up of the general assets of the
Company other than those allocated to any separate account. The Fixed Account is
part of the Company's general account. Because of applicable exemptive and
exclusionary provisions, interests in the Fixed Account have not been registered
under the Securities Act of 1933 (the "1933 Act"), and neither the Fixed Account
nor the Company's general account has been registered under the Investment
Company Act of 1940 (the "1940 Act"). Therefore, neither the Fixed Account nor
any interest therein is generally subject to regulation under the provisions of
the 1933 Act or the 1940 Act. Accordingly, the Company has been advised that the
staff of the Commission has not reviewed the disclosure in this Prospectus
relating to the Fixed Account.
The initial Premium Payment and any subsequent Premium Payment(s) will be
allocated to Sub-Accounts available in connection with the Fixed Account to the
extent elected by the Owner at the time such payment is made. In addition, all
or part of the Owner's Annuity Account Value may be transferred to such
Sub-Accounts available under the Contract as described under "Transfer
Privilege." Instead of the Owner assuming all of the investment risk as is the
case for Premium Payments allocated to the Variable Account, the Company
guarantees it will credit a specified minimum interest rate to amounts allocated
to the Fixed Account.
Assets supporting amounts allocated to Sub-Accounts within the Fixed Account
become part of the Company's general account assets and are available to fund
the claims of all creditors of the Company. All of the Company's general account
assets will be available to fund benefits under the Contracts. The Owner does
not participate in the investment performance of the assets of the Fixed Account
or the Company's general account. Instead, a specified rate of interest,
declared in advance, is credited to amounts allocated to the Fixed Account. This
rate is guaranteed to be at least 3% per year. The Company may credit interest
at a rate in excess of 3% per year; however, the Company is not obligated to
credit any interest in excess of 3% per year.
The Company will invest the assets of the general account in those assets
chosen by the Company and allowed by applicable state laws regarding the nature
and quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
If the Owner maintains Annuity Account Values within a Fixed Account
Sub-Account for the duration of the Sub-Account's Guaranteed Period, the Company
guarantees that it will credit interest at the guaranteed rate specified for the
Sub-Account. In the event the Owner withdraws any amount from the Sub-Account
prior to the expiration of the Sub-Account's Guaranteed Period for any reason,
the withdrawn amount is subjected to a MVA (see "Market Value Adjustment") and a
withdrawal charge, if applicable. The Company guarantees, however, that an Owner
will be credited with interest at a rate of not less than 3% per year,
compounded annually, on amounts allocated to any Fixed Account Sub-Account under
the Contracts, regardless of any application of the MVA (that is, the MVA will
not reduce the amount available for withdrawal or transfer to an amount less
than the initial amount allocated or transferred to the Fixed Account
Sub-Account plus interest of 3% per year). The application of any withdrawal
charge may cause the amount realized to be less than the net interest credited
at 3% per year. The Company reserves the right to defer the payment or transfer
of amounts withdrawn from the Fixed Account for a period not to exceed six (6)
months from the date a proper request for such withdrawal or transfer is
received by the Company.
THE VARIABLE ACCOUNT. The basic objective of a variable annuity contract is to
provide variable accumulation of Premium Payments which will be to some degree
responsive to changes in the economic environment, including inflationary forces
and changes in rates of return available from various types of investments. The
Contracts are designed to seek to accomplish this objective by providing that
Annuity Account Values and/or Variable Annuity payments will reflect the
investment performance of the
9
<PAGE> 14
Sub-Accounts of the Variable Account with respect to amounts allocated to
Sub-Accounts of the Variable Account. (See "Annuity Options".) Since
Sub-Accounts of the Variable Account are always fully invested in shares of
corresponding portfolios of the Fund, their investment performance reflects the
investment performance of those portfolios. Values of Fund shares held by the
Variable Account fluctuate and are subject to the risks of changing economic
conditions as well as the risk inherent in the ability of the Fund's management
to make necessary changes in its portfolios to anticipate changes in economic
conditions. Therefore, the Owner bears the entire investment risk that the basic
objectives of the Contract may not be realized and that the adverse effects of
inflation may not be lessened. There can be no assurance that the total
surrender proceeds or the aggregate amount of annuity payments will equal or
exceed the Premium Payments made with respect to a particular Owner's Annuity
Account.
The CG Variable Annuity Separate Account (the "Variable Account") was
established by the Company as a separate account on May 15, 1992 pursuant to a
resolution of its Board of Directors. Under Connecticut insurance law, the
income, gains or losses of the Variable Account are credited to or charged
against the assets of the Variable Account without regard to the other income,
gains, or losses of the Company. These assets are held in relation to the
Contracts described in this Prospectus. Although that portion of the assets
maintained in the Variable Account equal to the reserves and other contract
liabilities with respect to the Variable Account will not be charged with any
liabilities arising out of any other business conducted by the Company, all
obligations arising under the Contracts, including the promise to make annuity
payments, are general corporate obligations of the Company.
The Variable Account is registered with the Commission as a unit investment
trust under the Act and meets the definition of a separate account under the
federal securities laws. Registration with the Commission does not involve
supervision of the management or investment practices or policies of the
Variable Account or of the Company by the Commission.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a specific portfolio of the Fund.
All amounts allocated to the Variable Account will be used to purchase Fund
shares as designated by the Owner at their net asset value. Any and all
distributions made by the Fund with respect to the shares held by the Variable
Account will be reinvested to purchase additional shares at their net asset
value. Deductions from the Variable Account for cash withdrawals, annuity
payments, death benefits, annuity account fees, and any applicable taxes will,
in effect, be made by redeeming the number of Fund shares at their net asset
value equal in total value to the amount to be deducted. (The Variable Account
will purchase and redeem Fund shares on an aggregate basis.) The Variable
Account will be fully invested in Fund shares at all times.
AIM VARIABLE INSURANCE FUNDS, INC. AIM Variable Insurance Funds, Inc. (the
"Fund") is an open-end investment management company registered under the Act.
Shares of the various portfolios of the Fund may be sold to other separate
accounts established by the Company or by other insurance companies to fund
other variable annuity or variable life insurance contracts. A I M Advisors,
Inc., ("AIM") the Fund's investment adviser, its affiliates, and any insurance
companies with separate accounts investing in the Fund will be responsible for
reporting to the Fund's Board of Directors any potential or existing conflicts
between the interests of variable annuity contract owners/participants and the
interests of owners of variable life insurance contracts that provide for
investment in shares of the Fund. The Board of Directors, a majority of whom are
not "interested persons" of the Fund, as that term is defined in the Act, also
will monitor the Fund to identify the existence of any such irreconcilable
material conflicts and to determine what action, if any, should be taken by the
Fund and/or AIM, and its affiliates (see "Management of the Fund" in the Fund
Prospectus).
The Fund is currently composed of thirteen independent portfolios of
securities, each of which has separate investment objectives and policies.
Shares of the Fund are issued to the Variable Account in nine of the thirteen
series, each corresponding to one of the portfolios. Additional portfolios may
be added to the Fund which may or may not be available for investment by the
Variable Account.
AIM V.I. CAPITAL APPRECIATION FUND ("CAPITAL APPRECIATION FUND") is a
diversified portfolio which seeks to provide capital appreciation through
investments in common stocks, with emphasis on medium-sized and smaller emerging
growth companies.
AIM V.I. DIVERSIFIED INCOME FUND ("DIVERSIFIED INCOME FUND") is a diversified
portfolio which seeks to achieve a high level of current income primarily by
investing in a diversified portfolio of foreign and U.S. government and
corporate debt securities, including lower rated high yield debt securities
(commonly known as "junk bonds").
AIM V.I. GLOBAL UTILITIES FUND ("GLOBAL UTILITIES FUND"), formerly AIM V.I.
Utilities Fund, is a non-diversified portfolio which seeks to achieve a high
level of current income, and as a secondary objective capital appreciation, by
investing primarily in common and preferred stocks of public utility companies
(either domestic or foreign).
AIM V.I. GOVERNMENT SECURITIES FUND ("GOVERNMENT FUND") is a diversified
portfolio which seeks to achieve a high level of current income consistent with
reasonable concern for safety of principal by investing in debt securities
issued, guaranteed or otherwise backed by the U.S. Government.
AIM V.I. GROWTH FUND ("GROWTH FUND") is a diversified portfolio which seeks to
provide growth of capital through investments primarily in common stocks of
leading U.S. companies considered by AIM to have strong earnings momentum.
AIM V.I. GROWTH AND INCOME FUND ("GROWTH & INCOME FUND") is a diversified
portfolio which seeks to provide growth of capital, with current income as a
secondary objective by investing primarily in dividend paying common stocks
which have prospects for both growth of capital and dividend income.
10
<PAGE> 15
AIM V.I. INTERNATIONAL EQUITY FUND ("INTERNATIONAL FUND") is a diversified
portfolio which seeks to provide long-term growth of capital by investing in
international equity securities, the issuers of which are considered by AIM to
have strong earnings momentum.
AIM V.I. MONEY MARKET FUND ("MONEY MARKET FUND") is a diversified portfolio
which seeks to provide as high a level of current income as is consistent with
the preservation of capital and liquidity by investing in a diversified
portfolio of money market instruments.
AIM V.I. VALUE FUND ("VALUE FUND") is a diversified portfolio which seeks to
achieve long-term growth of capital by investing primarily in equity securities
judged by AIM to be undervalued relative to the current or projected earnings of
the companies issuing the securities, or relative to current market values of
assets owned by the companies issuing the securities or relative to the equity
markets generally. Income is a secondary objective.
AIM is paid fees by the Fund for its services pursuant to an investment
advisory agreement. AIM, a Delaware corporation, also serves as investment
adviser to each of the funds in The AIM Family of Funds(R), and to certain other
investment companies. AIM operates as an autonomous organization and the
obligation of performance with respect to the investment advisory agreement is
solely that of AIM. The Company undertakes no obligation in this respect.
THERE IS NO ASSURANCE THAT ANY SERIES WILL ACHIEVE ITS STATED OBJECTIVE. A
more detailed description of the Fund, its investment objectives, policies and
restrictions and expenses may be found in the accompanying current Prospectus of
the Fund and in the Fund's Statement of Additional Information. Information
contained in the Fund's Prospectus should be read carefully before allocating
Premium Payments or making transfers to a Sub-Account of the Variable Account.
- --------------------------------------------------------------------------------
PREMIUM PAYMENTS AND ANNUITY ACCOUNT VALUES DURING ACCUMULATION PERIOD
PREMIUM PAYMENTS. All initial and subsequent Premium Payments are to be paid
to an authorized agent of the Company or to the Company. The Company will not
accept an initial Premium Payment from a Owner which is less than $2,500 ($2,000
for IRAs). In addition, any allocation of such initial Premium Payment must be
in minimum amounts of $2,500 per Fixed Account Sub-Account and $100 per Variable
Account Sub-Account. The Company will accept subsequent Premium Payments in
minimum amounts of $2,500 (for amounts to be allocated to each Fixed Account
Sub-Account) and $100 (for amounts to be allocated to each Variable Account
Sub-Account). The Company may reduce the minimum Premium Payment requirements
under group contracts where Premium Payments are made by each Owner through
employee payroll deduction. The Company may also reduce the minimum Premium
Payment requirements for Owners who use the Contract under a program which
qualifies under Section 403 or 408 of the Code. The prior approval of the
Company is required before it will accept any Premium Payment in excess of
$1,000,000.
A completed Contract Application, if required, or Order to Purchase and the
Initial Premium Payment must be received by the Company for acceptance. Upon
acceptance, the Contract is issued to the Owner and the Initial Premium Payment
is then credited to the Owner's Annuity Account. An Initial Premium Payment must
be credited within two business days of receipt by the Company of a completed
Contract Application or Order to Purchase containing information sufficient to
issue the Contract. The Company may retain the Premium Payment for up to five
business days while attempting to obtain any missing information. If sufficient
information is not obtained within five business days of receipt of the Premium
Payment, the prospective Owner will be informed of the reasons for the delay and
the Premium Payment will be returned immediately unless the prospective Owner
specifically consents to the Company's retaining the Premium Payment until
sufficient information is obtained.
Subsequent Premium Payments are also forwarded to the Company for acceptance.
Upon acceptance, the Premium Payment is credited to the Owner's Annuity Account.
A subsequent Premium Payment received by the Company prior to the closing time
of the New York Stock Exchange (currently 4 p.m. Eastern Time) will be applied
on the same day of receipt.
An Owner, or Annuitant if the Owner is a non-natural person, may be no more
than 85 years of age on the Date of Issue. The Company reserves the right in its
sole discretion not to accept a Premium Payment. In addition, the payment by the
Company of any amount under the Contract which is derived, all or in part, from
any Premium Payment paid to the Company by check or draft may be postponed until
such time as the Company determines the check or draft has been honored.
OWNER'S ANNUITY ACCOUNT. The Company will establish an Owner's Annuity Account
upon its acceptance of an initial Premium Payment. Each subsequent Premium
Payment under the Contract will be credited to the Owner's Annuity Account. The
Company will maintain the Annuity Account for the Owner during the Accumulation
Period. The Contract's Annuity Account Value for any Valuation Period is equal
to the sum of the variable accumulation value, if any, plus the fixed
accumulation value, if any, of the Annuity Account for that Valuation Period.
ANNUITY ACCOUNT CONTINUATION. The Annuity Account shall be continued
automatically in full force for the Owner until the earlier of: (1) the Annuity
Date; (2) all death benefits under the Contract are paid; (3) the Contract is
surrendered; and (4) the Annuity Account Value no longer meets the requirements
specified in the "Minimum Value Requirement." Cash withdrawals may cause the
Annuity Account to be discontinued by the Company.
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<PAGE> 16
ALLOCATION OF PREMIUM PAYMENT(S). The Initial Premium Payment and any
Subsequent Premium Payment(s) will be allocated among the Sub-Accounts available
in connection with the Fixed Account or the Variable Account, or to a
combination of both as specified by the Owner. Subject to the $2,500 Fixed
Account Sub-Account and $100 Variable Account Sub-Account minimum allocations
specified above (see "Premium Payments"), the Company will allocate the Initial
Premium Payment as specified by the Owner. Subsequent Premium Payments will also
be allocated as initially specified by the Owner unless the Company receives
different allocation instructions in writing from the Owner. Allocations to
multiple sub-accounts will be made in whole percentages. At this time, no more
than 18 Fixed Account and Variable Sub-Accounts may be opened during the life of
the Contract. The Company may expand this number at a future date. If applicable
allocation instructions would result in an allocation to a Fixed Account Sub-
Account that does not meet the $2,500 minimum, then the Company will promptly
seek further instructions from the Owner regarding allocation of the premium. In
certain states, with respect to Premium Payments received before or during the
Right to Examine Contract period and allocated to the Variable Account, the
Company will allocate such Premium Payments to the AIM V.I. Money Market Fund
during the Right to Examine Contract period (see "Right to Examine Contract").
After expiration of this period the Company will allocate the initial Premium
Payment as specified by the Owner (see "Right to Examine Contract")
FIXED ACCUMULATION VALUE. The fixed accumulation value of a Owner's Annuity
Account, if any, for any Valuation Period is equal to the sum of the values of
all Fixed Account Sub-Accounts credited to the Annuity Account for such
Valuation Period.
GUARANTEED PERIODS. The Owner may elect to allocate Premium Payments to one or
more Sub-Accounts within the Fixed Account. Each Sub-Account will maintain a
Guaranteed Period with a duration ranging from one to ten years. The duration of
the Guaranteed Period will affect the Guaranteed Interest Rate of the
Sub-Account. Initial Premium Payments and Subsequent Premium Payments, or
portions thereof, and transfer amounts allocated to a Fixed Account Sub-Account,
less any amounts subsequently withdrawn, will earn interest at the Guaranteed
Interest Rate during the particular Sub-Account's Guaranteed Period unless
withdrawn prior to the end of the Guaranteed Period. Initial Sub-Account
Guaranteed Periods begin on the date a Premium Payment is accepted or, in the
case of a transfer, on the effective date of the transfer, and end on the number
of calendar years in the Sub-Account's Guaranteed Period elected from the date
on which the amount was allocated to the Sub-Account (the "Expiration Date").
Any portion of the Annuity Account Value allocated to a specific Sub-Account
with a specified Expiration Date (including interest earned thereon) will be
referred to herein as a "Guaranteed Period Amount." Interest will be credited
daily at a rate equivalent to the compound annual rate. As a result of renewals
and transfers of portions of the Annuity Account Value described under "Transfer
Privilege" below, which will begin new Sub-Account Guaranteed Periods, amounts
allocated to Sub-Accounts of the same duration may have different Expiration
Dates. Thus each Guaranteed Period Amount will be treated separately for
purposes of determining any applicable Market Value Adjustment (see "MVA").
The Company will notify the Owner in writing prior to the Expiration Date for
any Guaranteed Period Amount. A new Sub-Account Guaranteed Period of the same
duration as the previous Sub-Account Guaranteed Period will commence
automatically at the end of the previous Guaranteed Period unless the Company
receives, following such notification but prior to the end of such Guaranteed
Period, a written election by the Owner to transfer the Guaranteed Period
Amount, in accordance with the Transfer Privilege provision, to a different
Fixed Account Sub-Account or to a Variable Account Sub-Account from among those
being offered by the Company at such time. Transfers of any Guaranteed Period
Amount which become effective upon the expiration of the applicable Guaranteed
Period are not subject to the twelve transfers per Contract Year limitations or
the additional Fixed Sub-Account transfer restrictions (see "Transfer
Privilege").
GUARANTEED INTEREST RATES. The Company periodically will establish an
applicable Guaranteed Interest Rate for each of the Sub-Account Guaranteed
Periods within the Fixed Account. Guaranteed Interest Rates offered at any time
may be changed by the Company depending on interest rates on investments
available to the Company and other factors as described below, but once
established, rates will be guaranteed for the entire duration of the
Sub-Account's respective Guaranteed Period. However, any amount withdrawn from
the Sub-Account may be subject to any applicable withdrawal charges, Annuity
Account Fees, MVA, premium taxes or other fees. Amounts transferred out of a
Fixed Account Sub-Account prior to the end of the Guaranteed Period will be
subject to the MVA.
The Guaranteed Interest Rate will not be less than 3% per year compounded
annually, regardless of any application of the MVA. The Company has no specific
formula for determining the rate of interest that it will declare as a
Guaranteed Interest Rate, as these rates will be reflective of interest rates
available on the types of debt instruments in which the Company intends to
invest amounts allocated to the Fixed Account (see "The Fixed Account"). In
addition, the Company's management may consider other factors in determining
Guaranteed Interest Rates for a particular Sub-Account including: regulatory and
tax requirements; sales commissions and administrative expenses borne by the
Company; general economic trends; and competitive factors. There is no
obligation to declare a rate in excess of 3%; the Owner assumes the risk that
declared rates will not exceed 3%. The Company has complete discretion to
declare any rate of at least 3%, regardless of market interest rates, the
amounts earned by the Company on its investments, or any other factors.
VARIABLE ACCUMULATION VALUE. The variable accumulation value of an Owner's
Annuity Account, if any, for any Valuation Period is equal to the sum of the
value of all Variable Accumulation Units credited to the Owner's Annuity Account
for such Valuation Period.
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<PAGE> 17
CREDITING VARIABLE ACCUMULATION UNITS. Upon the Company's acceptance of an
Initial Premium Payment and any Subsequent Premium Payment(s), all or that
portion, if any, of the Premium Payment(s) to be allocated to any Sub-Accounts
in accordance with the allocation factors will be credited to the Owner's
Annuity Account in the form of Variable Accumulation Units. The number of
particular Variable Accumulation Units to be credited is determined by dividing
the dollar amount allocated to the particular Sub-Account by the Variable
Accumulation Unit value for the particular Sub-Account for the Valuation Period
during which the Premium Payment is received at the Annuity & Variable Life
Services Center and accepted. Subsequent Premium Payments are applied upon
receipt.
VARIABLE ACCUMULATION UNIT VALUE. The Variable Accumulation Unit value for
each Sub-Account was established at $10 for the first Valuation Period of the
particular Sub-Account. The Variable Accumulation Unit value for the particular
Sub-Account for any subsequent Valuation Period is determined as follows:
(1) the total value of Fund shares held in the Sub-Account is calculated by
multiplying the number of Fund shares owned by the Sub-Account at the
beginning of the Valuation Period by the net asset value per share of the
Fund at the end of the Valuation Period, and adding any dividend or other
distribution of the Fund if an ex-dividend date occurs during the
Valuation Period; minus
(2) the liabilities of the Sub-Account at the end of the Valuation Period;
such liabilities include daily charges imposed on the Sub-Account, and may
include a charge or credit with respect to any taxes paid or reserved for
by the Company that the Company determines result from the operations of
the Variable Account; and
(3) the result of (2) is divided by the number of Sub-Account units
outstanding at the beginning of the Valuation Period.
The investment performance of the portfolio of the Fund corresponding to the
applicable Sub-Account, expenses, and the deduction of certain charges affect
the Variable Accumulation Unit Value.
OPTIONAL VARIABLE ACCOUNT SUB-ACCOUNT ALLOCATION PROGRAMS
The Owner may elect to enroll in either of the following programs. However,
both programs cannot be in effect at the same time.
DOLLAR COST AVERAGING. Dollar Cost Averaging is a program which, if elected by
the Owner, systematically allocates specified dollar amounts from the Money
Market Sub-Account or the One-Year Fixed Account Sub-Account to one or more of
the Contract's Variable Account Sub-Accounts at regular intervals as elected by
the Owner. By allocating on a regularly scheduled basis as opposed to allocating
the total amount at one particular time, an Owner may be less susceptible to the
impact of market fluctuations.
Dollar Cost Averaging may be selected by establishing a Money Market
Sub-Account of at least $1,000 or the One-Year Fixed Account Sub-Account value
of at least $2,500. The minimum amount per month to allocate is $50 (subject to
the 18 Sub-Account limitation described under "Allocation of Premium Payments"
above). Enrollment in this program may occur at any time by calling the Annuity
& Variable Life Services Center or by providing the information requested on the
Dollar Cost Averaging election form to the Company and ensuring that sufficient
value is in the Money Market Sub-Account or the One-Year Fixed Account
Sub-Account. Transfers to any Fixed Account Sub-Account or from a Fixed Account
Sub-Account other than the One-Year Fixed Account Sub-Account are not permitted
under Dollar Cost Averaging. The Company may, at its sole discretion, waive
Dollar Cost Averaging minimum deposit and transfer requirements.
Dollar Cost Averaging will terminate when any of the following occurs: (1) the
number of designated transfers has been completed; (2) the value of the Money
Market Sub-Account or the One-Year Fixed Sub-Account is insufficient to complete
the next transfer; (3) the Owner requests termination by telephone or in writing
and such request is received at least one week prior to the next scheduled
transfer date to take effect that month; or (4) the Contract is surrendered.
The Dollar Cost Averaging program is not available following the Annuity Date.
There is no current charge for Dollar Cost Averaging but the Company reserves
the right to charge for this program.
The Company does not control the Fund and cannot guarantee that it or any
Series thereunder will accept transfers under the Dollar Cost Averaging program.
Therefore, the Company reserves the right to discontinue or change this program
at any time. THERE IS NO GUARANTEE THAT THE DOLLAR COST AVERAGING PROGRAM WILL
RESULT IN ANNUITY ACCOUNT VALUES WHICH EQUAL OR EXCEED ANY INITIAL PREMIUM
PAYMENT OR SUBSEQUENT PREMIUM PAYMENT MADE. The Dollar Cost Averaging program
may not achieve its objective. There is no guarantee that the program will
result in a profit, or protect against loss, nor is there any guarantee that it
produces better results than a single lump-sum investment.
AUTOMATIC REBALANCING. Automatic Rebalancing is an option which, if elected
by the Owner, periodically restores to a pre-determined level the percentage of
Contract Value allocated to each Variable Account Sub-Account (e.g. 20% Money
Market, 50% Growth, 30% Utilities). This pre-determined level will be the
allocation initially selected when the Contract was purchased, unless
subsequently changed. The Automatic Rebalancing allocation may be changed at any
time by submitting a request to the Company.
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If Automatic Rebalancing is elected, all Net Premium Payments allocated to the
Variable Account Sub-Accounts must be subject to Automatic Rebalancing. The
Fixed Account Sub-Account is not available for Automatic Rebalancing.
Automatic Rebalancing may take place on either a quarterly, semi-annual or
annual basis, as selected by the Owner. Once the rebalancing option is
activated, any Variable Account Sub-Account transfers executed outside of the
rebalancing option will terminate the Automatic Rebalancing option. Any
subsequent premium payment or withdrawal that modifies the net account balance
within each Variable Account Sub-Account may also cause termination of the
Automatic Rebalancing option. Any such termination will be confirmed to the
Owner. The Owner may terminate the Automatic Rebalancing option or re-enroll at
any time by calling or writing the Annuity & Variable Life Services Center.
The Automatic Rebalancing program is not available following the Annuity Date.
There is no current charge for Automatic Rebalancing but the Company reserves
the right to charge for this program.
TRANSFER PRIVILEGE
ACCUMULATION PERIOD. During the Accumulation Period the Owner may, upon
request, transfer all or part of any of the Owner's Annuity Account Value(s) to
one or more Sub-Accounts available under the Contract. Transfers from Fixed
Account Sub-Accounts and Variable Account Sub-Accounts are subject to the
following conditions: (1) an Owner is limited to twelve transfers each Contract
Year; (2) the amount being transferred may not be less than $1,000, from a Fixed
Account Sub-Account, or $100 from a Variable Account Sub-Account unless the
entire value of the Fixed or Variable Account Sub-Account is being transferred;
(3) the amount transferred to any Fixed Account Sub-Account may not be less than
$2,500, or $100 to a Variable Account Sub-Account; (4) the Annuity Account Value
remaining in a Fixed Sub-Account may not be less than $2,500, and not less than
$50 in a Variable Sub-Account; and (5) no transfers are permitted during the
Right to Examine period. With the exception of transfers of any Guaranteed
Period Amount which become effective upon the expiration of the applicable
Guaranteed Period, all transfers from any Fixed Sub-Account are subject to the
following additional conditions: (1) An Owner may make only one transfer from
each Fixed Sub-Account in any Contract Year; and (2) The amount transferred from
any Fixed Sub-Account may not exceed 15% of the Annuity Account Value in the
Sub-Account on the transfer's effective date. Transfers from Fixed Account
Sub-Accounts may be subject to a MVA. Amounts transferred into a Fixed Account
Sub-Account will earn interest at the Guaranteed Interest Rate declared by the
Company for that Guaranteed Period as of the effective date of the transfer
(subject to any future MVA).
The Company reserves the right to otherwise restrict the transfer privilege in
any way or to eliminate it entirely. The Company also reserves the right to
defer transfer of amounts from the Fixed Account for a period not to exceed six
(6) months from the date a request for such transfer is received by the Company.
Transfer requests in writing must be upon a form acceptable to the Company.
Telephone transfers will be allowed automatically, unless the Owner specifically
declines this privilege in the Contract Application.
The Company will take the following procedures to confirm that instructions
communicated by telephone are genuine. Before a service representative accepts
any request, the caller will be asked for specific information to validate the
request. All calls will be recorded. All transactions performed will be
confirmed by the Company in writing. The Company is not liable for any loss,
cost or expense for acting on telephone instructions which are believed to be
genuine in accordance with these procedures.
Transfers of all or a portion of any Guaranteed Period Amount will be subject
to the MVA described below unless the transfer becomes effective upon the
Expiration Date of such Guaranteed Period. Transfers involving Variable
Accumulation Units shall be subject to such terms and conditions as may be
imposed by the Fund. A transfer from a Sub-Account of the Variable Account will
be effective on the date the request for transfer is received by the Company,
provided such request is received by the Company prior to 4:00 p.m. Eastern Time
on a day which the New York Stock Exchange is open for business. Otherwise, the
transfer will become effective the next succeeding day upon which the New York
Stock Exchange is open for business. Under current law, there will not be any
tax liability to the Owner for making a transfer.
ANNUITY PERIOD. After the Annuity Date the Payee may, by filing a request in
writing with the Company, exchange the value of a designated number of Annuity
Units of particular Variable Sub-Accounts then credited under the Contract into
other Annuity Units, the value of which would be such that the dollar amount of
an annuity payment made on the date of the exchange would be unaffected by the
exchange. Each Payee is limited to three exchanges per Contract Year after the
Annuity Date, and such exchanges may be made only between Variable Account
Sub-Accounts. Exchanges will be made using the Annuity Unit values for the
Valuation Period during which any request for exchange is received by the
Company.
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DISTRIBUTIONS UNDER THE CONTRACT
CASH WITHDRAWALS. At any time prior to the Annuity Date and during the
lifetime of the Owner, or of the Annuitant if the Owner is a nonnatural person,
an Owner may elect to receive a cash withdrawal payment from the Company. Any
such withdrawal from the Variable Account will be effective on the date that it
is received by the Company and will be processed within seven days of the
Company's receipt of such request, except as the Company may be permitted to
defer such payment in accordance with the Act and applicable state insurance
law.
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The Owner may request a full surrender (see "Surrender of the Contracts") or a
partial cash withdrawal. A request for a partial withdrawal will result in the
cancellation of a portion of the Owner's Annuity Account Value equal to the
dollar amount of the cash withdrawal payment, plus or minus any applicable MVA
plus any applicable withdrawal charge and premium taxes. The Company, upon
request, will advise the Owner of the amounts that would be payable in the event
of a full surrender or partial withdrawal.
A partial cash withdrawal must be in a minimum amount of at least $1,000. When
electing such a partial withdrawal, the Owner must instruct the Company as to:
1) the amount to be withdrawn; and 2) the Sub-Account(s) from which the
withdrawal shall occur. Partial withdrawals may not reduce the total Annuity
Account Value below $1,000. In the event the Owner does not specify the
Sub-Account(s) from which the withdrawal shall occur, the Company will withdraw
the requested amount pro-rata from each Sub-Account maintained by the Owner. If
such a pro-rata withdrawal reduces the value of any Fixed Sub-Account balance
below $2,500 and/or any Variable Sub-Account balance below $50, the Company will
transfer the value of those Sub-Accounts to that Variable Sub-Account of the
Owner maintaining the highest value, or to the Fixed Account if there is no
Variable Account Sub-Account maintaining a balance greater than $50.
ALL CASH WITHDRAWALS FROM ANY FIXED ACCOUNT SUB-ACCOUNT WILL BE SUBJECT TO THE
MVA, EXCEPT THOSE WHICH BECOME EFFECTIVE UPON THE EXPIRATION DATE OF SUCH
SUB-ACCOUNT'S GUARANTEED PERIOD. If an Owner makes a partial cash withdrawal,
the Company will assess any applicable withdrawal charge, MVA, and premium taxes
pro rata against the amounts remaining in each Sub-Account to which an Owner's
Annuity Account is allocated. If a full Surrender of the Contract is requested
by the Owner, the Company will assess any applicable withdrawal charges, MVA,
Annuity Account Fee, and premium taxes against the amount withdrawn. See
"Contract Charges and Fees". The Annuity Account Fee and any applicable MVA will
be deducted from the Annuity Account before the application of any withdrawal
charge.
The Company reserves the right to defer the payment of amounts withdrawn or
transferred from the Fixed Account for a period not to exceed six (6) months
from the date written request for such withdrawal or transfer is received by the
Company. (See "Deferral of Payment.")
Cash withdrawals from a Variable Account Sub-Account will result in the
cancellation of Variable Accumulation Units attributable to the Owner's Annuity
Account with an aggregate value on the effective date of the withdrawal equal to
the total amount by which the Annuity Account Value is reduced (which amount
will include any applicable withdrawal charge). The cancellation of such units
will be based on the Variable Accumulation Unit values of the Variable Account
Sub-Accounts at the end of the Valuation Period during which the cash withdrawal
request is received.
A cash withdrawal may have federal income tax consequences. See "Federal Tax
Matters".
MINIMUM VALUE REQUIREMENT. If a partial withdrawal is requested which would
cause an Owner's Annuity Account Value to fall to less than $1,000, then the
partial withdrawal will be treated as a request for a full surrender. In
addition, the Company will terminate a Contract and pay the Owner as if the
Contract was surrendered if no Premium Payments are made to the Company under
the Contract for three consecutive years and the Annuity Account Value has
fallen below $1,000 during this period. Prior to exercising this right to
terminate, the Company will provide the Owner with thirty (30) days notice and
the opportunity to make an additional Premium Payment to increase the Annuity
Account Value above the minimum amount. On termination, the Owner will receive
the amount which would have been paid had the Contract been fully surrendered.
The Company also reserves the right to transfer any Fixed Sub-Account balance
which has a value below $2,500 and any Variable Sub-Account balance which has a
value below $50 to that Variable Sub-Account of the Owner maintaining the
highest value or to the Fixed Account if there is no Variable Account
Sub-Account maintaining a balance greater than $50.
SECTION 403(B) ANNUITIES. The Code imposes restrictions on cash withdrawals
from Contracts used with Section 403(b) Annuities. In order for these Contracts
to receive tax deferred treatment, the Contract must provide that cash
withdrawals of amounts attributable to salary reduction contributions (other
than withdrawals of accumulation account value as of December 31, 1988
("Pre-1989 Salary Reduction Account Value")) may be made only when the Owner
attains age 59 1/2, separates from service with the employer, dies or becomes
disabled (within the meaning of Section 72(m)(7) of the Code). These
restrictions apply to any growth or interest on or after January 1, 1989 on
Pre-1989 Salary Reduction Account Value(s), salary reduction contributions made
on or after January 1, 1989, and any growth or interest on such contributions
("Restricted Annuity Account Value(s)").
Withdrawals of Restricted Annuity Account Value(s) are also permitted in cases
of financial hardship, but only to the extent of contributions; earnings on
contributions cannot be withdrawn for hardship reasons. Hardship (and other)
withdrawals may be subject to a 10% tax penalty, in addition to any withdrawal
charge, MVA, Annuity Account Fee, and premium taxes applicable under the
Contract.
Under the terms of a particular Section 403(b) plan, the Owner may be entitled
to transfer all or a portion of the Annuity Account Value to one or more
alternative funding options. An Owner should consult the documents governing his
or her plan and the person who administers the plan for information as to such
investment alternatives.
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With respect to these restrictions on withdrawals from the Variable Account,
the Company is relying upon a no-action letter dated November 28, 1988 from the
staff of the Commission to the American Council of Life Insurance, the
requirements for which have been or will be complied with by the Company.
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DEATH BENEFITS
DEATH BENEFIT PROVIDED BY THE CONTRACTS. In the event of the death of any
Owner prior to the Annuity Date, the Company will pay a death benefit to the
Beneficiary upon receipt of due proof of death of the Owner. If there is no
designated Beneficiary living on the date of death of the deceased Owner, the
Company will, upon receipt of due proof of death of both the deceased Owner and
the designated Beneficiary, pay the death benefit in one lump sum to the
deceased Owner's estate. If the death of any Annuitant occurs on or after the
Annuity Date, no death benefit will be payable under the Contract except as may
be provided under the Annuity Option elected.
ELECTION AND EFFECTIVE DATE OF ELECTION. During the lifetime of the Owner and
prior to the Annuity Date, the Owner may elect In Writing to have the death
benefit applied under the Annuity Options for the Beneficiary after the death of
the Owner.
If no death benefit payment method is in effect on the date of the Owner's
death, the Beneficiary may elect (a) to receive the death benefit in the form of
a single cash payment; or (b) to have the death benefit applied under the
Annuity Options (on the Annuity Date described under "Payment of Death Benefit")
for the Beneficiary. Such election may be made by filing with the Company an
election in writing. An Owner's election of an Annuity Option specifying the
method by which the death benefit shall be paid will become effective on the
date it is received by the Company. Any Annuity Option elected by the
Beneficiary will become effective on the later of: (a) the date the election is
received by the Company; or (b) the date due proof of the death of the deceased
Owner is received by the Company. If an election by the Beneficiary is not
received by the Company within 60 days following the date due proof of the death
of the Owner is received by the Company, the Beneficiary will be deemed to have
elected on such 60th day to receive the death benefit in the form of a single
cash payment.
The Annuity Option elected by the Owner or the Beneficiary may be restricted
by the Code. See "Federal Tax Matters" for further discussion.
PAYMENT OF DEATH BENEFIT. If the death benefit is to be paid in cash to the
Beneficiary, subject to the Company's receipt of due proof of death, payment
will be made within seven days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer any
such payment of amounts derived from the Variable Account in accordance with the
Act. If the death benefit is to be paid in one lump sum to the estate of the
Owner, payment will be made within seven (7) days of the date due proof of the
death of the Owner and/or the designated Beneficiary, as applicable, is received
by the Company except as the Company may be permitted to defer any such payment
of amounts derived from the Variable Account in accordance with the Act. If
payment is to be made under any of the Annuity Options, the Annuity Date will be
thirty (30) days following the effective date or the deemed effective date of
the election, and the Owner's Annuity Account will be maintained in effect until
the Annuity Date.
AMOUNT OF DEATH BENEFIT. No MVA or withdrawal charges are assessed against
amounts which are applied toward payment of a death benefit. The amount of the
death benefit is determined as of the effective date or deemed effective date of
the death benefit election (not as of the date of death), and, unless there is a
transfer of ownership, is equal to the greater of (1) the Annuity Account Value
for the Valuation Period during which the Death Benefit election is effective or
deemed to become effective; (2) the sum of all Premium Payments under the
Contract, minus the sum of all partial withdrawals from the Contract; (3) the
Owner's Annuity Account Value on the Seven Year Anniversary immediately
preceding the date the Death Benefit election is effective or is deemed to
become effective, adjusted for any subsequent Premium Payments and partial
withdrawals and charges; and (4) the amount that would have been payable in the
event of a full surrender of the Contract including surrender charges and any
applicable MVA on the date the Death Benefit election is effective or is deemed
to become effective.
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SURRENDER OF THE CONTRACTS
At any time before the Annuity Date, the Owner may elect to surrender the
Contract and receive a cash payment from the Company. On the Surrender Date the
Owner's Annuity Account will be canceled and the Annuity Account Value, minus
any applicable withdrawal charges, Annuity Account Fee, and premium taxes, and
plus or minus any applicable MVA, will be paid to the Owner within seven days of
the Surrender Date in the form of a cash payment except as the Company may be
permitted to defer any such payment of amount derived from the Variable Account
in accordance with the Act. The Company reserves the right, however, to defer
the payment of amounts withdrawn from the Fixed Account for a period not to
exceed six (6) months from the date written request for such withdrawal is
received by the Company.
Because withdrawals from an Owner's Annuity Account may be subject to a
withdrawal charge, a MVA, and applicable taxes and fees, and because the Owner
assumes the investment risk with respect to amounts allocated to the Variable
Account, the total amount paid upon total surrender of the Contract (taking any
prior cash withdrawals into account) may be more or less than the total Premium
Payments made. Following a surrender of the Contract, or if the Contract
terminates for any other reason, all rights of the Owner, Annuitant, and
Beneficiary will terminate.
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A surrender may have federal income tax consequences. See "Federal Tax
Matters".
ANNUITY PROVISIONS
ANNUITY DATE. Annuity payments will begin on the first day of the month
following the Annuity Date selected by the Purchaser, as specified in the
Contract Application or Order to Purchase. In most states, the date selected by
the Owner may not be sooner than 30 days following the Date of Issue. This date
may be changed by the Owner from time to time by notifying the Company in
writing, provided that notice of each change is received by the Company at least
45 days prior to the then current Annuity Date and the new Annuity Date is a
date which is: (1) at least 30 days after the effective date of the change; (2)
the first day of a month; and (3) not later than the first day of the first
month following the Annuitant's 90th birthday, unless otherwise restricted, in
the case of a Qualified Contract, by the particular retirement plan or by
applicable law. The Annuity Date may also be changed by an election of an
Annuity Option as described in the Death Benefit section of this Prospectus.
On the Annuity Date the Owner's Annuity Account will be canceled and the
Annuity Account Value, minus any applicable Annuity Account Fee and premium
taxes, will be applied to provide an annuity under one or more of the options
described below. No MVA or withdrawal charges will be imposed upon amounts
applied to purchase an annuity. NO PAYMENTS MAY BE REQUESTED UNDER THE
CONTRACT'S CASH WITHDRAWAL PROVISIONS ON OR AFTER THE ANNUITY DATE.
Since the Contracts offered by this Prospectus may be issued in connection
with retirement plans which meet the requirements of Section 401, 403, 408, or
457 of the Code, as well as certain non-qualified plans, reference should be
made to the terms of the particular plan for any limitations or restrictions on
the Annuity Date.
ELECTION - CHANGE OF ANNUITY OPTION. During the lifetime of the Owner and
prior to the Annuity Date, the Owner may elect one or more of the Annuity
Options described below, or such other Annuity Option as may be agreed to by the
Company. The Owner may also change any election, but notice in writing of any
election or change of election must be received by the Company at least 45 days
prior to the Annuity Date.
If no election is in effect on the 30th day prior to the Annuity Date and the
Contract is used by the Owner in connection with a retirement plan which meets
the requirements of either Section 401 (including Section 401(k)), Section 403,
Section 408(c), Section 408(k), or Section 457 of the Code, the Joint and
Survivor Annuity described below or Life Annuity, whichever is applicable, will
be deemed to have been elected if required by such retirement plan. If the
Contract is not used by the Owner in connection with one of these plans, the
Owner will be deemed to have elected Life Annuity with 120 Monthly Payments
Certain.
At any time the Owner may (in writing) request annuitization of the then
current Annuity Account Value in accordance with any one of the Annuity Options
described below. In such event, no withdrawal charge or MVA will be imposed at
the time payments under the Annuity Option begin. Such annuitization will
automatically result in a change in the Annuity Date to the date payments
commence under the Annuity Option elected.
Reference should be made to the terms of a particular retirement plan and any
applicable legislation for any limitations or restrictions on the options which
may be elected. NO CHANGE OF ANNUITY OPTION IS PERMITTED AFTER THE ANNUITY DATE.
ANNUITY OPTIONS. The Contract provides for seven different Annuity Options
which are described below. Four are fixed annuity options, and three are
variable annuity options. An Owner may elect a Fixed Annuity, a Variable
Annuity, or a combination of both. If electing a combination, the Owner must
specify what part of the Annuity Account is to be applied to each Fixed and
Variable Annuity Option. (If no such election is received by the 30th day prior
to the Annuity Date, the portion of the Annuity Account to be applied for a
Fixed Annuity and/or a Variable Annuity will be determined on a pro rata basis
from the composition of the Annuity Account on the Annuity Date. Thus, any
amounts in the Variable Account will be applied to a Variable Annuity, and
amounts in the Fixed Account will be applied to a Fixed Annuity.) Variable
Annuity payments will be based on the Sub-Account(s) selected by the Owner, or
on the allocation of the Annuity Account Value among the Sub-Accounts.
A FIXED ANNUITY provides for Annuity Option payments which will remain
constant pursuant to the terms of the Annuity Option elected. The effect of
choosing a Fixed Annuity is that the amount of each payment will be set on the
Annuity Date and will not change. If a Fixed Annuity is selected, the Variable
Account used to provide the Fixed Annuity will be transferred to the general
account of the Company, and the annuity payments will be fixed in amount by the
fixed annuity provisions selected and, for some options, the settlement age of
the Annuitant (determined in accordance with the Contract). The Fixed Annuity
payment amounts are determined by applying the Annuity Payment Rates found in
the Contract to the portion of the Annuity Account Value allocated to the Fixed
Annuity Option selected by the Owner, or, if more favorable to the Payee(s), by
applying the Annuity Payment Rates published by the Company and in use on the
Annuity Date. The rates found in the Contracts show, for each $1,000 applied,
the dollar amount of the monthly fixed annuity payment. This rate may be changed
by the Company with respect to Contracts established after the effective date of
such change (see "Modification").
A VARIABLE ANNUITY provides for payments that fluctuate or vary in dollar
amount, based on the investment performance of a Variable Account Sub-Account.
The Variable Annuity purchase rate tables in the Contract reflect an assumed
interest rate of 3%, so if the actual net investment performance of the
Sub-Account is less than this rate, then the dollar amount of the actual annuity
pay-
17
<PAGE> 22
ments will decrease. If the actual net investment performance of the Sub-Account
is higher than this rate, then the dollar amount of the actual annuity payments
will increase. If the net investment performance exactly equals the 3% rate,
then the dollar amount of the actual annuity payments will remain constant.
The amount of the first Variable Annuity payment is determined by the variable
annuity provisions selected and, for some options, the settlement age of the
Annuitant (determined in accordance with the Contract). All Variable Annuity
payments other than the first are determined by means of Annuity Units credited
to the contract with respect to the particular payee. The number of Annuity
Units to be credited in respect of a particular Sub-Account is determined by
dividing that portion of the first Variable Annuity payment attributable to that
Sub-Account by the Annuity Unit Value of that Sub-Account for the Valuation
Period which ends immediately preceding the Annuity Date. The number of Annuity
Units of each Sub-Account credited with respect to the particular payee then
remains fixed unless an exchange of Annuity Units is made pursuant to the
"Transfer Privilege - Annuity Period" section. The dollar amount of each
Variable Annuity payment after the first may increase, decrease or remain
constant, and is equal to the sum of the amounts determined by multiplying the
number of Annuity Units of a particular Sub-Account for the Valuation Period
which ends immediately preceding the due date of each subsequent payment by the
Annuity Unit Value for that Sub-Account for the first Valuation Period occurring
on or immediately prior to the first day of each month. The annual Annuity
Account Fee is deducted, pro rata, from each Variable Annuity payment.
The Owner may choose to receive annuity payments under any one of the Annuity
Options described below. The Company may consent to other plans of payment
before the Annuity Date.
If the Contract is used by the Owner in connection with a retirement plan
which meets the requirements of either Section 401 (including Section 401(k)),
Section 403, Section 408(c), Section 408(k), or Section 457 of the Code, a Joint
and Survivor Annuity will be offered under the Contract. A Joint and Survivor
Annuity provides for monthly payments payable during the joint lifetime of the
Payee and a designated second person and during the lifetime of the survivor.
During the lifetime of the survivor the monthly payment payable will be
determined the same manner as during the joint lifetime of the Payee and the
designated second person.
FIXED ANNUITY OPTIONS
LIFE ANNUITY OPTION. An annuity payable monthly to the Payee during the
lifetime of the Annuitant, ceasing with the last payment due prior to the death
of the Annuitant. Under this option, only one payment will be made if the
Annuitant dies before the second payment is made, only two payments will be made
if the Annuitant dies before the third payment is made, etc.
LIFE ANNUITY WITH CERTAIN PERIOD OPTION. An Annuity providing monthly income
to the Payee for a fixed period of 60, 120, 180, or 240 months (as selected),
and for as long thereafter as the Annuitant lives.
CASH REFUND LIFE ANNUITY OPTION. An annuity payable monthly to the Payee
during the lifetime of the Annuitant ceasing with the last payment due prior to
the death of the Annuitant provided that, at the death of the Annuitant, the
Payee will receive an additional payment equal to the excess, if any, of (a)
over (b) where: (a) is the initial value of the proceeds applied under this
option; and (b) is the dollar amount of payments already paid.
ANNUITY CERTAIN OPTION. An amount payable monthly for the number of years
selected which may be from 5 to 30 years.
VARIABLE ANNUITY OPTIONS
VARIABLE LIFE ANNUITY OPTION. A Variable Annuity payable monthly to the Payee
during the lifetime of the Annuitant, ceasing with the last payment due prior to
the death of the Annuitant. Under this option, only one payment will be made if
the Annuitant dies before the second payment is made, only two payments will be
made if the Annuitant dies before the third payment is made, etc.
VARIABLE LIFE ANNUITY WITH CERTAIN PERIOD OPTION. A Variable Annuity providing
monthly income to the Payee for a fixed period of 60, 120, 180, or 240 months
(as selected), and for as long thereafter as the Annuitant shall live.
VARIABLE ANNUITY CERTAIN OPTION. A variable amount payable monthly for the
number of years selected which may be from 5 to 30 years. At any time during the
period payments are made, the Annuitant may elect that a portion or all of the
future payments to which the Payee is entitled be commuted and paid in one sum.
A withdrawal may be taken at any time after annuitization which does not exceed
the total value of the variable annuity certain on the withdrawal date. The
value of the variable annuity certain is determined by first converting an
Owner's number of annuity units into dollars based on the value of the annuity
units. Thereafter the dollar value is divided by an annuity certain payment
factor to obtain the total value of the variable annuity certain. The annuity
certain payment factor is determined by calculating the number of monthly
payments remaining from the date of withdrawal to the end of the variable
annuity certain period and discounting such payments to a present value using an
assumed interest rate of 3%. The Annuitant may elect that the Payee receive all
or a portion of this present value.
ADDITIONAL ANNUITY OPTIONS. Any proceeds payable under the Contract may also
be settled under any other method of settlement including joint and senior
settlement options under joint life annuities) offered by the Company at the
time of the request.
18
<PAGE> 23
DETERMINATION OF ANNUITY PAYMENTS. On the Annuity Date, the adjusted value of
(i) the Fixed Account and (ii) the Variable Account will be applied to provide
for payments under the selected Annuity Option. The adjusted value will be equal
to the Annuity Account Value at the end of the Valuation Period which ends
immediately preceding the Annuity Date, reduced by a proportionate amount of the
Annuity Account Fee to reflect the time elapsed between the last day of the
prior contract year and the day before the Annuity Date, and minus premium or
similar taxes.
If the amount to be applied under any annuity option is less than $5,000, or
if the monthly annuity payment payable in accordance with such option is less
than $50, the Company will pay the amount to be applied in a single payment to
the Payee designated by the Owner.
- --------------------------------------------------------------------------------
CONTRACT CHARGES AND FEES
As more fully described below, charges under the Contracts offered by this
Prospectus are assessed in four ways: (1) as withdrawal charges (contingent
deferred sales charges); (2) as deductions for Contract administration expenses
and, if applicable, for premium taxes; (3) as charges against the assets of the
Variable Account for the assumption of mortality and expense risks and for
administrative expenses; and (4) as MVAs on certain withdrawals from the Fixed
Account. In addition, certain deductions are made from the assets of the Fund
for investment management fees and expenses. These fees and expenses are
described in the Fund's Prospectus and Statement of Additional Information.
WITHDRAWAL CHARGES. No deduction for sales charges is made from a Premium
Payment. However, if a cash withdrawal of a Premium Payment is made, a
withdrawal charge (contingent deferred sales charge) may be assessed by the
Company. The length of time between the Company's acceptance of the Premium
Payment deemed withdrawn and the receipt of a withdrawal request determines the
withdrawal charge. This charge will be used to cover certain expenses relating
to the sale of the Contracts including commissions paid to sales personnel, the
costs of preparation of sales literature, other promotional costs and
acquisition expenses.
Each Premium Payment has its own time period for purposes of assessing a
withdrawal charge. For purposes of computing the withdrawal charge, amounts are
deemed to be withdrawn in the order in which they were received by the Company.
For example, the Company will deem amounts first withdrawn to be from the oldest
Premium Payment accepted by the Company. After these amounts are exhausted, the
Company will deem amounts withdrawn to be from the second oldest Premium Payment
accepted by the Company, and so on until all of an Owner's Premium Payments have
been withdrawn. After all Premium Payments have been deemed withdrawn, the
Company will deem further withdrawals to be from net investment results
attributable to such Premium Payments, if any.
Subject to the Free Partial Withdrawal described below, Premium Payment
amounts withdrawn from an Owner's Annuity Account will be assessed the following
withdrawal charge (after being adjusted by any applicable MVA):
<TABLE>
<CAPTION>
WITHDRAWAL
CHARGE
PERCENTAGE YEAR APPLICABLE
- ---------- ---------------
<S> <C>
7%....................................... During 1st Year since Premium Payment accepted
6%....................................... During 2nd Year since Premium Payment accepted
5%....................................... During 3rd Year since Premium Payment accepted
4%....................................... During 4th Year since Premium Payment accepted
3%....................................... During 5th Year since Premium Payment accepted
2%....................................... During 6th Year since Premium Payment accepted
1%....................................... During 7th Year since Premium Payment accepted
0%....................................... Thereafter
</TABLE>
On withdrawal, any applicable Annuity Account Fee will be deducted from and
any Market Value Adjustment will be made to, the Owner's Annuity Account before
the application of any withdrawal charge. The withdrawal charge is then assessed
against the amounts remaining in the Owner's Annuity Account. If the Owner's
Annuity Account is allocated among more than one Sub-Account within the
Contract, the withdrawal charge will be assessed pro rata against the amounts
remaining within the Sub-Accounts from which the withdrawal occurred. If the
Sub-Accounts from which the withdrawal occurred do not contain sufficient
amounts to satisfy the withdrawal charge, the deficiency will be assessed pro
rata against all amounts remaining within the Sub-Accounts. If a cash withdrawal
causes the entire value of the Annuity Account to be withdrawn (i.e., a complete
surrender), then the withdrawal charge will be deducted from the amount paid.
The withdrawal charge is not imposed on a Premium Payment withdrawn after the
end of the seventh year from the Company's acceptance of such Premium Payment,
nor is the withdrawal charge imposed upon payment of the Death Benefit or upon
amounts applied to an Annuity Option.
The Company may, upon notice to the Owner, modify the withdrawal charges
provided that such modification shall apply only to an Owner's Annuity Account
established after the effective date of such modification (see "Modification").
For examples of withdrawals, surrenders, withdrawal charges and the MVA, see the
Statement of Additional Information.
19
<PAGE> 24
FREE PARTIAL WITHDRAWAL. Upon request in writing, an Owner may withdraw during
each Contract Year prior to the Annuity Date a portion of Premium Payments made
to the Owner's Annuity Account without the imposition of a withdrawal charge.
This privilege continues until all Premium Payments made to the Owner's Annuity
Account are considered withdrawn. Up to 15% of the total amount of an Owner's
Premium Payments may be withdrawn, in one or more increments, without a
withdrawal charge each Contract Year. The amount must be at least $1,000.
An Owner must specify the Sub-Account(s) from which the amount will be
withdrawn. If a Owner does not specify the Sub-Account(s) from which the
withdrawal will occur, the Company will withdraw the amount pro rata from all
the Owner's Sub-Accounts.
Withdrawals under this provision may be paid as a lump sum or, upon consent of
the Company, paid over equal installments no more frequently than monthly.
A Free Partial Withdrawal may have federal income tax consequences. See
"Federal Tax Matters".
ANNUITY ACCOUNT FEE. On the last Valuation Date of each contract year, the
Company deducts an annual policy administration fee ("Annuity Account Fee") on a
pro rata basis from all of an Owner's Sub-Accounts equal to $35 to partially
reimburse it for administrative expenses relating to the issue and maintenance
of the Contract and the Owner's Annuity Account. If the Purchaser's Annuity
Account was established during that calendar year, then the Company will pro
rate the Owner's initial Annuity Account Fee to reflect the shorter initial
period. Thereafter the full $35 Annuity Account Fee will be assessed annually.
If the Contract is surrendered, a $35 Annuity Account Fee will be deducted. On
the Annuity Date, the Annuity Account Value will be reduced by a proportionate
amount of the Annuity Account Fee to reflect the time elapsed between the
previous December 31 and the day before the Annuity Date. After the Annuity
Date, an annual $35 Annuity Account Fee will be deducted in approximately equal
amounts from each Variable Annuity payment made during the year. No Annuity
Account Fee will be deducted from Fixed Annuity payments. If applicable state
law requires, the $35 Annuity Account Fee will be reduced to a lesser amount.
The annual Annuity Account Fee will be waived each year that the Purchaser's
Annuity Account Value equals or exceeds $100,000 or the last Valuation Date of
that year.
ADMINISTRATIVE FEE. The Company also deducts a daily Administrative Fee from
the assets of each Sub-Account of the Variable Account to partially reimburse it
for administrative expenses relating to the issue and maintenance of the
Contract and the Owner's Annuity Account. This charge is currently at an
effective annual rate of 0.10% (equal to a daily rate of 0.000275834% of the
assets in each Sub-Account). There is no necessary relationship between the
administrative charges imposed and the amount of expenses that may be
attributable to any single Owner's Annuity Account. The Company does not
anticipate realizing any profit from this fee.
PREMIUM TAXES. Premium tax equivalents (including any related retaliatory
taxes), if any, and any other taxes due under the Contract will be deducted if
applicable. It is currently the Company's practice to deduct such taxes, if any,
at the time the Annuity Account Value, or any portion thereof, is withdrawn or
annuitized (although the deduction could, in the future, be taken from Premium
Payments). Currently these taxes range from 0% to 3.5% of the amount of premium
paid depending upon the Owner's state of residence.
No charges are currently made for federal, state or local taxes other than
state premium taxes. However, the Company reserves the right to deduct charges
in the future for such taxes or other economic burden resulting from the
application of any tax laws that the Company determines to be attributable to
the Contracts.
CHARGE FOR MORTALITY AND EXPENSE RISKS. The mortality risk assumed by the
Company arises from the contractual obligation to continue to make annuity
payments to one or more Payees regardless of how long the Annuitant lives and
regardless of how long all annuitants as a group live. This assures each
annuitant that neither the longevity of fellow annuitants nor an improvement in
the life expectancy generally will have an adverse effect on the amount of any
annuity payment received under the Contract. The Company assumes this mortality
risk by virtue of annuity rates incorporated into the Contract which cannot be
changed. The Company also assumes a mortality risk in connection with the Death
Benefits. The expense risk assumed by the Company is the risk that the
administrative charges assessed under the Contract may be insufficient to cover
the actual total administrative expenses incurred by the Company.
For assuming these risks, the Company makes a deduction from the Variable
Account at the end of each Valuation Period at an effective annual rate of 1.25%
(calculated at a daily rate of 0.003447920% of the assets in the Variable
Account). (The approximate portion of this charge estimated to be attributable
to mortality risks is 0.75%; the approximate portion of this charge estimated to
be attributable to expense risks is 0.50%.) If the deduction is insufficient to
cover the actual cost of the mortality and expense risk undertaking, the Company
will bear the loss. Conversely, if the deduction proves more than sufficient,
the excess will be profit to the Company. The Company expects to realize a
profit from this charge. No deduction for these risks is made from the Fixed
Account.
The Company assumes the risk that withdrawal charges assessed under the
Contracts may be insufficient to compensate the Company for the costs of
distributing the Contracts. In the event the withdrawal charges prove to be
insufficient to cover actual distribution expenses, the deficiency will be met
from the Company's general corporate funds, which may include amounts derived
from the mortality and expense risk charge.
20
<PAGE> 25
The Contracts provide that the Company may modify the mortality and expense
risk charges; however, such modification shall apply only with respect to an
Owner's Annuity Account established after the effective date of such
modification.
MVA. Any cash withdrawal or transfer of a Fixed Account Guaranteed Period
Amount, other than a withdrawal or transfer pursuant to an election which
becomes effective upon the Expiration Date of the Guaranteed Period, will be
subject to a MVA. The MVA will be applied to the amount being withdrawn or
transferred after deduction of any applicable Annuity Account Fee and before
deduction of any applicable withdrawal charge.
The MVA generally reflects the relationship between the Index Rate (based upon
the Treasury Constant Maturity Series published by the Federal Reserve) in
effect at the time a Premium Payment is allocated to a Sub-Account's Guaranteed
Period under the Contract and the Index Rate in effect at the time of the
Premium Payment's withdrawal or transfer. It also reflects the time remaining in
the Sub-Account's Guaranteed Period. Generally, if the Index Rate at the time of
withdrawal or transfer is more than .50% lower than the Index Rate at the time
the Premium Payment was allocated, then the application of the MVA will result
in higher payment upon withdrawal or transfer. Similarly, if the Index Rate at
the time of withdrawal or transfer is higher than the Index Rate at the time the
Premium Payment was allocated (or less than 0.50% lower), the application of the
MVA will generally result in a lower payment upon withdrawal or transfer.
The MVA is computed by applying the following formula:
(1 + A)(N)
----------
(1 + B)(N)
Where:
A = an Index Rate (based on the Treasury Constant Maturity Series published by
the Federal Reserve) for a security with time to maturity equal to the
Sub-Account's Guaranteed Period, determined at the beginning of the Guaranteed
Period.
B = an Index Rate (based on the Treasury Constant Maturity Series published by
the Federal Reserve) for a security with time to maturity equal to the
Sub-Account's Guaranteed Period, determined at the time of withdrawal or
transfer, plus a 0.50% adjustment (unless otherwise limited by applicable state
law). This adjustment builds into the formula a factor representing direct and
indirect costs to the Company associated with liquidating general account assets
in order to satisfy surrender requests. This adjustment of .50% has been added
to the denominator of the formula because it is anticipated that a substantial
portion of applicable general account portfolio assets will be in relatively
illiquid securities. Thus, in addition to direct transaction costs, if such
securities must be sold (e.g., because of surrenders), the market price may be
lower. Accordingly, even if interest rates decline, there will not be a positive
adjustment until this factor is overcome, and then any adjustment will be lower
than otherwise, to compensate for this factor. Similarly, if interest rates
rise, any negative adjustment will be greater than otherwise, to compensate for
this factor. If interest rates stay the same, this factor will result in a small
but negative MVA. If Index Rates "A" and "B" are within .25% of each other when
the Index Rate Factor is determined, no such percentage adjustment to "B" will
be made.
N = The number of years remaining in the Guaranteed Period (e.g. 1 year and 73
days = 1 + (73 divided by 365) = 1.2 years).
Straight line interpolation is used for periods to maturity not quoted.
See the Statement of Additional Information for examples of the application of
the MVA.
- --------------------------------------------------------------------------------
OTHER CONTRACT PROVISIONS
DEFERRAL OF PAYMENT. The Company may defer the calculation and payment of
partial withdrawal and full surrender values, transfers or Death Benefits from
any Variable Account Sub-Account during any period:
(1)(a) during which the New York Stock Exchange is closed other than
customary week-end and holiday closings or (b) during which trading on the New
York Stock Exchange is restricted as determined by the Commission, (2) for any
period during which an emergency exists as a result of which (a) disposal of
securities held by the Fund is not reasonably practicable or (b) it is not
reasonably practicable to determine the value of the net assets of the Fund or
(3) for such other periods as the Commission may by order permit for the
protection of security holders.
The Company reserves the right to defer the payment or transfer of amounts
withdrawn from any Fixed Account Sub-Account for a period not to exceed six
months from the date written request for such withdrawal or transfer is received
by the Company. If payment or transfer is deferred beyond thirty (30) days, the
Company will pay interest of not less than 3% per year on amounts so deferred.
In addition, payment of the amount of any withdrawal derived, all or in part,
from any Premium Payment paid to the Company by check or draft may be postponed
until the Company determines the check or draft has been honored.
DESIGNATION AND CHANGE OF BENEFICIARY. The Beneficiary designation contained
in the Contract Specifications will remain in effect until changed. The right to
change any Beneficiary is reserved to the Owner. Subject to the rights of an
irrevocably
21
<PAGE> 26
designated Beneficiary, the Owner may change or revoke the designation of a
Beneficiary at any time while the Owner is living by filing with the Company a
beneficiary designation or revocation in writing. The change or revocation will
not be binding upon the Company until it is recorded by the Company. When it is
so recorded the change or revocation will be effective as of the date on which
the beneficiary designation or revocation was signed, but the change or
revocation will be without prejudice to the Company with regard to any payment
made or any action taken by the Company prior to recording the change or
revocation.
Reference should be made to the terms of a particular retirement plan and any
applicable legislation for any restrictions on the beneficiary designation.
EXERCISE OF CONTRACT RIGHTS. A Contract shall belong to the Owner. All
Contract rights and privileges may be expressly reserved by the Owner. Such
rights and privileges can be exercised without the consent of the Beneficiary
(other than an irrevocably designated Beneficiary) or any other person. Such
rights and privileges may be exercised only during the lifetime of the Owner and
prior to the Annuity Date, except as otherwise provided in the Contract.
Unless provided otherwise the Annuitant becomes the Payee on and after the
Annuity Date. If the Annuitant predeceases the Owner prior to the Annuity Date,
the Owner becomes the Annuitant until the Owner designates a new Annuitant to
the Company in writing. The Beneficiary becomes the Payee on the death of the
Annuitant after the Annuity Date. Such Payee(s) may thereafter exercise such
rights and privileges, if any, of ownership which continue.
TRANSFER OF OWNERSHIP. The owner of a Non-Qualified Contract may transfer the
ownership of the Contract prior to the Annuity Date. A transfer of ownership
will not be binding upon the Company until written notification is received and
recorded by the Company. When such notification is so recorded, the change will
be effective as of the effective date specified by the Owner, but the change
will be without prejudice to the Company regarding any payment made or any
action taken by the Company prior to recording the change.
Ownership of a Qualified Contract may not be transferred except to: (1) the
Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Code; (3) the employer of the
Annuitant provided that the Qualified Contract after transfer is maintained
under the terms of a retirement plan qualified under Section 403(a) of the Code
for the benefit of the Annuitant; (4) the trustee of an individual retirement
account plan qualified under Section 408 of the Code for the benefit of the
Owner; or (5) as otherwise permitted from time to time by laws and regulations
governing the retirement or deferred compensation plans for which a Qualified
Contract may be issued. Subject to the foregoing, a Qualified Contract may not
be sold, assigned, transferred, discounted or pledged as collateral for a loan
or as security for the performance of an obligation or for any other purpose to
any person other than the Company.
A transfer of ownership may have federal income tax consequences. See "Federal
Tax Matters".
DEATH OF OWNER. If the Owner of a Non-Qualified Contract dies before the
Annuity Date, the death benefit payable under the Contract, if any, must be
distributed to the Beneficiary, if then alive, either (1) within five years
after the date of death of the Owner, or (2) over some period not greater than
the life or expected life of the Beneficiary, with annuity payments beginning
within one year after the date of death of the Owner. The person named as the
Owner's Beneficiary in the Contract Application shall be considered the
designated beneficiary for the purposes of Section 72(s) of the Code and if no
person then living has been so named, then the Annuitant shall automatically be
the designated beneficiary for this purpose. In all cases, any such designated
beneficiary shall not be entitled to exercise any rights prohibited by
applicable federal income tax law.
These mandatory distribution requirements will not apply when the designated
beneficiary is the spouse of the deceased Owner, if the spouse elects to
continue the Contract in the spouse's own name, as Owner.
If the Payee dies after the Annuity Date and before the entire accumulation
under such Owner's Annuity Account has been distributed, the remaining portion
of such Owner's Annuity Account, if any, must be distributed at least as rapidly
as the method of distribution then in effect. Similar rules may apply with
respect to Qualified Contracts.
VOTING OF FUND SHARES. The Company will vote Fund shares held by the
Sub-Accounts at meetings of shareholders of the Fund, and to the extent required
by law, will follow voting instructions received from persons having the right
to give voting instructions. The Owner is the person having the right to give
voting instructions prior to the Annuity Date. If an Owner elects a Variable
Annuity Option, then after the Annuity Date, the Payee has the right to give
voting instructions. The number of votes decreases as annuity payments are made
and as the reserves for the Contract decrease. The person's number of votes will
be determined by dividing the reserve for the Contract allocated to the
applicable Sub-Account by the net asset value per share of the corresponding
Portfolio of the Fund. There are no voting rights associated with the Fixed
Account or a Fixed Annuity before or after the Annuity Date.
Any shares attributable to the Company and Fund shares for which no timely
voting instructions are received will be voted by the Company in the same
proportion as the shares for which instructions are received from Owners. Voting
instructions must be received by the Company at least one day prior to the
shareholders meeting in order to be considered timely.
Owners participating under Qualified Contracts may be subject to other voting
provisions of the particular plan. Individuals who contribute to plans which are
funded by the Contracts may be entitled to instruct the Owners as to how to
instruct the Company to
22
<PAGE> 27
vote the Fund shares attributable to their contributions. Such plans may also
provide the additional extent, if any, to which the Owners shall follow voting
instructions of persons with rights under the plans. If no voting instructions
are received from any such person with respect to a particular employee's
Annuity Account, the Owner may instruct the Company as to how to vote the number
of Fund shares for which instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Act, nor any duty to
inquire as to the instructions received or the authority of Owners or others to
instruct the voting of Fund shares. Except as the Variable Account or the
Company has actual knowledge to the contrary, the instructions given by Owners
will be valid as they affect the Variable Account, the Company and any others
having voting instruction rights with respect to the Variable Account.
All Fund proxy material, together with an appropriate form to be used to give
voting instructions, will be provided to each person known by the Company to
have the right to give voting instructions at least ten days prior to each
meeting of the shareholders of the Fund. The number of Fund shares as to which
each such person is entitled to give instructions will be determined as of a
date not more than 90 days prior to each such meeting. Prior to the Annuity
Date, the number of Fund shares as to which voting instructions may be given to
the Company is determined by dividing the value of all of the Variable
Accumulation Units of the particular Sub-Account credited to the Owner's Annuity
Account by the net asset value of one Fund share as of the same date. The Fund
is not required to, and does not intend to, hold annual or other regular
meetings of shareholders.
If the Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, and as a result the Company determines
that it is permitted to vote the Fund's shares in its own right, it may elect to
do so. Fund shares held by the Company or its affiliates in which Owners or
other persons entitled to vote have no beneficial interest may be voted by the
shareholder thereof (the Company or its affiliates) in its sole discretion.
ADDITION, DELETION, OR SUBSTITUTION OF SECURITIES. The Company does not
control the Fund and cannot guarantee that it or any Portfolio thereunder will
be available for investment in the future or that it or any Portfolio thereunder
will accept Premium Payments or transfers. In the event the Fund or any
Portfolio thereunder is not available, the Company reserves the right to make
changes in the Variable Account and its investments, and may take reasonable
action to secure a comparable or otherwise appropriate funding vehicle, although
it is not required to do so and may not actually do so. In the unlikely event
that the Fund is not available in the future and a substitute funding vehicle is
not obtained, then all Annuity Account values could be maintained in the Fixed
Account. If the Fund or other funding vehicle restricts or refuses to accept
transfers or other transactions, then transfer privileges under the Contract may
be changed, modified or revoked.
The Company reserves the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for the shares of the Fund
that are held by the Variable Account (or any Sub-Account thereof) or that the
Variable Account (or any Sub-Account thereof) may purchase. The Company may
eliminate the shares of any of the Portfolios of the Fund and substitute shares
of another Portfolio of the Fund or any other investment vehicle or of another
open-end, registered investment company if laws or regulations are changed, if
the shares of the Fund or of a Portfolio are no longer available for investment,
or if the Company determines that further investment in any Portfolio should
become inappropriate in view of the purposes of the Variable Account. If any of
these events occurs, substitution of any shares attributable to a Owner's
interest in a Sub-Account of the Variable Account shall occur only after notice
and prior approval by the Commission to the extent required. Nothing contained
herein shall prevent the Variable Account from purchasing other securities for
other series or classes of policies, or from permitting a conversion between
series or classes of policies on the basis of requests made by Owners. The
Company shall make any appropriate endorsement to the Contracts to reflect any
substitution pursuant to this provision.
New Sub-Accounts may be established when, in the sole discretion of the
Company, marketing, tax, investment or other conditions warrant. Any new
Sub-Accounts may be made available to existing Owners on a basis to be
determined by the Company. Each additional Sub-Account will purchase shares in a
portfolio of the Fund or in another mutual fund or investment vehicle. The
Company may also eliminate one or more Sub-Accounts if, in its sole discretion,
marketing, tax, investment or other conditions warrant such change. In the event
any Sub-Account is eliminated, the Company will notify Owners and request a
reallocation of the amounts invested in the eliminated Sub-Account.
CHANGE IN OPERATION OF VARIABLE ACCOUNT. At the Company's election and if
deemed in the best interests of persons having voting rights under the
Contracts, the Variable Account may be operated as a management company under
the Act or any other form permitted by law; de-registered under the Act in the
event registration is no longer required (deregistration of the Variable Account
requires an order by the Commission); or combined with one or more other
separate accounts. To the extent permitted by applicable law, the Company also
may transfer the assets of the Variable Account associated with the Contracts to
another account or accounts. In the event of any change in the operation of the
Variable Account pursuant to this provision, the Company may make appropriate
endorsement to the Contracts to reflect the change and take such other action as
may be necessary and appropriate to effect the change.
MODIFICATION. Upon notice to the Owner(s) (or the Payee(s) after the Annuity
Date), the Contracts may be modified by the Company if such modification: (i) is
necessary to make the Contracts or the Variable Account comply with, or take
advantage of, any law or regulation issued by a governmental agency to which the
Company or the Variable Account is subject; or (ii) is neces-
23
<PAGE> 28
sary to attempt to assure continued qualification of the Contracts under the
Code or other federal or state laws relating to retirement annuities or annuity
contracts; or (iii) is necessary to reflect a change in the operation of the
Variable Account or its Sub-Account(s) (see "Change in Operation of Variable
Account"); or (iv) provides additional Variable Account and/or fixed
accumulation options. In the event of any such modification, the Company may
make appropriate endorsement in the Contracts to reflect such modification.
In addition, upon notice to the Owner the Contracts may be modified by the
Company to change the withdrawal charges, Annuity Account Fees, mortality and
expense risk charges, the tables used in determining the amount of the first
monthly fixed annuity payment, and the formula used to calculate the MVA,
provided that such modification shall apply only to Contracts established after
the effective date of such modification. In order to exercise its modification
rights in these particular instances, the Company must notify the Owner of such
modification in writing. All of the charges and the annuity tables which are
provided in the Contracts prior to any such modification will remain in effect
permanently, unless improved by the Company, with respect to Contracts
established prior to the effective date of such modification.
DISCONTINUANCE OF NEW PURCHASES. The Company reserves the right to limit or
discontinue the acceptance of new Contract Applications and Orders to Purchase
and the issuance of new Contracts. Such limitation or discontinuance shall have
no effect on rights or benefits with respect to any Contracts issued prior to
the effective date of such limitation or discontinuance.
RIGHT TO EXAMINE CONTRACT. If the Owner is not satisfied with a Contract it
may be returned by mailing it to the Company at the Annuity & Variable Life
Services Center mailing address listed on the cover of this Prospectus within
ten days, or longer if state law requires, after it was received by the Owner.
An Owner may not make transfers during this period. When the Company receives
the returned Contract it will be canceled and in most states the Owner will
receive a refund equal to the Owner's Annuity Account Value at the end of the
Valuation Period during which the returned Contract was received by the Company.
Where state law requires the full amount of any initial Premium Payment and
subsequent Premium Payment(s) if any, received by the Company to be refunded,
the Company will place the Premium Payment(s) that are allocated to Sub-Accounts
of the Variable Account in the AIM V.I. Money Market Fund until the end of the
Right to Examine period. This period will be deemed to commence on the day the
Contract is mailed, and on the first business day after the end of such period
the Premium Payments will be allocated as specified by the Owner.
IRA RIGHT OF REVOCATION. With respect to Individual Retirement Accounts, under
the Employee Retirement Income Security Act of 1974 ("ERISA") an Owner
establishing an Individual Retirement Account must be furnished with a
disclosure statement containing certain information about the Contract and
applicable legal requirements. This statement must be furnished on or before the
date the Individual Retirement Account is established. If the Owner is furnished
with such disclosure statement before the seventh day preceding the date the
Individual Retirement Account is established, the Owner will not have any right
of revocation. If the disclosure statement is furnished after the seventh day
preceding the establishment of the Individual Retirement Account, then the Owner
may give a notice of revocation to the Company at any time within seven days
after the Date of Issue. Upon such revocation, the Company will refund the
Premium Payment made by the Owner. The foregoing right of revocation with
respect to an Individual Retirement Account is in addition to the return
privilege set forth in the preceding paragraph. The Company will allow a
participant establishing an Individual Retirement Account a "ten day free-look",
notwithstanding the provisions of ERISA.
PERIODIC REPORTS. At least once each calendar year, the Company will provide
an Owner a report showing the Annuity Account Value at the end of the preceding
calendar year, all transactions during the calendar year, the current Annuity
Account Value, the number of Accumulation Units in each Variable Sub-Account,
the applicable Variable Accumulation Unit Value(s) as of the date of the report
and the interest rate credited to the Fixed Account Sub-Account(s). In addition,
each person having voting rights in the Variable Account and a Fund or Funds
will receive such reports as may be required by the Investment Company Act of
1940 and the Securities Act of 1933. The Company will also send such statements
reflecting transactions in the Annuity Account as may be required by applicable
laws, rules and regulations.
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FEDERAL TAX MATTERS
INTRODUCTION. The Contracts described in this Prospectus are designed for use
by individuals to accumulate Annuity Account Values and may be used by
retirement plans, whether or not they qualify for special federal income tax
treatment. The ultimate effect of federal income taxes on the amounts held under
a Contract, on annuity payments, and on the economic benefits to the Owner,
Annuitant or Beneficiary depends on the Company's tax status, on the type of
retirement plan for which a Contract is purchased, and upon the tax and
employment status of the individual concerned.
The following discussion is general in nature and is not intended as tax
advice. Each person concerned should consult a competent tax advisor. No attempt
is made to consider any applicable state or other tax laws. Moreover, the
discussion is based upon the Company's understanding of the federal income tax
laws as they are currently interpreted. No representation is made regarding the
likelihood of continuation of the federal income tax laws, the Treasury
Regulations, or the current interpretations by the Internal Revenue Service. THE
COMPANY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS, FEDERAL, STATE OR
LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACT.
24
<PAGE> 29
TAXATION OF ANNUITIES. The following discussion assumes the Contracts will
qualify as annuity contracts for federal income tax purposes. The Statement of
Additional Information discusses the requirements for qualifying as an annuity.
IN GENERAL. Code Section 72 governs taxation of annuities. In general, an
Owner is not taxed on increases in value under a Contract until some form of
distribution is made under the Contract. The exception to this rule is that
generally, an Owner who is not a natural person must include in income any
increase in the excess of the Owner's Annuity Account Value over the Owner's
investment in the contract during the taxable year. However, there are some
exceptions to this exception and you may wish to discuss these with your tax
counsel. The taxable portion of a distribution (in the form of an annuity or
lump sum payment) is generally taxed as ordinary income. For this purpose, the
assignment, pledge, or agreement to assign or pledge any portion of the Annuity
Account Value (or the Contract) generally will be treated as a distribution.
The following discussion generally applies to Contracts owned by natural
persons.
WITHDRAWALS AND SURRENDERS. In the case of a withdrawal distributed to a
participant or beneficiary under a Qualified Contract (other than a Qualified
Contract used in a retirement plan that qualifies for special income tax
treatment under Section 457 of the Code, as to which there are special rules) a
ratable portion of the amount received is taxable, generally based on the ratio
of the investment in the Contract to the total Annuity Account Value. The
"investment in the contract" generally equals the portion, if any, of any
Premium Payments paid by or on behalf of an individual under a Contract which is
not excluded from the individual's gross income. For contracts issued in
connection with qualified plans, the "investment in the contract" can be zero.
Special tax rules may be available for certain distribution from Qualified
Contracts.
Generally, in the case of a partial withdrawal under a Non-Qualified Contract
before the Annuity Date (including systematic withdrawals), amounts received are
first treated as taxable income to the extent that the Annuity Account Value
immediately before the withdrawal exceeds the "investment in the contract" at
that time. The Annuity Account Value immediately before a withdrawal may have to
be increased by any positive MVA which results from such a withdrawal. There is,
however, no definitive guidance on the proper tax treatment of MVAs, and the
Owner should contact a competent tax advisor with respect to the potential tax
consequences of a MVA.
In the case of a full surrender under a Non-Qualified Contract, the amount
received is generally treated as taxable income to the extent the net amount
received exceeds the "investment in the contract" at that time.
ANNUITY PAYMENTS. Although the tax consequences may vary depending on the
Annuity Option elected under the Contract, in general, only the portion of an
annuity payment that represents the amount by which the Annuity Account Value
exceeds the investment in the Contract will be taxed; after the investment in
the Contract is recovered, the full amount of any additional annuity payments is
taxable. For Variable Annuity payments, the taxable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic payments.
The entire distribution will, however, be taxable once the recipient has
recovered the dollar amount of the "investment in the contract." For Fixed
Annuity payments, in general, there is no tax on the portion of each payment
which represents the same ratio that the "investment in the contract" bears to
the total expected value of the annuity payments for the term of the payments;
however, the remainder of each annuity payment is taxable until the recovery of
the investment in the contract, and thereafter the full amount or each annuity
payment is taxable.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution from a
Non-Qualified Contract (including systematic withdrawals, other partial
withdrawals, surrenders, and any other distribution), there may be imposed a
penalty tax equal to 10% of the amount treated as taxable income. The penalty
tax is not imposed in certain circumstances, including, generally,
distributions: (1) made on or after the date on which the Owner is age 59 1/2;
(2) made as a result of death of the Owner or disability of the taxpayer; or (3)
received in substantially equal installments as a life annuity. Other tax
penalties may apply to certain distributions pursuant to a Qualified Contract.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a Contract
because of the death of an Owner. Generally, such amounts are includable in the
income of the recipient as follows: (1) if distributed in a lump sum, they are
taxed in the same manner as a full surrender of the Contract, as described
above, or (2) if distributed under an Annuity Option, they are taxed in the same
manner as annuity payments, as described above.
MULTIPLE CONTRACTS. All non-qualified, deferred annuity contracts that are
issued by the Company (or its affiliates) to the same Owner during any calendar
year are to be treated as one annuity contract for purposes of determining the
amount includable in an individual's gross income. There may be other situations
in which the Treasury may conclude that it would be appropriate to aggregate two
or more annuity contracts purchased by the same investor. Accordingly, an Owner
should consult a competent tax adviser before purchasing more than one Contract
or other annuity contracts.
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF CONTRACTS. A transfer of ownership of a
Contract; the designation of an Annuitant, Payee or other Beneficiary who is not
also the Owner; the selection of certain Annuity Dates; or a change of
Annuitant; may result in certain income or gift tax consequences to the Owner
that are beyond the scope of this discussion. An Owner contemplating any such
transfer, assignment or change should contact a competent tax adviser in respect
to the potential tax effects of such a transaction.
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<PAGE> 30
WITHHOLDING. Withholding of federal income taxes on the taxable portion of all
distributions may be required unless the recipient elects not to have any such
amounts withheld and properly notifies the Company of that election. Different
rules may apply to United States citizens or expatriates living abroad.
Withholding is mandatory for certain distributions from Qualified Contracts. In
addition, some states have enacted legislation requiring withholding.
SECTION 1035 EXCHANGES. Code Section 1035 generally provides that no gain or
loss shall be recognized on the exchange of one annuity contract for another. If
the surrendered contract was issued prior to August 14, 1982, the tax rules that
formerly provided that the surrender was taxable only to the extent the amount
received exceeds the owner's investment in the contract will continue to apply
to amounts allocable to investment in the contract before August 14, 1982.
Special rules and procedures apply to Code Section 1035 transactions.
Prospective purchasers wishing to take advantage of Code Section 1035 should
consult their tax advisers.
QUALIFIED PLANS. The Qualified Contract is designed for use with several types
of qualified plans. The tax rules applicable to participants and beneficiaries
in such qualified plans vary according to the type of plan and the terms and
conditions of the plan itself. Special favorable tax treatment may be available
for certain types of contributions and distributions (including special rules
for certain lump sum distributions). Adverse tax consequences may result from
contributions in excess of specified limits, distributions prior to age 59 1/2
(subject to certain exceptions), distributions that do not conform to specified
minimum distribution rules, aggregate distributions in excess of a specified
annual amount, and in certain other circumstances. Therefore, the Company makes
no attempt to provide more than general information about use of the Contract
with the various types of qualified plans. Owners and participants under
qualified plans as well as Annuitants, Payees and Beneficiaries are cautioned
that the rights of any person to any benefits under qualified plans may be
subject to the terms and conditions of the plan themselves, regardless of the
terms and conditions of the Contract issued in connection therewith. Owners of
Contracts for use with any qualified plan should seek competent legal and tax
advice regarding the suitability of the Contract therefor.
SECTION 403(B) PLANS. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase annuity
policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be subject
to FICA (Social Security) taxes. Additionally, in accordance with the
requirements of the Code, Section 403(b) annuities generally may not permit
distribution of (i) elective contributions made in years beginning after
December 31, 1988, and (ii) earnings on those contributions and (iii) earnings
on amounts attributed to elective contributions held as of the end of the last
year beginning before January 1, 1989. Distributions of such amounts will be
allowed only upon the death of the employee, on or after attainment of age
59 1/2, separation from service, disability, or financial hardship, except that
income attributable to elective contributions may not be distributed in the case
of hardship.
INDIVIDUAL RETIREMENT ANNUITIES. Sections 219 and 408 of the Code permit
individuals or their employers to contribute to an individual retirement program
known as an "Individual Retirement Annuity" or an "IRA". Individual Retirement
Annuities are subject to limitation on the amount which may be contributed and
deducted and the time when distributions may commence. In addition,
distributions from certain other types of qualified plans may be placed into an
Individual Retirement Annuity on a tax-deferred basis.
CORPORATE PENSION AND PROFIT-SHARING PLANS AND H.R. 10 PLANS. Section 401(a)
and 403(a) of the Code permit corporate employers to establish various types of
retirement plans for employees and self-employed individuals to establish
qualified plans for themselves and their employees. Such retirement plans may
permit the purchase of the Contracts to provide benefits under the plans.
DEFERRED COMPENSATION PLANS. Section 457 of the Code, while not actually
providing for a qualified plan as that term is normally used, provides for
certain deferred compensation plans with respect to service for state
governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities and tax exempt
organizations which enjoy special treatment. The Contracts can be used with such
plans. Under such plans a participant may specify the form of investment in
which his or her participation will be made. All such investments, however, are
owned by, and are subject to, the claims of the general creditors of the
sponsoring employer.
* * * * * * * * * * * * * *
The above description of federal income tax consequences pertaining to the
different types of Qualified Plans that may be funded by the Contracts is only a
brief summary and is not intended as tax advice. The rules governing the
provisions of Qualified Plans are extremely complex and often difficult to
comprehend, and are subject to change. Anything less than full compliance with
the applicable rules, all of which are subject to change, may have significant
adverse tax consequences. A prospective purchaser considering the purchase of a
Contract in connection with a Qualified Plan should first consult a qualified
and competent tax advisor with regard to the suitability of the Contract as an
investment vehicle for the Qualified Plan.
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<PAGE> 31
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DISTRIBUTION OF THE CONTRACTS
CIGNA Financial Advisors, Inc. ("CFA") located at 900 Cottage Grove Road,
Bloomfield, Connecticut 06002 is the principal underwriter and the distributor
of the Contracts. As of January 1, 1998, CFA, formerly a wholly-owned subsidiary
of CIGNA Corporation, became a wholly-owned subsidiary of Lincoln National
Corporation, an Indiana corporation with headquarters in Fort Wayne, Indiana,
whose principal businesses are insurance and financial services. CFA may enter
into contracts with various broker-dealers to aid in the distribution of the
Contracts. The commissions paid to dealers are no greater than 6.75% of Premium
Payments.
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HISTORICAL PERFORMANCE DATA
The Company may from time to time disclose the current annualized yield of the
Money Market Sub-Account for a 7-day period in a manner which does not take into
consideration any realized or unrealized gains or losses on shares of the AIM
V.I. Money Market Series or on its portfolio securities. Yield figures will not
reflect withdrawal charges or premium taxes. The current annualized yield is
computed by determining the net change (exclusive of realized gains and losses
on the sale of securities and unrealized appreciation and depreciation) at the
end of the 7-day period in the value of a hypothetical account having a balance
of 1 variable accumulation unit of the Money Market Sub-Account at the beginning
of the 7-day period, dividing such net change in account value by the value of
the account at the beginning of the period to determine the base period return,
and annualizing this quotient on a 365-day basis. The net change in account
value reflects (i) net income from the Portfolio attributable to the
hypothetical account; and (ii) charges and deductions imposed under a Contract
that are attributable to the hypothetical account.
The Company may also disclose the effective yield of the Money Market
Sub-Account for the same 7-day period, determined on a compounded basis. The
effective yield is calculated by compounding the unannualized base period return
by adding one to the base period return, raising the sum to a power equal to 365
divided by 7, and subtracting one from the result.
The Company may also advertise or disclose the current annualized yield of one
or more of the Sub-Accounts of the Variable Account (except the Money Market
Sub-Account) for 30-day periods. The annualized yield of a Sub-Account refers to
income generated by the Sub-Account over a specific 30-day period. Because the
yield is annualized, the yield generated by a Sub-Account during the 30-day
period is assumed to be generated each 30-day period over a 12-month period. The
yield is computed by dividing the net investment income per variable
accumulation unit earned during the period by the maximum offering price per
unit on the last day of the period. The yield calculations do not reflect the
effect of any premium taxes or withdrawal charges that may be applicable to a
particular Contract.
The Company may also advertise or disclose annual average total returns for
one or more Sub-Accounts of the Variable Account for various period of time. The
standardized total return of a Sub-Account refers to return quotations assuming
an investment has been held in the Sub-Account for various periods of time
including, but not limited to, one year, five years, and ten years (if the
Sub-Account has been in operation for those periods), and a period measured from
the date the Sub-Account commenced operations. Total returns represent the
average annual compounded rates of return that would equate the initial amount
invested to the redemption value of that investment as of the last day of each
of the periods for which total return quotations are provided. Accordingly, the
total return quotations will reflect not only income but also changes in
principal (i.e., variable accumulation unit) value, whereas the yield figures
will only reflect income. The standardized total return quotations reflect the
withdrawal charge, but the standardized yield figures will not.
The Company may from time to time also disclose average annual total returns
in a non-standard format in conjunction with the standard format described
above. The non-standard format will be identical to the standard format except
that the withdrawal charge percentage will be assumed to be 0%. The Company may
from time to time also disclose cumulative total returns in conjunction with the
standard format described above. The cumulative returns will be calculated
assuming that the withdrawal charge is 0%.
All non-standard performance data will only be advertised if the standard
performance data is also disclosed. Performance will vary from time to time and
historical results will not be representative of future performance. Performance
information may not provide a basis for comparison with other investments or
other investment companies using a different method of calculating performance.
Current yield is not fixed and varies with changes in investment income and
variable accumulation unit values. The Money Market Sub-Account's yield will be
affected if it experiences a net inflow of new money which is invested at
interest rates different from those being earned on its then-current
investments. An investor's principal in a Sub-Account and a Sub-Account's return
are not guaranteed and will fluctuate according to market conditions. And, as
noted above, advertised performance data figures will be historical figures for
a contract during the Accumulation Period.
The Company may also from time to time use advertising which includes
hypothetical illustrations to compare the difference between the growth of a
taxable investment and a tax-deferred investment in a variable annuity.
For additional information regarding the calculation of performance data,
please refer to the Statement of Additional Information.
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<PAGE> 32
YEAR 2000 ISSUES
Connecticut General Variable Annuity Separate Account (the "Account") is a
"separate account" of the Company established under Connecticut insurance law;
thus, the Company is responsible, as part of its Year 2000 updating process, for
the updating of the Account-related computer systems. Delaware Service Company
("Delaware"), provides substantially all of the necessary accounting and
valuation services for the Account. Delaware, for its part, is responsible for
updating all of its computer systems, including those which service the Account,
to accommodate the year 2000. The Company and Delaware have begun formal
discussions with each other to assess the requirements for their respective
systems to interface properly in order to facilitate the accurate and orderly
operation of the Account beginning in the year 2000.
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000. The
Year 2000 issue is pervasive and complex and affects virtually every aspect of
the businesses of both the Company and Delaware (collectively the "Companies").
The computer systems of the Companies and their interfaces with the computer
systems of vendors, suppliers, customers and other business partners are
particularly vulnerable. The inability to properly recognize date-sensitive
electronic information and to transfer data between systems could cause errors
or even complete failure of systems, which would result in a temporary inability
to process transactions correctly and engage in normal business activities for
the Account. The Companies respectively are redirecting significant portions of
their internal information technology efforts and are contracting, as needed,
with outside consultants to help update their systems to accommodate the year
2000. Also, in addition to the discussions with each other noted above, the
Companies have each initiated formal discussions with other critical parties
that interface with their systems to gain an understanding of the progress by
those parties in addressing Year 2000 issues. While the Companies are making
substantial efforts to address their own systems and the systems with which they
interface, it is not possible to provide assurance that operational problems
will not occur. The Companies presently believe that, assuming the modification
of existing computer systems, updates by vendors and conversion to new software
and hardware, the Year 2000 issue will not pose significant operations problems
for their respective computer systems. In addition, the Companies are
incorporating potential issues surrounding year 2000 into their contingency
planning process to address the probability that, despite these substantial
efforts, there are unresolved Year 2000 problems. If the remediation efforts
noted above are not completed timely or properly, the Year 2000 issue could have
a material adverse impact on the operation of the businesses of the Companies.
The cost of addressing Year 2000 issues and the timeliness of completion is
being monitored by management of the respective Companies. Nevertheless, there
can be no guarantee either by the Company or by Delaware that estimated costs
will be achieved, and actual results could differ significantly from those
anticipated. Specific factors that might cause such differences include, but are
not limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer problems, and other
uncertainties.
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STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available (at no cost) which contains
more details concerning the subjects discussed in this Prospectus. The following
is the Table of Contents for that Statement:
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE CONTRACTS -- GENERAL PROVISIONS......................... 3
The Contracts............................................. 3
Loans..................................................... 3
Non-Participating Contracts............................... 3
Misstatement of Age....................................... 3
Assignment................................................ 3
Evidence of Survival...................................... 3
Endorsement of Annuity Payments........................... 3
TAXATION OF THE COMPANY..................................... 3
INVESTMENT EXPERIENCE....................................... 3
Variable Accumulation Unit Value and Variable Accumulation
Value.................................................. 3
SAMPLE CALCULATIONS AND TABLES.............................. 5
Withdrawal Charge and MVA Tables.......................... 5
STATE REGULATION OF THE COMPANY............................. 6
ADMINISTRATION.............................................. 6
DISTRIBUTION OF THE CONTRACTS............................... 7
CUSTODY OF ASSETS........................................... 7
HISTORICAL PERFORMANCE DATA................................. 7
Money Market Sub-Account Yield............................ 7
Other Sub-Account Yields.................................. 7
Total Returns............................................. 8
Other Performance Data.................................... 8
LEGAL MATTERS............................................... 9
LEGAL PROCEEDINGS........................................... 9
EXPERTS..................................................... 9
FINANCIAL STATEMENTS........................................ 9
Connecticut General Life Insurance Company................ 10
CG Variable Annuity Separate Account...................... 29
</TABLE>
29
<PAGE> 34
PART B. STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 35
STATEMENT OF ADDITIONAL INFORMATION
AIM/CIGNA HERITAGE VARIABLE ANNUITY
Issued through
CG VARIABLE ANNUITY SEPARATE ACCOUNT
Offered by
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
Home Office Location:
900 Cottage Grove Road
Bloomfield, Connecticut 06002
Mailing Address:
Annuity & Variable Life
Service Center; Routing S-249
Hartford, CT 06152-2249
(800) 552-9898
This Statement of Additional Information ("Statement") expands upon subjects
discussed in the current Prospectus for the Variable Annuity Contracts (the
"Contracts") offered by Connecticut General Life Insurance Company through CG
Variable Annuity Separate Account. You may obtain a copy of the Prospectus dated
May 1, 1998, by calling (800) 552-9898, or by writing to Connecticut General
Life Insurance Company at the mailing address shown above. Terms used in the
current Prospectus for the Contracts are incorporated in this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACTS AND CG VARIABLE
ANNUITY SEPARATE ACCOUNT.
Dated: May 1, 1998
<PAGE> 36
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE CONTRACTS -- GENERAL PROVISIONS......................... 3
The Contracts............................................. 3
Loans..................................................... 3
Non-Participating Contracts............................... 3
Misstatement of Age....................................... 3
Assignment................................................ 3
Evidence of Survival...................................... 3
Endorsement of Annuity Payments........................... 3
TAXATION OF THE COMPANY..................................... 3
INVESTMENT EXPERIENCE....................................... 3
Variable Accumulation Unit Value and Variable Accumulation
Value.................................................. 3
SAMPLE CALCULATIONS AND TABLES.............................. 5
Withdrawal Charge and Market Value Adjustment Tables...... 5
STATE REGULATION OF THE COMPANY............................. 6
ADMINISTRATION.............................................. 6
DISTRIBUTION OF THE CONTRACTS............................... 7
CUSTODY OF ASSETS........................................... 7
HISTORICAL PERFORMANCE DATA................................. 7
Money Market Sub-Account Yield............................ 7
Other Sub-Account Yields.................................. 7
Total Returns............................................. 8
Other Performance Data.................................... 8
LEGAL MATTERS............................................... 9
LEGAL PROCEEDINGS........................................... 9
EXPERTS..................................................... 9
FINANCIAL STATEMENTS........................................ 9
Connecticut General Life Insurance Company................ 10
CG Variable Annuity Separate Account...................... 29
</TABLE>
2
<PAGE> 37
In order to supplement the description in the Prospectus, the following
provides additional information about Connecticut General Life Insurance Company
(the "Company") and the Contracts which may be of interest to a Contract Owner.
Terms have the same meaning as in the Prospectus, unless otherwise indicated.
- --------------------------------------------------------------------------------
THE CONTRACTS -- GENERAL PROVISIONS
THE CONTRACTS. A Contract, attached riders, amendments, any application, and
any applications, for additional amounts, form the entire contract. Only the
President, a Vice President, an Assistant Vice President, a Secretary, a
Director, or an Assistant Director of the Company may change or waive any
provision in a Contract. Any changes or waivers must be in writing.
The Company may change or amend the Contracts if such change or amendment is
necessary for the Contracts to comply with or take advantage of any state or
federal law, rule or regulation.
LOANS. Under the Contracts, loans are not permitted.
NON-PARTICIPATING CONTRACTS. The Contracts do not participate or share in the
profits or surplus earnings of the Company.
MISSTATEMENT OF AGE. If the age of the Annuitant is misstated, any amounts
payable by the Company under the Contract will be adjusted to be those amounts
which the Premium Payments would have purchased for the correct age, according
to the Company's rates in effect on the Date of Issue. Any overpayment by the
Company, with interest at the rate of 6% per year, compounded annually, will be
charged against the payments to be made next succeeding the adjustment. Any
underpayment by the Company will be paid in a lump sum.
ASSIGNMENT. During the lifetime of the Annuitant the Owner may assign any
rights under a Contract as security for a loan or other reasons. This does not
change the ownership of a Contract, but the rights of the Owner and any
Beneficiary are subject to the terms of the assignments. An assignment will not
be binding on the Company until the original assignment or a certified copy has
been filed at the Annuity & Variable Life Service Center. The Company is not
responsible for the validity of the assignment. An assignment may have income
tax consequences. Rights under Qualified Contracts may not be assignable.
EVIDENCE OF SURVIVAL. The Company reserves the right to require evidence of
the survival of any Payee at the time any payment payable to such Payee is due
under the following Annuity Options: Life Annuity (fixed), Life Annuity with
Certain Period (fixed), Cash Refund Life Annuity (fixed), Variable Life Annuity,
and Variable Life Annuity with Certain Period.
ENDORSEMENT OF ANNUITY PAYMENTS. The Company will make each annuity payment at
its Home Office by check. Each check must be personally endorsed by the Payee,
and the Company may require that proof of the Annuitant's survival be furnished.
- --------------------------------------------------------------------------------
TAXATION OF THE COMPANY
The Company at present is taxed as a life insurance company under part I of
Subchapter L of the Internal Revenue Code of 1986, as amended. The Variable
Account is treated as part of the Company and, accordingly, will not be taxed
separately as a "regulated investment company" under Subchapter M of the Code.
The Company does not expect to incur any federal income tax liability with
respect to investment income and net capital gains arising from the activities
of the Variable Account retained as part of the reserves under the Contract.
Based on this expectation, it is anticipated that no charges will be made
against the Variable Account for federal income taxes. If, in future years, any
federal income taxes or other economic burden are incurred by the Company with
respect to the Variable Account or the Contracts, the Company may make a charge
for any such amounts that are attributable to the Variable Account.
- --------------------------------------------------------------------------------
INVESTMENT EXPERIENCE
On any Valuation Date, the Variable Account value is equal to the totals of
the values allocated to the Contract in each Variable Account Sub-Account. The
portion of an Owner's Annuity Account Value held in any Variable Account
Sub-Account is equal to the number of Sub-Account units allocated to a Contract
multiplied by the Sub-Account accumulation unit value as described below.
VARIABLE ACCUMULATION UNIT VALUE AND VARIABLE ACCUMULATION VALUE. Upon receipt
of a Premium Payment by the Company, all or that portion, if any, of the Premium
Payment to be allocated to the Variable Account Sub-Accounts will be credited to
the Variable Account in the form of Variable Accumulation Units. The number of
particular Variable Accumulation Units to be credited is determined by dividing
the dollar amount allocated to the particular Variable Account Sub-Account by
the Variable Accumulation Unit Value for the particular Variable Account
Sub-Account for the Valuation Period during which the Premium Payment is
received by the Company (for the initial Premium Payment, for the Valuation
Period during which the Premium Payment is accepted).
3
<PAGE> 38
The Variable Accumulation Unit Value for each Variable Account Sub-Account was
established at $10.00 for the first Valuation Period of the particular Variable
Account Sub-Account. The Variable Accumulation Unit Value for the particular
Variable Account Sub-Account for any subsequent Valuation Period is determined
as follows:
(1) The total value of Fund shares held in the Sub-Account is calculated by
multiplying the number of Fund shares owned by the Sub-Account at the
beginning of the Valuation Period by the net asset value per share of the
Fund at the end of the Valuation Period, and adding any dividend or other
distribution of the Fund if an ex-dividend date occurs during the Valuation
Period; minus
(2) The liabilities of the Sub-Account at the end of the Valuation Period; such
liabilities include daily charges imposed on the Sub-Account, and may
include a charge or credit with respect to any taxes paid or reserved for by
the Company that the Company determines result from the operations of the
Variable Account; and
(3) The result of (2) is divided by the number of Sub-Account units outstanding
at the beginning of the Valuation Period.
The Variable Accumulation Unit Value for each Variable Account Sub-Account for
any Valuation Period is the value determined as of the end of the particular
Valuation Period and may increase, decrease, or remain constant from Valuation
Period to Valuation Period.
The variable accumulation value of the Annuity Account, if any, for any
Valuation Period is equal to the sum of the value of all Variable Accumulation
Units of each Variable Account Sub-Account credited to the Variable Account for
such Valuation Period. The variable accumulation value of each Variable Account
Sub-Account is determined by multiplying the number of Variable Accumulation
Units, if any, credited to each Variable Account Sub-Account by the Variable
Accumulation Unit Value of the particular Variable Account Sub-Account for such
Valuation Period.
- --------------------------------------------------------------------------------
4
<PAGE> 39
SAMPLE CALCULATIONS AND TABLES
WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT TABLES
The following example illustrates the detailed calculations for a $100,000
deposit into the Fixed Account with a guaranteed rate of 8% for a duration of
five years. The intent of the example is to show the effect of the Market Value
Adjustment ("MVA") and the 3% minimum guarantee under various interest rates on
the calculation of the cash surrender value. The effect of the MVA is reflected
in the index rate factor in column (2) and the minimum 3% guarantee is shown
under column (4) under the "Surrender Value Calculation". The effect of the
withdrawal charge and any taxes, such as premium taxes, is not shown. The
"Market Value Adjustment Tables" and "Minimum Value Calculation" contain the
explicit calculation of the index factors and the 3% minimum guarantee
respectively.
- --------------------------------------------------------------------------------
SAMPLE CALCULATIONS FOR MALE 35 ISSUE
CASH SURRENDER VALUES
<TABLE>
<S> <C>
Single premium.............................................. $100,000
Premium taxes............................................... 0
Withdrawals................................................. None
Guaranteed period........................................... 5 years
Guaranteed interest rate.................................... 8%
Annuity date................................................ Age 70
Index rate A................................................ 7.5%
Index rate B................................................ 8.00% end of policy year 1
7.75% end of policy year 2
7.00% end of policy year 3
6.50% end of policy year 4
Percentage adjustment to B.................................. 0.5%
</TABLE>
- --------------------------------------------------------------------------------
SURRENDER VALUE CALCULATION
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5) (6) (7)
-------- ----------- -------- -------- ---------- --------- ---------
ADJUSTED
CONTRACT ANNUITY INDEX ANNUITY MINIMUM GREATER OF SURRENDER SURRENDER
YEAR VALUE RATE FACTOR VALUE VALUE (3)&(4) CHARGE VALUE
-------- -------- ----------- -------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1.................. $107,965 0.963640 $104,039 $102,965 $104,039 $5,950 $ 98,089
2.................. $116,567 0.993056 $115,758 $106,019 $115,758 $5,100 $110,658
3.................. $125,858 1.000000 $125,858 $109,165 $125,858 $4,250 $121,608
4.................. $135,891 1.004673 $136,526 $112,404 $136,526 $3,400 $133,126
5.................. $146,727 1.000000 $146,727 $115,742 $146,727 $2,550 $144,177
</TABLE>
- --------------------------------------------------------------------------------
ANNUITY VALUE CALCULATION
<TABLE>
<CAPTION>
CONTRACT YEAR ANNUITY VALUE
------------- --------------------------------
<S> <C>
1........................................ $100,000 X 1.08 - $35 = $107,965
2........................................ $107,965 X 1.08 - $35 = $116,567
3........................................ $116,567 X 1.08 - $35 = $125,858
4........................................ $125,858 X 1.08 - $35 = $135,891
5........................................ $135,891 X 1.08 - $35 = $146,727
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE> 40
SURRENDER CHARGE CALCULATION
<TABLE>
<CAPTION>
(1) (2) (3)
------------- -------------------------------- ---------
SURRENDER SURRENDER CHARGE FACTOR ADJUSTED SURRENDER
CONTRACT YEAR CHARGE FACTOR FOR FREE PARTIAL WITHDRAWALS CHARGE
------------- ------------- -------------------------------- ---------
<S> <C> <C> <C>
1..................... 0.07 0.0595 $5,950
2..................... 0.06 0.0510 $5,100
3..................... 0.05 0.0425 $4,250
4..................... 0.04 0.0340 $3,400
5..................... 0.03 0.0255 $2,550
</TABLE>
- --------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENT TABLES
<TABLE>
<CAPTION>
INTEREST RATE FACTOR CALCULATION
- --------------------------------------------------------------------------------------------------
(5)
(1) (2) (3) (4) --------
------ ------ ------------ --- (1+A)(N)
INDEX INDEX ADJUSTED --------
CONTRACT YEAR RATE A RATE B INDEX RATE B N (I+B)(N)
------------- ------ ------ ------------ --- --------
<S> <C> <C> <C> <C> <C>
1.................. 7.5% 8.00 8.50 4 0.963640
2.................. 7.5% 7.75 7.75 3 0.993056
3.................. 7.5% 7.00 7.50 2 1.000000
4.................. 7.5% 6.50 7.00 1 1.004673
5.................. 7.5% NA NA 0 NA
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MINIMUM VALUE CALCULATION
- -----------------------------------------------------------------------------
CONTRACT YEAR MINIMUM VALUE
------------- --------------------------------
<S> <C>
1........................................ $100,000 X 1.03 - $35 = $102,965
2........................................ $102,965 X 1.03 - $35 = $106,019
3........................................ $106,019 X 1.03 - $35 = $109,165
4........................................ $109,165 X 1.03 - $35 = $112,404
5........................................ $112,404 X 1.03 - $35 = $115,742
</TABLE>
- --------------------------------------------------------------------------------
STATE REGULATION OF THE COMPANY
The Company, a Connecticut corporation, is subject to regulation by the
Connecticut Department of Insurance. An annual statement is filed with the
Connecticut Department of Insurance each year covering the operations and
reporting on the financial condition of the Company as of December 31 of the
preceding year. Periodically, the Connecticut Department of Insurance or other
authorities examine the liabilities and reserves of the Company and the Variable
Account, and a full examination of the Company's operations is conducted
periodically by the Connecticut Department of Insurance. In addition, the
Company is subject to the insurance laws and regulations of other states within
which it is licensed to operate.
A Contract is governed by the law of the state in which it is delivered. The
values and benefits of each policy are at least equal to those required by such
state.
- --------------------------------------------------------------------------------
ADMINISTRATION
The Company performs certain administrative functions relating to the
Contracts, the Fixed Account, and the Variable Account. These functions include,
among other things, maintaining the books and records of the Variable Account,
the Fixed Account, and the Sub-Accounts, and maintaining records of the name,
address, taxpayer identification number, contract number, Annuity Account number
and type, the status of each Annuity Account and other pertinent information
necessary to the administration and operation of the Contracts.
- --------------------------------------------------------------------------------
6
<PAGE> 41
DISTRIBUTION OF THE CONTRACTS
The offering of the Contracts is continuous. The Contracts will be sold by
licensed insurance agents in those states where the Contracts may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have entered into
distribution agreements with the Company and the principal underwriter for the
Contracts, CIGNA Financial Advisors, Inc. ("CFA"), Bloomfield, Connecticut. CFA
is registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 as a broker-dealer and is a member of the National
Association of Securities Dealers, Inc. CFA also acts as the general distributor
of certain other variable annuity contracts and of variable life insurance
contracts issued by the Company. Commissions and other distribution compensation
will be paid by the Company and will not be more than 6.75% of Premium Payments.
The Company received $2,217,462 in deferred sales charges attributable to the
Variable Account portion of the Contracts during the year ended December 31,
1997.
As of January 1, 1998, CFA, formerly a wholly-owned subsidiary of CIGNA
Corporation, became a wholly-owned subsidiary of Lincoln National Corporation,
an Indiana corporation with headquarters in Fort Wayne, Indiana, whose principal
businesses are insurance and financial services.
Sales charges on the Contracts are as described in the Prospectus. There are
no variations in sales load.
- --------------------------------------------------------------------------------
CUSTODY OF ASSETS
The Company is the Custodian of the assets of the Variable Account. The
Company will purchase Fund shares at net asset value in connection with amounts
allocated to the Variable Account Sub-Accounts in accordance with the
instructions of the Purchasers and redeem Fund shares at net asset value for the
purpose of meeting the contractual obligations of the Variable Account, paying
charges relative to the Variable Account or making adjustments for annuity
reserves held in the Variable Account. The assets of the Sub-Accounts of the
Variable Account are held separate and apart from the assets of any other
segregated asset accounts of the Company and separate and apart from the
Company's general account assets. The Company maintains records of all purchases
and redemptions of shares of the Fund held by each of the Sub-Accounts of the
Variable Account. Additional protection for the assets of the Variable Account
is afforded by the Company's fidelity bond covering the acts of officers and
employees of the Company which is presently (as of May 1, 1998) in the amount of
$100,000,000.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE DATA
Historical performance data as of December 31, 1997 for each of the
Sub-Accounts of the Separate Account follows in the Financial Statements.
MONEY MARKET SUB-ACCOUNT YIELD. The Company may from time to time disclose the
current annualized yield of the Money Market Sub-Account, which invests in the
Money Market Fund, for a 7-day period in a manner which does not take into
consideration any realized or unrealized gains or losses on shares of the Money
Market Fund or on its portfolio securities. This current annualized yield is
computed by determining the net change (exclusive of realized gains and losses
on the sale of securities and unrealized appreciation and depreciation) at the
end of the 7-day period in the value of a hypothetical account having a balance
of 1 unit of the Money Market Sub-Account at the beginning of the 7-day period,
dividing such net change in account value by the value of the account at the
beginning of the period to determine the base period return, and annualizing
this quotient on a 365-day basis. The net change in account value reflects (i)
net income from the Money Market Fund attributable to the hypothetical account;
and (ii) charges and deductions imposed under a Contract that are attributable
to the hypothetical account.
The Company may also disclose the effective yield of the Money Market
Sub-Account for the same 7-day period, determined on a compounded basis. The
effective yield is calculated by compounding the unannualized base period return
by adding one to the base period return, raising the sum to a power equal to 365
divided by 7, and subtracting one from the result.
The effective yield is calculated by compounding the unannualized base period
return according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)(365/7)] - 1
The yield on amounts held in the Money Market Sub-Account normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Money Market Sub-Account's actual yield is affected by changes in
interest rates on money market securities, average portfolio maturity of the
Money Market Fund, the types and quality of portfolio securities held by the
Money Market Fund and its operating expenses. The yield figures do not reflect
withdrawal charges or premium taxes.
OTHER SUB-ACCOUNT YIELDS. The Company may from time to time advertise or
disclose the current annualized yield of one or more of the Sub-Accounts of the
Variable Account (except the Money Market Sub-Account) for 30-day periods. The
annualized yield of a Sub-Account refers to income generated by the Sub-Account
over a specific 30-day period. Because the yield is annualized,
7
<PAGE> 42
the yield generated by a Sub-Account during the 30-day period is assumed to be
generated each 30-day period over a 12-month period. The yield is computed by:
(i) dividing the net investment income per accumulation unit earned during the
period by the maximum offering price per unit on the last day of the period,
according to the following formula:
Yield = 2 [(a - b + 1)(6) - 1]
------
cd
Where:
a = Net investment income earned during the period by the Fund
attributable to shares owned by the Sub-Account.
b = Expenses accrued for the period.
c = The average daily number of accumulation units outstanding during
the period.
d = The maximum offering price per accumulation unit on the last day
of the period.
Because of the charges and deductions imposed by the Variable Account, the
yield for a Sub-Account of the Variable Account will be lower than the yield for
its corresponding Fund. The yield calculations do not reflect the effect of any
premium taxes or withdrawal charges that may be applicable to a particular
Contract. Withdrawal charges range from 7% to 1% of the amount withdrawn on
total Premium Payments paid less prior partial surrenders, based on the Contract
Year of surrender.
The yield on amounts held in the Sub-Accounts of the Variable Account normally
will fluctuate over time. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. A Sub-Account's actual yield is affected by the types and quality of the
Fund's investments and its operating expenses.
TOTAL RETURNS. The Company may from time to time also advertise or disclose
annual average total returns for one or more of the Sub-Accounts of the Variable
Account for various periods of time. When a Sub-Account has been in operation
for 1, 5 and 10 years, respectively, the total return for these periods will be
provided. Total returns for other periods of time may from time to time also be
disclosed. Total returns represent the average annual compounded rates of return
that would equate the initial amount invested to the redemption value of that
investment as of the last day of each of the periods.
Total returns will be calculated using Sub-Account Unit Values which the
Company calculates on each Valuation Period based on the performance of the
Sub-Account's underlying Portfolio, and the deductions for the mortality and
expense risk charge, the administrative expense charge, and the Annuity Account
Fee. The Annuity Account Fee is reflected by dividing the total amount of such
charges collected during the year that are attributable to the Variable Account
by the total average net assets of all the Variable Sub-Accounts. The resulting
percentage is deducted from the return in calculating the ending redeemable
value. These figures will not reflect any premium taxes or charges or credits
for market value adjustments. Total return calculations will reflect the effect
of withdrawal charges that may be applicable to a particular period. The total
return will then be calculated according to the following formula:
P(l + T)(n) = ERV
Where:
P = A hypothetical initial Premium Payment of $1,000.
T = Average annual total return.
n = Number of years in the period.
ERV = Ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the one, five or ten-year period, at the end of the one,
five or ten-year period (or fractional portion thereof).
OTHER PERFORMANCE DATA. The Company may from time to time also disclose
average annual total returns in a non-standard format in conjunction with the
standard format described above. The non-standard format will be identical to
the standard format except that the withdrawal charge percentage will be assumed
to be 0%.
The Company may also from time to time also disclose cumulative total returns
in conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula assuming that the withdrawal
charge percentage will be 0%.
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of Sub-Account recurring charges
for the period.
8
<PAGE> 43
ERV = The ending redeemable value of the hypothetical investment made
at the beginning of the one, five or ten-year period, at the end of the
one, five or ten-year period (or fractional portion thereof).
P = A hypothetical initial payment of $10,000
All non-standard performance data will only be advertised if the standard
performance data is also disclosed.
The Company may also from time to time use advertising which includes
hypothetical illustrations to compare the difference between the growth of a
taxable investment and a tax-deferred investment in a variable annuity.
- --------------------------------------------------------------------------------
LEGAL MATTERS
Legal advice regarding certain matters relating to the federal securities laws
applicable to the issuance of the Contracts described in this Prospectus has
been provided by George N. Gingold, Esquire of West Hartford, CT. All matters of
Connecticut law pertaining to the Contracts, including the validity of the
Contracts and the Company's right to issue the Contracts under Connecticut
Insurance Law and any other applicable state insurance or securities laws, have
been passed upon by Mark A. Parsons, Chief Counsel, Retirement and Investment
Services Division, CIGNA Corporation.
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or to
which the assets of the Variable Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Variable Account.
- --------------------------------------------------------------------------------
EXPERTS
The consolidated financial statements of Connecticut General Life Insurance
Company as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997 included in this Statement of Additional
Information as well as the Statement of Assets and Liabilities of the Variable
Account at December 31, 1997 and the Statement of Operations and the Statement
of Changes in Net Assets for the period ended December 31, 1997, have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. Price Waterhouse LLP's consent to this reference to the firm as an
"expert" is filed as an exhibit to the registration statement of which this
Statement of Additional Information is a part.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of the Company which are included in
this Statement of Additional Information should be considered only as bearing on
the ability of the Company to meet the obligations under the Contracts. They
should not be considered as bearing on the investment performance of the assets
held in the Variable Account, or on the Guaranteed Interest Rate credited by the
Company during a Guaranteed Period. The Financial Statements of the Variable
Account as of and for the year ended December 31, 1997 are also included.
- --------------------------------------------------------------------------------
9
<PAGE> 44
One Financial Plaza Telephone 860 240 2000
Hartford, CT 06103
PRICE WATERHOUSE LLP [PRICE WATERHOUSE LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
February 10, 1998
To the Board of Directors and Shareholder of
Connecticut General Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Connecticut
General Life Insurance Company and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
10
<PAGE> 45
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
1997 1996 1995
FOR THE YEARS ENDED DECEMBER 31, ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Premiums and fees........................................... $5,376 $5,314 $4,998
Net investment income....................................... 3,139 3,199 3,138
Realized investment gains (losses).......................... 45 37 (7)
Other revenues.............................................. 10 9 9
------ ------ ------
Total revenues.................................... 8,570 8,559 8,138
------ ------ ------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses.................... 5,917 6,069 5,892
Policy acquisition expenses................................. 122 143 127
Other operating expenses.................................... 1,618 1,477 1,358
------ ------ ------
Total benefits, losses and expenses............... 7,657 7,689 7,377
------ ------ ------
INCOME BEFORE INCOME TAXES.................................. 913 870 761
------ ------ ------
Income taxes (benefits):
Current................................................... 347 394 301
Deferred.................................................. (49) (81) (44)
------ ------ ------
Total taxes....................................... 298 313 257
------ ------ ------
NET INCOME.................................................. 615 557 504
Dividends declared.......................................... (400) (600) (252)
Retained earnings, beginning of year........................ 3,177 3,220 2,968
------ ------ ------
RETAINED EARNINGS, END OF YEAR.............................. $3,392 $3,177 $3,220
====== ====== ======
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
11
<PAGE> 46
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
AS OF DECEMBER 31, ------- -------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $20,962;
$19,882)............................................... $22,323 $20,816
Mortgage loans............................................ 10,090 10,152
Equity securities, at fair value (cost, $75; $59)......... 54 41
Policy loans.............................................. 7,146 7,133
Real estate............................................... 749 1,025
Other long-term investments............................... 166 193
Short-term investments.................................... 173 417
------- -------
Total investments................................. 40,701 39,777
Cash and cash equivalents................................... 923 --
Accrued investment income................................... 602 619
Premiums and accounts receivable............................ 811 817
Reinsurance recoverables.................................... 1,271 1,303
Deferred policy acquisition costs........................... 834 780
Property and equipment, net................................. 291 276
Current income taxes........................................ 67 12
Deferred income taxes, net.................................. 653 639
Goodwill.................................................... 474 488
Other assets................................................ 209 249
Separate account assets..................................... 29,217 22,555
------- -------
Total assets...................................... $76,053 $67,515
------- -------
LIABILITIES
Contractholder deposit funds................................ $30,449 $29,621
Future policy benefits...................................... 8,224 8,187
Unpaid claims and claim expenses............................ 1,225 1,170
Unearned premiums........................................... 260 200
------- -------
Total insurance and contractholder liabilities.... 40,158 39,178
Accounts payable, accrued expenses and other liabilities.... 2,428 1,808
Separate account liabilities................................ 29,021 22,365
------- -------
Total liabilities................................. 71,607 63,351
------- -------
CONTINGENCIES -- NOTE 12
SHAREHOLDER'S EQUITY
Common stock (6 shares outstanding)......................... 30 30
Additional paid-in capital.................................. 766 766
Net unrealized appreciation on investments.................. 256 188
Net translation of foreign currencies....................... 2 3
Retained earnings........................................... 3,392 3,177
------- -------
Total shareholder's equity........................ 4,446 4,164
------- -------
Total liabilities and shareholder's equity........ $76,053 $67,515
======= =======
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
12
<PAGE> 47
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
FOR THE YEARS ENDED DECEMBER 31, ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 615 $ 557 $ 504
Adjustments to reconcile net income to net cash provided by
operating activities:
Insurance liabilities..................................... 78 57 (90)
Reinsurance recoverables.................................. 68 (11) 1,201
Premiums and accounts receivable.......................... 106 77 32
Deferred income taxes, net................................ (49) (82) (44)
Other assets.............................................. (54) 43 (14)
Deferred policy acquisition costs......................... (97) (92) 12
Accounts payable, accrued expenses, other liabilities and
current income taxes................................... 41 (113) 212
Depreciation and goodwill amortization.................... 88 94 89
Other, net................................................ (99) (151) (79)
------- ------- -------
Net cash provided by operating activities......... 697 379 1,823
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities.......................................... 1,583 1,589 1,070
Mortgage loans............................................ 807 640 383
Equity securities......................................... 14 13 119
Real estate............................................... 401 345 299
Other (primarily short-term investments).................. 6,447 3,613 2,268
Investment maturities and repayments:
Fixed maturities.......................................... 2,394 2,634 2,234
Mortgage loans............................................ 601 630 420
Investments purchased:
Fixed maturities.......................................... (4,339) (3,834) (4,439)
Mortgage loans............................................ (1,426) (1,300) (1,908)
Equity securities......................................... (9) (3) (20)
Policy loans.............................................. (13) (207) (2,129)
Other (primarily short-term investments).................. (6,296) (3,930) (2,334)
Other, net................................................ (102) (94) (119)
------- ------- -------
Net cash provided by (used in) investing
activities...................................... 62 96 (4,156)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder deposit funds:
Deposits and interest credited............................ 7,634 7,260 7,489
Withdrawals and benefit payments.......................... (7,023) (7,135) (4,985)
Dividends paid to parent.................................... (400) (600) (252)
Other, net.................................................. (47) -- 1
------- ------- -------
Net cash provided by (used in) financing
activities...................................... 164 (475) 2,253
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 923 -- (80)
Cash and cash equivalents, beginning of year................ -- -- 80
------- ------- -------
Cash and cash equivalents, end of year...................... $ 923 $ -- $ --
------- ------- -------
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds......................... $ 402 $ 385 $ 211
Interest paid............................................. $ 5 $ 7 $ 7
------- ------- -------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
13
<PAGE> 48
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Connecticut General Life Insurance Company and its subsidiaries (the Company)
provide insurance and related financial services throughout the United States
and in many locations worldwide. Principal products and services include group
life and health insurance, individual life insurance and annuity products, and
retirement and investment products and services. The Company is a wholly-owned
subsidiary of Connecticut General Corporation, which is an indirect wholly-owned
subsidiary of CIGNA Corporation (CIGNA).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of the Company and all significant subsidiaries. These consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles, and reflect management's estimates and assumptions, such
as those regarding medical costs and interest rates, that affect the recorded
amounts. Significant estimates used in determining insurance and contractholder
liabilities, related reinsurance recoverables, and valuation allowances for
investment assets are discussed throughout the Notes to Financial Statements.
Certain reclassifications have been made to prior years' amounts to conform with
the 1997 presentation.
B) RECENT ACCOUNTING PRONOUNCEMENTS: In 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which could change the way segments are
structured and require additional segment disclosure. Although the Company has
not determined the timing of implementation of this pronouncement, it will be
adopted no later than the required implementation date of December 31, 1998.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" in 1997. SOP 97-3 provides guidance on the
recognition and measurement of liabilities for guaranty fund and other
insurance-related assessments. Implementation is required by the first quarter
of 1999, with the cumulative effect of adopting the SOP reflected in net income
in the year of adoption. The Company has not determined the effect or timing of
implementation of this pronouncement.
In 1996, the Company implemented Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires write-down to fair
value when long-lived assets to be held and used are impaired. Long-lived assets
to be disposed of, including real estate held for sale, must be carried at the
lower of cost or fair value less costs to sell. Depreciation of assets to be
disposed of is prohibited. The effect of implementing SFAS No. 121 was not
material to the Company.
C) FINANCIAL INSTRUMENTS: In the normal course of business, the Company enters
into transactions involving various types of financial instruments, including
investments such as fixed maturities and equity securities and off-balance sheet
financial instruments such as investment and loan commitments and financial
guarantees. These instruments are subject to risk of loss due to interest rate
and market fluctuations and most have credit risk. The Company evaluates and
monitors each financial instrument individually and, where appropriate, uses
certain derivative instruments or obtains collateral or other forms of security
to minimize risk of loss.
Financial instruments that are subject to fair value disclosure requirements
(insurance contracts, real estate, goodwill and taxes are excluded) are carried
in the financial statements at amounts that approximate fair value, except for
Mortgage Loans and Contractholder Deposit Funds (non-insurance products). For
these financial instruments, the fair value was not materially different from
the carrying amount as of December 31, 1997 and 1996. Fair values of off-balance
sheet financial instruments as of December 31, 1997 and 1996 were not material.
Fair values for financial instruments are estimates that, in many cases, may
differ significantly from the amounts that could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial instruments with comparable terms and credit
quality. The fair value of liabilities for contractholder deposit funds was
estimated using the amount payable on demand, and for those not payable on
demand, discounted cash flow analyses.
D) INVESTMENTS: Investments in fixed maturities, which are classified as
available-for-sale, include bonds, asset-backed securities, including
collateralized mortgage obligations (CMOs), and redeemable preferred stocks.
Fixed maturities are carried at fair value, with unrealized appreciation or
depreciation included in Shareholder's Equity. Fixed maturities are considered
impaired and written down to fair value when a decline in value is considered to
be other than temporary.
Mortgage loans are carried principally at unpaid principal balances, net of
valuation reserves. Mortgage loans are considered impaired when it is probable
that the Company will not collect all amounts according to the contractual terms
of the loan agreement. If impaired, a valuation reserve is utilized to record
any change in the fair value of the underlying collateral below the carrying
value of the mortgage loan.
14
<PAGE> 49
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fixed maturities and mortgage loans that are delinquent or restructured to
modify basic financial terms, typically to reduce the interest rate and, in
certain cases, extend the term, are placed on non-accrual status. Net investment
income on such investments is recognized only when payment is received.
Real estate investments are either held for the production of income or held
for sale. Real estate investments held for the production of income are carried
at depreciated cost less any write-downs to fair value. Depreciation is
generally calculated using the straight-line method based on the estimated
useful lives of these assets.
Real estate investments held for sale are generally those which are acquired
through the foreclosure of mortgage loans. The Company's policy is to
rehabilitate, re-lease and sell foreclosed properties, which generally takes two
to four years. At the time of foreclosure, properties are valued at fair value
less estimated costs to sell and reclassified from mortgage loans to real estate
held for sale. Subsequent to foreclosure, these investments are carried at the
lower of cost or current fair value less estimated costs to sell and are no
longer depreciated. Adjustments to the carrying value as a result of changes in
fair value subsequent to foreclosure are recorded as valuation reserves. The
Company considers several methods in determining fair value for real estate,
with emphasis placed on the use of discounted cash flow analyses and, in some
cases, the use of third-party appraisals.
Equity securities, which include common and non-redeemable preferred stocks,
are carried at fair value, with unrealized appreciation or depreciation included
in Shareholder's Equity. Short-term investments are carried at fair value, which
approximates cost. Equity securities and short-term investments are classified
as available for sale.
Policy loans are generally carried at unpaid principal balances.
Realized investment gains and losses result from sales, investment asset
write-downs and changes in valuation reserves. Realized investment gains and
losses do not include amounts attributable to experience-rated pension
policyholders' contracts and participating life policies (policyholder share).
Realized investment gains and losses are based upon specific identification of
the investment assets.
Unrealized investment gains and losses for investments carried at fair value
are included in Shareholder's Equity net of policyholder-related amounts and
deferred income taxes.
See Note 4(F) for a discussion of the Company's accounting policies for
derivative financial instruments.
E) CASH AND CASH EQUIVALENTS: Short-term investments with a maturity of three
months or less at the time of purchase are reported as cash equivalents.
F) REINSURANCE RECOVERABLES: Reinsurance recoverables are estimates of amounts
to be received from reinsurers, including amounts under reinsurance agreements
with affiliated companies. Allowances are established for amounts estimated to
be uncollectible.
G) DEFERRED POLICY ACQUISITION COSTS: Acquisition costs consist of
commissions, premium taxes and other costs, which vary with, and are primarily
related to, the production of revenues. Acquisition costs for universal life
products and contractholder deposit funds are deferred and amortized in
proportion to the present value of total estimated gross profits over the
expected lives of the contracts. Acquisition costs for annuity and other
individual life insurance products are deferred and amortized, generally in
proportion to the ratio of annual revenue to the estimated total revenues over
the contract periods.
Deferred policy acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income. If such costs are
estimated to be unrecoverable, they are expensed unless such costs are estimated
to be unrecoverable as a result of treating unrealized investment gains and
losses as though they had been realized. In these cases a deferred acquisition
cost valuation allowance may be established or adjusted, with a comparable
offset in net unrealized appreciation (depreciation).
H) PROPERTY AND EQUIPMENT: Property and equipment are carried at cost less
accumulated depreciation. When applicable, cost includes interest and real
estate taxes incurred during construction and other construction-related costs.
Depreciation is calculated principally on the straight-line method based on the
estimated useful lives of the assets. Accumulated depreciation was $448 million
and $427 million at December 31, 1997 and 1996, respectively.
I) OTHER ASSETS: Other Assets consists of various insurance-related assets,
principally ceded unearned premiums, reinsurance deposits and other amounts due
from affiliated companies.
J) GOODWILL: Goodwill represents the excess of the cost of businesses acquired
over the fair value of their net assets. Goodwill is amortized on systematic
bases over periods, not exceeding 40 years, that correspond with the benefits
estimated to be derived from the acquisitions. The Company evaluates the
carrying amount of goodwill by analyzing historical and estimated future income
and undiscounted estimated cash flows of the related businesses. Goodwill is
written down when impaired. Amortization periods
15
<PAGE> 50
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are revised if it is estimated that the remaining period of benefit of the
goodwill has changed. Accumulated amortization was $113 million and $99 million
at December 31, 1997 and 1996, respectively.
K) SEPARATE ACCOUNTS: Separate account assets and liabilities are principally
carried at market value and represent policyholder funds maintained in accounts
having specific investment objectives. The investment income, gains and losses
of these accounts generally accrue to the policyholders and, therefore, are not
included in the Company's revenues and expenses.
L) CONTRACTHOLDER DEPOSIT FUNDS: Liabilities for Contractholder Deposit Funds
consist of deposits received from customers and investment earnings on their
fund balances, less administrative charges and, for universal life fund
balances, mortality charges.
M) FUTURE POLICY BENEFITS: Future policy benefits are liabilities for life,
health and annuity products. Such liabilities are established in amounts
adequate to meet the estimated future obligations of policies in force. These
liabilities are computed using premium assumptions for group annuity policies
and the net level premium method for individual life policies, and are based
upon estimates as to future investment yield, mortality and withdrawals that
include provisions for adverse deviation. Future policy benefits for individual
life insurance and annuity policies are computed using interest rates ranging
from 2% to 11%, generally graded down from 1 to 20 years. Mortality, morbidity,
and withdrawal assumptions are based on either the Company's own experience or
various actuarial tables.
N) UNPAID CLAIMS AND CLAIM EXPENSES: Liabilities for unpaid claims and claim
expenses are estimates of payments to be made on reported and incurred but not
reported insurance claims.
O) UNEARNED PREMIUMS: Premiums for group life and accident and health
insurance are reported as earned on a pro rata basis over the contract period.
The unexpired portion of these premiums is recorded as Unearned Premiums.
P) OTHER LIABILITIES: Other Liabilities consist principally of postretirement
and postemployment benefits and various insurance-related liabilities, including
amounts related to reinsurance contracts and guaranty fund assessments that can
be reasonably estimated.
Q) TRANSLATION OF FOREIGN CURRENCIES: Foreign operations primarily utilize the
local currencies as their functional currencies, and assets and liabilities are
translated at the rates of exchange as of the balance sheet date. The
translation gain or loss on such functional currencies, net of applicable taxes,
is generally reflected in Shareholder's Equity. Revenues and expenses are
translated at the average rates of exchange prevailing during the year.
R) PREMIUM AND FEES, REVENUES AND RELATED EXPENSES: Premiums for group life
and accident and health insurance are recognized as revenue on a pro-rata basis
over their contract periods. Benefits, losses and settlement expenses are
recognized when incurred.
Premiums for individual life insurance as well as individual and group annuity
products, excluding universal life and investment-related products, are
recognized as revenue when due. Benefits, losses and settlement expenses are
matched with premiums.
Revenues for universal life products consist of net investment income and
mortality, administration and surrender fees assessed against the fund balances
during the period. Net investment income represents investment income on assets
supporting universal life products and is recognized as earned. Fees for
mortality are recognized ratably over the policy year. Administration fees are
recognized as services are provided, and surrender charges are recognized as
earned. Benefit expenses for universal life products consist of benefit claims
in excess of fund balances, which are recognized when claims are filed, and
amounts credited in accordance with contract provisions.
Revenues for investment-related products consist of net investment income and
contract fees assessed against the fund balances during the period. Net
investment income represents investment income on assets supporting
investment-related products and is recognized as earned. Contract fees are based
upon related administrative expenses and are assessed ratably over the contract
year. Benefit expenses for investment-related products primarily consist of
amounts credited in accordance with contract provisions.
S) PARTICIPATING BUSINESS: Certain life insurance policies contain dividend
payment provisions that enable the policyholder to participate in a portion of
the earnings of the Company's business. The participating insurance in force
accounted for approximately 7% of total life insurance in force at December 31,
1997, 1996 and 1995.
T) INCOME TAXES: The Company and its domestic subsidiaries are included in the
consolidated United States federal income tax return filed by CIGNA. In
accordance with a tax sharing agreement with CIGNA, the provision for federal
income tax is computed as if the Company were filing a separate federal income
tax return, except that benefits arising from tax credits and net operating and
capital losses are allocated to those subsidiaries producing such attributes to
the extent they are utilized in CIGNA's consolidated federal income tax
provision.
16
<PAGE> 51
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes. See
Note 7 for additional information.
NOTE 3 -- DISPOSITION
As of January 1, 1998, the Company sold its individual life insurance and
annuity businesses for cash proceeds of $1.4 billion. The sale resulted in an
after-tax gain of approximately $800 million. Since the principal agreement to
sell these businesses is in the form of an indemnity reinsurance arrangement,
approximately $575 million of the gain will be deferred and amortized over
future periods at the rate that earnings from the businesses sold would have
been expected to emerge. Revenues for these businesses were $972 million, $926
million and $865 million for the years ended December 31, 1997, 1996 and 1995,
respectively, and net income was $102 million, $67 million and $74 million for
the same periods. The Company paid a dividend of $1.4 billion to its parent in
January 1998, having received prior approval of both the disposition and the
dividend from the Connecticut Insurance Department (the Department).
NOTE 4 -- INVESTMENTS
A) FIXED MATURITIES: Fixed maturities are net of cumulative write-downs of $36
million and $95 million, including policyholder share, as of December 31, 1997
and 1996, respectively.
The amortized cost and fair value by contractual maturity periods for fixed
maturities, including policyholder share, as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
(IN MILLIONS) --------- -------
<S> <C> <C>
Due in one year or less..................................... $ 1,114 $ 1,139
Due after one year through five years....................... 5,768 5,949
Due after five years through ten years...................... 4,734 4,998
Due after ten years......................................... 3,093 3,680
Asset-backed securities..................................... 6,253 6,557
------- -------
Total............................................. $20,962 $22,323
======= =======
</TABLE>
Actual maturities could differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Also, the Company may extend maturities in some cases.
Gross unrealized appreciation (depreciation) for fixed maturities, including
policyholder share, by type of issuer was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE
(IN MILLIONS) --------- ------------ ------------ -------
<S> <C> <C> <C> <C>
Federal government bonds....................... $ 1,361 $ 294 $ -- $ 1,655
State and local government bonds............... 178 22 (2) 198
Foreign government bonds....................... 143 7 (1) 149
Corporate securities........................... 13,027 860 (123) 13,764
Asset-backed securities........................ 6,253 317 (13) 6,557
------- ------ ----- -------
Total................................ $20,962 $1,500 $(139) $22,323
======= ====== ===== =======
</TABLE>
17
<PAGE> 52
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE
(IN MILLIONS) --------- ------------ ------------ -------
<S> <C> <C> <C> <C>
Federal government bonds....................... $ 475 $ 160 $ -- $ 635
State and local government bonds............... 174 13 (4) 183
Foreign government bonds....................... 121 6 -- 127
Corporate securities........................... 13,310 742 (148) 13,904
Asset-backed securities........................ 5,802 226 (61) 5,967
------- ------ ----- -------
Total................................ $19,882 $1,147 $(213) $20,816
======= ====== ===== =======
</TABLE>
Asset-backed securities include investments in CMOs as of December 31, 1997 of
$2.3 billion carried at fair value (amortized cost, $2.3 billion), compared with
$2.2 billion carried at fair value (amortized cost, $2.1 billion) as of December
31, 1996. Certain of these securities are backed by Aaa/AAA-rated government
agencies. All other CMO securities have high quality ratings through use of
credit enhancements provided by subordinated securities or mortgage insurance
from Aaa/AAA-rated insurance companies. CMO holdings are concentrated in
securities with limited prepayment, extension and default risk, such as planned
amortization class bonds. The Company's investments in interest-only and
principal-only CMOs, which are subject to interest rate risk due to accelerated
prepayments, represented approximately 0.1% of total CMO investments at December
31, 1997 and 1996.
At December 31, 1997, contractual fixed maturity investment commitments were
$188 million. The majority of investment commitments are for the purchase of
investment grade fixed maturities, bearing interest at a fixed market rate, and
require no collateral. These commitments are diversified by issuer and maturity
date, and it is estimated that approximately 83% will be disbursed in 1998.
B) MORTGAGE LOANS AND REAL ESTATE: The Company's mortgage loans and real
estate investments are diversified by property type and location and, for
mortgage loans, by borrower. Mortgage loans are collateralized by the related
properties and generally approximate 75% of the property's value at the time the
original loan is made.
At December 31, the carrying values of mortgage loans and real estate
investments, including policyholder share, were as follows:
<TABLE>
<CAPTION>
1997 1996
(IN MILLIONS) ------- -------
<S> <C> <C>
Mortgage Loans.............................................. $10,090 $10,152
------- -------
Real estate:
Held for sale............................................. 339 586
Held for production of income............................. 410 439
------- -------
Total real estate................................. 749 1,025
------- -------
Total............................................. $10,839 $11,177
======= =======
</TABLE>
18
<PAGE> 53
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, mortgage loans and real estate investments comprised the
following property types and geographic regions:
<TABLE>
<CAPTION>
1997 1996
(IN MILLIONS) ------- -------
<S> <C> <C>
Property type:
Retail facilities......................................... $ 4,227 $ 4,453
Office buildings.......................................... 3,984 4,241
Apartment buildings....................................... 1,311 1,272
Hotels.................................................... 498 665
Other (primarily industrial).............................. 819 546
------- -------
Total............................................. $10,839 $11,177
------- -------
Geographic region:
Central................................................... $ 3,484 $ 3,452
Pacific................................................... 2,962 3,132
Middle Atlantic........................................... 1,821 1,920
South Atlantic............................................ 1,458 1,526
New England............................................... 1,114 1,147
------- -------
Total............................................. $10,839 $11,177
======= =======
</TABLE>
MORTGAGE LOANS
At December 31, 1997, scheduled mortgage loan maturities were as follows:
1998 -- $0.7 billion; 1999 -- $1.1 billion; 2000 -- $1.3 billion; 2001 -- $1.1
billion; 2002 -- $1.7 billion; and $4.2 billion thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties; the maturity date may
be extended; and loans may be refinanced. During 1997 and 1996, the Company
refinanced at current market rates approximately $135 million and $477 million,
respectively, of its mortgage loans relating to borrowers that were unable to
obtain alternative financing.
At December 31, 1997, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $167 million, all
of which were at a fixed market rate of interest. These commitments expire
within six months, and are diversified by property type and geographic region.
At December 31, 1997, the Company's impaired mortgage loans were $375 million,
including $152 million before valuation reserves totaling $44 million, and $223
million which had no valuation reserves. At December 31, 1996, the Company's
impaired mortgage loans were $814 million, including $442 million before
valuation reserves totaling $94 million, and $372 million which had no valuation
reserves.
During the year ended December 31, changes in reserves for impaired mortgage
loans, including policyholder share, were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Reserve balance -- January 1................................ $ 94 $82
Transfers to foreclosed real estate......................... (30) (29)
Charge-offs upon sales...................................... (47) (19)
Net increase in valuation reserves.......................... 27 60
---- ---
Reserve balance -- December 31.................... $ 44 $94
==== ===
</TABLE>
During 1997 and 1996, impaired mortgage loans, before valuation reserves,
averaged approximately $597 million and $852 million, respectively. Interest
income recorded and cash received on these loans were approximately $34 million
and $73 million in 1997 and 1996, respectively.
REAL ESTATE
During 1997, 1996 and 1995, non-cash investing activities included real estate
acquired through foreclosure of mortgage loans, which totaled $81 million, $107
million and $144 million, respectively.
19
<PAGE> 54
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Valuation reserves and cumulative write-downs related to real estate,
including policyholder share, were $169 million and $273 million as of December
31, 1997 and 1996, respectively.
Net income for 1997 and 1996 included net investment income of $9 million and
$19 million, respectively, for real estate held for sale. Write-downs upon
foreclosure and changes in valuation reserves were not material for 1997 and
1996.
C) SHORT-TERM INVESTMENTS AND CASH EQUIVALENTS: Short-term investments and
cash equivalents, in the aggregate, primarily included debt securities,
principally corporate securities of $520 million and federal government
securities of $443 million at December 31, 1997 and, for 1996, principally
corporate securities of $418 million.
D) NET UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS: Unrealized
appreciation (depreciation) for investments carried at fair value as of December
31 was as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Unrealized appreciation:
Fixed maturities.......................................... $1,500 $1,147
Equity securities......................................... 8 8
------ ------
1,508 1,155
------ ------
Unrealized depreciation:
Fixed maturities.......................................... (139) (213)
Equity securities......................................... (29) (26)
------ ------
(168) (239)
------ ------
Less policyholder-related amounts........................... 931 610
Shareholder net unrealized appreciation..................... 409 306
Less deferred income taxes.................................. 153 118
------ ------
Net unrealized appreciation....................... $ 256 $ 188
====== ======
</TABLE>
Net unrealized appreciation (depreciation) for investments carried at fair
value is included as a separate component of Shareholder's Equity, net of
policyholder-related amounts and deferred income taxes. The net unrealized
appreciation (depreciation) for these investments, primarily fixed maturities,
during 1997, 1996 and 1995 was $68 million, ($288) million and $542 million,
respectively.
E) NON-INCOME PRODUCING INVESTMENTS: At December 31, the carrying values of
investments, including policyholder share, that were non-income producing during
the preceding 12 months were as follows:
<TABLE>
<CAPTION>
1997 1996
(IN MILLIONS) ---- ----
<S> <C> <C>
Fixed maturities............................................ $ 28 $ 52
Mortgage loans.............................................. -- 14
Real estate................................................. 141 172
---- ----
Total............................................. $169 $238
==== ====
</TABLE>
F) DERIVATIVE FINANCIAL INSTRUMENTS: The Company's investment strategy is to
manage the characteristics of investment assets, such as duration, yield,
currency and liquidity, to reflect the underlying characteristics of the related
insurance and contractholder liabilities, which vary among the Company's
principal product lines. In connection with this investment strategy, the
Company's use of derivative instruments, including interest rate and currency
swaps, purchased options and futures contracts, is limited to hedging
applications to minimize market risk.
Hedge accounting treatment requires a probability of high correlation between
the changes in the market value or cash flows of the derivatives and the hedged
assets or liabilities. Under hedge accounting, the changes in market value or
cash flows of the derivatives and the hedged assets or liabilities are
recognized in net income in the same period. If the Company's use of derivatives
does not qualify for hedge accounting treatment, the derivative is recorded at
fair value and changes in its fair value are recognized in net income without
considering changes in the hedged asset or liability.
20
<PAGE> 55
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company routinely monitors, by individual counterparty, exposure to credit
risk associated with swap and option contracts and diversifies the portfolio
among approved dealers of high credit quality. Futures contracts are
exchange-traded and, therefore, credit risk is limited since the exchange
assumes the obligations. The Company manages legal risks by following industry
standardized documentation procedures and by monitoring legal developments.
Underlying contract, notional or principal amounts associated with derivatives
at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
(IN MILLIONS) ---- ----
<S> <C> <C>
Interest rate swaps......................................... $265 $335
Currency swaps.............................................. 248 275
Purchased options........................................... 833 632
Futures..................................................... 75 45
</TABLE>
Under interest rate swaps, the Company agrees with other parties to
periodically exchange the difference between variable rate and fixed rate asset
cash flows to provide stable returns for related liabilities. The Company uses
currency swaps (primarily Canadian dollars, pounds sterling and Swiss francs) to
match the currency of investments to that of the associated liabilities. Under
currency swaps, the parties exchange principal and interest amounts in two
relevant currencies using agreed-upon exchange amounts.
The net interest cash flows from interest rate and currency swaps are
recognized currently as an adjustment to net investment income, and the fair
value of these swaps is reported as an adjustment to the related investments.
Using purchased options to reduce the effect of changes in interest rates or
equity indexes on liabilities, the Company pays an up-front fee to receive cash
flows from third parties when interest rates or equity indexes vary from
specified levels. Purchased options that qualify for hedge accounting are
recorded consistent with the related liabilities, at amortized cost plus
adjustments based on current equity indexes, and income is reported as an
adjustment to benefit expense. Purchased options are reported in other assets,
and fees paid are amortized to benefit expense over their contractual periods.
Purchased options with underlying notional amounts of $82 million and $112
million at December 31, 1997 and 1996, respectively, that are designated as
hedges, but do not qualify for hedge accounting, are reported in other long-term
investments at fair value with changes in fair value recognized as realized
investment gains and losses.
Interest rate futures are used to temporarily hedge against the changes in
market values of bonds and mortgage loans to be purchased or sold. Under futures
contracts, changes in the contract values are settled in cash daily with the
exchange on which the instrument is traded. These changes in contract values are
deferred and recorded as adjustments to the carrying value of the related bond
or mortgage loan. Deferred gains and losses are amortized into net investment
income over the life of the investments purchased or are recognized in full as
realized investment gains and losses if investments are sold. Gains and losses
on futures contracts deferred in anticipation of investment purchases were
immaterial at December 31, 1997 and 1996.
The effects of interest rate and currency swaps, purchased options and futures
on the components of net income for 1997, 1996 and 1995 were not material.
As of December 31, 1997 and 1996, the Company's variable interest rate
investments consisted of approximately $0.7 billion and $1.3 billion of fixed
maturities, respectively. As of December 31, 1997 and 1996, the Company's fixed
interest rate investments consisted of $21.6 billion and $19.5 billion,
respectively, of fixed maturities, and $10.1 billion and $10.2 billion,
respectively, of mortgage loans.
G) OTHER: As of December 31, 1997 and 1996, the Company had no concentration
of investments in a single investee exceeding 10% of Shareholder's Equity.
21
<PAGE> 56
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INVESTMENT INCOME AND GAINS AND LOSSES
A) NET INVESTMENT INCOME: The components of net investment income, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities............................................ $1,648 $1,647 $1,663
Equity securities........................................... 10 -- 15
Mortgage loans.............................................. 885 921 866
Policy loans................................................ 532 548 499
Real estate................................................. 118 227 301
Other long-term investments................................. 47 23 33
Short-term investments...................................... 28 35 46
------ ------ ------
3,268 3,401.. 3,423
Less investment expenses.................................... 129 202 285
------ ------ ------
Net investment income............................. $3,139 $3,199 $3,138
====== ====== ======
</TABLE>
Net investment income attributable to policyholder contracts, which is
included in the Company's revenues and is primarily offset by amounts included
in Benefits, Losses and Settlement Expenses, was approximately $1.7 billion for
1997 and $1.8 billion for 1996 and 1995. Net investment income for separate
accounts, which is not reflected in the Company's revenues, was $1.4 billion,
$1.1 billion and $885 million for 1997, 1996 and 1995, respectively.
As of December 31, 1997, fixed maturities and mortgage loans on non-accrual
status, including policyholder share, were $143 million and $153 million,
including restructured investments of $81 million and $137 million,
respectively. As of December 31, 1996, fixed maturities and mortgage loans on
non-accrual status, including policyholder share, were $160 million and $360
million, including restructured investments of $88 million and $304 million,
respectively. If interest on these investments had been recognized in accordance
with their original terms, net income would have been increased by $7 million,
$15 million and $18 million in 1997, 1996 and 1995, respectively.
B) REALIZED INVESTMENT GAINS AND LOSSES: Realized gains (losses) on
investments, excluding policyholder share, for the year ended December 31 were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities............................................ $(3) $ 11 $(10)
Equity securities........................................... 4 1 5
Mortgage loans.............................................. 4 (12) (5)
Real estate................................................. 28 15 4
Other....................................................... 12 22 (1)
--- ---- ----
45 37 (7)
Income tax expenses (benefits).............................. 8 17 (2)
--- ---- ----
Net realized investment gains (losses)............ $37 $ 20 $ (5)
=== ==== ====
</TABLE>
Realized investment gains and losses include impairments in the value of
investments, net of recoveries, of $25 million, $40 million and $27 million in
1997, 1996 and 1995, respectively.
Realized investment gains for separate accounts, which are not reflected in
the Company's revenues, were $489 million, $305 million and $412 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Realized investment
gains (losses) attributable to policyholder contracts, which also are not
reflected in the Company's revenues, were $76 million, $82 million and ($6)
million for the years ended December 31, 1997, 1996 and 1995, respectively.
22
<PAGE> 57
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Sales of available-for-sale fixed maturities and equity securities, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Proceeds from sales......................................... $3,978 $4,236 $1,667
Gross gains on sales........................................ $ 66 $ 146 $ 78
Gross losses on sales....................................... $ (21) $ (70) $ (53)
------ ------ ------
</TABLE>
NOTE 6 -- SHAREHOLDER'S EQUITY AND DIVIDEND RESTRICTIONS
The Department recognizes as net income and surplus (shareholder's equity)
those amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department, which may differ from generally
accepted accounting principles. As of December 31, 1997, there were no permitted
accounting practices utilized by the Company that were materially different from
those prescribed by the Department.
Capital stock of the Company at December 31, 1997 and 1996 consisted of
5,978,322 shares of common stock authorized, issued and outstanding (par value
$5).
The Company's statutory net income was $417 million, $611 million and $390
million for 1997, 1996 and 1995, respectively. Statutory surplus was $2.2
billion at December 31, 1997 and $2.1 billion at December 31, 1996. The
Connecticut Insurance Holding Company Act limits the amount of annual dividends
or other distributions available to shareholders of Connecticut insurance
companies without the Department's prior approval. During 1997, the Company paid
a total of $400 million in dividends to its parent, of which $100 million
received prior approval from the Department in accordance with requirements.
Under current law, the maximum dividend distribution that may be made by the
Company during 1998 without prior approval is $548 million. The amount of
restricted net assets as of December 31, 1997 was approximately $3.9 billion.
NOTE 7 -- INCOME TAXES
The Company's net deferred tax asset of $653 million and $639 million as of
December 31, 1997 and 1996, respectively, reflects management's belief that the
Company's taxable income in future years will be sufficient to realize the net
deferred tax asset based on the Company's earnings history and its future
expectations. In determining the adequacy of future taxable income, management
considered the future reversal of its existing taxable temporary differences and
available tax planning strategies that could be implemented, if necessary.
In accordance with the Life Insurance Company Income Tax Act of 1959, a
portion of the Company's statutory income was not subject to current income
taxation but was accumulated in an account designated Policyholders' Surplus
Account. Under the Tax Reform Act of 1984, no further additions may be made to
the Policyholders' Surplus Account for tax years ending after December 31, 1983.
The balance in the account of approximately $450 million at December 31, 1997
would result in a tax liability of $158 million only if distributed to the
shareholder or if the account balance exceeded a prescribed maximum. No income
taxes have been provided on this amount because, in management's opinion, the
likelihood that these conditions will be met is remote.
CIGNA's federal income tax returns are routinely audited by the Internal
Revenue Service (IRS), and provisions are made in CIGNA's financial statements
in anticipation of the results of these audits. CIGNA resolved all issues
relative to the Company arising out of audits for 1991 through 1993, which
resulted in an increase to net income of $13 million in 1997.
In management's opinion, adequate tax liabilities have been established for
all years.
23
<PAGE> 58
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences which give rise to deferred income tax
assets and liabilities as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
(IN MILLIONS) ---- ----
<S> <C> <C>
Deferred tax assets:
Other insurance and contractholder liabilities............ $400 $387
Employee and retiree benefit plans........................ 196 177
Investments, net.......................................... 262 228
Other..................................................... 63 74
---- ----
Total deferred tax assets......................... 921 866
---- ----
Deferred tax liabilities:
Policy acquisition expenses............................... 38 21
Depreciation.............................................. 77 88
Unrealized appreciation on investments.................... 153 118
---- ----
Total deferred tax liabilities.................... 268 227
---- ----
Net deferred income tax asset..................... $653 $639
==== ====
</TABLE>
Total income taxes for the year ended December 31 were less than the amount
computed using the nominal federal income tax rate of 35% for the following
reasons:
<TABLE>
<CAPTION>
1997 1996 1995
(IN MILLIONS) ---- ---- ----
<S> <C> <C> <C>
Tax expense at nominal rate................................. $320 $305 $266
Tax-exempt interest income.................................. (5) (5) (6)
Dividends received deduction................................ (7) (7) (7)
Amortization of goodwill.................................... 4 4 4
Resolved federal tax audit issues........................... (13) -- --
Other....................................................... (1) 16 --
---- ---- ----
Total income taxes................................ $298 $313 $257
==== ==== ====
</TABLE>
NOTE 8 -- PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PLANS
A) PENSION PLANS: The Company provides retirement benefits to eligible
employees and agents. These benefits are provided through a plan sponsored by
CIGNA covering most domestic employees (the Plan) and by several separate
pension plans for various subsidiaries, agents and foreign employees.
The Plan is a non-contributory, defined benefit, trusteed plan available to
eligible domestic employees. Generally, for employees whose service commenced
prior to 1989, benefits are based on their years of service and eligible
compensation during the highest three consecutive years of employment, offset by
a portion of the Social Security benefit for which they are eligible. In 1997,
CIGNA amended its Plan for employees whose service commenced after 1988. Under
the new Plan provisions, eligible employees receive annual benefit credits based
on an employee's age and credited service, and quarterly interest credits based
on U.S. Treasury bond rates. The employee's pension benefit equals the value of
accumulated credits, and may be paid at or after separation from service in a
lump sum or an annuity. CIGNA funds the Plan at least at the minimum amount
required by the Employee Retirement Income Security Act of 1974 (ERISA).
Allocated pension cost for the Company was $24 million, $26 million and $23
million in 1997, 1996 and 1995, respectively.
The Plan, and several separate pension plans for various subsidiaries and
agents, had deposits with the Company totaling approximately $2.5 billion and
$2.2 billion at December 31, 1997 and 1996, respectively.
B) OTHER POSTRETIREMENT BENEFITS PLANS: In addition to providing pension
benefits, the Company provides certain health care and life insurance benefits
to retired employees, spouses and other eligible dependents through various
plans sponsored by CIGNA. A substantial portion of the Company's employees may
become eligible for these benefits upon retirement. CIGNA's contributions for
health care benefits depend upon a retiree's date of retirement, age, years of
service and other cost-sharing features, such as deductibles and coinsurance.
Under the terms of the benefit plans, benefit provisions and cost-sharing
features can be
24
<PAGE> 59
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
adjusted. In general, retiree health care benefits are not funded by CIGNA, but
are paid as covered expenses are incurred. Retiree life insurance benefits are
paid from plan assets or as covered expenses are incurred.
Expense for postretirement benefits other than pensions allocated to the
Company totaled $2 million for 1997, $9 million for 1996 and $16 million for
1995. The other postretirement benefit liability included in Accounts Payable,
Accrued Expenses and Other Liabilities as of December 31, 1997 and 1996 was $412
million and $424 million, including net intercompany payables of $39 million and
$40 million, respectively, for services provided by affiliates' employees.
C) OTHER POSTEMPLOYMENT BENEFITS: The Company provides certain salary
continuation (severance and disability), health care and life insurance benefits
to inactive and former employees, spouses and other eligible dependents through
various employee benefit plans sponsored by CIGNA.
Although severance benefits accumulate with additional service, the Company
recognizes severance expense when severance is probable and the costs can be
reasonably estimated. Postemployment benefits other than severance generally do
not vest or accumulate; therefore, the estimated cost of benefits is accrued
when determined to be probable and estimable, generally upon disability or
termination. See Note 11 for additional information regarding severance accrued
as part of cost reduction initiatives.
D) CAPITAL ACCUMULATION PLANS: CIGNA sponsors various capital accumulation
plans in which employee contributions on a pre-tax basis (401(k)) are
supplemented by CIGNA matching contributions. These contributions are invested,
at the election of the employee, in one or more of the following investments:
CIGNA common stock fund, several CIGNA and non-CIGNA mutual funds, and a
fixed-income fund. In addition, beginning in 1999, CIGNA may provide additional
matching contributions, depending on its annual performance, which would be
invested in the CIGNA common stock fund. The Company's allocated expense for
such plans totaled $15 million for 1997, $16 million for 1996 and $14 million
for 1995.
NOTE 9 -- REINSURANCE
In the normal course of business, the Company enters into agreements,
primarily relating to short-duration contracts, to assume and cede reinsurance
with other insurance companies. Reinsurance is ceded primarily to limit losses
from large exposures and to permit recovery of a portion of direct losses,
although ceded reinsurance does not relieve the originating insurer of
liability. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of its reinsurers.
Failure of reinsurers to indemnify the Company, as a result of reinsurer
insolvencies and disputes, could result in losses. As of December 31, 1997 and
1996 there were no allowances for uncollectible amounts. Future charges for
unrecoverable reinsurance may materially affect results of operations in future
periods, however, such amounts are not expected to have a material adverse
effect on the Company's liquidity or financial condition.
The effects of reinsurance on net earned premiums and fees for the year ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
SHORT-DURATION CONTRACTS
Premiums and fees:
Direct.................................................... $3,119 $2,940 $2,613
Assumed................................................... 255 135 384
Ceded..................................................... (266) (166) (366)
------ ------ ------
Net earned premiums and fees...................... $3,108 $2,909 $2,631
====== ====== ======
LONG-DURATION CONTRACTS
Premiums and fees:
Direct.................................................... $1,979 $1,997 $1,950
Assumed................................................... 522 601 561
Ceded..................................................... (233) (193) (144)
------ ------ ------
Net earned premiums and fees...................... $2,268 $2,405 $2,367
====== ====== ======
</TABLE>
The effects of reinsurance on written premiums and fees for short-duration
contracts were not materially different from the amounts shown in the above
table. Benefits, losses and settlement expenses for 1997, 1996 and 1995 were net
of reinsurance recoveries of $340 million, $359 million and $442 million,
respectively.
25
<PAGE> 60
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- LEASES AND RENTALS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $76 million, $68 million and $60 million in 1997, 1996 and 1995,
respectively.
As of December 31, 1997, future net minimum rental payments under
non-cancelable operating leases were $167 million, payable as follows:
1998 -- $44 million; 1999 -- $37 million; 2000 -- $23 million; 2001 -- $17
million; 2002 -- $12 million; and $34 million thereafter.
NOTE 11 -- SEGMENT INFORMATION
The Company operates principally in three segments: Employee Life and Health
Benefits, Employee Retirement and Savings Benefits, and Individual Financial
Services. Other Operations consists principally of the results of the Company's
settlement annuity business and certain new business initiatives.
Summarized segment financial information for the year ended and as of December
31 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Employee Life and Health Benefits........................... $ 4,581 $ 4,510 $ 4,243
Employee Retirement and Savings Benefits.................... 1,773 1,899 1,914
Individual Financial Services............................... 2,004 1,950 1,800
Other Operations............................................ 212 200 181
------- ------- -------
Total............................................. $ 8,570 $ 8,559 $ 8,138
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES
Employee Life and Health Benefits........................... $ 300 $ 287 $ 294
Employee Retirement and Savings Benefits.................... 324 293 232
Individual Financial Services............................... 300 298 252
Other Operations............................................ (11) (8) (17)
------- ------- -------
Total............................................. $ 913 $ 870 $ 761
------- ------- -------
IDENTIFIABLE ASSETS
Employee Life and Health Benefits........................... $ 7,639 $ 7,065 $ 7,629
Employee Retirement and Savings Benefits.................... 45,884 40,122 37,609
Individual Financial Services............................... 19,809 17,930 16,189
Other Operations............................................ 2,721 2,398 2,569
------- ------- -------
Total............................................. $76,053 $67,515 $63,996
======= ======= =======
</TABLE>
During 1995, the Company recorded a $13 million pre-tax charge ($8 million
after-tax), included in Other Operating Expenses, for cost reduction
restructuring initiatives in the Employee Life and Health Benefits segment. The
charge consisted primarily of severance-related expenses representing costs
associated with nonvoluntary terminations covering approximately 1,100
employees. These initiatives were completed in 1997 with no material difference
from original estimates.
NOTE 12 -- CONTINGENCIES
A) FINANCIAL GUARANTEES: The Company is contingently liable for financial
guarantees provided in the ordinary course of business on the repayment of
principal and interest on certain industrial revenue bonds. The contractual
amounts of financial guarantees reflect the Company's maximum exposure to credit
loss in the event of nonperformance. To limit the Company's exposure in the
event of default of any guaranteed obligation, various programs are in place to
ascertain the creditworthiness of guaranteed parties and to monitor this status
on a periodic basis.
The industrial revenue bonds guaranteed directly by the Company have remaining
maturities of up to 18 years. The guarantees provide for payment of debt service
only as it becomes due; consequently, an event of default would not cause an
acceleration of scheduled principal and interest payments. The principal amount
of the bonds guaranteed by the Company at December 31, 1997 and 1996 was $202
million and $234 million, respectively. Revenues in connection with industrial
revenue bond guarantees are derived principally from equity participations in
the related projects and are included in Net Investment Income as earned. Loss
26
<PAGE> 61
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reserves for financial guarantees are established when a default has occurred or
when the Company believes that a loss has been incurred. There were no losses
for industrial revenue bonds in 1997, 1996 or 1995.
The Company also guarantees a minimum level of benefits for certain separate
account contracts and, in the event that separate account assets are
insufficient to fund minimum policy benefits, the Company is obligated to fund
the difference. As of December 31, 1997 and 1996, the amount of minimum benefit
guarantees for separate account contracts was $4.6 billion and $4.9 billion,
respectively. Reserves in addition to the separate account liabilities are
established when the Company believes a payment will be required under one of
these guarantees. No such reserves were required as of December 31, 1997 and
1996. Guarantee fees are part of the overall management fee charged to separate
accounts and are recognized in income as earned.
Although the ultimate outcome of any loss contingencies arising from the
Company's financial guarantees may adversely affect results of operations in
future periods, they are not expected to have a material adverse effect on the
Company's liquidity or financial condition.
B) REGULATORY AND INDUSTRY DEVELOPMENTS: The Company's businesses are subject
to a changing social, economic, legal, legislative and regulatory environment
that could affect them. Some of the changes include initiatives to increase
health care regulation, restrict insurance pricing and the application of
underwriting standards, and revise federal tax laws. Some of the more
significant issues are discussed below.
Efforts at the federal and state level to increase regulation of the health
care industry could have an adverse effect on the Company's health care
operations if they reduce marketplace competition and innovation or result in
increased medical or administrative costs. Matters under consideration that
could have an adverse effect include mandated benefits or services that increase
costs without improving the quality of care, loss of the ERISA preemption of
state law and restrictions on the use of prescription drug formularies. Due to
the uncertainty associated with the timing and content of any proposals
ultimately adopted, the effect on the Company's results of operations, liquidity
or financial condition cannot be reasonably estimated at this time.
In 1996, Congress passed legislation that phases out over a three-year period
the tax deductibility of policy loan interest for most leveraged corporate-owned
life insurance (COLI) products. For 1997, revenues of $591 million and net
income of $44 million for the Company were from leveraged COLI products that are
affected by this legislation. The Company does not expect this legislation to
have a material adverse effect on its consolidated results of operations,
liquidity or financial condition.
The National Association of Insurance Commissioners recently approved
standardized statutory accounting practices, which are not scheduled to take
effect before 1999. The Company has not determined the effect on statutory net
income, surplus or liquidity at this time.
The Company is contingently liable for possible assessments under regulatory
requirements pertaining to potential insolvencies of unaffiliated insurance
companies. Mandatory assessments, which are subject to statutory limits, can be
partially recovered through a reduction in future premium taxes in some states.
The Company recorded pre-tax charges of $17 million, $26 million and $22 million
for 1997, 1996 and 1995, respectively, for guaranty fund assessments that can be
reasonably estimated before giving effect to future premium tax recoveries.
Although future assessments and payments may adversely affect results of
operations in future periods, such amounts are not expected to have a material
adverse effect on the Company's liquidity or financial condition.
The eventual effect on the Company of the changing environment in which it
operates remains uncertain.
C) LITIGATION: The Company is routinely engaged in litigation incidental to
its business. While the outcome of all litigation involving the Company,
including insurance-related litigation, cannot be determined, litigation is not
expected to result in losses that differ from recorded reserves by amounts that
would be material to results of operations, liquidity or financial condition.
NOTE 13 -- RELATED PARTY TRANSACTIONS
The Company has assumed the settlement annuity and group pension business
written by Life Insurance Company of North America (LINA), an affiliate.
Reserves held by the Company with respect to this business were $1.7 billion at
December 31, 1997 and 1996.
The Company cedes long-term disability business to LINA. Reinsurance
recoverables from LINA at December 31, 1997 and 1996 were $869 million and $917
million, respectively.
The Company had lines of credit available from affiliates totaling $600
million at December 31, 1997 and 1996. All borrowings are payable upon demand
with interest rates equivalent to CIGNA's average monthly short-term borrowing
rate plus 1/4 of 1%. Interest expense was $0.2 million for 1997 and $1.0 million
for 1996 and 1995. As of December 31, 1997 and 1996, there were no borrowings
outstanding under such lines.
27
<PAGE> 62
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company extended lines of credit to affiliates totaling $600 million at
December 31, 1997 and 1996. All loans are payable upon demand with interest
rates equivalent to CIGNA's average monthly short-term borrowing rate. There
were no amounts outstanding as of December 31, 1997 or 1996.
The Company, together with other CIGNA subsidiaries, has entered into a
pooling arrangement known as the CIGNA Corporate Liquidity Account (the Account)
for the purpose of maximizing earnings on funds available for short-term
investments. Withdrawals from the Account, up to the total amount of the
participant's investment in the Account, are allowed on a demand basis. As of
December 31, 1997 and 1996, the Company had a balance in the Account of $484
million and $80 million, respectively.
CIGNA allocates to the Company its share of operating expenses incurred at the
corporate level. The Company also allocates a portion of its operating expenses
to affiliated companies on whose behalf it performs certain administrative
services.
28
<PAGE> 63
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Connecticut General
Life Insurance Company and Participants of the
CG Variable Annuity Separate Account
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the sub-accounts, AIM
V.I. Capital Appreciation Fund, AIM V.I. Diversified Income Fund, AIM V.I.
Global Utilities Fund, AIM V.I. Government Securities Fund, AIM V.I. Growth
Fund, AIM V.I. Growth and Income Fund, AIM V.I. International Equity Fund, AIM
V.I. Money Market Fund and AIM V.I. Value Fund (constituting the CG Variable
Annuity Separate Account, hereafter referred to as "the Account") at December
31, 1997, the results of each of their operations for the year then ended and
the changes in each of their net assets for each of the two years in the period
then ended, in conformity with generally accepted accounting principles. 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 of these financial statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Hartford, Connecticut
February 20, 1998
29
<PAGE> 64
CG VARIABLE ANNUITY SEPARATE ACCOUNT
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
AIM V.I. AIM V.I. AIM V.I. AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED GLOBAL GOVERNMENT AIM V.I. GROWTH AND
APPRECIATION INCOME UTILITIES SECURITIES GROWTH INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------ ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in AIM Variable Insurance
Funds, Inc. at value................ $331,487,587 $63,872,571 $15,333,055 $22,788,493 $195,724,986 $138,416,077
Receivable from Connecticut General
Life Insurance Company.............. -- 37,769 20,731 -- -- --
Receivable for fund shares sold....... 281,007 -- -- 31,194 139,112 93,155
------------ ----------- ----------- ----------- ------------ ------------
Total assets................. 331,768,594 63,910,340 15,353,786 22,819,687 195,864,098 138,509,232
------------ ----------- ----------- ----------- ------------ ------------
LIABILITIES:
Payable to Connecticut General Life
Insurance Company................... 281,007 -- -- 31,194 139,112 93,155
Payable for fund shares purchased..... -- 37,769 20,731 -- -- --
------------ ----------- ----------- ----------- ------------ ------------
Total liabilities............ 281,007 37,769 20,731 31,194 139,112 93,155
------------ ----------- ----------- ----------- ------------ ------------
Net assets................... $331,487,587 $63,872,571 $15,333,055 $22,788,493 $195,724,986 $138,416,077
============ =========== =========== =========== ============ ============
Accumulation units outstanding........ 16,027,198 4,695,148 921,883 1,926,036 9,603,064 7,046,189
Net asset value per accumulation
unit................................ $ 20.678292 $ 13.587875 $ 16.590836 $ 11.831813 $ 20.376320 $ 19.639381
------------ ----------- ----------- ----------- ------------ ------------
Accumulation net assets............... $331,415,083 $63,797,079 $15,294,803 $22,788,493 $195,675,112 $138,382,795
Annuity reserves ..................... 72,504 75,492 38,252 -- 49,874 33,282
------------ ----------- ----------- ----------- ------------ ------------
$331,487,587 $63,872,571 $15,333,055 $22,788,493 $195,724,986 $138,416,077
============ =========== =========== =========== ============ ============
<CAPTION>
AIM V.I. AIM V.I.
INTERNATIONAL MONEY AIM V.I.
EQUITY MARKET VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------- ----------- ------------
<S> <C> <C> <C>
ASSETS:
Investments in AIM Variable Insurance
Funds, Inc. at value................ $152,795,506 $44,310,515 $401,120,887
Receivable from Connecticut General
Life Insurance Company.............. -- 4,153 --
Receivable for fund shares sold....... 204,927 -- 2,217
------------ ----------- ------------
Total assets................. 153,000,433 44,314,668 401,123,104
------------ ----------- ------------
LIABILITIES:
Payable to Connecticut General Life
Insurance Company................... 204,927 -- 2,217
Payable for fund shares purchased..... -- 4,153 --
------------ ----------- ------------
Total liabilities............ 204,927 4,153 2,217
------------ ----------- ------------
Net assets................... $152,795,506 $44,310,515 $401,120,887
============ =========== ============
Accumulation units outstanding........ 9,290,316 3,829,515 18,682,024
Net asset value per accumulation
unit................................ $ 16.433916 $ 11.570791 $ 21.464229
------------ ----------- ------------
Accumulation net assets............... $152,676,278 $44,310,515 $400,995,241
Annuity reserves ..................... 119,228 -- 125,646
------------ ----------- ------------
$152,795,506 $44,310,515 $401,120,887
============ =========== ============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
30
<PAGE> 65
CG VARIABLE ANNUITY SEPARATE ACCOUNT
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AIM V.I. AIM V.I. AIM V.I. AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED GLOBAL GOVERNMENT AIM V.I. GROWTH AND
APPRECIATION INCOME UTILITIES SECURITIES GROWTH INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.................................. $ 317,483 $ 56,183 $ -- $ 10,597 $ 852,834 $ 74,359
EXPENSES:
Mortality and expense risk and
administrative charges................... 4,503,470 782,235 166,846 282,560 2,458,259 1,658,181
----------- ---------- ---------- ---------- ----------- -----------
Net investment gain (loss)........ (4,185,987) (726,052) (166,846) (271,963) (1,605,425) (1,583,822)
----------- ---------- ---------- ---------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Capital distribution from portfolio
sponsor.................................. 4,081,919 -- 4,689 -- 6,434,162 111,538
Net realized gain (loss) on share
transactions............................. 1,668,285 11,722 33,624 32,115 657,668 (59,526)
----------- ---------- ---------- ---------- ----------- -----------
Net realized gain.......................... 5,750,204 11,722 38,313 32,115 7,091,830 52,012
Net unrealized gain........................ 34,565,030 5,167,470 2,462,238 1,598,560 34,088,046 26,524,202
----------- ---------- ---------- ---------- ----------- -----------
Net realized and unrealized gain
on investments.................. 40,315,234 5,179,192 2,500,551 1,630,675 41,179,876 26,576,214
----------- ---------- ---------- ---------- ----------- -----------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................... $36,129,247 $4,453,140 $2,333,705 $1,358,712 $39,574,451 $24,992,392
=========== ========== ========== ========== =========== ===========
<CAPTION>
AIM V.I. AIM V.I.
INTERNATIONAL MONEY AIM V.I.
EQUITY MARKET VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------- ----------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends.................................. $ 695,422 $2,541,584 $ 3,569,686
EXPENSES:
Mortality and expense risk and
administrative charges................... 2,156,341 684,371 5,061,020
----------- ---------- -----------
Net investment gain (loss)........ (1,460,919) 1,857,213 (1,491,334)
----------- ---------- -----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Capital distribution from portfolio
sponsor.................................. 2,447,183 -- 10,959,402
Net realized gain (loss) on share
transactions............................. 615,581 -- 1,082,518
----------- ---------- -----------
Net realized gain.......................... 3,062,764 -- 12,041,920
Net unrealized gain........................ 6,821,337 -- 62,138,412
----------- ---------- -----------
Net realized and unrealized gain
on investments.................. 9,884,101 -- 74,180,332
----------- ---------- -----------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................... $ 8,423,182 $1,857,213 $72,688,998
=========== ========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
31
<PAGE> 66
CG VARIABLE ANNUITY SEPARATE ACCOUNT
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AIM V.I. AIM V.I. AIM V.I. AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED GLOBAL GOVERNMENT AIM V.I. GROWTH
APPRECIATION INCOME UTILITIES SECURITIES GROWTH AND INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------ ----------- --------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)........ $ (4,185,987) $ (726,052) $ (166,846) $ (271,963) $ (1,605,425) $ (1,583,822)
Net realized gain................. 5,750,204 11,722 38,313 32,115 7,091,830 52,012
Net unrealized gain............... 34,565,030 5,167,470 2,462,238 1,598,560 34,088,046 26,524,202
------------ ----------- ----------- ----------- ------------ ------------
Net increase from
operations............. 36,129,247 4,453,140 2,333,705 1,358,712 39,574,451 24,992,392
------------ ----------- ----------- ----------- ------------ ------------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits.............. 21,264,293 7,508,683 1,046,316 1,210,696 13,203,440 16,926,263
Participant transfers............. (16,341,983) 2,206,344 1,476,613 1,453,903 2,283,051 18,996,026
Participant withdrawals and
annuity payments................ (22,311,355) (4,323,378) (540,210) (1,907,014) (13,759,221) (12,914,594)
------------ ----------- ----------- ----------- ------------ ------------
Net increase (decrease)
from participant
transactions........... (17,389,045) 5,391,649 1,982,719 757,585 1,727,270 23,007,695
------------ ----------- ----------- ----------- ------------ ------------
Total increase (decrease)
in net assets.......... 18,740,202 9,844,789 4,316,424 2,116,297 41,301,721 48,000,087
NET ASSETS:
Beginning of period............... 312,747,385 54,027,782 11,016,631 20,672,196 154,423,265 90,415,990
------------ ----------- ----------- ----------- ------------ ------------
End of period..................... $331,487,587 $63,872,571 $15,333,055 $22,788,493 $195,724,986 $138,416,077
============ =========== =========== =========== ============ ============
<CAPTION>
AIM V.I. AIM V.I.
INTERNATIONAL MONEY AIM V.I.
EQUITY MARKET VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------- ------------ ------------
<S> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)........ $ (1,460,919) $ 1,857,213 $ (1,491,334)
Net realized gain................. 3,062,764 -- 12,041,920
Net unrealized gain............... 6,821,337 -- 62,138,412
------------ ----------- ------------
Net increase from
operations............. 8,423,182 1,857,213 72,688,998
------------ ----------- ------------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits.............. 13,869,606 24,414,333 25,805,089
Participant transfers............. (492,062) (13,972,232) 5,393,233
Participant withdrawals and
annuity payments................ (11,121,648) (22,198,209) (27,229,496)
------------ ----------- ------------
Net increase (decrease)
from participant
transactions........... 2,255,896 (11,756,108) 3,968,826
------------ ----------- ------------
Total increase (decrease)
in net assets.......... 10,679,078 (9,898,895) 76,657,824
NET ASSETS:
Beginning of period............... 142,116,428 54,209,410 324,463,063
------------ ----------- ------------
End of period..................... $152,795,506 $44,310,515 $401,120,887
============ =========== ============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
32
<PAGE> 67
CG VARIABLE ANNUITY SEPARATE ACCOUNT
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
AIM V.I. AIM V.I. AIM V.I. AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED GLOBAL GOVERNMENT AIM V.I. GROWTH AND
APPRECIATION INCOME UTILITIES SECURITIES GROWTH INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)............ $ (3,259,510) $ 2,646,150 $ 206,222 $ 796,083 $ (1,237,677) $ (61,630)
Net realized gain (loss).............. (264,756) 12,971 58,296 12,725 6,461,654 151,592
Net unrealized gain (loss)............ 41,079,909 1,406,492 743,831 (577,837) 14,610,617 11,146,372
------------ ----------- ----------- ----------- ------------ -----------
Net increase from
operations................. 37,555,643 4,065,613 1,008,349 230,971 19,834,594 11,236,334
------------ ----------- ----------- ----------- ------------ -----------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits.................. 58,438,556 9,713,519 2,990,281 4,066,057 25,951,601 25,772,496
Participant transfers................. 20,040,794 1,047,682 468,502 (502,335) 13,274,467 18,936,372
Participant withdrawals and annuity
payments............................ (13,756,884) (4,218,044) (596,803) (1,510,699) (7,263,101) (2,737,347)
------------ ----------- ----------- ----------- ------------ -----------
Net increase (decrease) from
participant transactions... 64,722,466 6,543,157 2,861,980 2,053,023 31,962,967 41,971,521
------------ ----------- ----------- ----------- ------------ -----------
Total increase (decrease) in
net assets................. 102,278,109 10,608,770 3,870,329 2,283,994 51,797,561 53,207,855
NET ASSETS:
Beginning of period................... 210,469,276 43,419,012 7,146,302 18,388,202 102,625,704 37,208,135
------------ ----------- ----------- ----------- ------------ -----------
End of period......................... $312,747,385 $54,027,782 $11,016,631 $20,672,196 $154,423,265 $90,415,990
============ =========== =========== =========== ============ ===========
<CAPTION>
AIM V.I. AIM V.I.
INTERNATIONAL MONEY AIM V.I.
EQUITY MARKET VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------- ------------ ------------
<S> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)............ $ (1,251,012) $ 2,187,937 $ (2,326,453)
Net realized gain (loss).............. (20,437) -- 16,131,341
Net unrealized gain (loss)............ 20,458,960 -- 24,188,520
------------ ------------ ------------
Net increase from
operations................. 19,187,511 2,187,937 37,993,408
------------ ------------ ------------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits.................. 24,438,686 57,721,314 56,528,366
Participant transfers................. 21,101,359 (62,556,743) (9,943,809)
Participant withdrawals and annuity
payments............................ (4,842,259) (8,609,516) (17,379,567)
------------ ------------ ------------
Net increase (decrease) from
participant transactions... 40,697,786 (13,444,945) 29,204,990
------------ ------------ ------------
Total increase (decrease) in
net assets................. 59,885,297 (11,257,008) 67,198,398
NET ASSETS:
Beginning of period................... 82,231,131 65,466,418 257,264,665
------------ ------------ ------------
End of period......................... $142,116,428 $ 54,209,410 $324,463,063
============ ============ ============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
33
<PAGE> 68
CG VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
CG Variable Annuity Separate Account (the Account) is registered as a Unit
Investment Trust under the Investment Company Act of 1940, as amended. The
operations of the Account are part of the operations of Connecticut General Life
Insurance Company (CG Life). The assets and liabilities of the Account are
clearly identified and distinguished from other assets and liabilities of CG
Life. The assets of the Account are not available to meet the general
obligations of CG Life and are held for the exclusive benefit of the
participants.
The assets of the Account are divided into variable sub-accounts invested in
shares of a specific series of the AIM Variable Insurance Funds, Inc. (the
Fund), which are open-end mutual funds. Nine sub-accounts are currently
available for investment within the Account: AIM V.I. Capital Appreciation Fund;
AIM V.I. Diversified Income Fund; AIM V.I. Global Utilities Fund; AIM V.I.
Government Securities Fund; AIM V.I. Growth Fund; AIM V.I. Growth and Income
Fund; AIM V.I. International Equity Fund; AIM V.I. Money Market Fund; and AIM
V.I. Value Fund.
Effective January 1, 1998, CG Life sold its individual variable annuity
business to Lincoln National Corporation (Lincoln). Although CG Life will remain
responsible for all policy terms and conditions, Lincoln will be servicing the
individual annuity contracts, including the payment of benefits, oversight of
investment management and contract administration.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with generally
accepted accounting principles. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies consistently
followed in the preparation of the Account's financial statements.
A. INVESTMENT VALUATION: Investments held by the sub-accounts are valued at
their respective closing net asset value per share as determined by the Fund as
of December 31, 1997. The change in the difference between cost and value is
reflected as unrealized gain (loss) in the Statements of Operations.
B. INVESTMENT TRANSACTIONS: Investment transactions are recorded on the trade
date (date the order to buy or sell is executed). Realized gains and losses on
sales of investments are determined by the last-in, first-out cost basis of the
investment sold. Dividend and capital gain distributions are recorded on the
ex-dividend date. Investment transactions are settled through CG Life.
C. FEDERAL INCOME TAXES: The operations of the Account form a part of, and are
taxed with, the total operations of CG Life, which is taxed as a life insurance
company. Under existing Federal income tax law, investment income (dividends)
and capital gains attributable to the Account are not taxed.
D. ANNUITY RESERVES: The amount of annuity reserves is determined by actuarial
assumptions which meet statutory requirements. Gains or losses resulting from
actual mortality experience, the responsibility for which is assumed by CG Life,
are offset by transfers to or from CG Life.
3. INVESTMENTS
Total shares held and cost of investments at December 31, 1997 were:
<TABLE>
<CAPTION>
COST OF
AIM V.I. SUB-ACCOUNT SHARES HELD INVESTMENTS
-------------------- ----------- ------------
<S> <C> <C>
Capital Appreciation........................................ 15,240,809 $216,581,673
Diversified Income.......................................... 5,657,447 56,878,217
Global Utilities............................................ 1,004,788 11,358,830
Government Securities....................................... 2,135,754 21,511,724
Growth...................................................... 9,870,146 129,098,857
Growth and Income........................................... 7,335,245 98,265,505
International Equity........................................ 8,919,761 115,285,342
Money Market................................................ 44,310,515 44,310,515
Value....................................................... 19,256,884 266,261,794
</TABLE>
34
<PAGE> 69
CG VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. INVESTMENTS (CONTINUED)
Total purchases and sales of shares for the year ended December 31, 1997,
amounted to:
<TABLE>
<CAPTION>
AIM V.I. SUB-ACCOUNT PURCHASES SALES
-------------------- ----------- -----------
<S> <C> <C>
Capital Appreciation........................................ $23,716,309 $41,209,425
Diversified Income.......................................... 15,183,342 10,517,741
Global Utilities............................................ 3,461,485 1,640,919
Government Securities....................................... 5,384,999 4,899,375
Growth...................................................... 27,618,106 21,062,096
Growth and Income........................................... 33,618,525 12,083,112
International Equity........................................ 19,398,850 16,156,688
Money Market................................................ 67,321,055 77,219,950
Value....................................................... 39,106,405 25,669,510
</TABLE>
4. CHARGES AND DEDUCTIONS
CG Life assumes the risk that annuitants, as a class, may live longer than
expected and also assumes a mortality risk in connection with the death benefits
of the contract. CG Life also assumes a risk that its actual administrative
expenses may be higher than amounts deducted for such expenses. CG Life charges
each variable sub-account the daily equivalent of 1.25%, on an annual basis, of
the current value of each sub-account's assets for the assumption of these
risks.
CG Life also deducts a daily administrative fee from the assets of each
sub-account as partial reimbursement for administrative expenses relating to the
issuance and maintenance of the contract and the participant's annuity account.
This charge is currently at an effective annual rate of .10%.
As partial compensation for administrative services provided, CG Life
additionally receives a $35 annuity account fee per year from each contract.
This charge is deducted from the fixed or variable sub-account of the
participant or on a pro-rata basis from two or more fixed or variable
sub-accounts in relation to their values under the contract. If applicable state
law requires, the $35 annuity account fee will be reduced to a lesser amount.
The annual annuity account fee will be waived each year that the purchaser's
annuity account value equals or exceeds $100,000 on the last valuation date of
that year. Fixed sub-accounts are part of the general account of CG Life and are
not included in these financial statements.
Under certain circumstances, CG Life reserves the right to charge a transfer
fee of up to $10 for transfers between sub-accounts. Transfer fees, for the
variable sub-accounts, amounted to $1,880 for the year ended December 31, 1997.
The fees charged by CG Life for mortality and expense risks, administrative
fees and the amounts deducted for annuity account fees (included in participant
withdrawals), from variable sub-accounts, for the year ended December 31, 1997,
amounted to:
<TABLE>
<CAPTION>
MORTALITY ASSET BASED ANNUITY
AND EXPENSE ADMINISTRATIVE ACCOUNT
AIM V.I. SUB-ACCOUNT RISK FEES FEES FEES
-------------------- ----------- -------------- --------
<S> <C> <C> <C>
Capital Appreciation................................. $4,169,880 $333,590 $155,671
Diversified Income................................... 724,292 57,943 17,877
Global Utilities..................................... 154,487 12,359 4,576
Government Securities................................ 261,630 20,930 5,760
Growth............................................... 2,276,166 182,093 76,511
Growth and Income.................................... 1,535,353 122,828 50,654
International Equity................................. 1,996,612 159,729 59,349
Money Market......................................... 633,677 50,694 12,023
Value................................................ 4,686,130 374,890 167,888
</TABLE>
No deduction for sales charges is made from a premium payment. However, if a
cash withdrawal is made, a withdrawal charge (contingent deferred sales charge)
may be assessed by CG Life. The withdrawal charge, if assessed, varies from 0-7%
depending upon the duration of each contract deposit. The withdrawal charge is
deducted from withdrawal proceeds for full withdrawals and reduces the remaining
account value for partial withdrawals. These charges are paid to CG Life as
reimbursement for services provided. These services include commissions paid to
sales personnel, the costs associated with preparation of sales literature and
35
<PAGE> 70
CG VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. CHARGES AND DEDUCTIONS (CONTINUED)
other promotional costs and acquisition expenses. Withdrawal charges paid to CG
Life for the variable sub-accounts, for the year ended December 31, 1997,
amounted to $2,217,462.
5. DISTRIBUTION OF NET INCOME
The Account does not expect to declare dividends to participants from
accumulated net income. The accumulated net income is distributed to
participants as part of surrenders, death benefits, transfers to other fixed or
variable sub-accounts or annuity payments in excess of net purchase payments.
6. DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code of 1986
(the Code), a variable annuity contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
an annuity contract for Federal tax purposes for any period for which the
investments of the segregated asset account, on which the contract 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. CG Life believes, based on assurances from the
Fund managers, that the Fund satisfies the requirements of the regulations.
36
<PAGE> 71
PART C. OTHER INFORMATION
<PAGE> 72
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
(1) Registrant
(A) Statements of Assets and Liabilities as of December 31, 1997.
(B) Statements of Operations for the Period Ended December 31,
1997.
(C) Statements of Changes in Net Assets for the Periods Ended
December 31, 1997 and December 31, 1996.
(2) Depositor
(A) Consolidated Statements of Income and Retained Earnings for
the Years Ended December 31, 1997, 1996, and 1995.
(B) Consolidated Balance Sheets As of December 31, 1997 and 1996.
(C) Consolidated Statement of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.
(b) Exhibits
(1) Resolution of Board of Directors Authorizing Establishment of
Registrant*
(2) Not Applicable
(3) Form of Selling Agreement among Connecticut General Life Insurance
Company, CIGNA Financial Advisors, Inc. as principal underwriter,
and selling dealers.*
(4) Form of Connecticut General Life Insurance Company Variable
Annuity Contract Form Number AN 400, together with Optional
Methods of Settlement Riders (Form Numbers AR 305 and AR 306),
Joint Annuitant Rider (Form Number B10321) and CRT Rider (Form
B10322).*
(5) Form of Application Which May Be Used in Connection with the
Contract Shown As Exhibit (4)(A)*
(6) (A) Certificate of Incorporation (Charter) of Connecticut General
Life Insurance Company, as amended*
(B) By-Laws of Connecticut General Life Insurance Company*
(7) Not Applicable
(8) Not Applicable
(9) Opinion and Consent of Mark A. Parsons, Esq., Chief Counsel, CIGNA
Corporation
(10) (A) Consent of Independent Accountants
(B) Consent of George N. Gingold, Esq.
(11) Not Applicable
(12) Not Applicable
(13) Schedules for Computation of Performance Data*
(14) Not Applicable
* Incorporated by reference to previous filings of this Registration Statement
<PAGE> 73
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of each of the directors and officers of
Connecticut General Life Insurance Company (the "Company") is the company's Home
Office, 900 Cottage Grove Road, Hartford, Connecticut 06152.
DIRECTORS AND OFFICERS OF DEPOSITOR
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH DEPOSITOR
---- ------------------------------------
<S> <C>
Thomas C. Jones...................... President (Principal Executive Officer) and
Director
John Wilkinson....................... Vice President and Actuary (Principal Financial
Officer)
Dominic A. DellaVolpe................ Assistant Vice President (Principal Accounting
Officer)
David C. Kopp........................ Corporate Secretary
Andrew G. Helming.................... Secretary
Stephen C. Stachelek................. Vice President and Treasurer
Harold W. Albert..................... Director
Robert W. Burgess.................... Director
John G. Day.......................... Director and Chief Counsel
Joseph M. Fitzgerald................. Director and Senior Vice President
H. Edward Hanway..................... Director and Chairman of the Board
Carol M. Olsen....................... Director and Senior Vice President
John E. Pacy......................... Director and Senior Vice President
Marc L. Preminger.................... Director and Senior Vice President
Patricia L. Rowland.................. Director and Senior Vice President
W. Allen Schaffer, MD................ Director and Senior Vice President
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
Incorporated by reference to Item 26 of Post-Effective Amendment No. 4 to the
Form N-4 Registration Statement of CG Variable Annuity Separate Account II (File
No. 33-83020) filed February 26, 1997 is a chart of a persons controlled by or
under common control with the Depositor. The consolidated financial statements
of the Depositor include the accounts of the Depositor and its wholly-owned
subsidiaries.
ITEM 27. NUMBER OF PURCHASERS
As of December 31, 1997 there were 19,404 owners of Contracts covered by this
Registration Statement.
ITEM 28. INDEMNIFICATION
The answer to this Item 28 is incorporated by reference to Item 28 of
Post-Effective Amendment No. 4 to the Form N-4 Registration Statement of CG
Variable Annuity Separate Account II under the Securities Act of 1933 (File No.
33-83020) filed February 26, 1997.
ITEM 29. PRINCIPAL UNDERWRITER
The Registrant's principal underwriter is CIGNA Financial Advisors, Inc.
("CFA"). Deferred sales charges of $1,075,638 were paid on the Contracts during
Registrant's eleven months ended December 31, 1996. CFA also acts as principal
underwriter of certain other variable annuity contracts and variable life
policies issued by the Company, and by the CIGNA Life Insurance Company. CFA's
mailing address is 900 Cottage Grove Road, Bloomfield, Connecticut 06002.
The investment companies for which CFA acts as a principal underwriter are:
CG Variable Annuity Separate Account
CG Variable Annuity Separate Account II
CG Variable Life Insurance Separate Account I
CG Variable Life Insurance Separate Account II
CIGNA Variable Annuity Separate Account I
<PAGE> 74
DIRECTORS AND OFFICERS OF PRINCIPAL UNDERWRITER
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH UNDERWRITER
---- --------------------------------------
<S> <C>
J. Michael Hemp...................... President
Todd R. Stephenson................... Senior Vice President and Chief Operating Officer
Carolyn P. Brody..................... Vice President
Joy P. McConnell..................... Vice President
Priscilla S. Brown................... Vice President
Philip L. Holstein................... Vice President
Karen R. Matheson.................... Director and Vice President
John M. Behrendt..................... Vice President
Janet C. Whitney..................... Vice President and Treasurer
Robert A. Picarello.................. Chief Counsel and Assistant Secretary
H. Edward Cohen...................... Assistant Vice President
Karen E. Goldman..................... Assistant Vice President
C. Suzanne Womack.................... Secretary
Gil L. Bearman....................... Assistant Secretary
Brian S. Becker...................... Assistant Secretary
Renee L. Beeks....................... Assistant Secretary
Gail Black........................... Assistant Treasurer
Walter W. Bonham, Jr. ............... Assistant Treasurer
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder are
maintained by Connecticut General Life Insurance Company at its Home Office at
900 Cottage Grove Road, Hartford, CT 06152.
ITEM 31. MANAGEMENT SERVICES
All management policies are discussed in Part A or Part B.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes that it will file a post effective amendment to this
registration statement under the Securities Act of 1933 as frequently as
necessary to ensure that the audited financial statements in the registration
statement are never more than 16 months old for so long as Premium Payments
under the Contracts may be accepted.
(b) Registrant undertakes that it will include either (i) a postcard or
similar written communication affixed to or included in the Prospectus that the
applicant can remove to send for a Statement of Additional Information or (ii) a
space in the Contract application that an applicant can check to request a
Statement of Additional Information.
(c) Registrant undertakes to deliver promptly, upon written or oral request
made to Connecticut General Life Insurance Company at the address or phone
number listed in the Prospectus, any Statement of Additional Information and any
financial statements required by Form N-4 to be made available to applicants or
contract owners.
FEES AND CHARGES REPRESENTATION
The Company represents that the fees and charges deducted under the Contracts,
in the aggregate, are reasonable in relation to the services rendered, the
expenses expected to be incurred, and the risks assumed by the Company.
SECTION 403(B) REPRESENTATION
Registrant represents that it is relying on a no-action letter dated November
28, 1988, to the American Council of Life Insurance (Ref. No. IP-6-88),
regarding Sections 22(e), 27(c)(1) and 27(d) of the Investment Company Act of
1940, in connection with redeemability restrictions on Section 403(b) Contracts,
and that paragraphs numbered (1) through (4) of that letter will be complied
with.
<PAGE> 75
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has duly caused this Post-Effective Amendment No. 8 to its
Registration Statement on Form N-4 (File No. 33-48137) to be signed on its
behalf by the undersigned thereunto duly authorized, in the Town of Bloomfield
and State of Connecticut on the 13th day of April, 1998. Registrant certifies
that this amendment meets all of the requirements for effectiveness pursuant to
Rule 485(b) under the Securities Act of 1933.
CG VARIABLE ANNUITY SEPARATE ACCOUNT
(REGISTRANT)
By /s/ THOMAS C. JONES
- --------------------------------------------------------
Thomas C. Jones
President and Director
Connecticut General Life Insurance Company
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
(DEPOSITOR)
By /s/ THOMAS C. JONES
- --------------------------------------------------------
Thomas C. Jones
President and Director
<PAGE> 76
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 8 to this Registration Statement (File No. 33-48137) has been
signed below on April 13, 1998 by the following persons, as officers and
directors of the Depositor, in the capacities indicted:
SIGNATURE
- ------------
<TABLE>
<S> <C> <C>
/s/ THOMAS C. JONES * President and Director
- ----------------------------------------------------- (Principal Executive officer)
Thomas C. Jones
/s/ JOHN WILKINSON Vice President and Actuary
- ----------------------------------------------------- (Principal Financial Officer)
John Wilkinson
/s/ DOMINIC A. DELLAVOLPE * Assistant Vice President (Principal Accounting
- ----------------------------------------------------- Officer)
Dominic A. DellaVolpe
/s/ HAROLD W. ALBERT * Vice President (Principal Accounting Officer)
- -----------------------------------------------------
Harold W. Albert
/s/ ROBERT W. BURGESS * Director
- -----------------------------------------------------
Robert W. Burgess
/s/ JOHN G. DAY * Director
- -----------------------------------------------------
John G. Day
/s/ JOSEPH M. FITZGERALD * Director
- -----------------------------------------------------
Joseph M. Fitzgerald
/s/ H. EDWARD HANWAY * Director
- -----------------------------------------------------
H. Edward Hanway
/s/ CAROL M. OLSEN * Director
- -----------------------------------------------------
Carol M. Olsen
/s/ JOHN E. PACY * Director
- -----------------------------------------------------
John E. Pacy
/s/ MARC L. PREMINGER * Director
- -----------------------------------------------------
Marc L. Preminger
/s/ PATRICIA L. ROWLAND * Director
- -----------------------------------------------------
Patricia L. Rowland
/s/ W. ALLEN SCHAFFER, M.D. * Director
- -----------------------------------------------------
W. Allen Schaffer, M.D.
*By /s/ JOHN WILKINSON
--- --------------------------------------------------
John Wilkinson
Attorney-in-Fact
</TABLE>
(A Majority of the Directors)
<PAGE> 77
POWER OF ATTORNEY
We, the undersigned directors and officers of Connecticut General Life
Insurance Company, hereby severally constitute and appoint John Wilkinson, Mark
A. Parsons and David C. Kopp, and each of them individually, our true and lawful
attorneys-in-fact, with full power to them and each of them to sign for us, in
our names and in the capacities indicated below, any and all amendments to
Registration Statement No. 33-48137 filed with the Securities and Exchange
Commission under the Securities Act of 1933, on behalf of the Company in its own
name or in the name of one of its Separate Accounts, hereby ratifying and
confirming our signatures as they may be signed by either of our
attorneys-in-fact to any such Registration Statement.
WITNESS our hands and common seal on this 10th day of April 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ THOMAS C. JONES President (Principal Executive Officer) and Director
- -----------------------------------------------------
Thomas C. Jones
/s/ JOHN WILKINSON Vice President and Actuary (Principal Financial
- ----------------------------------------------------- Officer)
John Wilkinson
/s/ DOMINIC A. DELLAVOLPE Assistant Vice President (Principal Accounting
- ----------------------------------------------------- Officer)
Dominic A. DellaVolpe
/s/ HAROLD W. ALBERT Director
- -----------------------------------------------------
Harold W. Albert
/s/ ROBERT W. BURGESS Director
- -----------------------------------------------------
Robert W. Burgess
/s/ JOHN G. DAY Director
- -----------------------------------------------------
John G. Day
/s/ JOSEPH M. FITZGERALD Director
- -----------------------------------------------------
Joseph M. Fitzgerald
/s/ H. EDWARD HANWAY Director
- -----------------------------------------------------
H. Edward Hanway
/s/ CAROL M. OLSEN Director
- -----------------------------------------------------
Carol M. Olsen
/s/ JOHN E. PACY Director
- -----------------------------------------------------
John E. Pacy
/s/ MARC L. PREMINGER Director
- -----------------------------------------------------
Marc L. Preminger
/s/ PATRICIA L. ROWLAND Director
- -----------------------------------------------------
Patricia L. Rowland
/s/ W. ALLEN SCHAFFER, M.D. Director
- -----------------------------------------------------
W. Allen Schaffer, M.D.
</TABLE>
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(1) Resolution of Board of Directors Authorizing Establishment
of Registrant*
(2) Not Applicable
(3) Form of Selling Agreement among Connecticut General Life
Insurance Company, CIGNA Financial Advisors, Inc. as
principal underwriter, and selling dealers.*
(4) Form of Connecticut General Life Insurance Company Variable
Annuity Contract Form Number AN 400, together with Optional
Methods of Settlement Riders (Form Numbers AR 305 and AR
306), Joint Annuitant Rider (Form Number B10321) and CRT
Rider (Form B10322).*
(5) Form of Application Which May Be Used in Connection with the
Contract Shown As Exhibit (4)(A)*
(6) (A) Certificate of Incorporation (Charter) of Connecticut
General Life Insurance Company, as amended*
(B) By-Laws of Connecticut General Life Insurance Company*
(7) Not Applicable
(8) Not Applicable
(9) Opinion and Consent of Mark A. Parsons, Esq., Chief Counsel,
CIGNA Corporation
(10) (A) Consent of Independent Accountants
(B) Consent of George N. Gingold, Esq.
(11) Not Applicable
(12) Not Applicable
(13) Schedules for Computation of Performance Data*
(14) Not Applicable
</TABLE>
* Incorporated by reference to previous filings of this Registration Statement
<PAGE> 1
EXHIBIT 9
Mark A. Parsons
Chief Counsel
Legal Department, S-215
Hartford, CT 06152-2215
Telephone: (860) 726-7673
Facsimile: (860) 572-8885
April 13, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: CONNECTICUT GENERAL VARIABLE ANNUITY SEPARATE ACCOUNT
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
POST-EFFECTIVE AMENDMENT NUMBER 8: 33-48137
Dear Sirs:
As Chief Counsel of the Retirement and Investment Services Division of
Connecticut CIGNA Corporation, I am familiar with the actions of the Board of
Directors of Connecticut General Life Insurance Company (the "Company"),
establishing the Account and its method of operation and authorizing the filing
of a Registration Statement under the Securities Act of 1933, (and amendments
thereto) for the securities to be issued by the Account and the Investment
Company Act of 1940 for the Account itself.
In the course of preparing this opinion, I have reviewed the Certificate of
Incorporation and the By Laws of the Company, the Board actions with respect to
the Account, and such other matters as I deemed necessary or appropriate. Based
on such review, I am of the opinion that the variable annuity contracts (and
interests therein) which are the subject of the Registration Statement under the
Securities Act of 1933, as amended, for the Account will when issued, be legally
issued and will represent binding obligations of the Company, the depositor for
the Account.
I further consent to the use of this opinion as an Exhibit to Post-Effective
Amendment No. 8 to said Registration Statement and to the reference to me under
the heading "Experts" in said Registration Statement, as amended.
Very truly yours,
/s/ MARK A. PARSONS
-----------------------------------------
Mark A. Parsons
Chief Counsel
<PAGE> 1
EXHIBIT 10A
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 8 under the Securities
Act of 1933 and Amendment No. 10 under the Investment Company Act of 1940 to the
registration statement of the CG Variable Annuity Separate Account on Form N-4
of our reports dated February 10, 1998 and February 20, 1998, relating to the
consolidated financial statements of Connecticut General Life Insurance Company
and the financial statements of the CG Variable Annuity Separate Account of
Connecticut General Life Insurance Company, respectively, which appear in such
Statement of Additional Information. We also consent to the reference to us
under the heading "Experts" in such Statement of Additional Information.
PRICE WATERHOUSE LLP
Hartford, Connecticut
April 22, 1998
<PAGE> 1
EXHIBIT 10B
GEORGE N. GINGOLD, ESQ.
ATTORNEY AT LAW
197 KING PHILIP DRIVE
WEST HARTFORD, CONNECTICUT
06117-1409
April 22, 1998
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Commissioners:
I hereby consent to the reference to my name under the caption "Legal Matters"
in the Statement of Additional Information contained in Post-Effective Amendment
No. 8 to the Registration Statement on Form N-4 (File No. 33-48137) to be filed
by Connecticut General Life Insurance Company and Connecticut General Variable
Annuity Separate Account with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended.
Very truly yours,
/s/ GEORGE N. GINGOLD
George N. Gingold, Esquire
