<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
[LOGO]
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
<TABLE>
<S> <C>
HOME OFFICE LOCATION: MAILING ADDRESS:
900 COTTAGE GROVE ROAD CIGNA INDIVIDUAL INSURANCE
HARTFORD, CT 06152 VARIABLE PRODUCTS SERVICE CENTER: ROUTING S-154
HARTFORD, CT 06152 - 2154
(800) (552-9898)
</TABLE>
- --------------------------------------------------------------------------------
FLEXIBLE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
The Flexible Payment Deferred Variable Annuity Contracts (the "Contracts")
described in this prospectus provide for accumulation of Contract Values and
eventual payment of monthly annuity payments on a fixed or variable basis. The
Contracts are designed to aid individuals in long term planning for retirement
or other long term purposes. The Contracts are available for retirement plans
which do not qualify for the special federal tax advantages available under the
Internal Revenue Code ("Non-Qualified Plans") and for retirement plans which do
qualify for the federal tax advantages available under the Internal Revenue Code
("Qualified Plans"). (See "Tax Status -- Qualified Plans.") Premium payments for
the Contracts will be allocated to a segregated investment account of
Connecticut General Life Insurance Company (the "Company"), designated CG
Variable Annuity Separate Account II (the "Variable Account"), or to the Fixed
Account, or some combination of them, as selected by the owner of the Contract.
The following funding options are available under a Contract: Through the
Variable Account, the Company offers seventeen diversified open-end management
investment companies (commonly called mutual funds), each with a different
investment objective: Alger American Fund -- Alger American Small Capitalization
Portfolio, Alger American Leveraged AllCap Portfolio, Alger American MidCap
Growth Portfolio and Alger American Growth Portfolio; Fidelity Variable
Insurance Products Fund -- Equity-Income Portfolio and Money Market Portfolio;
Fidelity Variable Insurance Products Fund II -- Investment Grade Bond Portfolio
and Asset Manager Portfolio; MFS Variable Insurance Trust -- MFS Total Return
Series, MFS Utilities Series and MFS World Governments Series; Neuberger &
Berman Advisers Management Trust -- Balanced Portfolio, Limited Maturity Bond
Portfolio and Partners Portfolio; Quest for Value Accumulation Trust -- Global
Equity Portfolio, Managed Portfolio and Small Cap Portfolio. The fixed interest
option offered under a Contract is the Fixed Account. Premium payments or
transfers allocated to the Fixed Account, and 3% interest per year thereon, are
guaranteed, and additional interest may be credited, with certain withdrawals
subject to a market value adjustment and withdrawal charges. Unless specifically
mentioned, this prospectus only describes the variable investment options.
This entire prospectus, and those of the Funds, should be read carefully
before investing to understand the Contracts being offered. The "Statement of
Additional Information", available at no charge by calling or writing the
Company's Variable Products Service Center as shown above, provides further
information. Its table of contents is at the end of this prospectus.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES
OF THE MUTUAL FUNDS AVAILABLE AS FUNDING OPTIONS FOR THE CONTRACTS OFFERED BY
THIS PROSPECTUS. ALL PROSPECTUSES SHOULD BE RETAINED FOR FUTURE REFERENCE.
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.
PROSPECTUS DATED: MAY 1, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
DEFINITIONS.................................... 3
HIGHLIGHTS..................................... 6
FEES AND EXPENSES.............................. 8
CONDENSED FINANCIAL INFORMATION................ 11
THE COMPANY, THE FIXED ACCOUNT AND THE VARIABLE
ACCOUNT....................................... 11
THE FUNDS...................................... 12
General...................................... 15
Substitution of Securities................... 15
Voting Rights................................ 15
PREMIUM PAYMENTS AND
CONTRACT VALUE................................ 16
Premium Payments............................. 16
Allocation of Premium Payments............... 16
Dollar Cost Averaging........................ 18
Contract Value............................... 18
Accumulation Unit............................ 18
CHARGES AND DEDUCTIONS......................... 19
Deduction for Contingent Deferred Sales
Charge (Sales Load)......................... 19
Deduction for Mortality and Expense Risk
Charge...................................... 20
Deduction for Administrative Expense Charge.. 21
Deduction for Annuity Account Fee............ 21
Deduction for Premium Tax Equivalents........ 21
Deduction for Income Taxes................... 21
Deduction for Fund Expenses.................. 21
Deduction for Transfer Fee................... 21
Deduction for Optional Death Benefit......... 22
OTHER CONTRACT FEATURES........................ 23
Ownership.................................... 23
Assignment................................... 24
Beneficiary.................................. 24
Change of Beneficiary........................ 24
Annuitant.................................... 24
Transfer of Contract Values between
Sub-Accounts................................ 25
Surrenders and Partial Withdrawals........... 25
Delay of Payments and Transfers.............. 26
Market Value Adjustment...................... 26
Death of the Contract Owner before the
Annuity Date................................ 27
<CAPTION>
CONTENTS PAGE
<S> <C>
Death of the Annuitant before the Annuity
Date........................................ 28
Death of the Annuitant after the
Annuity Date................................ 28
Change in Operation of Variable Account...... 28
Modification................................. 28
Discontinuance............................... 29
ANNUITY PROVISIONS............................. 29
Annuity Date; Change in Annuity Date and
Annuity Option.............................. 29
Annuity Options.............................. 29
Fixed Options................................ 29
Variable Options............................. 30
Evidence of Survival......................... 31
Endorsement of Annuity Payment............... 31
DISTRIBUTION OF THE CONTRACTS.................. 31
PERFORMANCE DATA............................... 31
Money Market Sub-Account..................... 31
Other Sub-Accounts........................... 32
Performance Ranking or Rating................ 32
TAX STATUS..................................... 32
General...................................... 33
Diversification.............................. 33
Distribution Requirements.................... 34
Multiple Contracts........................... 34
Tax Treatment of Assignments................. 35
Withholding.................................. 35
Section 1035 Exchanges....................... 35
Tax Treatment of Withdrawals -- Non-Qualified
Contracts................................... 35
Qualified Plans.............................. 35
Section 403(b) Plans......................... 36
Individual Retirement Annuities.............. 36
Corporate Pension and Profit-Sharing Plans
and H.R. 10 Plans........................... 37
Deferred Compensation Plans.................. 37
Tax Treatment of Withdrawals -- Qualified
Contracts................................... 37
FINANCIAL STATEMENTS........................... 38
LEGAL PROCEEDINGS.............................. 38
TABLE OF CONTENTS OF THE STATEMENT OF
ADDITIONAL INFORMATION........................ 38
</TABLE>
2
<PAGE>
DEFINITIONS
ACCUMULATION PERIOD: The period from the Effective Date 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.
ACCUMULATION UNIT: A measuring unit used to calculate the
value of the Owner's interest in each funding option used in
the variable portion of the Contract prior to the Annuity
Date.
ANNUITANT: A person designated by the Owner in writing upon
whose continuation of life any series of payments for a
definite period or involving life contingencies depends. If
the Annuitant dies before the Annuity Date, the Owner
becomes the Annuitant until naming a new Annuitant.
ANNUITY ACCOUNT VALUE: The value of the Contract at any
point in time.
ANNUITY DATE: The date on which annuity payments commence.
ANNUITY OPTION: The arrangement under which annuity payments
are made.
ANNUITY PERIOD: The period starting on the Annuity Date.
ANNUITY UNIT: A measuring unit used to calculate the portion
of annuity payments attributable to each funding option used
in the variable portion of the Contract on and after the
Annuity Date.
BENEFICIARY: The person entitled to the Death Benefit, who
must also be the "Designated Beneficiary", for purposes of
Section 72(s) of the Code, upon the Owner's death.
CODE: The Internal Revenue Code of 1986, as amended.
COMPANY: Connecticut General Life Insurance Company.
CONTRACT: The Variable Annuity Contract described in this
prospectus.
CONTRACT ANNIVERSARY, CONTRACT YEAR, EFFECTIVE DATE: The
Contract's Effective Date is the date it is issued. It is
also the date on which the first Contract Year, a 12-month
period, begins. Subsequent Contract Years begin on each
Contract Anniversary, which is the anniversary of the
Effective Date.
CONTRACT MONTH: The period from one Monthly Anniversary Date
to the next.
CONTRACT OWNER (OR OWNER): The person(s) initially
designated in the application or otherwise, unless later
changed, as having all ownership rights under the Contract.
FIXED ACCOUNT: The portion of the Contract under which
principal is guaranteed and interest is credited. Fixed
Account Assets are maintained in the Company's General
Account and not allocated to the Variable Account.
FIXED ANNUITY: An annuity with payments which do not vary as
to dollar amount.
FUND(S): One or more of Alger American Fund -- Alger
American Small Capitalization Portfolio, Alger American
Leveraged AllCap Portfolio, Alger American MidCap Growth
Portfolio and Alger American Growth Portfolio; Fidelity
Variable Insurance Products Fund -- VIP Equity-Income
Portfolio and VIP Money Market Portfolio; Fidelity Variable
Insurance Products Fund II -- VIP II Investment Grade Bond
Portfolio and VIP II Asset Manager Portfolio; MFS Variable
Insurance Trust -- MFS Total Return Series, MFS Utilities
Series and MFS World Governments Series; Neuberger & Berman
Advisers Management Trust -- Balanced Portfolio, Limited
Maturity Bond Portfolio and Partners Portfolio; Quest for
Value Accumulation Trust -- Quest Global Equity Portfolio,
Quest
3
<PAGE>
Managed Portfolio and Quest Small Cap Portfolio. Each is an
open-end management investment company (mutual fund) whose
shares are available to fund the benefits provided by the
Contract.
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, three, five, seven or
ten years, as elected by the Owner.
GUARANTEED PERIOD AMOUNT: Any portion of a Purchaser's
Annuity Account Value allocated to a specific Guaranteed
Period with a specified Expiration Date (including credited
interest thereon).
INDEX RATE: An index rate based on the Treasury Constant
Maturity Series published by the Federal Reserve Board.
IN WRITING: In a written form satisfactory to the Company
and received by the Company at its Variable Products Service
Center.
MONTHLY ANNIVERSARY DATE: The monthly anniversary of the
Effective Date, as shown on the specifications page of the
Contract, when the Company makes the monthly calculation of
any charge for the Optional Death Benefit.
NON-QUALIFIED CONTRACTS: A Contract used in connection with
a retirement plan which does not receive favorable federal
income tax treatment under Code Section 401, 403, 408, or
457. The owner of a Non-Qualified Contract must be a natural
person or an agent for a natural person in order for the
Contract to receive favorable income tax treatment as an
annuity.
PAYEE: A recipient of payments under the Contract. The term
includes an Annuitant, a Beneficiary who becomes entitled to
benefits upon the death of the Annuitant, and the Owner's
estate.
PREMIUM PAYMENT: Any amount paid to the Company cleared in
good funds 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 Code Section 401, 403, 408 or 457.
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.
SHARES: Shares of a Fund.
SUB-ACCOUNT: That portion of the Fixed Account associated
with specific Guaranteed Period(s) and Guaranteed Interest
Rate(s) and that portion of the Variable Account which
invests in shares of a specific Fund.
SURRENDER (OR WITHDRAWAL): When a lump sum amount
representing all or part of the Annuity Account Value (minus
any applicable withdrawal charges, market value adjustment,
contract fees, or premium tax equivalents) is paid to the
Owner. After a full surrender, all of the Owner's rights
under the Contract are terminated. In this prospectus, the
terms "surrender" and "withdrawal" are used interchangeably.
SURRENDER DATE: The date the Company processes the Owner's
election to surrender the Contract.
4
<PAGE>
VALUATION DATE: Every day on which Accumulation Units are
valued, which is each 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 Securities and
Exchange Commission ("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
in length.
VARIABLE ACCOUNT: CG Variable Annuity Separate Account II, a
separate account of the Company under Connecticut law, in
which the assets of the Sub-Account(s) funded through shares
of one or more of the Funds are maintained. Assets of the
Variable Account attributable to the Contracts are not
chargeable with the general liabilities of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the
calculation of the value of each variable portion of the
Owner's Annuity Account during the Accumulation Period.
VARIABLE ANNUITY UNIT: A unit of measure used in the
calculation of the value of each variable portion of the
Owner's Annuity Account during the Annuity Period, to
determine the amount of each variable annuity payment.
VARIABLE PRODUCTS SERVICE CENTER: The office of the Company
to which Premium Payments should be sent, notices given and
any customer service requests made. Mailing address: CIGNA
Individual Insurance, Variable Products Service Center,
Routing S-154, Hartford, CT 06152-2154.
5
<PAGE>
HIGHLIGHTS
Premium Payments attributable to the variable portion of the
Contracts will be allocated to a segregated asset account of
Connecticut General Life Insurance Company (the "Company")
which has been designated CG Variable Annuity Separate
Account II (the "Variable Account"). The Variable Account
invests in shares of one or more of the Funds available to
fund the Contract as selected by the Owner. Contract Owners
bear the investment risk for all amounts allocated to the
Variable Account. The Contract's provisions may vary in some
states. Inquiries about the Contracts may be made to the
Company's Variable Products Service Center.
The Contract may be returned within 10 days after it is
received. It can be mailed or delivered to either the
Company or the agent who sold it. Return of the Contract by
mail is effective on being postmarked, properly addressed
and postage prepaid. The Company will promptly refund the
Contract Value in states where permitted. This may be more
or less than the Premium Payment. In states where required,
the Company will promptly refund the Premium Payment, less
any partial surrenders. The Company has the right to
allocate initial Premium Payments to the Money Market
Sub-Account until the expiration of the right-to-examine
period. If the Company does so allocate an initial Premium
Payment, it will refund the greater of the Premium Payment,
less any partial surrenders, or the Contract Value. It is
the Company's current practice to directly allocate the
initial Premium Payment to the Fund(s) designated in the
application, unless state law requires a refund of Premium
Payments rather than of Annuity Account Value.
A Contingent Deferred Sales Charge (sales load) may be
deducted in the event of a full surrender or partial
withdrawal. The Contingent Deferred Sales Charge is imposed
on Premium Payments within seven (7) years after their being
made. Contract Owners may, not more frequently than once
each Contract Year, make a withdrawal of up to fifteen
percent (15%) of Premium Payments made, or any remaining
portion thereof, ("the Fifteen Percent Free") without
incurring a Contingent Deferred Sales Charge. The Contingent
Deferred Sales Charge will vary in amount, depending upon
the Contract Year in which the Premium Payment being
surrendered or withdrawn was made. For purposes of
determining the applicability of the Contingent Deferred
Sales Charge, surrenders and withdrawals are deemed to be on
a first-in, first-out basis.
The Contingent Deferred Sales Charge is found in the fee
table (See "Charges and Deductions -- Deduction for
Contingent Deferred Sales Charge (Sales Load)"). The maximum
Contingent Deferred Sales Charge is 7% of Premium Payments.
There may also be a Market Value Adjustment on the Fixed
Account portion of the Contract.
There is a Mortality and Expense Risk Charge which is equal,
on an annual basis, to 1.20% of the average daily net assets
of the Variable Account. This Charge compensates the Company
for assuming the mortality and expense risks under the
Contract (See "Charges and Deductions -- Deduction for
Mortality and Expense Risk Charge"), other than the Optional
Death Benefit risk (See "Charges and Deductions -- Deduction
for Optional Death Benefit").
There is an Administrative Expense Charge which is equal, on
an annual basis, to 0.10% of the average daily net assets of
the Variable Account (See "Charges and Deductions --
Deduction for Administrative Expense Charge").
There is an annual Annuity Account Fee of $35 unless the
Annuity Account Value equals or exceeds $100,000 at the end
of the Contract Year (See "Charges and Deductions --
Deduction for Annuity Account Fee").
There is a charge for any Optional Death Benefit Risk(s)
elected (See "Charges and Deductions -- Deduction for
Optional Death Benefit").
6
<PAGE>
Premium tax equivalents or other taxes payable to a state or
other governmental entity will be charged against Annuity
Account Value (See "Charges and Deductions -- Deduction for
Premium Taxes").
Under certain circumstances there may be assessed a $10
transfer fee when a Contract Owner transfers Annuity Account
Values from one Sub-Account to another (See "Charges and
Deductions -- Deduction for Transfer Fee").
There is a ten percent (10%) federal income tax penalty
applied to the income portion of any premature distribution
from Non-Qualified Contracts. However, the penalty is not
imposed on amounts distributed:
(a) after the Payee reaches age 59 1/2; (b) after the death
of the Contract Owner (or, if the Contract Owner is not a
natural person, the Annuitant); (c) if the Payee is totally
disabled (for this purpose, disability is as defined in
Section 72(m)(7) of the Code); (d) in a series of
substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy)
of the Payee or for the joint lives (or joint life
expectancies) of the Payee and his or her beneficiary; (e)
under an immediate annuity; or (f) which are allocable to
Premium Payments made prior to August 14, 1982. For federal
income tax purposes, distributions are deemed to be on a
last-in, first-out basis. Different tax withdrawal penalties
and restrictions apply to Qualified Contracts issued
pursuant to plans qualified under Code Section 401, 403(b),
408 or 457. (See "Tax Status -- Tax Treatment of Withdrawals
-- Qualified Contracts.") For a further discussion of the
taxation of the Contracts, see "Tax Status."
MARKET VALUE ADJUSTMENT. In certain situations, a surrender
or transfer of amounts from the Fixed Account will be
subject to a Market Value Adjustment. The Market Value
Adjustment will reflect the relationship between a rate
based on an index published by the Federal Reserve Board as
to current yields on U.S. government securities of various
maturities at the time a surrender or transfer is made
("Index Rate"), and the Index Rate at the time that the
Premium Payments being surrendered or transferred were made.
Generally, if the Index Rate at the time of surrender or
transfer is lower than the Index Rate at the time the
Premium Payment was allocated, then the application of the
Market Value Adjustment will result in a higher payment upon
surrender or transfer. Similarly, if the Index Rate at the
time of surrender or transfer is higher than the Index Rate
at the time the Premium Payment was allocated, the
application of the Market Value Adjustment will generally
result in a lower payment upon surrender or transfer. The
Market Value Adjustment may also apply to Death Benefit
payments but only if it would increase the Death Benefit. It
is not applied against a surrender or transfer taking place
at the end of the Guaranteed Period.
7
<PAGE>
FEES AND EXPENSES
CONTRACT OWNER TRANSACTION FEES
Contingent Deferred Sales Charge (as a percentage of Premium
Payments):
<TABLE>
<CAPTION>
YEARS SINCE
PAYMENT CHARGE
------------- ------
<S> <C> <C> <C>
0-1 7%
1-2 6%
A Contract Owner may, not more frequently than once each
2-3 5% Contract Year, make a withdrawal of up to 15% of Premium
3-4 4% Payments made, or the remaining portion thereof, without
4-5 3% incurring a Contingent Deferred Sales Charge.
5-6 2%
6-7 1%
7+ 0
</TABLE>
<TABLE>
<S> <C> <C> <C>
Transfer Fee........ $10
- Not imposed on the first three transfers during a Contract Year
or, if the Annuity Account Value is at least $5,000 at the time of
a transfer, on the fourth through twelfth transfers during a
Contract Year. Pre-scheduled automatic dollar cost averaging
transfers are not counted.
</TABLE>
<TABLE>
<S> <C> <C> <C>
Annuity Account $35 per Contract Year
Fee.................
- Waived if Annuity Account Value at the end of the Contract Year is $100,000 or
more.
</TABLE>
A Contract Owner may also elect the Optional Death Benefit(s) for which there is
a charge, prorated among the Sub-Accounts, which depends on the age and gender
classification (in accordance with state law) of the Owner (or the Annuitant, if
the Owner is a non-natural person) and on the dollar amount which is at risk.
(See "Deductions -- Optional Death Benefit.")
VARIABLE ACCOUNT ANNUAL EXPENSES
<TABLE>
<S> <C> <C>
(as a percentage of average account
value)
Mortality and Expense Risk Charge....... 1.20%
Administrative Expense Charge........... 0.10%
---
Total Variable Account Annual 1.30%
Expenses................................
</TABLE>
8
<PAGE>
FUND ANNUAL EXPENSES (as a percentage of Fund average net
assets).
The management fees for each Fund are based on a percentage
of that Fund's assets under management. The fees below
represent the amounts payable to the investment adviser of
each of the Funds on an annual basis as of the date of this
Prospectus, plus estimated other expenses. See "The Funds"
in this Prospectus and the discussion in each Fund's
prospectus.
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER ANNUAL
FEES EXPENSES EXPENSES
----------- --------- -----------
<C> <S> <C> <C> <C>
ALGER AMERICAN Alger American Growth 0.75% 0.11% 0.86%
Portfolio....................
FUNDS Alger American Leveraged 0.85% 0.94%* 1.79%
AllCap Portfolio.............
0.80% 0.17% 0.97%
Alger American MidCap Growth
Portfolio....................
0.85% 0.11% 0.96%
Alger American Small
Capitalization Portfolio.....
FIDELITY FUNDS Asset Manager Portfolio....... 0.72% 0.08% 0.80%(3)
0.52% 0.06% 0.58%(3)
Equity-Income Portfolio.......
0.46% 0.21% 0.67%
Investment Grade Bond
Portfolio....................
0.20% 0.07% 0.27%
Money Market Portfolio........
MFS FUNDS(4) MFS Total Return Series....... 0.75% 0.25%(4) 1.00%(4)
0.75% 0.25%(4) 1.00%(4)
MFS Utilities Series..........
0.75% 0.25%(4) 1.00%(4)
MFS World Governments
Series.......................
NEUBERGER & BERMAN AMT Balanced Portfolio........ 0.80% 0.17% 0.97%
FUNDS(1) AMT Limited Maturity Bond 0.60% 0.13% 0.73%
Portfolio....................
0.80% 0.50% 1.30%
AMT Partners Portfolio(2).....
QUEST FOR VALUE Quest Global Equity 0.75% 0.50% 1.25%
Portfolio....................
FUNDS** Quest Managed Portfolio....... 0.60% 0.06% 0.66%
0.60% 0.14% 0.74%
Quest Small Cap Portfolio.....
<FN>
* Includes 0.75% estimated Interest Expense.
** The expenses for the Quest Managed, Small Cap and
Global Equity Portfolios will be voluntarily limited
by Quest for Value Advisors so that annualized
operating fund expenses do not exceed 0.66%, 0.74%,
and 1.25% for the Quest Managed, Small Cap and Global
Equity Portfolios, respectively, through December 31,
1995. Variations in the actual amount of average
assets in any of these Portfolios during 1995 can
cause significant variations in expenses expressed as
a percentage of that Portfolio's average net assets.
It is estimated by Quest management that by the end
of 1995, the net assets of each of these Portfolios
will be sufficient such that the total annual
expenses of each Portfolio will, on an annualized
basis, be approximately equal to, if not less than,
the voluntary limits.
(1) Until May 1, 1995, all of these Portfolios had a
Distribution Plan ("Plan") pursuant to Rule 12b-1
which provided for the reimbursement of N&B
Management for certain Trust distribution expenses
up to a maximum of 0.25% on an annual basis of each
Portfolio's average daily net assets. The "Total
Annual Expenses" shown here for each AMT Portfolio
would be increased by 0.02% if the 12b-1 fees for
the months of January through April, 1995 were
taken into account.
(2) Other Expenses, and therefore Total Annual
Expenses, have been estimated and are annualized
for the Partners Portfolio.
(3) A portion of the brokerage commissions the Porfolio
paid was used to reduce its expenses. Without this
reduction, "Total Annual Expenses" would have been
0.81% for Asset Manager Portfolio and 0.60% for
Equity-Income Portfolio.
(4) The Funds' Adviser has agreed to bear, subject to
reimbursement, expenses for each of the Total
Return Series and Utilities Series, such that each
Series' aggregate operating expense shall not
exceed, on an annualized basis, 1.00% of the
average daily net assets of the Series from
November 2, 1994 through December 31, 1998, 1.25%
of the average daily net assets of the Series from
January 1, 1997 through December 31, 1998, and
1.50% of the average daily net assets of the Series
from January 1, 1999 through December 31, 2004;
provided however, that this obligation may be
terminated or revised at any time. Absent this
expense arrangement, "Other Expenses" and "Total
Annual Expenses" would be 0.62% and 1.37%,
respectively, for the Total Return Series, and
0.93% and 1.58%, respectively, for the Utilities
Series, based upon estimated expenses for the
Series' current fiscal year. The Adviser has agreed
to bear, subject to reimbursement, until December
31, 2004, expenses of the World Governments Series
such that the Series' aggregate operating expenses
do not exceed 1.00%, on an annualized basis, of its
average daily net assets. Absent this expense
arrangement, "Other Expenses" and "Total Annual
Expenses" for the World Governments Series would be
0.63% and 1.38%, respectively.
</TABLE>
9
<PAGE>
The purpose of the foregoing Table on page 9 of this
Prospectus is to assist the Contract Owner in understanding
the various costs and expenses that a Contract Owner will
incur, directly or indirectly. For additional information,
see the discussion in each Fund's prospectus. Premium tax
equivalents and charges for the Optional Death Benefit(s),
if elected, are not reflected in the Table, though they may
apply.
EXAMPLES
The Contract 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:
Alger Small Capitalization Portfolio..................... $ 84 $ 117 $ 154 $ 274
Alger Leveraged AllCap Portfolio......................... $ 92 $ 142 $ 194 $ 353
Alger MidCap Growth Portfolio............................ $ 84 $ 118 $ 154 $ 275
Alger Growth Portfolio................................... $ 83 $ 114 $ 149 $ 264
Fidelity VIP Equity-Income Portfolio..................... $ 80 $ 106 $ 134 $ 235
Fidelity VIP Money Market Portfolio...................... $ 77 $ 96 $ 118 $ 202
Fidelity VIP II Investment Grade Bond Portfolio.......... $ 81 $ 109 $ 139 $ 244
Fidelity VIP II Asset Manager Portfolio.................. $ 82 $ 113 $ 145 $ 257
MFS Total Return Series.................................. $ 84 $ 119 $ 156 $ 278
MFS Utilities Series..................................... $ 84 $ 119 $ 156 $ 278
MFS World Governments Series............................. $ 84 $ 119 $ 156 $ 278
AMT Balanced Portfolio................................... $ 84 $ 118 $ 154 $ 275
AMT Limited Maturity Bond Portfolio...................... $ 82 $ 110 $ 142 $ 250
AMT Partners Portfolio................................... $ 87 $ 128 $ 170 $ 307
Quest For Value Global Equity Portfolio.................. $ 87 $ 126 $ 168 $ 302
Quest For Value Managed Portfolio........................ $ 81 $ 108 $ 138 $ 243
Quest For Value Small Cap Portfolio...................... $ 82 $ 111 $ 142 $ 251
</TABLE>
2. IF THE CONTRACT IS NOT SURRENDERED OR IF IT IS
ANNUITIZED:
<TABLE>
<S> <C> <C> <C> <C>
Alger Small Capitalization Portfolio..... $ 24 $ 75 $ 128 $ 274
Alger Leveraged AllCap Portfolio......... $ 33 $ 99 $ 169 $ 353
Alger MidCap Growth Portfolio............ $ 24 $ 75 $ 129 $ 275
Alger Growth Portfolio................... $ 23 $ 72 $ 123 $ 264
Fidelity VIP Equity-Income Portfolio..... $ 21 $ 63 $ 109 $ 235
Fidelity VIP Money Market Portfolio...... $ 17 $ 54 $ 93 $ 202
Fidelity VIP II Investment Grade Bond
Portfolio............................... $ 21 $ 66 $ 113 $ 244
Fidelity VIP II Asset Manager
Portfolio............................... $ 23 $ 70 $ 120 $ 257
MFS Total Return Series.................. $ 25 $ 76 $ 130 $ 278
MFS Utilities Series..................... $ 25 $ 76 $ 130 $ 278
MFS World Governments Series............. $ 25 $ 76 $ 130 $ 278
AMT Balanced Portfolio................... $ 24 $ 75 $ 129 $ 275
AMT Limited Maturity Bond Portfolio...... $ 22 $ 68 $ 116 $ 250
AMT Partners Portfolio................... $ 28 $ 85 $ 145 $ 307
Quest For Value Global Equity
Portfolio............................... $ 27 $ 84 $ 142 $ 302
Quest For Value Managed Portfolio........ $ 21 $ 66 $ 113 $ 243
Quest For Value Small Cap Portfolio...... $ 22 $ 68 $ 117 $ 251
</TABLE>
The preceding tables are intended to assist the Owner in
understanding the costs and expenses borne, directly or
indirectly, by Premium Payments allocated to the Variable
Account. These include the expenses of the Funds, certain of
which are subject to expense reimbursement arrangements
which may be subject to change. See the Funds' Prospectuses.
In addition to the expenses listed above, charges for
premium tax equivalents and charges for any Optional Death
Benefit(s) selected may be applicable.
10
<PAGE>
These examples reflect the annual $35 Annuity Account Fee as
an annual charge of .14% of assets, based upon an
anticipated average Annuity Account Value of $25,000.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION
The Variable Account commenced operations on April 10, 1995.
The starting Accumulation Unit value for each Sub-Account
was or will be $10.00. As of April 26, 1995 not all
Sub-Accounts had yet been funded.
THE COMPANY, THE FIXED ACCOUNT AND THE VARIABLE ACCOUNT
THE COMPANY. The Company is a stock life insurance company
incorporated under the laws of Connecticut by special act of
the Connecticut General Assembly in 1865. Its Home Office
mailing address is Hartford, Connecticut 06152, Telephone
(203) 726-6000. It has obtained authorization to do 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 SECURITIES AND EXCHANGE
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 among Sub-Accounts available under the Contract
as described under "Transfer of Contract Values between
Sub-Accounts." Instead of the Owner's assuming all of the
investment risk as is the case for Premium Payments
allocated to the Variable Account, the Company guarantees it
will credit interest of at least 3% per year 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.
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
11
<PAGE>
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 Account Value within a Fixed Account Sub-Account is
maintained for the duration of the Sub-Account's Guaranteed
Period, the Company guarantees that it will credit interest
to that amount at the guaranteed rate specified for the
Sub-Account which may but need not be more than 3% per year.
Any amount withdrawn from the Sub-Account prior to the
expiration of the Sub-Account's Guaranteed Period is subject
to a Market Value Adjustment (see "Market Value Adjustment")
and a Deferred Sales Charge, if applicable. The Company
guarantees, however, that a Contract 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, regardless of any application of the Market
Value Adjustment (that is, the Market Value Adjustment will
not reduce the amount available for surrender, 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 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 surrender, withdrawal or
transfer is received by the Company.
THE VARIABLE ACCOUNT. The Variable Account was established
by the Company as a separate account on January 25, 1994
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, to the extent necessary to meet the Company's
obligations thereunder. 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 Securities and
Exchange Commission ("Commission") as a unit investment
trust under the 1940 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 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, mortality and expense
risk charges, administrative expense charges, the cost of
any Optional Death Benefit(s) 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 and will be fully invested
in Fund shares at all times.
THE FUNDS
Each of the seventeen Sub-Accounts of the Variable Account
is invested solely in shares of one of the seventeen Funds
available as funding vehicles under the Contracts. Each
12
<PAGE>
of the Funds is a series of one of six Massachusetts or
Delaware business trusts, collectively referred to herein as
the "Trusts", each of which is registered as an open-end,
diversified management investment company under the 1940
Act.
The Trusts and their investment advisers and distributors
are:
Alger American Fund ("Alger Trust"), managed by Fred
Alger Management, Inc., 75 Maiden Lane, New York, NY
10038; and distributed by Fred Alger & Company,
Incorporated, 30 Montgomery Street, Jersey City, NJ
07302;
Variable Insurance Products Fund I ("Fidelity Trust I"),
and Variable Insurance Products Fund II ("Fidelity Trust
II"), managed by Fidelity Management & Research Company
and distributed by Fidelity Distribution Corporation, 82
Devonshire Street, Boston, MA 02103;
MFS Variable Insurance Trust ("MFS Trust"), managed by
Massachusetts Financial Services Company and distributed
by MFS Investor Services, Inc., 500 Boylston Street,
Boston, MA 02116;
Neuberger & Berman Advisers Management Trust ("Neuberger
& Berman AMT Trust"), managed and distributed by
Neuberger & Berman Management Incorporated, 605 Third
Avenue, New York, NY 10158-0006;
Quest for Value Accumulation Trust ("Quest for Value
Trust"), managed by Quest for Value Advisors and
distributed by Quest for Value Distributors, One World
Financial Center, New York, NY 10281.
Four Funds of ALGER Trust are available under the Contracts:
Alger American Growth Portfolio;
Alger American Leveraged AllCap Portfolio;
Alger American MidCap Growth Portfolio;
Alger American Small Capitalization Portfolio.
Two Funds of FIDELITY Trust I are available under the
Contracts:
Equity-Income Portfolio ("Fidelity Equity-Income
Portfolio").
Money Market Portfolio ("Fidelity Money Market Fund").
Two Funds of FIDELITY Trust II are available under the
Contracts:
Asset Manager Portfolio ("Fidelity Asset Manager
Portfolio");
Investment Grade Bond Portfolio ("Fidelity Bond
Portfolio").
Three Funds of MFS Trust are available under the Contracts:
MFS Total Return Series;
MFS Utilities Series;
MFS World Governments Series.
Three Funds of NEUBERGER & BERMAN AMT Trust are available
under the Contracts:
AMT Balanced Portfolio;
AMT Limited Maturity Bond Portfolio;
AMT Partners Portfolio.
Three Funds of QUEST FOR VALUE Trust are available under the
Contracts:
Quest Global Equity Portfolio;
Quest Managed Portfolio;
Quest Small Cap Portfolio.
13
<PAGE>
The investment advisory fees charged the Funds by their
advisers are shown in the Fee Table at page 9 of this
Prospectus.
There follows a brief description of the investment
objective of each Fund. There can be no assurance that any
of the stated investment objectives will be achieved.
ALGER AMERICAN GROWTH PORTFOLIO: Seeks long-term capital
appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with
total market capitalization of $1 billion or greater.
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO: Seeks long-term
capital appreciation by investing in a diversified, actively
managed portfolio of equity securities, with the ability to
engage in leveraging (up to one-third of assets) and options
and futures transactions.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO: Seeks long-term
capital appreciation by investing in a diversified, actively
managed portfolio of equity securities, primarily of
companies with total market capitalization between $750
million and $3.5 billion.
ALGER AMERICAN SMALL CAP PORTFOLIO: Seeks long-term capital
appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with
total market capitalization of less than $1 billion.
FIDELITY ASSET MANAGER PORTFOLIO: Seeks high total return
with reduced risk over the long-term by allocating its
assets among domestic and foreign stocks, bonds and short-
term fixed-income instruments.
FIDELITY BOND PORTFOLIO: Seeks as high a level of current
income as is consistent with the preservation of capital by
investing in a broad range of investment-grade fixed-income
securities, with a dollar-weighted average portfolio
maturity of ten years or less.
FIDELITY EQUITY-INCOME PORTFOLIO: Seeks reasonable income by
investing primarily in income-producing equity securities,
with some potential for capital appreciation, seeking to
exceed the composite yield on the securities comprising the
Standard and Poor's 500 Composite Stock Price Index.
FIDELITY MONEY MARKET FUND: Seeks as high a level of current
income as is consistent with preserving capital and
providing liquidity, through investment in high quality U.S.
dollar denominated money market securities of domestic and
foreign issuers.
MFS TOTAL RETURN SERIES: Seeks primarily to obtain
above-average income, (compared to a portfolio entirely
invested in equity securities) consistent with the prudent
employment of capital, and secondarily to provide a
reasonable opportunity for growth of capital and income.
MFS UTILITIES SERIES: Seeks capital growth and current
income (income above that obtainable from a portfolio
invested entirely in equity securities).
MFS WORLD GOVERNMENTS SERIES: Seeks not only preservation,
but also growth, of capital together with moderate current
income.
AMT BALANCED PORTFOLIO: Seeks long-term capital growth and
reasonable current income without undue risk to principal.
AMT LIMITED MATURITY BOND PORTFOLIO: Seeks the highest
current income consistent with low risk to principal and
liquidity; and secondarily, enhanced total return through
capital appreciation when market factors, such as falling
interest rates and rising bond prices, indicate that capital
appreciation may be available without significant risk to
principal.
AMT PARTNERS PORTFOLIO: Seeks capital growth.
QUEST GLOBAL EQUITY PORTFOLIO: Seeks long-term capital
appreciation through a global investment strategy primarily
involving equity securities.
14
<PAGE>
QUEST MANAGED PORTFOLIO: Seeks growth of capital over time
through investment in a portfolio of common stocks, bonds
and cash equivalents, the percentage of which will vary
based on management's assessments of relative investment
values.
QUEST SMALL CAP PORTFOLIO: Seeks capital appreciation
through investments in a diversified portfolio of equity
securities of companies with market capitalizations of under
$1 billion.
GENERAL
There is no assurance that the investment objective of any
of the Funds will be met. Contract Owners bear the complete
investment risk for Annuity Account Values allocated to a
Variable Account Sub-Account. Each such Sub-Account involves
inherent investment risk, and such risk varies significantly
among the Sub-Accounts. Contract Owners should read each
Fund's prospectus carefully and understand the Funds'
relative degrees of risk before making or changing
investment choices. Additional Funds may, from time to time,
be made available as investments to underlie the Contracts.
However, the right to make such selections will be limited
by the terms and conditions imposed on such transactions by
the Company (See "Premium Payments and Contract Value --
Allocation of Premium Payments").
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Variable Account or if, in the judgment of
the Company, further investment in such shares should become
inappropriate in view of the purpose of the Contracts, the
Company may substitute shares of another Fund. No
substitution of securities in any Sub-Account may take place
without prior approval of the Commission and under such
requirements as it may impose.
VOTING RIGHTS
In accordance with its view of present applicable law, the
Company will vote the shares of each Fund held in the
Variable Account at special meetings of the shareholders of
the particular Trust in accordance with written instructions
received from persons having the voting interest in the
Variable Account. The Company will vote shares for which it
has not received instructions, as well as shares
attributable to it, in the same proportion as it votes
shares for which it has received instructions. The Trusts do
not hold regular meetings of shareholders.
The number of shares which a person has a right to vote will
be determined as of a date to be chosen by the Company not
more than sixty (60) days prior to the meeting of the
particular Trust. Voting instructions will be solicited by
written communication at least fourteen (14) days prior to
the meeting.
The Funds' shares are issued and redeemed only in connection
with variable annuity contracts and variable life insurance
policies issued through separate accounts of the Company and
other life insurance companies. The Trusts do not foresee
any disadvantage to Contract Owners arising out of the fact
that shares may be made available to separate accounts which
are used in connection with both variable annuity and
variable life insurance products. Nevertheless, the Trusts'
Boards intend to monitor events in order to identify any
material irreconcilable conflicts which may possibly arise
and to determine what action, if any, should be taken in
response thereto. If such a conflict were to occur, one of
the separate accounts might withdraw its investment in a
Fund. This might force a Fund to sell portfolio securities
at disadvantageous prices.
15
<PAGE>
PREMIUM PAYMENTS AND CONTRACT VALUE
PREMIUM PAYMENTS
The Contracts may be purchased under a flexible premium
payment plan. Premium Payments are payable in the frequency
and in the amount selected by the Contract Owner. The
initial Premium Payment is due on the Effective Date. It
must be at least $2,500 ($2,000 for an Individual Retirement
Annuity under Section 408 of the Code). Subsequent Premium
Payments must be at least $100. These minimum amounts are
not waived for Qualified Plans. The Company reserves the
right to decline any application or Premium Payment. A
Premium Payment in excess of $1 million requires preapproval
by the Company.
The Company may, at its sole discretion, waive the minimum
payment requirements.
The Contract Owner may elect to increase, decrease or change
the frequency of Premium Payments.
ALLOCATION OF PREMIUM PAYMENTS
Premium Payments are allocated to one or more of the
appropriate Sub-Accounts within the Variable Account and
Fixed Account as selected by the Contract Owner. For each
Variable Account Sub-Account, the Premium Payments are
converted into Accumulation Units. The number of
Accumulation Units credited to the Contract is determined by
dividing the Premium Payment allocated to the Sub-Account by
the value of the Accumulation Unit for the Sub-Account.
The Company will allocate the initial Premium Payment
directly to the Sub-Account(s) selected by the Owner unless
state law requires, during the right-to-examine period, a
refund of Premium Payments rather than Annuity Account
Value.
Transfers do not necessarily affect the allocation
instructions for payments. Subsequent payments will be
allocated as directed by the Owner; if no direction is
given, the allocation will be that which has been most
recently directed for payments by the Owner. The Owner may
change the allocation of future payments without fee,
penalty or other charge upon written notice to the Variable
Products Service Center. A change will be effective for
payments received on or after receipt of the written notice
of change.
Not less than 10% of any Premium Payment at the time of any
allocation may be allocated to a single Sub-Account, and no
allocation can be made which would result in a Variable
Account Sub-Account value of less than $500 or a Fixed
Account Sub-Account value of less than $2,500.
For initial Premium Payments, if the application for a
Contract is in good order, the Company will apply the
Premium Payment to the Variable Account and credit the
Contract with Accumulation Units within two business days of
receipt at the Accumulation Unit Value for the Valuation
Period during which the Premium Payment is accepted unless
state law requires, during the right-to-examine period, a
refund of Premium Payments rather than Annuity Account
Value.
If the application for a Contract is not in good order, the
Company will attempt to get it in good order or the Company
will return the application and the Premium Payment within
five business days. The Company will not retain a Premium
Payment for more than five business days while processing an
incomplete application unless it has been so authorized by
the purchaser.
For each subsequent Premium Payment, the Company will apply
such payment to the Variable Account and credit the Contract
with Accumulation Units at the Accumulation Unit Value for
the Valuation Period during which each such payment was
received in good order.
16
<PAGE>
FIXED ACCUMULATION VALUE. The fixed accumulation value of an
Annuity Account, if any, for any Valuation Period is equal
to the sum of the values of all Fixed Account Sub-Accounts
which are part of 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 of one, three, five, seven or ten years.
Every Premium Payment allocated to a Fixed Account
Sub-Account starts a new Sub-Account with its own duration
and Guaranteed Interest Rate. 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 transferred 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 prematurely 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 date after 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 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 of Contract Values between Sub-Accounts" 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
"Market Value Adjustment").
The Company will notify the Owner in writing at least 60
days 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 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 (or three) transfers per Contract Year
limitations or the additional Fixed Sub-Account transfer
restrictions (see "Transfer of Contract Values between Sub-
Accounts").
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.
Current Guaranteed Interest Rates may be changed by the
Company frequently or infrequently 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 respective
Sub-Account's Guaranteed Period. However, any amount
withdrawn from the Sub-Account may be subject to any
applicable withdrawal charges, Annuity Account Fees, Market
Value Adjustment, 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 Market
Value Adjustment.
The Guaranteed Interest Rate will not be less than 3% per
year compounded annually, regardless of any application of
the Market Value Adjustment. The Company has no
17
<PAGE>
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% PER YEAR; THE OWNER ASSUMES THE RISK
THAT DECLARED RATES WILL NOT EXCEED 3% PER YEAR. THE COMPANY
HAS COMPLETE DISCRETION TO DECLARE ANY RATE, SO LONG AS THAT
RATE IS AT LEAST 3% PER YEAR.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected,
enables a Contract Owner to systematically allocate
specified dollar amounts from the Money Market Sub-Account
to the Contract's other Sub-Accounts at regular intervals.
By allocating on a regularly scheduled basis as opposed to
allocating the total amount at one particular time, a
Contract Owner may be less susceptible to the impact of
market fluctuations.
Dollar Cost Averaging may be selected by establishing a
Money Market Sub-Account value of at least $12,000. The
minimum amount per month to allocate is $1,000. All Dollar
Cost Averaging transfers will be made effective the
twentieth of the month (or the next Valuation Date if the
twentieth of the month is not a Valuation Date). Election
into this program may occur at any time by properly
completing the Dollar Cost Averaging election form,
returning it to the Company so it is received by the tenth
of the month, to be effective that month, and insuring that
sufficient value is in the Money Market Sub-Account.
Transfers to or from the Fixed Account are not permitted
under Dollar Cost Averaging.
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 is insufficient to complete the next transfer; (3)
the Owner requests termination in writing and such writing
is received by the tenth of the month in order to cancel the
transfer scheduled to take effect that month; or (4) the
Contract is surrendered.
The Dollar Cost Averaging program may not be active
following the Annuity Date. There is no current charge for
Dollar Cost Averaging but the Company reserves the right to
charge for this program. In the event there are additional
transfers, the transfer fee may be charged. The Company does
not intend to profit from any such charge.
CONTRACT VALUE
The value of the Contract is the sum of the values
attributable to the Contract for each Fixed and Variable
Sub-Account. The value of each Variable Sub-Account is
determined by multiplying the number of Accumulation Units
attributable to the Contract in the Sub-Account by the value
of an Accumulation Unit for the Sub-Account.
ACCUMULATION UNIT
Premium Payments allocated to the Variable Account are
converted into Accumulation Units. This is done by dividing
each Premium Payment by the value of an Accumulation Unit
for the Valuation Period during which the Premium Payment is
allocated to the Variable Account. The Accumulation Unit
value for each Sub-Account was or will be set initially at
$10. It may increase or decrease from Valuation Period to
Valuation Period. The Accumulation Unit value for any later
Valuation Period is determined by multiplying
18
<PAGE>
the Accumulation Unit Value for that Sub-Account for the
preceding Valuation Period by the Net Investment Factor for
the current Valuation Period. The Net Investment Factor is
calculated as follows:
The Net Investment Factor for any Variable Account
Sub-Account for any Valuation Period is determined by
dividing (a) by (b) and then subtracting (c) from the
result, where:
(A) Is the net result of:
(1)the net asset value (as described in the prospectus
for the Fund) of a Fund share held in the Variable
Account Sub-Account determined as of the end of the
Valuation Period, plus
(2)the per share amount of any dividend or other
distribution declared by the Fund on the shares held
in the Variable Account Sub-Account if the
"ex-dividend" date occurs during the Valuation Period,
plus or minus
(3)a per share credit or charge with respect to any taxes
paid or reserved for by the Company during the
Valuation Period which are determined by the Company
to be attributable to the operation of the Variable
Account Sub-Account;
(B) is the net asset value of a Fund share held in the
Variable Account Sub-Account determined as of the end of
the preceding Valuation Period; and
(C) is the asset charge factor determined by the Company for
the Valuation Period to reflect the charges for assuming
the mortality and expense risks and for administrative
expenses.
The asset charge factor for any Valuation Period is equal to
the daily asset charge factor multiplied by the number of
24-hour periods in the Valuation Period.
CHARGES AND DEDUCTIONS
Various charges and deductions are made from Annuity Account
Values and the Variable Account. These charges and
deductions are:
DEDUCTION FOR CONTINGENT DEFERRED SALES CHARGE (SALES LOAD)
Upon a partial withdrawal or full surrender, a Contingent
Deferred Sales Charge (sales load) will be calculated and
will be deducted from the Annuity Account Value. This Charge
reimburses the Company for expenses incurred in connection
with the promotion, sale and distribution of the Contracts.
The Contingent Deferred Sales Charge applies only to those
Premium Payments received within seven (7) years of the date
of partial withdrawal or full surrender. In calculating the
Contingent Deferred Sales Charge, Premium Payments are
allocated to the amount surrendered or withdrawn on a
first-in, first-out basis. The amount of the Contingent
Deferred Sales Charge is calculated by: (a) allocating
Premium Payments to the amount surrendered; (b) multiplying
each allocated Premium Payment that has been held under the
Contract for the period shown below by the charge shown
below:
<TABLE>
<CAPTION>
YEARS SINCE
PAYMENT CHARGE
- ------------------ ------
<S> <C>
0-1 7%
1-2 6%
2-3 5%
3-4 4%
4-5 3%
5-6 2%
6-7 1%
7+ 0
</TABLE>
and (c) adding the products of each multiplication in (b)
above. The charge will not exceed 7% of the Premium
Payments. Any applicable negative Market Value Adjustment
19
<PAGE>
and Annuity Account Fee will be deducted before application
of the Contingent Deferred Sales Charge. The charge is not
imposed on any death benefit paid or upon amounts applied to
an annuity option.
A Contract Owner may, not more frequently than once each
Contract Year, make a withdrawal of up to fifteen percent
(15%) of Premium Payments, or any remaining portion thereof,
without incurring a Contingent Deferred Sales Charge. The
earliest Premium Payments remaining in the Contract will be
deemed withdrawn first under this Fifteen Percent Free, even
if no Contingent Deferred Sales Charge would have been
assessed on such a withdrawal. No Contingent Deferred Sales
Charge will be deducted from Premium Payments which have
been held under the Contract for more than seven (7)
Contract Years or as annuity payments. The Company may also
eliminate or reduce the Contingent Deferred Sales Charge
under the Company procedures then in effect.
For a partial withdrawal, unless the Owner designates
otherwise, the Contingent Deferred Sales Charge will be
deducted proportionately from the Sub-Account(s) from which
the withdrawal is to be made by cancelling Accumulation
Units from each applicable Sub-Account in the ratio that the
value of each Sub-Account bears to the total of the values
of the Sub-Accounts from which the partial withdrawal is
made. If the value(s) of such Sub-Account(s) are
insufficient, the amount payable on the withdrawal will be
net of any remaining Contingent Deferred Sales Charges
unless the Owner and the Company agree otherwise.
Commissions will be paid to broker-dealers who sell the
Contracts. Broker-dealers will be paid commissions, up to an
amount equal to 6.50% of Premium Payments, for promotional
or distribution expenses associated with the marketing of
the Contracts. To the extent that the Contingent Deferred
Sales Charge is insufficient to cover the actual cost of
distribution, the Company may use any of its corporate
assets, including potential profit which may arise from the
Mortality and Expense Risk Charge, to make up any
difference.
DEDUCTION FOR MORTALITY AND EXPENSE RISK CHARGE
The Company deducts on each Valuation Date a Mortality and
Expense Risk Charge which is equal, on an annual basis, to
1.20% of the average daily net assets of the Variable
Account (consisting of approximately .70% for mortality
risks and approximately .50% for expense risks). The
mortality risks assumed by the Company arise from its
contractual obligation to make annuity payments after the
Annuity Date for the life of the Annuitant in accordance
with annuity rates guaranteed in the Contracts. The expense
risk assumed by the Company is that all actual expenses
involved in administering the Contracts, including Contract
maintenance costs, administrative costs, mailing costs, data
processing costs, legal fees, accounting fees, filing fees,
and the costs of other services may exceed the amount
recovered from the Annuity Account Fee and the
Administrative Expense Charge.
If the Mortality and Expense Risk Charge is insufficient to
cover the actual costs, the loss will be borne by the
Company. Conversely, if the amount deducted proves more than
sufficient, the excess will be a profit to the Company. The
Company expects to profit from this charge.
The Mortality and Expense Risk Charge is guaranteed by the
Company and cannot be increased.
20
<PAGE>
DEDUCTION FOR ADMINISTRATIVE EXPENSE CHARGE
The Company deducts on each Valuation Date an Administrative
Expense Charge which is equal, on an annual basis, to 0.10%
of the average daily net assets of the Variable Account.
This charge is to reimburse the Company for a portion of its
expenses in administering the Contracts. This charge is
guaranteed by the Company and cannot be increased, and the
Company will not derive a profit from this charge.
DEDUCTION FOR ANNUITY ACCOUNT FEE
The Company deducts an annual Annuity Account Fee of $35
from the Annuity Account Value on the last Valuation Date of
each Contract Year. This charge is to reimburse the Company
for a portion of its administrative expenses (see above).
Prior to the Annuity Date, this charge is deducted by
cancelling Accumulation Units from each applicable
Sub-Account in the ratio that the value of each Sub-Account
bears to the total Annuity Account Value. When the Contract
is annuitized or surrendered for its full Surrender Value on
other than a Contract Anniversary, the Annuity Account Fee
will be prorated at the time of surrender. On and after the
Annuity Date, the Annuity Account Fee will be collected
proportionately from the Sub-Account(s) on which the
Variable Annuity payment is based, prorated on a monthly
basis and will result in a reduction of the annuity
payments. The Annuity Account Fee will be waived for any
Contract Year in which the Annuity Account Value equals or
exceeds $100,000 as of the last Valuation Date of the
Contract Year.
DEDUCTION FOR PREMIUM TAX EQUIVALENTS
Premium tax equivalents or other taxes payable to a state,
municipality or other governmental entity will be charged
against Annuity Account Value. Premium taxes currently
imposed by certain states on the Contracts offered hereby
range from 0% to 3.5% of Premiums paid. Some states assess
premium taxes at the time Premium Payments are made; others
assess premium taxes at the time annuity payments begin. The
Company will, in its sole discretion, determine when taxes
have resulted from: the investment experience of the
Variable Account; receipt by the Company of the Premium
Payment(s); or commencement of annuity payments. The Company
may, at its sole discretion, pay taxes when due and deduct
an equivalent amount reflecting investment experience from
the Annuity Account Value at a later date. Payment at an
earlier date does not waive any right the Company may have
to deduct amounts at a later date.
DEDUCTION FOR INCOME TAXES
While the Company is not currently maintaining a provision
for federal income taxes, the Company has reserved the right
to establish a provision for income taxes if it determines,
in its sole discretion, that it will incur a tax as a result
of the operation of the Variable Account. The Company will
deduct for any income taxes incurred by it as a result of
the operation of the Variable Account whether or not there
was a provision for taxes and whether or not it was
sufficient.
DEDUCTION FOR FUND EXPENSES
There are other deductions from, and expenses paid out of,
the assets of the Funds which are described in the
accompanying Funds' prospectuses.
DEDUCTION FOR TRANSFER FEE
Prior to the Annuity Date, a Contract Owner may transfer all
or a part of the Annuity Account Value in a Sub-Account to
another Sub-Account without the imposition of any
21
<PAGE>
transfer fee or charge if there have been no more than three
transfers made in the Contract Year (twelve if the Annuity
Account Value is at least $5000 at the time of a transfer.)
For additional transfers, the Company reserves the right to
deduct a transfer fee of up to $10 per transfer.
Prescheduled automatic dollar cost averaging transfers are
not counted toward the twelve (or three) transfer limit. The
Company reserves the right to charge a fee of up to $10 for
each transfer after the Annuity Date. The transfer fee at
any given time will not be set at a level greater than its
cost and will contain no element of profit.
DEDUCTION FOR OPTIONAL DEATH BENEFIT
If no Optional Death Benefit is selected, the death benefit
under the Contract will be the Annuity Account Value as of
the date of payment of the death benefit. No additional
charge is imposed for that death benefit.
For an additional charge, as described below, an Optional
Death Benefit can be selected at the time the Contract is
applied for. Under each form of Optional Death Benefit, the
death benefit payable will be the greater of the Annuity
Account Value or some other amount as of the date of payment
of the death benefit. That other amount can be one or more
of
Option A. Premium Payments made, less partial withdrawals.
Option B. Premium Payments made, less partial withdrawals,
with interest compounded daily at a rate equivalent to 5%
per year during the first seven Contract Years. As of the
beginning of the eighth Contract Year, the amount of death
benefit will decrease and thereafter be equal to total
Premium Payments made, less partial withdrawals. Only
available if the Owner (or the Annuitant, if the Owner is a
non-natural person) has not reached his or her 72nd birthday
at the Effective Date.
Option C. The Annuity Account Value on the seven-year
Contract 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 made between the immediate
preceding seven-year Contract Anniversary and the date and
death benefit election is effective or is deemed to become
effective (as referenced herein, seven-year Contract
Anniversary means the seventh Contract Anniversary and each
succeeding Contract Anniversary occurring at any seven-year
interval thereafter, for example, the 14th and 21st Contract
Anniversaries).
Option D. The highest Annuity Account Value ever attained on
a Contract Anniversary date, with adjustments for any
subsequent Premium Payments and partial withdrawals made
since the last determination of such highest value.
Once an election of one or more of these Optional Death
Benefits has been made, it will remain in effect for the
life of the Contract, unless the Owner chooses, by written
notice to the Variable Products Service Center, to
discontinue such election. The Owner can only give one
notice of discontinuance; such notice must address the
discontinuance of one or more of the Optional Death
Benefit(s) previously chosen. If no Optional Death
Benefit(s) are selected initially, they cannot be added
later, nor can the Owner change an initial selection to add
Optional Death Benefit(s) after the Contract is issued.
At each Contract Anniversary, a charge will be made against
Annuity Account Value (prorated among the Sub-Accounts used
in the Contract, if more than one be used) for any Optional
Death Benefit in effect for all or a portion of the Contract
Year then ended. Such charge will be computed in the
following manner, assuming for the sake of illustration that
the Optional Death Benefit is in effect for the entire
Contract Year.
22
<PAGE>
On the last business day of each Contract Month during the
Contract Year, the Company will calculate whether the amount
payable under any of the Optional Death Benefits in effect
on that date would exceed the Annuity Account Value on that
date. If it would not exceed the Annuity Account Value on
that date, then no charge for the Optional Death Benefit is
accrued as of that date. If it would exceed the Annuity
Account Value on that date, then a charge for the Optional
Death Benefit is accrued as of that date. That charge is
computed in accordance with mortality tables which are made
a part of the Contract reflecting the Owner's age and gender
classification (in accordance with state law) is computed on
the Amount at Risk, which is the excess of the Optional
Death Benefit over the Annuity Account Value on the last
business day of the Contract Month. If the Owner is a
corporation, partnership or other non-natural person, the
measuring life will be the Annuitant's. No deduction is
actually made from Annuity Account Value for the Optional
Death Benefit until the Contract Anniversary except upon a
full surrender or Annuitization of the Contract or upon the
payment of a Death Benefit, when the sum of any charges
accrued at the end of each Contract Month during the
Contract Year is deducted.
The annual rate per $1,000 of Amount at Risk charged for the
Optional Death Benefit(s) is set forth in the following
table:
<TABLE>
<CAPTION>
COST OF OPTIONAL DEATH
BENEFIT(S)
ANNUAL RATE PER $1,000
OF AMOUNT AT RISK
-------------------------------
ATTAINED AGE MALE FEMALE UNISEX
- ------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
less than 40............................ $ 2.40 $ 1.99 $ 2.20
40-45................................... 3.02 2.54 2.78
46-50................................... 4.92 4.02 4.47
51-55................................... 7.30 5.70 6.50
56-60................................... 11.46 8.34 9.90
61-65................................... 17.54 11.55 14.55
66-70................................... 27.85 18.19 23.02
71-75................................... 43.30 27.57 35.44
76-80................................... 70.53 47.33 58.93
81-85................................... 117.25 87.04 102.15
86-90................................... 179.55 147.37 163.46
</TABLE>
If, for example, at the end of a Contract Month the Optional
Death Benefit (assuming payment of a death benefit on that
date) were $40,000 and the Annuity Account Value were
$30,000, the Amount at Risk would be $10,000. Suppose the
Owner (or, if applicable, the Annuitant) were a female age
60. The charge accrued for the Optional Death Benefit that
month would be 10 X $8.34, divided by 12 (reflecting
one-twelfth of a year), or $6.95. If that proved to be the
only Contract Month end during the Contract Year at which
there were an Amount at Risk, that would be the only
Optional Death Benefit charge accrued during the Contract
Year. There is no daily deduction of a percentage of
Contract Values for any Optional Death Benefit.
OTHER CONTRACT FEATURES
OWNERSHIP
The Contract Owner has all rights and may receive all
benefits under the Contract. The Contract Owner may change
the Contract Owner at any time. If the Contract Owner dies,
a death benefit will be paid to the Beneficiary upon proof
of the Contract Owner's death. If the Owner is a
corporation, partnership or other non-natural person, the
death benefit is paid upon receipt of due proof of the
Annuitant's death. A change of Contract Owner will
automatically revoke any prior designation of Contract
Owner. A request for change must be: (1) made in writing;
and (2) received by the Company at its Variable
23
<PAGE>
Products Service Center. The change will become effective as
of the date the written request is signed. A new designation
of Contract Owner will not apply to any payment made or
action taken by the Company prior to the time it was
received. Any Optional Death Benefit in effect at the time
of a change of ownership will remain in effect. The cost of
the Optional Death Benefit(s) will be based on the attained
age of the new Owner (or the Annuitant, if the new Owner is
a non-natural person).
For non-qualified contracts, in accordance with Code Section
72(u), a deferred annuity contract held by a corporation or
other entity that is not a natural person is not treated as
an annuity contract for tax purposes. Income on the contract
is treated as ordinary income received by the owner during
the taxable year. But in accordance with Code Section 72(u),
an annuity contract held by a trust or other entity as agent
for a natural person is considered held by a natural person.
ASSIGNMENT
The Contract Owner may assign the Contract at any time
during his or her lifetime. Unless provided otherwise, an
assignment will not affect the interest of any previously
indicated Beneficiary. The Company will not be bound by any
assignment until written notice is received by the Company
at its Variable Products Service Center. The Company is not
responsible for the validity of any assignment. The Company
will not be liable as to any payment or other settlement
made by the Company before such assignment has been recorded
at the Company's Variable Products Service Center.
If the Contract is issued pursuant to a Qualified Plan, it
may not be assigned, pledged or otherwise transferred except
as may be allowed under applicable law.
BENEFICIARY
The Beneficiary is named when the Contract is applied for
and, unless changed, is entitled to receive any death
benefits to be paid. Prior to the Annuity Date, death
benefits are paid to the Beneficiary on the death of the
Owner.
CHANGE OF BENEFICIARY
The Contract Owner may change a Beneficiary by filing a
written request with the Company at its Variable Products
Service Center unless an irrevocable Beneficiary designation
was previously filed. After the change is recorded, it will
take effect as of the date the request was signed. If the
request reaches the Variable Products Service Center after
the Annuitant or Contract Owner, as applicable, dies but
before any payment is made, the change will be valid. The
Company will not be liable for any payment made or action
taken before it records the change.
ANNUITANT
The Annuitant must be a natural person. The maximum age of
the Annuitant on the Effective Date is 85 years old. The
Annuitant may be changed at any time prior to the Annuity
Date. Joint Annuitants are allowed at the time of
annuitization only, if the Company chooses to make a joint
and survivor annuity payment option available in addition to
the options provided in the Contract. The Annuitant has no
rights or privileges prior to the Annuity Date. When an
Annuity Option is elected, the amount payable as of the
Annuity Date is based on the age and gender classification
(in accordance with state law) of the Annuitant, as well as
the Option selected and the Annuity Account Value.
24
<PAGE>
TRANSFER OF CONTRACT VALUES BETWEEN SUB-ACCOUNTS
Prior to the Annuity Date, the Contract Owner may transfer
all or part of the Annuity Account Value in a Sub-Account to
another Sub-Account without the imposition of any fee or
charge if there have been no more than three transfers made
in the Contract Year (twelve if the Contract Value is at
least $5000 at the time of transfer). For additional
transfers, the Company reserves the right to deduct a
transfer fee of up to $10 (See "Charges and Deductions --
Deduction for Transfer Fee"). This Contract is not designed
for professional market timing organizations or other
entities using programmed and frequent transfers.
After the Annuity Date, provided a variable annuity option
was selected, the Contract Owner may make up to three
transfers between Variable Sub-Accounts in any Contract
Year.
All transfers are subject to the following:
A. The deduction of any transfer fee that may be imposed.
The transfer fee will be deducted from the amount which
is transferred if the entire amount in the Sub-Account is
being transferred, otherwise from the Sub-Account from
which the transfer is made.
B. The minimum amount which may be transferred is the lesser
of (i) $2,500 per Fixed Account Sub-Account or $500 per
Variable Account Sub-Account; or (ii) the Contract
Owner's entire interest in the Sub-Account.
C. No partial transfer will be made if the Contract Owner's
remaining Contract Value in the Sub-Account will be less
than $500.
D. Transfers will be effected during the Valuation Period
next following receipt by the Company of a written
transfer request (or by telephone, if authorized)
containing all required information. However, no transfer
may be made effective within seven calendar days of the
date on which the first annuity payment is due. Transfers
may not be permitted during the right-to-examine period.
E. Any transfer request must clearly specify the amount
which is to be transferred and the Sub-Accounts which are
to be affected.
F. Transfers of all or a portion of any Fixed Account
Sub-Account values are subject to any applicable Market
Value Adjustment;
G. The Company reserves the right to defer transfers from
any Fixed Account Sub-Account for up to six months after
date of receipt of the transfer request;
H. Transfers involving the Variable Account Sub-Accounts are
subject to such restrictions as may be imposed by the
Funds;
I. The Company reserves the right at any time and without
prior notice to any party to terminate, suspend or modify
the transfer privileges described above.
J. After the Annuity Date, transfers may not take place
between a Fixed Annuity Option and a Variable Annuity
Option.
SURRENDERS AND PARTIAL WITHDRAWALS
While the Contract is in force and before the Annuity Date,
the Company will, upon written request to the Company by the
Contract Owner, allow the surrender or Partial Withdrawal of
all or a portion of the Contract for its Surrender Value.
Such request may also be made by telephone if telephone
transfers have been previously authorized in writing.
Surrenders or Partial Withdrawals will result in the
cancellation of Accumulation Units from each applicable
Sub-Account in the ratio that the value of each Sub-Account
bears to the total Annuity Account Value, unless the
Contract Owner specifies in writing in advance which units
are to be cancelled. The Company will pay the amount of any
25
<PAGE>
surrender or Partial Withdrawal within seven (7) days of
receipt of a valid request, unless the "Delay of Payments"
provision is in effect. (See "Delay of Payments and
Transfers")
Certain tax withdrawal penalties and restrictions may apply
to surrenders and partial withdrawal from Contracts. (See
"Tax Status.") Contract Owners should consult their own tax
counsel or other tax adviser regarding any surrenders and
partial withdrawals.
The Surrender Value is the Annuity Account Value for the
Valuation Period next following the Valuation Period during
which the written request to the Company for surrender is
received, reduced, in the case of full surrender, by the sum
of:
A. any applicable premium tax equivalents not previously
deducted;
B. any applicable Annuity Account Fee;
C. any applicable Contingent Deferred Sales Charge; and
D. any applicable accrued charges for the Optional Death
Benefit(s) risk
and for partial withdrawals by A and C above.
DELAY OF PAYMENTS AND TRANSFERS
The Company reserves the right to suspend or postpone
payments or transfers for any period when:
1. the New York Stock Exchange is closed (other than
customary weekend and holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of
securities held in the Variable Account is not reasonably
practicable or it is not reasonably practicable to
determine the value of the Variable Account's net assets;
or
4. during any other period when the Commission, by order, so
permits for the protection of Contract Owners.
The applicable rules and regulations of the Commission will
govern as to whether the conditions described in 2. and 3.
exist.
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.
MARKET VALUE ADJUSTMENT
Any surrender or transfer of a Fixed Account Guaranteed
Period Amount, other than a surrender or transfer pursuant
to an election which becomes effective upon the Expiration
Date of the Guaranteed Period, will be subject to a Market
Value Adjustment ("MVA"). The MVA will be applied to the
amount being surrendered or transferred after deduction of
any applicable Annuity Account Fee and before deduction of
any applicable surrender 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 surrender or transfer. It
also reflects the time remaining in the Sub-Account's
Guaranteed Period.
26
<PAGE>
Generally, if the Index Rate at the time of surrender or
transfer is 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 surrender or
transfer. Similarly, if the Index Rate at the time of
surrender or transfer is higher than the Index Rate at the
time the Premium Payment was allocated, the application of
the MVA will generally result in a lower payment upon
surrender 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 surrender or transfer,
plus a 0.50% adjustment (unless otherwise limited by
applicable state law). 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, unless
otherwise required by 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 0.50% 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 Market Value Adjustment.
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)
See the Statement of Additional information for examples of
the application of the Market Value Adjustment.
DEATH OF THE CONTRACT OWNER BEFORE THE ANNUITY DATE
In the event of death of the Contract Owner (or the
Annuitant, if the Owner is a non-natural person) prior to
the Annuity Date, a death benefit is payable to the
Beneficiary designated by the Owner. The value of the death
benefit will be determined as of the Valuation Period next
following the date both due proof of death (a certified copy
of the Death Certificate) and a payment election are
received by the Company. Unless the Optional Death Benefit
is selected, the value of the death benefit is equal to the
Annuity Account Value. The Beneficiary may, at any time
before the end of the sixty (60) day period immediately
following receipt of due proof of death by the Company,
elect the death benefit to be paid as follows:
1. the payment of the entire death benefit within five years
of the date of the death of the Owner or Annuitant,
whichever is applicable; or
2. payment over the lifetime of the designated Beneficiary
or over a period not extending beyond the life expectancy
of the Beneficiary, with distribution beginning within
one year of the date of death of the Owner or Annuitant,
whichever is applicable (see "Annuity Provisions --
Annuity Options"); or
27
<PAGE>
3. payment in accordance with one of the settlement options
under the Contract (see "Annuity Provisions -- Annuity
Options"); or
4. if the designated Beneficiary is the Owner's spouse,
he/she can continue the Contract in his/her own name.
If no payment option is elected, a single sum settlement
will be made by the Company within seven (7) days of the end
of the sixty (60) day period following receipt of due proof
of death of the Owner or Annuitant as applicable.
If the Owner is a non-natural person, then for purposes of
the death benefit, the Annuitant shall be treated as the
Owner.
DEATH OF THE ANNUITANT BEFORE THE ANNUITY DATE
If the Annuitant dies prior to the Annuity Date and the
Annuitant is different from the Contract Owner, the Contract
Owner, if a natural person, may designate a new Annuitant.
Unless and until one is designated, the Contract Owner will
be the Annuitant. If the Contract Owner is not a natural
person, then the death benefit is paid on the Annuitant's
death.
DEATH OF THE ANNUITANT AFTER THE ANNUITY DATE
If the Annuitant dies after the Annuity Date, the death
benefit, if any, will be as specified in the Annuity Option
elected. The Company will require due proof of the
Annuitant's death. Death benefits will be paid at least as
rapidly as under the method of distribution in effect at the
Annuitant's death.
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 1940 Act or any other form
permitted by law; de-registered under the 1940 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 (or the Payee(s) during the Annuity
Period), 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
necessary 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 to the Contracts to reflect such
modification.
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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,
administrative expense charges, the tables used in
determining the amount of the first monthly fixed annuity
payment, and the formula used to calculate the Market Value
Adjustment, 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
The Company reserves the right to limit or discontinue the
offer and 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.
ANNUITY PROVISIONS
ANNUITY DATE; CHANGE IN ANNUITY DATE AND ANNUITY OPTION
The Contract Owner selects an Annuity Date at the time of
application. The Contract Owner may, upon at least thirty
(30) days prior written notice to the Company, at any time
prior to the Annuity Date, change the Annuity Date. The
Annuity Date must always be the first day of a calendar
month. The Annuity Date may not be later than the month
following the Annuitant's 90th birthday.
The Contract Owner may, upon at least (30) days prior
written notice to the Company, at any time prior to the
Annuity Date, select and/or change the Annuity Option.
ANNUITY OPTIONS
Instead of having the proceeds paid in one sum, the Contract
Owner may select one of the Annuity Options. These may be on
a fixed or variable basis, or a combination thereof. The
Annuity Option must be selected at least 30 days prior to
the Annuity Date. The Company may, at the time of election
of an Annuity Option, offer more favorable rates in lieu of
those guaranteed. The Company also may make available other
settlement options. The Company uses sex distinct or unisex
annuity rate tables when determining appropriate annuity
payments.
FIXED OPTIONS
Under a fixed option, once the selection has been made and
payments have begun, the amount of the payments will not
vary. The fixed options currently available are:
FIRST OPTION -- LIFE ANNUITY. The Company will make equal
monthly payments during the life of the Annuitant, ceasing
with the last payment due prior to the death of the
Annuitant.
SECOND OPTION -- LIFE ANNUITY WITH CERTAIN PERIOD. The
Company will make equal monthly payments during the life of
the Annuitant, but at least for the minimum period shown in
the annuity tables contained in the Contract. The amount of
each monthly payment per $1,000 of proceeds is based on the
age and gender classification (in accordance with state law)
of the Annuitant when the first payment is made and on the
minimum period chosen.
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THIRD OPTION -- LIFE ANNUITY WITH CASH REFUND. The Company
will make equal monthly payments during the life of the
Annuitant. Upon the death of the Annuitant, after payments
have started, the Company will pay in one sum any excess of
the amount of the proceeds applied under this Option over
the total of all payments made under this Option. The amount
of each monthly payment per $1,000 of proceeds is based on
the age and gender (in accordance with state law) of the
Annuitant when the first payment is made.
FOURTH OPTION -- ANNUITY CERTAIN. The Company will make
equal monthly payments for a number of years selected, not
less than five or more than thirty years.
VARIABLE OPTIONS
The actual dollar amount of variable annuity payments is
dependent upon (i) the Annuity Account Value at the time of
annuitization, (ii) the annuity table specified in the
Contract, (iii) the Annuity Option selected, and (iv) the
investment performance of the Sub-Account selected.
The dollar amount of the first monthly variable annuity
payment is determined by applying the available value (after
deduction of any premium tax equivalents not previously
deducted) to the table using the age and gender (in
accordance with state law) of the Annuitant. The number of
Annuity Units is then determined by dividing this dollar
amount by the then current Annuity Unit value. Thereafter,
the number of Annuity Units remains unchanged during the
period of annuity payments. This determination is made
separately for each Sub-Account of the Variable Account. The
number of Annuity Units is determined for each Sub-Account
and is based upon the available value in each Sub-Account as
of the date annuity payments are to begin.
The dollar amount determined for each Sub-Account will then
be aggregated for purposes of making payments.
The dollar amount of the second and later variable annuity
payments is equal to the number of Annuity Units determined
for each Sub-Account times the Annuity Unit value for that
Sub-Account as of the due date of the payment. This amount
may increase or decrease from month to month.
The annuity tables contained in the Contract are based on a
three percent (3%) assumed net investment rate. If the
actual net investment rate exceeds three percent (3%),
payments will increase. Conversely, if the actual rate is
less than three percent (3%), annuity payments will
decrease.
The Annuitant receives the value of a fixed number of
Annuity Units each month. The value of a fixed number of
Annuity Units will reflect the investment performance of the
Sub-Account selected and the amount of each annuity payment
will vary accordingly.
The Annuity Unit Value for a Sub-Account is determined by
multiplying the Annuity Unit Value for that Sub-Account for
the preceding Valuation Period by the Net Investment Factor
for the current Valuation Period (calculated as described on
pages 18 and 19 of this Prospectus) and multiplying the
result by 0.999919020, the daily factor to neutralize the
assumed net investment rate, discussed above, of 3% per
annum which is built into the annuity rate table. It may
increase or decrease from Valuation Period to Valuation
Period.
The variable options currently available are:
OPTION I -- VARIABLE LIFE ANNUITY. Monthly annuity payments
are paid during the life of an Annuitant, ceasing with the
last annuity payment due prior to the Annuitant's death.
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OPTION II -- VARIABLE LIFE ANNUITY WITH CERTAIN
PERIOD. Monthly annuity payments are paid during the life of
an Annuitant, but at least for the minimum period selected,
which may be five, ten, fifteen or twenty years;
OPTION III -- VARIABLE ANNUITY CERTAIN. Monthly annuity
payments are paid for a number of years selected, not less
than five or more than thirty years. Under this Option III,
the Annuitant may elect at any time during the period that
all or a portion of future payments be commuted and paid in
a lump sum or applied under Option I or Option II, subject
to the Company's rules about minimum payment amounts.
After the Annuity Date, the payee may, by written request to
the Variable Products Service Center, exchange Annuity Units
of one Variable Sub-Account for Annuity Units of equivalent
value in another Variable Sub-Account up to three times each
Contract Year.
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 or the Company may require that proof of the
Annuitant's survival be furnished.
DISTRIBUTION OF THE CONTRACTS
CIGNA Financial Advisors, Inc. ("CFA"), located at 900
Cottage Grove Road, Hartford, CT 06152, acts as the
principal underwriter and the distributor of the Contracts
as well as of variable life insurance policies and other
variable annuity contracts issued by the Company. CFA, a
registered broker-dealer under the Securities Exchange Act
of 1934, is a wholly-owned subsidiary of Connecticut General
Corporation. The Contracts are offered on a continuous
basis. CFA and the Company may enter into agreements to sell
the Contracts through various broker-dealers whose agents
are licensed to sell the Contracts.
PERFORMANCE DATA
MONEY MARKET SUB-ACCOUNT
From time to time, the Money Market Sub-Account may
advertise its "yield" and "effective yield." Both yield
figures will be based on historical earnings and are not
intended to indicate future performance. The "yield" of the
Money Market Sub-Account refers to the income generated by
Annuity Account Values in the Money Market Sub-Account over
a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is,
the amount of income generated by the investment during that
week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the Annuity Account
Values in the Money Market Sub-Account. The "effective
yield" is calculated similarly but, when annualized, the
income earned by Annuity Account Values in the Money Market
Sub-Account is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of
the compounding effect of this assumed reinvestment. The
computation of the yield calculation includes a deduction
for the Mortality and Expense Risk Charge, the
Administrative Expense Charge, and the Annuity Account Fee.
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OTHER SUB-ACCOUNTS
From time to time, the other Sub-Accounts may publish their
current yields and total returns in advertisements and
communications to Contract Owners. The current yield for
each Sub-Account will be calculated by dividing the
annualization of the dividend and interest income earned by
the underlying Fund during a recent 30-day period by the
maximum Accumulation Unit value at the end of such period.
Total return information will include the underlying Fund's
average annual compounded rate of return over the most
recent four calendar quarters and the period from the
underlying Fund's inception of operations, based upon the
value of the Accumulation Units acquired through a
hypothetical $1,000 investment at the Accumulation Unit
value at the beginning of the specified period and upon the
value of the Accumulation Unit at the end of such period,
assuming reinvestment of all distributions and the deduction
of the Mortality and Expense Risk Charge, the Administrative
Expense Charge and the Annuity Account Fee. Each Sub-Account
may also advertise aggregate and average total return
information over different periods of time.
In each case, the yield and total return figures will
reflect all recurring charges against the Sub-Account's
income, including the deduction for the Mortality and
Expense Risk Charge, the Administrative Expense Charge and
the Annuity Account Fee for the applicable time period.
Contract Owners should note that the investment results of
each Sub-Account will fluctuate over time, and any
presentation of a Sub-Account's current yield or total
return for any prior period should not be considered as a
representation of what an investment may earn or what a
Contract Owner's yield or total return may be in any future
period. See "Historical Performance Data" in the Statement
of Additional Information.
PERFORMANCE RANKING OR RATING
The performance of each or all of the Sub-Accounts of the
Variable Account may be compared in its advertising and
sales literature to the performance of other variable
annuity issuers in general or to the performance of
particular types of variable annuities investing in mutual
funds, or series of mutual funds with investment objectives
similar to each of the Sub-Accounts of the Variable Account.
Lipper Analytical Services, Inc. ("Lipper") Morningstar
Variable Annuity/Life Performance Report of Morningstar,
Inc. ("Morningstar") and the Variable Annuity Research and
Data Service ("VARDS-Registered Trademark-") are independent
services which monitor and rank or rate the performance of
variable annuity issuers in each of the major categories of
investment objectives on an industry-wide basis.
Lipper's rankings include variable life issuers as well as
variable annuity issuers. VARDS-Registered Trademark-
rankings compare only variable annuity issuers. Morningstar
ratings include mutual funds used by both variable life and
variable annuity issuers. The performance analyses prepared
by Lipper and VARDS-Registered Trademark- rank such issuers
on the basis of total return, assuming reinvestment of
distributions, but do not take sales charges, redemption
fees or certain expense deductions at the separate account
level into consideration. In addition,
VARDS-Registered Trademark- prepares risk-adjusted rankings,
which consider the effects of market risk on total return
performance. This type of ranking may address the question
as to which funds provide the highest total return with the
least amount of risk. Morningstar assigns ratings of zero to
five stars to the mutual funds taking into account primarily
historical performance and risk factors.
TAX STATUS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S
UNDERSTANDING OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE
TO ANNUITIES IN GENERAL. THE COMPANY CANNOT PREDICT
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THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
OWNERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING
THE POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT
GUARANTEE THE TAX STATUS OF THE CONTRACTS. OWNERS BEAR THE
COMPLETE RISK THAT THE CONTRACTS MAY NOT BE TREATED AS
"ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS.
GENERAL
Section 72 of the Code governs taxation of annuities in
general. A Contract Owner is not taxed on increases in the
value of a Contract until distribution occurs, either in the
form of a lump sum payment or as annuity payments under the
Settlement Option elected. For a lump sum payment received
as a total surrender (total redemption), the recipient is
taxed on the portion of the payment that exceeds the cost
basis of the Contract. For Non-Qualified Contracts, this
cost basis is generally the Premium Payments, while for
Qualified Contracts there may be no cost basis. The taxable
portion of the lump sum payment is taxed at ordinary income
tax rates.
For annuity payments, the taxable portion is determined by a
formula which establishes the ratio that the cost basis of
the Contract bears to the total value of annuity payments
for the term of the Contract. The taxable portion is taxed
at ordinary income rates. For certain types of Qualified
Plans there may be no cost basis in the Contract within the
meaning of Section 72 of the Code. Contract Owners,
Annuitants and Beneficiaries under the Contracts should seek
competent financial advice about the tax consequences of any
distributions.
The Company is taxed as a life insurance company under
Subchapter L of the Code. For federal income tax purposes,
the Variable Account is not a separate entity from the
Company, and its operations form a part of the Company.
Accordingly, the Variable Account 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.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable annuity
contracts. The Code provides that a variable annuity
contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments
are not adequately diversified in accordance with
regulations prescribed by the United States Treasury
Department ("Treasury Department"). Disqualification of the
Contract as an annuity contract would result in imposition
of federal income tax to the Contract Owner with respect to
earnings allocable to the Contract prior to the receipt of
payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the
Contracts meet the diversification requirements if, as of
the end of each quarter, the underlying assets meet the
diversification standards for a regulated investment company
and no more than fifty-five percent (55%) of the total
assets consist of cash, cash items, U.S. government
securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued regulations
(Treas. Reg. 1.817-5) which established diversification
requirements for the investment portfolios underlying
variable contracts such as the Contracts. The regulations
amplify the diversification
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requirements for variable contracts set forth in the Code
and provide an alternative to the safe harbor provision
described above. Under the regulations, an investment
portfolio will be deemed adequately diversified if: (1) no
more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (2) no more
than 70% of the value of the total assets of the portfolio
is represented by any two investments; (3) no more than 80%
of the value of the total assets of the portfolio is
represented by any three investments; and (4) no more than
90% of the value of the total assets of the portfolio is
represented by any four investments.
The Code provides that for purposes of determining whether
or not the diversification standards imposed on the
underlying assets of variable contracts by Section 817(h) of
the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate
issuer."
The Company intends, and the Trusts have undertaken, that
all Funds underlying the Contracts will be managed in such a
manner as to comply with these diversification requirements.
The Treasury Department has indicated that guidelines may be
forthcoming under which a variable annuity contract will not
be treated as an annuity contract for tax purposes if the
owner of the contract has excessive control over the
investments underlying the contract (i.e., by being able to
transfer values among sub-accounts with only limited
restrictions). The issuance of such guidelines may require
the Company to impose limitations on a Contract Owner's
right to control the investment. It is not known whether any
such guidelines would have a retroactive effect.
DISTRIBUTION REQUIREMENTS
Section 72(s) of the Code requires that in order to be
treated as an annuity contract for Federal income tax
purposes, any Nonqualified Contract must provide that (a) if
any Owner dies on or after the Annuity Date but prior to the
time the entire interest in the Contract has been
distributed, the remaining portion of such interest will be
distributed at least as rapidly as under the method of
distribution being used when the Owner died; and (b) if any
Owner dies prior to the Annuity Date, the entire interest in
the Contract will be distributed within five years after
such death. These requirements will be considered satisfied
as to any portion of the Owner's interest which is payable
to or for the benefit of a "designated beneficiary" and
which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life
expectancy of that beneficiary, provided that such
distributions begin within one year of the Owner's death.
The Owner's "designated beneficiary" is the person
designated by such Owner as a Beneficiary and to whom
ownership of the Contract passes by reason of death and must
be a natural person. However, if the Owner's "designated
beneficiary" is the surviving spouse of the Owner, the
Contract may be continued with the surviving spouse as the
new Owner.
The Contracts contain provisions which are intended to
comply with the requirements of Section 72(s) of the Code,
although no regulations interpreting these requirements have
yet been issued. The Company intends to review such
provisions and modify them if necessary to try to assure
that they comply with the Section 72(s) requirements when
clarified by regulation or otherwise. Similar rules may
apply to a Qualified Contract.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity
contracts which are issued during a calendar year to the
same contract owner by one company or its affiliates are
treated as one annuity contract for purposes of determining
the tax consequences of any
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distribution. Such treatment may result in adverse tax
consequences, including more rapid taxation of the
distributed amounts from such combination of contracts.
Contract Owners should consult a tax adviser prior to
purchasing more than one nonqualified annuity contract in
any single calendar year.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable
event. Contract Owners should therefore consult competent
tax advisers should they wish to assign their Contracts.
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.
TAX TREATMENT OF WITHDRAWALS --
NON-QUALIFIED CONTRACTS
Section 72 of the Code governs the treatment of
distributions from annuity contracts. It provides that if
the Annuity Account Value exceeds the aggregate Premium
Payments made, any amount withdrawn will be treated as
coming first from the earnings and then, only after the
income portion is exhausted, as coming from the principal.
Withdrawn earnings are includable in gross income. It
further provides that a ten percent (10%) penalty will apply
to the income portion of any premature distribution.
However, the penalty is not imposed on amounts received: (a)
after the Payee reaches age 59 1/2; (b) after the death of
the Contract Owner (or, if the Contract Owner is a
non-natural person, the Annuitant); (c) if the Payee is
totally disabled (for this purpose disability is as defined
in Section 72(m)(7) of the Code); (d) in a series of
substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy)
of the Payee or for the joint lives (or joint life
expectancies) of the Payee and his/her beneficiary; (e)
under an immediate annuity; or (f) which are allocable to
Premium Payments made prior to August 14, 1982.
The above information does not apply, except where noted, to
Qualified Contracts. However, separate tax withdrawal
penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals -- Qualified
Contracts.")
QUALIFIED PLANS
The Contracts offered by this Prospectus are designed to be
suitable for use under various types of Qualified Plans.
Because of the minimum purchase payment
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requirements, these Contracts may not be appropriate for
some periodic payment retirement plans. Taxation of
participants in each Qualified Plan varies with the type of
plan and terms and conditions of each specific plan.
Contract Owners, Annuitants and Beneficiaries are cautioned
that benefits under a Qualified Plan may be subject to the
terms and conditions of the plan regardless of the terms and
conditions of the Contracts issued pursuant to the plan.
Although the Company provides administration for the
Contract, it does not provide administrative support for
Qualified Plans. Following are general descriptions of the
types of Qualified Plans with which the Contracts may be
used. Such descriptions are not exhaustive and are for
general informational purposes only. The tax rules regarding
Qualified Plans are very complex and will have differing
applications, depending on individual facts and
circumstances. Each purchaser should obtain competent tax
advice prior to purchasing a Contract issued in connection
with a Qualified Plan.
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.
Purchasers 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.
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.
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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. 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 adviser
with regard to the suitability of the Contract as an
investment vehicle for the Qualified Plan.
TAX TREATMENT OF WITHDRAWALS --
QUALIFIED CONTRACTS
Section 72(t) of the Code imposes a 10% penalty tax on the
taxable portion of any distribution from qualified
retirement plans, including Contracts issued and qualified
under Code Sections 401, 403(b), 408 and 457. To the extent
amounts are not includable in gross income because they have
been properly rolled over to an IRA or to another eligible
Qualified Plan, no tax penalty will be imposed. The tax
penalty will not apply to the following distributions: (a)
if distribution is made on or after the date on which the
Payee reaches age 59 1/2; (b) distributions following the
death of the Contract Owner or Annuitant (as applicable) or
disability of the Payee (for this purpose disability is as
defined in Section 72(m)(7) of the Code); (c) after
separation from service, distributions that are part of
substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy)
of the Payee or the joint lives (or joint life expectancies)
of such Payee and his/her designated beneficiary; (d)
distributions to a Payee who has separated from service
after attaining age 55; (e) distributions made to the extent
such distributions do not exceed the amount allowable as a
deduction under Code Section 213 to the Payee for amounts
paid during the taxable year for medical care: and (f)
distributions made to an alternate payee pursuant to a
qualified domestic relations order.
The exceptions stated in Items (d), (e) and (f) above do not
apply in the case of an Individual Retirement Annuity.
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FINANCIAL STATEMENTS
Audited financial statements of the Company as of December
31, 1994 and 1993 and for each of the three years in the
period ended December 31, 1994 are included in the Statement
of Additional Information. No financial statements are
included for the Variable Account, which did not commence
operations until April 10, 1995.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable
Account, the Distributor or the Company is a party except
for routine litigation which the Company does not believe is
relevant to the Contracts offered by this Prospectus.
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available (at no cost) which contains
more details concerning some subjects discussed in this Prospectus. The
following is the Table of Contents for that Statement:
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
THE CONTRACTS-GENERAL PROVISIONS................ 3
The Contracts................................. 3
Loans......................................... 3
Non-Participating Contracts................... 3
Misstatement of Age........................... 3
Variable Accumulation Unit Value and
Variable Accumulation Value.................. 3
Net Investment Factor......................... 4
SAMPLE CALCULATIONS AND TABLES.................. 4
Variable Account Unit Value Calculations...... 4
Withdrawal Charge and Market Value Adjustment
Tables....................................... 5
STATE REGULATION OF THE COMPANY................. 6
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
ADMINISTRATION.................................. 7
PERIODIC REPORTS................................ 7
DISTRIBUTION OF THE CONTRACTS................... 7
CUSTODY OF ASSETS............................... 7
HISTORICAL PERFORMANCE DATA..................... 7
Money Market Sub-Account Yield................ 8
Other Sub-Account Yields...................... 8
Total Returns................................. 9
Other Performance Data........................ 9
LEGAL MATTERS................................... 10
LEGAL PROCEEDINGS............................... 10
EXPERTS......................................... 10
FINANCIAL STATEMENTS............................ 10
</TABLE>
38
<PAGE>
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<PAGE>
[LOGO]
537401 (5/95)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ACCRU-REGISTERED TRADEMARK- VARIABLE ANNUITY CONTRACTS
Issued through
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
Offered by
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
Home Office Location
900 Cottage Grove Road
Hartford, Connecticut 06152
Mailing Address
CIGNA Individual Insurance
Variable Products Service Center
Routing S-154
Hartford, Connecticut 06152-2154
This Statement of Additional Information ("Statement") expands upon subjects
discussed in the current Prospectus for the ACCRU-Registered Trademark- Variable
Annuity Contracts (the "Contracts") offered by Connecticut General Life
Insurance Company through CG Variable Annuity Separate Account II. You may
obtain a copy of the Prospectus dated May 1, 1995, by calling (800) 552-9898, or
by writing to Variable Products Service Center, Routing S-154, Connecticut
General Life Insurance Company, Hartford, Connecticut 06152-2154. 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 II.
Dated: May 1, 1995
1
<PAGE>
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
CALCULATION OF VARIABLE ACCOUNT VALUES..................................................................... 3
Variable Accumulation Unit Value......................................................................... 3
Net Investment Factor.................................................................................... 4
SAMPLE CALCULATIONS AND TABLES............................................................................. 4
Variable Account Unit Value Calculations................................................................. 4
Withdrawal Charge and Market Value Adjustment Tables..................................................... 5
STATE REGULATION OF THE COMPANY............................................................................ 6
ADMINISTRATION............................................................................................. 7
PERIODIC REPORTS........................................................................................... 7
DISTRIBUTION OF THE CONTRACTS.............................................................................. 7
CUSTODY OF ASSETS.......................................................................................... 7
HISTORICAL PERFORMANCE DATA................................................................................ 7
Money Market Sub-Account Yield........................................................................... 8
Other Sub-Account Yields................................................................................. 8
Total Returns............................................................................................ 9
Other Performance Data................................................................................... 9
LEGAL MATTERS.............................................................................................. 10
LEGAL PROCEEDINGS.......................................................................................... 10
EXPERTS.................................................................................................... 10
FINANCIAL STATEMENTS....................................................................................... 10
</TABLE>
2
<PAGE>
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 and any application, form the entire
contract. Only the President, a 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.
If the age or sex of the Owner is misstated, the Company will adjust the
charge associated with the Optional Death Benefits elected to the charges that
would have been assessed for the correct age and sex.
CALCULATION OF VARIABLE ACCOUNT VALUES
On any Valuation Date, the Variable Account value is equal to the totals of
the values allocated to the Contracts in each 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
Upon receipt of a Premium Payment by the Company at its Variable Products
Service Center, 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 at the Company's
Variable Products Service Center (for the initial Premium Payment, for the
Valuation Period during which the Premium Payment is accepted).
The Variable Accumulation Unit Value for each Variable Account Sub-Account
has been or will be set initially at $10.00 for the first Valuation Period of
the particular Variable Account Sub-Account. The Variable Account commenced
operations on April 10, 1995. The Variable Accumulation Unit Value for the
particular Variable Account Sub-Account for any subsequent Valuation Period is
determined by multiplying the Variable Accumulation Unit Value for the
particular Variable Account Sub-Account for the immediately preceding Valuation
Period by the Net Investment Factor for the particular Variable Account
Sub-Account for such subsequent Valuation Period. The Variable Accumulation
3
<PAGE>
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 Account portion of the Annuity Account Value, 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 Contract for such
Valuation Period. The value in a Contract of each Variable Account Sub-Account
is determined by multiplying the number of Variable Accumulation Units, if any,
credited to such Variable Account Sub-Account in a Contract by the Variable
Accumulation Unit Value of the particular Variable Account Sub-Account for such
Valuation Period.
NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Variable Account Sub-Account from one Valuation Period to the
next. The Net Investment Factor may be greater or less than or equal to 1.0;
therefore, the value of a Variable Accumulation Unit may increase, decrease, or
remain the same.
The Net Investment Factor for any Variable Account Sub-Account for any
Valuation Period is determined by dividing (a) by (b) and then subtracting (c)
from the result where:
(a) is the net result of:
(1) the net asset value of a Fund share held in the Variable Account
Sub-Account determined as of the end of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution declared
by the Fund on the shares held in the Variable Account Sub-Account if
the "ex-dividend" date occurs during the Valuation Period, plus or
minus
(3) a per share credit or charge with respect to any taxes paid or
reserved for by the Company during the Valuation Period which are
determined by the Company to be attributable to the operation of the
Variable Account Sub-Account;
(b) is the net asset value of a Fund share held in the Variable Account
Sub-Account determined as of the end of the preceding Valuation Period;
and
(c) is the asset charge factor determined by the Company for the valuation
period to reflect the charges for assuming mortality and expense risks
and for the administrative expenses.
SAMPLE CALCULATIONS AND TABLES
VARIABLE ACCOUNT UNIT VALUE CALCULATIONS
VARIABLE ACCUMULATION UNIT VALUE CALCULATION. Assume the net asset value of
a Fund share at the end of the current Valuation Period is $16.50; and its value
at the end of the immediately preceding Valuation Period was $16.46; the
Valuation Period is one day; and no dividends or distributions caused Fund
shares to go "ex-dividend" during the current Valuation Period. $16.50 divided
by $16.46 is 1.002430134. Subtracting the one day risk factor for mortality and
expense risks and the administrative expense charge of .00003584933 (the daily
equivalent of the current charge of 1.30% on an annual basis) gives a net
investment factor of 1.00239428467. If the value of the Variable Accumulation
Unit for the immediately preceding Valuation Period had been $14.703693, the
value for the current Valuation Period would be $14.738898 ($14.703693 X
1.00239428467).
VARIABLE ANNUITY UNIT VALUE CALCULATION. The assumptions in the above
example exist. Also assume that the value of an Annuity Unit for the immediately
preceding Valuation Period had been $13.579136. As the first variable annuity
payment is determined by using an assumed interest rate of 3% per year, the
value of the Annuity Unit for the current Valuation Period would be $13.610546
[$13.579136 X 1.00239428467 (the net investment factor) X 0.999919020].
0.999919020 is the factor, for a one day Valuation Period, that neutralizes the
assumed interest rate of three percent (3%) per year used to establish the
Annuity Payment Rates found in the Contract.
4
<PAGE>
VARIABLE ANNUITY PAYMENT CALCULATION. Assume that a Participant's Variable
Annuity Account is credited with 5319.7531 Variable Accumulation Units of a
particular Sub-Account; that the Variable Accumulation Unit value and the
Annuity Unit Value for the particular Sub-Account for the Valuation Period which
ends immediately preceding the Annuity Date are $14.703693 and $13.579136
respectively; that the Annuity Payment Rate for the age and option elected is
$6.52 per $1,000; and that the Annuity Unit Value on the day prior to the second
variable annuity payment date is $13.610170. The first variable annuity payment
would be $509.99 (5319.7531 X $14.703693 X 6.52 divided by 1,000). The number of
Annuity Units credited would be 37.5569 ($509.99 divided by $13.579136) and the
second variable annuity payment would be $511.16 (37.5569 X $13.610170).
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 (withdrawal) value. Any charges for
optional death benefit risks are not taken into account in the example. 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 "Market Value Adjustment Tables" and "Minimum Value
Calculation" contain the explicit calculation of the index factors and the 3%
minimum guarantee respectively. The "Annuity Value Calculation" and "Minimum
Value" calculations assume the imposition of the annual $35 Annuity Account Fee
charge, but that fee is waived if the Annuity Account Value at the end of a
Contract Year is $100,000 or more.
WITHDRAWAL CHARGE TABLES
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 contract year 1
7.75% end of contract year 2
7.00% end of contract year 3
6.50% end of contract year 4
Percentage adjustment to B......... 0.5%
</TABLE>
SURRENDER VALUE CALCULATION
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5) (6) (7)
ANNUITY INDEX RATE ADJUSTED MINIMUM GREATER OF SURRENDER SURRENDER
CONTRACT YEAR VALUE FACTOR ANNUITY 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>
5
<PAGE>
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>
SURRENDER CHARGE CALCULATION
<TABLE>
<CAPTION>
(2)
(1) SURRENDER CHARGE FACTOR (3)
SURRENDER 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
INTEREST RATE FACTOR CALCULATION
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
INDEX INDEX ADJUSTED N (1+A)N
CONTRACT YEAR RATE A RATE B INDEX RATE B -- (1+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>
MINIMUM VALUE CALCULATION
<TABLE>
<CAPTION>
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. Generally, the Insurance Department of any
other state applies the laws of the state of domicile in determining permissible
investments.
A Contract is governed by the laws 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.
6
<PAGE>
ADMINISTRATION
The Company performs certain administrative functions relating to the
Contracts, the individual Annuity Accounts, 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.
PERIODIC REPORTS
At least once during each Calendar Year, the Company will furnish the Owner
with 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 Accumulation
Amount, the applicable Accumulation Unit Value 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 each such reports or prospectuses as may be required by the
Investment Company Act of 1940 and the Securities Act of 1933. The Company will
also send each Owner such statements reflecting transactions in the Owner's
Annuity Account as may be required by applicable laws, rules and regulations.
Upon request to the Variable Products Service Center, the Company will
provide an Owner with information regarding fixed and variable accumulation
values.
DISTRIBUTION OF THE CONTRACTS
The principal underwriter for the Contracts, CIGNA Financial Advisors, Inc.
("CFA"), Hartford, Connecticut 06152, which is an affiliate of the Company as
well as of CIGNA Corporation, has not yet received any commissions with respect
to sales of the Contracts as of the date of this Statement of Additional
Information.
Sales charges on and exchange privileges under the Contracts are described
in the Prospectus. There are no variations in the prices at which the Contracts
are offered for certain types of purchasers.
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 each 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 December 1, 1994) in the
amount of $10,000,000.
HISTORICAL PERFORMANCE DATA
No historical performance data for each of the Sub-Accounts of the Separate
Account, other than the Money Market Sub-Account, is yet available, as the
Separate Account did not commence operations until April 10, 1995 and as of
April 26, 1995 not all of the Sub-Accounts had been funded.
7
<PAGE>
MONEY MARKET SUB-ACCOUNT YIELD
From time to time, the Money Market Sub-Account may advertise its "yield"
and "effective yield." Both yield figures will be based on historical earnings
and are not intended to indicate future performance. The "yield" of the Money
Market Sub-Account refers to the income generated by Annuity Account Values in
the Money Market Sub-Account over a seven-day period (which period will be
stated in the advertisement). This income is then "annualized." That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
Annuity Account Values in the Money Market Sub-Account. The "effective yield" is
calculated similarly but, when annualized, the income earned by Annuity Account
Values in the Money Market Sub-Account is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. The computation of the yield
calculation includes a deduction for the Mortality and Expense Risk Charge, the
Administrative Expense Charge, and the Annuity Account Fee.
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 or any charges for Optional Death Benefit(s)
selected.
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, 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 deferred sales charges that may be applicable to a particular
Contract. Deferred sales charges range from 7% to 1% of the amount withdrawn or
surrendered on total Premium Payments paid less prior partial withdrawals, based
on the Contract Year in which the withdrawal or surrender occurs.
8
<PAGE>
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 advise 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 Fund, 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 any charges for any
Optional Death Benefit selected by the Owner. Total return calculations will
reflect the effect of deferred sales charges that may be applicable to a
particular period. The total return will then be calculated according to the
following formula:
P(1+T)(5) = 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 one except that
the deferred sales charge percentage will be assumed to be 0%.
The Company may from time to time 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 deferred sales
charge percentage will be 0%.
CTR = (ERV/P) - 1
Where: CTR = The cumulative total return net of Sub-Account
recurring charges for the period.
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.
9
<PAGE>
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 the Prospectus and
this Statement has been provided by George N. Gingold, Esq., 197 King Philip
Drive, West Hartford, CT 06117. 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 Robert A.
Picarello, Chief Counsel, Individual Insurance, CIGNA Companies.
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, 1994 and 1993 and for each of the three years in the
period ended December 31, 1994 included in this Statement of Additional
Information 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 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. No financial statements of the Variable Account are
included, because the Variable Account did not commence operations until April
10, 1995.
10
<PAGE>
NORTHEAST INSURANCE SERVICES Telephone 203 240 2000
One Financial Plaza Facsimile 203 249 0457
Hartford, CT 06103
PRICE WATERHOUSE LLP [LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
February 13, 1995
The Board of Directors and Shareholder
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, 1994 and
1993, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, 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.
The Company implemented certain new accounting pronouncements as discussed in
Note 1 to the consolidated financial statements.
[SIG]
11
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and fees................................................. $ 4,960 $ 4,704 $ 4,541
Net investment income............................................. 2,805 2,742 2,649
Realized investment gains (losses)................................ 27 (65) (13)
Other revenues.................................................... 8 15 20
--------- --------- ---------
Total revenues................................................ 7,800 7,396 7,197
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses.......................... 5,574 5,215 5,168
Policy acquisition expenses....................................... 89 84 75
Other operating expenses.......................................... 1,363 1,351 1,368
--------- --------- ---------
Total benefits, losses and expenses........................... 7,026 6,650 6,611
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGES......................................................... 774 746 586
--------- --------- ---------
Income taxes (benefits):
Current......................................................... 220 433 131
Deferred........................................................ 45 (197) (61)
--------- --------- ---------
Total taxes................................................... 265 236 70
--------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES............. 509 510 516
Cumulative effect of accounting changes for postemployment and
postretirement benefits other than pensions, net of taxes....... -- -- (270)
Cumulative effect of accounting change for income taxes........... -- -- 105
--------- --------- ---------
NET INCOME........................................................ 509 510 351
Dividends declared................................................ (300) (190) (165)
Retained earnings, beginning of year.............................. 2,759 2,439 2,253
--------- --------- ---------
RETAINED EARNINGS, END OF YEAR.................................... $ 2,968 $ 2,759 $ 2,439
- ---------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
12
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
- -----------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value, $10,075; $11,158)... $ 10,061 $ 9,950
Available for sale, at fair value (amortized cost, $8,571; $8,187)... 8,324 9,145
Mortgage loans......................................................... 8,975 8,854
Equity securities, at fair value (cost, $109; $121).................... 119 120
Policy loans........................................................... 5,237 3,623
Real estate............................................................ 1,442 1,484
Other long-term investments............................................ 128 94
Short-term investments................................................. 143 96
--------- ---------
Total investments.................................................. 34,429 33,366
Cash and cash equivalents................................................ 80 --
Accrued investment income................................................ 578 504
Premiums and accounts receivable......................................... 911 1,021
Reinsurance recoverables................................................. 2,533 2,815
Deferred policy acquisition costs........................................ 700 623
Property and equipment, net.............................................. 346 364
Current income taxes..................................................... 119 --
Deferred income taxes, net............................................... 661 434
Goodwill................................................................. 518 532
Other assets............................................................. 135 203
Separate account assets.................................................. 14,498 13,620
- -----------------------------------------------------------------------------------------------
Total.............................................................. $ 55,508 $ 53,482
- -----------------------------------------------------------------------------------------------
--------------------
LIABILITIES
Contractholder deposit funds............................................. $ 26,696 $ 25,054
Future policy benefits................................................... 7,875 7,915
Unpaid claims and claim expenses......................................... 1,096 1,210
Unearned premiums........................................................ 84 86
--------- ---------
Total insurance and contractholder liabilities..................... 35,751 34,265
Accounts payable, accrued expenses and other liabilities................. 1,632 1,539
Current income taxes..................................................... -- 76
Separate account liabilities............................................. 14,427 13,618
- -----------------------------------------------------------------------------------------------
Total liabilities.................................................. 51,810 49,498
- -----------------------------------------------------------------------------------------------
--------------------
CONTINGENCIES -- NOTE 9
SHAREHOLDER'S EQUITY
Common stock (6 shares outstanding)...................................... 30 30
Additional paid-in capital............................................... 764 764
Net unrealized appreciation (depreciation) on investments................ (66) 428
Net translation of foreign currencies.................................... 2 3
Retained earnings........................................................ 2,968 2,759
- -----------------------------------------------------------------------------------------------
Total shareholder's equity......................................... 3,698 3,984
- -----------------------------------------------------------------------------------------------
Total.............................................................. $ 55,508 $ 53,482
- -----------------------------------------------------------------------------------------------
--------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
13
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(IN MILLIONS)
- -------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1994 1993 1992
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before cumulative effect of accounting changes........... $ 509 $ 510 $ 516
Adjustments to reconcile income before cumulative effect of
accounting changes to net cash provided by (used in) operating
activities:
Insurance liabilities......................................... (249) 251 (360)
Reinsurance recoverables...................................... 282 (392) 128
Premiums and accounts receivable.............................. (188) 85 199
Deferred income taxes, net.................................... 45 (197) (61)
Other assets.................................................. 68 54 (72)
Accounts payable, accrued expenses, other liabilities and
current income taxes......................................... (192) 5 43
Other, net.................................................... (24) (82) (68)
--------- --------- ---------
Net cash provided by operating activities................... 251 234 325
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities -- available for sale........................ 1,389 -- --
Fixed maturities -- held to maturity.......................... 12 599 595
Mortgage loans................................................ 496 1,004 362
Equity securities............................................. 41 41 14
Other (primarily short-term investments)...................... 1,247 3,840 2,340
Investment maturities and repayments:
Fixed maturities -- available for sale........................ 686 -- --
Fixed maturities -- held to maturity.......................... 1,764 3,167 2,972
Mortgage loans................................................ 194 202 266
Investments purchased:
Fixed maturities -- available for sale........................ (2,390) -- --
Fixed maturities -- held to maturity.......................... (1,788) (5,128) (4,834)
Mortgage loans................................................ (882) (823) (795)
Equity securities............................................. (12) (112) (35)
Policy loans.................................................. (1,614) (1,561) (434)
Other (primarily short-term investments)...................... (1,093) (3,587) (2,176)
Other, net...................................................... (129) (48) (68)
--------- --------- ---------
Net cash used in investing activities....................... (2,079) (2,406) (1,793)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit
funds......................................................... 6,388 7,537 5,294
Withdrawals from contractholder deposit funds................... (4,216) (5,166) (4,073)
Dividends paid to Parent........................................ (300) (190) (165)
Other, net...................................................... 36 (30) (47)
--------- --------- ---------
Net cash provided by financing activities................. 1,908 2,151 1,009
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents............ 80 (21) (459)
Cash and cash equivalents, beginning of year.................... -- 21 480
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year.......................... $ 80 $ -- $ 21
- -------------------------------------------------------------------------------------------------
-------------------------------
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds............................. $ 411 $ 352 $ 301
Interest paid................................................. $ 5 $ 5 $ 3
- -------------------------------------------------------------------------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
14
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Connecticut General Life Insurance Company (the Company) and its
wholly-owned subsidiaries, CIGNA Life Insurance Company, ICO, Inc., and First
Equicor Life Insurance Company (FELIC). During 1994, the Company sold FELIC, the
effects of which were not material to the financial statements. The Company is a
wholly-owned subsidiary of Connecticut General Corporation (the Parent), which
is an indirect wholly-owned subsidiary of CIGNA Corporation (CIGNA). These
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain reclassifications have been
made to prior years' amounts to conform with the 1994 presentation.
B) RECENT ACCOUNTING PRONOUNCEMENTS: In 1993, the Company implemented
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that
debt and equity securities be classified into different categories and carried
at fair value if they are not classified as held to maturity. SFAS No. 115 does
not permit retroactive application of its provisions. The effect of implementing
SFAS No. 115 as of December 31, 1993 resulted in an increase in investment
assets of $958 million and an increase in shareholder's equity of $443 million
resulting from the classification of certain fixed maturities previously carried
at amortized cost to available for sale. The increase in shareholder's equity is
net of policyholder share of $277 million and deferred income taxes of $238
million. See Note 2 for additional information.
In 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which provides guidance on
the accounting and disclosure for impaired loans, and must be implemented by the
first quarter of 1995, with the cumulative effect of implementation included in
net income. In October 1994, the FASB issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures," which
eliminates the income recognition requirements of SFAS No. 114. The Company will
adopt SFAS Nos. 114 and 118 in 1995. The effect on the Company's results of
operations and financial condition upon adoption is not expected to be material.
In 1992, the Company implemented SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions;" SFAS No. 109, "Accounting for
Income Taxes;" and SFAS No. 112, "Employers' Accounting for Postemployment
Benefits." These accounting changes were implemented as of January 1, 1992
through cumulative effect adjustments. Prior year financial statements were not
restated.
The cumulative effect of implementing SFAS Nos. 106, 109 and 112 as of January
1, 1992 resulted in non-cash after-tax charges (benefit) to net income of $263
million, ($105) million and $7 million, respectively. In addition, the
implementation of SFAS No. 106 increased 1992 other operating expenses by $23
million ($15 million after-tax). The effect on income tax expense for 1992 as a
result of implementation of SFAS No. 109 was immaterial. There was no
incremental effect on 1992 net income from adopting SFAS No. 112. For additional
information on SFAS No. 109, see Note 5; for additional information on SFAS Nos.
106 and 112, see Note 6.
In 1992, the Company adopted the American Institute of Certified Public
Accountants' Statement of Position (SOP) 92-3, "Accounting for Foreclosed
Assets," which resulted in a realized investment loss of $5 million ($3 million
after-tax).
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,
financial guarantees, and interest rate swap and futures contracts. These
instruments have
15
<PAGE>
credit risk and also may be subject to risk of loss due to interest rate and
market fluctuations. However, risk of loss due to interest rate fluctuations is
reduced through the use of certain derivative instruments. The Company evaluates
and monitors each financial instrument individually and, where appropriate,
obtains collateral or other forms of security to minimize risk of loss.
D) INVESTMENTS: Investments in fixed maturities include bonds, asset-backed
securities, including collateralized mortgage obligations (CMOs); and redeemable
preferred stocks. Fixed maturities classified as held to maturity are carried at
amortized cost, net of impairments, and those classified as available for sale
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. Generally, mortgage loans are considered impaired and a
valuation reserve is established when a decline in the fair value of the
collateral below the carrying value is other than temporary.
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, and thereafter
interest income 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 valuation reserves when a decline in value is other
than temporary. Depreciation is generally calculated using the straight-line
method based on the estimated useful lives of the assets. Real estate
investments held for sale are those which are acquired through the foreclosure
of mortgage loans. These assets are valued at their fair value at the time of
foreclosure. The fair value is established as the new cost basis and the asset
acquired is reclassified from mortgage loans to real estate held for sale.
Subsequent to foreclosure, these investments are carried at the lower of
depreciated cost or current fair value less estimated costs to sell. Adjustments
to the carrying value as a result of changes in fair value subsequent to
foreclosure are recorded as valuation reserves and reported in realized
investment gains and losses. The Company considers several methods in
determining fair value for real estate acquired through foreclosure, with
greater emphasis placed on the use of discounted cash flow analyses and, in some
cases, the use of third-party appraisals. Assets held for sale are depreciated
using the straight-line method based on the estimated useful lives of the
assets.
Equity securities, which include common and non-redeemable preferred stocks,
are carried at fair value. 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, after deducting amounts
attributable to experience-rated pension policyholders' contracts and
participating life policies ("policyholder share"). Generally, realized
investment gains and losses are based upon specific identification of the
investment assets.
Unrealized investment gains and losses, after deducting policyholder share and
net of deferred income taxes, if applicable, for investments carried at fair
value are included in Shareholder's Equity.
See Note 2(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
deemed uncollectible.
16
<PAGE>
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. Group life and a portion of group health
insurance business acquisition costs are deferred and amortized over the terms
of the insurance policies. Acquisition costs related to universal life products
and contractholder deposit funds are deferred and amortized in proportion to
total estimated gross profits over the expected life of the contracts.
Acquisition costs related to annuity and other life insurance businesses are
deferred and amortized, generally in proportion to the ratio of annual revenue
to the estimated total revenues over the contract periods. Deferred acquisition
costs are reviewed to determine if they are recoverable from future income,
including investment income. If such costs are determined to be unrecoverable,
they are expensed at the time of determination.
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 $333 million
and $261 million at December 31, 1994 and 1993, 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. These costs are amortized on
systematic bases over periods, not exceeding 40 years, that correspond with the
benefits expected to be derived from the acquisition. The Company evaluates the
carrying amount of goodwill by analyzing historical and expected future income
and undiscounted cash flows of the related businesses. Write-downs of goodwill
are recognized when it is determined that the amount has been impaired. Also,
amortization periods are revised if it is determined that the remaining period
of benefit of the goodwill has changed. Accumulated amortization was $70 million
and $56 million at December 31, 1994 and 1993, respectively.
K) SEPARATE ACCOUNTS: Separate account assets and liabilities are principally
carried at market value, with less than 4% carried at amortized cost, 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
net income.
L) CONTRACTHOLDER DEPOSIT FUNDS: Contractholder Deposit Funds are liabilities
for investment-related and universal life products which were $18.6 billion and
$8.1 billion as of December 31, 1994, respectively, compared with $19.1 billion
and $6.0 billion as of December 31, 1993, respectively. These liabilities
consist of deposits received from customers and investment earnings on their
fund balances, less administrative charges and, for universal life fund
balances, mortality and surrender 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 and annuity 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 after 10 to 30
years. Mortality, morbidity, and withdrawal assumptions for all policies 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 insurance claims for reported
losses and estimates of losses incurred but not reported. The Company's prior
year claims and claim adjustment expenses were not material.
17
<PAGE>
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 consists principally of
postretirement and postemployment benefits and various insurance-related
liabilities, including amounts related to reinsurance contracts. Also included
in Other Liabilities are liabilities for 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. Revenues
and expenses are translated at the average rates of exchange prevailing during
the year. The translation gain or loss on such functional currencies is
generally reflected in Shareholder's Equity, net of applicable taxes.
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. Premiums for individual life and health 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 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 values
during the period. Benefit expenses for universal life products consist of
benefit claims in excess of fund values and net investment income credited to
fund values. Revenues for investment-related products consist of net investment
income and contract charges assessed against the fund values during the period.
Benefit expenses for investment-related products primarily consist of net
investment income credited to the fund values after deduction for investment and
risk fees.
S) PARTICIPATING BUSINESS: Certain life insurance policies contain dividend
payment provisions that enable the policyholder to participate in the earnings
of the Company's business. The participating insurance in force accounted for
5.2% of total insurance in force at December 31, 1994, compared with 3.6% at
December 31, 1993 and .4% at December 31, 1992.
T) INCOME TAXES: The Company and its subsidiaries are included in the
consolidated United States federal income tax return filed by CIGNA. In
accordance with United States federal income tax consolidated return
regulations, all corporations included in a consolidated tax return are jointly
and severally liable for all tax liabilities. In accordance with a tax sharing
agreement, the provision for federal income tax is computed as if the Company
was filing a separate federal income tax return, except that benefits arising
from tax credits and net operating losses are allocated to those subsidiaries
producing such attributes only to the extent they are utilized in the
consolidated federal income tax provision.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes. These
differences result primarily from loss reserves, policy acquisition expenses,
investments, reserves for postretirement benefits and unrealized appreciation or
depreciation on investments.
NOTE 2 -- INVESTMENTS
A) FIXED MATURITIES: Fixed maturities are net of cumulative write-downs of
$78 million and $76 million, including policyholder share, as of December 31,
1994 and 1993, respectively.
18
<PAGE>
The amortized cost and fair value by contractual maturity periods for fixed
maturities, including policyholder share, as of December 31, 1994 were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Held to Maturity (Carried at Amortized Cost)
Due in one year or less............................................... $ 201 $ 204
Due after one year through five years................................. 2,275 2,272
Due after five years through ten years................................ 3,424 3,383
Due after ten years................................................... 2,298 2,403
Asset-backed securities............................................... 1,863 1,813
- ---------------------------------------------------------------------------------------------
Total................................................................. $ 10,061 $ 10,075
- ---------------------------------------------------------------------------------------------
---------------------
Available for Sale (Carried at Fair Value)
Due in one year or less............................................... $ 85 $ 93
Due after one year through five years................................. 1,474 1,447
Due after five years through ten years................................ 1,769 1,681
Due after ten years................................................... 2,290 2,250
Asset-backed securities............................................... 2,953 2,853
- ---------------------------------------------------------------------------------------------
Total................................................................. $ 8,571 $ 8,324
- ---------------------------------------------------------------------------------------------
---------------------
</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.
As of December 31, 1994, gross unrealized appreciation (depreciation) for
fixed maturities, including policyholder share, by type of issuer was as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity (Carried at Amortized
Cost)
State and local government bonds.......... $ 61 $ 4 $ (1) $ 64
Foreign government bonds.................. 49 1 (1) 49
Corporate securities...................... 8,088 293 (232) 8,149
Asset-backed securities................... 1,863 46 (96) 1,813
- ---------------------------------------------------------------------------------------------
Total..................................... $ 10,061 $ 344 $ (330) $ 10,075
- ---------------------------------------------------------------------------------------------
-------------------------------------------------
Available for Sale (Carried at Fair Value)
Federal government bonds.................. $ 393 $ 35 $ (13) $ 415
State and local government bonds.......... 48 -- (4) 44
Foreign government bonds.................. 135 1 (6) 130
Corporate securities...................... 5,042 84 (244) 4,882
Asset-backed securities................... 2,953 98 (198) 2,853
- ---------------------------------------------------------------------------------------------
Total..................................... $ 8,571 $ 218 $ (465) $ 8,324
- ---------------------------------------------------------------------------------------------
-------------------------------------------------
</TABLE>
19
<PAGE>
As of December 31, 1993, gross unrealized appreciation (depreciation) for
fixed maturities, including policyholder share, by type of issuer was as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity (Carried at Amortized
Cost)
State and local government bonds.......... $ 56 $ 12 $ -- $ 68
Foreign government bonds.................. 25 2 -- 27
Corporate securities...................... 8,495 1,106 (13) 9,588
Asset-backed securities................... 1,374 107 (6) 1,475
- --------------------------------------------------------------------------------------------------
Total..................................... $ 9,950 $ 1,227 $ (19) $ 11,158
- --------------------------------------------------------------------------------------------------
------------------------------------------------------
Available for Sale (Carried at Fair Value)
Federal government bonds.................. $ 77 $ 10 $ -- $ 87
State and local government bonds.......... 43 4 -- 47
Foreign government bonds.................. 209 12 (2) 219
Corporate securities...................... 5,244 670 (28) 5,886
Asset-backed securities................... 2,614 311 (19) 2,906
- --------------------------------------------------------------------------------------------------
Total..................................... $ 8,187 $ 1,007 $ (49) $ 9,145
- --------------------------------------------------------------------------------------------------
------------------------------------------------------
</TABLE>
At December 31, 1994, contractual fixed maturity investment commitments
approximated $226 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 the full amount will be
disbursed in 1995, with the majority occurring within the first three months.
B) SHORT-TERM INVESTMENTS: As of December 31, 1994 and 1993, short-term
investments include debt securities, principally corporate securities of $139
million and $36 million, respectively; federal government securities of $3
million and $53 million, respectively; and foreign government securities of $1
million and $7 million as of December 31, 1994 and 1993, respectively.
C) 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 80% 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>
- -----------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage Loans........................................................... $ 8,975 $ 8,854
--------- ---------
Real estate:
Held for sale.......................................................... 760 807
Held for production of income.......................................... 682 677
--------- ---------
Total real estate........................................................ 1,442 1,484
- -----------------------------------------------------------------------------------------------
Total.................................................................... $ 10,417 $ 10,338
- -----------------------------------------------------------------------------------------------
--------------------
</TABLE>
Valuation reserves for mortgage loans, including policyholder share, were $115
million and $160 million as of December 31, 1994 and 1993, respectively.
Valuation reserves and cumulative write-downs related to real estate, including
policyholder share, were $294 million and $321 million as of December 31, 1994
and 1993, respectively.
20
<PAGE>
During 1994, 1993 and 1992, non-cash investing activities included real estate
acquired through foreclosure of mortgage loans, which totaled $127 million, $458
million and $411 million, respectively.
At December 31, mortgage loans and real estate investments comprised the
following property types and geographic regions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Property type:
Office buildings....................................................... $ 4,092 $ 4,252
Retail facilities...................................................... 3,867 3,650
Hotels................................................................. 819 876
Apartment buildings.................................................... 997 905
Other.................................................................. 642 655
- -----------------------------------------------------------------------------------------------
Total.................................................................... $ 10,417 $ 10,338
- -----------------------------------------------------------------------------------------------
--------------------
Geographic region:
Central................................................................ $ 3,664 $ 3,513
Pacific................................................................ 2,558 2,675
Middle Atlantic........................................................ 1,652 1,654
South Atlantic......................................................... 1,585 1,557
New England............................................................ 958 939
- -----------------------------------------------------------------------------------------------
Total.................................................................... $ 10,417 $ 10,338
- -----------------------------------------------------------------------------------------------
--------------------
</TABLE>
At December 31, 1994, scheduled mortgage loan maturities were as follows: 1995
- -- $752 million; 1996 -- $1.0 billion; 1997 -- $1.1 billion; 1998 -- $743
million; 1999 -- $1.2 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, and loans may be
refinanced. During 1994 and 1993, the Company refinanced approximately $600
million and $800 million, respectively, of its mortgage loans relating to
borrowers that were unable to obtain alternative financing.
At December 31, 1994, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $286 million, all
of which were at a fixed market rate of interest. These commitments generally
expire within one year, in most cases within three months, and are diversified
by property type and geographic region. Included in these commitments is
approximately $180 million of commitments to refinance mortgage loans, currently
in a separate account, relating to borrowers that are not expected to be able to
obtain alternative financing.
D) NET UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS: Unrealized
appreciation and depreciation for investments carried at fair value as of
December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized appreciation:
Fixed maturities.......................................................... $ 218 $ 1,007
Equity securities......................................................... 22 4
--------- ---------
240 1,011
--------- ---------
Unrealized depreciation:
Fixed maturities.......................................................... (465) (49)
Equity securities......................................................... (12) (5)
--------- ---------
(477) (54)
--------- ---------
Less: Policyholder net unrealized appreciation (depreciation)............... (141) 298
--------- ---------
Shareholder net unrealized appreciation (depreciation)...................... (96) 659
Less: Deferred income tax expenses (benefits)............................... (30) 231
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation).................................. $ (66) $ 428
- --------------------------------------------------------------------------------------------------
--------------------
</TABLE>
21
<PAGE>
Net unrealized appreciation (depreciation) on investments that are carried at
fair value is included as a separate component of Shareholders' Equity, net of
policyholder share and deferred income taxes. The increase (decrease) in net
unrealized appreciation/depreciation was ($494) million, $423 million and ($3)
million for the years ended December 31, 1994, 1993 and 1992, respectively,
including ($446) million and $443 million for fixed maturities that are carried
at fair value for the years ended December 31, 1994 and 1993.
The net unrealized appreciation on fixed maturities that are carried at
amortized cost is not recorded in the financial statements. The increase
(decrease) in such net unrealized appreciation was ($1,194) million, ($129)
million, and $115 million in 1994, 1993 and 1992, respectively.
E) NON-INCOME PRODUCING INVESTMENTS: At December 31, the carrying values of
investments that were non-income producing during the preceding 12 months,
including policyholder share, were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities.............................................................. $ 71 $ 83
Mortgage loans................................................................ 81 84
Real estate................................................................... 280 270
Other long-term investments................................................... 32 --
- ----------------------------------------------------------------------------------------------------
Total......................................................................... $ 464 $ 437
- ----------------------------------------------------------------------------------------------------
--------------------
</TABLE>
F) DERIVATIVE FINANCIAL INSTRUMENTS: The Company's investment strategy is to
manage investment assets to reflect the underlying characteristics of related
insurance and contractholder liabilities such as liquidity, currency, yield and
duration, which vary among the Company's principal product lines. In connection
with this investment strategy, the Company uses derivative instruments through
hedging applications to manage market risk.
Generally, the Company uses interest rate swap contracts to create, when
combined with cash flows from variable rate bonds, fixed rate cash flows that
meet its portfolio investment strategy. Currency swaps are used to match the
currency of individual investments to that of the associated liabilities.
Interest rate futures are used to temporarily hedge against changes in market
values of bonds and mortgage loans to be purchased or sold, and stock index
futures may be used to hedge the temporary cash position of equity accounts.
Interest rate futures also are used to hedge interest rate risk associated with
withdrawals by contractholders over a scheduled time period.
Cash requirements arise as a result of the Company's derivative activities.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and variable rate
interest amounts calculated by reference to an agreed-upon notional principal
amount. Under futures contracts, initial margin requirements are settled with
cash or other instruments and changes in the contract values are settled in cash
daily with the exchange on which the instrument is traded. Under currency swaps,
the parties generally exchange a principal amount in the two relevant
currencies, agreeing to re-exchange principal amounts at a specified future date
using an agreed-upon exchange rate, and agreeing to periodically exchange
amounts equal to interest payments using the agreed-upon exchange rate.
Because the Company's use of derivatives is limited to hedging applications,
changes in the market value of the derivatives are substantially offset by
changes in the market value of the hedged assets or underlying liabilities,
minimizing market risk. The Company routinely monitors, by individual
counterparty, exposure to credit risk associated with swap contracts. 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, by monitoring legal developments
and, consistent with its credit exposure policies, by limiting risks associated
with counterparty failure by diversifying the swaps portfolio among approved
dealers of high credit quality.
22
<PAGE>
Changes in the market value of futures contracts that qualify as hedges 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 recognized in full as
realized investment gains and losses in the event that the investment or futures
contract is sold prior to maturity. Futures contracts totaled $142 million and
$129 million as of December 31, 1994 and 1993, respectively, and were accounted
for as hedges. At December 31, 1994, gains and losses on futures contracts
deferred in anticipation of investment purchases were $1 million and $3 million,
respectively.
Net interest received or paid on an interest rate swap contract is recognized
currently as an adjustment to net investment income. Underlying notional
principal amounts associated with interest rate swap contracts outstanding were
$596 million and $542 million at December 31, 1994 and 1993, respectively.
The interest payment cash flows received in U.S. dollars from currency swaps
related to foreign currency denominated investment securities (primarily
Canadian dollars, pound sterling, Swiss francs, New Zealand dollars and Japanese
yen) are recognized as net investment income when received. Gains and losses
from changes in exchange rates related to foreign currency swaps are recognized
in realized investment gains and losses, offset by exchange rate gains and
losses on the related investments. Underlying principal amounts associated with
currency swap contracts outstanding were $325 million and $248 million at
December 31, 1994 and 1993, respectively.
As of December 31, 1994, the Company's variable rate investments consisted of
approximately $810 million of fixed maturities and the Company's fixed rate
investments consisted of $18 billion of fixed maturities and $9 billion of
mortgage loans. For the year ended December 31, 1994, the average yield on the
Company's investments in fixed maturities and mortgage loans was 8.7%. For the
year ended December 31, 1994, net investment income on bonds and mortgage loans
was increased by $7 million and $1 million, respectively, as a result of
recognizing amortization of deferred market value changes in futures contracts.
In addition, the increase in net investment income for bonds resulting from
interest rate swap contracts was $12 million, $19 million and $17 million for
the years ended December 31, 1994, 1993 and 1992, respectively.
G) OTHER: As of December 31, 1994 and 1993, the Company had no concentration
of investments in a single investee exceeding 10% of Shareholder's Equity.
NOTE 3 -- 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>
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities.................................................. $ 1,596 $ 1,547 $ 1,511
Mortgage loans.................................................... 776 892 931
Equity securities................................................. 20 16 9
Policy loans...................................................... 365 253 163
Real estate....................................................... 291 238 162
Other long-term investments....................................... 23 20 11
Short-term investments............................................ 8 18 34
--------- --------- ---------
3,079 2,984 2,821
Less investment expenses.......................................... 274 242 172
- ---------------------------------------------------------------------------------------------------
Net investment income............................................. $ 2,805 $ 2,742 $ 2,649
- ---------------------------------------------------------------------------------------------------
-------------------------------
</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,
23
<PAGE>
was approximately $1.5 billion for 1994 and $1.6 billion for 1993 and 1992. Net
investment income for separate accounts, which is not reflected in the Company's
revenues, was $693 million, $604 million and $656 million for December 31, 1994,
1993 and 1992, respectively.
As of December 31, 1994, fixed maturities and mortgage loans on non-accrual
status, including policyholder share, were $272 million and $743 million,
including restructured investments of $148 million and $543 million,
respectively. Amounts on non-accrual status as of December 31, 1993 were $332
million of fixed maturities and $827 million of mortgage loans, including
restructurings of $245 million and $689 million, respectively. If interest on
these investments had been recognized in accordance with their original terms,
net income would have been increased by $14 million, $17 million and $20 million
in 1994, 1993 and 1992, respectively.
B) REALIZED INVESTMENT GAINS AND LOSSES: Realized gains and losses on
investments, excluding policyholder share, for the year ended December 31 were
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities..................................................... $ 4 $ 28 $ 4
Mortgage loans....................................................... -- (5) (16)
Equity securities.................................................... 2 (5) 4
Real estate.......................................................... 15 (66) (13)
Other................................................................ 6 (17) 8
--- --- ---
27 (65) (13)
Income tax expenses (benefits)......................................... 12 (16) (31)
- -------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses)................................. $ 15 $ (49) $ 18
- -------------------------------------------------------------------------------------------------------------
---------------------
</TABLE>
Impairments in the value of investments, net of recoveries, that are included
in realized investment gains and losses were $33 million, $55 million and $38
million in 1994, 1993 and 1992, respectively.
Realized investment gains (losses) for separate accounts, which are not
reflected in the Company's revenues, were ($51) million, $612 million and $243
million for the years ended December 31, 1994, 1993 and 1992, respectively.
Realized investment (losses) attributable to policyholder contracts, which also
are not reflected in the Company's revenues, were ($5) million and ($103)
million for the years ended December 31, 1993 and 1992, respectively. Net
realized investment gains (losses) attributable to policyholder contracts were
zero for the year ended December 31, 1994.
During 1994, proceeds from sales of available-for-sale fixed maturities and
equities, including policyholder share, were $1.4 billion. Such sales resulted
in gross realized gains and gross realized losses of $73 million and $70
million, respectively.
During 1994, the Company also sold $14 million of held to maturity fixed
maturities, including policyholder share, resulting in gross proceeds of $12
million and a pre-tax realized loss of $2 million. In addition, $82 million of
fixed maturities classified as held to maturity, including policyholder share,
were transferred to the available-for-sale category at fair value, which was not
significantly different from the carrying value. The sales of fixed maturities
classified as held to maturity and the transfer of such securities to the
available-for-sale category were the result of significant credit deterioration
of the issuers of the affected investments.
Prior to adoption of SFAS No. 115, proceeds from voluntary sales of
investments in fixed maturities, including policyholder share, were $599 million
and $595 million in 1993 and 1992, respectively. Such sales resulted in gross
realized gains and gross realized (losses), including policyholder share, of $36
million and ($3) million in 1993, compared with $36 million and ($14) million in
1992. These amounts exclude the effects of sales of fixed maturities that, prior
to the implementation of SFAS No. 115, were classified as short-term
investments.
24
<PAGE>
NOTE 4 -- SHAREHOLDER'S EQUITY AND DIVIDEND RESTRICTIONS
The Connecticut Insurance Department (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
differ in certain respects from generally accepted accounting principles. As of
December 31, 1994, there were no material permitted accounting practices
utilized by the Company.
Capital stock of the Company at December 31, 1994 and 1993 consisted of
5,978,322 shares of common stock authorized, issued and outstanding (par value
$5.00).
Statutory surplus was $2.0 billion at both December 31, 1994 and 1993. The
Connecticut Insurance Holding Company Act limits the maximum amount of annual
dividends or other distributions available to shareholders of Connecticut
insurance companies without prior approval of the Insurance Commissioner. Under
current law, the maximum dividend distribution which may be made by the Company
during 1995 without prior approval is $429 million.
NOTE 5 -- INCOME TAXES
In accordance with SFAS No. 109, the Company adopted the liability method of
accounting for income taxes as discussed in Note 1.
As of December 31, 1994 and 1993, the net deferred tax asset was $661 million
and $434 million, respectively.
Management believes, based on the Company's earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize the net deferred tax asset. 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, 1994
would result in a tax liability of $158 million (at a 35% rate), only if
distributed to the shareholders 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 the financial statements in
anticipation of the results of these audits. CIGNA resolved all issues relative
to the Company arising out of audits for 1982 through 1990 which resulted in an
increase to net income of $2 million, $3 million and $121 million for 1994, 1993
and 1992, respectively.
In management's opinion, adequate tax liabilities have been established for
all years.
25
<PAGE>
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>
- ----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Insurance and contractholder liabilities.................................... $ 337 $ 410
Employee and retiree benefit plans.......................................... 175 166
Investments, net............................................................ 220 152
Unrealized depreciation on investments...................................... 30 --
Other....................................................................... 71 123
--------- ---------
Total deferred tax assets................................................... 833 851
--------- ---------
Deferred tax liabilities:
Policy acquisition expenses................................................. 60 68
Depreciation................................................................ 102 105
Unrealized appreciation on investments...................................... -- 235
Other....................................................................... 10 9
--------- ---------
Total deferred tax liabilities.............................................. 172 417
- ----------------------------------------------------------------------------------------------------
Deferred income taxes, net.................................................. $ 661 $ 434
- ----------------------------------------------------------------------------------------------------
--------------------
</TABLE>
As a result of the Omnibus Budget Reconciliation Act of 1993 (OBRA), the
federal corporate income tax rate increased by one percent to 35% retroactive to
January 1, 1993. Deferred income tax benefits for 1993 included $13 million
related to an increase in the Company's net deferred tax asset as of January 1,
1993, due to the effect of the tax rate increase.
Total income tax expense was less than the amount computed using the nominal
federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at nominal rate (35% for 1994 and 1993, 34% for 1992)..... $ 271 $ 261 $ 199
Tax-exempt interest income............................................ (7) (6) (5)
Dividends received deduction.......................................... (3) (4) (5)
Amortization of goodwill.............................................. 4 5 5
Resolved federal tax audit issues..................................... (2) (3) (121)
Increase in deferred tax asset for tax rate change.................... -- (13) --
Other, net............................................................ 2 (4) (3)
- -------------------------------------------------------------------------------------------------------
Total income tax expense.............................................. $ 265 $ 236 $ 70
- -------------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
Temporary and other differences which resulted in the deferred tax expense
(benefit) for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Insurance and contractholder liabilities............................. $ 93 $ (80) $ (31)
Policy acquisition expenses.......................................... (8) (39) (11)
Investments, net..................................................... (19) (36) (3)
Employee and retiree benefit plans................................... (9) (16) (3)
Realized investment gains/losses..................................... (20) (24) (18)
Other................................................................ 8 (2) 5
- ------------------------------------------------------------------------------------------------------
Deferred taxes (benefits)............................................ $ 45 $ (197) $ (61)
- ------------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
26
<PAGE>
NOTE 6 -- 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 single integrated
plan (the Plan) sponsored by CIGNA covering most domestic employees 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. Benefits are based on employees' years of service
and compensation during the highest three or, if service commenced after
December 31, 1988, five consecutive years of employment, offset by a portion of
the Social Security benefit for which they are eligible. CIGNA funds at least
the minimum amount required by the Employee Retirement Income Security Act of
1974. Allocated pension cost for the Company was $31 million, $27 million and
$24 million in 1994, 1993 and 1992, respectively.
The Plan, and several separate pension plans for various subsidiaries and
agents, had deposits with the Company totalling approximately $1.7 billion and
$1.6 billion at December 31, 1994 and 1993, 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. As of January 1, 1992, the
health care benefit plans required nominal contributions by retirees. In August
1992, CIGNA amended its plans effective January 1, 1993, whereby CIGNA's
contributions for health care benefits will depend upon a retiree's date of
retirement, age and years of service. In addition, the plan amendments increased
the level of other cost-sharing features, such as deductibles and coinsurance.
Under the terms of the benefit plans, benefit provisions and cost-sharing
features can continue to be adjusted. In general, retiree health care benefits
are not funded and are paid as covered expenses are incurred. Retiree life
insurance benefits are paid from plan assets or as covered expenses are
incurred.
Effective January 1, 1992, the Company adopted SFAS No. 106 for all of its
postretirement benefit plans (See Note 1). Under SFAS No. 106, an employer's
postretirement benefit liability is primarily measured by determining the
present value of the projected future costs of health benefits based on an
estimate of health care cost trend rates. Expense for postretirement benefits
other than pensions allocated to the Company totalled $28 million for 1994, $15
million for 1993 and $23 million for 1992. The other postretirement benefit
liability included in Accounts Payable, Accrued Expenses and Other Liabilities
as of December 31, 1994 and 1993 was $422 million and $415 million, including
net intercompany payables of $29 million and $32 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. Those plans are unfunded and
noncontributory, except for the life insurance and health care plans.
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 1 for additional information regarding implementation of
SFAS No. 112.
D) CAPITAL ACCUMULATION PLANS: CIGNA sponsors various capital accumulation
plans in which employee contributions on a before-tax basis (401(k)) are
supplemented by CIGNA matching contributions. Contributions are invested, at the
election of the employee, in one or more of the following
27
<PAGE>
investments: CIGNA common stock fund, several non-CIGNA stock and bond
portfolios and a fixed-income fund. The Company's expense for such plans totaled
$14 million, $13 million and $12 million for December 31, 1994, 1993 and 1992,
respectively.
NOTE 7 -- LEASES AND RENTALS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $62 million, $66 million and $65 million in 1994, 1993 and 1992,
respectively.
As of December 31, 1994, future net minimum rental payments under
non-cancelable operating leases were $151 million, payable as follows: 1995 -
$48 million; 1996 -$43 million; 1997 - $27 million; 1998 - $14 million; 1999 -
$10 million; and $9 million thereafter.
NOTE 8 -- 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 or disputes,
could result in losses. As of December 31, 1994 and 1993 there were no
allowances for uncollectible amounts. While future charges for unrecoverable
reinsurance may materially 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 effects of reinsurance on net earned premiums and fees for the year ended
December 31 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-DURATION CONTRACTS
Premiums and Fees:
Direct.......................................................... $ 3,419 $ 2,666 $ 2,461
Assumed......................................................... 716 1,248 1,320
Ceded........................................................... (291) (329) (197)
- ---------------------------------------------------------------------------------------------------
Net earned premiums and fees.................................... $ 3,844 $ 3,585 $ 3,584
- ---------------------------------------------------------------------------------------------------
-------------------------------
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
LONG-DURATION CONTRACTS
Premiums and Fees:
Direct.......................................................... $ 1,068 $ 1,023 $ 827
Assumed......................................................... 126 166 204
Ceded........................................................... (78) (70) (74)
- ---------------------------------------------------------------------------------------------------
Net earned premiums and fees.................................... $ 1,116 $ 1,119 $ 957
- ---------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
The effects of reinsurance on written premiums and fees for short-duration
contracts were not materially different from the amounts shown above. Benefits,
Losses and Settlement Expenses for 1994, 1993 and 1992 were net of reinsurance
recoveries of $149 million, $119 million and $124 million, respectively.
28
<PAGE>
NOTE 9 -- 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. Risk is further reduced through reinsurance and, in certain
programs, use of letters of credit and other types of security.
The industrial revenue bonds guaranteed directly by the Company have remaining
maturities of up to 21 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, 1994 and 1993 was $296
million and $323 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
reserves for financial guarantees are established when a default has occurred or
when the Company believes that a loss has been incurred. During 1994 and 1992,
losses for industrial revenue bonds were $1 million, and $4 million,
respectively. There were no such losses in 1993.
Prior to 1993, the Company had an arrangement with CIGNA Property and Casualty
Insurance Company (CIGNA P&C), an affiliate, whereby the Company guaranteed the
performance of certain investments purchased to support a group accident and
health reinsurance agreement between the companies. (See Note 11 for additional
information.) In accordance with 1993 amendments to the reinsurance treaties,
the Company and CIGNA P&C mutually agreed to terminate this arrangement. The
principal amount of such investments guaranteed by the Company was $150 million
as of December 31, 1992. A loss of $2 million related to this guarantee was
reported by the Company in 1992.
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, 1994 and 1993, the amount of minimum benefit
guarantees for separate account contracts was $4.8 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. As of December 31, 1994 and 1993, reserves of $6 million were
recorded. 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
which could adversely affect them. Some of the changes include initiatives to:
restrict insurance pricing and the application of underwriting standards; reform
health care; restrict investment practices; and expand regulation.
Proposals on national health care reform were under consideration in 1994
which could have significantly changed the way health care is financed and
delivered in the United States. Congress recessed in 1994 without enacting
health care reform. New legislation could be introduced in Congress in 1995;
however, comprehensive national reform is not likely to be proposed in 1995.
Instead, the Company expects federal and state proposals seeking modest
insurance reform and limitations on the formation and operation of efficient
health care networks. Due to uncertainties associated with the timing and
content of any health care legislation, the effect on the Company's future
results of operations, liquidity or financial condition cannot be reasonably
estimated at this time.
29
<PAGE>
The National Association of Insurance Commissioners (NAIC) has developed model
solvency-related guidelines ("risk-based capital" rules) to strengthen solvency
regulation of insurance companies. Depending on the ratio of the insurer's
surplus to its risk-based capital, the insurer could be subject to various
regulatory actions ranging from increased scrutiny to conservatorship. As of
December 31, 1994, the Company was adequately capitalized under the risk-based
capital rules. Also, the NAIC is addressing a proposal that would limit the
types and amounts of investments held. The Company does not expect such
guidelines to have a material adverse effect on its future results of
operations, liquidity or financial condition.
Unfavorable economic conditions have contributed to an increase in the number
of insurance companies that are impaired or insolvent. This is expected to
result in an increase in mandatory assessments by state guaranty funds of, or
voluntary payments by, solvent insurance companies to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments,
which are subject to statutory limits, can be partially recovered through a
reduction in future premium taxes in some states. Assessments against the
Company were $12 million, $10 million and $7 million for 1994, 1993 and 1992,
respectively, 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,
including litigation associated with syndicated investment products. 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 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
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 values, unless
otherwise indicated in the table below. The fair values used 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.
The following table presents carrying amounts and estimated fair values as of
December 31 for the Company's financial instruments that are not carried in the
financial statements at amounts approximating fair value.
<TABLE>
<CAPTION>
1994 1993
- ----------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(IN MILLIONS) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities-held to maturity................... $ 10,061 $ 10,075 $ 9,950 $ 11,158
Mortgage loans...................................... $ 8,975 $ 8,610 $ 8,854 $ 9,053
Contractholder deposit funds --
non-insurance products............................. $ 18,561 $ 18,512 $ 19,042 $ 20,249
- ----------------------------------------------------------------------------------------------------
</TABLE>
For additional information on fair values of fixed maturities, see Note 2(A).
Fair values of off-balance-sheet financial instruments as of December 31, 1994
and 1993 were not material.
30
<PAGE>
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Company has ceded group accident and health business under an
experience-rated stop loss agreement to CIGNA P&C. Reinsurance recoverables from
CIGNA P&C were $1.3 billion and $1.5 billion at December 31, 1994 and 1993,
respectively. During 1993 and 1992, the Company earned experience-rated refunds
from CIGNA P&C, net of premiums ceded, of $63 million, and $25 million,
respectively. Effective January 1, 1995 the reinsurance arrangement was
terminated. Effective with this termination, reserves of $312 million, primarily
related to long-term disability business, were recaptured, with CIGNA P&C
assuming responsibility for runout claims on the remaining reserves. Assets,
principally mortgages, with a fair market value equal to reserves were received
as part of the recapture.
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 $1.8 billion at
December 31, 1994 and 1993.
The Company cedes all long-term disability business to LINA. Reinsurance
recoverables from LINA at December 31, 1994 and 1993 were $921 million and $911
million, respectively.
The Company had lines of credit available from affiliates totaling $600
million at both December 31, 1994 and 1993. 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 $1 million for 1994 and $3
million for 1993 and 1992. As of December 31, 1994 and 1993, there were no
borrowings outstanding under such lines.
The Company extended lines of credit to affiliates totalling $600 million at
December 31, 1994 and 1993. All loans are payable upon demand with interest
rates equivalent to CIGNA's average monthly short-term borrowing rate. As of
December 31, 1994 and 1993, the Company had $1.5 million and $2.5 million,
respectively, in outstanding loans to affiliates under such lines.
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. As of December 31, 1994 and 1993, the Company had a balance in the
Account of $259 million and $99 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.
31
