<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
1933 Act Registration No. 33-83020
1940 Act Registration No. 811-8714
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 8 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 9 /X/
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
(EXACT NAME OF REGISTRANT)
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
(NAME OF DEPOSITOR)
900 Cottage Grove Road, Hartford, Connecticut 06152
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE
(860) 726-6000
COPY TO:
<TABLE>
<S> <C>
Mark A. Parsons, Esquire George N. Gingold, Esquire
Connecticut General Life Insurance
Company 197 King Philip Drive
900 Cottage Grove Road West Hartford, Connecticut 06117-1409
Hartford, Connecticut 06152
(NAME AND ADDRESS OF
AGENT FOR SERVICE)
</TABLE>
Approximate date of proposed public offering: Continuous
An indefinite amount of the securities offered by this Registration
Statement has been registered pursuant to Rule 24f-2 under the Investment
Company Act of 1940, and the initial registration fee of $500 was paid with the
Rule 24f-2 declaration. Form 24f-2 for Registrant's most recent fiscal year,
which ended December 31, 1997, was filed February 27, 1998.
It is proposed that this filing will become effective:
________ immediately upon filing pursuant to paragraph (b)
of Rule 485
___X___ on May 1, 1998 pursuant to paragraph (b) of Rule
485
_________ 60 days after filing pursuant to paragraph (a) of
Rule 485
_________ on , pursuant to paragraph (a) of
Rule 485
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<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 481
SHOWING LOCATION IN PART A (PROSPECTUS) AND
PART B (STATEMENT OF ADDITIONAL INFORMATION)
OF REGISTRATION STATEMENT OF INFORMATION REQUIRED BY FORM N-4
PART A
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PROSPECTUS CAPTION
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1. Cover Page...................................... Cover Page
2. Definitions..................................... Definitions
3. Synopsis........................................ Highlights; Fees and Expenses
4. Condensed Financial Information................. Condensed Financial Information
5. General.........................................
(a) Depositor................................... The Company and the Variable Account
(b) Registrant.................................. The Company and the Variable Account
(c) Portfolio Company The Funds
(d) Fund Prospectus The Funds
(e) Voting Rights............................... The Funds -- Voting Rights
6. Deductions and Expenses
(a) General..................................... Charges and Deductions
(b) Sales Load %................................ Charges and Deductions -- Contingent Deferred Sales
Charge (Sales Load)
(c) Special Purchase Plan....................... N/A
(d) Commissions................................. Distribution of the Contracts
(e) Fund Expenses............................... Fees and Expenses -- Fund Portfolio Annual Expenses
(f) Organizational Expenses..................... N/A
7. Contracts
(a) Persons with Rights......................... Other Contract Features (Ownership, Assignment,
Beneficiary, Change of Beneficiary, Annuitant,
Surrenders and Partial Withdrawals, Death of Owner,
Death of Annuitant); Annuity Provisions; Voting Rights
(b) (i) Allocation of Premium Payments.......... Premium Payments and Contract Value -- Allocation of
Premium Payments
(ii) Transfers.................................. Transfer of Contract Values Between Sub-Accounts
(iii) Exchanges................................. N/A
(c) Changes..................................... Modification; Substitution of Securities; Change in
Operation of Variable Account
(d) Inquiries................................... Cover Page; Highlights
8. Annuity Period.................................. Annuity Provisions
9. Death Benefit................................... Death of the Owner; Death of the Annuitant; Optional
Death Benefit (not in New York prospectus or Prospectus
No. 3)
10. Purchase and Contract Values
(a) Purchases................................... Premium Payments
(b) Valuation................................... Contract Value; Accumulation Unit;
(c) Daily Calculation........................... Accumulation Unit; Allocation of Premium Payments
(d) Underwriter................................. Distribution of the Contracts
11. Redemptions
(a) By Owners................................... Surrenders
By Annuitant.................................... Annuity Provisions -- Variable Options
(b) Texas ORP................................... N/A
(c) Check Delay................................. Delay of Payments and Transfers
(d) Lapse....................................... N/A
(e) Free Look................................... Highlights
12. Taxes........................................... Tax Matters
13. Legal Proceedings............................... Legal Proceedings
</TABLE>
i
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<TABLE>
<CAPTION>
ITEM OF FORM N-4 PROSPECTUS CAPTION
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<C> <S> <C>
14. Table of Contents for the Statement of
Additional Information......................... Table of Contents of the Statement of Additional
Information
</TABLE>
PART B
<TABLE>
<CAPTION>
ITEM OF FORM N-4 STATEMENT OF ADDITIONAL INFORMATION CAPTION
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<C> <S> <C>
15. Cover Page...................................... Cover Page
16. Table of Contents............................... Table of Contents
17. General Information and History................. a) N/A
b) N/A
c) (Prospectus) The Company and the Variable Account;
the Fixed Account
18. Services
(a) Fees and Expenses of Registrant............. N/A
(b) Management Contracts........................ N/A
(c) Custodian................................... Custody of Assets
Independent Accountant.......................... Experts
(d) Assets of Registrant........................ N/A
(e) Affiliated Person........................... N/A
(f) Principal Underwriter....................... N/A
19. Purchase of Securities Being Offered............ Distribution of the Contracts
Offering Sales Load............................. Distribution of the Contracts; (Prospectus) Charges and
Deductions -- Contingent Deferred Sales Charge (Sales
Load)
20. Underwriters.................................... Distribution of the Contracts; (Prospectus) Distribution
of the Contracts
21. Calculation of Performance Data................. Investment Experience; Historical Performance Data
22. Annuity Payments................................ (Prospectus) Annuity Provisions
23. Financial Statements............................ Financial Statements
</TABLE>
PART C -- OTHER INFORMATION
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PART C CAPTION
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<C> <S> <C>
24. Financial Statements and Exhibits............... Financial Statements and Exhibits
(a) Financial Statements........................ Financial Statements
(b) Exhibits.................................... Exhibits
25. Directors and Officers of the Depositor......... Directors and Officers of the Depositor
26. Persons Controlled By or Under Common Control
with the Depositor or Registrant............... Persons Controlled By or Under Common Control with the
Depositor or Registrant
27. Number of Owners................................ Number of Owners
28. Indemnification................................. Indemnification
29. Principal Underwriters.......................... Principal Underwriter
30. Location of Accounts and Records................ Location of Accounts and Records
31. Management Services............................. Management Services
32. Undertakings.................................... Undertakings
Signature Page.................................. Signatures
</TABLE>
ii
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PART A. PROSPECTUS NO. 1
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
<TABLE>
<S> <C> <C> <C>
HOME OFFICE LOCATION: MAILING ADDRESS: LOCKBOX ADDRESS: BY MAIL LOCKBOX ADDRESS: BY
900 COTTAGE GROVE ROAD ANNUITY & VARIABLE LIFE CONNECTICUT GENERAL LIFE OVERNIGHT
BLOOMFIELD, CT SERVICES INSURANCE COMPANY CONNECTICUT GENERAL LIFE
CENTER: ROUTING S-249 P.O. BOX 30790 INSURANCE COMPANY
HARTFORD, CT 06152-2249 HARTFORD, CT 06150 C/O FLEET BANK
TELEPHONE: (800) (552-9898) 20 CHURCH STREET
20TH FLOOR, MSN275
HARTFORD, CT 06120
ATTN: LOCKBOX 30790
</TABLE>
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FLEXIBLE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS - NEW YORK
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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 Matters -- 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 nineteen diversified open-end management
investment companies (commonly called mutual funds), each with a different
investment objective: The 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, Money Market
Portfolio; High Income Portfolio and Overseas Portfolio; Fidelity Variable
Insurance Products Fund II -- Investment Grade Bond Portfolio and Asset Manager
Portfolio; MFS-Registered Trademark- 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; OCC 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" dated May 1, 1998, available at no charge by calling or
writing the Company's Annuity & Variable Life Services 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, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
DEFINITIONS..................................... 3
HIGHLIGHTS...................................... 5
FEES AND EXPENSES............................... 7
CONDENSED FINANCIAL INFORMATION................. 11
THE COMPANY 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
Optional Variable Account Sub-Account
Allocation Programs.......................... 17
Dollar Cost Averaging....................... 17
Automatic Rebalancing....................... 18
Contract Value................................ 18
Accumulation Unit............................. 18
CHARGES AND DEDUCTIONS.......................... 19
Contingent Deferred Sales Charge (Sales
Load)........................................ 19
Mortality and Expense Risk Charge............. 20
Administrative Expense Charge................. 20
Account Fee................................... 20
Premium Tax Equivalents....................... 21
Income Taxes.................................. 21
Fund Expenses................................. 21
Transfer Fee.................................. 21
OTHER CONTRACT FEATURES......................... 21
Ownership..................................... 21
Assignment.................................... 22
Beneficiary................................... 22
Change of Beneficiary......................... 22
Annuitant..................................... 22
Transfer of Contract Values between
Sub-Accounts................................. 22
Procedures for Telephone Transfers............ 24
Surrenders and Partial Withdrawals............ 24
Delay of Payments and Transfers............... 24
Death of the Owner before the
Annuity Date................................. 25
Death of the Annuitant before the
Annuity Date................................. 26
Death of the Annuitant after the
Annuity Date................................. 26
<CAPTION>
CONTENTS PAGE
<S> <C>
Change in Operation of Variable Account....... 26
Modification.................................. 26
Discontinuance................................ 27
ANNUITY PROVISIONS.............................. 27
Annuity Date; Change in Annuity Date and
Annuity Option............................... 27
Annuity Options............................... 27
Fixed Options................................. 27
Variable Options.............................. 28
Evidence of Survival.......................... 29
Endorsement of Annuity Payment................ 29
THE FIXED ACCOUNT............................... 29
Market Value Adjustment....................... 31
DISTRIBUTION OF THE CONTRACTS................... 32
PERFORMANCE DATA................................ 32
Money Market Sub-Account...................... 32
Other Variable Account Sub-Accounts........... 32
Performance Ranking or Rating................. 33
TAX MATTERS..................................... 33
General....................................... 34
Diversification............................... 34
Distribution Requirements..................... 35
Multiple Contracts............................ 35
Tax Treatment of Assignments.................. 36
Withholding................................... 36
Section 1035 Exchanges........................ 36
Tax Treatment of Withdrawals --
Non-Qualified Contracts...................... 36
Qualified Plans............................... 36
Section 403(b) Plans.......................... 37
Individual Retirement Annuities............... 37
Corporate Pension and Profit-Sharing Plans and
H.R. 10 Plans................................ 37
Deferred Compensation Plans................... 38
Tax Treatment of Withdrawals -- Qualified
Contracts.................................... 38
FINANCIAL STATEMENTS............................ 38
YEAR 2000 ISSUES................................ 38
LEGAL PROCEEDINGS............................... 39
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL
INFORMATION................................... 40
APPENDIX I...................................... 41
Separate Account Annual Expenses for New York
Contracts Issued Before May 1, 1996.......... 41
</TABLE>
2
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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 & VARIABLE LIFE SERVICES CENTER: The office of the
Company to which notices are given and any customer service
requests are made. Mailing address: Annuity & Variable Life
Services Center, Routing S-249, Hartford, CT 06152-2249.
Premium payments must be sent, and all other correspondence
may be sent, to either Lockbox address: If by mail: P.O. Box
30790, Hartford, CT 06150; If by overnight courier: c/o
Fleet Bank, 20 Church Street, 20th Floor, MSN275, Hartford,
CT 06120, Attn: Lockbox 30790.
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.
CERTIFICATE: The document which evidences the participation
of an Owner in a group contract.
CODE: The Internal Revenue Code of 1986, as amended.
COMPANY: Connecticut General Life Insurance Company.
CONTRACT: The Variable Annuity Contract described in this
prospectus, i.e., the Certificate evidencing the Owner's
participation in a group contract.
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.
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.
3
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FUND(S): One or more of The Alger American Funds -- 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,
Money Market Portfolio, High Income Portfolio and Overseas
Portfolio; Fidelity Variable Insurance Products Fund II --
Investment Grade Bond Portfolio and Asset Manager Portfolio;
MFS-Registered Trademark- 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; OCC Accumulation Trust -- Global
Equity Portfolio, Managed Portfolio and 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 Annuity & Variable Life
Services Center.
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.
OWNER: The person(s) initially designated in the application
or order to purchase or otherwise, unless later changed, as
having all ownership rights under the Contract; is the
Certificate Owner under a group contract.
PAYEE: A recipient of payments under the Contract.
PREMIUM PAYMENT: Any amount paid to the Company cleared in
good funds as consideration for the benefits provided by the
Contract. 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.
SEVENTH YEAR ANNIVERSARY: The seventh Contract Anniversary
and each succeeding Contract Anniversary occurring at any
seven year interval thereafter, for example, the 7th, 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.
4
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SURRENDER (OR WITHDRAWAL): When a lump sum amount
representing all or part of the Annuity Account Value (minus
any applicable withdrawal charges, contract fees, and
premium tax equivalents and adjusted by any market value
adjustment) 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 or to receive a partial
withdrawal.
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.
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. Owners bear the
investment risk for all amounts allocated to the Variable
Account. Inquiries about the Contracts may be made to the
Company's Annuity & Variable Life Services Center.
The Contract may be returned within 10 days after it is
received, longer in some states. 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. This may be
more or less than the Premium Payment. 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 or order to purchase, 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. Owners may, during each Contract Year, withdraw up to
fifteen percent (15%) of Premium Payments made,
5
<PAGE>
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 -- 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 surrenders, withdrawals or
transfers from the Fixed Account portion of the Contract.
There is a Mortality and Expense Risk Charge which is equal,
on an annual basis, to 1.25%* 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 -- Mortality and
Expense Risk Charge").
There is an Administrative Expense Charge which is equal, on
an annual basis, to 0.15%* of the average daily net assets
of the Variable Account (See "Charges and Deductions --
Administrative Expense Charge").
There is an annual Account Fee of $30 which is waived if the
Annuity Account Value equals or exceeds $100,000 at the end
of the Contract Year (See "Charges and Deductions -- Account
Fee").
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 -- Premium
Taxes").
Under certain circumstances there may be assessed a $10
transfer fee when a Owner transfers Annuity Account Values
from one Sub-Account to another (See "Charges and Deductions
-- 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 Owner (or, if the 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 Matters -- Tax
Treatment of Withdrawals -- Qualified Contracts.") For a
further discussion of the taxation of the Contracts, see
"Tax Matters."
* (For New York Contracts issued before May 1, 1996, see
Appendix I.)
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.
6
<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
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. It is
not applied against a surrender or transfer taking place at
the end of the Guaranteed Period.
FEES AND EXPENSES
OWNER TRANSACTION FEES
Contingent Deferred Sales Charge (as a percentage of Premium
Payments):
YEARS SINCE
PAYMENT CHARGE
----------- -------
0-1 7%
1-2 6% An Owner may, during each Contract
2-3 5% Year, withdraw up to 15%
3-4 4% of Premium Payments made, or the
4-5 3% remaining portion thereof,
5-6 2% without incurring a Contingent
6-7 1% Deferred Sales Charge.
7+ 0
Transfer Fee........ $10
- Not imposed on the first twelve transfers during a
Contract Year. Pre-scheduled automatic dollar cost
averaging or automatic rebalancing transfers are not
counted.
Account Fee.............. $30 per Contract Year
- Waived if Annuity Account Value at the end of
the Contract Year is $100,000 or more.
VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account
value)
Mortality and Expense Risk Charge........ 1.25%*
Administrative Expense Charge............ 0.15%*
----------
Total Variable Account Annual Expenses... 1.40%*
* For New York Contracts issued before May 1, 1996, see
Appendix I.
7
<PAGE>
EXPENSE DATA
The purpose of the following Table is to help Purchasers and prospective
purchasers understand the costs and expenses that are borne, directly and
indirectly, by Purchasers assuming that all Premium Payments are allocated to
the Variable Account. The table reflects expenses of the Variable Account as
well as of the Individual Funds underlying the Variable Sub-Accounts.
FEE TABLE
<TABLE>
<CAPTION>
THE ALGER AMERICAN FUND
-------------------------------------------
ALGER ALGER
ALGER AMERICAN AMERICAN ALGER
AMERICAN LEVERAGED MIDCAP AMERICAN
GROWTH ALLCAP GROWTH SMALL CAP
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------- --------- -------- ---------
SEPARATE ACCOUNT ANNUAL EXPENSES
<S> <C> <C> <C> <C>
Mortality and Expense Risk
Charge*.......................... 1.25% 1.25% 1.25% 1.25%
Administrative Expense Charge*..... 0.15% 0.15% 0.15% 0.15%
Total Separate Account Annual
Expenses*........................ 1.40% 1.40% 1.40% 1.40%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees.................... 0.75% 0.85% 0.80% 0.85%
Other Expenses..................... 0.04% 0.15% 0.04% 0.04%
Total Fund
Portfolio Annual
Expenses......................... 0.79% 1.00%(1) 0.84% 0.89%
<CAPTION>
FIDELITY VARIABLE INSURANCE
PRODUCTS FUNDS
----------------------------------------------------------------
VIP II VIP VIP II VIP
ASSET EQUITY- INVESTMENT VIP MONEY HIGH VIP
MANAGER INCOME GRADE BOND MARKET INCOME OVERSEAS
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND PORTFOLIO
------- --------- ---------- --------- ------ --------
SEPARATE ACCOUNT ANNUAL EXPENSES
<S> <C> <C> <C> <C> <C> <C>
Mortality and Expense Risk
Charge*.......................... 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Administrative Expense Charge*..... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Total Separate Account Annual
Expenses*........................ 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees.................... 0.55% 0.50% 0.44% 0.21% 0.59% 0.75%
Other Expenses..................... 0.10% 0.08% 0.14% 0.10% 0.12% 0.17%
Total Fund
Portfolio Annual
Expenses......................... 0.65%(2) 0.58%(2) 0.58% 0.31% 0.71% 0.92%(2)
</TABLE>
- ------------------------
* For New York Contracts issued before May 1, 1996, see Appendix I.
(1) Included in Other Expenses of the Alger American Leveraged AllCap Portfolio
is .04% of interest expense.
(2) A portion of the brokerage commissions that certain funds pay was used to
reduce funds expenses. In addition, certain funds have entered into
arrangements with their custodian whereby credits realized as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, Total Fund Portfolio Annual Expenses would have been 0.64%
for the VIP II Asset Manager Portfolio, 0.57% for the VIP Equity-Income
Portfolio and 0.90% for the VIP Overseas Portfolio.
8
<PAGE>
The table does not reflect the deductions for the annual $30 Account Fee. The
information set forth should be considered together with the information
provided in this Prospectus under the heading "Fees and Expenses", and in each
Fund's Prospectus. All expenses are expressed as a percentage of average account
value.
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST NEUBERGER&BERMAN
- ---------------------------------------- ADVISERS MANAGEMENT TRUST(5)
--------------------------------------- OCC ACCUMULATION TRUST
MFS LIMITED -----------------------------------------
TOTAL MFS MFS WORLD MATURITY GLOBAL
RETURN UTILITIES GOVERNMENTS BALANCED BOND PARTNERS EQUITY MANAGED SMALL CAP
SERIES SERIES SERIES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%
0.75% 0.75% 0.75% 0.85%(6) 0.65%(6) 0.80%(6) 0.79%(7) 0.80%(7) 0.80%(7)
0.25%(4) 0.25%(4) 0.25%(4) 0.19% 0.12% 0.06% 0.40%(8) 0.07%(8) 0.17%(8)
1.00%(3) 1.00%(3) 1.00%(3) 1.04% 0.77% 0.86% 1.19%(9) 0.87%(9) 0.97%(9)
</TABLE>
- ------------------------
(3) The Adviser has agreed to bear expenses for each Series, subject to
reimbursement by each Series, such that each Series' "Other Expenses" shall
not exceed) 0.25% of the average daily net assets of the Series during the
current fiscal year. Otherwise, "Other Expenses" for the Total Return
Series, Utilities Series and World Government Series would be .27%, .45% and
.40% respectively, and "Total Fund Portfolio Expenses" would be 1.02%, 1.20%
and 1.15% respectively, for these Series. See "Information Concerning Shares
of Each Series -- Expenses."
(4) Each series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Series' expenses). Any such fee reductions are not
reflected under "Other Expenses".
(5) Neuberger&Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Managers Trust.
(6) The figures reported here are "Investment Management and Administration
Fees" which include the aggregate of the administration fees paid by the
Portfolio and the management fees paid by its corresponding Series.
Similarly, "Other Expenses" includes all other expenses of the Portfolio and
its corresponding Series.
(7) Reflects management fees after taking into effect any waiver.
(8) Other Expenses are shown gross of expense offsets afforded the Portfolios
which effectively lowered overall custody expenses.
(9) Total Portfolio Expenses for the Small Cap and Managed Portfolios are
limited by OpCap Advisors so that their respective annualized operating
expenses (net of any expense offsets) do not exceed 1.00% of average daily
net assets. Total Portfolio Expenses for the Global Equity Portfolio are
limited to 1.25% of average daily net assets. Without such limitation and
without giving effect to any expense offsets, the Management Fees, Other
Expenses and Total Portfolio Expenses incurred for the fiscal year ended
December 31, 1997 would have been: .80%, .17% and .97%, respectively, for
the Small Cap Portfolio, .80%, .07% and .87%, respectively, for the Managed
Portfolio and .80%, .40% and 1.20%, respectively, for the Global Equity
Portfolio.
9
<PAGE>
EXAMPLES
The 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 American Growth Portfolio........................... $82 $113 $147 $260
Alger American Leveraged AllCap Portfolio................. $84 $117 $153 $271
Alger American MidCap Growth Portfolio.................... $82 $112 $144 $255
Alger American Small Capitalization Portfolio............. $81 $110 $142 $250
Fidelity VIP Equity-Income Portfolio...................... $79 $104 $131 $228
Fidelity VIP Money Market Portfolio....................... $81 $108 $138 $241
Fidelity VIP High Income Portfolio........................ $83 $114 $149 $263
Fidelity VIP Overseas Portfolio........................... $79 $104 $131 $228
Fidelity VIP II Asset Manager Portfolio................... $80 $106 $135 $235
Fidelity VIP II Investment Grade Bond Portfolio........... $77 $ 95 $117 $198
MFS Total Return Series................................... $84 $117 $153 $271
MFS Utilities Series...................................... $84 $117 $153 $271
MFS World Governments Series.............................. $84 $117 $153 $271
N&B AMT Balanced Portfolio................................ $81 $110 $141 $248
N&B AMT Limited Maturity Bond Portfolio................... $82 $113 $145 $257
N&B AMT Partners Portfolio................................ $84 $118 $155 $275
OCC Accumulation Trust Global Equity Portfolio............ $86 $123 $162 $290
OCC Accumulation Trust Managed Portfolio.................. $82 $113 $146 $258
OCC Accumulation Trust Small Cap Portfolio................ $83 $116 $151 $268
</TABLE>
2. IF THE CONTRACT IS NOT SURRENDERED OR IF IT IS
ANNUITIZED:
<TABLE>
<S> <C> <C> <C> <C>
Alger American Growth Portfolio........................... $23 $ 71 $122 $260
Alger American Leveraged AllCap Portfolio................. $24 $ 74 $127 $271
Alger American MidCap Growth Portfolio.................... $22 $ 69 $119 $255
Alger American Small Capitalization Portfolio............. $22 $ 68 $116 $250
Fidelity VIP Equity-Income Portfolio...................... $20 $ 61 $105 $228
Fidelity VIP Money Market Portfolio....................... $21 $ 65 $112 $241
Fidelity VIP High Income Portfolio........................ $23 $ 72 $123 $263
Fidelity VIP Overseas Portfolio........................... $20 $ 61 $105 $228
Fidelity VIP II Asset Manager Portfolio................... $21 $ 64 $109 $235
Fidelity VIP II Investment Grade Bond Portfolio........... $17 $ 53 $ 91 $198
MFS Total Return Series................................... $24 $ 74 $127 $271
MFS Utilities Series...................................... $24 $ 74 $127 $271
MFS World Governments Series.............................. $24 $ 74 $127 $271
N&B AMT Balanced Portfolio................................ $22 $ 67 $115 $248
N&B AMT Limited Maturity Bond Portfolio................... $23 $ 70 $120 $257
N&B AMT Partners Portfolio................................ $25 $ 76 $129 $275
OCC Accumulation Trust Global Equity Portfolio............ $26 $ 80 $137 $290
OCC Accumulation Trust Managed Portfolio.................. $23 $ 70 $121 $258
OCC Accumulation Trust Small Cap Portfolio................ $24 $ 73 $126 $268
</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 may be applicable.
10
<PAGE>
These examples reflect the annual $30 Annuity Account Fee as
an annual charge of .06% of assets, based upon an
anticipated average Annuity Account Value of $50,000.
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 Sub-Accounts commenced operation on various dates
thereafter. The starting Accumulation Unit Value for each
Sub-Account was $10.00. There follows, for each of the
nineteen Variable Account Sub-Accounts available under the
Contracts, information regarding the changes in the
Accumulation Unit values from date of inception through
December 31, 1997, and the number of Accumulation Units
outstanding at December 31, 1997. See Appendix I for
Accumulation Unit Information as to Contracts issued before
May 1, 1996:
<TABLE>
<CAPTION>
(IN DOLLARS) NUMBER OF
------------------------ ACCUMULATION
ACCUMULATION ACCUMULATION UNITS
UNIT VALUE UNIT VALUE OUTSTANDING
SUB-ACCOUNT AT 12/31/96 AT 12/31/97 12/31/97
------------------------------------------- ----------- ----------- ----------------
<C> <S> <C> <C> <C>
Alger American Growth Portfolio 10.656 13.212 145,446
Alger American Leveraged AllCap Portfolio 9.952 11.744 33,901
Alger American MidCap Growth Portfolio 10.033 11.377 84,399
Alger American Small Cap Portfolio 9.368 10.290 137,954
Fidelity VIP Equity-Income Portfolio 10.852 13.707 232,844
Fidelity VIP Money Market Portfolio 10.223 12.299 55,953
Fidelity VIP High Income Portfolio 10.601 10.632 21,161
Fidelity VIP Overseas Portfolio 10.535 11.588 21,670
Fidelity VIP II Asset Manager Portfolio 10.797 12.845 41,423
Fidelity VIP II Investment Grade Bond
Portfolio 10.530 11.323 22,191
MFS Total Return Series 11.017 13.176 102,664
MFS Utilities Series 11.397 14.800 13,784
MFS World Governments Series 10.437 10.175 6,175
N&B AMT Balanced Portfolio 9.984 11.759 33,702
N&B AMT Limited Maturity Bond Portfolio 10.378 10.923 15,655
N&B AMT Partners Portfolio 11.514 14.901 131,403
OCC Accumulation Trust Global Equity
Portfolio 10.786 12.126 77,692
OCC Accumulation Trust Managed Portfolio 11.432 13.785 329,792
OCC Accumulation Trust Small Cap Portfolio 10.568 12.738 44,569
</TABLE>
THE COMPANY 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
(860) 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 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
11
<PAGE>
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 Investment Company Act of 1940, as amended
(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, account fees, mortality and expense risk
charges, administrative expense charges 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 nineteen Sub-Accounts of the Variable Account is
invested solely in shares of one of the nineteen Funds
available as funding vehicles under the Contracts. Each 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:
The 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 ("Fidelity VIP"), and
Variable Insurance Products Fund II ("Fidelity VIP II"),
managed by Fidelity Management & Research Company and
distributed by Fidelity Distribution Corporation, 82
Devonshire Street, Boston, MA 02103;
MFS-Registered Trademark- Variable Insurance Trust ("MFS
Trust"), managed by Massachusetts Financial Services
Company and distributed by MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116;
Neuberger & Berman Advisers Management Trust ("N&B AMT
Trust"), managed and distributed by Neuberger & Berman
Management Incorporated, 605 Third Avenue, 2nd Floor,
New York, NY 10158-0006;
12
<PAGE>
OCC Accumulation Trust ("OCC Trust") (formerly Quest for
Value Accumulation Trust), managed by OpCap Advisors
(formerly Quest for Value Advisors), and distributed by
OCC Distributors (formerly 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.
Four Funds of FIDELITY VIP are available under the
Contracts:
Equity-Income Portfolio ("Fidelity VIP Equity-Income
Portfolio");
Money Market Portfolio ("Fidelity VIP Money Market
Portfolio");
High Income Portfolio ("Fidelity VIP High Income
Portfolio");
Overseas Portfolio ("Fidelity VIP Overseas Portfolio").
Two Funds of FIDELITY VIP II are available under the
Contracts:
Asset Manager Portfolio ("Fidelity VIP II Asset Manager
Portfolio");
Investment Grade Bond Portfolio ("Fidelity VIP II
Investment Grade 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 N&B AMT Trust are available under the
Contracts:
Balanced Portfolio;
Limited Maturity Bond Portfolio;
Partners Portfolio.
Three Funds of OCC Accumulation Trust are available under
the Contracts:
Global Equity Portfolio;
Managed Portfolio;
Small Cap Portfolio.
The investment advisory fees charged the Funds by their
advisers are shown in the Fee Table at pages 8 and 9 of this
Prospectus.
There follows a brief description of the investment
objective and program of each Fund. There can be no
assurance that any of the stated investment objectives will
be achieved.
ALGER AMERICAN GROWTH PORTFOLIO (Large Cap Stocks): 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 (Large Cap
Stocks): 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 (Mid Cap Stocks):
Seeks long-term capital appreciation by investing in a
diversified, actively managed portfolio of equity
securities, primarily of companies whose total market
capitalization lies within the range of companies included
in the S & P MidCap 400 Index.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO (Small Cap
Stocks): Seeks long-term capital appreciation by investing
in a diversified, actively managed portfolio of equity
13
<PAGE>
securities, primarily of companies whose total market
capitalization lies within the range of companies included
in the Russell 2000 Growth Index or the S&P SmallCap 600
Index.
FIDELITY VIP II ASSET MANAGER PORTFOLIO (Balanced or Total
Return): Seeks high total return with reduced risk over the
long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term money market
instruments.
FIDELITY VIP II INVESTMENT GRADE BOND PORTFOLIO (Fixed
Income -- Intermediate Term Bonds): 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.
FIDELITY VIP EQUITY-INCOME PORTFOLIO (Large Cap Stocks):
Seeks reasonable income by investing primarily in
income-producing equity securities, with some potential for
capital appreciation, seeking a yield that exceeds the
composite yield on the securities comprising the Standard
and Poor's 500 Index (S&P 500).
FIDELITY VIP MONEY MARKET PORTFOLIO (Money Market): 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.
FIDELITY VIP HIGH INCOME PORTFOLIO (High Yield Bonds): Seeks
high current income by investing mainly in high yielding
debt securities, with an emphasis on lower quality
securities.
FIDELITY VIP OVERSEAS PORTFOLIO (International Equity):
Seeks long term growth of capital by investing mainly in
foreign securities.
MFS TOTAL RETURN SERIES (Balanced or Total Return): Seeks
primarily to obtain above-average income, (compared to a
portfolio invested entirely 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 (Specialty): Seeks capital growth and
current income (income above that available from a portfolio
invested entirely in equity securities), by investing, under
normal circumstances, at least 65% of its assets in equity
and debt securities of utility companies.
MFS WORLD GOVERNMENTS SERIES (International Fixed Income):
Seeks not only preservation, but also growth, of capital
together with moderate current income through a
professionally managed, internationally diversified
portfolio consisting primarily of debt securities and to a
lesser extent equity securities.
NEUBERGER & BERMAN AMT BALANCED PORTFOLIO (Balanced or Total
Return): Seeks long-term capital growth and reasonable
current income without undue risk to principal.
NEUBERGER & BERMAN AMT LIMITED MATURITY BOND PORTFOLIO
(Short to Intermediate Term Bonds): Seeks the highest
current income consistent with low risk to principal and
liquidity; and secondarily, total return.
NEUBERGER & BERMAN AMT PARTNERS PORTFOLIO (Large Cap
Stocks): Seeks capital growth. Invests primarily in common
stocks of medium to large capitalization established
companies, using the value-oriented investment approach. The
Portfolio seeks capital growth through an investment
approach that is designed to increase capital with
reasonable risk. The portfolio manager seeks securities
believed to be undervalued based on strong fundamentals such
as low price-to-earnings ratios, consistent cash flow, and
the portfolio company's track record through all parts of
the market cycle.
OCC ACCUMULATION TRUST GLOBAL EQUITY PORTFOLIO
(International Stocks): Seeks long-term capital appreciation
through a global investment strategy primarily involving
equity securities.
14
<PAGE>
OCC ACCUMULATION TRUST MANAGED PORTFOLIO (Balanced or Total
Return): 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.
OCC ACCUMULATION TRUST SMALL CAP PORTFOLIO (Small Cap
Stocks): Seeks capital appreciation through investments in a
diversified portfolio of equity securities of companies with
market capitalizations of under $1 billion.
The Neuberger & Berman AMT Partners Portfolio, Neuberger &
Berman AMT Limited Maturity Bond Porfolio, Fidelity VIP
Equity-Income Portfolio, Fidelity VIP II Asset Manager
Portfolio, Fidelity VIP High Income Portfolio, Fidelity VIP
Overseas Portfolio, MFS Total Return Series, MFS Utilities
Series, MFS World Governments Series, OCC Accumulation Trust
Global Equity Portfolio, OCC Accumulation Trust Managed
Portfolio, and the OCC Accumulation Trust Small Cap
Portfolio funds may invest in non-investment grade, high
yield, high-risk debt securities (commonly referred to as
"junk bonds"), as detailed in the individual Fund
prospectuses.
GENERAL
There is no assurance that the investment objective of any
of the Funds will be met. 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. 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. Shareholder votes
take place whenever state law or the 1940 Act so require,
for example on certain elections of Boards of Trustees, the
initial approval of investment advisory contracts and
changes in investment objectives and fundamental investment
policies.
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.
15
<PAGE>
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 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.
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 Owner. The initial Premium
Payment is due on the Effective Date. It must be at least
$2,000. 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
order to purchase or Premium Payment. A Premium Payment in
excess of $1 million requires preapproval by the Company.
The Company may, at its sole discretion, offer special
premium payment programs and/ or waive the minimum payment
requirements.
The 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 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 Annuity &
Variable Life Services Center. A change will be effective
for payments received on or after receipt of the written
notice of change.
Any Premium Payment at the time of any allocation may be
allocated to a single or multiple sub-accounts in whole
precentages (e.g., 12%). No allocation can be made which
would result in a Variable Account Sub-Account of less than
$50 or a Fixed Account Sub-Account value of less than
$2,000. Further, at this time, no more than 18 Fixed Account
and Variable Account Sub-Accounts may be opened during the
life of the Contract. The Company may expand this number at
a future date.
The Company may, at its sole discretion, waive minimum
premium allocation requirements or minimum Variable Account
Sub-Account requirements.
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<PAGE>
For initial Premium Payments, if the application or order to
purchase 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 or order to purchase 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 or
order to purchase 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 or order to purchase 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.
OPTIONAL VARIABLE ACCOUNT SUB-ACCOUNT ALLOCATION PROGRAMS
The Contract Owner may elect to enroll in either of the
following programs. However, both programs cannot be in
effect at the same time.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected by the
Contract Owner, systematically allocates specified dollar
amounts from the Money Market Sub-Account or the One-Year
Fixed Account Sub-Account to one or more of the Contract's
Variable Account Sub-Accounts at regular intervals as
selected by the Contract Owner. By allocating on a regularly
scheduled basis as opposed to allocating the total amount at
one particular time, an Owner may be less susceptible to the
impact of market fluctuations.
Dollar Cost Averaging may be selected by establishing a
Money Market Sub-Account of at least $1,000 or the One-Year
Fixed Account Sub-Account value of at least $2,000. The
minimum amount per month to allocate is $50 (subject to the
18 Sub-Account limitation described under "Allocation of
Premium Payments" above). Enrollment in this program may
occur at any time by calling or writing the Annuity &
Variable Life Services Center or by providing the
information requested on the Dollar Cost Averaging election
form to the Company and ensuring that sufficient value is in
the Money Market Sub-Account or the One-year Fixed Account
Sub-Account. Transfers to any Fixed Account Sub-Account or
from a Fixed Account Sub-Account other than the One-Year
Fixed Account Sub-Account are not permitted under Dollar
Cost Averaging. The Company may, at its sole discretion,
waive Dollar Cost Averaging minimum deposit and transfer
requirements.
Dollar Cost Averaging will terminate when any of the
following occurs: (1) the number of designated transfers has
been completed; (2) the value of the Money Market
Sub-Account or the One-Year Fixed Sub-Account is
insufficient to complete the next transfer; (3) the Owner
requests termination by telephone or in writing and such
request is received at least one week prior to the next
scheduled transfer date to take effect that month; or (4)
the Contract is surrendered.
The Dollar Cost Averaging program is not available following
the Annuity Date. There is no current charge for Dollar Cost
Averaging but the Company reserves the right to charge for
this program.
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<PAGE>
AUTOMATIC REBALANCING
Automatic Rebalancing is an option which, if elected by the
Contract Owner, periodically restores to a pre-determined
level the percentage of Contract Value allocated to each
Variable Account Sub-Account (e.g. 20% Money Market, 50%
Growth, 30% Utilities). This pre-determined level will be
the allocation initially selected when the Contract was
purchased, unless subsequently changed. The Automatic
Rebalancing allocation may be changed at any time by
submitting a request to the Company.
If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Variable Account Sub-Accounts must
be subject to Automatic Rebalancing. The Fixed Account
Sub-Account is not available for Automatic Rebalancing.
Automatic Rebalancing may take place on either a quarterly,
semi-annual or annual basis, as selected by the Owner. Once
the rebalancing option is activated, any Variable Account
Sub-Account transfers executed outside of the rebalancing
option will terminate the Automatic Rebalancing option. Any
subsequent premium payment or withdrawal that modifies the
net account balance within each Variable Account Sub-Account
may also cause termination of the Automatic Rebalancing
option. Any such termination will be confirmed to the Owner.
The Owner may terminate the Automatic Rebalancing option or
re-enroll at any time by calling or writing the Annuity &
Variable Life Services Center.
The Automatic Rebalancing program is not available following
the Annuity Date. There is no current charge for Automatic
Rebalancing but the Company reserves the right to charge for
this program.
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 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 as follows:
(1)The total value of Fund shares held in the Sub-Account
is calculated by multiplying the number of Fund shares
owned by the Sub-Account at the beginning of the
Valuation Period by the net asset value per share of
the Fund at the end of the Valuation Period, and
adding any dividend or other distribution of the Fund
if an ex-dividend date occurs during the Valuation
Period; minus
(2)The liabilities of the Sub-Account at the end of the
Valuation Period; such liabilities include daily
charges imposed on the Sub-Account, and may include a
charge or credit with respect to any taxes paid or
reserved for by the Company that the Company
determines result from the operations of the Variable
Account; and
(3)The result of (2) is divided by the number of
Sub-Account units outstanding at the beginning of the
Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation
Period are equal to the daily mortality and expense risk
charge plus daily administrative expense charge multiplied
by the number of calendar days in the Valuation Period.
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<PAGE>
CHARGES AND DEDUCTIONS
Various charges and deductions are made from Annuity Account
Values and the Variable Account. These charges and
deductions are:
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 withdrawn or 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
and 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.
An Owner may, during each Contract Year, withdraw 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 provision. No Contingent Deferred Sales Charge
will be deducted on withdrawals from Premium Payments which
have been held under the Contract for more than seven (7)
Contract Years or from 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 of up to 7.00% will be paid to broker-dealers
who sell the Contracts, and the Company will incur other
promotional or distribution expenses associated with the
marketing of the Contracts. To the extent that the
Contingent Deferred Sales Charge is
19
<PAGE>
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.
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
1.25%* of the average daily net assets of the Variable
Account (consisting of approximately .75% 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 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.
* For New York Contracts issued before May 1, 1996, see
Appendix I.
ADMINISTRATIVE EXPENSE CHARGE
The Company deducts on each Valuation Date an Administrative
Expense Charge which is equal, on an annual basis, to 0.15%*
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.
* For New York Contracts issued before May 1, 1996, see
Appendix I.
ACCOUNT FEE
The Company deducts an annual Account Fee of $30 from the
Annuity Account Value on the last Valuation Date of each
Contract Year. This charge, like the Administrative Expense
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 Account Fee will be prorated at the time of
surrender or annuitization. On and after the Annuity Date,
the 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 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.
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<PAGE>
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. No premium taxes are
currently imposed by the State of New York on the Contracts
offered hereby. 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.
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.
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.
TRANSFER FEE
Prior to the Annuity Date, a 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 transfer
fee or charge if there have been no more than twelve
transfers made in the Contract Year. For additional
transfers, the Company reserves the right to deduct a
transfer fee of up to $10 per transfer. Prescheduled
automatic Dollar Cost Averaging or Automatic Rebalancing
transfers are not counted toward the twelve 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 is guaranteed not to exceed $10, will not
be set at a level greater than its cost and will contain no
element of profit.
OTHER CONTRACT FEATURES
OWNERSHIP
The Owner has all rights and may receive all benefits under
the Contract. The Owner may change the Owner at any time. If
the Owner dies, a death benefit will be paid to the
Beneficiary upon proof of the 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 Owner will automatically
revoke any prior designation of Owner. A request for change
must be: (1) made in writing; and (2) received by the
Company at its Annuity & Variable Life Services Center. The
change will become effective as of the date the written
request is signed. A new designation of Owner will not apply
to any payment made or action taken by the Company prior to
the time it was received.
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
21
<PAGE>
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 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 Annuity & Variable Life Services 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 Owner may change a Beneficiary by filing a written
request with the Company at its Annuity & Variable Life
Services 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 Annuity & Variable Life
Services Center after the Annuitant or 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.
TRANSFER OF CONTRACT VALUES BETWEEN SUB-ACCOUNTS
Prior to the Annuity Date, the 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 twelve transfers made
in the Contract Year. For additional transfers, the Company
reserves the right to deduct a transfer fee of up to $10
(See "Charges and Deductions -- Transfer Fee"). This
Contract is not designed for professional market timing
organizations or other entities using programmed and
frequent transfers.
22
<PAGE>
After the Annuity Date, provided a variable annuity option
was selected, the 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) $2,000 per Fixed Account Sub-Account or $50 per
Variable Account Sub-Account. (The Company, at its sole
discretion may waive these minimum requirements); or (ii)
the Owner's entire interest in the Sub-Account.
c. No partial transfer will be made if the Owner's remaining
Contract Value in the Sub-Account will be less than $50.
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 are not
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 (other than transfers pursuant to the
Dollar Cost Averaging program) 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.
k. The Company reserves the right to reject any premium
allocation or transfer which would cause the Fixed
Account Sub-Account values in aggregate to exceed then
current Company limits.
Transfers between Sub-Accounts may be made by calling or
writing the Annuity & Variable Life Services Center.
Transfer requests must be received prior to 4:00 pm Eastern
Time in order to be effective that day.
Transfers between any Sub-Accounts may be suspended or
postponed during any period in which the New York Stock
Exchange is closed or has suspended trading.
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<PAGE>
PROCEDURES FOR TELEPHONE TRANSFERS
Owners may effect telephone transfers by calling the Annuity
& Variable Life Services Center.
The Company will take the following procedures to confirm
that instructions communicated by telephone are genuine.
Before a service representative accepts any request, the
caller will be asked for specific information to validate
the request. All calls will be recorded. All transactions
performed will be confirmed by the Company in writing. The
Company is not liable for any loss, cost or expense for
acting on telephone instructions which are believed to be
genuine in accordance with these procedures.
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
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 Owner specifies in writing
in advance which units are to be cancelled. The Company will
pay the amount of any 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 withdrawals from Contracts (See
"Tax Status"). 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 Account Fee;
c. any applicable Contingent Deferred Sales Charge; and
in the case of partial withdrawals, by the sum: of 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 Owners.
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<PAGE>
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.
DEATH OF THE OWNER BEFORE THE ANNUITY DATE
In the event of death of the 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. The
value of the death benefit is determined as of the effective
date of the death benefit election (see "Election and
Effective Date of Election") and is equal to the greatest of
(a) Premium Payments made, less partial withdrawals; (b) the
Annuity Account Value or (c) the Purchasers' Annuity Account
Value on the Seven Year Anniversary immediately preceding
the date that the death benefit election is effective or is
deemed to become effective, adjusted for any subsequent
Premium Payments and partial withdrawals and charges. If the
death benefit is payable after the Owner's (or Annuitant's)
85th birthday, the amount payable will be the greater of (a)
or (b) above. 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
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.
Payment amounts may vary with their frequency and duration
(see "Annuity Provisions -- Annuity Options"). To the extent
that the Beneficiary elects a variable payment option, the
Beneficiary will bear the investment risk associated with
the performance of the underlying Fund(s) in which the
relevant Variable Sub Account invest(s).
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.
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<PAGE>
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 Owner, the Owner, if a
natural person, may designate a new Annuitant. Unless and
until one is designated, the Owner will be the Annuitant. If
the Owner is not a natural person, then the death benefit,
valued as described in "Death of the Owner before the
Annuity Date", is paid on due proof of 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.
In addition, upon notice to the Owner, the Contracts may be
modified by the Company to change the withdrawal charges,
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
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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 Owner selects an Annuity Date at the time of application
or order to purchase. The Owner may, upon at least
forty-five (45) 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 85th birthday.
The Owner may, upon at least forty-five (45) 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 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. Under this option, it is possible only one
monthly annuity payment would be made, if the Annuitant died
before the second monthly annuity payment was due.
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.
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.
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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. Each
annuity payment will be less if payments are to be made more
frequently or for longer periods of time.
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
calculating the Accumulation Unit value for the current
Valuation Period (as described on page 18 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, assuming the
Annuity Account Value is at least $1,000 when variable
annuity payments commence, 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.
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.
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After the Annuity Date, the payee may, by written request to
the Annuity & Variable Life Services 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.
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 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 Premium 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 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
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but need not be more than 3% per year. Any amount withdrawn
from or transferred out of 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.
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" above,
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 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 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
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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, 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 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.
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. 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)to the power N
---------------------------------------
(1+B)to the power 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 0.25% adjustment. 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
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representing direct and indirect costs to the Company
associated with liquidating general account assets in order
to satisfy surrender requests. This adjustment of 0.25% 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.
DISTRIBUTION OF THE CONTRACTS
CIGNA Financial Advisors, Inc. ("CFA"), located at 900
Cottage Grove Road, Bloomfield, CT, acts as the principal
underwriter and the distributor of the Contracts as well as
of certain variable life insurance policies and other
variable annuity contracts issued by the Company. CFA is a
registered broker-dealer under the Securities Exchange Act
of 1934 and a member of the National Association of
Securities Dealers (NASD). As of January 1, 1998, CFA,
formerly a wholly-owned subsidiary of CIGNA Corporation,
became a wholly-owned subsidiary of Lincoln National
Corporation, an Indiana corporation with headquarters in
Fort Wayne, Indiana, whose principal businesses are
insurance and financial services. 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 Account Fee.
OTHER VARIABLE ACCOUNT SUB-ACCOUNTS
From time to time, the other Variable Account Sub-Accounts
may publish their current yields and total returns in
advertisements and communications to Owners. The current
yield for each Variable Account Sub-Account will be
calculated by dividing the annualization of the dividend and
interest income earned by the underlying Fund during a
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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
Account Fee. Each Variable Account 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 Variable Account
Sub-Account's income, including the deduction for the
Mortality and Expense Risk Charge, the Administrative
Expense Charge and the Account Fee for the applicable time
period. Owners should note that the investment results of
each Sub-Account will fluctuate over time, and any
presentation of a Variable Account 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 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 sometimes be published and compared to
the performance of other variable annuity issuers in general
or to the performance of particular types of variable
annuities investing in funds, or series of 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. Generally,
these services may not be used, and such comparisons may not
be made, in advertising or sales literature for variable
annuities.
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 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 MATTERS
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 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.
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GENERAL
Section 72 of the Code governs taxation of annuities in
general. An 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. 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 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.
Treasury Department regulations (Treas. Reg. 1.817-5)
established diversification requirements for the investment
portfolios underlying variable contracts such as the
Contracts. The regulations amplify the diversification
requirements for variable contracts set forth in the Code
and provide an alternative to the safe harbor provision
described above. Under the regulations, an investment
portfolio will be deemed adequately diversified if: (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
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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 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 Owner by one company or its affiliates are treated as
one annuity Contract for purposes of determining the tax
consequences of any distribution. Such treatment may result
in adverse tax consequences, including more rapid taxation
of the distributed amounts from such combination of
Contracts. Owners should consult a tax adviser prior to
purchasing more than one nonqualified annuity Contract in
any single calendar year.
35
<PAGE>
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable
event. 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 Owner (or, if the 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 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. 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
36
<PAGE>
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.
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.
37
<PAGE>
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 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.
FINANCIAL STATEMENTS
Audited financial statements of the Company as of December
31, 1997, 1996 and 1995 are included in the Statement of
Additional Information, as are audited financial statements
for the Variable Account, which commenced operations April
10, 1995, as of and for the periods (as defined in the
financial statements) ended December 31, 1997.
YEAR 2000 ISSUES
Connecticut General Variable Annuity Separate Account II
(the "Account") is a "separate account" of the Company
established under Connecticut insurance law; thus, the
38
<PAGE>
Company is responsible, as part of its Year 2000 updating
process, for the updating of the Account-related computer
systems. Delaware Service Company ("Delaware") provides
substantially all of the necessary accounting and valuation
services for the Account. Delaware, for its part, is
responsible for updating all of its computer systems,
including those which service the Account, to accommodate
the year 2000. The Company and Delaware have begun formal
discussions with each other to assess the requirements for
their respective systems to interface properly in order to
facilitate the accurate and orderly operation of the Account
beginning in the year 2000.
Many existing computer programs use only two digits to
identify a year in the date field. These programs were
designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results
by or at the year 2000. The Year 2000 issue is pervasive and
complex and affects virtually every aspect of the businesses
of both the Company and Delaware (collectively the
"Companies"). The computer systems of the Companies and
their interfaces with the computer systems of vendors,
suppliers, customers and other business partners are
particularly vulnerable. The inability to properly recognize
date-sensitive electronic information and to transfer data
between systems could cause errors or even complete failure
of systems, which would result in a temporary inability to
process transactions correctly and engage in normal business
activities for the Account. The Companies respectively are
redirecting significant portions of their internal
information technology efforts and are contracting, as
needed, with outside consultants to help update their
systems to accommodate the year 2000. Also, in addition to
the discussions with each other noted above, the Companies
have each initiated formal discussions with other critical
parties that interface with their systems to gain an
understanding of the progress by those parties in addressing
Year 2000 issues. While the Companies are making substantial
efforts to address their own systems and the systems with
which they interface, it is not possible to provide
assurance that operational problems will not occur. The
Companies presently believe that, assuming the modification
of existing computer systems, updates by vendors and
conversion to new software and hardware, the Year 2000 issue
will not pose significant operations problems for their
respective computer systems. In addition, the Companies are
incorporating potential issues surrounding year 2000 into
their contingency planning process to address the
probability that, despite these substantial efforts, there
are unresolved Year 2000 problems. If the remediation
efforts noted above are not completed timely or properly,
the Year 2000 issue could have a material adverse impact on
the operation of the businesses of the Companies.
The cost of addressing Year 2000 issues and the timeliness
of completion is being monitored by management of the
respective Companies. Nevertheless, there can be no
guarantee either by the Company or by Delaware that
estimated costs will be achieved, and actual results could
differ significantly from those anticipated. Specific
factors that might cause such differences include, but are
not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all
relevant computer problems, and other uncertainties.
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.
39
<PAGE>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information which contains more details concerning
some subjects discussed in this Prospectus is available (at no cost) by calling
or writing the Annuity & Variable Life Services Center. 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
CALCULATION OF VARIABLE ACCOUNT VALUES.......... 3
Variable Accumulation Unit Value and
Variable Accumulation Value.................. 3
SAMPLE CALCULATIONS AND TABLES.................. 4
Withdrawal Charge and Market Value Adjustment
Tables....................................... 5
STATE REGULATION OF THE COMPANY................. 6
ADMINISTRATION.................................. 7
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
ACCOUNT INFORMATION............................. 7
DISTRIBUTION OF THE CONTRACTS................... 7
CUSTODY OF ASSETS............................... 8
HISTORICAL PERFORMANCE DATA..................... 8
Money Market Sub-Account Yield................ 8
Other Sub-Account Yields...................... 8
Total Returns................................. 9
Other Performance Data........................ 10
LEGAL MATTERS................................... 10
LEGAL PROCEEDINGS............................... 10
EXPERTS......................................... 10
FINANCIAL STATEMENTS............................ 11
Connecticut General Life Insurance Company.... 13
CG Variable Annuity Separate Account II....... 31
</TABLE>
40
<PAGE>
APPENDIX I
SEPARATE ACCOUNT ANNUAL EXPENSES FOR
NEW YORK CONTRACTS ISSUED BEFORE MAY 1, 1996
For New York Contracts issued before May 1, 1996, the daily deduction for
the Company's assumption of mortality and expense risks is at an annual rate of
1.20%, not 1.25%. For these Contracts, the daily deduction for administrative
expenses is at an annual rate of 0.10%, not 0.15%. Total Separate Account Annual
Expenses for these contracts are then 1.30%, not 1.40%.
CONDENSED FINANCIAL INFORMATION
The Variable Account commenced operations on April 10, 1995. The
Sub-Accounts commenced operation on various dates thereafter. The starting
Accumulation Unit Value for each Sub-Account was $10.00. There follows, for each
of the nineteen Variable Account Sub-Accounts available under the Contracts,
information regarding the changes in the Accumulation Unit values from date of
inception through December 31, 1997, and the number of Accumulation Units
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
(IN DOLLARS) NUMBER OF
------------------------------------- ACCUMULATION
ACCUMULATION ACCUMULATION ACCUMULATION UNITS
UNIT VALUE UNIT VALUE UNIT VALUE OUTSTANDING
SUB-ACCOUNT AT 12/31/95 AT 12/31/96 AT 12/31/97 12/31/96
- ---------------------------------------------------------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Alger American Growth Portfolio 12.386 13.855 17.196 1,521,063
Alger American Leveraged AllCap Portfolio 13.895 15.364 18.149 401,116
Alger American MidCap Growth Portfolio 13.107 14.474 16.429 802,891
Alger American Small Cap Portfolio 13.092 13.461 14.799 1,125,616
Fidelity VIP Equity-Income Portfolio 12.129 13.679 17.297 2,564,387
Fidelity VIP Money Market Portfolio 10.245 10.658 12.546 997,952
Fidelity VIP High Income Portfolio * 10.802 11.096 1,017,888
Fidelity VIP Overseas Portfolio * 10.614 11.687 417,152
Fidelity VIP II Asset Manager Portfolio 11.280 12.758 15.193 403,681
Fidelity VIP II Investment Grade Bond Portfolio 10.541 10.734 11.555 776,658
MFS Total Return Series 11.004 12.421 14.870 1,032,242
MFS Utilities Series 11.365 13.293 17.279 322,795
MFS World Governments Series 10.278 10.552 10.297 131,155
AMT Balanced Portfolio 10.270 10.833 12.772 389,760
AMT Limited Maturity Bond Portfolio 10.547 10.857 11.439 460,111
AMT Partners Portfolio 12.122 15.501 20.081 1,242,083
OCC Global Equity Portfolio 11.759 13.347 15.021 1,032,703
OCC Managed Portfolio 11.144 13.503 16.298 3,343,230
OCC Small Cap Portfolio 10.855 12.719 15.346 448,919
<FN>
* Had not commenced operations as of December 31, 1995
</TABLE>
41
<PAGE>
[LOGO]
29236 (5/98)
<PAGE>
PART A. PROSPECTUS NO. 2
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
[LOGO]
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
<TABLE>
<S> <C> <C> <C>
HOME OFFICE LOCATION: MAILING ADDRESS: LOCKBOX ADDRESS: BY MAIL: LOCKBOX ADDRESS: BY OVERNIGHT:
900 COTTAGE GROVE ROAD ANNUITY & VARIABLE LIFE CONNECTICUT GENERAL LIFE CONNECTICUT GENERAL LIFE
BLOOMFIELD, CT SERVICES INSURANCE COMPANY INSURANCE COMPANY
CENTER: ROUTING S-249 P.O. BOX 30790 C/O FLEET BANK
HARTFORD, CT 06152 - 2249 HARTFORD, CT 06150 20 CHURCH STREET
20TH FLOOR, MSN275
HARTFORD, CT 06120
ATTN: LOCKBOX 30790
TELEPHONE: (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 Matters -- 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 nineteen diversified open-end management
investment companies (commonly called mutual funds), each with a different
investment objective: The 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, Money Market
Portfolio, High Income Portfolio and Overseas Portfolio; Fidelity Variable
Insurance Products Fund II -- Investment Grade Bond Portfolio and Asset Manager
Portfolio; MFS-Registered Trademark- 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; OCC 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" dated May 1, 1998, available at no charge by calling or
writing the Company's Annuity & Variable Life Services 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, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
DEFINITIONS.................................... 3
HIGHLIGHTS..................................... 5
FEES AND EXPENSES.............................. 7
CONDENSED FINANCIAL INFORMATION................ 11
THE COMPANY AND THE VARIABLE ACCOUNT........... 12
THE FUNDS...................................... 12
General...................................... 15
Substitution of Securities................... 15
Voting Rights................................ 16
PREMIUM PAYMENTS AND CONTRACT VALUE............ 16
Premium Payments............................. 16
Allocation of Premium Payments............... 16
Optional Variable Account Sub-Account
Allocation Programs......................... 17
Dollar Cost Averaging........................ 17
Automatic Rebalancing........................ 18
Contract Value............................... 18
Accumulation Unit............................ 18
CHARGES AND DEDUCTIONS......................... 19
Contingent Deferred Sales Charge (Sales
Load)....................................... 19
Mortality and Expense Risk Charge............ 20
Administrative Expense Charge................ 20
Account Fee.................................. 20
Premium Tax Equivalents...................... 21
Income Taxes................................. 21
Fund Expenses................................ 21
Transfer Fee................................. 21
Optional Death Benefit....................... 21
OTHER CONTRACT FEATURES........................ 23
Ownership.................................... 23
Assignment................................... 24
Beneficiary.................................. 24
Change of Beneficiary........................ 24
Annuitant.................................... 24
Transfer of Contract Values between Sub-
Accounts.................................... 24
Procedures for Telephone Transfers........... 25
Surrenders and Partial Withdrawals........... 26
Delay of Payments and Transfers.............. 26
Death of the Contract Owner before the
Annuity Date................................ 26
Death of the Annuitant before the Annuity
Date........................................ 27
<CAPTION>
CONTENTS PAGE
<S> <C>
Death of the Annuitant after the Annuity
Date........................................ 27
Change in Operation of Variable Account...... 27
Modification................................. 28
Discontinuance............................... 28
ANNUITY PROVISIONS............................. 28
Annuity Date; Change in Annuity Date and
Annuity Option.............................. 28
Annuity Options.............................. 28
Fixed Options................................ 29
Variable Options............................. 29
Evidence of Survival......................... 30
Endorsement of Annuity Payments.............. 30
THE FIXED ACCOUNT.............................. 30
Market Value Adjustment...................... 33
DISTRIBUTION OF THE CONTRACTS.................. 34
PERFORMANCE DATA............................... 34
Money Market Sub-Account..................... 34
Other Variable Account Sub-Accounts.......... 34
Performance Ranking or Rating................ 35
TAX MATTERS.................................... 35
General...................................... 35
Diversification.............................. 36
Distribution Requirements.................... 37
Multiple Contracts........................... 37
Tax Treatment of Assignments................. 37
Withholding.................................. 37
Section 1035 Exchanges....................... 38
Tax Treatment of Withdrawals Non-Qualified
Contracts................................... 38
Qualified Plans.............................. 38
Section 403(b) Plans......................... 39
Individual Retirement Annuities.............. 39
Corporate Pension and Profit-Sharing Plans
and H.R. 10 Plans........................... 39
Deferred Compensation Plans.................. 39
Tax Treatment of Withdrawals Qualified
Contracts................................... 40
FINANCIAL STATEMENTS........................... 40
YEAR 2000 ISSUES............................... 40
LEGAL PROCEEDINGS.............................. 41
TABLE OF CONTENTS OF THE STATEMENT OF
ADDITIONAL INFORMATION........................ 42
APPENDIX I..................................... 43
Illustration of Cost of Optional Death
Benefits.................................... 43
</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 & VARIABLE LIFE SERVICES CENTER: The office of the
Company to which notices are given and any customer service
requests are made. Mailing address: Annuity & Variable Life
Services Center, Routing S-249, Hartford, CT 06152-2249.
Premium payments must be sent, and all other correspondence
may be sent, to either Lockbox address: If by mail: P.O. Box
30790, Hartford, CT 06150; If by overnight courier: c/o
Fleet Bank, 20 Church Street, 20th Floor, MSN275, Hartford,
CT 06120, Attn: Lockbox 30790.
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 order to purchase 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.
3
<PAGE>
FUND(S): One or more of The Alger American Funds -- 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,
Money Market Portfolio, High Income Portfolio and Overseas
Portfolio; Fidelity Variable Insurance Products Fund II --
Investment Grade Bond Portfolio and Asset Manager Portfolio;
MFS-Registered Trademark- 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; OCC Accumulation Trust -- Global
Equity Portfolio, Managed Portfolio and 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 Annuity & Variable Life
Services 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.
PREMIUM PAYMENT: Any amount paid to the Company cleared in
good funds as consideration for the benefits provided by the
Contract. 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 7th, 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.
4
<PAGE>
SURRENDER (OR WITHDRAWAL): When a lump sum amount
representing all or part of the Annuity Account Value (minus
any applicable withdrawal charges, contract fees, and
premium tax equivalents and adjusted for any Market Value
Adjustment) 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 or to receive a partial
withdrawal.
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.
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 Annuity & Variable Life Services Center.
The Contract may be returned within 10 days after it is
received, longer in some states. 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 or order to purchase, unless
state law requires a refund of Premium Payments rather than
of Annuity Account Value.
5
<PAGE>
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, during each Contract Year,
withdraw 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 -- 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 surrenders, withdrawals or
transfers from 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 -- Mortality and
Expense Risk Charge"), other than the Optional Death Benefit
risk (See "Charges and Deductions -- 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 --
Administrative Expense Charge").
There is an annual 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 -- Account Fee").
There is a charge for any Optional Death Benefit(s) elected
(See "Charges and Deductions -- Optional Death Benefit").
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 -- 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 -- 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
6
<PAGE>
pursuant to plans qualified under Code Section 401, 403(b),
408 or 457. (See "Tax Matters -- Tax Treatment of
Withdrawals -- Qualified Contracts.") For a further
discussion of the taxation of the Contracts, see "Tax
Matters."
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. It is
not applied against a surrender or transfer taking place at
the end of the Guaranteed Period.
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, during each Contract Year, withdraw up to
2-3 5% 15% of Premium Payments made, or the remaining portion thereof,
3-4 4% without incurring a Contingent Deferred Sales Charge.
4-5 3%
5-6 2%
6-7 1%
7+ 0
</TABLE>
<TABLE>
<S> <C> <C> <C>
Transfer Fee........ $10
- Not imposed on the first twelve transfers during a Contract Year.
Pre-scheduled automatic dollar cost averaging or automatic
rebalancing transfers are not counted.
Account Fee......... $35 per Contract Year
- Waived if Annuity Account Value at the end of the Contract Year
is $100,000 or more. 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 "Charges and Deductions -- Optional Death
Benefit.")
</TABLE>
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>
7
<PAGE>
EXPENSE DATA
The purpose of the following Table is to help Purchasers and prospective
purchasers understand the costs and expenses that are borne, directly and
indirectly, by Purchasers assuming that all Premium Payments are allocated to
the Variable Account. The table reflects expenses of the Variable Account as
well as of the Individual Funds underlying the Variable Sub-Accounts.
FEE TABLE
<TABLE>
<CAPTION>
THE ALGER AMERICAN FUND
-------------------------------------------
ALGER ALGER
ALGER AMERICAN AMERICAN ALGER
AMERICAN LEVERAGED MIDCAP AMERICAN
GROWTH ALLCAP GROWTH SMALL CAP
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge............. 1.20% 1.20% 1.20% 1.20%
Administrative Expense Charge................. 0.10% 0.10% 0.10% 0.10%
Total Separate Account Annual Expenses........ 1.30% 1.30% 1.30% 1.30%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees............................... 0.75% 0.85% 0.80% 0.85%
Other Expenses................................ 0.04% 0.15% 0.04% 0.04%
Total Fund Portfolio Annual Expenses.......... 0.79% 1.00%(1) 0.84% 0.89%
<CAPTION>
FIDELITY VARIABLE INSURANCE
PRODUCTS FUNDS
----------------------------------------------------------------
VIP II VIP VIP II VIP
ASSET EQUITY- INVESTMENT VIP MONEY HIGH VIP
MANAGER INCOME GRADE BOND MARKET INCOME OVERSEAS
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND PORTFOLIO
------- --------- ---------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge............. 1.20% 1.20% 1.20% 1.20% 1.20% 1.20%
Administrative Expense Charge................. 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%
Total Separate Account Annual Expenses........ 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees............................... 0.55% 0.50% 0.44% 0.21% 0.59% 0.75%
Other Expenses................................ 0.10% 0.08% 0.14% 0.10% 0.12% 0.17%
Total Fund Portfolio Annual Expenses.......... 0.65%(2) 0.58%(2) 0.58% 0.31% 0.71% 0.92%(2)
</TABLE>
- ------------------------
(1) Included in Other Expenses of the Alger American Leveraged AllCap Portfolio
is .04% of interest expense.
(2) A portion of the brokerage commissions that certain funds pay was used to
reduce funds expenses. In addition, certain funds have entered into
arrangements with their custodian whereby credits realized as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, Total Fund Portfolio Annual Expenses would have been 0.64%
for the VIP II Asset Manager Portfolio, 0.57% for the VIP Equity-Income
Portfolio and 0.90% for the VIP Overseas Portfolio.
8
<PAGE>
The table does not reflect the deductions for the annual $35 Account Fee,
charges for any Optional Death Benefits selected, or premium tax equivalents.
The information set forth should be considered together with the information
provided in this Prospectus under the heading "Fees and Expenses", and in each
Fund's Prospectus. All expenses are expressed as a percentage of average account
value.
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST NEUBERGER&BERMAN
- ---------------------------------------- ADVISERS MANAGEMENT TRUST(5)
--------------------------------------- OCC ACCUMULATION TRUST
MFS LIMITED -----------------------------------------
TOTAL MFS MFS WORLD MATURITY GLOBAL
RETURN UTILITIES GOVERNMENTS BALANCED BOND PARTNERS EQUITY MANAGED SMALL CAP
SERIES SERIES SERIES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1.20% 1.20% 1.20% 1.20% 1.20% 1.20% 1.20% 1.20% 1.20%
0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%
1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
0.75% 0.75% 0.75% 0.85%(6) 0.65%(6) 0.80%(6) 0.79%(7) 0.80%(7) 0.80%(7)
0.25%(4) 0.25%(4) 0.25%(4) 0.19% 0.12% 0.06% 0.40%(8) 0.07%(8) 0.17%(8)
1.00%(3) 1.00%(3) 1.00%(3) 1.04% 0.77% 0.86% 1.19%(9) 0.87%(9) 0.97%(9)
</TABLE>
- ------------------------
(3) The Adviser has agreed to bear expenses for each Series, subject to
reimbursement by each Series, such that each Series' "Other Expenses" shall
not exceed 0.25% of the average daily net assets of the Series during the
current fiscal year. Otherwise, "Other Expenses" for the Total Return
Series, Utilities Series and World Government Series would be .27%, .45% and
.40% respectively, and "Total Fund Portfolio Expenses" would be 1.02%, 1.20%
and 1.15% respectively, for these Series. See "Information Concerning Shares
of Each Series -- Expenses."
(4) Each Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Series' expenses). Any such fee reductions are not
reflected under "Other Expenses".
(5) Neuberger&Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Managers Trust.
(6) The figures reported here are "Investment Management and Administration
Fees" which include the aggregate of the administration fees paid by the
Portfolio and the management fees paid by its corresponding Series.
Similarly, "Other Expenses" includes all other expenses of the Portfolio and
its corresponding Series.
(7) Reflects management fees after taking into effect any waiver.
(8) Other Expenses are shown gross of expense offsets afforded the Portfolios
which effectively lowered overall custody expenses.
(9) Total Portfolio Expenses for the Small Cap and Managed Portfolios are
limited by OpCap Advisors so that their respective annualized operating
expenses (net of any expense offsets) do not exceed 1.00% of average daily
net assets. Total Portfolio Expenses for the Global Equity Portfolio are
limited to 1.25% of average daily net assets. Without such limitation and
without giving effect to any expense offsets, the Management Fees, Other
Expenses and Total Portfolio Expenses incurred for the fiscal year ended
December 31, 1997 would have been: .80%, .17% and .97%, respectively, for
the Small Cap Portfolio, .80%, .07% and .87%, respectively, for the Managed
Portfolio and .80%, .40% and 1.20%, respectively, for the Global Equity
Portfolio.
9
<PAGE>
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 American Growth Portfolio.......................... $ 83 $ 114 $ 148 $ 261
Alger American Leveraged AllCap Portfolio................ $ 84 $ 117 $ 153 $ 272
Alger American MidCap Growth Portfolio................... $ 82 $ 112 $ 145 $ 256
Alger American Small Capitalization Portfolio............ $ 82 $ 111 $ 142 $ 251
Fidelity VIP Equity-Income Portfolio..................... $ 79 $ 104 $ 131 $ 229
Fidelity VIP Money Market Portfolio...................... $ 81 $ 108 $ 138 $ 242
Fidelity VIP High Income Portfolio....................... $ 83 $ 115 $ 149 $ 264
Fidelity VIP Overseas Portfolios......................... $ 79 $ 104 $ 131 $ 229
Fidelity VIP II Asset Manager Portfolio.................. $ 80 $ 106 $ 135 $ 236
Fidelity VIP II Investment Grade Bond Portfolio.......... $ 77 $ 96 $ 117 $ 200
MFS Total Return Series.................................. $ 84 $ 117 $ 153 $ 272
MFS Utilities Series..................................... $ 84 $ 117 $ 153 $ 272
MFS World Governments Series............................. $ 84 $ 117 $ 153 $ 272
N&B AMT Balanced Portfolio............................... $ 81 $ 110 $ 141 $ 249
N&B AMT Limited Maturity Bond Portfolio.................. $ 82 $ 113 $ 146 $ 258
N&B AMT Partners Portfolio............................... $ 84 $ 118 $ 155 $ 276
OCC Accumulation Trust Global Equity Portfolio........... $ 86 $ 123 $ 163 $ 291
OCC Accumulation Trust Managed Portfolio................. $ 82 $ 113 $ 147 $ 259
OCC Accumulation Trust Small Cap Portfolio............... $ 83 $ 116 $ 152 $ 269
</TABLE>
2. IF THE CONTRACT IS NOT SURRENDERED OR IF IT IS
ANNUITIZED:
<TABLE>
<S> <C> <C> <C> <C>
Alger American Growth Portfolio.......... $ 23 $ 71 $ 122 $ 261
Alger American Leveraged AllCap
Portfolio............................... $ 24 $ 75 $ 128 $ 272
Alger American MidCap Growth Portfolio... $ 23 $ 70 $ 119 $ 256
Alger American Small Capitalization
Portfolio............................... $ 22 $ 68 $ 117 $ 251
Fidelity VIP Equity-Income Portfolio..... $ 20 $ 62 $ 106 $ 229
Fidelity VIP Money Market Portfolio...... $ 21 $ 66 $ 113 $ 242
Fidelity VIP High Income Portfolio....... $ 23 $ 72 $ 124 $ 264
Fidelity VIP Overseas Portfolios......... $ 20 $ 62 $ 106 $ 229
Fidelity VIP II Asset Manager
Portfolio............................... $ 21 $ 64 $ 110 $ 236
Fidelity VIP II Investment Grade Bond
Portfolio............................... $ 17 $ 53 $ 92 $ 200
MFS Total Return Series.................. $ 24 $ 75 $ 128 $ 272
MFS Utilities Series..................... $ 24 $ 75 $ 128 $ 272
MFS World Governments Series............. $ 24 $ 75 $ 128 $ 272
N&B AMT Balanced Portfolio............... $ 22 $ 68 $ 116 $ 249
N&B AMT Limited Maturity Bond
Portfolio............................... $ 23 $ 70 $ 121 $ 258
N&B AMT Partners Portfolio............... $ 25 $ 76 $ 130 $ 276
OCC Accumulation Trust Global Equity
Portfolio............................... $ 26 $ 80 $ 137 $ 291
OCC Accumulation Trust Managed
Portfolio............................... $ 23 $ 71 $ 121 $ 259
OCC Accumulation Trust Small Cap
Portfolio............................... $ 24 $ 74 $ 126 $ 269
</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 Account Fee as an
annual charge of .07% of assets, based upon an anticipated
average Annuity Account Value of $50,000.
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 Sub-Accounts commenced operation on various dates
thereafter. The starting Accumulation Unit Value for each
Sub-Account was $10.00. There follows, for each of the
nineteen Variable Account Sub-Accounts available under the
Contracts, information regarding the changes in the
Accumulation Unit values from date of inception through
December 31, 1997, and the number of Accumulation Units
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
(IN DOLLARS) NUMBER OF
------------------------------------------- ACCUMULATION
ACCUMULATION ACCUMULATION ACCUMULATION UNITS
UNIT VALUE UNIT VALUE UNIT VALUE OUTSTANDING
SUB-ACCOUNT AT 12/31/95 AT 12/31/96 AT 12/31/97 12/31/97
------------------------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Alger American Growth Portfolio 12.386 13.855 17.196 1,521,063
Alger American Leveraged AllCap
Portfolio 13.895 15.364 18.149 401,116
Alger American MidCap Growth
Portfolio 13.107 14.474 16.429 802,891
Alger American Small Cap
Portfolio 13.092 13.461 14.799 1,125,616
Fidelity VIP Equity-Income
Portfolio 12.129 13.679 17.297 2,564,387
Fidelity VIP Money Market
Portfolio 10.245 10.658 12.546 1,017,888
Fidelity VIP High Income
Portfolio * 10.802 11.096 997,952
Fidelity VIP Overseas Portfolio * 10.614 11.687 417,152
Fidelity VIP II Asset Manager
Portfolio 11.280 12.758 15.193 403,681
Fidelity VIP II Investment
Grade Bond Portfolio 10.541 10.734 11.555 776,658
MFS Total Return Series 11.004 12.421 14.870 1,032,242
MFS Utilities Series 11.365 13.293 17.279 322,795
MFS World Governments Series 10.278 10.552 10.297 131,155
N&B AMT Balanced Portfolio 10.270 10.833 12.772 389,760
N&B AMT Limited Maturity Bond
Portfolio 10.547 10.857 11.439 460,111
N&B AMT Partners Portfolio 12.122 15.501 20.081 1,242,083
OCC Accumulation Trust Global
Equity Portfolio 11.759 13.347 15.021 1,032,703
OCC Accumulation Trust Managed
Portfolio 11.144 13.503 16.299 3,343,230
OCC Accumulation Trust Small
Cap Portfolio 10.855 12.719 15.346 448,919
* Had not commenced operations as of December 31, 1995
</TABLE>
11
<PAGE>
THE COMPANY 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
(860) 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 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, 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 nineteen Sub-Accounts of the Variable Account is
invested solely in shares of one of the nineteen Funds
available as funding vehicles under the Contracts. Each 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.
12
<PAGE>
The Trusts and their investment advisers and distributors
are:
The 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 ("Fidelity VIP"), and
Variable Insurance Products Fund II ("Fidelity VIP II"),
managed by Fidelity Management & Research Company and
distributed by Fidelity Distribution Corporation, 82
Devonshire Street, Boston, MA 02103;
MFS-Registered Trademark- Variable Insurance Trust ("MFS
Trust"), managed by Massachusetts Financial Services
Company and distributed by MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116;
Neuberger & Berman Advisers Management Trust ("N&B AMT
Trust"), managed and distributed by Neuberger & Berman
Management Incorporated, 605 Third Avenue, 2nd Floor,
New York, NY 10158-0006;
OCC Accumulation Trust ("OCC Trust") (formerly Quest for
Value Accumulation Trust), managed by OpCap Advisors
(formerly Quest for Value Advisors) and distributed by
OCC Distributors (formerly 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.
Four Funds of FIDELITY VIP are available under the
Contracts:
Equity-Income Portfolio ("Fidelity VIP Equity-Income
Portfolio");
Money Market Portfolio ("Fidelity VIP Money Market
Portfolio");
High Income Portfolio ("Fidelity VIP High Income
Portfolio");
Overseas Portfolio ("Fidelity VIP Overseas Portfolio").
Two Funds of FIDELITY VIP II are available under the
Contracts:
Asset Manager Portfolio ("Fidelity VIP II Asset Manager
Portfolio");
Investment Grade Bond Portfolio ("Fidelity VIP II
Investment Grade 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 N&B AMT Trust are available under the
Contracts:
Balanced Portfolio;
Limited Maturity Bond Portfolio;
Partners Portfolio.
Three Funds of OCC Accumulation Trust are available under
the Contracts:
Global Equity Portfolio;
Managed Portfolio;
Small Cap Portfolio.
The investment advisory fees charged the Funds by their
advisers are shown in the Fee Table at pages 8 and 9 of this
Prospectus.
There follows a brief description of the investment
objective and program of each Fund. There can be no
assurance that any of the stated investment objectives will
be achieved.
13
<PAGE>
ALGER AMERICAN GROWTH PORTFOLIO (Large Cap Stocks): 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 (Large Cap
Stocks): 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 (Mid Cap Stocks):
Seeks long-term capital appreciation by investing in a
diversified, actively managed portfolio of equity
securities, primarily of companies whose total market
capitalization lies within the range of companies included
in the S & P MidCap 400 Index.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO (Small Cap
Stocks): Seeks long-term capital appreciation by investing
in a diversified, actively managed portfolio of equity
securities, primarily of companies whose total market
capitalization lies within the range of companies included
in the Russell 2000 Growth Index or the S&P SmallCap 600
Index.
FIDELITY VIP II ASSET MANAGER PORTFOLIO (Balanced or Total
Return): Seeks high total return with reduced risk over the
long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term money market
instruments.
FIDELITY VIP II INVESTMENT GRADE BOND PORTFOLIO (Fixed
Income -- Intermediate Term Bonds): 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.
FIDELITY VIP EQUITY-INCOME PORTFOLIO (Large Cap Stocks):
Seeks reasonable income by investing primarily in
income-producing equity securities, with some potential for
capital appreciation, seeking a yield that exceeds the
composite yield on the securities comprising the Standard
and Poor's 500 Index (S&P 500).
FIDELITY VIP MONEY MARKET PORTFOLIO (Money Market): 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.
FIDELITY VIP HIGH INCOME PORTFOLIO (High Yield Bonds): Seeks
high current income by investing mainly in high yielding
debt securities, with an emphasis on lower quality
securities.
FIDELITY VIP OVERSEAS PORTFOLIO (International Equity):
Seeks long term growth of capital by investing mainly in
foreign securities.
MFS TOTAL RETURN SERIES (Balanced or Total Return): Seeks
primarily to obtain above-average income, (compared to a
portfolio invested entirely 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 (Specialty): Seeks capital growth and
current income (income above that available from a portfolio
invested entirely in equity securities) by investing, under
normal circumstances, at least 65% of its assets in equity
and debt securities of utility companies.
MFS WORLD GOVERNMENTS SERIES (International Fixed Income):
Seeks not only preservation, but also growth, of capital
together with moderate current income through a
professionally managed, internationally diversified
portfolio consisting primarily of debt securities and to a
lesser extent equity securities.
NEUBERGER&BERMAN AMT BALANCED PORTFOLIO (Balanced or Total
Return): Seeks long-term capital growth and reasonable
current income without undue risk to principal.
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<PAGE>
NEUBERGER&BERMAN AMT LIMITED MATURITY BOND PORTFOLIO (Short
to Intermediate-Term Bonds): Seeks the highest current
income consistent with low risk to principal and liquidity;
and secondarily, total return.
NEUBERGER&BERMAN AMT PARTNERS PORTFOLIO (Large Cap Stocks):
Seeks capital growth. Invests primarily in common stocks of
medium to large capitalization established companies, using
the value-oriented investment approach. The Portfolio seeks
capital growth through an investment approach that is
designed to increase capital with reasonable risk. The
portfolio manager seeks securities believed to be
undervalued based on strong fundamentals such as low
price-to-earnings ratios, consistent cash flow, and the
portfolio company's track record through all parts of the
market cycle.
OCC ACCUMULATION TRUST GLOBAL EQUITY PORTFOLIO
(International Stocks): Seeks long-term capital appreciation
through a global investment strategy primarily involving
equity securities.
OCC ACCUMULATION TRUST MANAGED PORTFOLIO (Balanced or Total
Return): 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.
OCC ACCUMULATION TRUST SMALL CAP PORTFOLIO (Small Cap
Stocks): Seeks capital appreciation through investments in a
diversified portfolio of equity securities of companies with
market capitalizations of under $1 billion.
The Neuberger&Berman AMT Partners Portfolio,
Neuberger&Berman AMT Limited Maturity Bond Portfolio,
Fidelity VIP Equity-Income Portfolio, Fidelity VIP II Asset
Manager Portfolio, Fidelity VIP High Income Portfolio,
Fidelity VIP Overseas Portfolio, MFS Total Return Series,
MFS Utilities Series, MFS World Governments Series, OCC
Accumulation Trust Global Equity Portfolio, OCC Accumulation
Trust Managed Portfolio, and the OCC Accumulation Trust
Small Cap Portfolio funds may invest in non-investment
grade, high yield, high-risk debt securities (commonly
referred to as "junk bonds"), as detailed in the individual
Fund prospectuses.
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.
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<PAGE>
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. Shareholder votes
take place whenever state law or the 1940 Act so require,
for example on certain elections of Board of Trustees, the
initial approval of investment advisory contracts and
changes in investment objectives and fundamental investment
policies.
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.
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 $2,000. 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 order to purchase or Premium Payment. A
Premium Payment in excess of $1 million requires preapproval
by the Company.
The Company may, at its sole discretion, offer special
premium payment programs and/ or 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.
16
<PAGE>
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 Annuity &
Variable Life Services Center. A change will be effective
for payments received on or after receipt of the written
notice of change.
Any Premium Payment at the time of any allocation may be
allocated to a single or multiple sub-accounts in whole
percentages (e.g., 12%). No allocation can be made which
would result in a Variable Account Sub-Account of less than
$50 or a Fixed Account Sub-Account value of less than
$2,000. Further, at this time, no more than 18 Fixed Account
and Variable Account Sub-Accounts may be opened during the
life of the Contract. The Company may expand this number at
a future date.
The Company may, at its sole discretion, waive minimum
premium allocation requirements or minimum Variable Account
Sub-Account requirements.
For initial Premium Payments, if the application or order to
purchase 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 or order to purchase 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 or
order to purchase 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 or order to purchase 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.
OPTIONAL VARIABLE ACCOUNT SUB-ACCOUNT ALLOCATION PROGRAMS
The Contract Owner may elect to enroll in either of the
following programs. However, both programs cannot be in
effect at the same time.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected by the
Contract Owner, systematically allocates specified dollar
amounts from the Money Market Sub-Account or the One-Year
Fixed Account Sub-Account to one or more of the Contract's
Variable Account Sub-Account at regular intervals as
selected by the Contract Owner. By allocating on a regularly
scheduled basis as opposed to allocating the total amount at
one particular time, an Owner may be less susceptible to the
impact of market fluctuations.
Dollar Cost Averaging may be selected by establishing a
Money Market Sub-Account of at least $1,000 or the One-Year
Fixed Account Sub-Account value of at least $2,000. The
minimum amount per month to allocate is $50 (subject to the
18 Sub-Account limitation described under "Allocation of
Premium Payments" above). Enrollment in this program may
occur at any time by calling the Annuity & Variable Life
Services Center or by providing the information requested on
the Dollar Cost Averaging election form to the Company and
ensuring that sufficient value is in the Money Market
Sub-Account or the
17
<PAGE>
One-year Fixed Account Sub-Account. Transfers to any Fixed
Account Sub-Account or from a Fixed Account Sub-Account
other than the One-Year Fixed Account Sub-Account are not
permitted under Dollar Cost Averaging. The Company may, at
its sole discretion, waive Dollar Cost Averaging minimum
deposit and transfer requirements.
Dollar Cost Averaging will terminate when any of the
following occurs: (1) the number of designated transfers has
been completed; (2) the value of the Money Market Sub-
Account or the One-Year Fixed Sub-Account is insufficient to
complete the next transfer; (3) the Owner requests
termination by telephone or in writing and such request is
received at least one week prior to the next scheduled
transfer date to take effect that month; or (4) the Contract
is surrendered.
The Dollar Cost Averaging program is not available following
the Annuity Date. There is no current charge for Dollar Cost
Averaging but the Company reserves the right to charge for
this program.
AUTOMATIC REBALANCING
Automatic Rebalancing is an option which, if elected by the
Contract Owner, periodically restores to a pre-determined
level the percentage of Contract Value allocated to each
Variable Account Sub-Account (e.g. 20% Money Market, 50%
Growth, 30% Utilities). This pre-determined level will be
the allocation initially selected when the Contract was
purchased, unless subsequently changed. The Automatic
Rebalancing allocation may be changed at any time by
submitting a request to the Company.
If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Variable Account Sub-Accounts must
be subject to Automatic Rebalancing. The Fixed Account
Sub-Account is not available for Automatic Rebalancing.
Automatic Rebalancing may take place on either a quarterly,
semi-annual or annual basis, as selected by the Owner. Once
the rebalancing option is activated, any Variable Account
Sub-Account transfers executed outside of the rebalancing
option will terminate the Automatic Rebalancing option. Any
subsequent premium payment or withdrawal that modifies the
net account balance within each Variable Account Sub-Account
may also cause termination of the Automatic Rebalancing
option. Any such termination will be confirmed to the Owner.
The Owner may terminate the Automatic Rebalancing option or
re-enroll at any time by calling or writing the Annuity &
Variable Life Services Center.
The Automatic Rebalancing program is not available following
the Annuity Date. There is no current charge for Automatic
Rebalancing but the Company reserves the right to charge for
this program.
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 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 as follows:
(1)The total value of Fund shares held in the Sub-Account
is calculated by multiplying the number of Fund shares
owned by the Sub-Account at the
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<PAGE>
beginning of the Valuation Period by the net asset
value per share of the Fund at the end of the
Valuation Period, and adding any dividend or other
distribution of the Fund if an ex-dividend date occurs
during the Valuation Period; minus
(2)The liabilities of the Sub-Account at the end of the
Valuation Period; such liabilities include daily
charges imposed on the Sub-Account, and may include a
charge or credit with respect to any taxes paid or
reserved for by the Company that the Company
determines result from the operations of the Variable
Account; and
(3)The result of (2) is divided by the number of
Sub-Account units outstanding at the beginning of the
Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation
Period are equal to the daily mortality and expense risk
charge plus daily administrative expense charge multiplied
by the number of calendar days 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:
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 withdrawn or 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
and 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 on withdrawals from Premium Payments
which have been held under the Contract for
19
<PAGE>
more than seven (7) Contract Years or from 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 of up to 7.00% will be paid to broker-dealers
who sell the Contracts, and the Company will incur
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.
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 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.
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.
ACCOUNT FEE
The Company deducts an annual Account Fee of $35 from the
Annuity Account Value on the last Valuation Date of each
Contract Year. This charge, like the Administrative Expense
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
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<PAGE>
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
Account Fee will be prorated at the time of surrender or
annuitization. On and after the Annuity Date, the 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 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.
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.
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.
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.
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 transfer
fee or charge if there have been no more than twelve
transfers made in the Contract Year. For additional
transfers, the Company reserves the right to deduct a
transfer fee of up to $10 per transfer. Prescheduled
automatic Dollar Cost Averaging or Automatic Rebalancing
transfers are not counted toward the twelve 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.
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.
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<PAGE>
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 7th, 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 Annuity & Variable Life Services 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 may 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.
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.
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<PAGE>
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
91+..................................... 400.00 380.00 390.00
</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
57. 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 Annuity
Account Values for any Optional Death Benefit. (See Appendix
1).
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 Annuity & Variable
Life Services 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
23
<PAGE>
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 Annuity & Variable Life Services 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 Annuity & Variable Life
Services 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 Annuity & Variable
Life Services 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 Annuity & Variable Life
Services 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 90 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.
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 twelve transfers made
in the Contract Year. For additional transfers, the Company
reserves the right to deduct a transfer fee of up to $10
(See "Charges and Deductions -- Transfer Fee"). This
Contract is not designed for professional market timing
organizations or other entities using programmed and
frequent transfers.
24
<PAGE>
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) $2,000 per Fixed Account Sub-Account or $50 per
Variable Account Sub-Account; or (ii) the Contract
Owner's entire interest in the Sub-Account. The Company,
at its sole discretion may waive these minimum
requirements.
c. No partial transfer will be made if the Contract Owner's
remaining Contract Value in the Sub-Account will be less
than $100.
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
are not 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.
k. The Company reserves the right to reject any premium
allocation or transfer which would cause the Fixed
Account Sub-Account values in aggregate to exceed then
current Company limits.
Transfers between Sub-Accounts may be made by calling or
writing the Annuity & Variable Life Services Center.
Transfer requests must be received prior to 4:00 Eastern
Time in order to be effective that day.
Transfers between any Sub-Accounts may be suspended or
postponed during any periiod in which the New York Stock
Exchange is closed or has suspended trading.
PROCEDURES FOR TELEPHONE TRANSFERS
Owners may effect telephone transfers by calling the Annuity
& Variable Life Services Center.
The Company will take the following procedures to confirm
that instructions communicated by telephone are genuine.
Before a service representative accepts any request, the
caller will be asked for specific information to validate
the request. All calls will be recorded. All transactions
performed will be confirmed by the Company in writing. The
Company is not liable for any loss, cost or expense for
acting on telephone instructions which are believed to be
genuine in accordance with these procedures.
25
<PAGE>
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.
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
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 withdrawals from Contracts. (See
"Tax Matters.") 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 Account Fee;
c. any applicable Contingent Deferred Sales Charge; and
d. any applicable accrued charges for the Optional Death
Benefit(s), and in the case of partial withdrawals, by
the sum of: 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.
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
26
<PAGE>
Death Certificate) and a payment election are received by
the Company. Unless an Optional Death Benefit is selected
and in effect, 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
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.
Payment amounts may vary with their frequency and duration
(see "Annuity Provisions -- Annuity Options"). To the extent
that the Beneficiary elects a variable payment option, the
Beneficiary will bear the investment risk associated with
the performance of the underlying Fund(s) in which the
relevant Variable Sub-Account invest(s).
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, valued as described in
"Death of the Contract Owner before the Annuity Date", is
paid on due proof of 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
27
<PAGE>
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.
In addition, upon notice to the Owner, the Contracts may be
modified by the Company to change the withdrawal charges,
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 or order to purchase. The Contract Owner may,
upon at least forty-five (45) 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 forty-five (45) 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
28
<PAGE>
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.
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. Each
annuity payment will be less if payments are to be made more
frequently or for longer periods of time.
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.
29
<PAGE>
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
calculating the Accumulation Unit Value for the current
Valuation Period (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.
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.
After the Annuity Date, the payee may, by written request to
the Annuity & Variable Life Services 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.
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
30
<PAGE>
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 Premium 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 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.
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
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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" above,
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 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, 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 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.
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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. 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)to the power N
------------------
(1+B)to the power 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.
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DISTRIBUTION OF THE CONTRACTS
CIGNA Financial Advisors, Inc. ("CFA"), located at 900
Cottage Grove Road, Bloomfield, CT, acts as the principal
underwriter and the distributor of the Contracts as well as
of certain variable life insurance policies and other
variable annuity contracts issued by the Company. CFA is a
registered broker-dealer under the Securities Exchange Act
of 1934 and a member of the National Association of
Securities Dealers (NASD). As of January 1, 1998, CFA,
formerly a wholly-owned subsidiary of CIGNA Corporation,
became a wholly-owned subsidiary of Lincoln National
Corporation, an Indiana corporation with headquarters in
Fort Wayne, Indiana, whose principal businesses are
insurance and financial services. 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 Account Fee.
OTHER VARIABLE ACCOUNT SUB-ACCOUNTS
From time to time, the other Variable Account Sub-Accounts
may publish their current yields and total returns in
advertisements and communications to Contract Owners. The
current yield for each Variable Account 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 Variable Account 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 Variable Account
Sub-Account's income, including the deduction for the
Mortality and Expense Risk Charge, the Administrative
Expense Charge and the 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 Variable Account
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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 sometimes be published and compared to
the performance of other variable annuity issuers in general
or to the performance of particular types of variable
annuities investing in funds, or series of 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. Generally,
these services may not be used, and such comparisons may not
be made, in advertising or sales literature for variable
annuities.
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 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 MATTERS
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 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
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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.
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 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
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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 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.
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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 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
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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.
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
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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.
FINANCIAL STATEMENTS
Audited financial statements of the Company as of December
31, 1997, 1996 and 1995 are included in the Statement of
Additional Information. Also included are audited financial
statements for the Variable Account, which commenced
operations April 10, 1995, as of and for the periods (as
defined in the financial statements) ended December 31,
1997.
YEAR 2000 ISSUES
Connecticut General Variable Annuity Separate Account II
(the "Account") is a "separate account" of the Company
established under Connecticut insurance law; thus, the
Company is responsible, as part of its Year 2000 updating
process, for the updating of the Account-related computer
systems. Delaware Service Company ("Delaware") provides
substantially all of the necessary accounting and valuation
services for the Account. Delaware, for its part, is
responsible for updating all of its computer systems,
including those which service the Account, to accommodate
the year 2000. The Company and Delaware have begun formal
discussions with each other to assess the requirements for
their respective systems to interface properly in order to
facilitate the accurate and orderly operation of the Account
beginning in the year 2000.
Many existing computer programs use only two digits to
identify a year in the date field. These programs were
designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results
by or at the year 2000. The Year 2000 issue is pervasive and
complex and affects virtually every aspect of the businesses
of both the Company
40
<PAGE>
and Delaware (collectively the "Companies"). The computer
systems of the Companies and their interfaces with the
computer systems of vendors, suppliers, customers and other
business partners are particularly vulnerable. The inability
to properly recognize date-sensitive electronic information
and to transfer data between systems could cause errors or
even complete failure of systems, which would result in a
temporary inability to process transactions correctly and
engage in normal business activities for the Account. The
Companies respectively are redirecting significant portions
of their internal information technology efforts and are
contracting, as needed, with outside consultants to help
update their systems to accommodate the year 2000. Also, in
addition to the discussions with each other noted above, the
Companies have each initiated formal discussions with other
critical parties that interface with their systems to gain
an understanding of the progress by those parties in
addressing Year 2000 issues. While the Companies are making
substantial efforts to address their own systems and the
systems with which they interface, it is not possible to
provide assurance that operational problems will not occur.
The Companies presently believe that, assuming the
modification of existing computer systems, updates by
vendors and conversion to new software and hardware, the
Year 2000 issue will not pose significant operations
problems for their respective computer systems. In addition,
the Companies are incorporating potential issues surrounding
year 2000 into their contingency planning process to address
the probability that, despite these substantial efforts,
there are unresolved Year 2000 problems. If the remediation
efforts noted above are not completed timely or properly,
the Year 2000 issue could have a material adverse impact on
the operation of the businesses of the Companies.
The cost of addressing Year 2000 issues and the timeliness
of completion is being monitored by management of the
respective Companies. Nevertheless, there can be no
guarantee either by the Company or by Delaware that
estimated costs will be achieved, and actual results could
differ significantly from those anticipated. Specific
factors that might cause such differences include, but are
not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all
relevant computer problems, and other uncertainties.
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.
41
<PAGE>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information which contains more details concerning
some subjects discussed in this Prospectus is available (at no cost) by calling
or writing the Annuity & Variable Life Services Center. 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
CALCULATION OF VARIABLE ACCOUNT VALUES.......... 3
Variable Accumulation Unit Value.............. 3
SAMPLE CALCULATIONS AND TABLES.................. 4
Withdrawal Charge and Market Value Adjustment
Tables....................................... 5
STATE REGULATION OF THE COMPANY................. 6
ADMINISTRATION.................................. 6
ACCOUNT INFORMATION............................. 6
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
DISTRIBUTION OF THE CONTRACTS................... 7
CUSTODY OF ASSETS............................... 7
HISTORICAL PERFORMANCE DATA..................... 7
Money Market Sub-Account Yield................ 7
Other Sub-Account Yields...................... 8
Total Returns................................. 8
Other Performance Data........................ 9
LEGAL MATTERS................................... 9
LEGAL PROCEEDINGS............................... 10
EXPERTS......................................... 10
FINANCIAL STATEMENTS............................ 10
Connecticut General Life Insurance Company.... 12
CG Variable Annuity Separate Account II....... 30
</TABLE>
42
<PAGE>
APPENDIX 1
ILLUSTRATION OF
COST OF OPTIONAL DEATH BENEFITS
- --------------------------------------------------------------------------------
SIMPLIFIED EXAMPLE
Contract Owner: Mrs. Smith, female, age 57
Death Benefit Choice: D (annual step-up)
<TABLE>
<CAPTION>
GUARANTEED
DEATH
DATE ACCOUNT VALUE* BENEFIT AMOUNT AT RISK
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
May 15, Year 1 $30,000 $30,000 $0.00
(New contract --
date policy is in
force)
- ---------------------------------------------------------------------------------------------
May 15, Year 2 $40,000 $40,000 $0.00
(First contract (Death
anniversary) benefit
steps up.)
- ---------------------------------------------------------------------------------------------
June 15, Year 2 $30,000 $40,000 Guar. Death Bene. equals: $40,000
(Last day of (Market correction Account Value equals: -$30,000
month. Account is has occurred. Account AMOUNT AT RISK EQUALS: --------
assessed for death value has fallen (Owner WILL be charged $10,000
benefit charges.) below guaranteed for death benefit this
death benefit.) month.)
- ---------------------------------------------------------------------------------------------
July 15, Year 2 $40,000 $40,000 Guar. Death Bene. equals: $40,000
(One month later.) (Market recovers. Account Value equals: -$40,000
Account value has AMOUNT AT RISK EQUALS: --------
increased.) (Owner will NOT be $0.00
charged for death benefit
this month.)
- ---------------------------------------------------------------------------------------------
</TABLE>
In the case shown above, the Amount at Risk on June 15, Yr. 2 would be $10,000.
Now refer to the chart below, also found on page 23 of this prospectus. A 57
year old female will pay $8.34 per thousand of Amount at Risk. 10 X $8.34 =
$83.40. That amount is an annual charge. It is divided by 12 to determine the
monthly charge of $6.95.
In the example above, no Amount at Risk exists on July 15, Yr. 2. The Owner will
NOT be charged for a death benefit that month. However a market recovery in June
will not affect a death benefit charge already accrued for May. That charge is
fixed and will appear on the Owner's annual statement at the end of the Contract
Year.
<TABLE>
<CAPTION>
COST OF OPTIONAL DEATH BENEFIT(S)
ACTUAL 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
91+............................................ 400.00 380.00 390.00
</TABLE>
*After $35 Account Fee is applied.
43
<PAGE>
[LOGO]
29236-2(5/98)
<PAGE>
PART A. PROSPECTUS NO. 3
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
[LOGO]
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
<TABLE>
<S> <C> <C> <C>
HOME OFFICE LOCATION: MAILING ADDRESS: LOCKBOX ADDRESS: BY LOCKBOX ADDRESS: BY
900 COTTAGE GROVE ROAD ANNUITY & VARIABLE LIFE MAIL: OVERNIGHT:
BLOOMFIELD, CT SERVICES CENTER: CONNECTICUT GENERAL LIFE CONNECTICUT GENERAL LIFE
ROUTING S-249 INSURANCE COMPANY INSURANCE COMPANY
HARTFORD, CT 06152-2249 P.O. BOX 30790 C/O FLEET BANK
TELEPHONE: (800) HARTFORD, CT 06150 20 CHURCH STREET
(552-9898) 20TH FLOOR, MSN275
HARTFORD, CT 06120
ATTN: LOCKBOX 30790
</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 Matters -- 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 twenty-one diversified open-end management
investment companies (commonly called mutual funds), each with a different
investment objective: The Alger American Fund -- Alger American Small
Capitalization Portfolio, Alger American Leveraged AllCap Portfolio, Alger
American MidCap Growth Portfolio and Alger American Growth Portfolio; CIGNA
Variable Products Group -- VP Money Market Fund; Fidelity Variable Insurance
Products Fund -- Equity-Income Portfolio, High Income Portfolio and Overseas
Portfolio; Fidelity Variable Insurance Products Fund II -- Investment Grade Bond
Portfolio and Contrafund Portfolio; Fidelity Variable Insurance Products Fund
III -- Growth Opportunities Portfolio; MFS-Registered Trademark- Variable
Insurance Trust -- MFS Total Return Series, MFS Utilities Series, MFS Emerging
Growth Series, MFS Research Series and MFS Growth With Income Series; Neuberger
& Berman Advisers Management Trust -- Limited Maturity Bond Portfolio and
Partners Portfolio; OCC 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" dated May 1, 1998, available at no charge by calling or
writing the Company's Annuity & Variable Life Services 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, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
DEFINITIONS.................................... 3
HIGHLIGHTS..................................... 5
FEES AND EXPENSES.............................. 7
CONDENSED FINANCIAL INFORMATION................ 11
THE COMPANY AND THE VARIABLE ACCOUNT........... 12
THE FUNDS...................................... 12
General...................................... 16
Substitution of Securities................... 16
Voting Rights................................ 16
PREMIUM PAYMENTS AND CONTRACT VALUE............ 17
Premium Payments............................. 17
Allocation of Premium Payments............... 17
Optional Variable Account Sub-Account
Allocation Programs......................... 18
Dollar Cost Averaging...................... 18
Automatic Rebalancing...................... 18
Contract Value............................... 19
Accumulation Unit............................ 19
CHARGES AND DEDUCTIONS......................... 20
Contingent Deferred Sales Charge (Sales
Load)....................................... 20
Mortality and Expense Risk Charge............ 21
Administrative Expense Charge................ 21
Account Fee.................................. 21
Premium Tax Equivalents...................... 21
Income Taxes................................. 22
Fund Expenses................................ 22
Transfer Fee................................. 22
DEATH BENEFITS................................. 22
Death Benefits Provided by the Contract...... 22
Amount of Death Benefit...................... 23
Election and Effective Date of Election...... 23
Death of the Annuitant before the Annuity
Date........................................ 24
Death of the Annuitant after the Annuity
Date........................................ 24
OTHER CONTRACT FEATURES........................ 24
Ownership.................................... 24
Assignment................................... 25
Beneficiary.................................. 25
Change of Beneficiary........................ 25
Annuitant.................................... 25
Transfer of Contract Values between Sub-
Accounts.................................... 25
Procedures for Telephone Transfers........... 26
<CAPTION>
CONTENTS PAGE
<S> <C>
Surrenders and Partial Withdrawals........... 27
Delay of Payments and Transfers.............. 27
Change in Operation of Variable Account...... 27
Modification................................. 28
Discontinuance............................... 28
ANNUITY PROVISIONS............................. 28
Annuity Date; Change in Annuity Date and
Annuity Option.............................. 28
Annuity Options.............................. 29
Fixed Options................................ 29
Variable Options............................. 29
Evidence of Survival......................... 30
Endorsement of Annuity Payments.............. 30
THE FIXED ACCOUNT.............................. 30
Market Value Adjustment...................... 32
DISTRIBUTION OF THE CONTRACTS.................. 34
PERFORMANCE DATA............................... 34
Money Market Sub-Account..................... 34
Other Variable Account Sub-Accounts.......... 34
Performance Ranking or Rating................ 35
TAX MATTERS.................................... 35
General...................................... 35
Diversification.............................. 36
Distribution Requirements.................... 37
Multiple Contracts........................... 37
Tax Treatment of Assignments................. 37
Withholding.................................. 37
Section 1035 Exchanges....................... 38
Tax Treatment of Withdrawals -- Non-Qualified
Contracts................................... 38
Qualified Plans.............................. 38
Section 403(b) Plans......................... 39
Individual Retirement Annuities.............. 39
Corporate Pension and Profit-Sharing Plans
and H.R. 10 Plans........................... 39
Deferred Compensation Plans.................. 39
Tax Treatment of Withdrawals -- Qualified
Contracts................................... 40
FINANCIAL STATEMENTS........................... 40
YEAR 2000 ISSUES............................... 40
LEGAL PROCEEDINGS.............................. 41
TABLE OF CONTENTS OF THE STATEMENT OF
ADDITIONAL INFORMATION........................ 42
</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 & VARIABLE LIFE SERVICES CENTER: The office of the
Company to which notices are given and any customer service
requests are made. Mailing address: Annuity & Variable Life
Services Center, Routing S-249, Hartford, CT 06152-2249.
Premium Payments must be sent, and all other correspondence
may be sent, to either Lockbox address: If by mail: P.O. Box
30790, Hartford, CT 06150; If by overnight courier: c/o
Fleet Bank, 20 Church Street, 20th Floor, MSN275, Hartford,
CT 06120, Attn: Lockbox 30790.
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 fixed and 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.
CERTIFICATE: The document which evidences the participation
of an Owner in a group contract.
CODE: The Internal Revenue Code of 1986, as amended.
COMPANY: Connecticut General Life Insurance Company.
CONTRACT: The Variable Annuity Contract described in this
prospectus (or the certificate evidencing the Owner's
participation in a group contract).
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 order to purchase or
otherwise, unless later changed, as having all ownership
rights under the Contract; is the Certificate Owner under a
group contract.
3
<PAGE>
FIXED ACCOUNT: Those Sub-Accounts associated with Guaranteed
Periods and Guaranteed Rates. 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 the Alger American Funds -- Alger
American Small Capitalization Portfolio, Alger American
Leveraged AllCap Portfolio, Alger American MidCap Growth
Portfolio and Alger American Growth Portfolio; CIGNA
Variable Products Group -- VP Money Market Fund; Fidelity
Variable Insurance Products Fund -- Equity-Income Portfolio,
High Income Portfolio and Overseas Portfolio; Fidelity
Variable Insurance Products Fund II -- Investment Grade Bond
Portfolio and Contrafund Portfolio; Fidelity Variable
Insurance Products Fund III -- Growth Opportunities
Portfolio; MFS-Registered Trademark- Variable Insurance
Trust -- MFS Total Return Series, MFS Utilities Series, MFS
Emerging Growth Series, MFS Research Series and MFS Growth
with Income Series; Neuberger&Berman Advisers Management
Trust -- Limited Maturity Bond Portfolio and Partners
Portfolio; OCC Accumulation Trust -- Global Equity
Portfolio, Managed Portfolio and 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, five 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 Annuity & Variable Life
Services 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.
PREMIUM PAYMENT: Any amount paid to the Company cleared in
good funds as consideration for the benefits provided by the
Contract. 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.
SHARES: Shares of a Fund.
4
<PAGE>
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, contract fees and premium
tax equivalents and adjusted by any Market Value Adjustment)
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 or to receive a partial
withdrawal.
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 Value 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 Value during the Annuity Period, to
determine the amount of each variable annuity payment.
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 Annuity & Variable Life Services Center.
The Contract may be returned within 10 days after it is
received, longer in some states. 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
5
<PAGE>
to directly allocate the initial Premium Payment to the
Fund(s) designated in the application or order to purchase,
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, during each Contract Year,
withdraw 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 -- 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 surrenders, withdrawals or
transfers from the Fixed Account portion of the Contract.
There is a Mortality and Expense Risk Charge which is equal,
on an annual basis, to 1.25% 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 -- Mortality and
Expense Risk Charge").
There is an Administrative Expense Charge which is equal, on
an annual basis, to 0.15% of the average daily net assets of
the Variable Account (See "Charges and Deductions --
Administrative Expense Charge").
There is an annual Account Fee of $35 ($30 for New York
Contracts) which is waived if the Annuity Account Value
equals or exceeds $100,000 at the end of the Contract Year
(See "Charges and Deductions -- Account Fee").
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 -- Premium Tax
Equivalents").
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 -- 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 Matters -- Tax Treatment of
Withdrawals -- Qualified Contracts.") For a further
discussion of the taxation of the Contracts, see "Tax
Matters."
6
<PAGE>
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. It is
not applied against a surrender or transfer taking place at
the end of the Guaranteed Period.
FEES AND EXPENSES
CONTRACT OWNER TRANSACTION FEES
Contingent Deferred Sales Charge (as a percentage of Premium
Payments):
YEARS SINCE
PAYMENT CHARGE
----------- -------
0-1 7%
1-2 7% A Contract Owner may, during each
2-3 7% Contract Year, withdraw up to
3-4 6% 15% of Premium Payments made, or
4-5 6% any remaining portion thereof,
5-6 5% without incurring a Contingent
6-7 4% Deferred Sales Charge.
7+ 0
<TABLE>
<S> <C> <C>
Transfer Fee........ $10
- Not imposed on the first twelve transfers during a Contract
Year. Pre-scheduled automatic dollar cost averaging or
automatic rebalancing transfers are not counted.
Account Fee......... $35 per Contract Year ($30 for New York
Contracts)
- Waived if Annuity Account Value at the end of the Contract
Year is $100,000 or more.
</TABLE>
VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
<TABLE>
<S> <C>
Mortality and Expense Risk Charge......... 1.25%
Administrative Expense Charge............. 0.15%
---
Total Variable Account Annual Expenses.... 1.40%
</TABLE>
7
<PAGE>
EXPENSE DATA
The purpose of the following Table is to help Purchasers and prospective
purchasers understand the costs and expenses that are borne, directly and
indirectly, by Purchasers assuming that all Premium Payments are allocated to
the Variable Account. The table reflects expenses of the Variable Account as
well as of the individual Funds underlying the Variable Sub-Accounts.
FEE TABLE
<TABLE>
<CAPTION>
THE ALGER AMERICAN FUND
--------------------------------------------
ALGER ALGER ALGER
ALGER AMERICAN AMERICAN AMERICAN
AMERICAN LEVERAGED MIDCAP SMALL
GROWTH ALLCAP GROWTH CAP
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------- ----------- -------- --------
<S> <C> <C> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge....... 1.25% 1.25% 1.25% 1.25%
Administrative Expense Charge........... 0.15% 0.15% 0.15% 0.15%
Total Separate Account Annual
Expenses............................... 1.40% 1.40% 1.40% 1.40%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees......................... 0.75% 0.85% 0.80% 0.85%
Other Expenses.......................... 0.04% 0.15% 0.04% 0.04%
Total Fund Portfolio Annual Expenses.... 0.79% 1.00%(1) 0.84% 0.89%
<CAPTION>
FIDELITY VARIABLE INSURANCE
PRODUCTS FUNDS
-----------------------------------------------------------------------------
VIP II
VIP II INVESTMENT VIP III
CONTRA- VIP EQUITY GRADE VIP HIGH VIP GROWTH
FUND INCOME BOND INCOME OVERSEAS OPPORTUNITIES
PORTFOLIO PORTFOLIO PORTFOLIO FUND PORTFOLIO PORTFOLIO
----------- ----------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge....... 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Administrative Expense Charge........... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Total Separate Account Annual
Expenses............................... 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees......................... 0.60% 0.50% 0.44% 0.59% 0.75% 0.60%
Other Expenses.......................... 0.11% 0.08% 0.14% 0.12% 0.17% 0.14%
Total Fund Portfolio Annual Expenses.... 0.71%(2) 0.58%(2) 0.58% 0.71% 0.92%(2) 0.74%(2)
</TABLE>
- ------------------------------
(1) Included in Other Expenses of the Alger American Leveraged AllCap Portfolio
is .04% of interest expense.
(2) A portion of the brokerage commissions that certain funds pay was used to
reduce funds expenses. In addition, certain funds have entered into
arrangements with their custodian whereby credits realized as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, Total Fund Portfolio Annual Expenses would have been 0.57
for the VIP Equity-Income Portfolio, 0.90% for the VIP Overseas Portfolio,
0.68% for the VIP II Contrafund Portfolio and 0.73% for the VIP III Growth
Opportunities Portfolio.
8
<PAGE>
The table does not reflect the deductions for the annual $35 Account Fee ($30
for New York Contracts) or premium tax equivalents. The information set forth
should be considered together with the information provided in this Prospectus
under the heading "Fees and Expenses", and in each Fund's Prospectus. All
expenses are expressed as a percentage of average account value.
<TABLE>
<CAPTION>
NEUBERGER&BERMAN
ADVISERS MANAGEMENT CIGNA
VARIABLE
MFS VARIABLE INSURANCE TRUST PRODUCTS
- --------------------------------------------------------- TRUST(5) GROUP
MFS --------------------- --------- OCC ACCUMULATION TRUST
MFS MFS GROWTH LIMITED VP ---------------------------------
TOTAL MFS EMERGING MFS WITH MATURITY MONEY GLOBAL
RETURN UTILITIES GROWTH RESEARCH INCOME PARTNERS BOND MARKET EQUITY MANAGED SMALL CAP
SERIES SERIES SERIES SERIES SERIES PORTFOLIO PORTFOLIO FUND PORTFOLIO PORTFOLIO PORTFOLIO
- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.30%
0.75% 0.75% 0.75% 0.75% 0.75% 0.80%(6) 0.65%(6) 0.35% 0.79%(8) 0.80%(8) 0.80%(8)
0.25%(4) 0.25%(4) 0.12%(4) 0.13%(4) 0.25%(4) 0.06% 0.12% 0.15% 0.40%(9) 0.07%(9) 0.17%(9)
1.00%(3) 1.00%(3) 0.87% 0.88% 1.00%(3) 0.86% 0.77% 0.50%(7) 1.19%(10) 0.87%(10) 0.97%(10)
</TABLE>
- ------------------------------
(3) The Adviser has agreed to bear expenses for each Series, subject to
reimbursement by each Series, such that each Series' "Other Expenses" shall
not exceed 0.25% of the average daily net assets of the Series during the
current fiscal year. Otherwise, "Other Expenses" for the Growth With Income
Series, Total Return Series and Utilities Series would be 0.35%, 0.27%,
0.45% and "Total Fund Portfolio Expenses" would be 1.10%, 1.02% and 1.20%
respectively, for these Series. See "Information Concerning Shares of Each
Series -- Expenses."
(4) Each Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Series' expenses). Any such fee reductions are not
reflected under "Other Expenses".
(5) Neuberger&Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Managers Trust.
(6) The figures reported here are "Investment Management and Administration
Fees" which include the aggregate of the administration fees paid by the
Portfolio and the management fees paid by its corresponding Series.
Similarly, "Other Expenses" includes all other expenses of the Portfolio and
its corresponding Series.
(7) Through May 1, 1999, the Fund's adviser has agreed to bear expenses of the
Fund so that Total Fund Portfolio Annual Operating Expenses do not exceed
0.50% of average daily net asset value. Otherwise, Total Fund Portfolio
Annual Operating Expenses would have been 1.11% of average daily net asset
value for 1997.
(8) Reflects management fees after taking into effect any waiver.
(9) Other Expenses are shown gross of expense offsets afforded the Portfolios
which effectively lowered overall custody expenses.
(10) Total Portfolio Expenses for the Small Cap and Managed Portfolios are
limited by OpCap Advisors so that their respective annualized operating
expenses (net of any expense offsets) do not exceed 1.00% of average daily
net assets. Total Portfolio Expenses for the Global Equity Portfolio are
limited to 1.25% of average daily net assets. Without such limitation and
without giving effect to any expense offsets, the Management Fees, Other
Expenses and Total Portfolio Expenses incurred for the fiscal year ended
December 31, 1997 would have been: .80%, .17% and .97%, respectively, for
the Small Cap Portfolio, .80%, .07% and .87%, respectively, for the Managed
Portfolio and .80%, .40% and 1.20%, respectively, for the Global Equity
Portfolio.
9
<PAGE>
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 $ 134 $ 178 $ 271
Alger Leveraged AllCap Portfolio......................... $ 85 $ 137 $ 184 $ 282
Alger MidCap Growth Portfolio............................ $ 83 $ 132 $ 176 $ 266
Alger Growth Portfolio................................... $ 83 $ 131 $ 173 $ 261
CIGNA VP Money Market Fund............................... $ 80 $ 122 $ 158 $ 231
Fidelity VIP Equity-Income Portfolio..................... $ 80 $ 124 $ 162 $ 239
Fidelity VIP High Income Portfolio....................... $ 82 $ 128 $ 169 $ 253
Fidelity VIP Overseas Portfolio.......................... $ 84 $ 135 $ 180 $ 274
Fidelity VIPII Investment Grade Bond Portfolio........... $ 80 $ 124 $ 162 $ 239
Fidelity VIPII Contrafund Portfolio...................... $ 82 $ 128 $ 169 $ 253
Fidelity VIPIII Growth Opportunities Portfolio........... $ 82 $ 129 $ 170 $ 256
MFS Total Return Series.................................. $ 85 $ 137 $ 184 $ 282
MFS Utilities Series..................................... $ 85 $ 137 $ 184 $ 282
MFS Emerging Growth Series............................... $ 83 $ 133 $ 177 $ 269
MFS Research Series...................................... $ 84 $ 134 $ 178 $ 270
MFS Growth With Income Series............................ $ 85 $ 137 $ 184 $ 282
N&B AMT Limited Maturity Bond Portfolio.................. $ 82 $ 130 $ 172 $ 259
N&B AMT Partners Portfolio............................... $ 83 $ 133 $ 177 $ 268
OCC Accumulation Trust Global Equity Portfolio........... $ 87 $ 143 $ 193 $ 301
OCC Accumulation Trust Managed Portfolio................. $ 83 $ 133 $ 177 $ 269
OCC Accumulation Trust Small Cap Portfolio............... $ 84 $ 136 $ 182 $ 279
2. IF THE CONTRACT IS NOT SURRENDERED OR IF IT IS ANNUITIZED:
Alger Small Capitalization Portfolio..................... $ 24 $ 74 $ 127 $ 271
Alger Leveraged AllCap Portfolio......................... $ 25 $ 78 $ 133 $ 282
Alger MidCap Growth Portfolio............................ $ 24 $ 73 $ 125 $ 266
Alger Growth Portfolio................................... $ 23 $ 71 $ 122 $ 261
CIGNA VP Money Market Fund............................... $ 20 $ 62 $ 107 $ 231
Fidelity VIP Equity-Income Portfolio..................... $ 21 $ 65 $ 111 $ 239
Fidelity VIP High Income Portfolio....................... $ 22 $ 69 $ 118 $ 253
Fidelity VIP Overseas Portfolio.......................... $ 24 $ 75 $ 129 $ 274
Fidelity VIPII Investment Grade Bond Portfolio........... $ 21 $ 65 $ 111 $ 239
Fidelity VIPII Contrafund Portfolio...................... $ 22 $ 69 $ 118 $ 253
Fidelity VIPIII Growth Opportunities Portfolio........... $ 23 $ 70 $ 119 $ 256
MFS Total Return Series.................................. $ 25 $ 78 $ 133 $ 282
MFS Utilities Series..................................... $ 25 $ 78 $ 133 $ 282
MFS Emerging Growth Series............................... $ 24 $ 74 $ 126 $ 269
MFS Research Series...................................... $ 24 $ 74 $ 127 $ 270
MFS Growth With Income Series............................ $ 25 $ 78 $ 133 $ 282
N&B AMT Limited Maturity Bond Portfolio.................. $ 23 $ 71 $ 121 $ 259
N&B AMT Partners Portfolio............................... $ 24 $ 73 $ 126 $ 268
OCC Accumulation Trust Global Equity Portfolio........... $ 27 $ 84 $ 142 $ 301
OCC Accumulation Trust Managed Portfolio................. $ 24 $ 74 $ 126 $ 269
OCC Accumulation Trust Small Cap Portfolio............... $ 25 $ 77 $ 131 $ 279
</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
10
<PAGE>
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
may be applicable.
These examples reflect the annual $35 Account Fee as an
annual charge of .07% of assets, based upon an anticipated
average Annuity Account Value of $50,000. The results would
be slightly different for New York Contracts which have a
$30 annual Account Fee.
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 Sub-Accounts commenced operation on various dates
thereafter. The starting Accumulation Unit Value for each
Sub-Account was $10.00. There follows, for each of the
twenty-one Variable Account Sub-Accounts available under the
Contracts, information regarding the changes in the
Accumulation Unit values from date of inception through
December 31, 1997, and the number of Accumulation Units
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF
DATE INITIALLY ACCUMULATION
FUNDED ACCUMULATION UNITS
(INCEPTION UNIT VALUE OUTSTANDING
SUB-ACCOUNT DATE) AT 12/31/97 12/31/97
------------------------------------------ --------------- ------------- -----------------
<S> <C> <C> <C> <C>
Alger American Growth Portfolio 6/6/97 11.169 241,255
Alger American Leveraged AllCap Portfolio 6/9/97 10.988 52,402
Alger American MidCap Growth Portfolio 6/2/97 11.124 112,152
Alger American Small Cap Portfolio 6/6/97 11.406 175,551
CIGNA VIP Money Market Fund 5/20/97 10.231 671,479
Fidelity VIP Equity-Income Portfolio 6/6/97 11.250 456,837
Fidelity VIP High Income Portfolio 6/2/97 11.013 391,937
Fidelity VIP Overseas Portfolio 6/2/97 9.986 187,414
Fidelity VIPII Contrafund Portfolio 6/2/97 11.485 148,976
Fidelity VIPII Investment Grade Bond
Portfolio 6/9/97 10.587 175,848
Fidelity VIPIII Growth Opportunities
Portfolio 6/9/97 11.380 336,690
MFS Total Return Series 6/2/97 11.107 244,760
MFS Utilities Series 6/9/97 12.027 39,107
MFS Emerging Growth Series 6/2/97 11.329 187,043
MFS Research Series 6/9/97 10.759 341,999
MFS Growth with Income Series 6/5/97 11.422 242,027
N&B AMT Limited Maturity Bond Portfolio 6/2/97 10.359 116,110
N&B AMT Partners Portfolio 5/22/97 11.785 637,684
OCC Accumulation Trust Global Equity
Portfolio 6/2/97 10.384 226,381
OCC Accumulation Trust Managed Portfolio 5/22/97 11.210 792,156
OCC Accumulation Trust Small Cap Portfolio 6/13/97 10.689 145,504
</TABLE>
11
<PAGE>
THE COMPANY 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
(860) 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 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, account fees, mortality and expense risk
charges, administrative expense charges 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 twenty-one Sub-Accounts of the Variable Account
is invested solely in shares of one of the twenty-one Funds
available as funding vehicles under the Contracts. Each of
the Funds is a series of one of eight 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.
12
<PAGE>
The Trusts and their investment advisers and distributors
are:
The 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;
CIGNA Variable Products Group ("CIGNA Group"), managed
by CIGNA Investments, Inc. and distributed by CIGNA
Financial Advisors, Inc., 900 Cottage Grove Road,
Bloomfield, CT 06002;
Variable Insurance Products Fund ("Fidelity VIP"),
Variable Insurance Products Fund II ("Fidelity VIP II")
and Variable Insurance Products Fund III ("Fidelity VIP
III"), managed by Fidelity Management & Research Company
and distributed by Fidelity Distribution Corporation, 82
Devonshire Street, Boston, MA 02103;
MFS-Registered Trademark- Variable Insurance Trust ("MFS
Trust"), managed by Massachusetts Financial Services
Company and distributed by MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116;
Neuberger & Berman Advisers Management Trust ("N&B AMT
Trust"), managed and distributed by Neuberger & Berman
Management Incorporated, 605 Third Avenue, 2nd Floor,
New York, NY 10158-0006;
OCC Accumulation Trust ("OCC Trust") (formerly Quest for
Value Accumulation Trust), managed by OpCap Advisors
(formerly Quest for Value Advisors) and distributed by
OCC Distributors (formerly 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.
One Fund of CIGNA Group is available under the Contracts:
Money Market Fund ("CIGNA VP Money Market Fund").
Three Funds of FIDELITY VIP are available under the
Contracts:
Equity-Income Portfolio ("Fidelity VIP Equity-Income
Portfolio");
High Income Portfolio ("Fidelity VIP High Income
Portfolio");
Overseas Portfolio ("Fidelity VIP Overseas Portfolio").
Two Funds of FIDELITY VIPII are available under the
Contracts:
Contrafund Portfolio ("Fidelity VIPII Contra Fund
Portfolio");
Investment Grade Bond Portfolio ("Fidelity VIP II
Investment Grade Bond Portfolio").
One Fund of FIDELITY VIPIII is available under the
Contracts:
Growth Opportunities Portfolio ("Fidelity VIP III Growth
Opportunities Portfolio").
Five Funds of MFS Trust are available under the Contracts:
MFS Total Return Series;
MFS Utilities Series;
13
<PAGE>
MFS Emerging Growth Series;
MFS Research Series;
MFS Growth with Income Series.
Two Funds of N&B AMT Trust are available under the
Contracts:
Limited Maturity Bond Portfolio;
Partners Portfolio.
Three Funds of OCC Accumulation Trust are available under
the Contracts:
Global Equity Portfolio;
Managed Portfolio;
Small Cap Portfolio.
The investment advisory fees charged the Funds by their
advisers are shown in the Fee Table at pages 8 and 9 of this
Prospectus.
There follows a brief description of the investment
objective and program of each Fund. There can be no
assurance that any of the stated investment objectives will
be achieved.
ALGER AMERICAN GROWTH PORTFOLIO (Large Cap Stocks): 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 (Large Cap
Stocks): 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 (Mid Cap Stocks):
Seeks long-term capital appreciation by investing in a
diversified, actively managed portfolio of equity
securities, primarily of companies whose total market
capitalization lies within the range of companies included
in the S & P MidCap 400 Index.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO (Small Cap
Stocks): Seeks long-term capital appreciation by investing
in a diversified, actively managed portfolio of equity
securities, primarily of companies whose total market
capitalization lies within the range of companies included
in the Russell 2000 Growth Index or the S&P SmallCap 600
Index.
CIGNA VP MONEY MARKET FUND (Money Market): 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.
FIDELITY VIPII CONTRAFUND PORTFOLIO (Large Cap Stocks) Seeks
capital appreciation by investing primarily in securities of
companies whose value the advisor believes is not fully
recognized by the public.
FIDELITY VIPII INVESTMENT GRADE BOND PORTFOLIO (Fixed
Income-Intermediate Term Bonds): 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.
FIDELITY VIP EQUITY-INCOME PORTFOLIO (Large Cap Stocks):
Seeks reasonable income by investing primarily in
income-producing equity securities, with some potential for
capital appreciation, seeking a yield that exceeds the
composite yield on the securities comprising the Standard
and Poor's 500 Index (S&P 500).
14
<PAGE>
FIDELITY VIP HIGH INCOME PORTFOLIO (High Yield Bonds): Seeks
high current income by investing mainly in high yielding
debt securities, with an emphasis on lower quality
securities.
FIDELITY VIP OVERSEAS PORTFOLIO (International Equity):
Seeks long term growth of capital by investing mainly in
foreign securities.
FIDELITY VIPIII GROWTH OPPORTUNITIES PORTFOLIO (Large Cap
Stocks): Seeks capital growth by investing primarily in
common stocks and securities convertible into common stocks.
MFS EMERGING GROWTH SERIES (Large Cap Stocks): Seeks
long-term growth of capital by investing primarily in common
stocks of companies management believes to be early in their
life cycle but which have the potential to become major
enterprises.
MFS GROWTH WITH INCOME SERIES (Large Cap Stocks): Seeks
reasonable current income and long-term growth of capital
and income.
MFS RESEARCH SERIES (Large Cap Stocks): Seeks to provide
long-term growth of capital and future income.
MFS TOTAL RETURN SERIES (Balanced or Total Return): Seeks
primarily to obtain above-average income, (compared to a
portfolio invested entirely 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 (Specialty): Seeks capital growth and
current income (income above that available from a portfolio
invested entirely in equity securities) by investing, under
normal circumstances, at least 65% of its assets in equity
and debt securities of utility companies.
NEUBERGER&BERMAN AMT LIMITED MATURITY BOND PORTFOLIO (Short
to Intermediate Term Bonds): Seeks the highest current
income consistent with low risk to principal and liquidity;
and secondarily, total return.
NEUBERGER&BERMAN AMT PARTNERS PORTFOLIO (Large Cap Stocks):
Seeks capital growth. Invests principally in common stocks
of medium to large capitalization established companies,
using the value-oriented investment approach. The Portfolio
seeks capital growth through an investment approach that is
designed to increase capital with reasonable risk. The
portfolio manager seeks securities believed to be
undervalued based on strong fundamentals such as low
price-to-earnings ratios, consistent cash flow, and the
portfolio company's track record through all parts of the
market cycle.
OCC ACCUMULATION TRUST GLOBAL EQUITY PORTFOLIO
(International Stocks): Seeks long-term capital appreciation
through a global investment strategy primarily involving
equity securities.
OCC ACCUMULATION TRUST MANAGED PORTFOLIO (Balanced or Total
Return): 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.
OCC ACCUMULATION TRUST SMALL CAP PORTFOLIO (Small Cap
Stocks): Seeks capital appreciation through investments in a
diversified portfolio of equity securities of companies with
market capitalizations of under $1 billion.
The Neuberger&Berman AMT Partners Portfolio,
Neuberger&Berman Limited Maturity Bond Portfolio, Fidelity
VIP Equity-Income Portfolio, Fidelity VIP II Contra Fund
Portfolio, Fidelity VIP High Income Portfolio, Fidelity VIP
Overseas Portfolio, MFS Emerging Growth Series, MFS Research
Series, MFS Total Return Series, MFS Utilities Series, OCC
Accumulation Trust Global Equity Portfolio, OCC Accumulation
Trust Managed Portfolio,
15
<PAGE>
and the OCC Accumulation Trust Small Cap Portfolio funds may
invest in non-investment grade, high yield, high-risk debt
securities (commonly referred to as "junk bonds"), as
detailed in the individual Fund prospectuses.
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. Shareholder votes
take place whenever state law or the 1940 Act so require,
for example on certain elections of Board of Trustees, the
initial approval of investment advisory contracts and
changes in investment objectives and fundamental investment
policies.
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.
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<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 $2,000. 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 order to purchase or Premium Payment. A
Premium Payment in excess of $1 million requires preapproval
by the Company.
The Company may, at its sole discretion, offer special
premium payment programs and/ or 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.
In such cases, the initial Premium Payment will be allocated
to the money market account until the right-to-examine
period has expired.
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 Annuity &
Variable Life Services Center. A change will be effective
for payments received on or after receipt of the notice of
change.
Any Premium Payment at the time of any allocation may be
allocated to a single or multiple sub-accounts in whole
percentages (e.g., 12%). No allocation can be made which
would result in a Variable Account Sub-Account of less than
$50 or a Fixed Account Sub-Account value of less than
$2,000. Further, at this time, no more than 18 Fixed Account
and Variable Account Sub-Accounts may be opened during the
life of the Contract. The Company may expand this number at
a future date.
The Company may, at its sole discretion, waive minimum
premium allocation requirements or minimum Variable Account
Sub-Account requirements.
For initial Premium Payments, if the application or order to
purchase 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.
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<PAGE>
If the application or order to purchase 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 or
order to purchase 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 or order to purchase 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.
OPTIONAL VARIABLE ACCOUNT SUB-ACCOUNT ALLOCATION PROGRAMS
The Contract Owner may elect to enroll in either of the
following programs. However, both programs cannot be in
effect at the same time.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected by the
Contract Owner, systematically allocates specified dollar
amounts from the Money Market Sub-Account or the One-Year
Fixed Account Sub-Account to one or more of the Contract's
Variable Account Sub-Accounts at regular intervals as
selected by the Contract Owner. By allocating on a regularly
scheduled basis as opposed to allocating the total amount at
one particular time, an Owner may be less susceptible to the
impact of market fluctuations.
Dollar Cost Averaging may be selected by establishing a
Money Market Sub-Account of at least $1,000 or a One-Year
Fixed Account Sub-Account with a value of at least $2,000.
The minimum amount per month to allocate is $50 (subject to
the 18 Sub-Account limitation described under "Allocation of
Premium Payments" above). Enrollment in this program may
occur at any time by calling or writing the Annuity &
Variable Life Services Center or by providing the
information requested on the Dollar Cost Averaging election
form to the Company and ensuring that sufficient value is in
the Money Market Sub-Account or the One-year Fixed Account
Sub-Account. Transfers to any Fixed Account Sub-Account or
from a Fixed Account Sub-Account other than the One-Year
Fixed Account Sub-Account are not permitted under Dollar
Cost Averaging. The Company may, at its sole discretion,
waive Dollar Cost Averaging minimum deposit and transfer
requirements.
Dollar Cost Averaging will terminate when any of the
following occurs: (1) the number of designated transfers has
been completed; (2) the value of the Money Market Sub-
Account or the One-Year Fixed Sub-Account is insufficient to
complete the next transfer; (3) the Owner requests
termination by telephone or in writing and such request is
received at least one week prior to the next scheduled
transfer date to take effect that month; or (4) the Contract
is surrendered.
The Dollar Cost Averaging program is not available following
the Annuity Date. There is no current charge for Dollar Cost
Averaging but the Company reserves the right to charge for
this program.
AUTOMATIC REBALANCING
Automatic Rebalancing is an option which, if elected by the
Contract Owner, periodically restores to a pre-determined
level the percentage of Contract Value allocated to each
Variable Account Sub-Account (e.g. 20% Money Market, 50%
Growth, 30% Utilities).
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<PAGE>
This pre-determined level will be the allocation initially
selected when the Contract was purchased, unless
subsequently changed. The Automatic Rebalancing allocation
may be changed at any time by submitting a request to the
Company.
If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Variable Account Sub-Accounts must
be subject to Automatic Rebalancing. The Fixed Account
Sub-Account is not available for Automatic Rebalancing.
Automatic Rebalancing may take place on either a quarterly,
semi-annual or annual basis, as selected by the Owner. Once
the rebalancing option is activated, any Variable Account
Sub-Account transfers executed outside of the rebalancing
option will terminate the Automatic Rebalancing option. Any
subsequent premium payment or withdrawal that modifies the
net account balance within each Variable Account Sub-Account
may also cause termination of the Automatic Rebalancing
option. Any such termination will be confirmed to the Owner.
The Owner may terminate the Automatic Rebalancing option or
re-enroll at any time by calling or writing the Annuity &
Variable Life Services Center.
The Automatic Rebalancing program is not available following
the Annuity Date. There is no current charge for Automatic
Rebalancing but the Company reserves the right to charge for
this program.
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 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 as follows:
(1)The total value of fund shares held in the sub-Account
is calculated by multiplying the number of Fund shares
owned by the sub-Account at the beginning of the
Valuation Period by the net asset value per share of
the Fund at the end of the Valuation Period,and adding
any dividing or other distribution of the fund of an
ex-dividend date occurs during the Valuation Period;
minus
(2)The liabilities of the Sub-Account at the end of the
Valuation Period; such liabilities include daily
charges imposed on the sub-Account, and may include a
charge or credit with respect to any taxes paid or
reserved for by the Company that the Company
determines result from the operations of the Variable
Account; and
(3)The result of (2) is divided by the number of
Sub-Account units outstanding at the beginning of the
Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation
Period are equal to the daily mortality and expense risk
charge plus daily administrative expense charge multiplied
by the number of calendar days in the Valuation Period.
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<PAGE>
CHARGES AND DEDUCTIONS
Various charges and deductions are made from Annuity Account
Values and the Variable Account. These charges and
deductions are:
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 withdrawn or 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 7%
2-3 7%
3-4 6%
4-5 6%
5-6 5%
6-7 4%
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
and 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, during each Contract Year, withdraw 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 provision. No Contingent
Deferred Sales Charge will be deducted on withdrawals from
Premium Payments which have been held under the Contract for
more than seven (7) Contract Years or from 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 of up to 7.00% will be paid to broker-dealers
who sell the Contracts, and the Company will incur other
promotional or distribution expenses associated with the
marketing of the Contracts. To the extent that the
Contingent Deferred Sales Charge is
20
<PAGE>
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.
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
1.25% of the average daily net assets of the Variable
Account (consisting of approximately .75% 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 Contract and to pay
death benefits that may exceed the Annuity Account Value.
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 Account Fee and the Administrative
Expense Charge, each of which is described below.
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.
ADMINISTRATIVE EXPENSE CHARGE
The Company deducts on each Valuation Date an Administrative
Expense Charge which is equal, on an annual basis, to 0.15%
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.
ACCOUNT FEE
The Company deducts an annual Account Fee of $35 ($30 for
New York Contracts) from the Annuity Account Value on the
last Valuation Date of each Contract Year. This charge, like
the Administrative Expense Charge, is to reimburse the
Company for a portion of its expenses in administering the
Contracts. 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
Account Fee will be prorated at the time of surrender or
annuitization. On and after the Annuity Date, the 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 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.
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
21
<PAGE>
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.
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.
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.
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 transfer
fee or charge if there have been no more than twelve
transfers made in the Contract Year. For additional
transfers, the Company reserves the right to deduct a
transfer fee of up to $10 per transfer. Prescheduled
automatic Dollar Cost Averaging or Automatic Rebalancing
transfers are not counted toward the twelve 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.
DEATH BENEFITS
DEATH BENEFITS PROVIDED BY THE CONTRACTS
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 upon due proof of death
(a certified copy of the Death Certificate) of the Owner. If
there is no designated Beneficiary, or contingent
Beneficiary, the Company will, upon receipt of due proof of
death of Owner, Beneficiary and contingent Beneficiary, pay
the death benefit in one lump sum to the deceased Owner's
estate.
If the death of any annuitant occurs on or after the Annuity
Date, no death benefit will be payable under the Contract
except as may be provided under the Annuity Option elected.
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<PAGE>
AMOUNT OF DEATH BENEFIT
The amount of the death benefit is determined as of the
effective date or deemed effective date of the death benefit
election (see "Election and Effective Date of Election"),
and is equal to the greatest of --
(a) the Annuity Account Value for the Valuation Period
during which the death benefit election is effective or
deemed to become effective;
(b) the sum of all the Premium Payments made under the
Contract, less the sum of all partial withdrawals; or
(c) the highest Annuity Account Value ever attained on a
Contract Anniversary date occurring on or before the
Owner's 80th birthday, with adjustments for any
subsequent Premium Payments, partial withdrawals and
charges made since such Contract Anniversary Date.
On or after Owner's 90th birthday, the amount of the death
benefit is the greater of (a) and (b) above.
No Market Value Adjustment (see "Market Value Adjustment",
page 33) or withdrawal charges are assessed against amounts
which are applied toward payment of a death benefit.
Upon a transfer of ownership, the death benefit becomes the
greatest of --
(a) the Annuity Account Value for the Valuation Period
during which the death benefit election is effective or
deemed to become effective;
(b) the sum of Premium Payments made less the sum of
withdrawals made on or before the date of transfer,
adjusted for any subsequent Premium Payments and partial
withdrawals made under the Contract; or
(c) the highest Annuity Account Value ever attained on a
Contract Anniversary date subsequent to the date of
transfer occurring on or before the new Owner's 80th
birthday, with adjustments for any subsequent Premium
Payments, partial withdrawals and charges made since
such Contract Anniversary Date.
On or after the then current Owner's 90th birthday, the
amount of the death benefit is the greater of (a) and (b)
above.
ELECTION AND EFFECTIVE DATE OF ELECTION
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 on a specified
date, which must be 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
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.
Payment amounts may vary with their frequency and duration
(see "Annuity Provisions -- Annuity Options"). To the extent
that the Beneficiary elects a variable payment option, the
Beneficiary will bear the investment risk associated with
the performance of the underlying Fund(s) in which the
relevant Variable Sub-Account invest(s).
23
<PAGE>
Such election may be made by filing with the Company a
statement in writing specifying the method by which the
death benefit shall be paid and such election shall become
effective on the later of (a) the date the election is
received by the Company, and (b) the date due proof of death
of the Owner is received by the Company.
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, except that in such case a change of annuitant would
be treated as a death of the annuitant.
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, valued as described in
"Amount of Death Benefit" but based on the Annuitant, is
paid on due proof of 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.
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 Annuity & Variable
Life Services 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.
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.
24
<PAGE>
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 Annuity & Variable Life Services 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 Annuity & Variable Life
Services 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 Annuity & Variable
Life Services 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 Annuity & Variable Life
Services Center after the death of the Annuitant or Contract
Owner, as applicable, 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 date the Contract is issued is 90 years
old. The Annuitant may be changed at any time prior to the
Annuity Date unless the Contract is owned by a non-natural
person. 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.
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 twelve transfers made
in the Contract Year. For additional transfers, the Company
reserves the right to deduct a transfer fee of up to $10
(See "Charges and Deductions -- Transfer Fee"). This
Contract is not designed for professional market timing
organizations or other entities using programmed and
frequent transfers.
Repeated patterns of frequent transfers are disruptive to
the operation of the Sub-Accounts, and should the Company
become aware of such disruptive practices, the Company may
refuse to permit more than 12 transfers in any year and may
modify the transfer provisions of the Contract.
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<PAGE>
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) $2,000 per Fixed Account Sub-Account or $50 per
Variable Account Sub-Account; or (ii) the Contract
Owner's entire interest in the Sub-Account. The Company,
at its sole discretion may waive these minimum
requirements.
c. No partial transfer will be made if the Contract Owner's
remaining Contract Value in the Sub-Account will be less
than $50.
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
are not 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 (other than transfers pursuant to the
Dollar Cost Averaging program) 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.
k. The Company reserves the right to reject any premium
allocation or transfer which would cause the Fixed
Account Sub-Account values in aggregate to exceed then
current Company limits.
Transfers between Sub-Accounts may be made by calling or
writing the Annuity & Variable Life Services Center.
Transfer requests must be received prior to 4:00 Eastern
Time in order to be effective that day.
Transfers between any Sub-Accounts may be suspended or
postponed during any period in which the New York Stock
Exchange is closed or has suspended trading.
PROCEDURES FOR TELEPHONE TRANSFERS
Owners may effect telephone transfers by calling the Annuity
& Variable Life Services Center.
The Company will take the following procedures to confirm
that instructions communicated by telephone are genuine.
Before a service representative accepts any request, the
caller will be asked for specific information to validate
the request. All calls will be recorded. All transactions
performed will be confirmed by the Company in writing. The
Company is not liable for any loss, cost or expense for
acting on telephone instructions which are believed to be
genuine in accordance with these procedures.
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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.
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
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 withdrawals from Contracts. (See
"Tax Matters.") 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 Account Fee; and
c. any applicable Contingent Deferred Sales Charge; and
for partial withdrawals, by the sum of 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.
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
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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.
In addition, upon notice to the Owner, the Contracts may be
modified by the Company to change the withdrawal charges,
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 or order to purchase. The Contract Owner may,
upon at least forty-five (45) 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 forty-five (45) days
prior written notice to the Company, at any time prior to
the Annuity Date, select and/or change the Annuity Option.
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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.
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. Each
annuity payment will be less if payments are to be made more
frequently or for longer periods of time.
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.
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<PAGE>
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
calculating the Accumulation Unit value for the current
Valuation Period (as described on page 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.
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.
After the Annuity Date, the payee may, by written request to
the Annuity & Variable Life Services 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.
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
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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 Premium 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 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 or transferred out of 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.
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, five 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
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<PAGE>
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" above, 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 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 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, 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 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.
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
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("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. 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)to the power N
------------------
(1+B)to the power 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.
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DISTRIBUTION OF THE CONTRACTS
CIGNA Financial Advisors, Inc. ("CFA"), located at 900
Cottage Grove Road, Bloomfield, CT, acts as the principal
underwriter and the distributor of the Contracts as well as
of certain variable life insurance policies and other
variable annuity contracts issued by the Company. CFA is a
registered broker-dealer under the Securities Exchange Act
of 1934 and a member of the National Association of
Securities Dealers. As of January 1, 1998, CFA, formerly a
wholly-owned subsidiary of CIGNA Corporation, became a
wholly-owned subsidiary of Lincoln National Corporation, an
Indiana corporation with headquarters in Fort Wayne,
Indiana, whose principal businesses are insurance and
financial services.
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 Account Fee.
OTHER VARIABLE ACCOUNT SUB-ACCOUNTS
From time to time, the other Variable Account Sub-Accounts
may publish their current yields and total returns in
advertisements and communications to Contract Owners. The
current yield for each Variable Account 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 Variable Account 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 Variable Account
Sub-Account's income, including the deduction for the
Mortality and Expense Risk Charge, the Administrative
Expense Charge and the 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 Variable Account Sub-Account's current
yield or total return for any prior period should not be
considered
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<PAGE>
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 sometimes be published and compared to
the performance of other variable annuity issuers in general
or to the performance of particular types of variable
annuities investing in funds, or series of 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. Generally,
these services may not be used, and such comparisons may not
be made, in advertising or sales literature for variable
annuities.
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 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 MATTERS
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 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
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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.
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 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
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<PAGE>
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 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.
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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 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
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<PAGE>
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.
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
39
<PAGE>
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.
FINANCIAL STATEMENTS
Audited financial statements of the Company as of December
31, 1996 and 1995 and for each of the three years in the
period ended December 31, 1996 are included in the Statement
of Additional Information. Also included are audited
financial statements for the Variable Account, which
commenced operations April 10, 1995, as of and for the
periods (as defined in the financial statements) ended
December 31, 1995 and 1996.
YEAR 2000 ISSUES
Connecticut General Variable Annuity Separate Account II
(the "Account") is a "separate account" of the Company
established under Connecticut insurance law; thus, the
Company is responsible, as part of its Year 2000 updating
process, for the updating of the Account-related computer
systems. Delaware Service Company ("Delaware") provides
substantially all of the necessary accounting and valuation
services for the Account. Delaware, for its part, is
responsible for updating all of its computer systems,
including those which service the Account, to accommodate
the year 2000. The Company and Delaware have begun formal
discussions with each other to assess the requirements for
their respective systems to interface properly in order to
facilitate the accurate and orderly operation of the Account
beginning in the year 2000.
Many existing computer programs use only two digits to
identify a year in the date field. These programs were
designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results
by or at the year 2000. The Year 2000 issue is pervasive and
complex and affects virtually every aspect of the businesses
of both the Company
40
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and Delaware (collectively the "Companies"). The computer
systems of the Companies and their interfaces with the
computer systems of vendors, suppliers, customers and other
business partners are particularly vulnerable. The inability
to properly recognize date-sensitive electronic information
and to transfer data between systems could cause errors or
even complete failure of systems, which would result in a
temporary inability to process transactions correctly and
engage in normal business activities for the Account. The
Companies respectively are redirecting significant portions
of their internal information technology efforts and are
contracting, as needed, with outside consultants to help
update their systems to accommodate the year 2000. Also, in
addition to the discussions with each other noted above, the
Companies have each initiated formal discussions with other
critical parties that interface with their systems to gain
an understanding of the progress by those parties in
addressing Year 2000 issues. While the Companies are making
substantial efforts to address their own systems and the
systems with which they interface, it is not possible to
provide assurance that operational problems will not occur.
The Companies presently believe that, assuming the
modification of existing computer systems, updates by
vendors and conversion to new software and hardware, the
Year 2000 issue will not pose significant operations
problems for their respective computer systems. In addition,
the Companies are incorporating potential issues surrounding
year 2000 into their contingency planning process to address
the probability that, despite these substantial efforts,
there are unresolved Year 2000 problems. If the remediation
efforts noted above are not completed timely or properly,
the Year 2000 issue could have a material adverse impact on
the operation of the businesses of the Companies.
The cost of addressing Year 2000 issues and the timeliness
of completion is being monitored by management of the
respective Companies. Nevertheless, there can be no
guarantee either by the Company or by Delaware that
estimated costs will be achieved, and actual results could
differ significantly from those anticipated. Specific
factors that might cause such differences include, but are
not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all
relevant computer problems, and other uncertainties.
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.
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TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information which contains more details concerning
some subjects discussed in this Prospectus is available (at no cost) by calling
or writing the Annuity & Variable Life Services Center. 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
CALCULATION OF VARIABLE ACCOUNT VALUES.......... 3
Variable Accumulation Unit Value.............. 3
SAMPLE CALCULATIONS AND TABLES.................. 4
Withdrawal Charge and Market Value Adjustment
Tables....................................... 5
STATE REGULATION OF THE COMPANY................. 6
ADMINISTRATION.................................. 6
ACCOUNT INFORMATION............................. 6
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
DISTRIBUTION OF THE CONTRACTS................... 7
CUSTODY OF ASSETS............................... 7
HISTORICAL PERFORMANCE DATA..................... 7
Money Market Sub-Account Yield................ 7
Other Sub-Account Yields...................... 8
Total Returns................................. 8
Other Performance Data........................ 9
LEGAL MATTERS................................... 9
LEGAL PROCEEDINGS............................... 10
EXPERTS......................................... 10
FINANCIAL STATEMENTS............................ 10
Connecticut General Life Insurance Company.... 12
CG Variable Annuity Separate Account II....... 30
</TABLE>
42
<PAGE>
PART B. STATEMENT OF ADDITIONAL INFORMATION NO. 1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FLEXIBLE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS -- NEW YORK
Issued through
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
Offered by
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
<TABLE>
<S> <C>
Home Office Location: Mailing Address:
900 Cottage Grove Road Annuity & Variable Life Services Center
Bloomfield, Connecticut Routing S-249
Hartford, Connecticut 06152-2249
Telephone: (800) 552-9898
Lockbox Address -- By Overnight:
Connecticut General Life Insurance Company
Lockbox Address -- By Mail: c/o Fleet Bank
Connecticut General Life Insurance Company 20 Church Street
P.O. Box 30790 20th Floor, MSN275
Hartford, CT 06150 Hartford, CT 06120
Attn: Lockbox 30790
</TABLE>
This Statement of Additional Information ("Statement") expands upon subjects
discussed in the current Prospectus for the Variable Annuity Contracts (the
"Contracts") offered by Connecticut General Life Insurance Company through CG
Variable Annuity Separate Account II. You may obtain a copy of the Prospectus
dated May 1, 1998, by calling (800) 552-9898, or by writing to Annuity &
Variable Life Services Center, Routing S-249, Connecticut General Life Insurance
Company, Hartford, Connecticut 06152-2249. 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, 1998
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
SAMPLE CALCULATIONS AND TABLES............................................................................. 4
Withdrawal Charge and Market Value Adjustment Tables..................................................... 4
STATE REGULATION OF THE COMPANY............................................................................ 6
ADMINISTRATION............................................................................................. 7
ACCOUNT INFORMATION........................................................................................ 7
DISTRIBUTION OF THE CONTRACTS.............................................................................. 7
CUSTODY OF ASSETS.......................................................................................... 8
HISTORICAL PERFORMANCE DATA................................................................................ 8
Money Market Sub-Account Yield........................................................................... 8
Other Sub-Account Yields................................................................................. 8
Total Returns............................................................................................ 9
Other Performance Data................................................................................... 10
LEGAL MATTERS.............................................................................................. 10
LEGAL PROCEEDINGS.......................................................................................... 10
EXPERTS.................................................................................................... 10
FINANCIAL STATEMENTS....................................................................................... 11
Connecticut General Life Insurance Company............................................................... 13
CG Variable Annuity Separate Account II.................................................................. 31
</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 an 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.
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 Annuity & Variable
Life Services 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
was 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 as
follows:
(1) The total value of Fund shares held in the Sub-Account is calculated by
multiplying the number of Fund shares owned by the Sub-Account at the
beginning of the Valuation Period
3
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by the net asset value per share of the Fund at the end of the Valuation
Period, and adding any dividend or other distribution of the Fund if an
ex-dividend date occurs during the Valuation Period; minus
(2) The liabilities of the Sub-Account at the end of the Valuation Period;
such liabilities include daily charges imposed on the Sub-Account, and
may include a charge or credit with respect to any taxes paid or reserved
for by the Company that the Company determines result from the operations
of the Variable Account; and
(3) The result of (2) is divided by the number of Sub-Account units
outstanding at the beginning of the Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation Period are
equal to the daily mortality and expense risk charge plus daily administrative
expense charge multiplied by the number of calendar days in the 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.
SAMPLE CALCULATIONS AND TABLES
WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT TABLES
The following example illustrates the detailed calculations for a $50,000
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 "Surrender Charge Calculation" assumes there have been no
prior withdrawals and illustrates the operation of the Fifteen Percent Free
provision of the Contract. 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 $30 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.
4
<PAGE>
WITHDRAWAL CHARGE TABLES
SAMPLE CALCULATIONS FOR MALE 35 ISSUE
CASH SURRENDER VALUES
<TABLE>
<S> <C>
Single premium..................... $50,000
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 (before adjustment)... 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>
5
<PAGE>
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............................... $ 53,970 0.963640 $ 52,008 $ 51,470 $ 52,008 $ 2,975 $ 49,033
2............................... $ 58,258 0.993056 $ 57,853 $ 52,984 $ 57,853 $ 2,550 $ 55,303
3............................... $ 62,888 1.000000 $ 62,888 $ 54,544 $ 62,888 $ 2,125 $ 60,763
4............................... $ 67,889 1.004673 $ 68,207 $ 56,150 $ 68,207 $ 1,700 $ 66,507
5............................... $ 73,290 1.000000 $ 73,290 $ 57,804 $ 73,290 $ 1,275 $ 72,015
</TABLE>
ANNUITY VALUE CALCULATION
<TABLE>
<CAPTION>
CONTRACT YEAR ANNUITY VALUE
- ------------------------------ ------------------------------------------
<S> <C>
1............................. $50,000 X 1.08 - $30 = $53,970
2............................. $53,970 X 1.08 - $30 = $58,258
3............................. $58,258 X 1.08 - $30 = $62,888
4............................. $62,888 X 1.08 - $30 = $67,889
5............................. $67,889 X 1.08 - $30 = $73,290
</TABLE>
SURRENDER CHARGE CALCULATION
<TABLE>
<CAPTION>
(1) (3)
SURRENDER (2) SURRENDER
CONTRACT YEAR CHARGE FACTOR SURRENDER CHARGE FACTOR CHARGE
- -------------------------------------------------------------- --------------- ----------------------- -----------
<S> <C> <C> <C>
1............................................................. 0.07 0.0595 $ 2,975
2............................................................. 0.06 0.0510 $ 2,550
3............................................................. 0.05 0.0425 $ 2,125
4............................................................. 0.04 0.0340 $ 1,700
5............................................................. 0.03 0.0255 $ 1,275
</TABLE>
MARKET VALUE ADJUSTMENT TABLES
INTEREST RATE FACTOR CALCULATION
<TABLE>
<CAPTION>
(1) (2) (3) (5)
INDEX INDEX ADJUSTED (4) (1+A)
CONTRACT YEAR RATE A RATE B INDEX RATE B N (1+B)
- -------------------------------------------------- ------ ------ ------------ ----- -----------
<S> <C> <C> <C> <C> <C>
1................................................. 7.5% 8.00 8.25 4 0.972573
2................................................. 7.5% 7.75 7.75 3 0.993056
3................................................. 7.5% 7.00 7.25 2 1.004667
4................................................. 7.5% 6.50 6.75 1 1.007026
5................................................. 7.5% NA NA 0 NA
</TABLE>
MINIMUM VALUE CALCULATION
<TABLE>
<CAPTION>
CONTRACT YEAR MINIMUM VALUE
- ------------------------------ ------------------------------------------
<S> <C>
1............................. $50,000 X 1.03 - $30 = $51,470
2............................. $51,470 X 1.03 - $30 = $52,984
3............................. $52,984 X 1.03 - $30 = $54,544
4............................. $54,544 X 1.03 - $30 = $56,150
5............................. $56,150 X 1.03 - $30 = $57,804
</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
6
<PAGE>
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 Contract are at least equal to those required by
such state.
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.
ACCOUNT INFORMATION
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 Account
Sub-Account Accumulation Account and the applicable Accumulation Unit Value as
of the date of the report. 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 Annuity & Variable Life Services Center, the Company
will provide an Owner with information regarding fixed and variable accumulation
values.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may lawfully be sold. Such agents will be registered
representatives of broker-dealers registered under the Securities Exchange Act
of 1934 who are members of the National Association of Securities Dealers, Inc.
(NASD). The Contracts will be distributed by the Company's principal
underwriter, CIGNA Financial Advisors, Inc. ("CFA"), located at 900 Cottage
Grove Road, Bloomfield, CT. CFA is a Connecticut corporation organized in 1967,
and is the principal underwriter for certain of the Company's other registered
separate accounts. As of January 1, 1998, CFA, formerly a wholly-owned
subsidiary of CIGNA Corporation, became a wholly-owned subsidiary of Lincoln
National Corporation, an Indiana corporation with headquarters in Fort Wayne,
Indiana, whose principal businesses are insurance and financial services.
Commissions and other distribution compensation will be paid by the Company and
will not be more than 7.00% of Premium Payments. The Company received $145,226
in deferred sales charges attributable to the Variable Account portion of the
Contracts issued pursuant to CG Variable Annuity Separate Account II for the
period ended December 31, 1997.
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.
7
<PAGE>
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 in the amount of $100,000,000.
HISTORICAL PERFORMANCE DATA
Historical performance data as of December 31, 1997 for each of the
Sub-Accounts of the Separate Account follows in the Financial Statements.
MONEY MARKET SUB-ACCOUNT YIELD
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)] - 1
The yield on amounts held in the Money Market Sub-Account normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Money Market Sub-Account's actual yield is affected by changes in
interest rates on money market securities, average portfolio maturity of the
Money Market Fund, the types and quality of portfolio securities held by the
Money Market Fund and its operating expenses. The yield figures do not reflect
withdrawal charges or premium taxes.
OTHER SUB-ACCOUNT YIELDS
The Company may from time to time advertise or disclose the current
annualized yield of one or more of the Sub-Accounts of the Variable Account
(except the Money Market Sub-Account) for 30-day periods. The annualized yield
of a Sub-Account refers to income generated by the Sub-Account over a specific
30-day period. Because the yield is annualized, 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
8
<PAGE>
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) - 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.
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 Account Fee. The 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. 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) = 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).
9
<PAGE>
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.
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, Esquire, of West
Hartford, Connecticut. All matters of Connecticut law pertaining to the
Contracts, including the validity of the Contracts and the Company's right to
issue the Contracts under Connecticut Insurance Law and any other applicable
state insurance or securities laws, have been passed upon by Mark A. Parsons,
Chief Counsel, Retirement and Investment Services Division, CIGNA Corporation.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or
to which the assets of the Variable Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Variable Account.
EXPERTS
The consolidated financial statements of Connecticut General Life Insurance
Company as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997 included in this Statement of Additional
Information as well as the Statement of Assets and Liabilities of the Variable
Account at December 31, 1997 and the Statement of Operations and the Statement
of Changes in Net Assets for the period ended December 31, 1997 have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. Price Waterhouse LLP's consent to this reference to the firm as an
"expert" is filed as an exhibit to the registration statement of which this
Statement of Additional Information is a part.
10
<PAGE>
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. The financial statements of the Variable Account as
of and for the period ending December 31, 1997 are also included.
11
<PAGE>
One Financial Plaza Telephone 860 240 2000
Hartford, CT 06103
PRICE WATERHOUSE LLP [LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
February 10, 1998
To the Board of Directors and Shareholder of
Connecticut General Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Connecticut
General Life Insurance Company and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
[SIGNATURE]
12
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS)
- -------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and fees................................................... $ 5,376 $ 5,314 $ 4,998
Net investment income............................................... 3,139 3,199 3,138
Realized investment gains (losses).................................. 45 37 (7)
Other revenues...................................................... 10 9 9
--------- --------- ---------
Total revenues.................................................. 8,570 8,559 8,138
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses............................ 5,917 6,069 5,892
Policy acquisition expenses......................................... 122 143 127
Other operating expenses............................................ 1,618 1,477 1,358
--------- --------- ---------
Total benefits, losses and expenses................................. 7,657 7,689 7,377
--------- --------- ---------
INCOME BEFORE INCOME TAXES.......................................... 913 870 761
--------- --------- ---------
Income taxes (benefits):
Current........................................................... 347 394 301
Deferred.......................................................... (49) (81) (44)
--------- --------- ---------
Total taxes..................................................... 298 313 257
--------- --------- ---------
NET INCOME.......................................................... 615 557 504
Dividends declared.................................................. (400) (600) (252)
Retained earnings, beginning of year................................ 3,177 3,220 2,968
- -------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF YEAR...................................... $ 3,392 $ 3,177 $ 3,220
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
13
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS)
- -------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $20,962; $19,882)...... $ 22,323 $ 20,816
Mortgage loans.......................................................... 10,090 10,152
Equity securities, at fair value (cost, $75; $59)....................... 54 41
Policy loans............................................................ 7,146 7,133
Real estate............................................................. 749 1,025
Other long-term investments............................................. 166 193
Short-term investments.................................................. 173 417
--------- ---------
Total investments................................................... 40,701 39,777
Cash and cash equivalents................................................. 923 --
Accrued investment income................................................. 602 619
Premiums and accounts receivable.......................................... 811 817
Reinsurance recoverables.................................................. 1,271 1,303
Deferred policy acquisition costs......................................... 834 780
Property and equipment, net............................................... 291 276
Current income taxes...................................................... 67 12
Deferred income taxes, net................................................ 653 639
Goodwill.................................................................. 474 488
Other assets.............................................................. 209 249
Separate account assets................................................... 29,217 22,555
- -------------------------------------------------------------------------------------------
Total assets........................................................ $ 76,053 $ 67,515
- -------------------------------------------------------------------------------------------
--------------------
LIABILITIES
Contractholder deposit funds.............................................. $ 30,449 $ 29,621
Future policy benefits.................................................... 8,224 8,187
Unpaid claims and claim expenses.......................................... 1,225 1,170
Unearned premiums......................................................... 260 200
--------- ---------
Total insurance and contractholder liabilities...................... 40,158 39,178
Accounts payable, accrued expenses and other liabilities.................. 2,428 1,808
Separate account liabilities.............................................. 29,021 22,365
- -------------------------------------------------------------------------------------------
Total liabilities................................................... 71,607 63,351
- -------------------------------------------------------------------------------------------
CONTINGENCIES -- NOTE 12
SHAREHOLDER'S EQUITY
Common stock (6 shares outstanding)....................................... 30 30
Additional paid-in capital................................................ 766 766
Net unrealized appreciation on investments................................ 256 188
Net translation of foreign currencies..................................... 2 3
Retained earnings......................................................... 3,392 3,177
- -------------------------------------------------------------------------------------------
Total shareholder's equity.......................................... 4,446 4,164
- -------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity.......................... $ 76,053 $ 67,515
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
14
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS)
- -------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................ $ 615 $ 557 $ 504
Adjustments to reconcile net income to net cash provided by
operating activities:
Insurance liabilities........................................... 78 57 (90)
Reinsurance recoverables........................................ 68 (11) 1,201
Premiums and accounts receivable................................ 106 77 32
Deferred income taxes, net...................................... (49) (82) (44)
Other assets.................................................... (54) 43 (14)
Deferred policy acquisition costs............................... (97) (92) 12
Accounts payable, accrued expenses, other liabilities and
current income taxes........................................... 41 (113) 212
Depreciation and goodwill amortization.......................... 88 94 89
Other, net...................................................... (99) (151) (79)
--------- --------- ---------
Net cash provided by operating activities..................... 697 379 1,823
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities................................................ 1,583 1,589 1,070
Mortgage loans.................................................. 807 640 383
Equity securities............................................... 14 13 119
Real estate..................................................... 401 345 299
Other (primarily short-term investments)........................ 6,447 3,613 2,268
Investment maturities and repayments:
Fixed maturities................................................ 2,394 2,634 2,234
Mortgage loans.................................................. 601 630 420
Investments purchased:
Fixed maturities................................................ (4,339) (3,834) (4,439)
Mortgage loans.................................................. (1,426) (1,300) (1,908)
Equity securities............................................... (9) (3) (20)
Policy loans.................................................... (13) (207) (2,129)
Other (primarily short-term investments)........................ (6,296) (3,930) (2,334)
Other, net...................................................... (102) (94) (119)
--------- --------- ---------
Net cash provided by (used in) investing activities........... 62 96 (4,156)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder deposit funds:
Deposits and interest credited.................................. 7,634 7,260 7,489
Withdrawals and benefit payments................................ (7,023) (7,135) (4,985)
Dividends paid to parent.......................................... (400) (600) (252)
Other, net........................................................ (47) -- 1
--------- --------- ---------
Net cash provided by (used in) financing activities........... 164 (475) 2,253
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents.............. 923 -- (80)
Cash and cash equivalents, beginning of year...................... -- -- 80
- -------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year............................ $ 923 $ -- $ --
- -------------------------------------------------------------------------------------------
-------------------------------
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds............................... $ 402 $ 385 $ 211
Interest paid................................................... $ 5 $ 7 $ 7
- -------------------------------------------------------------------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
15
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Connecticut General Life Insurance Company and its subsidiaries (the Company)
provide insurance and related financial services throughout the United States
and in many locations worldwide. Principal products and services include group
life and health insurance, individual life insurance and annuity products, and
retirement and investment products and services. The Company is a wholly-owned
subsidiary of Connecticut General Corporation, which is an indirect wholly-owned
subsidiary of CIGNA Corporation (CIGNA).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of the Company and all significant subsidiaries. These consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles, and reflect management's estimates and assumptions, such
as those regarding medical costs and interest rates, that affect the recorded
amounts. Significant estimates used in determining insurance and contractholder
liabilities, related reinsurance recoverables, and valuation allowances for
investment assets are discussed throughout the Notes to Financial Statements.
Certain reclassifications have been made to prior years' amounts to conform with
the 1997 presentation.
B) RECENT ACCOUNTING PRONOUNCEMENTS: In 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which could change the way segments are
structured and require additional segment disclosure. Although the Company has
not determined the timing of implementation of this pronouncement, it will be
adopted no later than the required implementation date of December 31, 1998.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" in 1997. SOP 97-3 provides guidance on the
recognition and measurement of liabilities for guaranty fund and other
insurance-related assessments. Implementation is required by the first quarter
of 1999, with the cumulative effect of adopting the SOP reflected in net income
in the year of adoption. The Company has not determined the effect or timing of
implementation of this pronouncement.
In 1996, the Company implemented Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires write-down to fair
value when long-lived assets to be held and used are impaired. Long-lived assets
to be disposed of, including real estate held for sale, must be carried at the
lower of cost or fair value less costs to sell. Depreciation of assets to be
disposed of is prohibited. The effect of implementing SFAS No. 121 was not
material to the Company.
C) FINANCIAL INSTRUMENTS: In the normal course of business, the Company
enters into transactions involving various types of financial instruments,
including investments such as fixed maturities and equity securities and off-
balance sheet financial instruments such as investment and loan commitments and
financial guarantees. These instruments are subject to risk of loss due to
interest rate and market fluctuations and most have credit risk. The Company
evaluates and monitors each financial instrument individually and, where
appropriate, uses certain derivative instruments or obtains collateral or other
forms of security to minimize risk of loss.
Financial instruments that are subject to fair value disclosure requirements
(insurance contracts, real estate, goodwill and taxes are excluded) are carried
in the financial statements at amounts that approximate fair value, except for
Mortgage Loans and Contractholder Deposit Funds (non-insurance products). For
these financial instruments, the fair value was not materially different from
the carrying amount as of December 31, 1997 and 1996. Fair values of off-balance
sheet financial instruments as of December 31, 1997 and 1996 were not material.
Fair values for financial instruments are estimates that, in many cases, may
differ significantly from the amounts that could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial
16
<PAGE>
instruments with comparable terms and credit quality. The fair value of
liabilities for contractholder deposit funds was estimated using the amount
payable on demand, and for those not payable on demand, discounted cash flow
analyses.
D) INVESTMENTS: Investments in fixed maturities, which are classified as
available-for-sale, include bonds, asset-backed securities, including
collateralized mortgage obligations (CMOs), and redeemable preferred stocks.
Fixed maturities are carried at fair value, with unrealized appreciation or
depreciation included in Shareholder's Equity. Fixed maturities are considered
impaired and written down to fair value when a decline in value is considered to
be other than temporary.
Mortgage loans are carried principally at unpaid principal balances, net of
valuation reserves. Mortgage loans are considered impaired when it is probable
that the Company will not collect all amounts according to the contractual terms
of the loan agreement. If impaired, a valuation reserve is utilized to record
any change in the fair value of the underlying collateral below the carrying
value of the mortgage loan.
Fixed maturities and mortgage loans that are delinquent or restructured to
modify basic financial terms, typically to reduce the interest rate and, in
certain cases, extend the term, are placed on non-accrual status. Net investment
income on such investments is recognized only when payment is received.
Real estate investments are either held for the production of income or held
for sale. Real estate investments held for the production of income are carried
at depreciated cost less any write-downs to fair value. Depreciation is
generally calculated using the straight-line method based on the estimated
useful lives of these assets.
Real estate investments held for sale are generally those which are acquired
through the foreclosure of mortgage loans. The Company's policy is to
rehabilitate, re-lease and sell foreclosed properties, which generally takes two
to four years. At the time of foreclosure, properties are valued at fair value
less estimated costs to sell and reclassified from mortgage loans to real estate
held for sale. Subsequent to foreclosure, these investments are carried at the
lower of cost or current fair value less estimated costs to sell and are no
longer depreciated. Adjustments to the carrying value as a result of changes in
fair value subsequent to foreclosure are recorded as valuation reserves. The
Company considers several methods in determining fair value for real estate,
with emphasis placed on the use of discounted cash flow analyses and, in some
cases, the use of third-party appraisals.
Equity securities, which include common and non-redeemable preferred stocks,
are carried at fair value, with unrealized appreciation or depreciation included
in Shareholder's Equity. Short-term investments are carried at fair value, which
approximates cost. Equity securities and short-term investments are classified
as available for sale.
Policy loans are generally carried at unpaid principal balances.
Realized investment gains and losses result from sales, investment asset
write-downs and changes in valuation reserves. Realized investment gains and
losses do not include amounts attributable to experience-rated pension
policyholders' contracts and participating life policies (policyholder share).
Realized investment gains and losses are based upon specific identification of
the investment assets.
Unrealized investment gains and losses for investments carried at fair value
are included in Shareholder's Equity net of policyholder-related amounts and
deferred income taxes.
See Note 4(F) for a discussion of the Company's accounting policies for
derivative financial instruments.
E) CASH AND CASH EQUIVALENTS: Short-term investments with a maturity of three
months or less at the time of purchase are reported as cash equivalents.
F) REINSURANCE RECOVERABLES: Reinsurance recoverables are estimates of
amounts to be received from reinsurers, including amounts under reinsurance
agreements with affiliated companies. Allowances are established for amounts
estimated to be uncollectible.
G) DEFERRED POLICY ACQUISITION COSTS: Acquisition costs consist of
commissions, premium taxes and other costs, which vary with, and are primarily
related to, the production of revenues. Acquisition costs for universal life
products and contractholder deposit funds are deferred and amortized in
proportion to the present value of total
17
<PAGE>
estimated gross profits over the expected lives of the contracts. Acquisition
costs for annuity and other individual life insurance products are deferred and
amortized, generally in proportion to the ratio of annual revenue to the
estimated total revenues over the contract periods.
Deferred policy acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income. If such costs are
estimated to be unrecoverable, they are expensed unless such costs are estimated
to be unrecoverable as a result of treating unrealized investment gains and
losses as though they had been realized. In these cases a deferred acquisition
cost valuation allowance may be established or adjusted, with a comparable
offset in net unrealized appreciation (depreciation).
H) PROPERTY AND EQUIPMENT: Property and equipment are carried at cost less
accumulated depreciation. When applicable, cost includes interest and real
estate taxes incurred during construction and other construction-related costs.
Depreciation is calculated principally on the straight-line method based on the
estimated useful lives of the assets. Accumulated depreciation was $448 million
and $427 million at December 31, 1997 and 1996, respectively.
I) OTHER ASSETS: Other Assets consists of various insurance-related assets,
principally ceded unearned premiums, reinsurance deposits and other amounts due
from affiliated companies.
J) GOODWILL: Goodwill represents the excess of the cost of businesses
acquired over the fair value of their net assets. Goodwill is amortized on
systematic bases over periods, not exceeding 40 years, that correspond with the
benefits estimated to be derived from the acquisitions. The Company evaluates
the carrying amount of goodwill by analyzing historical and estimated future
income and undiscounted estimated cash flows of the related businesses. Goodwill
is written down when impaired. Amortization periods are revised if it is
estimated that the remaining period of benefit of the goodwill has changed.
Accumulated amortization was $113 million and $99 million at December 31, 1997
and 1996, respectively.
K) SEPARATE ACCOUNTS: Separate account assets and liabilities are principally
carried at market value and represent policyholder funds maintained in accounts
having specific investment objectives. The investment income, gains and losses
of these accounts generally accrue to the policyholders and, therefore, are not
included in the Company's revenues and expenses.
L) CONTRACTHOLDER DEPOSIT FUNDS: Liabilities for Contractholder Deposit Funds
consist of deposits received from customers and investment earnings on their
fund balances, less administrative charges and, for universal life fund
balances, mortality charges.
M) FUTURE POLICY BENEFITS: Future policy benefits are liabilities for life,
health and annuity products. Such liabilities are established in amounts
adequate to meet the estimated future obligations of policies in force. These
liabilities are computed using premium assumptions for group annuity policies
and the net level premium method for individual life policies, and are based
upon estimates as to future investment yield, mortality and withdrawals that
include provisions for adverse deviation. Future policy benefits for individual
life insurance and annuity policies are computed using interest rates ranging
from 2% to 11%, generally graded down from 1 to 20 years. Mortality, morbidity,
and withdrawal assumptions are based on either the Company's own experience or
various actuarial tables.
N) UNPAID CLAIMS AND CLAIM EXPENSES: Liabilities for unpaid claims and claim
expenses are estimates of payments to be made on reported and incurred but not
reported insurance claims.
O) UNEARNED PREMIUMS: Premiums for group life and accident and health
insurance are reported as earned on a pro rata basis over the contract period.
The unexpired portion of these premiums is recorded as Unearned Premiums.
P) OTHER LIABILITIES: Other Liabilities consist principally of postretirement
and postemployment benefits and various insurance-related liabilities, including
amounts related to reinsurance contracts and guaranty fund assessments that can
be reasonably estimated.
Q) TRANSLATION OF FOREIGN CURRENCIES: Foreign operations primarily utilize
the local currencies as their functional currencies, and assets and liabilities
are translated at the rates of exchange as of the balance sheet date. The
translation gain or loss on such functional currencies, net of applicable taxes,
is generally reflected in Shareholder's Equity. Revenues and expenses are
translated at the average rates of exchange prevailing during the year.
18
<PAGE>
R) PREMIUM AND FEES, REVENUES AND RELATED EXPENSES: Premiums for group life
and accident and health insurance are recognized as revenue on a pro-rata basis
over their contract periods. Benefits, losses and settlement expenses are
recognized when incurred.
Premiums for individual life insurance as well as individual and group annuity
products, excluding universal life and investment-related products, are
recognized as revenue when due. Benefits, losses and settlement expenses are
matched with premiums.
Revenues for universal life products consist of net investment income and
mortality, administration and surrender fees assessed against the fund balances
during the period. Net investment income represents investment income on assets
supporting universal life products and is recognized as earned. Fees for
mortality are recognized ratably over the policy year. Administration fees are
recognized as services are provided, and surrender charges are recognized as
earned. Benefit expenses for universal life products consist of benefit claims
in excess of fund balances, which are recognized when claims are filed, and
amounts credited in accordance with contract provisions.
Revenues for investment-related products consist of net investment income and
contract fees assessed against the fund balances during the period. Net
investment income represents investment income on assets supporting
investment-related products and is recognized as earned. Contract fees are based
upon related administrative expenses and are assessed ratably over the contract
year. Benefit expenses for investment-related products primarily consist of
amounts credited in accordance with contract provisions.
S) PARTICIPATING BUSINESS: Certain life insurance policies contain dividend
payment provisions that enable the policyholder to participate in a portion of
the earnings of the Company's business. The participating insurance in force
accounted for approximately 7% of total life insurance in force at December 31,
1997, 1996 and 1995.
T) INCOME TAXES: The Company and its domestic subsidiaries are included in
the consolidated United States federal income tax return filed by CIGNA. In
accordance with a tax sharing agreement with CIGNA, the provision for federal
income tax is computed as if the Company were filing a separate federal income
tax return, except that benefits arising from tax credits and net operating and
capital losses are allocated to those subsidiaries producing such attributes to
the extent they are utilized in CIGNA's consolidated federal income tax
provision.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes. See
Note 7 for additional information.
NOTE 3 -- DISPOSITION
As of January 1, 1998, the Company sold its individual life insurance and
annuity businesses for cash proceeds of $1.4 billion. The sale resulted in an
after-tax gain of approximately $800 million. Since the principal agreement to
sell these businesses is in the form of an indemnity reinsurance arrangement,
approximately $575 million of the gain will be deferred and amortized over
future periods at the rate that earnings from the businesses sold would have
been expected to emerge. Revenues for these businesses were $972 million, $926
million and $865 million for the years ended December 31, 1997, 1996 and 1995,
respectively, and net income was $102 million, $67 million and $74 million for
the same periods. The Company paid a dividend of $1.4 billion to its parent in
January 1998, having received prior approval of both the disposition and the
dividend from the Connecticut Insurance Department (the Department).
NOTE 4 -- INVESTMENTS
A) FIXED MATURITIES: Fixed maturities are net of cumulative write-downs of
$36 million and $95 million, including policyholder share, as of December 31,
1997 and 1996, respectively.
19
<PAGE>
The amortized cost and fair value by contractual maturity periods for fixed
maturities, including policyholder share, as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less.................................................. $ 1,114 $ 1,139
Due after one year through five years.................................... 5,768 5,949
Due after five years through ten years................................... 4,734 4,998
Due after ten years...................................................... 3,093 3,680
Asset-backed securities.................................................. 6,253 6,557
- -------------------------------------------------------------------------------------------
Total.................................................................... $ 20,962 $ 22,323
- -------------------------------------------------------------------------------------------
----------------------
</TABLE>
Actual maturities could differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Also, the Company may extend maturities in some cases.
Gross unrealized appreciation (depreciation) for fixed maturities, including
policyholder share, by type of issuer was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
December 31, 1997
- -------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal government bonds......................... $ 1,361 $ 294 $ -- $ 1,655
State and local government bonds................. 178 22 (2) 198
Foreign government bonds......................... 143 7 (1) 149
Corporate securities............................. 13,027 860 (123) 13,764
Asset-backed securities.......................... 6,253 317 (13) 6,557
- -------------------------------------------------------------------------------------------
Total............................................ $ 20,962 $ 1,500 $ (139 ) $ 22,323
- -------------------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
December 31, 1996
- -------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal government bonds......................... $ 475 $ 160 $ -- $ 635
State and local government bonds................. 174 13 (4) 183
Foreign government bonds......................... 121 6 -- 127
Corporate securities............................. 13,310 742 (148) 13,904
Asset-backed securities.......................... 5,802 226 (61) 5,967
- -------------------------------------------------------------------------------------------
Total............................................ $ 19,882 $ 1,147 $ (213 ) $ 20,816
- -------------------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
Asset-backed securities include investments in CMOs as of December 31, 1997 of
$2.3 billion carried at fair value (amortized cost, $2.3 billion), compared with
$2.2 billion carried at fair value (amortized cost, $2.1 billion) as of December
31, 1996. Certain of these securities are backed by Aaa/AAA-rated government
agencies. All other CMO securities have high quality ratings through use of
credit enhancements provided by subordinated securities or mortgage insurance
from Aaa/AAA-rated insurance companies. CMO holdings are concentrated in
securities with limited prepayment, extension and default risk, such as planned
amortization class bonds. The Company's investments in interest-only and
principal-only CMOs, which are subject to interest rate risk due to accelerated
prepayments, represented approximately 0.1% of total CMO investments at December
31, 1997 and 1996.
At December 31, 1997, contractual fixed maturity investment commitments were
$188 million. The majority of investment commitments are for the purchase of
investment grade fixed maturities, bearing interest at a fixed market rate, and
require no collateral. These commitments are diversified by issuer and maturity
date, and it is estimated that approximately 83% will be disbursed in 1998.
20
<PAGE>
B) MORTGAGE LOANS AND REAL ESTATE: The Company's mortgage loans and real
estate investments are diversified by property type and location and, for
mortgage loans, by borrower. Mortgage loans are collateralized by the related
properties and generally approximate 75% of the property's value at the time the
original loan is made.
At December 31, the carrying values of mortgage loans and real estate
investments, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage Loans............................................................ $ 10,090 $ 10,152
--------- ---------
Real estate:
Held for sale........................................................... 339 586
Held for production of income........................................... 410 439
--------- ---------
Total real estate......................................................... 749 1,025
- -------------------------------------------------------------------------------------------
Total..................................................................... $ 10,839 $ 11,177
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
At December 31, mortgage loans and real estate investments comprised the
following property types and geographic regions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Property type:
Retail facilities....................................................... $ 4,227 $ 4,453
Office buildings........................................................ 3,984 4,241
Apartment buildings..................................................... 1,311 1,272
Hotels.................................................................. 498 665
Other (primarily industrial)............................................ 819 546
- -------------------------------------------------------------------------------------------
Total..................................................................... $ 10,839 $ 11,177
- -------------------------------------------------------------------------------------------
--------------------
Geographic region:
Central................................................................. $ 3,484 $ 3,452
Pacific................................................................. 2,962 3,132
Middle Atlantic......................................................... 1,821 1,920
South Atlantic.......................................................... 1,458 1,526
New England............................................................. 1,114 1,147
- -------------------------------------------------------------------------------------------
Total..................................................................... $ 10,839 $ 11,177
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
MORTGAGE LOANS
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $0.7 billion; 1999 -- $1.1 billion; 2000 -- $1.3 billion; 2001 -- $1.1
billion; 2002 -- $1.7 billion; and $4.2 billion thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties; the maturity date may
be extended; and loans may be refinanced. During 1997 and 1996, the Company
refinanced at current market rates approximately $135 million and $477 million,
respectively, of its mortgage loans relating to borrowers that were unable to
obtain alternative financing.
At December 31, 1997, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $167 million, all
of which were at a fixed market rate of interest. These commitments expire
within six months, and are diversified by property type and geographic region.
At December 31, 1997, the Company's impaired mortgage loans were $375 million,
including $152 million before valuation reserves totaling $44 million, and $223
million which had no valuation reserves. At December 31, 1996, the Company's
impaired mortgage loans were $814 million, including $442 million before
valuation reserves totaling $94 million, and $372 million which had no valuation
reserves.
21
<PAGE>
During the year ended December 31, changes in reserves for impaired mortgage
loans, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Reserve balance -- January 1................................................... $ 94 $ 82
Transfers to foreclosed real estate............................................ (30) (29)
Charge-offs upon sales......................................................... (47) (19)
Net increase in valuation reserves............................................. 27 60
- -------------------------------------------------------------------------------------------
Reserve balance -- December 31................................................. $ 44 $ 94
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
During 1997 and 1996, impaired mortgage loans, before valuation reserves,
averaged approximately $597 million and $852 million, respectively. Interest
income recorded and cash received on these loans were approximately $34 million
and $73 million in 1997 and 1996, respectively.
REAL ESTATE
During 1997, 1996 and 1995, non-cash investing activities included real estate
acquired through foreclosure of mortgage loans, which totaled $81 million, $107
million and $144 million, respectively.
Valuation reserves and cumulative write-downs related to real estate,
including policyholder share, were $169 million and $273 million as of December
31, 1997 and 1996, respectively.
Net income for 1997 and 1996 included net investment income of $9 million and
$19 million, respectively, for real estate held for sale. Write-downs upon
foreclosure and changes in valuation reserves were not material for 1997 and
1996.
C) SHORT-TERM INVESTMENTS AND CASH EQUIVALENTS: Short-term investments and
cash equivalents, in the aggregate, primarily included debt securities,
principally corporate securities of $520 million and federal government
securities of $443 million at December 31, 1997 and, for 1996, principally
corporate securities of $418 million.
D) NET UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS: Unrealized
appreciation (depreciation) for investments carried at fair value as of December
31 was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized appreciation:
Fixed maturities.......................................................... $ 1,500 $ 1,147
Equity securities......................................................... 8 8
--------- ---------
1,508 1,155
--------- ---------
Unrealized depreciation:
Fixed maturities.......................................................... (139) (213)
Equity securities......................................................... (29) (26)
--------- ---------
(168) (239)
--------- ---------
Less policyholder-related amounts........................................... 931 610
--------- ---------
Shareholder net unrealized appreciation..................................... 409 306
Less deferred income taxes.................................................. 153 118
- -------------------------------------------------------------------------------------------
Net unrealized appreciation................................................. $ 256 $ 188
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
Net unrealized appreciation (depreciation) for investments carried at fair
value is included as a separate component of Shareholder's Equity, net of
policyholder-related amounts and deferred income taxes. The net unrealized
appreciation (depreciation) for these investments, primarily fixed maturities,
during 1997, 1996 and 1995 was $68 million, ($288) million and $542 million,
respectively.
22
<PAGE>
E) NON-INCOME PRODUCING INVESTMENTS: At December 31, the carrying values of
investments, including policyholder share, that were non-income producing during
the preceding 12 months were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities............................................................... $ 28 $ 52
Mortgage loans................................................................. -- 14
Real estate.................................................................... 141 172
- -------------------------------------------------------------------------------------------
Total.......................................................................... $ 169 $ 238
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
F) DERIVATIVE FINANCIAL INSTRUMENTS: The Company's investment strategy is to
manage the characteristics of investment assets, such as duration, yield,
currency and liquidity, to reflect the underlying characteristics of the related
insurance and contractholder liabilities, which vary among the Company's
principal product lines. In connection with this investment strategy, the
Company's use of derivative instruments, including interest rate and currency
swaps, purchased options and futures contracts, is limited to hedging
applications to minimize market risk.
Hedge accounting treatment requires a probability of high correlation between
the changes in the market value or cash flows of the derivatives and the hedged
assets or liabilities. Under hedge accounting, the changes in market value or
cash flows of the derivatives and the hedged assets or liabilities are
recognized in net income in the same period. If the Company's use of derivatives
does not qualify for hedge accounting treatment, the derivative is recorded at
fair value and changes in its fair value are recognized in net income without
considering changes in the hedged asset or liability.
The Company routinely monitors, by individual counterparty, exposure to credit
risk associated with swap and option contracts and diversifies the portfolio
among approved dealers of high credit quality. Futures contracts are
exchange-traded and, therefore, credit risk is limited since the exchange
assumes the obligations. The Company manages legal risks by following industry
standardized documentation procedures and by monitoring legal developments.
Underlying contract, notional or principal amounts associated with derivatives
at December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps............................................................ $ 265 $ 335
Currency swaps................................................................. 248 275
Purchased options.............................................................. 833 632
Futures........................................................................ 75 45
- -------------------------------------------------------------------------------------------
</TABLE>
Under interest rate swaps, the Company agrees with other parties to
periodically exchange the difference between variable rate and fixed rate asset
cash flows to provide stable returns for related liabilities. The Company uses
currency swaps (primarily Canadian dollars, pounds sterling and Swiss francs) to
match the currency of investments to that of the associated liabilities. Under
currency swaps, the parties exchange principal and interest amounts in two
relevant currencies using agreed-upon exchange amounts.
The net interest cash flows from interest rate and currency swaps are
recognized currently as an adjustment to net investment income, and the fair
value of these swaps is reported as an adjustment to the related investments.
Using purchased options to reduce the effect of changes in interest rates or
equity indexes on liabilities, the Company pays an up-front fee to receive cash
flows from third parties when interest rates or equity indexes vary from
specified levels. Purchased options that qualify for hedge accounting are
recorded consistent with the related liabilities, at amortized cost plus
adjustments based on current equity indexes, and income is reported as an
adjustment to benefit expense. Purchased options are reported in other assets,
and fees paid are amortized to benefit expense over their contractual periods.
Purchased options with underlying notional amounts of $82 million and $112
million at December 31, 1997 and 1996, respectively, that are designated as
hedges, but do not qualify for hedge accounting, are reported in other long-term
investments at fair value with changes in fair value recognized as realized
investment gains and losses.
23
<PAGE>
Interest rate futures are used to temporarily hedge against the changes in
market values of bonds and mortgage loans to be purchased or sold. Under futures
contracts, changes in the contract values are settled in cash daily with the
exchange on which the instrument is traded. These changes in contract values are
deferred and recorded as adjustments to the carrying value of the related bond
or mortgage loan. Deferred gains and losses are amortized into net investment
income over the life of the investments purchased or are recognized in full as
realized investment gains and losses if investments are sold. Gains and losses
on futures contracts deferred in anticipation of investment purchases were
immaterial at December 31, 1997 and 1996.
The effects of interest rate and currency swaps, purchased options and futures
on the components of net income for 1997, 1996 and 1995 were not material.
As of December 31, 1997 and 1996, the Company's variable interest rate
investments consisted of approximately $0.7 billion and $1.3 billion of fixed
maturities, respectively. As of December 31, 1997 and 1996, the Company's fixed
interest rate investments consisted of $21.6 billion and $19.5 billion,
respectively, of fixed maturities, and $10.1 billion and $10.2 billion,
respectively, of mortgage loans.
G) OTHER: As of December 31, 1997 and 1996, the Company had no concentration
of investments in a single investee exceeding 10% of Shareholder's Equity.
NOTE 5 -- INVESTMENT INCOME AND GAINS AND LOSSES
A) NET INVESTMENT INCOME: The components of net investment income, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities.................................................... $ 1,648 $ 1,647 $ 1,663
Equity securities................................................... 10 -- 15
Mortgage loans...................................................... 885 921 866
Policy loans........................................................ 532 548 499
Real estate......................................................... 118 227 301
Other long-term investments......................................... 47 23 33
Short-term investments.............................................. 28 35 46
--------- --------- ---------
3,268 3,401 3,423
Less investment expenses............................................ 129 202 285
- -------------------------------------------------------------------------------------------
Net investment income............................................... $ 3,139 $ 3,199 $ 3,138
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
Net investment income attributable to policyholder contracts, which is
included in the Company's revenues and is primarily offset by amounts included
in Benefits, Losses and Settlement Expenses, was approximately $1.7 billion for
1997 and $1.8 billion for 1996 and 1995. Net investment income for separate
accounts, which is not reflected in the Company's revenues, was $1.4 billion,
$1.1 billion and $885 million for 1997, 1996 and 1995, respectively.
As of December 31, 1997, fixed maturities and mortgage loans on non-accrual
status, including policyholder share, were $143 million and $153 million,
including restructured investments of $81 million and $137 million,
respectively. As of December 31, 1996, fixed maturities and mortgage loans on
non-accrual status, including policyholder share, were $160 million and $360
million, including restructured investments of $88 million and $304 million,
respectively. If interest on these investments had been recognized in accordance
with their original terms, net income would have been increased by $7 million,
$15 million and $18 million in 1997, 1996 and 1995, respectively.
24
<PAGE>
B) REALIZED INVESTMENT GAINS AND LOSSES: Realized gains (losses) on
investments, excluding policyholder share, for the year ended December 31 were
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities......................................................... $ (3) $ 11 $ (10)
Equity securities........................................................ 4 1 5
Mortgage loans........................................................... 4 (12) (5)
Real estate.............................................................. 28 15 4
Other.................................................................... 12 22 (1)
--
--- ---
45 37 (7)
Income tax expenses (benefits)........................................... 8 17 (2)
- -------------------------------------------------------------------------------------------
Net realized investment gains (losses)................................... $ 37 $ 20 $ (5 )
- -------------------------------------------------------------------------------------------
------------------
</TABLE>
Realized investment gains and losses include impairments in the value of
investments, net of recoveries, of $25 million, $40 million and $27 million in
1997, 1996 and 1995, respectively.
Realized investment gains for separate accounts, which are not reflected in
the Company's revenues, were $489 million, $305 million and $412 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Realized investment
gains (losses) attributable to policyholder contracts, which also are not
reflected in the Company's revenues, were $76 million, $82 million and ($6)
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Sales of available-for-sale fixed maturities and equity securities, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales................................................. $ 3,978 $ 4,236 $ 1,667
Gross gains on sales................................................ $ 66 $ 146 $ 78
Gross losses on sales............................................... $ (21) $ (70) $ (53)
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE 6 -- SHAREHOLDER'S EQUITY AND DIVIDEND RESTRICTIONS
The Department recognizes as net income and surplus (shareholder's equity)
those amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department, which may differ from generally
accepted accounting principles. As of December 31, 1997, there were no permitted
accounting practices utilized by the Company that were materially different from
those prescribed by the Department.
Capital stock of the Company at December 31, 1997 and 1996 consisted of
5,978,322 shares of common stock authorized, issued and outstanding (par value
$5).
The Company's statutory net income was $417 million, $611 million and $390
million for 1997, 1996 and 1995, respectively. Statutory surplus was $2.2
billion at December 31, 1997 and $2.1 billion at December 31, 1996. The
Connecticut Insurance Holding Company Act limits the amount of annual dividends
or other distributions available to shareholders of Connecticut insurance
companies without the Department's prior approval. During 1997, the Company paid
a total of $400 million in dividends to its parent, of which $100 million
received prior approval from the Department in accordance with requirements.
Under current law, the maximum dividend distribution that may be made by the
Company during 1998 without prior approval is $548 million. The amount of
restricted net assets as of December 31, 1997 was approximately $3.9 billion.
NOTE 7 -- INCOME TAXES
The Company's net deferred tax asset of $653 million and $639 million as of
December 31, 1997 and 1996, respectively, reflects management's belief that the
Company's taxable income in future years will be sufficient to realize the net
deferred tax asset based on the Company's earnings history and its future
expectations. In determining the adequacy of future taxable income, management
considered the future reversal of its existing taxable temporary differences and
available tax planning strategies that could be implemented, if necessary.
25
<PAGE>
In accordance with the Life Insurance Company Income Tax Act of 1959, a
portion of the Company's statutory income was not subject to current income
taxation but was accumulated in an account designated Policyholders' Surplus
Account. Under the Tax Reform Act of 1984, no further additions may be made to
the Policyholders' Surplus Account for tax years ending after December 31, 1983.
The balance in the account of approximately $450 million at December 31, 1997
would result in a tax liability of $158 million only if distributed to the
shareholder or if the account balance exceeded a prescribed maximum. No income
taxes have been provided on this amount because, in management's opinion, the
likelihood that these conditions will be met is remote.
CIGNA's federal income tax returns are routinely audited by the Internal
Revenue Service (IRS), and provisions are made in CIGNA's financial statements
in anticipation of the results of these audits. CIGNA resolved all issues
relative to the Company arising out of audits for 1991 through 1993, which
resulted in an increase to net income of $13 million in 1997.
In management's opinion, adequate tax liabilities have been established for
all years.
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) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Other insurance and contractholder liabilities............................... $ 400 $ 387
Employee and retiree benefit plans........................................... 196 177
Investments, net............................................................. 262 228
Other........................................................................ 63 74
--- ---
Total deferred tax assets.................................................... 921 866
--- ---
Deferred tax liabilities:
Policy acquisition expenses.................................................. 38 21
Depreciation................................................................. 77 88
Unrealized appreciation on investments....................................... 153 118
--- ---
Total deferred tax liabilities............................................... 268 227
- -------------------------------------------------------------------------------------------
Net deferred income tax asset................................................ $ 653 $ 639
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
Total income taxes for the year ended December 31 were less than the amount
computed using the nominal federal income tax rate of 35% for the following
reasons:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at nominal rate.............................................. $ 320 $ 305 $ 266
Tax-exempt interest income............................................... (5) (5) (6)
Dividends received deduction............................................. (7) (7) (7)
Amortization of goodwill................................................. 4 4 4
Resolved federal tax audit issues........................................ (13) -- --
Other.................................................................... (1) 16 --
- -------------------------------------------------------------------------------------------
Total income taxes....................................................... $ 298 $ 313 $ 257
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
NOTE 8 -- PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PLANS
A) PENSION PLANS: The Company provides retirement benefits to eligible
employees and agents. These benefits are provided through a plan sponsored by
CIGNA covering most domestic employees (the Plan) and by several separate
pension plans for various subsidiaries, agents and foreign employees.
The Plan is a non-contributory, defined benefit, trusteed plan available to
eligible domestic employees. Generally, for employees whose service commenced
prior to 1989, benefits are based on their years of service and eligible
compensation during the highest three consecutive years of employment, offset by
a portion of the Social Security benefit for which they are eligible. In 1997,
CIGNA amended its Plan for employees whose service commenced
26
<PAGE>
after 1988. Under the new Plan provisions, eligible employees receive annual
benefit credits based on an employee's age and credited service, and quarterly
interest credits based on U.S. Treasury bond rates. The employee's pension
benefit equals the value of accumulated credits, and may be paid at or after
separation from service in a lump sum or an annuity. CIGNA funds the Plan at
least at the minimum amount required by the Employee Retirement Income Security
Act of 1974 (ERISA). Allocated pension cost for the Company was $24 million, $26
million and $23 million in 1997, 1996 and 1995, respectively.
The Plan, and several separate pension plans for various subsidiaries and
agents, had deposits with the Company totaling approximately $2.5 billion and
$2.2 billion at December 31, 1997 and 1996, respectively.
B) OTHER POSTRETIREMENT BENEFITS PLANS: In addition to providing pension
benefits, the Company provides certain health care and life insurance benefits
to retired employees, spouses and other eligible dependents through various
plans sponsored by CIGNA. A substantial portion of the Company's employees may
become eligible for these benefits upon retirement. CIGNA's contributions for
health care benefits depend upon a retiree's date of retirement, age, years of
service and other cost-sharing features, such as deductibles and coinsurance.
Under the terms of the benefit plans, benefit provisions and cost-sharing
features can be adjusted. In general, retiree health care benefits are not
funded by CIGNA, but are paid as covered expenses are incurred. Retiree life
insurance benefits are paid from plan assets or as covered expenses are
incurred.
Expense for postretirement benefits other than pensions allocated to the
Company totaled $2 million for 1997, $9 million for 1996 and $16 million for
1995. The other postretirement benefit liability included in Accounts Payable,
Accrued Expenses and Other Liabilities as of December 31, 1997 and 1996 was $412
million and $424 million, including net intercompany payables of $39 million and
$40 million, respectively, for services provided by affiliates' employees.
C) OTHER POSTEMPLOYMENT BENEFITS: The Company provides certain salary
continuation (severance and disability), health care and life insurance benefits
to inactive and former employees, spouses and other eligible dependents through
various employee benefit plans sponsored by CIGNA.
Although severance benefits accumulate with additional service, the Company
recognizes severance expense when severance is probable and the costs can be
reasonably estimated. Postemployment benefits other than severance generally do
not vest or accumulate; therefore, the estimated cost of benefits is accrued
when determined to be probable and estimable, generally upon disability or
termination. See Note 11 for additional information regarding severance accrued
as part of cost reduction initiatives.
D) CAPITAL ACCUMULATION PLANS: CIGNA sponsors various capital accumulation
plans in which employee contributions on a pre-tax basis (401(k)) are
supplemented by CIGNA matching contributions. These contributions are invested,
at the election of the employee, in one or more of the following investments:
CIGNA common stock fund, several CIGNA and non-CIGNA mutual funds, and a
fixed-income fund. In addition, beginning in 1999, CIGNA may provide additional
matching contributions, depending on its annual performance, which would be
invested in the CIGNA common stock fund. The Company's allocated expense for
such plans totaled $15 million for 1997, $16 million for 1996 and $14 million
for 1995.
NOTE 9 -- REINSURANCE
In the normal course of business, the Company enters into agreements,
primarily relating to short-duration contracts, to assume and cede reinsurance
with other insurance companies. Reinsurance is ceded primarily to limit losses
from large exposures and to permit recovery of a portion of direct losses,
although ceded reinsurance does not relieve the originating insurer of
liability. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of its reinsurers.
Failure of reinsurers to indemnify the Company, as a result of reinsurer
insolvencies and disputes, could result in losses. As of December 31, 1997 and
1996 there were no allowances for uncollectible amounts. Future charges for
unrecoverable reinsurance may materially affect results of operations in future
periods, however, such amounts are not expected to have a material adverse
effect on the Company's liquidity or financial condition.
27
<PAGE>
The effects of reinsurance on net earned premiums and fees for the year ended
December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-DURATION CONTRACTS
Premiums and fees:
Direct............................................................ $ 3,119 $ 2,940 $ 2,613
Assumed........................................................... 255 135 384
Ceded............................................................. (266) (166) (366)
- -------------------------------------------------------------------------------------------
Net earned premiums and fees........................................ $ 3,108 $ 2,909 $ 2,631
- -------------------------------------------------------------------------------------------
-------------------------------
LONG-DURATION CONTRACTS
Premiums and fees:
Direct............................................................ $ 1,979 $ 1,997 $ 1,950
Assumed........................................................... 522 601 561
Ceded............................................................. (233) (193) (144)
- -------------------------------------------------------------------------------------------
Net earned premiums and fees........................................ $ 2,268 $ 2,405 $ 2,367
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
The effects of reinsurance on written premiums and fees for short-duration
contracts were not materially different from the amounts shown in the above
table. Benefits, losses and settlement expenses for 1997, 1996 and 1995 were net
of reinsurance recoveries of $340 million, $359 million and $442 million,
respectively.
NOTE 10 -- LEASES AND RENTALS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $76 million, $68 million and $60 million in 1997, 1996 and 1995,
respectively.
As of December 31, 1997, future net minimum rental payments under
non-cancelable operating leases were $167 million, payable as follows: 1998 --
$44 million; 1999 -- $37 million; 2000 -- $23 million; 2001 -- $17 million; 2002
- -- $12 million; and $34 million thereafter.
NOTE 11 -- SEGMENT INFORMATION
The Company operates principally in three segments: Employee Life and Health
Benefits, Employee Retirement and Savings Benefits, and Individual Financial
Services. Other Operations consists principally of the results of the Company's
settlement annuity business and certain new business initiatives.
Summarized segment financial information for the year ended and as of December
31 was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(IN MILLIONS) 1997 1996 1995
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Employee Life and Health Benefits................................ $ 4,581 $ 4,510 $ 4,243
Employee Retirement and Savings Benefits......................... 1,773 1,899 1,914
Individual Financial Services.................................... 2,004 1,950 1,800
Other Operations................................................. 212 200 181
- -------------------------------------------------------------------------------------------
Total............................................................ $ 8,570 $ 8,559 $ 8,138
- -------------------------------------------------------------------------------------------
-------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
Employee Life and Health Benefits................................ $ 300 $ 287 $ 294
Employee Retirement and Savings Benefits......................... 324 293 232
Individual Financial Services.................................... 300 298 252
Other Operations................................................. (11) (8) (17)
- -------------------------------------------------------------------------------------------
Total............................................................ $ 913 $ 870 $ 761
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Employee Life and Health Benefits................................ $ 7,639 $ 7,065 $ 7,629
Employee Retirement and Savings Benefits......................... 45,884 40,122 37,609
Individual Financial Services.................................... 19,809 17,930 16,189
Other Operations................................................. 2,721 2,398 2,569
- -------------------------------------------------------------------------------------------
Total............................................................ $ 76,053 $ 67,515 $ 63,996
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
During 1995, the Company recorded a $13 million pre-tax charge ($8 million
after-tax), included in Other Operating Expenses, for cost reduction
restructuring initiatives in the Employee Life and Health Benefits segment. The
charge consisted primarily of severance-related expenses representing costs
associated with nonvoluntary terminations covering approximately 1,100
employees. These initiatives were completed in 1997 with no material difference
from original estimates.
NOTE 12 -- CONTINGENCIES
A) FINANCIAL GUARANTEES: The Company is contingently liable for financial
guarantees provided in the ordinary course of business on the repayment of
principal and interest on certain industrial revenue bonds. The contractual
amounts of financial guarantees reflect the Company's maximum exposure to credit
loss in the event of nonperformance. To limit the Company's exposure in the
event of default of any guaranteed obligation, various programs are in place to
ascertain the creditworthiness of guaranteed parties and to monitor this status
on a periodic basis.
The industrial revenue bonds guaranteed directly by the Company have remaining
maturities of up to 18 years. The guarantees provide for payment of debt service
only as it becomes due; consequently, an event of default would not cause an
acceleration of scheduled principal and interest payments. The principal amount
of the bonds guaranteed by the Company at December 31, 1997 and 1996 was $202
million and $234 million, respectively. Revenues in connection with industrial
revenue bond guarantees are derived principally from equity participations in
the related projects and are included in Net Investment Income as earned. Loss
reserves for financial guarantees are established when a default has occurred or
when the Company believes that a loss has been incurred. There were no losses
for industrial revenue bonds in 1997, 1996 or 1995.
The Company also guarantees a minimum level of benefits for certain separate
account contracts and, in the event that separate account assets are
insufficient to fund minimum policy benefits, the Company is obligated to fund
the difference. As of December 31, 1997 and 1996, the amount of minimum benefit
guarantees for separate account contracts was $4.6 billion and $4.9 billion,
respectively. Reserves in addition to the separate account liabilities are
established when the Company believes a payment will be required under one of
these guarantees. No such reserves were required as of December 31, 1997 and
1996. Guarantee fees are part of the overall management fee charged to separate
accounts and are recognized in income as earned.
Although the ultimate outcome of any loss contingencies arising from the
Company's financial guarantees may adversely affect results of operations in
future periods, they are not expected to have a material adverse effect on the
Company's liquidity or financial condition.
B) REGULATORY AND INDUSTRY DEVELOPMENTS: The Company's businesses are subject
to a changing social, economic, legal, legislative and regulatory environment
that could affect them. Some of the changes include initiatives to increase
health care regulation, restrict insurance pricing and the application of
underwriting standards, and revise federal tax laws. Some of the more
significant issues are discussed below.
Efforts at the federal and state level to increase regulation of the health
care industry could have an adverse effect on the Company's health care
operations if they reduce marketplace competition and innovation or result in
increased medical or administrative costs. Matters under consideration that
could have an adverse effect include mandated benefits or services that increase
costs without improving the quality of care, loss of the ERISA preemption of
state law and restrictions on the use of prescription drug formularies. Due to
the uncertainty associated with the timing and content of any proposals
ultimately adopted, the effect on the Company's results of operations, liquidity
or financial condition cannot be reasonably estimated at this time.
29
<PAGE>
In 1996, Congress passed legislation that phases out over a three-year period
the tax deductibility of policy loan interest for most leveraged corporate-owned
life insurance (COLI) products. For 1997, revenues of $591 million and net
income of $44 million for the Company were from leveraged COLI products that are
affected by this legislation. The Company does not expect this legislation to
have a material adverse effect on its consolidated results of operations,
liquidity or financial condition.
The National Association of Insurance Commissioners recently approved
standardized statutory accounting practices, which are not scheduled to take
effect before 1999. The Company has not determined the effect on statutory net
income, surplus or liquidity at this time.
The Company is contingently liable for possible assessments under regulatory
requirements pertaining to potential insolvencies of unaffiliated insurance
companies. Mandatory assessments, which are subject to statutory limits, can be
partially recovered through a reduction in future premium taxes in some states.
The Company recorded pre-tax charges of $17 million, $26 million and $22 million
for 1997, 1996 and 1995, respectively, for guaranty fund assessments that can be
reasonably estimated before giving effect to future premium tax recoveries.
Although future assessments and payments may adversely affect results of
operations in future periods, such amounts are not expected to have a material
adverse effect on the Company's liquidity or financial condition.
The eventual effect on the Company of the changing environment in which it
operates remains uncertain.
C) LITIGATION: The Company is routinely engaged in litigation incidental to
its business. While the outcome of all litigation involving the Company,
including insurance-related litigation, cannot be determined, litigation is not
expected to result in losses that differ from recorded reserves by amounts that
would be material to results of operations, liquidity or financial condition.
NOTE 13 -- RELATED PARTY TRANSACTIONS
The Company has assumed the settlement annuity and group pension business
written by Life Insurance Company of North America (LINA), an affiliate.
Reserves held by the Company with respect to this business were $1.7 billion at
December 31, 1997 and 1996.
The Company cedes long-term disability business to LINA. Reinsurance
recoverables from LINA at December 31, 1997 and 1996 were $869 million and $917
million, respectively.
The Company had lines of credit available from affiliates totaling $600
million at December 31, 1997 and 1996. All borrowings are payable upon demand
with interest rates equivalent to CIGNA's average monthly short-term borrowing
rate plus 1/4 of 1%. Interest expense was $0.2 million for 1997 and $1.0 million
for 1996 and 1995. As of December 31, 1997 and 1996, there were no borrowings
outstanding under such lines.
The Company extended lines of credit to affiliates totaling $600 million at
December 31, 1997 and 1996. All loans are payable upon demand with interest
rates equivalent to CIGNA's average monthly short-term borrowing rate. There
were no amounts outstanding as of December 31, 1997 or 1996.
The Company, together with other CIGNA subsidiaries, has entered into a
pooling arrangement known as the CIGNA Corporate Liquidity Account (the Account)
for the purpose of maximizing earnings on funds available for short-term
investments. Withdrawals from the Account, up to the total amount of the
participant's investment in the Account, are allowed on a demand basis. As of
December 31, 1997 and 1996, the Company had a balance in the Account of $484
million and $80 million, respectively.
CIGNA allocates to the Company its share of operating expenses incurred at the
corporate level. The Company also allocates a portion of its operating expenses
to affiliated companies on whose behalf it performs certain administrative
services.
30
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
CIGNA
VARIABLE
PRODUCTS
GROUP
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS SUB-ACCOUNT
--------------------------------------------------- -----------
LEVERAGED MIDCAP SMALL MONEY
GROWTH ALLCAP GROWTH CAPITALIZATION MARKET
----------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $30,808,248 $8,253,666 $15,398,687 $20,132,265 $6,869,616
Receivable from Connecticut
General Life Insurance
Company..................... 31,506 6,260 1,903 -- --
Receivable for fund shares
sold........................ -- -- -- 3,763 8,637
----------- ---------- ---------- -------------- -----------
Total assets................ 30,839,754 8,259,926 15,400,590 20,136,028 6,878,253
----------- ---------- ---------- -------------- -----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- -- 3,763 8,637
Payable for fund shares
purchased................... 31,506 6,260 1,903 -- --
----------- ---------- ---------- -------------- -----------
Total liabilities........... 31,506 6,260 1,903 3,763 8,637
----------- ---------- ---------- -------------- -----------
Net assets.................. $30,808,248 $8,253,666 $15,398,687 $20,132,265 $6,869,616
----------- ---------- ---------- -------------- -----------
----------- ---------- ---------- -------------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 1,521,063 401,116 802,891 1,125,616 --
Net asset value per
accumulation unit........... $ 17.196381 $18.148668 $16.429260 $ 14.799455 $ --
----------- ---------- ---------- -------------- -----------
$26,156,787 $7,279,720 $13,190,901 $16,658,508 $ --
----------- ---------- ---------- -------------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 145,446 33,901 84,399 137,954 --
Net asset value per
accumulation unit........... $ 13.211614 $11.744336 $11.377289 $ 10.289562 $ --
----------- ---------- ---------- -------------- -----------
$ 1,921,574 $ 398,139 $ 960,230 $ 1,419,485 $ --
----------- ---------- ---------- -------------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. 241,255 52,402 112,152 175,551 671,479
Net asset value per
accumulation unit........... $ 11.168525 $10.988210 $11.123794 $ 11.406099 $10.230578
----------- ---------- ---------- -------------- -----------
$ 2,694,461 $ 575,807 $1,247,556 $ 2,002,348 $6,869,616
----------- ---------- ---------- -------------- -----------
Accumulation net assets....... $30,772,822 $8,253,666 $15,398,687 $20,080,341 $6,869,616
Annuity reserves.............. 35,426 -- -- 51,924 --
----------- ---------- ---------- -------------- -----------
$30,808,248 $8,253,666 $15,398,687 $20,132,265 $6,869,616
----------- ---------- ---------- -------------- -----------
----------- ---------- ---------- -------------- -----------
<CAPTION>
FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
------------------------------------------------
EQUITY- HIGH MONEY
INCOME INCOME MARKET OVERSEAS
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $52,730,899 $17,524,570 $11,575,573 $6,997,880
Receivable from Connecticut
General Life Insurance
Company..................... 30,505 33,735 -- 13,114
Receivable for fund shares
sold........................ -- -- 407 --
----------- ---------- ----------- ----------
Total assets................ 52,761,404 17,558,305 11,575,980 7,010,994
----------- ---------- ----------- ----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- 407 --
Payable for fund shares
purchased................... 30,505 33,735 -- 13,114
----------- ---------- ----------- ----------
Total liabilities........... 30,505 33,735 407 13,114
----------- ---------- ----------- ----------
Net assets.................. $52,730,899 $17,524,570 $11,575,573 $6,997,880
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 2,564,387 997,952 1,017,888 417,152
Net asset value per
accumulation unit........... $ 17.296831 $12.545574 $ 11.095784 $11.687000
----------- ---------- ----------- ----------
$44,355,770 $12,519,875 $11,294,261 $4,875,251
----------- ---------- ----------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 232,844 55,953 21,161 21,670
Net asset value per
accumulation unit........... $ 13.707441 $12.298844 $ 10.632251 $11.587559
----------- ---------- ----------- ----------
$ 3,191,701 $ 688,161 $ 224,994 $ 251,102
----------- ---------- ----------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. 456,837 391,937 -- 187,414
Net asset value per
accumulation unit........... $ 11.249844 $11.013339 $ -- $ 9.986074
----------- ---------- ----------- ----------
$ 5,139,346 $4,316,534 $ -- $1,871,527
----------- ---------- ----------- ----------
Accumulation net assets....... $52,686,817 $17,524,570 $11,519,255 $6,997,880
Annuity reserves.............. 44,082 -- 56,318 --
----------- ---------- ----------- ----------
$52,730,899 $17,524,570 $11,575,573 $6,997,880
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
31
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP III
FIDELITY VIP II PORTFOLIO SUB-
PORTFOLIO SUB-ACCOUNTS ACCOUNT
------------------------------------ ----------------
ASSET CONTRA- INVESTMENT GROWTH
MANAGER FUND GRADE BOND OPPORTUNITIES
----------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
Receivable from Connecticut
General Life Insurance
Company..................... 5,447 8,985 52,259 17,930
Receivable for fund shares
sold........................ -- -- -- --
----------- ----------- ---------- ----------------
Total assets................ 6,670,706 1,720,007 11,139,522 3,849,418
----------- ----------- ---------- ----------------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- -- --
Payable for fund shares
purchased................... 5,447 8,985 52,259 17,930
----------- ----------- ---------- ----------------
Total liabilities........... 5,447 8,985 52,259 17,930
----------- ----------- ---------- ----------------
Net assets.................. $ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
----------- ----------- ---------- ----------------
----------- ----------- ---------- ----------------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 403,681 -- 776,658 --
Net asset value per
accumulation unit........... $ 15.193166 $ -- $11.554977 $ --
----------- ----------- ---------- ----------------
$ 6,133,197 $ -- $8,974,264 $ --
----------- ----------- ---------- ----------------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 41,423 -- 22,191 --
Net asset value per
accumulation unit........... $ 12.844560 $ -- $11.323436 $ --
----------- ----------- ---------- ----------------
$ 532,062 $ -- $ 251,281 $ --
----------- ----------- ---------- ----------------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. -- 148,976 175,848 336,690
Net asset value per
accumulation unit........... $ -- $ 11.485208 $10.587068 $11.379873
----------- ----------- ---------- ----------------
$ -- $ 1,711,022 $1,861,718 $3,831,488
----------- ----------- ---------- ----------------
Accumulation net assets....... $ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
Annuity reserves.............. -- -- -- --
----------- ----------- ---------- ----------------
$ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
----------- ----------- ---------- ----------------
----------- ----------- ---------- ----------------
<CAPTION>
MFS SERIES SUB-ACCOUNTS
-------------------------------------------------------------------------
EMERGING GROWTH WITH TOTAL WORLD
GROWTH INCOME RESEARCH RETURN UTILITIES GOVERNMENTS
---------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
Receivable from Connecticut
General Life Insurance
Company..................... 3,955 54,701 33,334 -- 14,783 --
Receivable for fund shares
sold........................ -- -- -- 706 -- 54
---------- ----------- ---------- ---------- ---------- -----------
Total assets................ 2,123,044 2,819,157 3,713,005 19,421,933 6,266,653 1,413,444
---------- ----------- ---------- ---------- ---------- -----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- -- 706 -- 54
Payable for fund shares
purchased................... 3,955 54,701 33,334 -- 14,783 --
---------- ----------- ---------- ---------- ---------- -----------
Total liabilities........... 3,955 54,701 33,334 706 14,783 54
---------- ----------- ---------- ---------- ---------- -----------
Net assets.................. $2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
---------- ----------- ---------- ---------- ---------- -----------
---------- ----------- ---------- ---------- ---------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. -- -- -- 1,032,242 322,795 131,155
Net asset value per
accumulation unit........... $ -- $ -- $ -- $14.870405 $17.278823 $10.297427
---------- ----------- ---------- ---------- ---------- -----------
$ -- $ -- $ -- $15,349,858 $5,577,524 $1,350,557
---------- ----------- ---------- ---------- ---------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. -- -- -- 102,664 13,784 6,175
Net asset value per
accumulation unit........... $ -- $ -- $ -- $13.176208 $14.800406 $10.174585
---------- ----------- ---------- ---------- ---------- -----------
$ -- $ -- $ -- $1,352,720 $ 204,004 $ 62,833
---------- ----------- ---------- ---------- ---------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. 187,043 242,027 341,999 244,760 39,107 --
Net asset value per
accumulation unit........... $11.329433 $11.422097 $10.759295 $11.107402 $12.027164 $ --
---------- ----------- ---------- ---------- ---------- -----------
$2,119,089 $2,764,456 $3,679,671 $2,718,649 $ 470,342 $ --
---------- ----------- ---------- ---------- ---------- -----------
Accumulation net assets....... $2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
Annuity reserves.............. -- -- -- -- -- --
---------- ----------- ---------- ---------- ---------- -----------
$2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
---------- ----------- ---------- ---------- ---------- -----------
---------- ----------- ---------- ---------- ---------- -----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
32
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMT PORTFOLIO SUB-ACCOUNTS
----------------------------------- OCC ACCUMULATION TRUST SUB-ACCOUNTS
LIMITED --------------------------------------
MATURITY GLOBAL
BALANCED BOND PARTNERS EQUITY MANAGED SMALL CAP
---------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $5,410,923 $6,636,808 $34,421,582 $18,864,939 $ 67,959,224 $9,066,217
Receivable from Connecticut
General Life Insurance
Company..................... -- 212 52,086 7,429 53,492 13,210
Receivable for fund shares
sold........................ 290 -- -- -- -- --
---------- ---------- ----------- ---------- ------------- ----------
Total assets................ 5,411,213 6,637,020 34,473,668 18,872,368 68,012,716 9,079,427
---------- ---------- ----------- ---------- ------------- ----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... 290 -- -- -- -- --
Payable for fund shares
purchased................... -- 212 52,086 7,429 53,492 13,210
---------- ---------- ----------- ---------- ------------- ----------
Total liabilities........... 290 212 52,086 7,429 53,492 13,210
---------- ---------- ----------- ---------- ------------- ----------
Net assets.................. $5,410,923 $6,636,808 $34,421,582 $18,864,939 $ 67,959,224 $9,066,217
---------- ---------- ----------- ---------- ------------- ----------
---------- ---------- ----------- ---------- ------------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 389,760 460,111 1,242,083 1,032,703 3,343,230 448,919
Net asset value per
accumulation unit........... $12.772116 $11.438698 $ 20.080660 $15.021373 $ 16.298405 $15.345589
---------- ---------- ----------- ---------- ------------- ----------
$4,978,066 $5,263,072 $24,941,844 $15,512,619 $ 54,489,310 $6,888,934
---------- ---------- ----------- ---------- ------------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 33,702 15,655 131,403 77,692 329,792 44,569
Net asset value per
accumulation unit........... $11.759038 $10.922542 $ 14.901357 $12.126399 $ 13.785620 $12.738185
---------- ---------- ----------- ---------- ------------- ----------
$ 396,303 $ 170,997 $ 1,958,078 $ 942,121 $ 4,546,388 $ 567,734
---------- ---------- ----------- ---------- ------------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. -- 116,110 637,684 226,381 792,156 145,504
Net asset value per
accumulation unit........... $ -- $10.358639 $ 11.785098 $10.384482 $ 11.210441 $10.688805
---------- ---------- ----------- ---------- ------------- ----------
$ -- $1,202,739 $ 7,515,164 $2,350,845 $ 8,880,418 $1,555,263
---------- ---------- ----------- ---------- ------------- ----------
Accumulation net assets....... $5,374,369 $6,636,808 $34,415,086 $18,805,585 $ 67,916,116 $9,011,931
Annuity reserves.............. 36,554 -- 6,496 59,354 43,108 54,286
---------- ---------- ----------- ---------- ------------- ----------
$5,410,923 $6,636,808 $34,421,582 $18,864,939 $ 67,959,224 $9,066,217
---------- ---------- ----------- ---------- ------------- ----------
---------- ---------- ----------- ---------- ------------- ----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
33
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CIGNA
VARIABLE
PRODUCTS
GROUP
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS SUB-ACCOUNT
------------------------------------------------- ---------
LEVERAGED MIDCAP SMALL MONEY
GROWTH ALLCAP GROWTH CAPITALIZATION MARKET *
---------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................... $ 77,695 $ -- $ 7,282 $ -- $94,819
EXPENSES:
Mortality and expense risk and
administrative charges................ 331,270 94,488 171,622 218,002 26,486
---------- ---------- ---------- ------------- ---------
Net investment gain (loss)............ (253,575) (94,488) (164,340) (218,002 ) 68,333
---------- ---------- ---------- ------------- ---------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Capital distribution from portfolio
sponsor............................... 140,707 -- 177,571 587,421 --
Net realized gain (loss) on share
transactions.......................... 1,540 19,106 24,882 (93,004 ) --
---------- ---------- ---------- ------------- ---------
Net realized gain..................... 142,247 19,106 202,453 494,417 --
Net unrealized gain..................... 5,050,728 1,153,622 1,532,602 1,272,653 --
---------- ---------- ---------- ------------- ---------
Net realized and unrealized gain on
investments......................... 5,192,975 1,172,728 1,735,055 1,767,070 --
---------- ---------- ---------- ------------- ---------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................ $4,939,400 $1,078,240 $1,570,715 $ 1,549,068 $68,333
---------- ---------- ---------- ------------- ---------
---------- ---------- ---------- ------------- ---------
<CAPTION>
FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
----------------------------------------------
EQUITY- HIGH MONEY
INCOME INCOME MARKET OVERSEAS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................... $ 501,651 $ 401,740 $ 762,513 $ 40,523
EXPENSES:
Mortality and expense risk and
administrative charges................ 531,764 141,971 187,646 60,775
---------- ---------- ---------- ----------
Net investment gain (loss)............ (30,113) 259,769 574,867 (20,252 )
---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Capital distribution from portfolio
sponsor............................... 2,522,193 49,653 -- 160,863
Net realized gain (loss) on share
transactions.......................... (10,861) (12,799) -- (3,004 )
---------- ---------- ---------- ----------
Net realized gain..................... 2,511,332 36,854 -- 157,859
Net unrealized gain..................... 6,563,776 1,259,396 -- 38,849
---------- ---------- ---------- ----------
Net realized and unrealized gain on
investments......................... 9,075,108 1,296,250 -- 196,708
---------- ---------- ---------- ----------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................ $9,044,995 $1,556,019 $ 574,867 $ 176,456
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ----------------------------------
* Period from May 20, 1997 (date deposits first received) to December 31, 1997
The Notes to Financial Statements are an integral part of these statements.
34
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP III
FIDELITY VIP II PORTFOLIO SUB- MFS SERIES
PORTFOLIO SUB-ACCOUNTS ACCOUNT SUB-ACCOUNTS
------------------------------- ----------------- ----------------------
ASSET CONTRA- INVESTMENT GROWTH EMERGING GROWTH WITH
MANAGER FUND ** GRADE BOND OPPORTUNITIES *** GROWTH ** INCOME ****
---------- ------- ---------- ----------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................... $ 167,312 $ -- $ 360,990 $ -- $ -- $ 10,678
EXPENSES:
Mortality and expense risk and
administrative charges...... 76,758 5,782 104,517 12,362 6,875 8,570
---------- ------- ---------- -------- --------- -----------
Net investment gain
(loss).................... 90,554 (5,782) 256,473 (12,362) (6,875 ) 2,108
---------- ------- ---------- -------- --------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Capital distribution from
portfolio sponsor........... 419,698 -- -- -- -- 49,949
Net realized gain (loss) on
share transactions.......... 5,306 (17) 2,025 57 1,644 (98 )
---------- ------- ---------- -------- --------- -----------
Net realized gain (loss).... 425,004 (17) 2,025 57 1,644 49,851
Net unrealized gain (loss).... 492,627 41,006 368,703 165,241 24,778 43,425
---------- ------- ---------- -------- --------- -----------
Net realized and unrealized
gain (loss) on
investments............... 917,631 40,989 370,728 165,298 26,422 93,276
---------- ------- ---------- -------- --------- -----------
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS.................. $1,008,185 $35,207 $ 627,201 $ 152,936 $ 19,547 $ 95,384
---------- ------- ---------- -------- --------- -----------
---------- ------- ---------- -------- --------- -----------
<CAPTION>
TOTAL WORLD
RESEARCH *** RETURN UTILITIES GOVERNMENTS
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................... $ -- $ -- $ -- $ 22,035
EXPENSES:
Mortality and expense risk and
administrative charges...... 11,215 190,114 57,968 18,142
------------ ---------- ---------- -----------
Net investment gain
(loss).................... (11,215 ) (190,114) (57,968) 3,893
------------ ---------- ---------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Capital distribution from
portfolio sponsor........... -- -- -- 9,988
Net realized gain (loss) on
share transactions.......... 1,277 3,460 2,162 (1,993)
------------ ---------- ---------- -----------
Net realized gain (loss).... 1,277 3,460 2,162 7,995
Net unrealized gain (loss).... 20,550 2,716,983 1,313,374 (47,665)
------------ ---------- ---------- -----------
Net realized and unrealized
gain (loss) on
investments............... 21,827 2,720,443 1,315,536 (39,670)
------------ ---------- ---------- -----------
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS.................. $ 10,612 $2,530,329 $1,257,568 $ (35,777)
------------ ---------- ---------- -----------
------------ ---------- ---------- -----------
</TABLE>
- ------------------------------
** Period from June 2, 1997 (date deposits first received) to December 31,
1997
*** Period from June 9, 1997 (date deposits first received) to December 31,
1997
**** Period from June 5, 1997 (date deposits first received) to December 31,
1997
The Notes to Financial Statements are an integral part of these statements.
35
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMT PORTFOLIO SUB-ACCOUNTS
-------------------------------------- OCC ACCUMULATION TRUST SUB-ACCOUNTS
LIMITED --------------------------------------------
MATURITY GLOBAL
BALANCED BOND PARTNERS EQUITY MANAGED SMALL CAP
------------ --------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................... $ 62,015 $230,704 $ 35,980 $ 89,675 $ 399,586 $ 19,838
EXPENSES:
Mortality and expense risk and
administrative charges...... 57,524 65,699 287,570 200,143 684,466 74,900
------------ --------- ----------- ------------ -------------- ------------
Net investment gain
(loss).................... 4,491 165,005 (251,590) (110,468) (284,880) (55,062)
------------ --------- ----------- ------------ -------------- ------------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Capital distribution from
portfolio sponsor........... 159,172 -- 554,096 863,304 1,227,260 139,904
Net realized gain (loss) on
share transactions.......... 8,894 1,260 (36,279) (3,225) 473 1,039
------------ --------- ----------- ------------ -------------- ------------
Net realized gain........... 168,066 1,260 517,817 860,079 1,227,733 140,943
Net unrealized gain........... 507,948 92,716 4,735,263 718,584 7,959,980 845,266
------------ --------- ----------- ------------ -------------- ------------
Net realized and unrealized
gain on investments....... 676,014 93,976 5,253,080 1,578,663 9,187,713 986,209
------------ --------- ----------- ------------ -------------- ------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS... $ 680,505 $258,981 $5,001,490 $1,468,195 $ 8,902,833 $931,147
------------ --------- ----------- ------------ -------------- ------------
------------ --------- ----------- ------------ -------------- ------------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
36
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CIGNA
VARIABLE
PRODUCTS
GROUP
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS SUB-ACCOUNT
--------------------------------------------------- ------------
LEVERAGED MIDCAP SMALL MONEY MARKET
GROWTH ALLCAP GROWTH CAPITALIZATION *
----------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (253,575) $ (94,488) $ (164,340) $ (218,002) $ 68,333
Net realized gain.................. 142,247 19,106 202,453 494,417 --
Net unrealized gain................ 5,050,728 1,153,622 1,532,602 1,272,653 --
----------- ---------- ---------- -------------- ------------
Net increase from operations..... 4,939,400 1,078,240 1,570,715 1,549,068 68,333
----------- ---------- ---------- -------------- ------------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 5,337,526 1,537,063 2,637,168 3,430,738 26,057,549
Participant transfers.............. 3,181,343 280,882 2,087,535 1,351,675 (19,218,746)
Participant withdrawals and annuity
payments......................... (824,870) (226,287) (472,429) (593,283) (37,520)
----------- ---------- ---------- -------------- ------------
Net increase from participant
transactions................... 7,693,999 1,591,658 4,252,274 4,189,130 6,801,283
----------- ---------- ---------- -------------- ------------
Total increase in net assets... 12,633,399 2,669,898 5,822,989 5,738,198 6,869,616
----------- ---------- ---------- -------------- ------------
NET ASSETS:
Beginning of period................ 18,174,849 5,583,768 9,575,698 14,394,067 --
----------- ---------- ---------- -------------- ------------
End of period...................... $30,808,248 $8,253,666 $15,398,687 $20,132,265 $ 6,869,616
----------- ---------- ---------- -------------- ------------
----------- ---------- ---------- -------------- ------------
<CAPTION>
FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
--------------------------------------------------
EQUITY- HIGH MONEY
INCOME INCOME MARKET OVERSEAS
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (30,113) $ 259,769 $ 574,867 $ (20,252)
Net realized gain.................. 2,511,332 36,854 -- 157,859
Net unrealized gain................ 6,563,776 1,259,396 -- 38,849
----------- ---------- ----------- -----------
Net increase from operations..... 9,044,995 1,556,019 574,867 176,456
----------- ---------- ----------- -----------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 9,877,589 7,265,778 25,555,964 2,765,425
Participant transfers.............. 7,616,249 4,195,306 (23,453,172) 2,324,012
Participant withdrawals and annuity
payments......................... (1,991,191) (375,923) (1,704,916) (162,622)
----------- ---------- ----------- -----------
Net increase from participant
transactions................... 15,502,647 11,085,161 397,876 4,926,815
----------- ---------- ----------- -----------
Total increase in net assets... 24,547,642 12,641,180 972,743 5,103,271
----------- ---------- ----------- -----------
NET ASSETS:
Beginning of period................ 28,183,257 4,883,390 10,602,830 1,894,609
----------- ---------- ----------- -----------
End of period...................... $52,730,899 $17,524,570 $11,575,573 $ 6,997,880
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
- ------------------------------
* Period from May 20, 1997 (date deposits first received) to December 31, 1997
The Notes to Financial Statements are an integral part of these statements.
37
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP III
FIDELITY VIP II PORTFOLIO SUB-
PORTFOLIO SUB-ACCOUNTS ACCOUNT
----------------------------------- --------------------
ASSET CONTRA- INVESTMENT GROWTH OPPORTUNITIES
MANAGER FUND ** GRADE BOND ***
----------- ---------- ---------- --------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ 90,554 $ (5,782) $ 256,473 $ (12,362)
Net realized gain (loss)........... 425,004 (17) 2,025 57
Net unrealized gain (loss)......... 492,627 41,006 368,703 165,241
----------- ---------- ---------- ----------
Net increase (decrease) from
operations..................... 1,008,185 35,207 627,201 152,936
----------- ---------- ---------- ----------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits............... 999,019 1,155,144 2,794,038 2,597,161
Participant transfers.............. 810,077 547,974 2,142,175 1,101,690
Participant withdrawals............ (355,632) (27,303) (316,736) (20,299)
----------- ---------- ---------- ----------
Net increase (decrease) from
participant transactions....... 1,453,464 1,675,815 4,619,477 3,678,552
----------- ---------- ---------- ----------
Total increase (decrease) in
net assets................... 2,461,649 1,711,022 5,246,678 3,831,488
----------- ---------- ---------- ----------
NET ASSETS:
Beginning of period................ 4,203,610 -- 5,840,585 --
----------- ---------- ---------- ----------
End of period...................... $ 6,665,259 $1,711,022 $11,087,263 $ 3,831,488
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
<CAPTION>
MFS SERIES SUB-ACCOUNTS
----------------------------------------------------------------------------
EMERGING GROWTH WITH RESEARCH TOTAL WORLD
GROWTH ** INCOME **** *** RETURN UTILITIES GOVERNMENTS
------------ ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (6,875) $ 2,108 $ (11,215 ) $ (190,114) $ (57,968) $ 3,893
Net realized gain (loss)........... 1,644 49,851 1,277 3,460 2,162 7,995
Net unrealized gain (loss)......... 24,778 43,425 20,550 2,716,983 1,313,374 (47,665)
------------ ----------- ---------- ----------- ---------- -----------
Net increase (decrease) from
operations..................... 19,547 95,384 10,612 2,530,329 1,257,568 (35,777)
------------ ----------- ---------- ----------- ---------- -----------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits............... 1,299,509 1,387,817 2,361,107 4,951,791 697,454 205,485
Participant transfers.............. 849,791 1,287,747 1,353,004 3,826,468 1,697,348 (228,367)
Participant withdrawals............ (49,758) (6,492 ) (45,052 ) (589,750) (192,307) (35,414)
------------ ----------- ---------- ----------- ---------- -----------
Net increase (decrease) from
participant transactions....... 2,099,542 2,669,072 3,669,059 8,188,509 2,202,495 (58,296)
------------ ----------- ---------- ----------- ---------- -----------
Total increase (decrease) in
net assets................... 2,119,089 2,764,456 3,679,671 10,718,838 3,460,063 (94,073)
------------ ----------- ---------- ----------- ---------- -----------
NET ASSETS:
Beginning of period................ -- -- -- 8,702,389 2,791,807 1,507,463
------------ ----------- ---------- ----------- ---------- -----------
End of period...................... $ 2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
------------ ----------- ---------- ----------- ---------- -----------
------------ ----------- ---------- ----------- ---------- -----------
</TABLE>
- ------------------------------
** Period from June 2, 1997 (date deposits first received) to December 31,
1997
*** Period from June 9, 1997 (date deposits first received) to December 31,
1997
**** Period from June 5, 1997 (date deposits first received) to December 31,
1997
The Notes to Financial Statements are an integral part of these statements.
38
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMT PORTFOLIO SUB-ACCOUNTS OCC ACCUMULATION TRUST SUB-ACCOUNTS
---------------------------------------- ------------------------------------------
LIMITED GLOBAL
BALANCED MATURITY BOND PARTNERS EQUITY MANAGED SMALL CAP
----------- -------------- ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain
(loss)................. $ 4,491 $ 165,005 $ (251,590) $ (110,468) $ (284,880) $ (55,062)
Net realized gain........ 168,066 1,260 517,817 860,079 1,227,733 140,943
Net unrealized gain...... 507,948 92,716 4,735,263 718,584 7,959,980 845,266
----------- -------------- ---------- -------------- ------------ -----------
Net increase from
operations........... 680,505 258,981 5,001,490 1,468,195 8,902,833 931,147
----------- -------------- ---------- -------------- ------------ -----------
ACCUMULATION AND ANNUITY
UNIT TRANSACTIONS:
Participant deposits 794,039 1,839,438 10,686,060 4,406,191 16,196,357 2,555,273
Participant transfers.... 772,497 1,058,558 9,775,496 3,352,013 11,795,604 3,078,585
Participant withdrawals
and annuity payments... (201,295) (183,646) (738,005) (555,871) (2,062,412) (255,114)
----------- -------------- ---------- -------------- ------------ -----------
Net increase from
participant
transactions......... 1,365,241 2,714,350 19,723,551 7,202,333 25,929,549 5,378,744
----------- -------------- ---------- -------------- ------------ -----------
Total increase in net
assets.............. 2,045,746 2,973,331 24,725,041 8,670,528 34,832,382 6,309,891
----------- -------------- ---------- -------------- ------------ -----------
NET ASSETS:
Beginning of period...... 3,365,177 3,663,477 9,696,541 10,194,411 33,126,842 2,756,326
----------- -------------- ---------- -------------- ------------ -----------
End of period............ $ 5,410,923 $6,636,808 $34,421,582 $ 18,864,939 $ 67,959,224 $ 9,066,217
----------- -------------- ---------- -------------- ------------ -----------
----------- -------------- ---------- -------------- ------------ -----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
39
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIODS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
--------------------------------------------------- --------------------------------------------------
LEVERAGED MIDCAP SMALL EQUITY- HIGH MONEY
GROWTH ALLCAP GROWTH CAPITALIZATION INCOME INCOME * MARKET OVERSEAS **
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain
(loss)................. $ (137,697) $ (48,267) $ (67,601) $ (126,196) $ (209,687) $ (19,299) $ 428,827 $ (5,307)
Net realized gain
(loss)................. 229,107 8,055 80,821 1,764 340,521 (241) -- 168
Net unrealized gain...... 1,131,951 218,998 345,620 109,613 2,059,625 196,922 -- 64,159
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
Net increase (decrease)
from operations...... 1,223,361 178,786 358,840 (14,819) 2,190,459 177,382 428,827 59,020
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
ACCUMULATION AND ANNUITY
UNIT TRANSACTIONS:
Participant deposits..... 10,783,257 3,476,529 4,553,845 8,786,778 15,889,145 2,685,680 30,385,963 1,005,559
Participant transfers.... 2,602,802 772,742 2,723,340 2,632,177 5,222,220 2,257,438 (26,362,351) 834,182
Participant withdrawals
and annuity payments... (294,588) (53,503) (98,852) (281,569) (1,664,909) (237,110) (825,252) (4,152)
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
Net increase from
participant
transactions......... 13,091,471 4,195,768 7,178,333 11,137,386 19,446,456 4,706,008 3,198,360 1,835,589
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
Total increase in net
assets............. 14,314,832 4,374,554 7,537,173 11,122,567 21,636,915 4,883,390 3,627,187 1,894,609
NET ASSETS:
Beginning of period...... 3,860,017 1,209,214 2,038,525 3,271,500 6,546,342 -- 6,975,643 --
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
End of period............ $18,174,849 $5,583,768 $9,575,698 $14,394,067 $28,183,257 $4,883,390 $ 10,602,830 $1,894,609
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
<CAPTION>
FIDELITY VIP II
PORTFOLIO SUB-ACCOUNTS
-----------------------
ASSET INVESTMENT
MANAGER GRADE BOND
---------- -----------
<S> <C> <C>
OPERATIONS:
Net investment gain
(loss)................. $ (3,908) $ 44,176
Net realized gain
(loss)................. 23,191 (39,580)
Net unrealized gain...... 318,766 134,649
---------- -----------
Net increase (decrease)
from operations...... 338,049 139,245
---------- -----------
ACCUMULATION AND ANNUITY
UNIT TRANSACTIONS:
Participant deposits..... 2,404,033 4,267,300
Participant transfers.... 837,140 (43,936)
Participant withdrawals
and annuity payments... (79,225) (43,602)
---------- -----------
Net increase from
participant
transactions......... 3,161,948 4,179,762
---------- -----------
Total increase in net
assets............. 3,499,997 4,319,007
NET ASSETS:
Beginning of period...... 703,613 1,521,578
---------- -----------
End of period............ $4,203,610 $5,840,585
---------- -----------
---------- -----------
</TABLE>
- ------------------------------
* Period from May 22, 1996 (date deposits first received) to December 31, 1996
** Period from May 20, 1996 (date deposits first received) to December 31, 1996
The Notes to Financial Statements are an integral part of these statements.
40
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MFS SERIES SUB-ACCOUNTS AMT PORTFOLIO SUB-ACCOUNTS
----------------------------------- --------------------------------------
TOTAL WORLD LIMITED
RETURN UTILITIES GOVERNMENTS BALANCED MATURITY BOND PARTNERS
---------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ 70,381 $ 43,717 $ (12,757) $ (370) $ 82,632 $ (58,511)
Net realized gain.................. 59,975 165,947 103 159,057 110 78,862
Net unrealized gain (loss)......... 468,302 99,863 61,456 (27,931) 8,894 1,271,284
---------- ---------- ----------- ---------- ------------- ----------
Net increase from operations..... 598,658 309,527 48,802 130,756 91,636 1,291,635
---------- ---------- ----------- ---------- ------------- ----------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 4,811,832 1,302,058 895,119 1,994,125 1,858,603 4,552,441
Participant transfers.............. 1,778,613 721,609 229,235 421,781 669,231 2,538,705
Participant withdrawals and annuity
payments......................... (126,130) (54,286) (8,402) (59,302) (82,873) (209,905)
---------- ---------- ----------- ---------- ------------- ----------
Net increase from participant
transactions................... 6,464,315 1,969,381 1,115,952 2,356,604 2,444,961 6,881,241
---------- ---------- ----------- ---------- ------------- ----------
Total increase in net assets... 7,062,973 2,278,908 1,164,754 2,487,360 2,536,597 8,172,876
NET ASSETS:
Beginning of period................ 1,639,416 512,899 342,709 877,817 1,126,880 1,523,665
---------- ---------- ----------- ---------- ------------- ----------
End of period...................... $8,702,389 $2,791,807 $1,507,463 $3,365,177 $3,663,477 $9,696,541
---------- ---------- ----------- ---------- ------------- ----------
---------- ---------- ----------- ---------- ------------- ----------
<CAPTION>
OCC ACCUMULATION
TRUST SUB-ACCOUNTS
------------------------------------
GLOBAL SMALL
EQUITY MANAGED CAP
----------- ----------- ----------
<S> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (40,318) $ (125,580) $ (9,497)
Net realized gain.................. 51,921 76,937 24,917
Net unrealized gain (loss)......... 767,457 3,785,792 239,507
----------- ----------- ----------
Net increase from operations..... 779,060 3,737,149 254,927
----------- ----------- ----------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 5,606,065 17,033,548 1,053,997
Participant transfers.............. 2,295,536 7,398,554 835,481
Participant withdrawals and annuity
payments......................... (124,119) (464,195) (17,732)
----------- ----------- ----------
Net increase from participant
transactions................... 7,777,482 23,967,907 1,871,746
----------- ----------- ----------
Total increase in net assets... 8,556,542 27,705,056 2,126,673
NET ASSETS:
Beginning of period................ 1,637,869 5,421,786 629,653
----------- ----------- ----------
End of period...................... $10,194,411 $33,126,842 $2,756,326
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
41
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
CG Variable Annuity Separate Account II (the Account) is registered as a
Unit Investment Trust under the Investment Company Act of 1940, as amended. The
operations of the Account are part of the operations of Connecticut General Life
Insurance Company (CG Life). The assets and liabilities of the Account are
clearly identified and distinguished from other assets and liabilities of CG
Life. The assets of the Account are not available to meet the general
obligations of CG Life and are held for the exclusive benefit of the
participants. Within the account are four contract types that have different
contract terms and or different fees (See Note 4).
The assets of the Account are divided into variable sub-accounts each of
which is invested in shares of twenty-five portfolios (mutual funds) of eight
diversified open-end management investment companies, each portfolio with its
own investment objective. The variable sub-accounts are:
ALGER AMERICAN FUND:--
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Capitalization Portfolio
CIGNA VARIABLE PRODUCTS GROUP:--
CIGNA Variable Products Money Market Fund
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:--
Equity-Income Portfolio
High Income Portfolio
Money Market Portfolio
Overseas Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:--
Asset Manager Portfolio
Contrafund Portfolio
Investment Grade Bond Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III:--
Growth Opportunities Portfolio
MFS VARIABLE INSURANCE TRUST:--
MFS Emerging Growth Series
MFS Growth with Income Series
MFS Research Series
MFS Total Return Series
MFS Utilities Series
MFS World Governments Series
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST:--
AMT Balanced Portfolio
AMT Limited Maturity Bond Portfolio
AMT Partners Portfolio
42
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION (CONTINUED)
OCC ACCUMULATION TRUST:--
OCC Global Equity Portfolio
OCC Managed Portfolio
OCC Small Cap Portfolio
Effective January 1, 1998, CG Life sold its individual variable annuity
business to Lincoln National Corporation (Lincoln). Although CG Life will remain
responsible for all policy terms and conditions, Lincoln will be servicing the
individual annuity contracts, including the payment of benefits, oversight of
investment management and contract administration.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with generally
accepted accounting principles. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies consistently
followed in the preparation of the Account's financial statements.
A. INVESTMENT VALUATION:--Investments held by the sub-accounts are valued at
their respective closing net asset value per share as determined by the
mutual funds as of December 31, 1997. The change in the difference between
cost and value is reflected as unrealized gain (loss) in the Statements of
Operations.
B. INVESTMENT TRANSACTIONS:--Investment transactions are recorded on the trade
date (date the order to buy or sell is executed). Realized gains and losses
on sales of investments are determined by the last-in, first-out cost basis
of the investment sold. Dividend and capital gain distributions are recorded
on the ex-dividend date. Investment transactions are settled through CG
Life.
C. FEDERAL INCOME TAXES:--The operations of the Account form a part of, and are
taxed with, the total operations of CG Life, which is taxed as a life
insurance company. Under existing Federal income tax law, investment income
(dividends) and capital gains attributable to the Account are not taxed.
D. ANNUITY RESERVES:--The amount of annuity reserves is determined by the
actuarial assumptions which meet statutory requirements. Gains or losses
resulting from the actual mortality experience, the responsibility of which
is assumed by CG Life, are offset by transfers to or from CG Life.
43
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
3. INVESTMENTS
Total shares held and cost of investments as of December 31, 1997 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SHARES COST OF
SUB-ACCOUNT HELD INVESTMENTS
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Growth Portfolio..................................... 720,492 $24,629,937
Alger American Leveraged AllCap Portfolio........................... 356,222 6,847,244
Alger American MidCap Growth Portfolio.............................. 636,836 13,557,022
Alger American Small Capitalization Portfolio....................... 460,166 18,845,387
CIGNA Variable Products Money Market Fund........................... 6,869,616 6,869,616
Fidelity Equity-Income Portfolio.................................... 2,171,783 43,838,658
Fidelity High Income Portfolio...................................... 1,290,469 16,068,252
Fidelity Money Market Portfolio..................................... 11,575,573 11,575,573
Fidelity Overseas Portfolio......................................... 364,474 6,894,872
Fidelity Asset Manager Portfolio.................................... 370,087 5,827,525
Fidelity Contrafund Portfolio....................................... 85,809 1,670,018
Fidelity Investment Grade Bond Portfolio............................ 882,744 10,559,814
Fidelity Growth Opportunities Portfolio............................. 198,832 3,666,247
MFS Emerging Growth Series.......................................... 131,294 2,094,311
MFS Growth with Income Series....................................... 168,154 2,721,031
MFS Research Series................................................. 233,038 3,659,121
MFS Total Return Series............................................. 1,167,843 16,201,968
MFS Utilities Series................................................ 347,520 4,830,719
MFS World Governments Series........................................ 138,432 1,421,536
AMT Balanced Portfolio.............................................. 303,984 4,930,498
AMT Limited Maturity Bond Portfolio................................. 470,029 6,506,300
AMT Partners Portfolio.............................................. 1,670,951 28,361,035
OCC Global Equity Portfolio......................................... 1,317,384 17,399,927
OCC Managed Portfolio............................................... 1,603,568 55,978,469
OCC Small Cap Portfolio............................................. 343,808 7,961,523
- -------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
3. INVESTMENTS (CONTINUED)
Total purchases and sales of shares for each mutual fund, for the periods
ended December 31, 1997, amounted to:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SUB-ACCOUNT PURCHASES SALES
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Growth Portfolio.................................... $8,595,764 $1,014,633
Alger American Leveraged AllCap Portfolio.......................... 2,723,167 1,225,998
Alger American MidCap Growth Portfolio............................. 5,434,002 1,168,497
Alger American Small Capitalization Portfolio...................... 8,828,840 4,270,290
CIGNA Variable Products Money Market Fund*......................... 16,585,368 9,715,752
Fidelity Equity-Income Portfolio................................... 20,031,213 2,036,485
Fidelity High Income Portfolio..................................... 14,065,473 2,670,890
Fidelity Money Market Portfolio.................................... 27,152,685 26,179,942
Fidelity Overseas Portfolio........................................ 5,656,133 588,707
Fidelity Asset Manager Portfolio................................... 2,826,840 863,124
Fidelity Contrafund Portfolio**.................................... 1,717,783 47,748
Fidelity Investment Grade Bond Portfolio........................... 6,343,028 1,467,077
Fidelity Growth Opportunities Portfolio***......................... 3,767,973 101,783
MFS Emerging Growth Series**....................................... 2,134,597 41,930
MFS Growth with Income Series****.................................. 2,729,062 7,933
MFS Research Series***............................................. 3,805,827 147,983
MFS Total Return Series............................................ 8,657,635 659,240
MFS Utilities Series............................................... 2,560,406 415,879
MFS World Governments Series....................................... 569,430 613,845
AMT Balanced Portfolio............................................. 2,296,440 767,536
AMT Limited Maturity Bond Portfolio................................ 4,359,908 1,480,553
AMT Partners Portfolio............................................. 22,831,233 2,805,176
OCC Global Equity Portfolio........................................ 8,917,830 962,662
OCC Managed Portfolio.............................................. 27,881,600 1,009,672
OCC Small Cap Portfolio............................................ 5,864,106 400,520
- -------------------------------------------------------------------------------------------
</TABLE>
* From 5/20/97, date deposits first received, to December 31, 1997.
** From 6/2/97, date deposits first received, to December 31, 1997.
*** From 6/9/97, date deposits first received, to December 31, 1997.
**** From 6/5/97, date deposits first received, to December 31, 1997.
4. CHARGES AND DEDUCTIONS
CG Life assumes the risk that annuitants may live longer than expected and
also assumes a mortality risk in connection with the death benefits of the
contract. CG Life also assumes a risk that its actual administrative expenses
may be higher than amounts deducted for such expenses. For all contracts sold
after April 30, 1997, CG Life charges each variable sub-account the daily
equivalent of 1.25%, on an annual basis, of the current value of each
sub-account's assets for the assumption of these risks. All contracts sold
before May 1, 1997, with the exception of contracts sold in the state of New
York from May 1, 1996 to April 30, 1997 (1.25% annual fee), have an annual fee
of 1.20% for mortality and expense risks.
CG Life also deducts a daily administrative fee from the assets of each
variable sub-account as partial reimbursement for administrative expenses
relating to the issuance and maintenance of the contract and the participant's
annuity
45
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
4. CHARGES AND DEDUCTIONS (CONTINUED)
account. For all contracts sold after April 30, 1997, this charge is at an
effective annual rate of .15%. All contracts sold before May 1, 1997, with the
exception of contracts sold in the state of New York from May 1, 1996 to April
30, 1997 (.15% annual fee), have an effective annual rate of .10%.
As partial compensation for administrative services provided, CG Life
additionally receives a $35 ($30 on New York contracts) annuity account fee per
year from each contract. This charge is deducted from the fixed or variable sub-
account of the participant or on a pro-rata basis from two or more fixed or
variable sub-accounts in relation to their values under the contract. Fixed
sub-accounts are part of the general account of CG Life and are not included in
these financial statements. 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. Annuity account fees, for the
variable sub-accounts, amounting to $71,683, were deducted for the periods ended
December 31, 1997.
For contracts sold prior to May 1, 1997 (excluding contracts sold in the
state of New York where the optional death benefit was not available), the
participant could have, for an additional charge, selected an optional death
benefit (optional death benefit fee). The optional death benefit fee will be
deducted from the participant's fixed or variable sub-account or on a pro-rata
basis from two or more fixed or variable sub-accounts in relation to their
values under the contract on the date of each contract anniversary. The optional
death benefit fees, for the variable sub-accounts, amounted to $4,356 for the
periods ended December 31, 1997.
Under certain circumstances, CG Life reserves the right to charge a transfer
fee of up to $10 for transfers between sub-accounts. No transfer fees, for the
variable sub-accounts, were deducted for the periods ended December 31, 1997.
46
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
4. CHARGES AND DEDUCTIONS (CONTINUED)
The fees charged by CG Life for mortality and expense risks and
administrative fees, from variable sub-accounts, for the periods ended December
31, 1997, amounted to:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
MORTALITY ASSET BASED
AND EXPENSE ADMINISTRATIVE
SUB-ACCOUNT RISK FEES FEES
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Growth Portfolio...................................... $ 304,868 $ 26,402
Alger American Leveraged AllCap Portfolio............................ 86,987 7,501
Alger American MidCap Growth Portfolio............................... 157,966 13,656
Alger American Small Capitalization Portfolio........................ 200,537 17,465
CIGNA Variable Products Money Market Fund*........................... 23,648 2,838
Fidelity Equity-Income Portfolio..................................... 489,324 42,440
Fidelity High Income Portfolio....................................... 130,361 11,610
Fidelity Money Market Portfolio...................................... 173,089 14,557
Fidelity Overseas Portfolio.......................................... 55,821 4,954
Fidelity Asset Manager Portfolio..................................... 70,643 6,115
Fidelity Contrafund Portfolio**...................................... 5,162 620
Fidelity Investment Grade Bond Portfolio............................. 96,220 8,297
Fidelity Growth Opportunities Portfolio***........................... 11,037 1,325
MFS Emerging Growth Series**......................................... 6,138 737
MFS Growth with Income Series****.................................... 7,652 918
MFS Research Series***............................................... 10,013 1,202
MFS Total Return Series.............................................. 174,760 15,354
MFS Utilities Series................................................. 53,426 4,542
MFS World Governments Series......................................... 16,724 1,418
AMT Balanced Portfolio............................................... 52,966 4,558
AMT Limited Maturity Bond Portfolio.................................. 60,458 5,241
AMT Partners Portfolio............................................... 263,923 23,647
OCC Global Equity Portfolio.......................................... 184,183 15,960
OCC Managed Portfolio................................................ 629,309 55,157
OCC Small Cap Portfolio.............................................. 68,834 6,066
- -----------------------------------------------------------------------------------------------
</TABLE>
* From 5/20/97, date deposits first received, to December 31, 1997.
** From 6/2/97, date deposits first received, to December 31, 1997.
*** From 6/9/97, date deposits first received, to December 31, 1997.
**** From 6/5/97, date deposits first received, to December 31, 1997.
No deduction for sales charges is made from a premium payment. However, if a
cash withdrawal is made, a withdrawal charge (contingent deferred sales charge)
may be assessed by CG Life. The withdrawal charge, if assessed, varies from 0-7%
depending upon the duration of each contract deposit. The withdrawal charge is
deducted from withdrawal proceeds for full withdrawals and reduces the remaining
account value for partial withdrawals. These charges are paid to CG Life as
reimbursement for services provided. These services include commissions paid to
sales personnel, the costs associated with preparation of sales literature and
other promotional costs and acquisition expenses. Withdrawal charges paid to CG
Life for the variable sub-accounts, for the periods ended December 31, 1997,
amounted to $145,226.
47
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
5. DISTRIBUTION OF NET INCOME
The Account does not expect to declare dividends to participants from
accumulated net income. The accumulated net income is distributed to
participants as part of surrenders, death benefits, transfers to other fixed or
variable sub-accounts or annuity payments in excess of net purchase payments.
6. DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code of 1986
(the Code), a variable annuity contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
an annuity contract for Federal tax purposes for any period for which the
investments of the segregated asset account, on which the contract is based, are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of the Treasury. CG Life believes, based on assurances from the
mutual fund managers, that the mutual funds satisfy the requirements of the
regulations.
48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Connecticut General
Life Insurance Company and Participants of the
CG Variable Annuity Separate Account II
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the sub-accounts, Alger
American Fund--Alger American Growth Portfolio, Alger American Leveraged AllCap
Portfolio, Alger American MidCap Growth Portfolio, Alger American Small
Capitalization Portfolio; CIGNA Variable Products Group--CIGNA Variable Products
Money Market Fund; Fidelity Variable Insurance Products Fund--Equity-Income
Portfolio, High Income Portfolio, Money Market Portfolio, Overseas Portfolio;
Fidelity Variable Insurance Products Fund II--Asset Manager Portfolio,
Contrafund Portfolio, Investment Grade Bond Portfolio; Fidelity Variable
Insurance Products Fund III--Growth Opportunities Portfolio; MFS Variable
Insurance Trust--MFS Emerging Growth Series, MFS Growth with Income Series, MFS
Research Series, MFS Total Return Series, MFS Utilities Series, MFS World
Governments Series; Neuberger & Berman Advisers Management Trust--AMT Balanced
Portfolio, AMT Limited Maturity Bond Portfolio, AMT Partners Portfolio; OCC
Accumulation Trust--OCC Global Equity Portfolio, OCC Managed Portfolio, OCC
Small Cap Portfolio (constituting the CG Variable Annuity Separate Account II,
hereafter referred to as "the Account") at December 31, 1997, the results of
each of their operations and the changes in each of their net assets for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Account's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodians, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Hartford, Connecticut
February 20, 1998
49
<PAGE>
PART B. STATEMENT OF ADDITIONAL INFORMATION NO. 2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FLEXIBLE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS
Issued through
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
Offered by
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
<TABLE>
<S> <C>
Home Office Location: Mailing Address:
900 Cottage Grove Road Annuity & Variable Life Services Center
Bloomfield, Connecticut Routing S-249
Hartford, Connecticut 06152-2249
Telephone: (800) 552-9898
Lockbox Address -- By Overnight:
Connecticut General Life Insurance Company
Lockbox Address -- By Mail: c/o Fleet Bank
Connecticut General Life Insurance Company 20 Church Street
P.O. Box 30790 20th Floor, MSN275
Hartford, CT 06150 Hartford, CT 06120
Attn: Lockbox 30790
</TABLE>
This Statement of Additional Information ("Statement") expands upon subjects
discussed in the current Prospectus for the Variable Annuity Contracts (the
"Contracts") offered by Connecticut General Life Insurance Company through CG
Variable Annuity Separate Account II. You may obtain a copy of the Prospectus
dated May 1, 1998, by calling (800) 552-9898, or by writing to Annuity &
Variable Life Services Center, Routing S-249, Connecticut General Life Insurance
Company, Hartford, Connecticut 06152-2249. 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, 1998
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
SAMPLE CALCULATIONS AND TABLES............................................................................. 4
Withdrawal Charge and Market Value Adjustment Tables..................................................... 4
STATE REGULATION OF THE COMPANY............................................................................ 6
ADMINISTRATION............................................................................................. 6
ACCOUNT INFORMATION........................................................................................ 6
DISTRIBUTION OF THE CONTRACTS.............................................................................. 7
CUSTODY OF ASSETS.......................................................................................... 7
HISTORICAL PERFORMANCE DATA................................................................................ 7
Money Market Sub-Account Yield........................................................................... 7
Other Sub-Account Yields................................................................................. 8
Total Returns............................................................................................ 8
Other Performance Data................................................................................... 9
LEGAL MATTERS.............................................................................................. 9
LEGAL PROCEEDINGS.......................................................................................... 10
EXPERTS.................................................................................................... 10
FINANCIAL STATEMENTS....................................................................................... 10
Connecticut General Life Insurance Company............................................................... 12
CG Variable Annuity Separate Account II.................................................................. 30
</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 an 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 any 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 Annuity & Variable
Life Services 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
was 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 as
follows:
(1) The total value of Fund shares held in the Sub-Account is calculated by
multiplying the number of Fund shares owned by the Sub-Account at the
beginning of the Valuation Period
3
<PAGE>
by the net asset value per share of the Fund at the end of the Valuation
Period, and adding any dividend or other distribution of the Fund if an
ex-dividend date occurs during the Valuation Period; minus
(2) The liabilities of the Sub-Account at the end of the Valuation Period;
such liabilities include daily charges imposed on the Sub-Account, and
may include a charge or credit with respect to any taxes paid or reserved
for by the Company that the Company determines result from the operations
of the Variable Account; and
(3) The result of (2) is divided by the number of Sub-Account units
outstanding at the beginning of the Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation Period are
equal to the daily mortality and expense risk charge plus daily administrative
expense charge multiplied by the number of calendar days in the 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.
SAMPLE CALCULATIONS AND TABLES
WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT TABLES
The following example illustrates the detailed calculations for a $50,000
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 "Surrender Charge Calculation" assumes there have been no
prior withdrawals and illustrates the operation of the Fifteen Percent Free
provision of the Contract. 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.
4
<PAGE>
WITHDRAWAL CHARGE TABLES
SAMPLE CALCULATIONS FOR MALE 35 ISSUE
CASH SURRENDER VALUES
<TABLE>
<S> <C>
Single premium..................... $50,000
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.................................... $ 53,965 0.963640 $ 52,003 $ 51,465 $ 52,003 $ 2,975 $ 49,028
2.................................... $ 58,247 0.993056 $ 57,843 $ 52,974 $ 57,843 $ 2,550 $ 55,293
3.................................... $ 62,872 1.000000 $ 62,872 $ 54,528 $ 62,872 $ 2,125 $ 60,747
4.................................... $ 67,867 1.004673 $ 68,184 $ 56,129 $ 68,184 $ 1,700 $ 66,484
5.................................... $ 73,261 1.000000 $ 73,261 $ 57,778 $ 73,261 $ 1,275 $ 71,986
</TABLE>
ANNUITY VALUE CALCULATION
<TABLE>
<CAPTION>
CONTRACT YEAR ANNUITY VALUE
- ------------------------------ ------------------------------------------
<S> <C>
1............................. $50,000 X 1.08 - $35 = $53,965
2............................. $53,965 X 1.08 - $35 = $58,247
3............................. $58,247 X 1.08 - $35 = $62,872
4............................. $62,872 X 1.08 - $35 = $67,867
5............................. $67,867 X 1.08 - $35 = $73,261
</TABLE>
SURRENDER CHARGE CALCULATION
<TABLE>
<CAPTION>
(1) (3)
SURRENDER (2) SURRENDER
CONTRACT YEAR CHARGE FACTOR SURRENDER CHARGE FACTOR CHARGE
- -------------------------------------------------------------- --------------- ----------------------- -----------
<S> <C> <C> <C>
1............................................................. 0.07 0.0595 $ 2,975
2............................................................. 0.06 0.0510 $ 2,550
3............................................................. 0.05 0.0425 $ 2,125
4............................................................. 0.04 0.0340 $ 1,700
5............................................................. 0.03 0.0255 $ 1,275
</TABLE>
5
<PAGE>
MARKET VALUE ADJUSTMENT TABLES
INTEREST RATE FACTOR CALCULATION
<TABLE>
<CAPTION>
(3) (5)
(1) (2) ADJUSTED (1+A)(n)
INDEX INDEX INDEX (4) --------
CONTRACT YEAR RATE A RATE B RATE B N (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............................. $50,000 X 1.03 - $35 = $51,465
2............................. $51,465 X 1.03 - $35 = $52,974
3............................. $52,974 X 1.03 - $35 = $54,528
4............................. $54,528 X 1.03 - $35 = $56,129
5............................. $56,129 X 1.03 - $35 = $57,778
</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 Contract are at least equal to those required by
such state.
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.
ACCOUNT INFORMATION
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 Account
Sub-Account Accumulation Account and the applicable Accumulation Unit Value as
of the date of the report. 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
6
<PAGE>
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 Annuity & Variable Life Services Center, the Company
will provide an Owner with information regarding fixed and variable accumulation
values.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may lawfully be sold. Such agents will be registered
representatives or broker-dealers registered under the Securities Exchange Act
of 1934 who are members of the National Association of Securities Dealers, Inc.
(NASD). The Contracts will be distributed by the Company's principal
underwriter, CIGNA Financial Advisors, Inc. ("CFA"), located at 900 Cottage
Grove Road, Bloomfield, CT. CFA is a Connecticut corporation organized in 1967,
and is the principal underwriter for certain of the Company's other registered
separate accounts. As of January 1, 1998, CFA, formerly a wholly-owned
subsidiary of CIGNA Corporation, became a wholly-owned subsidiary of Lincoln
National Corporation, an Indiana corporation with headquarters in Fort Wayne,
Indiana, whose principal businesses are insurance and financial services.
Commissions and other distribution compensation will be paid by the Company and
will not be more than 7.00% of Premium Payments. The Company received $145,226
in deferred sales charges attributable to the Variable Account portion of the
Contracts issued pursuant to CG Variable Annuity Separate Account II for the
period ended December 31, 1997.
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 in the amount of $100,000,000.
HISTORICAL PERFORMANCE DATA
Historical performance data as of December 31, 1997 for each of the
Sub-Accounts of the Separate Account follows in the Financial Statements.
MONEY MARKET SUB-ACCOUNT YIELD
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"
7
<PAGE>
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)] - 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) - 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.
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.
8
<PAGE>
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 Account Fee. The 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) = 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.
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, Esquire of West Hartford,
Connecticut. All matters of Connecticut law pertaining to the Contracts,
including the validity of the Contracts and the Company's right to issue the
Contracts under Connecticut Insurance Law and any other applicable state
insurance or securities laws, have been passed upon by Mark A. Parsons, Chief
Counsel, Retirement and Investment Services Division, CIGNA Corporation.
9
<PAGE>
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or
to which the assets of the Variable Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Variable Account.
EXPERTS
The consolidated financial statements of Connecticut General Life Insurance
Company as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997 included in this Statement of Additional
Information as well as the Statement of Assets and Liabilities of the Variable
Account of December 31, 1997 and the Statement of Operations and the Statement
of Changes in Net Assets for the period ended December 31, 1997 have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. Price Waterhouse LLP's consent to this reference to the firm as an
"expert" is filed as an exhibit to the registration statement of which this
Statement of Additional Information is a part.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company which are included in
this Statement should be considered only as bearing on the ability of the
Company to meet the obligations under the Contracts. They should not be
considered as bearing on the investment performance of the assets held in the
Variable Account, or on the Guaranteed Interest Rate credited by the Company
during a Guaranteed Period. The financial statements of the Variable Account as
of and for the period ending December 31, 1997 are also included.
10
<PAGE>
One Financial Plaza Telephone 860 240 2000
Hartford, CT 06103
PRICE WATERHOUSE LLP [LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
February 10, 1998
To the Board of Directors and Shareholder of
Connecticut General Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Connecticut
General Life Insurance Company and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
[SIG]
11
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS)
- -------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and fees................................................... $ 5,376 $ 5,314 $ 4,998
Net investment income............................................... 3,139 3,199 3,138
Realized investment gains (losses).................................. 45 37 (7)
Other revenues...................................................... 10 9 9
--------- --------- ---------
Total revenues.................................................. 8,570 8,559 8,138
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses............................ 5,917 6,069 5,892
Policy acquisition expenses......................................... 122 143 127
Other operating expenses............................................ 1,618 1,477 1,358
--------- --------- ---------
Total benefits, losses and expenses................................. 7,657 7,689 7,377
--------- --------- ---------
INCOME BEFORE INCOME TAXES.......................................... 913 870 761
--------- --------- ---------
Income taxes (benefits):
Current........................................................... 347 394 301
Deferred.......................................................... (49) (81) (44)
--------- --------- ---------
Total taxes..................................................... 298 313 257
--------- --------- ---------
NET INCOME.......................................................... 615 557 504
Dividends declared.................................................. (400) (600) (252)
Retained earnings, beginning of year................................ 3,177 3,220 2,968
- -------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF YEAR...................................... $ 3,392 $ 3,177 $ 3,220
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
12
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS)
- -------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $20,962; $19,882)...... $ 22,323 $ 20,816
Mortgage loans.......................................................... 10,090 10,152
Equity securities, at fair value (cost, $75; $59)....................... 54 41
Policy loans............................................................ 7,146 7,133
Real estate............................................................. 749 1,025
Other long-term investments............................................. 166 193
Short-term investments.................................................. 173 417
--------- ---------
Total investments................................................... 40,701 39,777
Cash and cash equivalents................................................. 923 --
Accrued investment income................................................. 602 619
Premiums and accounts receivable.......................................... 811 817
Reinsurance recoverables.................................................. 1,271 1,303
Deferred policy acquisition costs......................................... 834 780
Property and equipment, net............................................... 291 276
Current income taxes...................................................... 67 12
Deferred income taxes, net................................................ 653 639
Goodwill.................................................................. 474 488
Other assets.............................................................. 209 249
Separate account assets................................................... 29,217 22,555
- -------------------------------------------------------------------------------------------
Total assets........................................................ $ 76,053 $ 67,515
- -------------------------------------------------------------------------------------------
--------------------
LIABILITIES
Contractholder deposit funds.............................................. $ 30,449 $ 29,621
Future policy benefits.................................................... 8,224 8,187
Unpaid claims and claim expenses.......................................... 1,225 1,170
Unearned premiums......................................................... 260 200
--------- ---------
Total insurance and contractholder liabilities...................... 40,158 39,178
Accounts payable, accrued expenses and other liabilities.................. 2,428 1,808
Separate account liabilities.............................................. 29,021 22,365
- -------------------------------------------------------------------------------------------
Total liabilities................................................... 71,607 63,351
- -------------------------------------------------------------------------------------------
CONTINGENCIES -- NOTE 12
SHAREHOLDER'S EQUITY
Common stock (6 shares outstanding)....................................... 30 30
Additional paid-in capital................................................ 766 766
Net unrealized appreciation on investments................................ 256 188
Net translation of foreign currencies..................................... 2 3
Retained earnings......................................................... 3,392 3,177
- -------------------------------------------------------------------------------------------
Total shareholder's equity.......................................... 4,446 4,164
- -------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity.......................... $ 76,053 $ 67,515
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
13
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS)
- -------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................ $ 615 $ 557 $ 504
Adjustments to reconcile net income to net cash provided by
operating activities:
Insurance liabilities........................................... 78 57 (90)
Reinsurance recoverables........................................ 68 (11) 1,201
Premiums and accounts receivable................................ 106 77 32
Deferred income taxes, net...................................... (49) (82) (44)
Other assets.................................................... (54) 43 (14)
Deferred policy acquisition costs............................... (97) (92) 12
Accounts payable, accrued expenses, other liabilities and
current income taxes........................................... 41 (113) 212
Depreciation and goodwill amortization.......................... 88 94 89
Other, net...................................................... (99) (151) (79)
--------- --------- ---------
Net cash provided by operating activities..................... 697 379 1,823
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities................................................ 1,583 1,589 1,070
Mortgage loans.................................................. 807 640 383
Equity securities............................................... 14 13 119
Real estate..................................................... 401 345 299
Other (primarily short-term investments)........................ 6,447 3,613 2,268
Investment maturities and repayments:
Fixed maturities................................................ 2,394 2,634 2,234
Mortgage loans.................................................. 601 630 420
Investments purchased:
Fixed maturities................................................ (4,339) (3,834) (4,439)
Mortgage loans.................................................. (1,426) (1,300) (1,908)
Equity securities............................................... (9) (3) (20)
Policy loans.................................................... (13) (207) (2,129)
Other (primarily short-term investments)........................ (6,296) (3,930) (2,334)
Other, net...................................................... (102) (94) (119)
--------- --------- ---------
Net cash provided by (used in) investing activities........... 62 96 (4,156)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder deposit funds:
Deposits and interest credited.................................. 7,634 7,260 7,489
Withdrawals and benefit payments................................ (7,023) (7,135) (4,985)
Dividends paid to parent.......................................... (400) (600) (252)
Other, net........................................................ (47) -- 1
--------- --------- ---------
Net cash provided by (used in) financing activities........... 164 (475) 2,253
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents.............. 923 -- (80)
Cash and cash equivalents, beginning of year...................... -- -- 80
- -------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year............................ $ 923 $ -- $ --
- -------------------------------------------------------------------------------------------
-------------------------------
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds............................... $ 402 $ 385 $ 211
Interest paid................................................... $ 5 $ 7 $ 7
- -------------------------------------------------------------------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
14
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Connecticut General Life Insurance Company and its subsidiaries (the Company)
provide insurance and related financial services throughout the United States
and in many locations worldwide. Principal products and services include group
life and health insurance, individual life insurance and annuity products, and
retirement and investment products and services. The Company is a wholly-owned
subsidiary of Connecticut General Corporation, which is an indirect wholly-owned
subsidiary of CIGNA Corporation (CIGNA).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of the Company and all significant subsidiaries. These consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles, and reflect management's estimates and assumptions, such
as those regarding medical costs and interest rates, that affect the recorded
amounts. Significant estimates used in determining insurance and contractholder
liabilities, related reinsurance recoverables, and valuation allowances for
investment assets are discussed throughout the Notes to Financial Statements.
Certain reclassifications have been made to prior years' amounts to conform with
the 1997 presentation.
B) RECENT ACCOUNTING PRONOUNCEMENTS: In 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which could change the way segments are
structured and require additional segment disclosure. Although the Company has
not determined the timing of implementation of this pronouncement, it will be
adopted no later than the required implementation date of December 31, 1998.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" in 1997. SOP 97-3 provides guidance on the
recognition and measurement of liabilities for guaranty fund and other
insurance-related assessments. Implementation is required by the first quarter
of 1999, with the cumulative effect of adopting the SOP reflected in net income
in the year of adoption. The Company has not determined the effect or timing of
implementation of this pronouncement.
In 1996, the Company implemented Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires write-down to fair
value when long-lived assets to be held and used are impaired. Long-lived assets
to be disposed of, including real estate held for sale, must be carried at the
lower of cost or fair value less costs to sell. Depreciation of assets to be
disposed of is prohibited. The effect of implementing SFAS No. 121 was not
material to the Company.
C) FINANCIAL INSTRUMENTS: In the normal course of business, the Company
enters into transactions involving various types of financial instruments,
including investments such as fixed maturities and equity securities and off-
balance sheet financial instruments such as investment and loan commitments and
financial guarantees. These instruments are subject to risk of loss due to
interest rate and market fluctuations and most have credit risk. The Company
evaluates and monitors each financial instrument individually and, where
appropriate, uses certain derivative instruments or obtains collateral or other
forms of security to minimize risk of loss.
Financial instruments that are subject to fair value disclosure requirements
(insurance contracts, real estate, goodwill and taxes are excluded) are carried
in the financial statements at amounts that approximate fair value, except for
Mortgage Loans and Contractholder Deposit Funds (non-insurance products). For
these financial instruments, the fair value was not materially different from
the carrying amount as of December 31, 1997 and 1996. Fair values of off-balance
sheet financial instruments as of December 31, 1997 and 1996 were not material.
Fair values for financial instruments are estimates that, in many cases, may
differ significantly from the amounts that could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial
15
<PAGE>
instruments with comparable terms and credit quality. The fair value of
liabilities for contractholder deposit funds was estimated using the amount
payable on demand, and for those not payable on demand, discounted cash flow
analyses.
D) INVESTMENTS: Investments in fixed maturities, which are classified as
available-for-sale, include bonds, asset-backed securities, including
collateralized mortgage obligations (CMOs), and redeemable preferred stocks.
Fixed maturities are carried at fair value, with unrealized appreciation or
depreciation included in Shareholder's Equity. Fixed maturities are considered
impaired and written down to fair value when a decline in value is considered to
be other than temporary.
Mortgage loans are carried principally at unpaid principal balances, net of
valuation reserves. Mortgage loans are considered impaired when it is probable
that the Company will not collect all amounts according to the contractual terms
of the loan agreement. If impaired, a valuation reserve is utilized to record
any change in the fair value of the underlying collateral below the carrying
value of the mortgage loan.
Fixed maturities and mortgage loans that are delinquent or restructured to
modify basic financial terms, typically to reduce the interest rate and, in
certain cases, extend the term, are placed on non-accrual status. Net investment
income on such investments is recognized only when payment is received.
Real estate investments are either held for the production of income or held
for sale. Real estate investments held for the production of income are carried
at depreciated cost less any write-downs to fair value. Depreciation is
generally calculated using the straight-line method based on the estimated
useful lives of these assets.
Real estate investments held for sale are generally those which are acquired
through the foreclosure of mortgage loans. The Company's policy is to
rehabilitate, re-lease and sell foreclosed properties, which generally takes two
to four years. At the time of foreclosure, properties are valued at fair value
less estimated costs to sell and reclassified from mortgage loans to real estate
held for sale. Subsequent to foreclosure, these investments are carried at the
lower of cost or current fair value less estimated costs to sell and are no
longer depreciated. Adjustments to the carrying value as a result of changes in
fair value subsequent to foreclosure are recorded as valuation reserves. The
Company considers several methods in determining fair value for real estate,
with emphasis placed on the use of discounted cash flow analyses and, in some
cases, the use of third-party appraisals.
Equity securities, which include common and non-redeemable preferred stocks,
are carried at fair value, with unrealized appreciation or depreciation included
in Shareholder's Equity. Short-term investments are carried at fair value, which
approximates cost. Equity securities and short-term investments are classified
as available for sale.
Policy loans are generally carried at unpaid principal balances.
Realized investment gains and losses result from sales, investment asset
write-downs and changes in valuation reserves. Realized investment gains and
losses do not include amounts attributable to experience-rated pension
policyholders' contracts and participating life policies (policyholder share).
Realized investment gains and losses are based upon specific identification of
the investment assets.
Unrealized investment gains and losses for investments carried at fair value
are included in Shareholder's Equity net of policyholder-related amounts and
deferred income taxes.
See Note 4(F) for a discussion of the Company's accounting policies for
derivative financial instruments.
E) CASH AND CASH EQUIVALENTS: Short-term investments with a maturity of three
months or less at the time of purchase are reported as cash equivalents.
F) REINSURANCE RECOVERABLES: Reinsurance recoverables are estimates of
amounts to be received from reinsurers, including amounts under reinsurance
agreements with affiliated companies. Allowances are established for amounts
estimated to be uncollectible.
G) DEFERRED POLICY ACQUISITION COSTS: Acquisition costs consist of
commissions, premium taxes and other costs, which vary with, and are primarily
related to, the production of revenues. Acquisition costs for universal life
products and contractholder deposit funds are deferred and amortized in
proportion to the present value of total
16
<PAGE>
estimated gross profits over the expected lives of the contracts. Acquisition
costs for annuity and other individual life insurance products are deferred and
amortized, generally in proportion to the ratio of annual revenue to the
estimated total revenues over the contract periods.
Deferred policy acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income. If such costs are
estimated to be unrecoverable, they are expensed unless such costs are estimated
to be unrecoverable as a result of treating unrealized investment gains and
losses as though they had been realized. In these cases a deferred acquisition
cost valuation allowance may be established or adjusted, with a comparable
offset in net unrealized appreciation (depreciation).
H) PROPERTY AND EQUIPMENT: Property and equipment are carried at cost less
accumulated depreciation. When applicable, cost includes interest and real
estate taxes incurred during construction and other construction-related costs.
Depreciation is calculated principally on the straight-line method based on the
estimated useful lives of the assets. Accumulated depreciation was $448 million
and $427 million at December 31, 1997 and 1996, respectively.
I) OTHER ASSETS: Other Assets consists of various insurance-related assets,
principally ceded unearned premiums, reinsurance deposits and other amounts due
from affiliated companies.
J) GOODWILL: Goodwill represents the excess of the cost of businesses
acquired over the fair value of their net assets. Goodwill is amortized on
systematic bases over periods, not exceeding 40 years, that correspond with the
benefits estimated to be derived from the acquisitions. The Company evaluates
the carrying amount of goodwill by analyzing historical and estimated future
income and undiscounted estimated cash flows of the related businesses. Goodwill
is written down when impaired. Amortization periods are revised if it is
estimated that the remaining period of benefit of the goodwill has changed.
Accumulated amortization was $113 million and $99 million at December 31, 1997
and 1996, respectively.
K) SEPARATE ACCOUNTS: Separate account assets and liabilities are principally
carried at market value and represent policyholder funds maintained in accounts
having specific investment objectives. The investment income, gains and losses
of these accounts generally accrue to the policyholders and, therefore, are not
included in the Company's revenues and expenses.
L) CONTRACTHOLDER DEPOSIT FUNDS: Liabilities for Contractholder Deposit Funds
consist of deposits received from customers and investment earnings on their
fund balances, less administrative charges and, for universal life fund
balances, mortality charges.
M) FUTURE POLICY BENEFITS: Future policy benefits are liabilities for life,
health and annuity products. Such liabilities are established in amounts
adequate to meet the estimated future obligations of policies in force. These
liabilities are computed using premium assumptions for group annuity policies
and the net level premium method for individual life policies, and are based
upon estimates as to future investment yield, mortality and withdrawals that
include provisions for adverse deviation. Future policy benefits for individual
life insurance and annuity policies are computed using interest rates ranging
from 2% to 11%, generally graded down from 1 to 20 years. Mortality, morbidity,
and withdrawal assumptions are based on either the Company's own experience or
various actuarial tables.
N) UNPAID CLAIMS AND CLAIM EXPENSES: Liabilities for unpaid claims and claim
expenses are estimates of payments to be made on reported and incurred but not
reported insurance claims.
O) UNEARNED PREMIUMS: Premiums for group life and accident and health
insurance are reported as earned on a pro rata basis over the contract period.
The unexpired portion of these premiums is recorded as Unearned Premiums.
P) OTHER LIABILITIES: Other Liabilities consist principally of postretirement
and postemployment benefits and various insurance-related liabilities, including
amounts related to reinsurance contracts and guaranty fund assessments that can
be reasonably estimated.
Q) TRANSLATION OF FOREIGN CURRENCIES: Foreign operations primarily utilize
the local currencies as their functional currencies, and assets and liabilities
are translated at the rates of exchange as of the balance sheet date. The
translation gain or loss on such functional currencies, net of applicable taxes,
is generally reflected in Shareholder's Equity. Revenues and expenses are
translated at the average rates of exchange prevailing during the year.
17
<PAGE>
R) PREMIUM AND FEES, REVENUES AND RELATED EXPENSES: Premiums for group life
and accident and health insurance are recognized as revenue on a pro-rata basis
over their contract periods. Benefits, losses and settlement expenses are
recognized when incurred.
Premiums for individual life insurance as well as individual and group annuity
products, excluding universal life and investment-related products, are
recognized as revenue when due. Benefits, losses and settlement expenses are
matched with premiums.
Revenues for universal life products consist of net investment income and
mortality, administration and surrender fees assessed against the fund balances
during the period. Net investment income represents investment income on assets
supporting universal life products and is recognized as earned. Fees for
mortality are recognized ratably over the policy year. Administration fees are
recognized as services are provided, and surrender charges are recognized as
earned. Benefit expenses for universal life products consist of benefit claims
in excess of fund balances, which are recognized when claims are filed, and
amounts credited in accordance with contract provisions.
Revenues for investment-related products consist of net investment income and
contract fees assessed against the fund balances during the period. Net
investment income represents investment income on assets supporting
investment-related products and is recognized as earned. Contract fees are based
upon related administrative expenses and are assessed ratably over the contract
year. Benefit expenses for investment-related products primarily consist of
amounts credited in accordance with contract provisions.
S) PARTICIPATING BUSINESS: Certain life insurance policies contain dividend
payment provisions that enable the policyholder to participate in a portion of
the earnings of the Company's business. The participating insurance in force
accounted for approximately 7% of total life insurance in force at December 31,
1997, 1996 and 1995.
T) INCOME TAXES: The Company and its domestic subsidiaries are included in
the consolidated United States federal income tax return filed by CIGNA. In
accordance with a tax sharing agreement with CIGNA, the provision for federal
income tax is computed as if the Company were filing a separate federal income
tax return, except that benefits arising from tax credits and net operating and
capital losses are allocated to those subsidiaries producing such attributes to
the extent they are utilized in CIGNA's consolidated federal income tax
provision.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes. See
Note 7 for additional information.
NOTE 3 -- DISPOSITION
As of January 1, 1998, the Company sold its individual life insurance and
annuity businesses for cash proceeds of $1.4 billion. The sale resulted in an
after-tax gain of approximately $800 million. Since the principal agreement to
sell these businesses is in the form of an indemnity reinsurance arrangement,
approximately $575 million of the gain will be deferred and amortized over
future periods at the rate that earnings from the businesses sold would have
been expected to emerge. Revenues for these businesses were $972 million, $926
million and $865 million for the years ended December 31, 1997, 1996 and 1995,
respectively, and net income was $102 million, $67 million and $74 million for
the same periods. The Company paid a dividend of $1.4 billion to its parent in
January 1998, having received prior approval of both the disposition and the
dividend from the Connecticut Insurance Department (the Department).
NOTE 4 -- INVESTMENTS
A) FIXED MATURITIES: Fixed maturities are net of cumulative write-downs of
$36 million and $95 million, including policyholder share, as of December 31,
1997 and 1996, respectively.
18
<PAGE>
The amortized cost and fair value by contractual maturity periods for fixed
maturities, including policyholder share, as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less.................................................. $ 1,114 $ 1,139
Due after one year through five years.................................... 5,768 5,949
Due after five years through ten years................................... 4,734 4,998
Due after ten years...................................................... 3,093 3,680
Asset-backed securities.................................................. 6,253 6,557
- -------------------------------------------------------------------------------------------
Total.................................................................... $ 20,962 $ 22,323
- -------------------------------------------------------------------------------------------
----------------------
</TABLE>
Actual maturities could differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Also, the Company may extend maturities in some cases.
Gross unrealized appreciation (depreciation) for fixed maturities, including
policyholder share, by type of issuer was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
December 31, 1997
- -------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal government bonds......................... $ 1,361 $ 294 $ -- $ 1,655
State and local government bonds................. 178 22 (2) 198
Foreign government bonds......................... 143 7 (1) 149
Corporate securities............................. 13,027 860 (123) 13,764
Asset-backed securities.......................... 6,253 317 (13) 6,557
- -------------------------------------------------------------------------------------------
Total............................................ $ 20,962 $ 1,500 $ (139 ) $ 22,323
- -------------------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
December 31, 1996
- -------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal government bonds......................... $ 475 $ 160 $ -- $ 635
State and local government bonds................. 174 13 (4) 183
Foreign government bonds......................... 121 6 -- 127
Corporate securities............................. 13,310 742 (148) 13,904
Asset-backed securities.......................... 5,802 226 (61) 5,967
- -------------------------------------------------------------------------------------------
Total............................................ $ 19,882 $ 1,147 $ (213 ) $ 20,816
- -------------------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
Asset-backed securities include investments in CMOs as of December 31, 1997 of
$2.3 billion carried at fair value (amortized cost, $2.3 billion), compared with
$2.2 billion carried at fair value (amortized cost, $2.1 billion) as of December
31, 1996. Certain of these securities are backed by Aaa/AAA-rated government
agencies. All other CMO securities have high quality ratings through use of
credit enhancements provided by subordinated securities or mortgage insurance
from Aaa/AAA-rated insurance companies. CMO holdings are concentrated in
securities with limited prepayment, extension and default risk, such as planned
amortization class bonds. The Company's investments in interest-only and
principal-only CMOs, which are subject to interest rate risk due to accelerated
prepayments, represented approximately 0.1% of total CMO investments at December
31, 1997 and 1996.
At December 31, 1997, contractual fixed maturity investment commitments were
$188 million. The majority of investment commitments are for the purchase of
investment grade fixed maturities, bearing interest at a fixed market rate, and
require no collateral. These commitments are diversified by issuer and maturity
date, and it is estimated that approximately 83% will be disbursed in 1998.
19
<PAGE>
B) MORTGAGE LOANS AND REAL ESTATE: The Company's mortgage loans and real
estate investments are diversified by property type and location and, for
mortgage loans, by borrower. Mortgage loans are collateralized by the related
properties and generally approximate 75% of the property's value at the time the
original loan is made.
At December 31, the carrying values of mortgage loans and real estate
investments, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage Loans............................................................ $ 10,090 $ 10,152
--------- ---------
Real estate:
Held for sale........................................................... 339 586
Held for production of income........................................... 410 439
--------- ---------
Total real estate......................................................... 749 1,025
- -------------------------------------------------------------------------------------------
Total..................................................................... $ 10,839 $ 11,177
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
At December 31, mortgage loans and real estate investments comprised the
following property types and geographic regions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Property type:
Retail facilities....................................................... $ 4,227 $ 4,453
Office buildings........................................................ 3,984 4,241
Apartment buildings..................................................... 1,311 1,272
Hotels.................................................................. 498 665
Other (primarily industrial)............................................ 819 546
- -------------------------------------------------------------------------------------------
Total..................................................................... $ 10,839 $ 11,177
- -------------------------------------------------------------------------------------------
--------------------
Geographic region:
Central................................................................. $ 3,484 $ 3,452
Pacific................................................................. 2,962 3,132
Middle Atlantic......................................................... 1,821 1,920
South Atlantic.......................................................... 1,458 1,526
New England............................................................. 1,114 1,147
- -------------------------------------------------------------------------------------------
Total..................................................................... $ 10,839 $ 11,177
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
MORTGAGE LOANS
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $0.7 billion; 1999 -- $1.1 billion; 2000 -- $1.3 billion; 2001 -- $1.1
billion; 2002 -- $1.7 billion; and $4.2 billion thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties; the maturity date may
be extended; and loans may be refinanced. During 1997 and 1996, the Company
refinanced at current market rates approximately $135 million and $477 million,
respectively, of its mortgage loans relating to borrowers that were unable to
obtain alternative financing.
At December 31, 1997, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $167 million, all
of which were at a fixed market rate of interest. These commitments expire
within six months, and are diversified by property type and geographic region.
At December 31, 1997, the Company's impaired mortgage loans were $375 million,
including $152 million before valuation reserves totaling $44 million, and $223
million which had no valuation reserves. At December 31, 1996, the Company's
impaired mortgage loans were $814 million, including $442 million before
valuation reserves totaling $94 million, and $372 million which had no valuation
reserves.
20
<PAGE>
During the year ended December 31, changes in reserves for impaired mortgage
loans, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Reserve balance -- January 1................................................... $ 94 $ 82
Transfers to foreclosed real estate............................................ (30) (29)
Charge-offs upon sales......................................................... (47) (19)
Net increase in valuation reserves............................................. 27 60
- -------------------------------------------------------------------------------------------
Reserve balance -- December 31................................................. $ 44 $ 94
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
During 1997 and 1996, impaired mortgage loans, before valuation reserves,
averaged approximately $597 million and $852 million, respectively. Interest
income recorded and cash received on these loans were approximately $34 million
and $73 million in 1997 and 1996, respectively.
REAL ESTATE
During 1997, 1996 and 1995, non-cash investing activities included real estate
acquired through foreclosure of mortgage loans, which totaled $81 million, $107
million and $144 million, respectively.
Valuation reserves and cumulative write-downs related to real estate,
including policyholder share, were $169 million and $273 million as of December
31, 1997 and 1996, respectively.
Net income for 1997 and 1996 included net investment income of $9 million and
$19 million, respectively, for real estate held for sale. Write-downs upon
foreclosure and changes in valuation reserves were not material for 1997 and
1996.
C) SHORT-TERM INVESTMENTS AND CASH EQUIVALENTS: Short-term investments and
cash equivalents, in the aggregate, primarily included debt securities,
principally corporate securities of $520 million and federal government
securities of $443 million at December 31, 1997 and, for 1996, principally
corporate securities of $418 million.
D) NET UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS: Unrealized
appreciation (depreciation) for investments carried at fair value as of December
31 was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized appreciation:
Fixed maturities.......................................................... $ 1,500 $ 1,147
Equity securities......................................................... 8 8
--------- ---------
1,508 1,155
--------- ---------
Unrealized depreciation:
Fixed maturities.......................................................... (139) (213)
Equity securities......................................................... (29) (26)
--------- ---------
(168) (239)
--------- ---------
Less policyholder-related amounts........................................... 931 610
--------- ---------
Shareholder net unrealized appreciation..................................... 409 306
Less deferred income taxes.................................................. 153 118
- -------------------------------------------------------------------------------------------
Net unrealized appreciation................................................. $ 256 $ 188
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
Net unrealized appreciation (depreciation) for investments carried at fair
value is included as a separate component of Shareholder's Equity, net of
policyholder-related amounts and deferred income taxes. The net unrealized
appreciation (depreciation) for these investments, primarily fixed maturities,
during 1997, 1996 and 1995 was $68 million, ($288) million and $542 million,
respectively.
21
<PAGE>
E) NON-INCOME PRODUCING INVESTMENTS: At December 31, the carrying values of
investments, including policyholder share, that were non-income producing during
the preceding 12 months were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities............................................................... $ 28 $ 52
Mortgage loans................................................................. -- 14
Real estate.................................................................... 141 172
- -------------------------------------------------------------------------------------------
Total.......................................................................... $ 169 $ 238
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
F) DERIVATIVE FINANCIAL INSTRUMENTS: The Company's investment strategy is to
manage the characteristics of investment assets, such as duration, yield,
currency and liquidity, to reflect the underlying characteristics of the related
insurance and contractholder liabilities, which vary among the Company's
principal product lines. In connection with this investment strategy, the
Company's use of derivative instruments, including interest rate and currency
swaps, purchased options and futures contracts, is limited to hedging
applications to minimize market risk.
Hedge accounting treatment requires a probability of high correlation between
the changes in the market value or cash flows of the derivatives and the hedged
assets or liabilities. Under hedge accounting, the changes in market value or
cash flows of the derivatives and the hedged assets or liabilities are
recognized in net income in the same period. If the Company's use of derivatives
does not qualify for hedge accounting treatment, the derivative is recorded at
fair value and changes in its fair value are recognized in net income without
considering changes in the hedged asset or liability.
The Company routinely monitors, by individual counterparty, exposure to credit
risk associated with swap and option contracts and diversifies the portfolio
among approved dealers of high credit quality. Futures contracts are
exchange-traded and, therefore, credit risk is limited since the exchange
assumes the obligations. The Company manages legal risks by following industry
standardized documentation procedures and by monitoring legal developments.
Underlying contract, notional or principal amounts associated with derivatives
at December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps............................................................ $ 265 $ 335
Currency swaps................................................................. 248 275
Purchased options.............................................................. 833 632
Futures........................................................................ 75 45
- -------------------------------------------------------------------------------------------
</TABLE>
Under interest rate swaps, the Company agrees with other parties to
periodically exchange the difference between variable rate and fixed rate asset
cash flows to provide stable returns for related liabilities. The Company uses
currency swaps (primarily Canadian dollars, pounds sterling and Swiss francs) to
match the currency of investments to that of the associated liabilities. Under
currency swaps, the parties exchange principal and interest amounts in two
relevant currencies using agreed-upon exchange amounts.
The net interest cash flows from interest rate and currency swaps are
recognized currently as an adjustment to net investment income, and the fair
value of these swaps is reported as an adjustment to the related investments.
Using purchased options to reduce the effect of changes in interest rates or
equity indexes on liabilities, the Company pays an up-front fee to receive cash
flows from third parties when interest rates or equity indexes vary from
specified levels. Purchased options that qualify for hedge accounting are
recorded consistent with the related liabilities, at amortized cost plus
adjustments based on current equity indexes, and income is reported as an
adjustment to benefit expense. Purchased options are reported in other assets,
and fees paid are amortized to benefit expense over their contractual periods.
Purchased options with underlying notional amounts of $82 million and $112
million at December 31, 1997 and 1996, respectively, that are designated as
hedges, but do not qualify for hedge accounting, are reported in other long-term
investments at fair value with changes in fair value recognized as realized
investment gains and losses.
22
<PAGE>
Interest rate futures are used to temporarily hedge against the changes in
market values of bonds and mortgage loans to be purchased or sold. Under futures
contracts, changes in the contract values are settled in cash daily with the
exchange on which the instrument is traded. These changes in contract values are
deferred and recorded as adjustments to the carrying value of the related bond
or mortgage loan. Deferred gains and losses are amortized into net investment
income over the life of the investments purchased or are recognized in full as
realized investment gains and losses if investments are sold. Gains and losses
on futures contracts deferred in anticipation of investment purchases were
immaterial at December 31, 1997 and 1996.
The effects of interest rate and currency swaps, purchased options and futures
on the components of net income for 1997, 1996 and 1995 were not material.
As of December 31, 1997 and 1996, the Company's variable interest rate
investments consisted of approximately $0.7 billion and $1.3 billion of fixed
maturities, respectively. As of December 31, 1997 and 1996, the Company's fixed
interest rate investments consisted of $21.6 billion and $19.5 billion,
respectively, of fixed maturities, and $10.1 billion and $10.2 billion,
respectively, of mortgage loans.
G) OTHER: As of December 31, 1997 and 1996, the Company had no concentration
of investments in a single investee exceeding 10% of Shareholder's Equity.
NOTE 5 -- INVESTMENT INCOME AND GAINS AND LOSSES
A) NET INVESTMENT INCOME: The components of net investment income, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities.................................................... $ 1,648 $ 1,647 $ 1,663
Equity securities................................................... 10 -- 15
Mortgage loans...................................................... 885 921 866
Policy loans........................................................ 532 548 499
Real estate......................................................... 118 227 301
Other long-term investments......................................... 47 23 33
Short-term investments.............................................. 28 35 46
--------- --------- ---------
3,268 3,401 3,423
Less investment expenses............................................ 129 202 285
- -------------------------------------------------------------------------------------------
Net investment income............................................... $ 3,139 $ 3,199 $ 3,138
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
Net investment income attributable to policyholder contracts, which is
included in the Company's revenues and is primarily offset by amounts included
in Benefits, Losses and Settlement Expenses, was approximately $1.7 billion for
1997 and $1.8 billion for 1996 and 1995. Net investment income for separate
accounts, which is not reflected in the Company's revenues, was $1.4 billion,
$1.1 billion and $885 million for 1997, 1996 and 1995, respectively.
As of December 31, 1997, fixed maturities and mortgage loans on non-accrual
status, including policyholder share, were $143 million and $153 million,
including restructured investments of $81 million and $137 million,
respectively. As of December 31, 1996, fixed maturities and mortgage loans on
non-accrual status, including policyholder share, were $160 million and $360
million, including restructured investments of $88 million and $304 million,
respectively. If interest on these investments had been recognized in accordance
with their original terms, net income would have been increased by $7 million,
$15 million and $18 million in 1997, 1996 and 1995, respectively.
23
<PAGE>
B) REALIZED INVESTMENT GAINS AND LOSSES: Realized gains (losses) on
investments, excluding policyholder share, for the year ended December 31 were
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities......................................................... $ (3) $ 11 $ (10)
Equity securities........................................................ 4 1 5
Mortgage loans........................................................... 4 (12) (5)
Real estate.............................................................. 28 15 4
Other.................................................................... 12 22 (1)
--
--- ---
45 37 (7)
Income tax expenses (benefits)........................................... 8 17 (2)
- -------------------------------------------------------------------------------------------
Net realized investment gains (losses)................................... $ 37 $ 20 $ (5 )
- -------------------------------------------------------------------------------------------
------------------
</TABLE>
Realized investment gains and losses include impairments in the value of
investments, net of recoveries, of $25 million, $40 million and $27 million in
1997, 1996 and 1995, respectively.
Realized investment gains for separate accounts, which are not reflected in
the Company's revenues, were $489 million, $305 million and $412 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Realized investment
gains (losses) attributable to policyholder contracts, which also are not
reflected in the Company's revenues, were $76 million, $82 million and ($6)
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Sales of available-for-sale fixed maturities and equity securities, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales................................................. $ 3,978 $ 4,236 $ 1,667
Gross gains on sales................................................ $ 66 $ 146 $ 78
Gross losses on sales............................................... $ (21) $ (70) $ (53)
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE 6 -- SHAREHOLDER'S EQUITY AND DIVIDEND RESTRICTIONS
The Department recognizes as net income and surplus (shareholder's equity)
those amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department, which may differ from generally
accepted accounting principles. As of December 31, 1997, there were no permitted
accounting practices utilized by the Company that were materially different from
those prescribed by the Department.
Capital stock of the Company at December 31, 1997 and 1996 consisted of
5,978,322 shares of common stock authorized, issued and outstanding (par value
$5).
The Company's statutory net income was $417 million, $611 million and $390
million for 1997, 1996 and 1995, respectively. Statutory surplus was $2.2
billion at December 31, 1997 and $2.1 billion at December 31, 1996. The
Connecticut Insurance Holding Company Act limits the amount of annual dividends
or other distributions available to shareholders of Connecticut insurance
companies without the Department's prior approval. During 1997, the Company paid
a total of $400 million in dividends to its parent, of which $100 million
received prior approval from the Department in accordance with requirements.
Under current law, the maximum dividend distribution that may be made by the
Company during 1998 without prior approval is $548 million. The amount of
restricted net assets as of December 31, 1997 was approximately $3.9 billion.
NOTE 7 -- INCOME TAXES
The Company's net deferred tax asset of $653 million and $639 million as of
December 31, 1997 and 1996, respectively, reflects management's belief that the
Company's taxable income in future years will be sufficient to realize the net
deferred tax asset based on the Company's earnings history and its future
expectations. In determining the adequacy of future taxable income, management
considered the future reversal of its existing taxable temporary differences and
available tax planning strategies that could be implemented, if necessary.
24
<PAGE>
In accordance with the Life Insurance Company Income Tax Act of 1959, a
portion of the Company's statutory income was not subject to current income
taxation but was accumulated in an account designated Policyholders' Surplus
Account. Under the Tax Reform Act of 1984, no further additions may be made to
the Policyholders' Surplus Account for tax years ending after December 31, 1983.
The balance in the account of approximately $450 million at December 31, 1997
would result in a tax liability of $158 million only if distributed to the
shareholder or if the account balance exceeded a prescribed maximum. No income
taxes have been provided on this amount because, in management's opinion, the
likelihood that these conditions will be met is remote.
CIGNA's federal income tax returns are routinely audited by the Internal
Revenue Service (IRS), and provisions are made in CIGNA's financial statements
in anticipation of the results of these audits. CIGNA resolved all issues
relative to the Company arising out of audits for 1991 through 1993, which
resulted in an increase to net income of $13 million in 1997.
In management's opinion, adequate tax liabilities have been established for
all years.
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) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Other insurance and contractholder liabilities............................... $ 400 $ 387
Employee and retiree benefit plans........................................... 196 177
Investments, net............................................................. 262 228
Other........................................................................ 63 74
--- ---
Total deferred tax assets.................................................... 921 866
--- ---
Deferred tax liabilities:
Policy acquisition expenses.................................................. 38 21
Depreciation................................................................. 77 88
Unrealized appreciation on investments....................................... 153 118
--- ---
Total deferred tax liabilities............................................... 268 227
- -------------------------------------------------------------------------------------------
Net deferred income tax asset................................................ $ 653 $ 639
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
Total income taxes for the year ended December 31 were less than the amount
computed using the nominal federal income tax rate of 35% for the following
reasons:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at nominal rate.............................................. $ 320 $ 305 $ 266
Tax-exempt interest income............................................... (5) (5) (6)
Dividends received deduction............................................. (7) (7) (7)
Amortization of goodwill................................................. 4 4 4
Resolved federal tax audit issues........................................ (13) -- --
Other.................................................................... (1) 16 --
- -------------------------------------------------------------------------------------------
Total income taxes....................................................... $ 298 $ 313 $ 257
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
NOTE 8 -- PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PLANS
A) PENSION PLANS: The Company provides retirement benefits to eligible
employees and agents. These benefits are provided through a plan sponsored by
CIGNA covering most domestic employees (the Plan) and by several separate
pension plans for various subsidiaries, agents and foreign employees.
The Plan is a non-contributory, defined benefit, trusteed plan available to
eligible domestic employees. Generally, for employees whose service commenced
prior to 1989, benefits are based on their years of service and eligible
compensation during the highest three consecutive years of employment, offset by
a portion of the Social Security benefit for which they are eligible. In 1997,
CIGNA amended its Plan for employees whose service commenced
25
<PAGE>
after 1988. Under the new Plan provisions, eligible employees receive annual
benefit credits based on an employee's age and credited service, and quarterly
interest credits based on U.S. Treasury bond rates. The employee's pension
benefit equals the value of accumulated credits, and may be paid at or after
separation from service in a lump sum or an annuity. CIGNA funds the Plan at
least at the minimum amount required by the Employee Retirement Income Security
Act of 1974 (ERISA). Allocated pension cost for the Company was $24 million, $26
million and $23 million in 1997, 1996 and 1995, respectively.
The Plan, and several separate pension plans for various subsidiaries and
agents, had deposits with the Company totaling approximately $2.5 billion and
$2.2 billion at December 31, 1997 and 1996, respectively.
B) OTHER POSTRETIREMENT BENEFITS PLANS: In addition to providing pension
benefits, the Company provides certain health care and life insurance benefits
to retired employees, spouses and other eligible dependents through various
plans sponsored by CIGNA. A substantial portion of the Company's employees may
become eligible for these benefits upon retirement. CIGNA's contributions for
health care benefits depend upon a retiree's date of retirement, age, years of
service and other cost-sharing features, such as deductibles and coinsurance.
Under the terms of the benefit plans, benefit provisions and cost-sharing
features can be adjusted. In general, retiree health care benefits are not
funded by CIGNA, but are paid as covered expenses are incurred. Retiree life
insurance benefits are paid from plan assets or as covered expenses are
incurred.
Expense for postretirement benefits other than pensions allocated to the
Company totaled $2 million for 1997, $9 million for 1996 and $16 million for
1995. The other postretirement benefit liability included in Accounts Payable,
Accrued Expenses and Other Liabilities as of December 31, 1997 and 1996 was $412
million and $424 million, including net intercompany payables of $39 million and
$40 million, respectively, for services provided by affiliates' employees.
C) OTHER POSTEMPLOYMENT BENEFITS: The Company provides certain salary
continuation (severance and disability), health care and life insurance benefits
to inactive and former employees, spouses and other eligible dependents through
various employee benefit plans sponsored by CIGNA.
Although severance benefits accumulate with additional service, the Company
recognizes severance expense when severance is probable and the costs can be
reasonably estimated. Postemployment benefits other than severance generally do
not vest or accumulate; therefore, the estimated cost of benefits is accrued
when determined to be probable and estimable, generally upon disability or
termination. See Note 11 for additional information regarding severance accrued
as part of cost reduction initiatives.
D) CAPITAL ACCUMULATION PLANS: CIGNA sponsors various capital accumulation
plans in which employee contributions on a pre-tax basis (401(k)) are
supplemented by CIGNA matching contributions. These contributions are invested,
at the election of the employee, in one or more of the following investments:
CIGNA common stock fund, several CIGNA and non-CIGNA mutual funds, and a
fixed-income fund. In addition, beginning in 1999, CIGNA may provide additional
matching contributions, depending on its annual performance, which would be
invested in the CIGNA common stock fund. The Company's allocated expense for
such plans totaled $15 million for 1997, $16 million for 1996 and $14 million
for 1995.
NOTE 9 -- REINSURANCE
In the normal course of business, the Company enters into agreements,
primarily relating to short-duration contracts, to assume and cede reinsurance
with other insurance companies. Reinsurance is ceded primarily to limit losses
from large exposures and to permit recovery of a portion of direct losses,
although ceded reinsurance does not relieve the originating insurer of
liability. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of its reinsurers.
Failure of reinsurers to indemnify the Company, as a result of reinsurer
insolvencies and disputes, could result in losses. As of December 31, 1997 and
1996 there were no allowances for uncollectible amounts. Future charges for
unrecoverable reinsurance may materially affect results of operations in future
periods, however, such amounts are not expected to have a material adverse
effect on the Company's liquidity or financial condition.
26
<PAGE>
The effects of reinsurance on net earned premiums and fees for the year ended
December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-DURATION CONTRACTS
Premiums and fees:
Direct............................................................ $ 3,119 $ 2,940 $ 2,613
Assumed........................................................... 255 135 384
Ceded............................................................. (266) (166) (366)
- -------------------------------------------------------------------------------------------
Net earned premiums and fees........................................ $ 3,108 $ 2,909 $ 2,631
- -------------------------------------------------------------------------------------------
-------------------------------
LONG-DURATION CONTRACTS
Premiums and fees:
Direct............................................................ $ 1,979 $ 1,997 $ 1,950
Assumed........................................................... 522 601 561
Ceded............................................................. (233) (193) (144)
- -------------------------------------------------------------------------------------------
Net earned premiums and fees........................................ $ 2,268 $ 2,405 $ 2,367
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
The effects of reinsurance on written premiums and fees for short-duration
contracts were not materially different from the amounts shown in the above
table. Benefits, losses and settlement expenses for 1997, 1996 and 1995 were net
of reinsurance recoveries of $340 million, $359 million and $442 million,
respectively.
NOTE 10 -- LEASES AND RENTALS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $76 million, $68 million and $60 million in 1997, 1996 and 1995,
respectively.
As of December 31, 1997, future net minimum rental payments under
non-cancelable operating leases were $167 million, payable as follows: 1998 --
$44 million; 1999 -- $37 million; 2000 -- $23 million; 2001 -- $17 million; 2002
- -- $12 million; and $34 million thereafter.
NOTE 11 -- SEGMENT INFORMATION
The Company operates principally in three segments: Employee Life and Health
Benefits, Employee Retirement and Savings Benefits, and Individual Financial
Services. Other Operations consists principally of the results of the Company's
settlement annuity business and certain new business initiatives.
Summarized segment financial information for the year ended and as of December
31 was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(IN MILLIONS) 1997 1996 1995
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Employee Life and Health Benefits................................ $ 4,581 $ 4,510 $ 4,243
Employee Retirement and Savings Benefits......................... 1,773 1,899 1,914
Individual Financial Services.................................... 2,004 1,950 1,800
Other Operations................................................. 212 200 181
- -------------------------------------------------------------------------------------------
Total............................................................ $ 8,570 $ 8,559 $ 8,138
- -------------------------------------------------------------------------------------------
-------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
Employee Life and Health Benefits................................ $ 300 $ 287 $ 294
Employee Retirement and Savings Benefits......................... 324 293 232
Individual Financial Services.................................... 300 298 252
Other Operations................................................. (11) (8) (17)
- -------------------------------------------------------------------------------------------
Total............................................................ $ 913 $ 870 $ 761
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Employee Life and Health Benefits................................ $ 7,639 $ 7,065 $ 7,629
Employee Retirement and Savings Benefits......................... 45,884 40,122 37,609
Individual Financial Services.................................... 19,809 17,930 16,189
Other Operations................................................. 2,721 2,398 2,569
- -------------------------------------------------------------------------------------------
Total............................................................ $ 76,053 $ 67,515 $ 63,996
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
During 1995, the Company recorded a $13 million pre-tax charge ($8 million
after-tax), included in Other Operating Expenses, for cost reduction
restructuring initiatives in the Employee Life and Health Benefits segment. The
charge consisted primarily of severance-related expenses representing costs
associated with nonvoluntary terminations covering approximately 1,100
employees. These initiatives were completed in 1997 with no material difference
from original estimates.
NOTE 12 -- CONTINGENCIES
A) FINANCIAL GUARANTEES: The Company is contingently liable for financial
guarantees provided in the ordinary course of business on the repayment of
principal and interest on certain industrial revenue bonds. The contractual
amounts of financial guarantees reflect the Company's maximum exposure to credit
loss in the event of nonperformance. To limit the Company's exposure in the
event of default of any guaranteed obligation, various programs are in place to
ascertain the creditworthiness of guaranteed parties and to monitor this status
on a periodic basis.
The industrial revenue bonds guaranteed directly by the Company have remaining
maturities of up to 18 years. The guarantees provide for payment of debt service
only as it becomes due; consequently, an event of default would not cause an
acceleration of scheduled principal and interest payments. The principal amount
of the bonds guaranteed by the Company at December 31, 1997 and 1996 was $202
million and $234 million, respectively. Revenues in connection with industrial
revenue bond guarantees are derived principally from equity participations in
the related projects and are included in Net Investment Income as earned. Loss
reserves for financial guarantees are established when a default has occurred or
when the Company believes that a loss has been incurred. There were no losses
for industrial revenue bonds in 1997, 1996 or 1995.
The Company also guarantees a minimum level of benefits for certain separate
account contracts and, in the event that separate account assets are
insufficient to fund minimum policy benefits, the Company is obligated to fund
the difference. As of December 31, 1997 and 1996, the amount of minimum benefit
guarantees for separate account contracts was $4.6 billion and $4.9 billion,
respectively. Reserves in addition to the separate account liabilities are
established when the Company believes a payment will be required under one of
these guarantees. No such reserves were required as of December 31, 1997 and
1996. Guarantee fees are part of the overall management fee charged to separate
accounts and are recognized in income as earned.
Although the ultimate outcome of any loss contingencies arising from the
Company's financial guarantees may adversely affect results of operations in
future periods, they are not expected to have a material adverse effect on the
Company's liquidity or financial condition.
B) REGULATORY AND INDUSTRY DEVELOPMENTS: The Company's businesses are subject
to a changing social, economic, legal, legislative and regulatory environment
that could affect them. Some of the changes include initiatives to increase
health care regulation, restrict insurance pricing and the application of
underwriting standards, and revise federal tax laws. Some of the more
significant issues are discussed below.
Efforts at the federal and state level to increase regulation of the health
care industry could have an adverse effect on the Company's health care
operations if they reduce marketplace competition and innovation or result in
increased medical or administrative costs. Matters under consideration that
could have an adverse effect include mandated benefits or services that increase
costs without improving the quality of care, loss of the ERISA preemption of
state law and restrictions on the use of prescription drug formularies. Due to
the uncertainty associated with the timing and content of any proposals
ultimately adopted, the effect on the Company's results of operations, liquidity
or financial condition cannot be reasonably estimated at this time.
28
<PAGE>
In 1996, Congress passed legislation that phases out over a three-year period
the tax deductibility of policy loan interest for most leveraged corporate-owned
life insurance (COLI) products. For 1997, revenues of $591 million and net
income of $44 million for the Company were from leveraged COLI products that are
affected by this legislation. The Company does not expect this legislation to
have a material adverse effect on its consolidated results of operations,
liquidity or financial condition.
The National Association of Insurance Commissioners recently approved
standardized statutory accounting practices, which are not scheduled to take
effect before 1999. The Company has not determined the effect on statutory net
income, surplus or liquidity at this time.
The Company is contingently liable for possible assessments under regulatory
requirements pertaining to potential insolvencies of unaffiliated insurance
companies. Mandatory assessments, which are subject to statutory limits, can be
partially recovered through a reduction in future premium taxes in some states.
The Company recorded pre-tax charges of $17 million, $26 million and $22 million
for 1997, 1996 and 1995, respectively, for guaranty fund assessments that can be
reasonably estimated before giving effect to future premium tax recoveries.
Although future assessments and payments may adversely affect results of
operations in future periods, such amounts are not expected to have a material
adverse effect on the Company's liquidity or financial condition.
The eventual effect on the Company of the changing environment in which it
operates remains uncertain.
C) LITIGATION: The Company is routinely engaged in litigation incidental to
its business. While the outcome of all litigation involving the Company,
including insurance-related litigation, cannot be determined, litigation is not
expected to result in losses that differ from recorded reserves by amounts that
would be material to results of operations, liquidity or financial condition.
NOTE 13 -- RELATED PARTY TRANSACTIONS
The Company has assumed the settlement annuity and group pension business
written by Life Insurance Company of North America (LINA), an affiliate.
Reserves held by the Company with respect to this business were $1.7 billion at
December 31, 1997 and 1996.
The Company cedes long-term disability business to LINA. Reinsurance
recoverables from LINA at December 31, 1997 and 1996 were $869 million and $917
million, respectively.
The Company had lines of credit available from affiliates totaling $600
million at December 31, 1997 and 1996. All borrowings are payable upon demand
with interest rates equivalent to CIGNA's average monthly short-term borrowing
rate plus 1/4 of 1%. Interest expense was $0.2 million for 1997 and $1.0 million
for 1996 and 1995. As of December 31, 1997 and 1996, there were no borrowings
outstanding under such lines.
The Company extended lines of credit to affiliates totaling $600 million at
December 31, 1997 and 1996. All loans are payable upon demand with interest
rates equivalent to CIGNA's average monthly short-term borrowing rate. There
were no amounts outstanding as of December 31, 1997 or 1996.
The Company, together with other CIGNA subsidiaries, has entered into a
pooling arrangement known as the CIGNA Corporate Liquidity Account (the Account)
for the purpose of maximizing earnings on funds available for short-term
investments. Withdrawals from the Account, up to the total amount of the
participant's investment in the Account, are allowed on a demand basis. As of
December 31, 1997 and 1996, the Company had a balance in the Account of $484
million and $80 million, respectively.
CIGNA allocates to the Company its share of operating expenses incurred at the
corporate level. The Company also allocates a portion of its operating expenses
to affiliated companies on whose behalf it performs certain administrative
services.
29
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
CIGNA
VARIABLE
PRODUCTS
GROUP
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS SUB-ACCOUNT
--------------------------------------------------- -----------
LEVERAGED MIDCAP SMALL MONEY
GROWTH ALLCAP GROWTH CAPITALIZATION MARKET
----------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $30,808,248 $8,253,666 $15,398,687 $20,132,265 $6,869,616
Receivable from Connecticut
General Life Insurance
Company..................... 31,506 6,260 1,903 -- --
Receivable for fund shares
sold........................ -- -- -- 3,763 8,637
----------- ---------- ---------- -------------- -----------
Total assets................ 30,839,754 8,259,926 15,400,590 20,136,028 6,878,253
----------- ---------- ---------- -------------- -----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- -- 3,763 8,637
Payable for fund shares
purchased................... 31,506 6,260 1,903 -- --
----------- ---------- ---------- -------------- -----------
Total liabilities........... 31,506 6,260 1,903 3,763 8,637
----------- ---------- ---------- -------------- -----------
Net assets.................. $30,808,248 $8,253,666 $15,398,687 $20,132,265 $6,869,616
----------- ---------- ---------- -------------- -----------
----------- ---------- ---------- -------------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 1,521,063 401,116 802,891 1,125,616 --
Net asset value per
accumulation unit........... $ 17.196381 $18.148668 $16.429260 $ 14.799455 $ --
----------- ---------- ---------- -------------- -----------
$26,156,787 $7,279,720 $13,190,901 $16,658,508 $ --
----------- ---------- ---------- -------------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 145,446 33,901 84,399 137,954 --
Net asset value per
accumulation unit........... $ 13.211614 $11.744336 $11.377289 $ 10.289562 $ --
----------- ---------- ---------- -------------- -----------
$ 1,921,574 $ 398,139 $ 960,230 $ 1,419,485 $ --
----------- ---------- ---------- -------------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. 241,255 52,402 112,152 175,551 671,479
Net asset value per
accumulation unit........... $ 11.168525 $10.988210 $11.123794 $ 11.406099 $10.230578
----------- ---------- ---------- -------------- -----------
$ 2,694,461 $ 575,807 $1,247,556 $ 2,002,348 $6,869,616
----------- ---------- ---------- -------------- -----------
Accumulation net assets....... $30,772,822 $8,253,666 $15,398,687 $20,080,341 $6,869,616
Annuity reserves.............. 35,426 -- -- 51,924 --
----------- ---------- ---------- -------------- -----------
$30,808,248 $8,253,666 $15,398,687 $20,132,265 $6,869,616
----------- ---------- ---------- -------------- -----------
----------- ---------- ---------- -------------- -----------
<CAPTION>
FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
------------------------------------------------
EQUITY- HIGH MONEY
INCOME INCOME MARKET OVERSEAS
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $52,730,899 $17,524,570 $11,575,573 $6,997,880
Receivable from Connecticut
General Life Insurance
Company..................... 30,505 33,735 -- 13,114
Receivable for fund shares
sold........................ -- -- 407 --
----------- ---------- ----------- ----------
Total assets................ 52,761,404 17,558,305 11,575,980 7,010,994
----------- ---------- ----------- ----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- 407 --
Payable for fund shares
purchased................... 30,505 33,735 -- 13,114
----------- ---------- ----------- ----------
Total liabilities........... 30,505 33,735 407 13,114
----------- ---------- ----------- ----------
Net assets.................. $52,730,899 $17,524,570 $11,575,573 $6,997,880
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 2,564,387 997,952 1,017,888 417,152
Net asset value per
accumulation unit........... $ 17.296831 $12.545574 $ 11.095784 $11.687000
----------- ---------- ----------- ----------
$44,355,770 $12,519,875 $11,294,261 $4,875,251
----------- ---------- ----------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 232,844 55,953 21,161 21,670
Net asset value per
accumulation unit........... $ 13.707441 $12.298844 $ 10.632251 $11.587559
----------- ---------- ----------- ----------
$ 3,191,701 $ 688,161 $ 224,994 $ 251,102
----------- ---------- ----------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. 456,837 391,937 -- 187,414
Net asset value per
accumulation unit........... $ 11.249844 $11.013339 $ -- $ 9.986074
----------- ---------- ----------- ----------
$ 5,139,346 $4,316,534 $ -- $1,871,527
----------- ---------- ----------- ----------
Accumulation net assets....... $52,686,817 $17,524,570 $11,519,255 $6,997,880
Annuity reserves.............. 44,082 -- 56,318 --
----------- ---------- ----------- ----------
$52,730,899 $17,524,570 $11,575,573 $6,997,880
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
30
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP III
FIDELITY VIP II PORTFOLIO SUB-
PORTFOLIO SUB-ACCOUNTS ACCOUNT
------------------------------------ ----------------
ASSET CONTRA- INVESTMENT GROWTH
MANAGER FUND GRADE BOND OPPORTUNITIES
----------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
Receivable from Connecticut
General Life Insurance
Company..................... 5,447 8,985 52,259 17,930
Receivable for fund shares
sold........................ -- -- -- --
----------- ----------- ---------- ----------------
Total assets................ 6,670,706 1,720,007 11,139,522 3,849,418
----------- ----------- ---------- ----------------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- -- --
Payable for fund shares
purchased................... 5,447 8,985 52,259 17,930
----------- ----------- ---------- ----------------
Total liabilities........... 5,447 8,985 52,259 17,930
----------- ----------- ---------- ----------------
Net assets.................. $ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
----------- ----------- ---------- ----------------
----------- ----------- ---------- ----------------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 403,681 -- 776,658 --
Net asset value per
accumulation unit........... $ 15.193166 $ -- $11.554977 $ --
----------- ----------- ---------- ----------------
$ 6,133,197 $ -- $8,974,264 $ --
----------- ----------- ---------- ----------------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 41,423 -- 22,191 --
Net asset value per
accumulation unit........... $ 12.844560 $ -- $11.323436 $ --
----------- ----------- ---------- ----------------
$ 532,062 $ -- $ 251,281 $ --
----------- ----------- ---------- ----------------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. -- 148,976 175,848 336,690
Net asset value per
accumulation unit........... $ -- $ 11.485208 $10.587068 $11.379873
----------- ----------- ---------- ----------------
$ -- $ 1,711,022 $1,861,718 $3,831,488
----------- ----------- ---------- ----------------
Accumulation net assets....... $ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
Annuity reserves.............. -- -- -- --
----------- ----------- ---------- ----------------
$ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
----------- ----------- ---------- ----------------
----------- ----------- ---------- ----------------
<CAPTION>
MFS SERIES SUB-ACCOUNTS
-------------------------------------------------------------------------
EMERGING GROWTH WITH TOTAL WORLD
GROWTH INCOME RESEARCH RETURN UTILITIES GOVERNMENTS
---------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
Receivable from Connecticut
General Life Insurance
Company..................... 3,955 54,701 33,334 -- 14,783 --
Receivable for fund shares
sold........................ -- -- -- 706 -- 54
---------- ----------- ---------- ---------- ---------- -----------
Total assets................ 2,123,044 2,819,157 3,713,005 19,421,933 6,266,653 1,413,444
---------- ----------- ---------- ---------- ---------- -----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- -- 706 -- 54
Payable for fund shares
purchased................... 3,955 54,701 33,334 -- 14,783 --
---------- ----------- ---------- ---------- ---------- -----------
Total liabilities........... 3,955 54,701 33,334 706 14,783 54
---------- ----------- ---------- ---------- ---------- -----------
Net assets.................. $2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
---------- ----------- ---------- ---------- ---------- -----------
---------- ----------- ---------- ---------- ---------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. -- -- -- 1,032,242 322,795 131,155
Net asset value per
accumulation unit........... $ -- $ -- $ -- $14.870405 $17.278823 $10.297427
---------- ----------- ---------- ---------- ---------- -----------
$ -- $ -- $ -- $15,349,858 $5,577,524 $1,350,557
---------- ----------- ---------- ---------- ---------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. -- -- -- 102,664 13,784 6,175
Net asset value per
accumulation unit........... $ -- $ -- $ -- $13.176208 $14.800406 $10.174585
---------- ----------- ---------- ---------- ---------- -----------
$ -- $ -- $ -- $1,352,720 $ 204,004 $ 62,833
---------- ----------- ---------- ---------- ---------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. 187,043 242,027 341,999 244,760 39,107 --
Net asset value per
accumulation unit........... $11.329433 $11.422097 $10.759295 $11.107402 $12.027164 $ --
---------- ----------- ---------- ---------- ---------- -----------
$2,119,089 $2,764,456 $3,679,671 $2,718,649 $ 470,342 $ --
---------- ----------- ---------- ---------- ---------- -----------
Accumulation net assets....... $2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
Annuity reserves.............. -- -- -- -- -- --
---------- ----------- ---------- ---------- ---------- -----------
$2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
---------- ----------- ---------- ---------- ---------- -----------
---------- ----------- ---------- ---------- ---------- -----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
31
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMT PORTFOLIO SUB-ACCOUNTS
----------------------------------- OCC ACCUMULATION TRUST SUB-ACCOUNTS
LIMITED --------------------------------------
MATURITY GLOBAL
BALANCED BOND PARTNERS EQUITY MANAGED SMALL CAP
---------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $5,410,923 $6,636,808 $34,421,582 $18,864,939 $ 67,959,224 $9,066,217
Receivable from Connecticut
General Life Insurance
Company..................... -- 212 52,086 7,429 53,492 13,210
Receivable for fund shares
sold........................ 290 -- -- -- -- --
---------- ---------- ----------- ---------- ------------- ----------
Total assets................ 5,411,213 6,637,020 34,473,668 18,872,368 68,012,716 9,079,427
---------- ---------- ----------- ---------- ------------- ----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... 290 -- -- -- -- --
Payable for fund shares
purchased................... -- 212 52,086 7,429 53,492 13,210
---------- ---------- ----------- ---------- ------------- ----------
Total liabilities........... 290 212 52,086 7,429 53,492 13,210
---------- ---------- ----------- ---------- ------------- ----------
Net assets.................. $5,410,923 $6,636,808 $34,421,582 $18,864,939 $ 67,959,224 $9,066,217
---------- ---------- ----------- ---------- ------------- ----------
---------- ---------- ----------- ---------- ------------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 389,760 460,111 1,242,083 1,032,703 3,343,230 448,919
Net asset value per
accumulation unit........... $12.772116 $11.438698 $ 20.080660 $15.021373 $ 16.298405 $15.345589
---------- ---------- ----------- ---------- ------------- ----------
$4,978,066 $5,263,072 $24,941,844 $15,512,619 $ 54,489,310 $6,888,934
---------- ---------- ----------- ---------- ------------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 33,702 15,655 131,403 77,692 329,792 44,569
Net asset value per
accumulation unit........... $11.759038 $10.922542 $ 14.901357 $12.126399 $ 13.785620 $12.738185
---------- ---------- ----------- ---------- ------------- ----------
$ 396,303 $ 170,997 $ 1,958,078 $ 942,121 $ 4,546,388 $ 567,734
---------- ---------- ----------- ---------- ------------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. -- 116,110 637,684 226,381 792,156 145,504
Net asset value per
accumulation unit........... $ -- $10.358639 $ 11.785098 $10.384482 $ 11.210441 $10.688805
---------- ---------- ----------- ---------- ------------- ----------
$ -- $1,202,739 $ 7,515,164 $2,350,845 $ 8,880,418 $1,555,263
---------- ---------- ----------- ---------- ------------- ----------
Accumulation net assets....... $5,374,369 $6,636,808 $34,415,086 $18,805,585 $ 67,916,116 $9,011,931
Annuity reserves.............. 36,554 -- 6,496 59,354 43,108 54,286
---------- ---------- ----------- ---------- ------------- ----------
$5,410,923 $6,636,808 $34,421,582 $18,864,939 $ 67,959,224 $9,066,217
---------- ---------- ----------- ---------- ------------- ----------
---------- ---------- ----------- ---------- ------------- ----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
32
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CIGNA
VARIABLE
PRODUCTS
GROUP
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS SUB-ACCOUNT
------------------------------------------------- ---------
LEVERAGED MIDCAP SMALL MONEY
GROWTH ALLCAP GROWTH CAPITALIZATION MARKET *
---------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................... $ 77,695 $ -- $ 7,282 $ -- $94,819
EXPENSES:
Mortality and expense risk and
administrative charges................ 331,270 94,488 171,622 218,002 26,486
---------- ---------- ---------- ------------- ---------
Net investment gain (loss)............ (253,575) (94,488) (164,340) (218,002 ) 68,333
---------- ---------- ---------- ------------- ---------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Capital distribution from portfolio
sponsor............................... 140,707 -- 177,571 587,421 --
Net realized gain (loss) on share
transactions.......................... 1,540 19,106 24,882 (93,004 ) --
---------- ---------- ---------- ------------- ---------
Net realized gain..................... 142,247 19,106 202,453 494,417 --
Net unrealized gain..................... 5,050,728 1,153,622 1,532,602 1,272,653 --
---------- ---------- ---------- ------------- ---------
Net realized and unrealized gain on
investments......................... 5,192,975 1,172,728 1,735,055 1,767,070 --
---------- ---------- ---------- ------------- ---------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................ $4,939,400 $1,078,240 $1,570,715 $ 1,549,068 $68,333
---------- ---------- ---------- ------------- ---------
---------- ---------- ---------- ------------- ---------
<CAPTION>
FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
----------------------------------------------
EQUITY- HIGH MONEY
INCOME INCOME MARKET OVERSEAS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................... $ 501,651 $ 401,740 $ 762,513 $ 40,523
EXPENSES:
Mortality and expense risk and
administrative charges................ 531,764 141,971 187,646 60,775
---------- ---------- ---------- ----------
Net investment gain (loss)............ (30,113) 259,769 574,867 (20,252 )
---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Capital distribution from portfolio
sponsor............................... 2,522,193 49,653 -- 160,863
Net realized gain (loss) on share
transactions.......................... (10,861) (12,799) -- (3,004 )
---------- ---------- ---------- ----------
Net realized gain..................... 2,511,332 36,854 -- 157,859
Net unrealized gain..................... 6,563,776 1,259,396 -- 38,849
---------- ---------- ---------- ----------
Net realized and unrealized gain on
investments......................... 9,075,108 1,296,250 -- 196,708
---------- ---------- ---------- ----------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................ $9,044,995 $1,556,019 $ 574,867 $ 176,456
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ----------------------------------
* Period from May 20, 1997 (date deposits first received) to December 31, 1997
The Notes to Financial Statements are an integral part of these statements.
33
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP III
FIDELITY VIP II PORTFOLIO SUB- MFS SERIES
PORTFOLIO SUB-ACCOUNTS ACCOUNT SUB-ACCOUNTS
------------------------------- ----------------- ----------------------
ASSET CONTRA- INVESTMENT GROWTH EMERGING GROWTH WITH
MANAGER FUND ** GRADE BOND OPPORTUNITIES *** GROWTH ** INCOME ****
---------- ------- ---------- ----------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................... $ 167,312 $ -- $ 360,990 $ -- $ -- $ 10,678
EXPENSES:
Mortality and expense risk and
administrative charges...... 76,758 5,782 104,517 12,362 6,875 8,570
---------- ------- ---------- -------- --------- -----------
Net investment gain
(loss).................... 90,554 (5,782) 256,473 (12,362) (6,875 ) 2,108
---------- ------- ---------- -------- --------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Capital distribution from
portfolio sponsor........... 419,698 -- -- -- -- 49,949
Net realized gain (loss) on
share transactions.......... 5,306 (17) 2,025 57 1,644 (98 )
---------- ------- ---------- -------- --------- -----------
Net realized gain (loss).... 425,004 (17) 2,025 57 1,644 49,851
Net unrealized gain (loss).... 492,627 41,006 368,703 165,241 24,778 43,425
---------- ------- ---------- -------- --------- -----------
Net realized and unrealized
gain (loss) on
investments............... 917,631 40,989 370,728 165,298 26,422 93,276
---------- ------- ---------- -------- --------- -----------
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS.................. $1,008,185 $35,207 $ 627,201 $ 152,936 $ 19,547 $ 95,384
---------- ------- ---------- -------- --------- -----------
---------- ------- ---------- -------- --------- -----------
<CAPTION>
TOTAL WORLD
RESEARCH *** RETURN UTILITIES GOVERNMENTS
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................... $ -- $ -- $ -- $ 22,035
EXPENSES:
Mortality and expense risk and
administrative charges...... 11,215 190,114 57,968 18,142
------------ ---------- ---------- -----------
Net investment gain
(loss).................... (11,215 ) (190,114) (57,968) 3,893
------------ ---------- ---------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Capital distribution from
portfolio sponsor........... -- -- -- 9,988
Net realized gain (loss) on
share transactions.......... 1,277 3,460 2,162 (1,993)
------------ ---------- ---------- -----------
Net realized gain (loss).... 1,277 3,460 2,162 7,995
Net unrealized gain (loss).... 20,550 2,716,983 1,313,374 (47,665)
------------ ---------- ---------- -----------
Net realized and unrealized
gain (loss) on
investments............... 21,827 2,720,443 1,315,536 (39,670)
------------ ---------- ---------- -----------
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS.................. $ 10,612 $2,530,329 $1,257,568 $ (35,777)
------------ ---------- ---------- -----------
------------ ---------- ---------- -----------
</TABLE>
- ------------------------------
** Period from June 2, 1997 (date deposits first received) to December 31,
1997
*** Period from June 9, 1997 (date deposits first received) to December 31,
1997
**** Period from June 5, 1997 (date deposits first received) to December 31,
1997
The Notes to Financial Statements are an integral part of these statements.
34
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMT PORTFOLIO SUB-ACCOUNTS
-------------------------------------- OCC ACCUMULATION TRUST SUB-ACCOUNTS
LIMITED --------------------------------------------
MATURITY GLOBAL
BALANCED BOND PARTNERS EQUITY MANAGED SMALL CAP
------------ --------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................... $ 62,015 $230,704 $ 35,980 $ 89,675 $ 399,586 $ 19,838
EXPENSES:
Mortality and expense risk and
administrative charges...... 57,524 65,699 287,570 200,143 684,466 74,900
------------ --------- ----------- ------------ -------------- ------------
Net investment gain
(loss).................... 4,491 165,005 (251,590) (110,468) (284,880) (55,062)
------------ --------- ----------- ------------ -------------- ------------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Capital distribution from
portfolio sponsor........... 159,172 -- 554,096 863,304 1,227,260 139,904
Net realized gain (loss) on
share transactions.......... 8,894 1,260 (36,279) (3,225) 473 1,039
------------ --------- ----------- ------------ -------------- ------------
Net realized gain........... 168,066 1,260 517,817 860,079 1,227,733 140,943
Net unrealized gain........... 507,948 92,716 4,735,263 718,584 7,959,980 845,266
------------ --------- ----------- ------------ -------------- ------------
Net realized and unrealized
gain on investments....... 676,014 93,976 5,253,080 1,578,663 9,187,713 986,209
------------ --------- ----------- ------------ -------------- ------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS... $ 680,505 $258,981 $5,001,490 $1,468,195 $ 8,902,833 $931,147
------------ --------- ----------- ------------ -------------- ------------
------------ --------- ----------- ------------ -------------- ------------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
35
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CIGNA
VARIABLE
PRODUCTS
GROUP
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS SUB-ACCOUNT
--------------------------------------------------- ------------
LEVERAGED MIDCAP SMALL MONEY MARKET
GROWTH ALLCAP GROWTH CAPITALIZATION *
----------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (253,575) $ (94,488) $ (164,340) $ (218,002) $ 68,333
Net realized gain.................. 142,247 19,106 202,453 494,417 --
Net unrealized gain................ 5,050,728 1,153,622 1,532,602 1,272,653 --
----------- ---------- ---------- -------------- ------------
Net increase from operations..... 4,939,400 1,078,240 1,570,715 1,549,068 68,333
----------- ---------- ---------- -------------- ------------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 5,337,526 1,537,063 2,637,168 3,430,738 26,057,549
Participant transfers.............. 3,181,343 280,882 2,087,535 1,351,675 (19,218,746)
Participant withdrawals and annuity
payments......................... (824,870) (226,287) (472,429) (593,283) (37,520)
----------- ---------- ---------- -------------- ------------
Net increase from participant
transactions................... 7,693,999 1,591,658 4,252,274 4,189,130 6,801,283
----------- ---------- ---------- -------------- ------------
Total increase in net assets... 12,633,399 2,669,898 5,822,989 5,738,198 6,869,616
----------- ---------- ---------- -------------- ------------
NET ASSETS:
Beginning of period................ 18,174,849 5,583,768 9,575,698 14,394,067 --
----------- ---------- ---------- -------------- ------------
End of period...................... $30,808,248 $8,253,666 $15,398,687 $20,132,265 $ 6,869,616
----------- ---------- ---------- -------------- ------------
----------- ---------- ---------- -------------- ------------
<CAPTION>
FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
--------------------------------------------------
EQUITY- HIGH MONEY
INCOME INCOME MARKET OVERSEAS
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (30,113) $ 259,769 $ 574,867 $ (20,252)
Net realized gain.................. 2,511,332 36,854 -- 157,859
Net unrealized gain................ 6,563,776 1,259,396 -- 38,849
----------- ---------- ----------- -----------
Net increase from operations..... 9,044,995 1,556,019 574,867 176,456
----------- ---------- ----------- -----------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 9,877,589 7,265,778 25,555,964 2,765,425
Participant transfers.............. 7,616,249 4,195,306 (23,453,172) 2,324,012
Participant withdrawals and annuity
payments......................... (1,991,191) (375,923) (1,704,916) (162,622)
----------- ---------- ----------- -----------
Net increase from participant
transactions................... 15,502,647 11,085,161 397,876 4,926,815
----------- ---------- ----------- -----------
Total increase in net assets... 24,547,642 12,641,180 972,743 5,103,271
----------- ---------- ----------- -----------
NET ASSETS:
Beginning of period................ 28,183,257 4,883,390 10,602,830 1,894,609
----------- ---------- ----------- -----------
End of period...................... $52,730,899 $17,524,570 $11,575,573 $ 6,997,880
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
- ------------------------------
* Period from May 20, 1997 (date deposits first received) to December 31, 1997
The Notes to Financial Statements are an integral part of these statements.
36
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP
III
PORTFOLIO SUB-
FIDELITY VIP II ACCOUNT
PORTFOLIO SUB-ACCOUNTS --------------
----------------------------------- GROWTH
ASSET CONTRA- INVESTMENT OPPORTUNITIES
MANAGER FUND ** GRADE BOND ***
----------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ 90,554 $ (5,782) $ 256,473 $ (12,362)
Net realized gain (loss)........... 425,004 (17) 2,025 57
Net unrealized gain (loss)......... 492,627 41,006 368,703 165,241
----------- ---------- ---------- --------------
Net increase (decrease) from
operations..................... 1,008,185 35,207 627,201 152,936
----------- ---------- ---------- --------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits............... 999,019 1,155,144 2,794,038 2,597,161
Participant transfers.............. 810,077 547,974 2,142,175 1,101,690
Participant withdrawals............ (355,632) (27,303) (316,736) (20,299)
----------- ---------- ---------- --------------
Net increase (decrease) from
participant transactions....... 1,453,464 1,675,815 4,619,477 3,678,552
----------- ---------- ---------- --------------
Total increase (decrease) in
net assets................... 2,461,649 1,711,022 5,246,678 3,831,488
----------- ---------- ---------- --------------
NET ASSETS:
Beginning of period................ 4,203,610 -- 5,840,585 --
----------- ---------- ---------- --------------
End of period...................... $ 6,665,259 $1,711,022 $11,087,263 $ 3,831,488
----------- ---------- ---------- --------------
----------- ---------- ---------- --------------
<CAPTION>
MFS SERIES SUB-ACCOUNTS
----------------------------------------------------------------------------
EMERGING GROWTH WITH RESEARCH TOTAL WORLD
GROWTH ** INCOME **** *** RETURN UTILITIES GOVERNMENTS
------------ ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (6,875) $ 2,108 $ (11,215 ) $ (190,114) $ (57,968) $ 3,893
Net realized gain (loss)........... 1,644 49,851 1,277 3,460 2,162 7,995
Net unrealized gain (loss)......... 24,778 43,425 20,550 2,716,983 1,313,374 (47,665)
------------ ----------- ---------- ----------- ---------- -----------
Net increase (decrease) from
operations..................... 19,547 95,384 10,612 2,530,329 1,257,568 (35,777)
------------ ----------- ---------- ----------- ---------- -----------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits............... 1,299,509 1,387,817 2,361,107 4,951,791 697,454 205,485
Participant transfers.............. 849,791 1,287,747 1,353,004 3,826,468 1,697,348 (228,367)
Participant withdrawals............ (49,758) (6,492 ) (45,052 ) (589,750) (192,307) (35,414)
------------ ----------- ---------- ----------- ---------- -----------
Net increase (decrease) from
participant transactions....... 2,099,542 2,669,072 3,669,059 8,188,509 2,202,495 (58,296)
------------ ----------- ---------- ----------- ---------- -----------
Total increase (decrease) in
net assets................... 2,119,089 2,764,456 3,679,671 10,718,838 3,460,063 (94,073)
------------ ----------- ---------- ----------- ---------- -----------
NET ASSETS:
Beginning of period................ -- -- -- 8,702,389 2,791,807 1,507,463
------------ ----------- ---------- ----------- ---------- -----------
End of period...................... $ 2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
------------ ----------- ---------- ----------- ---------- -----------
------------ ----------- ---------- ----------- ---------- -----------
</TABLE>
- ------------------------------
** Period from June 2, 1997 (date deposits first received) to December 31,
1997
*** Period from June 9, 1997 (date deposits first received) to December 31,
1997
**** Period from June 5, 1997 (date deposits first received) to December 31,
1997
The Notes to Financial Statements are an integral part of these statements.
37
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMT PORTFOLIO SUB-ACCOUNTS
-----------------------------------
LIMITED OCC ACCUMULATION TRUST SUB-ACCOUNTS
MATURITY ------------------------------------------
BALANCED BOND PARTNERS GLOBAL EQUITY MANAGED SMALL CAP
----------- ---------- ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain
(loss)................. $ 4,491 $ 165,005 $ (251,590) $ (110,468) $ (284,880) $ (55,062)
Net realized gain........ 168,066 1,260 517,817 860,079 1,227,733 140,943
Net unrealized gain...... 507,948 92,716 4,735,263 718,584 7,959,980 845,266
----------- ---------- ---------- -------------- ------------ -----------
Net increase from
operations........... 680,505 258,981 5,001,490 1,468,195 8,902,833 931,147
----------- ---------- ---------- -------------- ------------ -----------
ACCUMULATION AND ANNUITY
UNIT TRANSACTIONS:
Participant deposits 794,039 1,839,438 10,686,060 4,406,191 16,196,357 2,555,273
Participant transfers.... 772,497 1,058,558 9,775,496 3,352,013 11,795,604 3,078,585
Participant withdrawals
and annuity payments... (201,295) (183,646 ) (738,005) (555,871) (2,062,412) (255,114)
----------- ---------- ---------- -------------- ------------ -----------
Net increase from
participant
transactions......... 1,365,241 2,714,350 19,723,551 7,202,333 25,929,549 5,378,744
----------- ---------- ---------- -------------- ------------ -----------
Total increase in net
assets.............. 2,045,746 2,973,331 24,725,041 8,670,528 34,832,382 6,309,891
----------- ---------- ---------- -------------- ------------ -----------
NET ASSETS:
Beginning of period...... 3,365,177 3,663,477 9,696,541 10,194,411 33,126,842 2,756,326
----------- ---------- ---------- -------------- ------------ -----------
End of period............ $ 5,410,923 $6,636,808 $34,421,582 $ 18,864,939 $ 67,959,224 $ 9,066,217
----------- ---------- ---------- -------------- ------------ -----------
----------- ---------- ---------- -------------- ------------ -----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
38
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIODS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
--------------------------------------------------- --------------------------------------------------
LEVERAGED MIDCAP SMALL EQUITY- HIGH MONEY
GROWTH ALLCAP GROWTH CAPITALIZATION INCOME INCOME * MARKET OVERSEAS **
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain
(loss)................. $ (137,697) $ (48,267) $ (67,601) $ (126,196) $ (209,687) $ (19,299) $ 428,827 $ (5,307)
Net realized gain
(loss)................. 229,107 8,055 80,821 1,764 340,521 (241) -- 168
Net unrealized gain...... 1,131,951 218,998 345,620 109,613 2,059,625 196,922 -- 64,159
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
Net increase (decrease)
from operations...... 1,223,361 178,786 358,840 (14,819) 2,190,459 177,382 428,827 59,020
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
ACCUMULATION AND ANNUITY
UNIT TRANSACTIONS:
Participant deposits..... 10,783,257 3,476,529 4,553,845 8,786,778 15,889,145 2,685,680 30,385,963 1,005,559
Participant transfers.... 2,602,802 772,742 2,723,340 2,632,177 5,222,220 2,257,438 (26,362,351) 834,182
Participant withdrawals
and annuity payments... (294,588) (53,503) (98,852) (281,569) (1,664,909) (237,110) (825,252) (4,152)
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
Net increase from
participant
transactions......... 13,091,471 4,195,768 7,178,333 11,137,386 19,446,456 4,706,008 3,198,360 1,835,589
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
Total increase in net
assets............. 14,314,832 4,374,554 7,537,173 11,122,567 21,636,915 4,883,390 3,627,187 1,894,609
NET ASSETS:
Beginning of period...... 3,860,017 1,209,214 2,038,525 3,271,500 6,546,342 -- 6,975,643 --
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
End of period............ $18,174,849 $5,583,768 $9,575,698 $14,394,067 $28,183,257 $4,883,390 $ 10,602,830 $1,894,609
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
<CAPTION>
FIDELITY VIP II
PORTFOLIO SUB-ACCOUNTS
-----------------------
ASSET INVESTMENT
MANAGER GRADE BOND
---------- -----------
<S> <C> <C>
OPERATIONS:
Net investment gain
(loss)................. $ (3,908) $ 44,176
Net realized gain
(loss)................. 23,191 (39,580)
Net unrealized gain...... 318,766 134,649
---------- -----------
Net increase (decrease)
from operations...... 338,049 139,245
---------- -----------
ACCUMULATION AND ANNUITY
UNIT TRANSACTIONS:
Participant deposits..... 2,404,033 4,267,300
Participant transfers.... 837,140 (43,936)
Participant withdrawals
and annuity payments... (79,225) (43,602)
---------- -----------
Net increase from
participant
transactions......... 3,161,948 4,179,762
---------- -----------
Total increase in net
assets............. 3,499,997 4,319,007
NET ASSETS:
Beginning of period...... 703,613 1,521,578
---------- -----------
End of period............ $4,203,610 $5,840,585
---------- -----------
---------- -----------
</TABLE>
- ------------------------------
* Period from May 22, 1996 (date deposits first received) to December 31, 1996
** Period from May 20, 1996 (date deposits first received) to December 31, 1996
The Notes to Financial Statements are an integral part of these statements.
39
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MFS SERIES SUB-ACCOUNTS AMT PORTFOLIO SUB-ACCOUNTS
----------------------------------- --------------------------------------
TOTAL WORLD LIMITED
RETURN UTILITIES GOVERNMENTS BALANCED MATURITY BOND PARTNERS
---------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ 70,381 $ 43,717 $ (12,757) $ (370) $ 82,632 $ (58,511)
Net realized gain.................. 59,975 165,947 103 159,057 110 78,862
Net unrealized gain (loss)......... 468,302 99,863 61,456 (27,931) 8,894 1,271,284
---------- ---------- ----------- ---------- ------------- ----------
Net increase from operations..... 598,658 309,527 48,802 130,756 91,636 1,291,635
---------- ---------- ----------- ---------- ------------- ----------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 4,811,832 1,302,058 895,119 1,994,125 1,858,603 4,552,441
Participant transfers.............. 1,778,613 721,609 229,235 421,781 669,231 2,538,705
Participant withdrawals and annuity
payments......................... (126,130) (54,286) (8,402) (59,302) (82,873) (209,905)
---------- ---------- ----------- ---------- ------------- ----------
Net increase from participant
transactions................... 6,464,315 1,969,381 1,115,952 2,356,604 2,444,961 6,881,241
---------- ---------- ----------- ---------- ------------- ----------
Total increase in net assets... 7,062,973 2,278,908 1,164,754 2,487,360 2,536,597 8,172,876
NET ASSETS:
Beginning of period................ 1,639,416 512,899 342,709 877,817 1,126,880 1,523,665
---------- ---------- ----------- ---------- ------------- ----------
End of period...................... $8,702,389 $2,791,807 $1,507,463 $3,365,177 $3,663,477 $9,696,541
---------- ---------- ----------- ---------- ------------- ----------
---------- ---------- ----------- ---------- ------------- ----------
<CAPTION>
OCC ACCUMULATION
TRUST SUB-ACCOUNTS
------------------------------------
GLOBAL SMALL
EQUITY MANAGED CAP
----------- ----------- ----------
<S> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (40,318) $ (125,580) $ (9,497)
Net realized gain.................. 51,921 76,937 24,917
Net unrealized gain (loss)......... 767,457 3,785,792 239,507
----------- ----------- ----------
Net increase from operations..... 779,060 3,737,149 254,927
----------- ----------- ----------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 5,606,065 17,033,548 1,053,997
Participant transfers.............. 2,295,536 7,398,554 835,481
Participant withdrawals and annuity
payments......................... (124,119) (464,195) (17,732)
----------- ----------- ----------
Net increase from participant
transactions................... 7,777,482 23,967,907 1,871,746
----------- ----------- ----------
Total increase in net assets... 8,556,542 27,705,056 2,126,673
NET ASSETS:
Beginning of period................ 1,637,869 5,421,786 629,653
----------- ----------- ----------
End of period...................... $10,194,411 $33,126,842 $2,756,326
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
40
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
CG Variable Annuity Separate Account II (the Account) is registered as a
Unit Investment Trust under the Investment Company Act of 1940, as amended. The
operations of the Account are part of the operations of Connecticut General Life
Insurance Company (CG Life). The assets and liabilities of the Account are
clearly identified and distinguished from other assets and liabilities of CG
Life. The assets of the Account are not available to meet the general
obligations of CG Life and are held for the exclusive benefit of the
participants. Within the account are four contract types that have different
contract terms and or different fees (See Note 4).
The assets of the Account are divided into variable sub-accounts each of
which is invested in shares of twenty-five portfolios (mutual funds) of eight
diversified open-end management investment companies, each portfolio with its
own investment objective. The variable sub-accounts are:
ALGER AMERICAN FUND:--
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Capitalization Portfolio
CIGNA VARIABLE PRODUCTS GROUP:--
CIGNA Variable Products Money Market Fund
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:--
Equity-Income Portfolio
High Income Portfolio
Money Market Portfolio
Overseas Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:--
Asset Manager Portfolio
Contrafund Portfolio
Investment Grade Bond Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III:--
Growth Opportunities Portfolio
MFS VARIABLE INSURANCE TRUST:--
MFS Emerging Growth Series
MFS Growth with Income Series
MFS Research Series
MFS Total Return Series
MFS Utilities Series
MFS World Governments Series
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST:--
AMT Balanced Portfolio
AMT Limited Maturity Bond Portfolio
AMT Partners Portfolio
41
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION (CONTINUED)
OCC ACCUMULATION TRUST:--
OCC Global Equity Portfolio
OCC Managed Portfolio
OCC Small Cap Portfolio
Effective January 1, 1998, CG Life sold its individual variable annuity
business to Lincoln National Corporation (Lincoln). Although CG Life will remain
responsible for all policy terms and conditions, Lincoln will be servicing the
individual annuity contracts, including the payment of benefits, oversight of
investment management and contract administration.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with generally
accepted accounting principles. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies consistently
followed in the preparation of the Account's financial statements.
A. INVESTMENT VALUATION:--Investments held by the sub-accounts are valued at
their respective closing net asset value per share as determined by the
mutual funds as of December 31, 1997. The change in the difference between
cost and value is reflected as unrealized gain (loss) in the Statements of
Operations.
B. INVESTMENT TRANSACTIONS:--Investment transactions are recorded on the trade
date (date the order to buy or sell is executed). Realized gains and losses
on sales of investments are determined by the last-in, first-out cost basis
of the investment sold. Dividend and capital gain distributions are recorded
on the ex-dividend date. Investment transactions are settled through CG
Life.
C. FEDERAL INCOME TAXES:--The operations of the Account form a part of, and are
taxed with, the total operations of CG Life, which is taxed as a life
insurance company. Under existing Federal income tax law, investment income
(dividends) and capital gains attributable to the Account are not taxed.
D. ANNUITY RESERVES:--The amount of annuity reserves is determined by the
actuarial assumptions which meet statutory requirements. Gains or losses
resulting from the actual mortality experience, the responsibility of which
is assumed by CG Life, are offset by transfers to or from CG Life.
42
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
3. INVESTMENTS
Total shares held and cost of investments as of December 31, 1997 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SHARES COST OF
SUB-ACCOUNT HELD INVESTMENTS
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Growth Portfolio..................................... 720,492 $24,629,937
Alger American Leveraged AllCap Portfolio........................... 356,222 6,847,244
Alger American MidCap Growth Portfolio.............................. 636,836 13,557,022
Alger American Small Capitalization Portfolio....................... 460,166 18,845,387
CIGNA Variable Products Money Market Fund........................... 6,869,616 6,869,616
Fidelity Equity-Income Portfolio.................................... 2,171,783 43,838,658
Fidelity High Income Portfolio...................................... 1,290,469 16,068,252
Fidelity Money Market Portfolio..................................... 11,575,573 11,575,573
Fidelity Overseas Portfolio......................................... 364,474 6,894,872
Fidelity Asset Manager Portfolio.................................... 370,087 5,827,525
Fidelity Contrafund Portfolio....................................... 85,809 1,670,018
Fidelity Investment Grade Bond Portfolio............................ 882,744 10,559,814
Fidelity Growth Opportunities Portfolio............................. 198,832 3,666,247
MFS Emerging Growth Series.......................................... 131,294 2,094,311
MFS Growth with Income Series....................................... 168,154 2,721,031
MFS Research Series................................................. 233,038 3,659,121
MFS Total Return Series............................................. 1,167,843 16,201,968
MFS Utilities Series................................................ 347,520 4,830,719
MFS World Governments Series........................................ 138,432 1,421,536
AMT Balanced Portfolio.............................................. 303,984 4,930,498
AMT Limited Maturity Bond Portfolio................................. 470,029 6,506,300
AMT Partners Portfolio.............................................. 1,670,951 28,361,035
OCC Global Equity Portfolio......................................... 1,317,384 17,399,927
OCC Managed Portfolio............................................... 1,603,568 55,978,469
OCC Small Cap Portfolio............................................. 343,808 7,961,523
- -------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
3. INVESTMENTS (CONTINUED)
Total purchases and sales of shares for each mutual fund, for the periods
ended December 31, 1997, amounted to:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SUB-ACCOUNT PURCHASES SALES
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Growth Portfolio.................................... $8,595,764 $1,014,633
Alger American Leveraged AllCap Portfolio.......................... 2,723,167 1,225,998
Alger American MidCap Growth Portfolio............................. 5,434,002 1,168,497
Alger American Small Capitalization Portfolio...................... 8,828,840 4,270,290
CIGNA Variable Products Money Market Fund*......................... 16,585,368 9,715,752
Fidelity Equity-Income Portfolio................................... 20,031,213 2,036,485
Fidelity High Income Portfolio..................................... 14,065,473 2,670,890
Fidelity Money Market Portfolio.................................... 27,152,685 26,179,942
Fidelity Overseas Portfolio........................................ 5,656,133 588,707
Fidelity Asset Manager Portfolio................................... 2,826,840 863,124
Fidelity Contrafund Portfolio**.................................... 1,717,783 47,748
Fidelity Investment Grade Bond Portfolio........................... 6,343,028 1,467,077
Fidelity Growth Opportunities Portfolio***......................... 3,767,973 101,783
MFS Emerging Growth Series**....................................... 2,134,597 41,930
MFS Growth with Income Series****.................................. 2,729,062 7,933
MFS Research Series***............................................. 3,805,827 147,983
MFS Total Return Series............................................ 8,657,635 659,240
MFS Utilities Series............................................... 2,560,406 415,879
MFS World Governments Series....................................... 569,430 613,845
AMT Balanced Portfolio............................................. 2,296,440 767,536
AMT Limited Maturity Bond Portfolio................................ 4,359,908 1,480,553
AMT Partners Portfolio............................................. 22,831,233 2,805,176
OCC Global Equity Portfolio........................................ 8,917,830 962,662
OCC Managed Portfolio.............................................. 27,881,600 1,009,672
OCC Small Cap Portfolio............................................ 5,864,106 400,520
- -------------------------------------------------------------------------------------------
</TABLE>
* From 5/20/97, date deposits first received, to December 31, 1997.
** From 6/2/97, date deposits first received, to December 31, 1997.
*** From 6/9/97, date deposits first received, to December 31, 1997.
**** From 6/5/97, date deposits first received, to December 31, 1997.
4. CHARGES AND DEDUCTIONS
CG Life assumes the risk that annuitants may live longer than expected and
also assumes a mortality risk in connection with the death benefits of the
contract. CG Life also assumes a risk that its actual administrative expenses
may be higher than amounts deducted for such expenses. For all contracts sold
after April 30, 1997, CG Life charges each variable sub-account the daily
equivalent of 1.25%, on an annual basis, of the current value of each
sub-account's assets for the assumption of these risks. All contracts sold
before May 1, 1997, with the exception of contracts sold in the state of New
York from May 1, 1996 to April 30, 1997 (1.25% annual fee), have an annual fee
of 1.20% for mortality and expense risks.
CG Life also deducts a daily administrative fee from the assets of each
variable sub-account as partial reimbursement for administrative expenses
relating to the issuance and maintenance of the contract and the participant's
annuity
44
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
4. CHARGES AND DEDUCTIONS (CONTINUED)
account. For all contracts sold after April 30, 1997, this charge is at an
effective annual rate of .15%. All contracts sold before May 1, 1997, with the
exception of contracts sold in the state of New York from May 1, 1996 to April
30, 1997 (.15% annual fee), have an effective annual rate of .10%.
As partial compensation for administrative services provided, CG Life
additionally receives a $35 ($30 on New York contracts) annuity account fee per
year from each contract. This charge is deducted from the fixed or variable sub-
account of the participant or on a pro-rata basis from two or more fixed or
variable sub-accounts in relation to their values under the contract. Fixed
sub-accounts are part of the general account of CG Life and are not included in
these financial statements. 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. Annuity account fees, for the
variable sub-accounts, amounting to $71,683, were deducted for the periods ended
December 31, 1997.
For contracts sold prior to May 1, 1997 (excluding contracts sold in the
state of New York where the optional death benefit was not available), the
participant could have, for an additional charge, selected an optional death
benefit (optional death benefit fee). The optional death benefit fee will be
deducted from the participant's fixed or variable sub-account or on a pro-rata
basis from two or more fixed or variable sub-accounts in relation to their
values under the contract on the date of each contract anniversary. The optional
death benefit fees, for the variable sub-accounts, amounted to $4,356 for the
periods ended December 31, 1997.
Under certain circumstances, CG Life reserves the right to charge a transfer
fee of up to $10 for transfers between sub-accounts. No transfer fees, for the
variable sub-accounts, were deducted for the periods ended December 31, 1997.
45
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
4. CHARGES AND DEDUCTIONS (CONTINUED)
The fees charged by CG Life for mortality and expense risks and
administrative fees, from variable sub-accounts, for the periods ended December
31, 1997, amounted to:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
MORTALITY ASSET BASED
AND EXPENSE ADMINISTRATIVE
SUB-ACCOUNT RISK FEES FEES
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Growth Portfolio...................................... $ 304,868 $ 26,402
Alger American Leveraged AllCap Portfolio............................ 86,987 7,501
Alger American MidCap Growth Portfolio............................... 157,966 13,656
Alger American Small Capitalization Portfolio........................ 200,537 17,465
CIGNA Variable Products Money Market Fund*........................... 23,648 2,838
Fidelity Equity-Income Portfolio..................................... 489,324 42,440
Fidelity High Income Portfolio....................................... 130,361 11,610
Fidelity Money Market Portfolio...................................... 173,089 14,557
Fidelity Overseas Portfolio.......................................... 55,821 4,954
Fidelity Asset Manager Portfolio..................................... 70,643 6,115
Fidelity Contrafund Portfolio**...................................... 5,162 620
Fidelity Investment Grade Bond Portfolio............................. 96,220 8,297
Fidelity Growth Opportunities Portfolio***........................... 11,037 1,325
MFS Emerging Growth Series**......................................... 6,138 737
MFS Growth with Income Series****.................................... 7,652 918
MFS Research Series***............................................... 10,013 1,202
MFS Total Return Series.............................................. 174,760 15,354
MFS Utilities Series................................................. 53,426 4,542
MFS World Governments Series......................................... 16,724 1,418
AMT Balanced Portfolio............................................... 52,966 4,558
AMT Limited Maturity Bond Portfolio.................................. 60,458 5,241
AMT Partners Portfolio............................................... 263,923 23,647
OCC Global Equity Portfolio.......................................... 184,183 15,960
OCC Managed Portfolio................................................ 629,309 55,157
OCC Small Cap Portfolio.............................................. 68,834 6,066
- -----------------------------------------------------------------------------------------------
</TABLE>
* From 5/20/97, date deposits first received, to December 31, 1997.
** From 6/2/97, date deposits first received, to December 31, 1997.
*** From 6/9/97, date deposits first received, to December 31, 1997.
**** From 6/5/97, date deposits first received, to December 31, 1997.
No deduction for sales charges is made from a premium payment. However, if a
cash withdrawal is made, a withdrawal charge (contingent deferred sales charge)
may be assessed by CG Life. The withdrawal charge, if assessed, varies from 0-7%
depending upon the duration of each contract deposit. The withdrawal charge is
deducted from withdrawal proceeds for full withdrawals and reduces the remaining
account value for partial withdrawals. These charges are paid to CG Life as
reimbursement for services provided. These services include commissions paid to
sales personnel, the costs associated with preparation of sales literature and
other promotional costs and acquisition expenses. Withdrawal charges paid to CG
Life for the variable sub-accounts, for the periods ended December 31, 1997,
amounted to $145,226.
46
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
5. DISTRIBUTION OF NET INCOME
The Account does not expect to declare dividends to participants from
accumulated net income. The accumulated net income is distributed to
participants as part of surrenders, death benefits, transfers to other fixed or
variable sub-accounts or annuity payments in excess of net purchase payments.
6. DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code of 1986
(the Code), a variable annuity contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
an annuity contract for Federal tax purposes for any period for which the
investments of the segregated asset account, on which the contract is based, are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of the Treasury. CG Life believes, based on assurances from the
mutual fund managers, that the mutual funds satisfy the requirements of the
regulations.
47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Connecticut General
Life Insurance Company and Participants of the
CG Variable Annuity Separate Account II
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the sub-accounts, Alger
American Fund--Alger American Growth Portfolio, Alger American Leveraged AllCap
Portfolio, Alger American MidCap Growth Portfolio, Alger American Small
Capitalization Portfolio; CIGNA Variable Products Group--CIGNA Variable Products
Money Market Fund; Fidelity Variable Insurance Products Fund--Equity-Income
Portfolio, High Income Portfolio, Money Market Portfolio, Overseas Portfolio;
Fidelity Variable Insurance Products Fund II--Asset Manager Portfolio,
Contrafund Portfolio, Investment Grade Bond Portfolio; Fidelity Variable
Insurance Products Fund III--Growth Opportunities Portfolio; MFS Variable
Insurance Trust--MFS Emerging Growth Series, MFS Growth with Income Series, MFS
Research Series, MFS Total Return Series, MFS Utilities Series, MFS World
Governments Series; Neuberger & Berman Advisers Management Trust--AMT Balanced
Portfolio, AMT Limited Maturity Bond Portfolio, AMT Partners Portfolio; OCC
Accumulation Trust--OCC Global Equity Portfolio, OCC Managed Portfolio, OCC
Small Cap Portfolio (constituting the CG Variable Annuity Separate Account II,
hereafter referred to as "the Account") at December 31, 1997, the results of
each of their operations and the changes in each of their net assets for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Account's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodians, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Hartford, Connecticut
February 20, 1998
48
<PAGE>
PART B. STATEMENT OF ADDITIONAL INFORMATION NO. 3
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FLEXIBLE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS
Issued through
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
Offered by
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
<TABLE>
<S> <C>
Home Office Location: Mailing Address:
900 Cottage Grove Road Annuity & Variable Life Services Center
Bloomfield, Connecticut Routing S-249
Hartford, Connecticut 06152-2249
Telephone: (800) 552-9898
Lockbox Address -- By Mail: Lockbox Address -- By Overnight:
Connecticut General Life Insurance Company Connecticut General Life Insurance Company
P.O. Box 30790 c/o Fleet Bank
Hartford, CT 06150 20 Church Street
20th Floor, MSN275
Hartford, CT 06120
Attn: Lockbox 30790
</TABLE>
This Statement of Additional Information ("Statement") expands upon subjects
discussed in the current Prospectus for the Variable Annuity Contracts (the
"Contracts") offered by Connecticut General Life Insurance Company through CG
Variable Annuity Separate Account II. You may obtain a copy of the Prospectus
dated May 1, 1998, by calling (800) 552-9898, or by writing to Annuity &
Variable Life Services Center, Routing S-249, Connecticut General Life Insurance
Company, Hartford, Connecticut 06152-2249. 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, 1998
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
SAMPLE CALCULATIONS AND TABLES............................................................................. 4
Withdrawal Charge and Market Value Adjustment Tables..................................................... 4
STATE REGULATION OF THE COMPANY............................................................................ 6
ADMINISTRATION............................................................................................. 6
ACCOUNT INFORMATION........................................................................................ 6
DISTRIBUTION OF THE CONTRACTS.............................................................................. 7
CUSTODY OF ASSETS.......................................................................................... 7
HISTORICAL PERFORMANCE DATA................................................................................ 7
Money Market Sub-Account Yield........................................................................... 7
Other Sub-Account Yields................................................................................. 8
Total Returns............................................................................................ 8
Other Performance Data................................................................................... 9
LEGAL MATTERS.............................................................................................. 9
LEGAL PROCEEDINGS.......................................................................................... 10
EXPERTS.................................................................................................... 10
FINANCIAL STATEMENTS....................................................................................... 10
Connecticut General Life Insurance Company............................................................... 12
CG Variable Annuity Separate Account II.................................................................. 30
</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 an 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 any 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 Annuity & Variable
Life Services 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
was 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 as
follows:
(1) The total value of Fund shares held in the Sub-Account is calculated by
multiplying the number of Fund shares owned by the Sub-Account at the
beginning of the Valuation Period
3
<PAGE>
by the net asset value per share of the Fund at the end of the Valuation
Period, and adding any dividend or other distribution of the Fund if an
ex-dividend date occurs during the Valuation Period; minus
(2) The liabilities of the Sub-Account at the end of the Valuation Period;
such liabilities include daily charges imposed on the Sub-Account, and
may include a charge or credit with respect to any taxes paid or reserved
for by the Company that the Company determines result from the operations
of the Variable Account; and
(3) The result of (2) is divided by the number of Sub-Account units
outstanding at the beginning of the Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation Period are
equal to the daily mortality and expense risk charge plus daily administrative
expense charge multiplied by the number of calendar days in the 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.
SAMPLE CALCULATIONS AND TABLES
WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT TABLES
The following example illustrates the detailed calculations for a $50,000
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 "Surrender Charge Calculation" assumes there have been no
prior withdrawals and illustrates the operation of the Fifteen Percent Free
provision of the Contract. 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. The results would be slightly different for
New York Contracts which have a $30 annual Account Fee.
4
<PAGE>
WITHDRAWAL CHARGE TABLES
SAMPLE CALCULATIONS FOR MALE 35 ISSUE
CASH SURRENDER VALUES
<TABLE>
<S> <C>
Single premium..................... $50,000
Premium taxes...................... None
Withdrawals........................ None
Guaranteed period.................. 5 years
Guaranteed interest rate........... 8%
Annuity date....................... Age 70
Index rate A....................... 7.50%
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......... 0.50%
</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.................................... $ 53,965 0.963640 $ 52,003 $ 51,465 $ 52,003 $ 2,975 $ 49,028
2.................................... $ 58,247 0.993056 $ 57,843 $ 52,974 $ 57,843 $ 2,975 $ 54,868
3.................................... $ 62,872 1.000000 $ 62,872 $ 54,528 $ 62,872 $ 2,975 $ 59,897
4.................................... $ 67,867 1.004673 $ 68,184 $ 56,129 $ 68,184 $ 2,550 $ 65,634
5.................................... $ 73,261 1.000000 $ 73,261 $ 57,778 $ 73,261 $ 2,550 $ 70,711
</TABLE>
ANNUITY VALUE CALCULATION
<TABLE>
<CAPTION>
CONTRACT YEAR ANNUITY VALUE
- ------------------------------ ------------------------------------------
<S> <C>
1............................. $50,000 X 1.08 - $35 = $53,965
2............................. $53,965 X 1.08 - $35 = $58,247
3............................. $58,247 X 1.08 - $35 = $62,872
4............................. $62,872 X 1.08 - $35 = $67,867
5............................. $67,867 X 1.08 - $35 = $73,261
</TABLE>
SURRENDER CHARGE CALCULATION
<TABLE>
<CAPTION>
(1) (3)
SURRENDER (2) SURRENDER
CONTRACT YEAR CHARGE FACTOR SURRENDER CHARGE FACTOR CHARGE
- -------------------------------------------------------------- --------------- ----------------------- -----------
<S> <C> <C> <C>
1............................................................. 0.07 0.0595 $ 2,975
2............................................................. 0.07 0.0595 $ 2,975
3............................................................. 0.07 0.0595 $ 2,975
4............................................................. 0.06 0.0510 $ 2,550
5............................................................. 0.06 0.0510 $ 2,550
</TABLE>
5
<PAGE>
MARKET VALUE ADJUSTMENT TABLES
INTEREST RATE FACTOR CALCULATION
<TABLE>
<CAPTION>
(5)
(1) (2) (3) (1+A)
INDEX INDEX ADJUSTED (4) -----
CONTRACT YEAR RATE A RATE B INDEX RATE B N (1+B)
- ------------------------------------------------------------- ------ ------ ------------- --- --------
<S> <C> <C> <C> <C> <C>
1............................................................ 7.50% 8.00% 8.50% 4 0.963640
2............................................................ 7.50% 7.75% 7.75% 3 0.993056
3............................................................ 7.50% 7.00% 7.50% 2 1.000000
4............................................................ 7.50% 6.50% 7.00% 1 1.004673
5............................................................ 7.50% NA NA 0 NA
</TABLE>
MINIMUM VALUE CALCULATION
<TABLE>
<CAPTION>
CONTRACT YEAR MINIMUM VALUE
- ------------------------------ ------------------------------------------
<S> <C>
1............................. $50,000 X 1.03 - $35 = $51,465
2............................. $51,465 X 1.03 - $35 = $52,974
3............................. $52,974 X 1.03 - $35 = $54,528
4............................. $54,528 X 1.03 - $35 = $56,129
5............................. $56,129 X 1.03 - $35 = $57,778
</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 Contract are at least equal to those required by
such state.
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.
ACCOUNT INFORMATION
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 Account
Sub-Account Accumulation Account and the applicable Accumulation Unit Value as
of the date of the report. 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
6
<PAGE>
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 Annuity & Variable Life Services Center, the Company
will provide an Owner with information regarding fixed and variable accumulation
values.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may lawfully be sold. Such agents will be registered
representatives or broker-dealers registered under the Securities Exchange Act
of 1934 who are members of the National Association of Securities Dealers, Inc.
(NASD). The Contracts will be distributed by the Company's principal
underwriter, CIGNA Financial Advisors, Inc. ("CFA"), located at 900 Cottage
Grove Road, Bloomfield, CT 06002. CFA is a Connecticut corporation organized in
1967, and is the principal underwriter for certain of the Company's other
registered separate accounts. As of January 1, 1998, CFA, formerly a
wholly-owned subsidiary of CIGNA Corporation, became a wholly-owned subsidiary
of Lincoln National Corporation, an Indiana corporation with headquarters in
Fort Wayne, Indiana, whose principal businesses are insurance and financial
services. Commissions and other distribution compensation will be paid by the
Company and will not be more than 6.50% of Premium Payments. The Company
received $145,226 in deferred sales charges attributable to the Variable Account
portion of the Contracts issued pursuant to CG Variable Annuity Separate Account
II for the period ended December 31, 1997.
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 in the amount of $100,000,000.
HISTORICAL PERFORMANCE DATA
Historical performance data as of December 31, 1997 for each of the
Sub-Accounts of the Separate Account follows in the Financial Statements.
MONEY MARKET SUB-ACCOUNT YIELD
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"
7
<PAGE>
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)] - 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) - 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.
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
8
<PAGE>
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 Account Fee. The 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) = 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.
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, Esquire of West Hartford,
Connecticut. All matters of Connecticut law pertaining to the Contracts,
including the validity of the Contracts and the Company's right to issue the
9
<PAGE>
Contracts under Connecticut Insurance Law and any other applicable state
insurance or securities laws, have been passed upon by Mark A. Parsons, Chief
Counsel, Retirement and Investment Services Division, CIGNA Corporation.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or
to which the assets of the Variable Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Variable Account.
EXPERTS
The consolidated financial statements of Connecticut General Life Insurance
Company as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997 included in this Statement of Additional
Information as well as the Statement of Assets and Liabilities of the Variable
Account at December 31, 1997 and the Statement of Operations and the Statement
of Changes in Net Assets for the period ended December 31, 1997 have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. Price Waterhouse LLP's consent to this reference to the firm as an
"expert" is filed as an exhibit to the registration statement of which this
Statement of Additional Information is a part.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company which are included in
this Statement should be considered only as bearing on the ability of the
Company to meet the obligations under the Contracts. They should not be
considered as bearing on the investment performance of the assets held in the
Variable Account, or on the Guaranteed Interest Rate credited by the Company
during a Guaranteed Period. The financial statements of the Variable Account as
of and for the period ending December 31, 1997 are also included.
10
<PAGE>
One Financial Plaza Telephone 860 240 2000
Hartford, CT 06103
PRICE WATERHOUSE LLP [LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
February 10, 1998
To the Board of Directors and Shareholder of
Connecticut General Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Connecticut
General Life Insurance Company and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
[SIG]
11
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS)
- -------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and fees................................................... $ 5,376 $ 5,314 $ 4,998
Net investment income............................................... 3,139 3,199 3,138
Realized investment gains (losses).................................. 45 37 (7)
Other revenues...................................................... 10 9 9
--------- --------- ---------
Total revenues.................................................. 8,570 8,559 8,138
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses............................ 5,917 6,069 5,892
Policy acquisition expenses......................................... 122 143 127
Other operating expenses............................................ 1,618 1,477 1,358
--------- --------- ---------
Total benefits, losses and expenses................................. 7,657 7,689 7,377
--------- --------- ---------
INCOME BEFORE INCOME TAXES.......................................... 913 870 761
--------- --------- ---------
Income taxes (benefits):
Current........................................................... 347 394 301
Deferred.......................................................... (49) (81) (44)
--------- --------- ---------
Total taxes..................................................... 298 313 257
--------- --------- ---------
NET INCOME.......................................................... 615 557 504
Dividends declared.................................................. (400) (600) (252)
Retained earnings, beginning of year................................ 3,177 3,220 2,968
- -------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF YEAR...................................... $ 3,392 $ 3,177 $ 3,220
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
12
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS)
- -------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $20,962; $19,882)...... $ 22,323 $ 20,816
Mortgage loans.......................................................... 10,090 10,152
Equity securities, at fair value (cost, $75; $59)....................... 54 41
Policy loans............................................................ 7,146 7,133
Real estate............................................................. 749 1,025
Other long-term investments............................................. 166 193
Short-term investments.................................................. 173 417
--------- ---------
Total investments................................................... 40,701 39,777
Cash and cash equivalents................................................. 923 --
Accrued investment income................................................. 602 619
Premiums and accounts receivable.......................................... 811 817
Reinsurance recoverables.................................................. 1,271 1,303
Deferred policy acquisition costs......................................... 834 780
Property and equipment, net............................................... 291 276
Current income taxes...................................................... 67 12
Deferred income taxes, net................................................ 653 639
Goodwill.................................................................. 474 488
Other assets.............................................................. 209 249
Separate account assets................................................... 29,217 22,555
- -------------------------------------------------------------------------------------------
Total assets........................................................ $ 76,053 $ 67,515
- -------------------------------------------------------------------------------------------
--------------------
LIABILITIES
Contractholder deposit funds.............................................. $ 30,449 $ 29,621
Future policy benefits.................................................... 8,224 8,187
Unpaid claims and claim expenses.......................................... 1,225 1,170
Unearned premiums......................................................... 260 200
--------- ---------
Total insurance and contractholder liabilities...................... 40,158 39,178
Accounts payable, accrued expenses and other liabilities.................. 2,428 1,808
Separate account liabilities.............................................. 29,021 22,365
- -------------------------------------------------------------------------------------------
Total liabilities................................................... 71,607 63,351
- -------------------------------------------------------------------------------------------
CONTINGENCIES -- NOTE 12
SHAREHOLDER'S EQUITY
Common stock (6 shares outstanding)....................................... 30 30
Additional paid-in capital................................................ 766 766
Net unrealized appreciation on investments................................ 256 188
Net translation of foreign currencies..................................... 2 3
Retained earnings......................................................... 3,392 3,177
- -------------------------------------------------------------------------------------------
Total shareholder's equity.......................................... 4,446 4,164
- -------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity.......................... $ 76,053 $ 67,515
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
13
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS)
- -------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................ $ 615 $ 557 $ 504
Adjustments to reconcile net income to net cash provided by
operating activities:
Insurance liabilities........................................... 78 57 (90)
Reinsurance recoverables........................................ 68 (11) 1,201
Premiums and accounts receivable................................ 106 77 32
Deferred income taxes, net...................................... (49) (82) (44)
Other assets.................................................... (54) 43 (14)
Deferred policy acquisition costs............................... (97) (92) 12
Accounts payable, accrued expenses, other liabilities and
current income taxes........................................... 41 (113) 212
Depreciation and goodwill amortization.......................... 88 94 89
Other, net...................................................... (99) (151) (79)
--------- --------- ---------
Net cash provided by operating activities..................... 697 379 1,823
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities................................................ 1,583 1,589 1,070
Mortgage loans.................................................. 807 640 383
Equity securities............................................... 14 13 119
Real estate..................................................... 401 345 299
Other (primarily short-term investments)........................ 6,447 3,613 2,268
Investment maturities and repayments:
Fixed maturities................................................ 2,394 2,634 2,234
Mortgage loans.................................................. 601 630 420
Investments purchased:
Fixed maturities................................................ (4,339) (3,834) (4,439)
Mortgage loans.................................................. (1,426) (1,300) (1,908)
Equity securities............................................... (9) (3) (20)
Policy loans.................................................... (13) (207) (2,129)
Other (primarily short-term investments)........................ (6,296) (3,930) (2,334)
Other, net...................................................... (102) (94) (119)
--------- --------- ---------
Net cash provided by (used in) investing activities........... 62 96 (4,156)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder deposit funds:
Deposits and interest credited.................................. 7,634 7,260 7,489
Withdrawals and benefit payments................................ (7,023) (7,135) (4,985)
Dividends paid to parent.......................................... (400) (600) (252)
Other, net........................................................ (47) -- 1
--------- --------- ---------
Net cash provided by (used in) financing activities........... 164 (475) 2,253
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents.............. 923 -- (80)
Cash and cash equivalents, beginning of year...................... -- -- 80
- -------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year............................ $ 923 $ -- $ --
- -------------------------------------------------------------------------------------------
-------------------------------
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds............................... $ 402 $ 385 $ 211
Interest paid................................................... $ 5 $ 7 $ 7
- -------------------------------------------------------------------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
14
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Connecticut General Life Insurance Company and its subsidiaries (the Company)
provide insurance and related financial services throughout the United States
and in many locations worldwide. Principal products and services include group
life and health insurance, individual life insurance and annuity products, and
retirement and investment products and services. The Company is a wholly-owned
subsidiary of Connecticut General Corporation, which is an indirect wholly-owned
subsidiary of CIGNA Corporation (CIGNA).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of the Company and all significant subsidiaries. These consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles, and reflect management's estimates and assumptions, such
as those regarding medical costs and interest rates, that affect the recorded
amounts. Significant estimates used in determining insurance and contractholder
liabilities, related reinsurance recoverables, and valuation allowances for
investment assets are discussed throughout the Notes to Financial Statements.
Certain reclassifications have been made to prior years' amounts to conform with
the 1997 presentation.
B) RECENT ACCOUNTING PRONOUNCEMENTS: In 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which could change the way segments are
structured and require additional segment disclosure. Although the Company has
not determined the timing of implementation of this pronouncement, it will be
adopted no later than the required implementation date of December 31, 1998.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" in 1997. SOP 97-3 provides guidance on the
recognition and measurement of liabilities for guaranty fund and other
insurance-related assessments. Implementation is required by the first quarter
of 1999, with the cumulative effect of adopting the SOP reflected in net income
in the year of adoption. The Company has not determined the effect or timing of
implementation of this pronouncement.
In 1996, the Company implemented Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires write-down to fair
value when long-lived assets to be held and used are impaired. Long-lived assets
to be disposed of, including real estate held for sale, must be carried at the
lower of cost or fair value less costs to sell. Depreciation of assets to be
disposed of is prohibited. The effect of implementing SFAS No. 121 was not
material to the Company.
C) FINANCIAL INSTRUMENTS: In the normal course of business, the Company
enters into transactions involving various types of financial instruments,
including investments such as fixed maturities and equity securities and off-
balance sheet financial instruments such as investment and loan commitments and
financial guarantees. These instruments are subject to risk of loss due to
interest rate and market fluctuations and most have credit risk. The Company
evaluates and monitors each financial instrument individually and, where
appropriate, uses certain derivative instruments or obtains collateral or other
forms of security to minimize risk of loss.
Financial instruments that are subject to fair value disclosure requirements
(insurance contracts, real estate, goodwill and taxes are excluded) are carried
in the financial statements at amounts that approximate fair value, except for
Mortgage Loans and Contractholder Deposit Funds (non-insurance products). For
these financial instruments, the fair value was not materially different from
the carrying amount as of December 31, 1997 and 1996. Fair values of off-balance
sheet financial instruments as of December 31, 1997 and 1996 were not material.
Fair values for financial instruments are estimates that, in many cases, may
differ significantly from the amounts that could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial
15
<PAGE>
instruments with comparable terms and credit quality. The fair value of
liabilities for contractholder deposit funds was estimated using the amount
payable on demand, and for those not payable on demand, discounted cash flow
analyses.
D) INVESTMENTS: Investments in fixed maturities, which are classified as
available-for-sale, include bonds, asset-backed securities, including
collateralized mortgage obligations (CMOs), and redeemable preferred stocks.
Fixed maturities are carried at fair value, with unrealized appreciation or
depreciation included in Shareholder's Equity. Fixed maturities are considered
impaired and written down to fair value when a decline in value is considered to
be other than temporary.
Mortgage loans are carried principally at unpaid principal balances, net of
valuation reserves. Mortgage loans are considered impaired when it is probable
that the Company will not collect all amounts according to the contractual terms
of the loan agreement. If impaired, a valuation reserve is utilized to record
any change in the fair value of the underlying collateral below the carrying
value of the mortgage loan.
Fixed maturities and mortgage loans that are delinquent or restructured to
modify basic financial terms, typically to reduce the interest rate and, in
certain cases, extend the term, are placed on non-accrual status. Net investment
income on such investments is recognized only when payment is received.
Real estate investments are either held for the production of income or held
for sale. Real estate investments held for the production of income are carried
at depreciated cost less any write-downs to fair value. Depreciation is
generally calculated using the straight-line method based on the estimated
useful lives of these assets.
Real estate investments held for sale are generally those which are acquired
through the foreclosure of mortgage loans. The Company's policy is to
rehabilitate, re-lease and sell foreclosed properties, which generally takes two
to four years. At the time of foreclosure, properties are valued at fair value
less estimated costs to sell and reclassified from mortgage loans to real estate
held for sale. Subsequent to foreclosure, these investments are carried at the
lower of cost or current fair value less estimated costs to sell and are no
longer depreciated. Adjustments to the carrying value as a result of changes in
fair value subsequent to foreclosure are recorded as valuation reserves. The
Company considers several methods in determining fair value for real estate,
with emphasis placed on the use of discounted cash flow analyses and, in some
cases, the use of third-party appraisals.
Equity securities, which include common and non-redeemable preferred stocks,
are carried at fair value, with unrealized appreciation or depreciation included
in Shareholder's Equity. Short-term investments are carried at fair value, which
approximates cost. Equity securities and short-term investments are classified
as available for sale.
Policy loans are generally carried at unpaid principal balances.
Realized investment gains and losses result from sales, investment asset
write-downs and changes in valuation reserves. Realized investment gains and
losses do not include amounts attributable to experience-rated pension
policyholders' contracts and participating life policies (policyholder share).
Realized investment gains and losses are based upon specific identification of
the investment assets.
Unrealized investment gains and losses for investments carried at fair value
are included in Shareholder's Equity net of policyholder-related amounts and
deferred income taxes.
See Note 4(F) for a discussion of the Company's accounting policies for
derivative financial instruments.
E) CASH AND CASH EQUIVALENTS: Short-term investments with a maturity of three
months or less at the time of purchase are reported as cash equivalents.
F) REINSURANCE RECOVERABLES: Reinsurance recoverables are estimates of
amounts to be received from reinsurers, including amounts under reinsurance
agreements with affiliated companies. Allowances are established for amounts
estimated to be uncollectible.
G) DEFERRED POLICY ACQUISITION COSTS: Acquisition costs consist of
commissions, premium taxes and other costs, which vary with, and are primarily
related to, the production of revenues. Acquisition costs for universal life
products and contractholder deposit funds are deferred and amortized in
proportion to the present value of total
16
<PAGE>
estimated gross profits over the expected lives of the contracts. Acquisition
costs for annuity and other individual life insurance products are deferred and
amortized, generally in proportion to the ratio of annual revenue to the
estimated total revenues over the contract periods.
Deferred policy acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income. If such costs are
estimated to be unrecoverable, they are expensed unless such costs are estimated
to be unrecoverable as a result of treating unrealized investment gains and
losses as though they had been realized. In these cases a deferred acquisition
cost valuation allowance may be established or adjusted, with a comparable
offset in net unrealized appreciation (depreciation).
H) PROPERTY AND EQUIPMENT: Property and equipment are carried at cost less
accumulated depreciation. When applicable, cost includes interest and real
estate taxes incurred during construction and other construction-related costs.
Depreciation is calculated principally on the straight-line method based on the
estimated useful lives of the assets. Accumulated depreciation was $448 million
and $427 million at December 31, 1997 and 1996, respectively.
I) OTHER ASSETS: Other Assets consists of various insurance-related assets,
principally ceded unearned premiums, reinsurance deposits and other amounts due
from affiliated companies.
J) GOODWILL: Goodwill represents the excess of the cost of businesses
acquired over the fair value of their net assets. Goodwill is amortized on
systematic bases over periods, not exceeding 40 years, that correspond with the
benefits estimated to be derived from the acquisitions. The Company evaluates
the carrying amount of goodwill by analyzing historical and estimated future
income and undiscounted estimated cash flows of the related businesses. Goodwill
is written down when impaired. Amortization periods are revised if it is
estimated that the remaining period of benefit of the goodwill has changed.
Accumulated amortization was $113 million and $99 million at December 31, 1997
and 1996, respectively.
K) SEPARATE ACCOUNTS: Separate account assets and liabilities are principally
carried at market value and represent policyholder funds maintained in accounts
having specific investment objectives. The investment income, gains and losses
of these accounts generally accrue to the policyholders and, therefore, are not
included in the Company's revenues and expenses.
L) CONTRACTHOLDER DEPOSIT FUNDS: Liabilities for Contractholder Deposit Funds
consist of deposits received from customers and investment earnings on their
fund balances, less administrative charges and, for universal life fund
balances, mortality charges.
M) FUTURE POLICY BENEFITS: Future policy benefits are liabilities for life,
health and annuity products. Such liabilities are established in amounts
adequate to meet the estimated future obligations of policies in force. These
liabilities are computed using premium assumptions for group annuity policies
and the net level premium method for individual life policies, and are based
upon estimates as to future investment yield, mortality and withdrawals that
include provisions for adverse deviation. Future policy benefits for individual
life insurance and annuity policies are computed using interest rates ranging
from 2% to 11%, generally graded down from 1 to 20 years. Mortality, morbidity,
and withdrawal assumptions are based on either the Company's own experience or
various actuarial tables.
N) UNPAID CLAIMS AND CLAIM EXPENSES: Liabilities for unpaid claims and claim
expenses are estimates of payments to be made on reported and incurred but not
reported insurance claims.
O) UNEARNED PREMIUMS: Premiums for group life and accident and health
insurance are reported as earned on a pro rata basis over the contract period.
The unexpired portion of these premiums is recorded as Unearned Premiums.
P) OTHER LIABILITIES: Other Liabilities consist principally of postretirement
and postemployment benefits and various insurance-related liabilities, including
amounts related to reinsurance contracts and guaranty fund assessments that can
be reasonably estimated.
Q) TRANSLATION OF FOREIGN CURRENCIES: Foreign operations primarily utilize
the local currencies as their functional currencies, and assets and liabilities
are translated at the rates of exchange as of the balance sheet date. The
translation gain or loss on such functional currencies, net of applicable taxes,
is generally reflected in Shareholder's Equity. Revenues and expenses are
translated at the average rates of exchange prevailing during the year.
17
<PAGE>
R) PREMIUM AND FEES, REVENUES AND RELATED EXPENSES: Premiums for group life
and accident and health insurance are recognized as revenue on a pro-rata basis
over their contract periods. Benefits, losses and settlement expenses are
recognized when incurred.
Premiums for individual life insurance as well as individual and group annuity
products, excluding universal life and investment-related products, are
recognized as revenue when due. Benefits, losses and settlement expenses are
matched with premiums.
Revenues for universal life products consist of net investment income and
mortality, administration and surrender fees assessed against the fund balances
during the period. Net investment income represents investment income on assets
supporting universal life products and is recognized as earned. Fees for
mortality are recognized ratably over the policy year. Administration fees are
recognized as services are provided, and surrender charges are recognized as
earned. Benefit expenses for universal life products consist of benefit claims
in excess of fund balances, which are recognized when claims are filed, and
amounts credited in accordance with contract provisions.
Revenues for investment-related products consist of net investment income and
contract fees assessed against the fund balances during the period. Net
investment income represents investment income on assets supporting
investment-related products and is recognized as earned. Contract fees are based
upon related administrative expenses and are assessed ratably over the contract
year. Benefit expenses for investment-related products primarily consist of
amounts credited in accordance with contract provisions.
S) PARTICIPATING BUSINESS: Certain life insurance policies contain dividend
payment provisions that enable the policyholder to participate in a portion of
the earnings of the Company's business. The participating insurance in force
accounted for approximately 7% of total life insurance in force at December 31,
1997, 1996 and 1995.
T) INCOME TAXES: The Company and its domestic subsidiaries are included in
the consolidated United States federal income tax return filed by CIGNA. In
accordance with a tax sharing agreement with CIGNA, the provision for federal
income tax is computed as if the Company were filing a separate federal income
tax return, except that benefits arising from tax credits and net operating and
capital losses are allocated to those subsidiaries producing such attributes to
the extent they are utilized in CIGNA's consolidated federal income tax
provision.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes. See
Note 7 for additional information.
NOTE 3 -- DISPOSITION
As of January 1, 1998, the Company sold its individual life insurance and
annuity businesses for cash proceeds of $1.4 billion. The sale resulted in an
after-tax gain of approximately $800 million. Since the principal agreement to
sell these businesses is in the form of an indemnity reinsurance arrangement,
approximately $575 million of the gain will be deferred and amortized over
future periods at the rate that earnings from the businesses sold would have
been expected to emerge. Revenues for these businesses were $972 million, $926
million and $865 million for the years ended December 31, 1997, 1996 and 1995,
respectively, and net income was $102 million, $67 million and $74 million for
the same periods. The Company paid a dividend of $1.4 billion to its parent in
January 1998, having received prior approval of both the disposition and the
dividend from the Connecticut Insurance Department (the Department).
NOTE 4 -- INVESTMENTS
A) FIXED MATURITIES: Fixed maturities are net of cumulative write-downs of
$36 million and $95 million, including policyholder share, as of December 31,
1997 and 1996, respectively.
18
<PAGE>
The amortized cost and fair value by contractual maturity periods for fixed
maturities, including policyholder share, as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less.................................................. $ 1,114 $ 1,139
Due after one year through five years.................................... 5,768 5,949
Due after five years through ten years................................... 4,734 4,998
Due after ten years...................................................... 3,093 3,680
Asset-backed securities.................................................. 6,253 6,557
- -------------------------------------------------------------------------------------------
Total.................................................................... $ 20,962 $ 22,323
- -------------------------------------------------------------------------------------------
----------------------
</TABLE>
Actual maturities could differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Also, the Company may extend maturities in some cases.
Gross unrealized appreciation (depreciation) for fixed maturities, including
policyholder share, by type of issuer was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
December 31, 1997
- -------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal government bonds......................... $ 1,361 $ 294 $ -- $ 1,655
State and local government bonds................. 178 22 (2) 198
Foreign government bonds......................... 143 7 (1) 149
Corporate securities............................. 13,027 860 (123) 13,764
Asset-backed securities.......................... 6,253 317 (13) 6,557
- -------------------------------------------------------------------------------------------
Total............................................ $ 20,962 $ 1,500 $ (139 ) $ 22,323
- -------------------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
December 31, 1996
- -------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal government bonds......................... $ 475 $ 160 $ -- $ 635
State and local government bonds................. 174 13 (4) 183
Foreign government bonds......................... 121 6 -- 127
Corporate securities............................. 13,310 742 (148) 13,904
Asset-backed securities.......................... 5,802 226 (61) 5,967
- -------------------------------------------------------------------------------------------
Total............................................ $ 19,882 $ 1,147 $ (213 ) $ 20,816
- -------------------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
Asset-backed securities include investments in CMOs as of December 31, 1997 of
$2.3 billion carried at fair value (amortized cost, $2.3 billion), compared with
$2.2 billion carried at fair value (amortized cost, $2.1 billion) as of December
31, 1996. Certain of these securities are backed by Aaa/AAA-rated government
agencies. All other CMO securities have high quality ratings through use of
credit enhancements provided by subordinated securities or mortgage insurance
from Aaa/AAA-rated insurance companies. CMO holdings are concentrated in
securities with limited prepayment, extension and default risk, such as planned
amortization class bonds. The Company's investments in interest-only and
principal-only CMOs, which are subject to interest rate risk due to accelerated
prepayments, represented approximately 0.1% of total CMO investments at December
31, 1997 and 1996.
At December 31, 1997, contractual fixed maturity investment commitments were
$188 million. The majority of investment commitments are for the purchase of
investment grade fixed maturities, bearing interest at a fixed market rate, and
require no collateral. These commitments are diversified by issuer and maturity
date, and it is estimated that approximately 83% will be disbursed in 1998.
19
<PAGE>
B) MORTGAGE LOANS AND REAL ESTATE: The Company's mortgage loans and real
estate investments are diversified by property type and location and, for
mortgage loans, by borrower. Mortgage loans are collateralized by the related
properties and generally approximate 75% of the property's value at the time the
original loan is made.
At December 31, the carrying values of mortgage loans and real estate
investments, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage Loans............................................................ $ 10,090 $ 10,152
--------- ---------
Real estate:
Held for sale........................................................... 339 586
Held for production of income........................................... 410 439
--------- ---------
Total real estate......................................................... 749 1,025
- -------------------------------------------------------------------------------------------
Total..................................................................... $ 10,839 $ 11,177
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
At December 31, mortgage loans and real estate investments comprised the
following property types and geographic regions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Property type:
Retail facilities....................................................... $ 4,227 $ 4,453
Office buildings........................................................ 3,984 4,241
Apartment buildings..................................................... 1,311 1,272
Hotels.................................................................. 498 665
Other (primarily industrial)............................................ 819 546
- -------------------------------------------------------------------------------------------
Total..................................................................... $ 10,839 $ 11,177
- -------------------------------------------------------------------------------------------
--------------------
Geographic region:
Central................................................................. $ 3,484 $ 3,452
Pacific................................................................. 2,962 3,132
Middle Atlantic......................................................... 1,821 1,920
South Atlantic.......................................................... 1,458 1,526
New England............................................................. 1,114 1,147
- -------------------------------------------------------------------------------------------
Total..................................................................... $ 10,839 $ 11,177
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
MORTGAGE LOANS
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $0.7 billion; 1999 -- $1.1 billion; 2000 -- $1.3 billion; 2001 -- $1.1
billion; 2002 -- $1.7 billion; and $4.2 billion thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties; the maturity date may
be extended; and loans may be refinanced. During 1997 and 1996, the Company
refinanced at current market rates approximately $135 million and $477 million,
respectively, of its mortgage loans relating to borrowers that were unable to
obtain alternative financing.
At December 31, 1997, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $167 million, all
of which were at a fixed market rate of interest. These commitments expire
within six months, and are diversified by property type and geographic region.
At December 31, 1997, the Company's impaired mortgage loans were $375 million,
including $152 million before valuation reserves totaling $44 million, and $223
million which had no valuation reserves. At December 31, 1996, the Company's
impaired mortgage loans were $814 million, including $442 million before
valuation reserves totaling $94 million, and $372 million which had no valuation
reserves.
20
<PAGE>
During the year ended December 31, changes in reserves for impaired mortgage
loans, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Reserve balance -- January 1................................................... $ 94 $ 82
Transfers to foreclosed real estate............................................ (30) (29)
Charge-offs upon sales......................................................... (47) (19)
Net increase in valuation reserves............................................. 27 60
- -------------------------------------------------------------------------------------------
Reserve balance -- December 31................................................. $ 44 $ 94
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
During 1997 and 1996, impaired mortgage loans, before valuation reserves,
averaged approximately $597 million and $852 million, respectively. Interest
income recorded and cash received on these loans were approximately $34 million
and $73 million in 1997 and 1996, respectively.
REAL ESTATE
During 1997, 1996 and 1995, non-cash investing activities included real estate
acquired through foreclosure of mortgage loans, which totaled $81 million, $107
million and $144 million, respectively.
Valuation reserves and cumulative write-downs related to real estate,
including policyholder share, were $169 million and $273 million as of December
31, 1997 and 1996, respectively.
Net income for 1997 and 1996 included net investment income of $9 million and
$19 million, respectively, for real estate held for sale. Write-downs upon
foreclosure and changes in valuation reserves were not material for 1997 and
1996.
C) SHORT-TERM INVESTMENTS AND CASH EQUIVALENTS: Short-term investments and
cash equivalents, in the aggregate, primarily included debt securities,
principally corporate securities of $520 million and federal government
securities of $443 million at December 31, 1997 and, for 1996, principally
corporate securities of $418 million.
D) NET UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS: Unrealized
appreciation (depreciation) for investments carried at fair value as of December
31 was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized appreciation:
Fixed maturities.......................................................... $ 1,500 $ 1,147
Equity securities......................................................... 8 8
--------- ---------
1,508 1,155
--------- ---------
Unrealized depreciation:
Fixed maturities.......................................................... (139) (213)
Equity securities......................................................... (29) (26)
--------- ---------
(168) (239)
--------- ---------
Less policyholder-related amounts........................................... 931 610
--------- ---------
Shareholder net unrealized appreciation..................................... 409 306
Less deferred income taxes.................................................. 153 118
- -------------------------------------------------------------------------------------------
Net unrealized appreciation................................................. $ 256 $ 188
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
Net unrealized appreciation (depreciation) for investments carried at fair
value is included as a separate component of Shareholder's Equity, net of
policyholder-related amounts and deferred income taxes. The net unrealized
appreciation (depreciation) for these investments, primarily fixed maturities,
during 1997, 1996 and 1995 was $68 million, ($288) million and $542 million,
respectively.
21
<PAGE>
E) NON-INCOME PRODUCING INVESTMENTS: At December 31, the carrying values of
investments, including policyholder share, that were non-income producing during
the preceding 12 months were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities............................................................... $ 28 $ 52
Mortgage loans................................................................. -- 14
Real estate.................................................................... 141 172
- -------------------------------------------------------------------------------------------
Total.......................................................................... $ 169 $ 238
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
F) DERIVATIVE FINANCIAL INSTRUMENTS: The Company's investment strategy is to
manage the characteristics of investment assets, such as duration, yield,
currency and liquidity, to reflect the underlying characteristics of the related
insurance and contractholder liabilities, which vary among the Company's
principal product lines. In connection with this investment strategy, the
Company's use of derivative instruments, including interest rate and currency
swaps, purchased options and futures contracts, is limited to hedging
applications to minimize market risk.
Hedge accounting treatment requires a probability of high correlation between
the changes in the market value or cash flows of the derivatives and the hedged
assets or liabilities. Under hedge accounting, the changes in market value or
cash flows of the derivatives and the hedged assets or liabilities are
recognized in net income in the same period. If the Company's use of derivatives
does not qualify for hedge accounting treatment, the derivative is recorded at
fair value and changes in its fair value are recognized in net income without
considering changes in the hedged asset or liability.
The Company routinely monitors, by individual counterparty, exposure to credit
risk associated with swap and option contracts and diversifies the portfolio
among approved dealers of high credit quality. Futures contracts are
exchange-traded and, therefore, credit risk is limited since the exchange
assumes the obligations. The Company manages legal risks by following industry
standardized documentation procedures and by monitoring legal developments.
Underlying contract, notional or principal amounts associated with derivatives
at December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps............................................................ $ 265 $ 335
Currency swaps................................................................. 248 275
Purchased options.............................................................. 833 632
Futures........................................................................ 75 45
- -------------------------------------------------------------------------------------------
</TABLE>
Under interest rate swaps, the Company agrees with other parties to
periodically exchange the difference between variable rate and fixed rate asset
cash flows to provide stable returns for related liabilities. The Company uses
currency swaps (primarily Canadian dollars, pounds sterling and Swiss francs) to
match the currency of investments to that of the associated liabilities. Under
currency swaps, the parties exchange principal and interest amounts in two
relevant currencies using agreed-upon exchange amounts.
The net interest cash flows from interest rate and currency swaps are
recognized currently as an adjustment to net investment income, and the fair
value of these swaps is reported as an adjustment to the related investments.
Using purchased options to reduce the effect of changes in interest rates or
equity indexes on liabilities, the Company pays an up-front fee to receive cash
flows from third parties when interest rates or equity indexes vary from
specified levels. Purchased options that qualify for hedge accounting are
recorded consistent with the related liabilities, at amortized cost plus
adjustments based on current equity indexes, and income is reported as an
adjustment to benefit expense. Purchased options are reported in other assets,
and fees paid are amortized to benefit expense over their contractual periods.
Purchased options with underlying notional amounts of $82 million and $112
million at December 31, 1997 and 1996, respectively, that are designated as
hedges, but do not qualify for hedge accounting, are reported in other long-term
investments at fair value with changes in fair value recognized as realized
investment gains and losses.
22
<PAGE>
Interest rate futures are used to temporarily hedge against the changes in
market values of bonds and mortgage loans to be purchased or sold. Under futures
contracts, changes in the contract values are settled in cash daily with the
exchange on which the instrument is traded. These changes in contract values are
deferred and recorded as adjustments to the carrying value of the related bond
or mortgage loan. Deferred gains and losses are amortized into net investment
income over the life of the investments purchased or are recognized in full as
realized investment gains and losses if investments are sold. Gains and losses
on futures contracts deferred in anticipation of investment purchases were
immaterial at December 31, 1997 and 1996.
The effects of interest rate and currency swaps, purchased options and futures
on the components of net income for 1997, 1996 and 1995 were not material.
As of December 31, 1997 and 1996, the Company's variable interest rate
investments consisted of approximately $0.7 billion and $1.3 billion of fixed
maturities, respectively. As of December 31, 1997 and 1996, the Company's fixed
interest rate investments consisted of $21.6 billion and $19.5 billion,
respectively, of fixed maturities, and $10.1 billion and $10.2 billion,
respectively, of mortgage loans.
G) OTHER: As of December 31, 1997 and 1996, the Company had no concentration
of investments in a single investee exceeding 10% of Shareholder's Equity.
NOTE 5 -- INVESTMENT INCOME AND GAINS AND LOSSES
A) NET INVESTMENT INCOME: The components of net investment income, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities.................................................... $ 1,648 $ 1,647 $ 1,663
Equity securities................................................... 10 -- 15
Mortgage loans...................................................... 885 921 866
Policy loans........................................................ 532 548 499
Real estate......................................................... 118 227 301
Other long-term investments......................................... 47 23 33
Short-term investments.............................................. 28 35 46
--------- --------- ---------
3,268 3,401 3,423
Less investment expenses............................................ 129 202 285
- -------------------------------------------------------------------------------------------
Net investment income............................................... $ 3,139 $ 3,199 $ 3,138
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
Net investment income attributable to policyholder contracts, which is
included in the Company's revenues and is primarily offset by amounts included
in Benefits, Losses and Settlement Expenses, was approximately $1.7 billion for
1997 and $1.8 billion for 1996 and 1995. Net investment income for separate
accounts, which is not reflected in the Company's revenues, was $1.4 billion,
$1.1 billion and $885 million for 1997, 1996 and 1995, respectively.
As of December 31, 1997, fixed maturities and mortgage loans on non-accrual
status, including policyholder share, were $143 million and $153 million,
including restructured investments of $81 million and $137 million,
respectively. As of December 31, 1996, fixed maturities and mortgage loans on
non-accrual status, including policyholder share, were $160 million and $360
million, including restructured investments of $88 million and $304 million,
respectively. If interest on these investments had been recognized in accordance
with their original terms, net income would have been increased by $7 million,
$15 million and $18 million in 1997, 1996 and 1995, respectively.
23
<PAGE>
B) REALIZED INVESTMENT GAINS AND LOSSES: Realized gains (losses) on
investments, excluding policyholder share, for the year ended December 31 were
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities......................................................... $ (3) $ 11 $ (10)
Equity securities........................................................ 4 1 5
Mortgage loans........................................................... 4 (12) (5)
Real estate.............................................................. 28 15 4
Other.................................................................... 12 22 (1)
--
--- ---
45 37 (7)
Income tax expenses (benefits)........................................... 8 17 (2)
- -------------------------------------------------------------------------------------------
Net realized investment gains (losses)................................... $ 37 $ 20 $ (5 )
- -------------------------------------------------------------------------------------------
------------------
</TABLE>
Realized investment gains and losses include impairments in the value of
investments, net of recoveries, of $25 million, $40 million and $27 million in
1997, 1996 and 1995, respectively.
Realized investment gains for separate accounts, which are not reflected in
the Company's revenues, were $489 million, $305 million and $412 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Realized investment
gains (losses) attributable to policyholder contracts, which also are not
reflected in the Company's revenues, were $76 million, $82 million and ($6)
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Sales of available-for-sale fixed maturities and equity securities, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales................................................. $ 3,978 $ 4,236 $ 1,667
Gross gains on sales................................................ $ 66 $ 146 $ 78
Gross losses on sales............................................... $ (21) $ (70) $ (53)
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE 6 -- SHAREHOLDER'S EQUITY AND DIVIDEND RESTRICTIONS
The Department recognizes as net income and surplus (shareholder's equity)
those amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department, which may differ from generally
accepted accounting principles. As of December 31, 1997, there were no permitted
accounting practices utilized by the Company that were materially different from
those prescribed by the Department.
Capital stock of the Company at December 31, 1997 and 1996 consisted of
5,978,322 shares of common stock authorized, issued and outstanding (par value
$5).
The Company's statutory net income was $417 million, $611 million and $390
million for 1997, 1996 and 1995, respectively. Statutory surplus was $2.2
billion at December 31, 1997 and $2.1 billion at December 31, 1996. The
Connecticut Insurance Holding Company Act limits the amount of annual dividends
or other distributions available to shareholders of Connecticut insurance
companies without the Department's prior approval. During 1997, the Company paid
a total of $400 million in dividends to its parent, of which $100 million
received prior approval from the Department in accordance with requirements.
Under current law, the maximum dividend distribution that may be made by the
Company during 1998 without prior approval is $548 million. The amount of
restricted net assets as of December 31, 1997 was approximately $3.9 billion.
NOTE 7 -- INCOME TAXES
The Company's net deferred tax asset of $653 million and $639 million as of
December 31, 1997 and 1996, respectively, reflects management's belief that the
Company's taxable income in future years will be sufficient to realize the net
deferred tax asset based on the Company's earnings history and its future
expectations. In determining the adequacy of future taxable income, management
considered the future reversal of its existing taxable temporary differences and
available tax planning strategies that could be implemented, if necessary.
24
<PAGE>
In accordance with the Life Insurance Company Income Tax Act of 1959, a
portion of the Company's statutory income was not subject to current income
taxation but was accumulated in an account designated Policyholders' Surplus
Account. Under the Tax Reform Act of 1984, no further additions may be made to
the Policyholders' Surplus Account for tax years ending after December 31, 1983.
The balance in the account of approximately $450 million at December 31, 1997
would result in a tax liability of $158 million only if distributed to the
shareholder or if the account balance exceeded a prescribed maximum. No income
taxes have been provided on this amount because, in management's opinion, the
likelihood that these conditions will be met is remote.
CIGNA's federal income tax returns are routinely audited by the Internal
Revenue Service (IRS), and provisions are made in CIGNA's financial statements
in anticipation of the results of these audits. CIGNA resolved all issues
relative to the Company arising out of audits for 1991 through 1993, which
resulted in an increase to net income of $13 million in 1997.
In management's opinion, adequate tax liabilities have been established for
all years.
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) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Other insurance and contractholder liabilities............................... $ 400 $ 387
Employee and retiree benefit plans........................................... 196 177
Investments, net............................................................. 262 228
Other........................................................................ 63 74
--- ---
Total deferred tax assets.................................................... 921 866
--- ---
Deferred tax liabilities:
Policy acquisition expenses.................................................. 38 21
Depreciation................................................................. 77 88
Unrealized appreciation on investments....................................... 153 118
--- ---
Total deferred tax liabilities............................................... 268 227
- -------------------------------------------------------------------------------------------
Net deferred income tax asset................................................ $ 653 $ 639
- -------------------------------------------------------------------------------------------
--------------------
</TABLE>
Total income taxes for the year ended December 31 were less than the amount
computed using the nominal federal income tax rate of 35% for the following
reasons:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at nominal rate.............................................. $ 320 $ 305 $ 266
Tax-exempt interest income............................................... (5) (5) (6)
Dividends received deduction............................................. (7) (7) (7)
Amortization of goodwill................................................. 4 4 4
Resolved federal tax audit issues........................................ (13) -- --
Other.................................................................... (1) 16 --
- -------------------------------------------------------------------------------------------
Total income taxes....................................................... $ 298 $ 313 $ 257
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
NOTE 8 -- PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PLANS
A) PENSION PLANS: The Company provides retirement benefits to eligible
employees and agents. These benefits are provided through a plan sponsored by
CIGNA covering most domestic employees (the Plan) and by several separate
pension plans for various subsidiaries, agents and foreign employees.
The Plan is a non-contributory, defined benefit, trusteed plan available to
eligible domestic employees. Generally, for employees whose service commenced
prior to 1989, benefits are based on their years of service and eligible
compensation during the highest three consecutive years of employment, offset by
a portion of the Social Security benefit for which they are eligible. In 1997,
CIGNA amended its Plan for employees whose service commenced
25
<PAGE>
after 1988. Under the new Plan provisions, eligible employees receive annual
benefit credits based on an employee's age and credited service, and quarterly
interest credits based on U.S. Treasury bond rates. The employee's pension
benefit equals the value of accumulated credits, and may be paid at or after
separation from service in a lump sum or an annuity. CIGNA funds the Plan at
least at the minimum amount required by the Employee Retirement Income Security
Act of 1974 (ERISA). Allocated pension cost for the Company was $24 million, $26
million and $23 million in 1997, 1996 and 1995, respectively.
The Plan, and several separate pension plans for various subsidiaries and
agents, had deposits with the Company totaling approximately $2.5 billion and
$2.2 billion at December 31, 1997 and 1996, respectively.
B) OTHER POSTRETIREMENT BENEFITS PLANS: In addition to providing pension
benefits, the Company provides certain health care and life insurance benefits
to retired employees, spouses and other eligible dependents through various
plans sponsored by CIGNA. A substantial portion of the Company's employees may
become eligible for these benefits upon retirement. CIGNA's contributions for
health care benefits depend upon a retiree's date of retirement, age, years of
service and other cost-sharing features, such as deductibles and coinsurance.
Under the terms of the benefit plans, benefit provisions and cost-sharing
features can be adjusted. In general, retiree health care benefits are not
funded by CIGNA, but are paid as covered expenses are incurred. Retiree life
insurance benefits are paid from plan assets or as covered expenses are
incurred.
Expense for postretirement benefits other than pensions allocated to the
Company totaled $2 million for 1997, $9 million for 1996 and $16 million for
1995. The other postretirement benefit liability included in Accounts Payable,
Accrued Expenses and Other Liabilities as of December 31, 1997 and 1996 was $412
million and $424 million, including net intercompany payables of $39 million and
$40 million, respectively, for services provided by affiliates' employees.
C) OTHER POSTEMPLOYMENT BENEFITS: The Company provides certain salary
continuation (severance and disability), health care and life insurance benefits
to inactive and former employees, spouses and other eligible dependents through
various employee benefit plans sponsored by CIGNA.
Although severance benefits accumulate with additional service, the Company
recognizes severance expense when severance is probable and the costs can be
reasonably estimated. Postemployment benefits other than severance generally do
not vest or accumulate; therefore, the estimated cost of benefits is accrued
when determined to be probable and estimable, generally upon disability or
termination. See Note 11 for additional information regarding severance accrued
as part of cost reduction initiatives.
D) CAPITAL ACCUMULATION PLANS: CIGNA sponsors various capital accumulation
plans in which employee contributions on a pre-tax basis (401(k)) are
supplemented by CIGNA matching contributions. These contributions are invested,
at the election of the employee, in one or more of the following investments:
CIGNA common stock fund, several CIGNA and non-CIGNA mutual funds, and a
fixed-income fund. In addition, beginning in 1999, CIGNA may provide additional
matching contributions, depending on its annual performance, which would be
invested in the CIGNA common stock fund. The Company's allocated expense for
such plans totaled $15 million for 1997, $16 million for 1996 and $14 million
for 1995.
NOTE 9 -- REINSURANCE
In the normal course of business, the Company enters into agreements,
primarily relating to short-duration contracts, to assume and cede reinsurance
with other insurance companies. Reinsurance is ceded primarily to limit losses
from large exposures and to permit recovery of a portion of direct losses,
although ceded reinsurance does not relieve the originating insurer of
liability. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of its reinsurers.
Failure of reinsurers to indemnify the Company, as a result of reinsurer
insolvencies and disputes, could result in losses. As of December 31, 1997 and
1996 there were no allowances for uncollectible amounts. Future charges for
unrecoverable reinsurance may materially affect results of operations in future
periods, however, such amounts are not expected to have a material adverse
effect on the Company's liquidity or financial condition.
26
<PAGE>
The effects of reinsurance on net earned premiums and fees for the year ended
December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-DURATION CONTRACTS
Premiums and fees:
Direct............................................................ $ 3,119 $ 2,940 $ 2,613
Assumed........................................................... 255 135 384
Ceded............................................................. (266) (166) (366)
- -------------------------------------------------------------------------------------------
Net earned premiums and fees........................................ $ 3,108 $ 2,909 $ 2,631
- -------------------------------------------------------------------------------------------
-------------------------------
LONG-DURATION CONTRACTS
Premiums and fees:
Direct............................................................ $ 1,979 $ 1,997 $ 1,950
Assumed........................................................... 522 601 561
Ceded............................................................. (233) (193) (144)
- -------------------------------------------------------------------------------------------
Net earned premiums and fees........................................ $ 2,268 $ 2,405 $ 2,367
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
The effects of reinsurance on written premiums and fees for short-duration
contracts were not materially different from the amounts shown in the above
table. Benefits, losses and settlement expenses for 1997, 1996 and 1995 were net
of reinsurance recoveries of $340 million, $359 million and $442 million,
respectively.
NOTE 10 -- LEASES AND RENTALS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $76 million, $68 million and $60 million in 1997, 1996 and 1995,
respectively.
As of December 31, 1997, future net minimum rental payments under
non-cancelable operating leases were $167 million, payable as follows: 1998 --
$44 million; 1999 -- $37 million; 2000 -- $23 million; 2001 -- $17 million; 2002
- -- $12 million; and $34 million thereafter.
NOTE 11 -- SEGMENT INFORMATION
The Company operates principally in three segments: Employee Life and Health
Benefits, Employee Retirement and Savings Benefits, and Individual Financial
Services. Other Operations consists principally of the results of the Company's
settlement annuity business and certain new business initiatives.
Summarized segment financial information for the year ended and as of December
31 was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(IN MILLIONS) 1997 1996 1995
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Employee Life and Health Benefits................................ $ 4,581 $ 4,510 $ 4,243
Employee Retirement and Savings Benefits......................... 1,773 1,899 1,914
Individual Financial Services.................................... 2,004 1,950 1,800
Other Operations................................................. 212 200 181
- -------------------------------------------------------------------------------------------
Total............................................................ $ 8,570 $ 8,559 $ 8,138
- -------------------------------------------------------------------------------------------
-------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
Employee Life and Health Benefits................................ $ 300 $ 287 $ 294
Employee Retirement and Savings Benefits......................... 324 293 232
Individual Financial Services.................................... 300 298 252
Other Operations................................................. (11) (8) (17)
- -------------------------------------------------------------------------------------------
Total............................................................ $ 913 $ 870 $ 761
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Employee Life and Health Benefits................................ $ 7,639 $ 7,065 $ 7,629
Employee Retirement and Savings Benefits......................... 45,884 40,122 37,609
Individual Financial Services.................................... 19,809 17,930 16,189
Other Operations................................................. 2,721 2,398 2,569
- -------------------------------------------------------------------------------------------
Total............................................................ $ 76,053 $ 67,515 $ 63,996
- -------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
During 1995, the Company recorded a $13 million pre-tax charge ($8 million
after-tax), included in Other Operating Expenses, for cost reduction
restructuring initiatives in the Employee Life and Health Benefits segment. The
charge consisted primarily of severance-related expenses representing costs
associated with nonvoluntary terminations covering approximately 1,100
employees. These initiatives were completed in 1997 with no material difference
from original estimates.
NOTE 12 -- CONTINGENCIES
A) FINANCIAL GUARANTEES: The Company is contingently liable for financial
guarantees provided in the ordinary course of business on the repayment of
principal and interest on certain industrial revenue bonds. The contractual
amounts of financial guarantees reflect the Company's maximum exposure to credit
loss in the event of nonperformance. To limit the Company's exposure in the
event of default of any guaranteed obligation, various programs are in place to
ascertain the creditworthiness of guaranteed parties and to monitor this status
on a periodic basis.
The industrial revenue bonds guaranteed directly by the Company have remaining
maturities of up to 18 years. The guarantees provide for payment of debt service
only as it becomes due; consequently, an event of default would not cause an
acceleration of scheduled principal and interest payments. The principal amount
of the bonds guaranteed by the Company at December 31, 1997 and 1996 was $202
million and $234 million, respectively. Revenues in connection with industrial
revenue bond guarantees are derived principally from equity participations in
the related projects and are included in Net Investment Income as earned. Loss
reserves for financial guarantees are established when a default has occurred or
when the Company believes that a loss has been incurred. There were no losses
for industrial revenue bonds in 1997, 1996 or 1995.
The Company also guarantees a minimum level of benefits for certain separate
account contracts and, in the event that separate account assets are
insufficient to fund minimum policy benefits, the Company is obligated to fund
the difference. As of December 31, 1997 and 1996, the amount of minimum benefit
guarantees for separate account contracts was $4.6 billion and $4.9 billion,
respectively. Reserves in addition to the separate account liabilities are
established when the Company believes a payment will be required under one of
these guarantees. No such reserves were required as of December 31, 1997 and
1996. Guarantee fees are part of the overall management fee charged to separate
accounts and are recognized in income as earned.
Although the ultimate outcome of any loss contingencies arising from the
Company's financial guarantees may adversely affect results of operations in
future periods, they are not expected to have a material adverse effect on the
Company's liquidity or financial condition.
B) REGULATORY AND INDUSTRY DEVELOPMENTS: The Company's businesses are subject
to a changing social, economic, legal, legislative and regulatory environment
that could affect them. Some of the changes include initiatives to increase
health care regulation, restrict insurance pricing and the application of
underwriting standards, and revise federal tax laws. Some of the more
significant issues are discussed below.
Efforts at the federal and state level to increase regulation of the health
care industry could have an adverse effect on the Company's health care
operations if they reduce marketplace competition and innovation or result in
increased medical or administrative costs. Matters under consideration that
could have an adverse effect include mandated benefits or services that increase
costs without improving the quality of care, loss of the ERISA preemption of
state law and restrictions on the use of prescription drug formularies. Due to
the uncertainty associated with the timing and content of any proposals
ultimately adopted, the effect on the Company's results of operations, liquidity
or financial condition cannot be reasonably estimated at this time.
28
<PAGE>
In 1996, Congress passed legislation that phases out over a three-year period
the tax deductibility of policy loan interest for most leveraged corporate-owned
life insurance (COLI) products. For 1997, revenues of $591 million and net
income of $44 million for the Company were from leveraged COLI products that are
affected by this legislation. The Company does not expect this legislation to
have a material adverse effect on its consolidated results of operations,
liquidity or financial condition.
The National Association of Insurance Commissioners recently approved
standardized statutory accounting practices, which are not scheduled to take
effect before 1999. The Company has not determined the effect on statutory net
income, surplus or liquidity at this time.
The Company is contingently liable for possible assessments under regulatory
requirements pertaining to potential insolvencies of unaffiliated insurance
companies. Mandatory assessments, which are subject to statutory limits, can be
partially recovered through a reduction in future premium taxes in some states.
The Company recorded pre-tax charges of $17 million, $26 million and $22 million
for 1997, 1996 and 1995, respectively, for guaranty fund assessments that can be
reasonably estimated before giving effect to future premium tax recoveries.
Although future assessments and payments may adversely affect results of
operations in future periods, such amounts are not expected to have a material
adverse effect on the Company's liquidity or financial condition.
The eventual effect on the Company of the changing environment in which it
operates remains uncertain.
C) LITIGATION: The Company is routinely engaged in litigation incidental to
its business. While the outcome of all litigation involving the Company,
including insurance-related litigation, cannot be determined, litigation is not
expected to result in losses that differ from recorded reserves by amounts that
would be material to results of operations, liquidity or financial condition.
NOTE 13 -- RELATED PARTY TRANSACTIONS
The Company has assumed the settlement annuity and group pension business
written by Life Insurance Company of North America (LINA), an affiliate.
Reserves held by the Company with respect to this business were $1.7 billion at
December 31, 1997 and 1996.
The Company cedes long-term disability business to LINA. Reinsurance
recoverables from LINA at December 31, 1997 and 1996 were $869 million and $917
million, respectively.
The Company had lines of credit available from affiliates totaling $600
million at December 31, 1997 and 1996. All borrowings are payable upon demand
with interest rates equivalent to CIGNA's average monthly short-term borrowing
rate plus 1/4 of 1%. Interest expense was $0.2 million for 1997 and $1.0 million
for 1996 and 1995. As of December 31, 1997 and 1996, there were no borrowings
outstanding under such lines.
The Company extended lines of credit to affiliates totaling $600 million at
December 31, 1997 and 1996. All loans are payable upon demand with interest
rates equivalent to CIGNA's average monthly short-term borrowing rate. There
were no amounts outstanding as of December 31, 1997 or 1996.
The Company, together with other CIGNA subsidiaries, has entered into a
pooling arrangement known as the CIGNA Corporate Liquidity Account (the Account)
for the purpose of maximizing earnings on funds available for short-term
investments. Withdrawals from the Account, up to the total amount of the
participant's investment in the Account, are allowed on a demand basis. As of
December 31, 1997 and 1996, the Company had a balance in the Account of $484
million and $80 million, respectively.
CIGNA allocates to the Company its share of operating expenses incurred at the
corporate level. The Company also allocates a portion of its operating expenses
to affiliated companies on whose behalf it performs certain administrative
services.
29
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
CIGNA
VARIABLE
PRODUCTS
GROUP
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS SUB-ACCOUNT
--------------------------------------------------- -----------
LEVERAGED MIDCAP SMALL MONEY
GROWTH ALLCAP GROWTH CAPITALIZATION MARKET
----------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $30,808,248 $8,253,666 $15,398,687 $20,132,265 $6,869,616
Receivable from Connecticut
General Life Insurance
Company..................... 31,506 6,260 1,903 -- --
Receivable for fund shares
sold........................ -- -- -- 3,763 8,637
----------- ---------- ---------- -------------- -----------
Total assets................ 30,839,754 8,259,926 15,400,590 20,136,028 6,878,253
----------- ---------- ---------- -------------- -----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- -- 3,763 8,637
Payable for fund shares
purchased................... 31,506 6,260 1,903 -- --
----------- ---------- ---------- -------------- -----------
Total liabilities........... 31,506 6,260 1,903 3,763 8,637
----------- ---------- ---------- -------------- -----------
Net assets.................. $30,808,248 $8,253,666 $15,398,687 $20,132,265 $6,869,616
----------- ---------- ---------- -------------- -----------
----------- ---------- ---------- -------------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 1,521,063 401,116 802,891 1,125,616 --
Net asset value per
accumulation unit........... $ 17.196381 $18.148668 $16.429260 $ 14.799455 $ --
----------- ---------- ---------- -------------- -----------
$26,156,787 $7,279,720 $13,190,901 $16,658,508 $ --
----------- ---------- ---------- -------------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 145,446 33,901 84,399 137,954 --
Net asset value per
accumulation unit........... $ 13.211614 $11.744336 $11.377289 $ 10.289562 $ --
----------- ---------- ---------- -------------- -----------
$ 1,921,574 $ 398,139 $ 960,230 $ 1,419,485 $ --
----------- ---------- ---------- -------------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. 241,255 52,402 112,152 175,551 671,479
Net asset value per
accumulation unit........... $ 11.168525 $10.988210 $11.123794 $ 11.406099 $10.230578
----------- ---------- ---------- -------------- -----------
$ 2,694,461 $ 575,807 $1,247,556 $ 2,002,348 $6,869,616
----------- ---------- ---------- -------------- -----------
Accumulation net assets....... $30,772,822 $8,253,666 $15,398,687 $20,080,341 $6,869,616
Annuity reserves.............. 35,426 -- -- 51,924 --
----------- ---------- ---------- -------------- -----------
$30,808,248 $8,253,666 $15,398,687 $20,132,265 $6,869,616
----------- ---------- ---------- -------------- -----------
----------- ---------- ---------- -------------- -----------
<CAPTION>
FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
------------------------------------------------
EQUITY- HIGH MONEY
INCOME INCOME MARKET OVERSEAS
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $52,730,899 $17,524,570 $11,575,573 $6,997,880
Receivable from Connecticut
General Life Insurance
Company..................... 30,505 33,735 -- 13,114
Receivable for fund shares
sold........................ -- -- 407 --
----------- ---------- ----------- ----------
Total assets................ 52,761,404 17,558,305 11,575,980 7,010,994
----------- ---------- ----------- ----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- 407 --
Payable for fund shares
purchased................... 30,505 33,735 -- 13,114
----------- ---------- ----------- ----------
Total liabilities........... 30,505 33,735 407 13,114
----------- ---------- ----------- ----------
Net assets.................. $52,730,899 $17,524,570 $11,575,573 $6,997,880
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 2,564,387 997,952 1,017,888 417,152
Net asset value per
accumulation unit........... $ 17.296831 $12.545574 $ 11.095784 $11.687000
----------- ---------- ----------- ----------
$44,355,770 $12,519,875 $11,294,261 $4,875,251
----------- ---------- ----------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 232,844 55,953 21,161 21,670
Net asset value per
accumulation unit........... $ 13.707441 $12.298844 $ 10.632251 $11.587559
----------- ---------- ----------- ----------
$ 3,191,701 $ 688,161 $ 224,994 $ 251,102
----------- ---------- ----------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. 456,837 391,937 -- 187,414
Net asset value per
accumulation unit........... $ 11.249844 $11.013339 $ -- $ 9.986074
----------- ---------- ----------- ----------
$ 5,139,346 $4,316,534 $ -- $1,871,527
----------- ---------- ----------- ----------
Accumulation net assets....... $52,686,817 $17,524,570 $11,519,255 $6,997,880
Annuity reserves.............. 44,082 -- 56,318 --
----------- ---------- ----------- ----------
$52,730,899 $17,524,570 $11,575,573 $6,997,880
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
30
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP III
FIDELITY VIP II PORTFOLIO SUB-
PORTFOLIO SUB-ACCOUNTS ACCOUNT
------------------------------------ ----------------
ASSET INVESTMENT GROWTH
MANAGER CONTRA- FUND GRADE BOND OPPORTUNITIES
----------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
Receivable from Connecticut
General Life Insurance
Company..................... 5,447 8,985 52,259 17,930
Receivable for fund shares
sold........................ -- -- -- --
----------- ----------- ---------- ----------------
Total assets................ 6,670,706 1,720,007 11,139,522 3,849,418
----------- ----------- ---------- ----------------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- -- --
Payable for fund shares
purchased................... 5,447 8,985 52,259 17,930
----------- ----------- ---------- ----------------
Total liabilities........... 5,447 8,985 52,259 17,930
----------- ----------- ---------- ----------------
Net assets.................. $ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
----------- ----------- ---------- ----------------
----------- ----------- ---------- ----------------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 403,681 -- 776,658 --
Net asset value per
accumulation unit........... $ 15.193166 $ -- $11.554977 $ --
----------- ----------- ---------- ----------------
$ 6,133,197 $ -- $8,974,264 $ --
----------- ----------- ---------- ----------------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 41,423 -- 22,191 --
Net asset value per
accumulation unit........... $ 12.844560 $ -- $11.323436 $ --
----------- ----------- ---------- ----------------
$ 532,062 $ -- $ 251,281 $ --
----------- ----------- ---------- ----------------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. -- 148,976 175,848 336,690
Net asset value per
accumulation unit........... $ -- $ 11.485208 $10.587068 $11.379873
----------- ----------- ---------- ----------------
$ -- $ 1,711,022 $1,861,718 $3,831,488
----------- ----------- ---------- ----------------
Accumulation net assets....... $ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
Annuity reserves.............. -- -- -- --
----------- ----------- ---------- ----------------
$ 6,665,259 $ 1,711,022 $11,087,263 $3,831,488
----------- ----------- ---------- ----------------
----------- ----------- ---------- ----------------
<CAPTION>
MFS SERIES SUB-ACCOUNTS
-------------------------------------------------------------------------
EMERGING GROWTH WITH TOTAL WORLD
GROWTH INCOME RESEARCH RETURN UTILITIES GOVERNMENTS
---------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
Receivable from Connecticut
General Life Insurance
Company..................... 3,955 54,701 33,334 -- 14,783 --
Receivable for fund shares
sold........................ -- -- -- 706 -- 54
---------- ----------- ---------- ---------- ---------- -----------
Total assets................ 2,123,044 2,819,157 3,713,005 19,421,933 6,266,653 1,413,444
---------- ----------- ---------- ---------- ---------- -----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... -- -- -- 706 -- 54
Payable for fund shares
purchased................... 3,955 54,701 33,334 -- 14,783 --
---------- ----------- ---------- ---------- ---------- -----------
Total liabilities........... 3,955 54,701 33,334 706 14,783 54
---------- ----------- ---------- ---------- ---------- -----------
Net assets.................. $2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
---------- ----------- ---------- ---------- ---------- -----------
---------- ----------- ---------- ---------- ---------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. -- -- -- 1,032,242 322,795 131,155
Net asset value per
accumulation unit........... $ -- $ -- $ -- $14.870405 $17.278823 $10.297427
---------- ----------- ---------- ---------- ---------- -----------
$ -- $ -- $ -- $15,349,858 $5,577,524 $1,350,557
---------- ----------- ---------- ---------- ---------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. -- -- -- 102,664 13,784 6,175
Net asset value per
accumulation unit........... $ -- $ -- $ -- $13.176208 $14.800406 $10.174585
---------- ----------- ---------- ---------- ---------- -----------
$ -- $ -- $ -- $1,352,720 $ 204,004 $ 62,833
---------- ----------- ---------- ---------- ---------- -----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. 187,043 242,027 341,999 244,760 39,107 --
Net asset value per
accumulation unit........... $11.329433 $11.422097 $10.759295 $11.107402 $12.027164 $ --
---------- ----------- ---------- ---------- ---------- -----------
$2,119,089 $2,764,456 $3,679,671 $2,718,649 $ 470,342 $ --
---------- ----------- ---------- ---------- ---------- -----------
Accumulation net assets....... $2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
Annuity reserves.............. -- -- -- -- -- --
---------- ----------- ---------- ---------- ---------- -----------
$2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
---------- ----------- ---------- ---------- ---------- -----------
---------- ----------- ---------- ---------- ---------- -----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
31
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMT PORTFOLIO SUB-ACCOUNTS
----------------------------------- OCC ACCUMULATION TRUST SUB-ACCOUNTS
LIMITED --------------------------------------
MATURITY GLOBAL
BALANCED BOND PARTNERS EQUITY MANAGED SMALL CAP
---------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment in variable
insurance funds at value.... $5,410,923 $6,636,808 $34,421,582 $18,864,939 $ 67,959,224 $9,066,217
Receivable from Connecticut
General Life Insurance
Company..................... -- 212 52,086 7,429 53,492 13,210
Receivable for fund shares
sold........................ 290 -- -- -- -- --
---------- ---------- ----------- ---------- ------------- ----------
Total assets................ 5,411,213 6,637,020 34,473,668 18,872,368 68,012,716 9,079,427
---------- ---------- ----------- ---------- ------------- ----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company...... 290 -- -- -- -- --
Payable for fund shares
purchased................... -- 212 52,086 7,429 53,492 13,210
---------- ---------- ----------- ---------- ------------- ----------
Total liabilities........... 290 212 52,086 7,429 53,492 13,210
---------- ---------- ----------- ---------- ------------- ----------
Net assets.................. $5,410,923 $6,636,808 $34,421,582 $18,864,939 $ 67,959,224 $9,066,217
---------- ---------- ----------- ---------- ------------- ----------
---------- ---------- ----------- ---------- ------------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS
Accumulation units
outstanding................. 389,760 460,111 1,242,083 1,032,703 3,343,230 448,919
Net asset value per
accumulation unit........... $12.772116 $11.438698 $ 20.080660 $15.021373 $ 16.298405 $15.345589
---------- ---------- ----------- ---------- ------------- ----------
$4,978,066 $5,263,072 $24,941,844 $15,512,619 $ 54,489,310 $6,888,934
---------- ---------- ----------- ---------- ------------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS--NEW YORK
Accumulation units
outstanding................. 33,702 15,655 131,403 77,692 329,792 44,569
Net asset value per
accumulation unit........... $11.759038 $10.922542 $ 14.901357 $12.126399 $ 13.785620 $12.738185
---------- ---------- ----------- ---------- ------------- ----------
$ 396,303 $ 170,997 $ 1,958,078 $ 942,121 $ 4,546,388 $ 567,734
---------- ---------- ----------- ---------- ------------- ----------
FLEXIBLE PAYMENT DEFERRED
ANNUITY
CONTRACTS--CHOICEPLUS
Accumulation units
outstanding................. -- 116,110 637,684 226,381 792,156 145,504
Net asset value per
accumulation unit........... $ -- $10.358639 $ 11.785098 $10.384482 $ 11.210441 $10.688805
---------- ---------- ----------- ---------- ------------- ----------
$ -- $1,202,739 $ 7,515,164 $2,350,845 $ 8,880,418 $1,555,263
---------- ---------- ----------- ---------- ------------- ----------
Accumulation net assets....... $5,374,369 $6,636,808 $34,415,086 $18,805,585 $ 67,916,116 $9,011,931
Annuity reserves.............. 36,554 -- 6,496 59,354 43,108 54,286
---------- ---------- ----------- ---------- ------------- ----------
$5,410,923 $6,636,808 $34,421,582 $18,864,939 $ 67,959,224 $9,066,217
---------- ---------- ----------- ---------- ------------- ----------
---------- ---------- ----------- ---------- ------------- ----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
32
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CIGNA
VARIABLE
PRODUCTS
GROUP
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS SUB-ACCOUNT
------------------------------------------------- ---------
LEVERAGED MIDCAP SMALL MONEY
GROWTH ALLCAP GROWTH CAPITALIZATION MARKET *
---------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................... $ 77,695 $ -- $ 7,282 $ -- $94,819
EXPENSES:
Mortality and expense risk and
administrative charges................ 331,270 94,488 171,622 218,002 26,486
---------- ---------- ---------- ------------- ---------
Net investment gain (loss)............ (253,575) (94,488) (164,340) (218,002 ) 68,333
---------- ---------- ---------- ------------- ---------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Capital distribution from portfolio
sponsor............................... 140,707 -- 177,571 587,421 --
Net realized gain (loss) on share
transactions.......................... 1,540 19,106 24,882 (93,004 ) --
---------- ---------- ---------- ------------- ---------
Net realized gain..................... 142,247 19,106 202,453 494,417 --
Net unrealized gain..................... 5,050,728 1,153,622 1,532,602 1,272,653 --
---------- ---------- ---------- ------------- ---------
Net realized and unrealized gain on
investments......................... 5,192,975 1,172,728 1,735,055 1,767,070 --
---------- ---------- ---------- ------------- ---------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................ $4,939,400 $1,078,240 $1,570,715 $ 1,549,068 $68,333
---------- ---------- ---------- ------------- ---------
---------- ---------- ---------- ------------- ---------
<CAPTION>
FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
----------------------------------------------
EQUITY- HIGH MONEY
INCOME INCOME MARKET OVERSEAS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................... $ 501,651 $ 401,740 $ 762,513 $ 40,523
EXPENSES:
Mortality and expense risk and
administrative charges................ 531,764 141,971 187,646 60,775
---------- ---------- ---------- ----------
Net investment gain (loss)............ (30,113) 259,769 574,867 (20,252 )
---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Capital distribution from portfolio
sponsor............................... 2,522,193 49,653 -- 160,863
Net realized gain (loss) on share
transactions.......................... (10,861) (12,799) -- (3,004 )
---------- ---------- ---------- ----------
Net realized gain..................... 2,511,332 36,854 -- 157,859
Net unrealized gain..................... 6,563,776 1,259,396 -- 38,849
---------- ---------- ---------- ----------
Net realized and unrealized gain on
investments......................... 9,075,108 1,296,250 -- 196,708
---------- ---------- ---------- ----------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................ $9,044,995 $1,556,019 $ 574,867 $ 176,456
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ----------------------------------
* Period from May 20, 1997 (date deposits first received) to December 31, 1997
The Notes to Financial Statements are an integral part of these statements.
33
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP III
FIDELITY VIP II PORTFOLIO SUB- MFS SERIES
PORTFOLIO SUB-ACCOUNTS ACCOUNT SUB-ACCOUNTS
------------------------------- ----------------- ----------------------
ASSET CONTRA- INVESTMENT GROWTH EMERGING GROWTH WITH
MANAGER FUND ** GRADE BOND OPPORTUNITIES *** GROWTH ** INCOME ****
---------- ------- ---------- ----------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................... $ 167,312 $ -- $ 360,990 $ -- $ -- $ 10,678
EXPENSES:
Mortality and expense risk and
administrative charges...... 76,758 5,782 104,517 12,362 6,875 8,570
---------- ------- ---------- -------- --------- -----------
Net investment gain
(loss).................... 90,554 (5,782) 256,473 (12,362) (6,875 ) 2,108
---------- ------- ---------- -------- --------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Capital distribution from
portfolio sponsor........... 419,698 -- -- -- -- 49,949
Net realized gain (loss) on
share transactions.......... 5,306 (17) 2,025 57 1,644 (98 )
---------- ------- ---------- -------- --------- -----------
Net realized gain (loss).... 425,004 (17) 2,025 57 1,644 49,851
Net unrealized gain (loss).... 492,627 41,006 368,703 165,241 24,778 43,425
---------- ------- ---------- -------- --------- -----------
Net realized and unrealized
gain (loss) on
investments............... 917,631 40,989 370,728 165,298 26,422 93,276
---------- ------- ---------- -------- --------- -----------
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS.................. $1,008,185 $35,207 $ 627,201 $ 152,936 $ 19,547 $ 95,384
---------- ------- ---------- -------- --------- -----------
---------- ------- ---------- -------- --------- -----------
<CAPTION>
TOTAL WORLD
RESEARCH *** RETURN UTILITIES GOVERNMENTS
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................... $ -- $ -- $ -- $ 22,035
EXPENSES:
Mortality and expense risk and
administrative charges...... 11,215 190,114 57,968 18,142
------------ ---------- ---------- -----------
Net investment gain
(loss).................... (11,215 ) (190,114) (57,968) 3,893
------------ ---------- ---------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Capital distribution from
portfolio sponsor........... -- -- -- 9,988
Net realized gain (loss) on
share transactions.......... 1,277 3,460 2,162 (1,993)
------------ ---------- ---------- -----------
Net realized gain (loss).... 1,277 3,460 2,162 7,995
Net unrealized gain (loss).... 20,550 2,716,983 1,313,374 (47,665)
------------ ---------- ---------- -----------
Net realized and unrealized
gain (loss) on
investments............... 21,827 2,720,443 1,315,536 (39,670)
------------ ---------- ---------- -----------
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS.................. $ 10,612 $2,530,329 $1,257,568 $ (35,777)
------------ ---------- ---------- -----------
------------ ---------- ---------- -----------
</TABLE>
- ------------------------------
** Period from June 2, 1997 (date deposits first received) to December 31,
1997
*** Period from June 9, 1997 (date deposits first received) to December 31,
1997
**** Period from June 5, 1997 (date deposits first received) to December 31,
1997
The Notes to Financial Statements are an integral part of these statements.
34
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMT PORTFOLIO SUB-ACCOUNTS
-------------------------------------- OCC ACCUMULATION TRUST SUB-ACCOUNTS
LIMITED --------------------------------------------
MATURITY GLOBAL
BALANCED BOND PARTNERS EQUITY MANAGED SMALL CAP
------------ --------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................... $ 62,015 $230,704 $ 35,980 $ 89,675 $ 399,586 $ 19,838
EXPENSES:
Mortality and expense risk and
administrative charges...... 57,524 65,699 287,570 200,143 684,466 74,900
------------ --------- ----------- ------------ -------------- ------------
Net investment gain
(loss).................... 4,491 165,005 (251,590) (110,468) (284,880) (55,062)
------------ --------- ----------- ------------ -------------- ------------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Capital distribution from
portfolio sponsor........... 159,172 -- 554,096 863,304 1,227,260 139,904
Net realized gain (loss) on
share transactions.......... 8,894 1,260 (36,279) (3,225) 473 1,039
------------ --------- ----------- ------------ -------------- ------------
Net realized gain........... 168,066 1,260 517,817 860,079 1,227,733 140,943
Net unrealized gain........... 507,948 92,716 4,735,263 718,584 7,959,980 845,266
------------ --------- ----------- ------------ -------------- ------------
Net realized and unrealized
gain on investments....... 676,014 93,976 5,253,080 1,578,663 9,187,713 986,209
------------ --------- ----------- ------------ -------------- ------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS... $ 680,505 $258,981 $5,001,490 $1,468,195 $ 8,902,833 $931,147
------------ --------- ----------- ------------ -------------- ------------
------------ --------- ----------- ------------ -------------- ------------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
35
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CIGNA
VARIABLE
PRODUCTS
GROUP
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS SUB-ACCOUNT
--------------------------------------------------- ------------
LEVERAGED MIDCAP SMALL MONEY MARKET
GROWTH ALLCAP GROWTH CAPITALIZATION *
----------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (253,575) $ (94,488) $ (164,340) $ (218,002) $ 68,333
Net realized gain.................. 142,247 19,106 202,453 494,417 --
Net unrealized gain................ 5,050,728 1,153,622 1,532,602 1,272,653 --
----------- ---------- ---------- -------------- ------------
Net increase from operations..... 4,939,400 1,078,240 1,570,715 1,549,068 68,333
----------- ---------- ---------- -------------- ------------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 5,337,526 1,537,063 2,637,168 3,430,738 26,057,549
Participant transfers.............. 3,181,343 280,882 2,087,535 1,351,675 (19,218,746)
Participant withdrawals and annuity
payments......................... (824,870) (226,287) (472,429) (593,283) (37,520)
----------- ---------- ---------- -------------- ------------
Net increase from participant
transactions................... 7,693,999 1,591,658 4,252,274 4,189,130 6,801,283
----------- ---------- ---------- -------------- ------------
Total increase in net assets... 12,633,399 2,669,898 5,822,989 5,738,198 6,869,616
----------- ---------- ---------- -------------- ------------
NET ASSETS:
Beginning of period................ 18,174,849 5,583,768 9,575,698 14,394,067 --
----------- ---------- ---------- -------------- ------------
End of period...................... $30,808,248 $8,253,666 $15,398,687 $20,132,265 $ 6,869,616
----------- ---------- ---------- -------------- ------------
----------- ---------- ---------- -------------- ------------
<CAPTION>
FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
--------------------------------------------------
EQUITY- HIGH MONEY
INCOME INCOME MARKET OVERSEAS
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (30,113) $ 259,769 $ 574,867 $ (20,252)
Net realized gain.................. 2,511,332 36,854 -- 157,859
Net unrealized gain................ 6,563,776 1,259,396 -- 38,849
----------- ---------- ----------- -----------
Net increase from operations..... 9,044,995 1,556,019 574,867 176,456
----------- ---------- ----------- -----------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 9,877,589 7,265,778 25,555,964 2,765,425
Participant transfers.............. 7,616,249 4,195,306 (23,453,172) 2,324,012
Participant withdrawals and annuity
payments......................... (1,991,191) (375,923) (1,704,916) (162,622)
----------- ---------- ----------- -----------
Net increase from participant
transactions................... 15,502,647 11,085,161 397,876 4,926,815
----------- ---------- ----------- -----------
Total increase in net assets... 24,547,642 12,641,180 972,743 5,103,271
----------- ---------- ----------- -----------
NET ASSETS:
Beginning of period................ 28,183,257 4,883,390 10,602,830 1,894,609
----------- ---------- ----------- -----------
End of period...................... $52,730,899 $17,524,570 $11,575,573 $ 6,997,880
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
- ------------------------------
* Period from May 20, 1997 (date deposits first received) to December 31, 1997
The Notes to Financial Statements are an integral part of these statements.
36
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP
III
PORTFOLIO SUB-
FIDELITY VIP II ACCOUNT
PORTFOLIO SUB-ACCOUNTS --------------
----------------------------------- GROWTH
ASSET CONTRA- INVESTMENT OPPORTUNITIES
MANAGER FUND ** GRADE BOND ***
----------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ 90,554 $ (5,782) $ 256,473 $ (12,362)
Net realized gain (loss)........... 425,004 (17) 2,025 57
Net unrealized gain (loss)......... 492,627 41,006 368,703 165,241
----------- ---------- ---------- --------------
Net increase (decrease) from
operations..................... 1,008,185 35,207 627,201 152,936
----------- ---------- ---------- --------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits............... 999,019 1,155,144 2,794,038 2,597,161
Participant transfers.............. 810,077 547,974 2,142,175 1,101,690
Participant withdrawals............ (355,632) (27,303) (316,736) (20,299)
----------- ---------- ---------- --------------
Net increase (decrease) from
participant transactions....... 1,453,464 1,675,815 4,619,477 3,678,552
----------- ---------- ---------- --------------
Total increase (decrease) in
net assets................... 2,461,649 1,711,022 5,246,678 3,831,488
----------- ---------- ---------- --------------
NET ASSETS:
Beginning of period................ 4,203,610 -- 5,840,585 --
----------- ---------- ---------- --------------
End of period...................... $ 6,665,259 $1,711,022 $11,087,263 $ 3,831,488
----------- ---------- ---------- --------------
----------- ---------- ---------- --------------
<CAPTION>
MFS SERIES SUB-ACCOUNTS
----------------------------------------------------------------------------
EMERGING GROWTH WITH RESEARCH TOTAL WORLD
GROWTH ** INCOME **** *** RETURN UTILITIES GOVERNMENTS
------------ ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (6,875) $ 2,108 $ (11,215 ) $ (190,114) $ (57,968) $ 3,893
Net realized gain (loss)........... 1,644 49,851 1,277 3,460 2,162 7,995
Net unrealized gain (loss)......... 24,778 43,425 20,550 2,716,983 1,313,374 (47,665)
------------ ----------- ---------- ----------- ---------- -----------
Net increase (decrease) from
operations..................... 19,547 95,384 10,612 2,530,329 1,257,568 (35,777)
------------ ----------- ---------- ----------- ---------- -----------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits............... 1,299,509 1,387,817 2,361,107 4,951,791 697,454 205,485
Participant transfers.............. 849,791 1,287,747 1,353,004 3,826,468 1,697,348 (228,367)
Participant withdrawals............ (49,758) (6,492 ) (45,052 ) (589,750) (192,307) (35,414)
------------ ----------- ---------- ----------- ---------- -----------
Net increase (decrease) from
participant transactions....... 2,099,542 2,669,072 3,669,059 8,188,509 2,202,495 (58,296)
------------ ----------- ---------- ----------- ---------- -----------
Total increase (decrease) in
net assets................... 2,119,089 2,764,456 3,679,671 10,718,838 3,460,063 (94,073)
------------ ----------- ---------- ----------- ---------- -----------
NET ASSETS:
Beginning of period................ -- -- -- 8,702,389 2,791,807 1,507,463
------------ ----------- ---------- ----------- ---------- -----------
End of period...................... $ 2,119,089 $2,764,456 $3,679,671 $19,421,227 $6,251,870 $1,413,390
------------ ----------- ---------- ----------- ---------- -----------
------------ ----------- ---------- ----------- ---------- -----------
</TABLE>
- ------------------------------
** Period from June 2, 1997 (date deposits first received) to December 31,
1997
*** Period from June 9, 1997 (date deposits first received) to December 31,
1997
**** Period from June 5, 1997 (date deposits first received) to December 31,
1997
The Notes to Financial Statements are an integral part of these statements.
37
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMT PORTFOLIO SUB-ACCOUNTS
-----------------------------------
LIMITED OCC ACCUMULATION TRUST SUB-ACCOUNTS
MATURITY ------------------------------------------
BALANCED BOND PARTNERS GLOBAL EQUITY MANAGED SMALL CAP
----------- ---------- ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain
(loss)................. $ 4,491 $ 165,005 $ (251,590) $ (110,468) $ (284,880) $ (55,062)
Net realized gain........ 168,066 1,260 517,817 860,079 1,227,733 140,943
Net unrealized gain...... 507,948 92,716 4,735,263 718,584 7,959,980 845,266
----------- ---------- ---------- -------------- ------------ -----------
Net increase from
operations........... 680,505 258,981 5,001,490 1,468,195 8,902,833 931,147
----------- ---------- ---------- -------------- ------------ -----------
ACCUMULATION AND ANNUITY
UNIT TRANSACTIONS:
Participant deposits 794,039 1,839,438 10,686,060 4,406,191 16,196,357 2,555,273
Participant transfers.... 772,497 1,058,558 9,775,496 3,352,013 11,795,604 3,078,585
Participant withdrawals
and annuity payments... (201,295) (183,646 ) (738,005) (555,871) (2,062,412) (255,114)
----------- ---------- ---------- -------------- ------------ -----------
Net increase from
participant
transactions......... 1,365,241 2,714,350 19,723,551 7,202,333 25,929,549 5,378,744
----------- ---------- ---------- -------------- ------------ -----------
Total increase in net
assets.............. 2,045,746 2,973,331 24,725,041 8,670,528 34,832,382 6,309,891
----------- ---------- ---------- -------------- ------------ -----------
NET ASSETS:
Beginning of period...... 3,365,177 3,663,477 9,696,541 10,194,411 33,126,842 2,756,326
----------- ---------- ---------- -------------- ------------ -----------
End of period............ $ 5,410,923 $6,636,808 $34,421,582 $ 18,864,939 $ 67,959,224 $ 9,066,217
----------- ---------- ---------- -------------- ------------ -----------
----------- ---------- ---------- -------------- ------------ -----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
38
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIODS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ALGER AMERICAN PORTFOLIO SUB-ACCOUNTS FIDELITY VIP PORTFOLIO SUB-ACCOUNTS
--------------------------------------------------- --------------------------------------------------
LEVERAGED MIDCAP SMALL EQUITY- HIGH MONEY
GROWTH ALLCAP GROWTH CAPITALIZATION INCOME INCOME * MARKET OVERSEAS **
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain
(loss)................. $ (137,697) $ (48,267) $ (67,601) $ (126,196) $ (209,687) $ (19,299) $ 428,827 $ (5,307)
Net realized gain
(loss)................. 229,107 8,055 80,821 1,764 340,521 (241) -- 168
Net unrealized gain...... 1,131,951 218,998 345,620 109,613 2,059,625 196,922 -- 64,159
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
Net increase (decrease)
from operations...... 1,223,361 178,786 358,840 (14,819) 2,190,459 177,382 428,827 59,020
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
ACCUMULATION AND ANNUITY
UNIT TRANSACTIONS:
Participant deposits..... 10,783,257 3,476,529 4,553,845 8,786,778 15,889,145 2,685,680 30,385,963 1,005,559
Participant transfers.... 2,602,802 772,742 2,723,340 2,632,177 5,222,220 2,257,438 (26,362,351) 834,182
Participant withdrawals
and annuity payments... (294,588) (53,503) (98,852) (281,569) (1,664,909) (237,110) (825,252) (4,152)
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
Net increase from
participant
transactions......... 13,091,471 4,195,768 7,178,333 11,137,386 19,446,456 4,706,008 3,198,360 1,835,589
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
Total increase in net
assets............. 14,314,832 4,374,554 7,537,173 11,122,567 21,636,915 4,883,390 3,627,187 1,894,609
NET ASSETS:
Beginning of period...... 3,860,017 1,209,214 2,038,525 3,271,500 6,546,342 -- 6,975,643 --
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
End of period............ $18,174,849 $5,583,768 $9,575,698 $14,394,067 $28,183,257 $4,883,390 $ 10,602,830 $1,894,609
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
----------- ---------- ---------- -------------- ----------- ---------- ------------ -----------
<CAPTION>
FIDELITY VIP II
PORTFOLIO SUB-ACCOUNTS
-----------------------
ASSET INVESTMENT
MANAGER GRADE BOND
---------- -----------
<S> <C> <C>
OPERATIONS:
Net investment gain
(loss)................. $ (3,908) $ 44,176
Net realized gain
(loss)................. 23,191 (39,580)
Net unrealized gain...... 318,766 134,649
---------- -----------
Net increase (decrease)
from operations...... 338,049 139,245
---------- -----------
ACCUMULATION AND ANNUITY
UNIT TRANSACTIONS:
Participant deposits..... 2,404,033 4,267,300
Participant transfers.... 837,140 (43,936)
Participant withdrawals
and annuity payments... (79,225) (43,602)
---------- -----------
Net increase from
participant
transactions......... 3,161,948 4,179,762
---------- -----------
Total increase in net
assets............. 3,499,997 4,319,007
NET ASSETS:
Beginning of period...... 703,613 1,521,578
---------- -----------
End of period............ $4,203,610 $5,840,585
---------- -----------
---------- -----------
</TABLE>
- ------------------------------
* Period from May 22, 1996 (date deposits first received) to December 31, 1996
** Period from May 20, 1996 (date deposits first received) to December 31, 1996
The Notes to Financial Statements are an integral part of these statements.
39
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MFS SERIES SUB-ACCOUNTS AMT PORTFOLIO SUB-ACCOUNTS
----------------------------------- --------------------------------------
TOTAL WORLD LIMITED
RETURN UTILITIES GOVERNMENTS BALANCED MATURITY BOND PARTNERS
---------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ 70,381 $ 43,717 $ (12,757) $ (370) $ 82,632 $ (58,511)
Net realized gain.................. 59,975 165,947 103 159,057 110 78,862
Net unrealized gain (loss)......... 468,302 99,863 61,456 (27,931) 8,894 1,271,284
---------- ---------- ----------- ---------- ------------- ----------
Net increase from operations..... 598,658 309,527 48,802 130,756 91,636 1,291,635
---------- ---------- ----------- ---------- ------------- ----------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 4,811,832 1,302,058 895,119 1,994,125 1,858,603 4,552,441
Participant transfers.............. 1,778,613 721,609 229,235 421,781 669,231 2,538,705
Participant withdrawals and annuity
payments......................... (126,130) (54,286) (8,402) (59,302) (82,873) (209,905)
---------- ---------- ----------- ---------- ------------- ----------
Net increase from participant
transactions................... 6,464,315 1,969,381 1,115,952 2,356,604 2,444,961 6,881,241
---------- ---------- ----------- ---------- ------------- ----------
Total increase in net assets... 7,062,973 2,278,908 1,164,754 2,487,360 2,536,597 8,172,876
NET ASSETS:
Beginning of period................ 1,639,416 512,899 342,709 877,817 1,126,880 1,523,665
---------- ---------- ----------- ---------- ------------- ----------
End of period...................... $8,702,389 $2,791,807 $1,507,463 $3,365,177 $3,663,477 $9,696,541
---------- ---------- ----------- ---------- ------------- ----------
---------- ---------- ----------- ---------- ------------- ----------
<CAPTION>
OCC ACCUMULATION
TRUST SUB-ACCOUNTS
------------------------------------
GLOBAL SMALL
EQUITY MANAGED CAP
----------- ----------- ----------
<S> <C> <C> <C>
OPERATIONS:
Net investment gain (loss)......... $ (40,318) $ (125,580) $ (9,497)
Net realized gain.................. 51,921 76,937 24,917
Net unrealized gain (loss)......... 767,457 3,785,792 239,507
----------- ----------- ----------
Net increase from operations..... 779,060 3,737,149 254,927
----------- ----------- ----------
ACCUMULATION AND ANNUITY UNIT
TRANSACTIONS:
Participant deposits............... 5,606,065 17,033,548 1,053,997
Participant transfers.............. 2,295,536 7,398,554 835,481
Participant withdrawals and annuity
payments......................... (124,119) (464,195) (17,732)
----------- ----------- ----------
Net increase from participant
transactions................... 7,777,482 23,967,907 1,871,746
----------- ----------- ----------
Total increase in net assets... 8,556,542 27,705,056 2,126,673
NET ASSETS:
Beginning of period................ 1,637,869 5,421,786 629,653
----------- ----------- ----------
End of period...................... $10,194,411 $33,126,842 $2,756,326
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
40
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
CG Variable Annuity Separate Account II (the Account) is registered as a
Unit Investment Trust under the Investment Company Act of 1940, as amended. The
operations of the Account are part of the operations of Connecticut General Life
Insurance Company (CG Life). The assets and liabilities of the Account are
clearly identified and distinguished from other assets and liabilities of CG
Life. The assets of the Account are not available to meet the general
obligations of CG Life and are held for the exclusive benefit of the
participants. Within the account are four contract types that have different
contract terms and or different fees (See Note 4).
The assets of the Account are divided into variable sub-accounts each of
which is invested in shares of twenty-five portfolios (mutual funds) of eight
diversified open-end management investment companies, each portfolio with its
own investment objective. The variable sub-accounts are:
ALGER AMERICAN FUND:--
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Capitalization Portfolio
CIGNA VARIABLE PRODUCTS GROUP:--
CIGNA Variable Products Money Market Fund
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:--
Equity-Income Portfolio
High Income Portfolio
Money Market Portfolio
Overseas Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:--
Asset Manager Portfolio
Contrafund Portfolio
Investment Grade Bond Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III:--
Growth Opportunities Portfolio
MFS VARIABLE INSURANCE TRUST:--
MFS Emerging Growth Series
MFS Growth with Income Series
MFS Research Series
MFS Total Return Series
MFS Utilities Series
MFS World Governments Series
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST:--
AMT Balanced Portfolio
AMT Limited Maturity Bond Portfolio
AMT Partners Portfolio
41
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION (CONTINUED)
OCC ACCUMULATION TRUST:--
OCC Global Equity Portfolio
OCC Managed Portfolio
OCC Small Cap Portfolio
Effective January 1, 1998, CG Life sold its individual variable annuity
business to Lincoln National Corporation (Lincoln). Although CG Life will remain
responsible for all policy terms and conditions, Lincoln will be servicing the
individual annuity contracts, including the payment of benefits, oversight of
investment management and contract administration.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with generally
accepted accounting principles. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies consistently
followed in the preparation of the Account's financial statements.
A. INVESTMENT VALUATION:--Investments held by the sub-accounts are valued at
their respective closing net asset value per share as determined by the
mutual funds as of December 31, 1997. The change in the difference between
cost and value is reflected as unrealized gain (loss) in the Statements of
Operations.
B. INVESTMENT TRANSACTIONS:--Investment transactions are recorded on the trade
date (date the order to buy or sell is executed). Realized gains and losses
on sales of investments are determined by the last-in, first-out cost basis
of the investment sold. Dividend and capital gain distributions are recorded
on the ex-dividend date. Investment transactions are settled through CG
Life.
C. FEDERAL INCOME TAXES:--The operations of the Account form a part of, and are
taxed with, the total operations of CG Life, which is taxed as a life
insurance company. Under existing Federal income tax law, investment income
(dividends) and capital gains attributable to the Account are not taxed.
D. ANNUITY RESERVES:--The amount of annuity reserves is determined by the
actuarial assumptions which meet statutory requirements. Gains or losses
resulting from the actual mortality experience, the responsibility of which
is assumed by CG Life, are offset by transfers to or from CG Life.
42
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
3. INVESTMENTS
Total shares held and cost of investments as of December 31, 1997 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SHARES COST OF
SUB-ACCOUNT HELD INVESTMENTS
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Growth Portfolio..................................... 720,492 $24,629,937
Alger American Leveraged AllCap Portfolio........................... 356,222 6,847,244
Alger American MidCap Growth Portfolio.............................. 636,836 13,557,022
Alger American Small Capitalization Portfolio....................... 460,166 18,845,387
CIGNA Variable Products Money Market Fund........................... 6,869,616 6,869,616
Fidelity Equity-Income Portfolio.................................... 2,171,783 43,838,658
Fidelity High Income Portfolio...................................... 1,290,469 16,068,252
Fidelity Money Market Portfolio..................................... 11,575,573 11,575,573
Fidelity Overseas Portfolio......................................... 364,474 6,894,872
Fidelity Asset Manager Portfolio.................................... 370,087 5,827,525
Fidelity Contrafund Portfolio....................................... 85,809 1,670,018
Fidelity Investment Grade Bond Portfolio............................ 882,744 10,559,814
Fidelity Growth Opportunities Portfolio............................. 198,832 3,666,247
MFS Emerging Growth Series.......................................... 131,294 2,094,311
MFS Growth with Income Series....................................... 168,154 2,721,031
MFS Research Series................................................. 233,038 3,659,121
MFS Total Return Series............................................. 1,167,843 16,201,968
MFS Utilities Series................................................ 347,520 4,830,719
MFS World Governments Series........................................ 138,432 1,421,536
AMT Balanced Portfolio.............................................. 303,984 4,930,498
AMT Limited Maturity Bond Portfolio................................. 470,029 6,506,300
AMT Partners Portfolio.............................................. 1,670,951 28,361,035
OCC Global Equity Portfolio......................................... 1,317,384 17,399,927
OCC Managed Portfolio............................................... 1,603,568 55,978,469
OCC Small Cap Portfolio............................................. 343,808 7,961,523
- -------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
3. INVESTMENTS (CONTINUED)
Total purchases and sales of shares for each mutual fund, for the periods
ended December 31, 1997, amounted to:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SUB-ACCOUNT PURCHASES SALES
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Growth Portfolio.................................... $8,595,764 $1,014,633
Alger American Leveraged AllCap Portfolio.......................... 2,723,167 1,225,998
Alger American MidCap Growth Portfolio............................. 5,434,002 1,168,497
Alger American Small Capitalization Portfolio...................... 8,828,840 4,270,290
CIGNA Variable Products Money Market Fund*......................... 16,585,368 9,715,752
Fidelity Equity-Income Portfolio................................... 20,031,213 2,036,485
Fidelity High Income Portfolio..................................... 14,065,473 2,670,890
Fidelity Money Market Portfolio.................................... 27,152,685 26,179,942
Fidelity Overseas Portfolio........................................ 5,656,133 588,707
Fidelity Asset Manager Portfolio................................... 2,826,840 863,124
Fidelity Contrafund Portfolio**.................................... 1,717,783 47,748
Fidelity Investment Grade Bond Portfolio........................... 6,343,028 1,467,077
Fidelity Growth Opportunities Portfolio***......................... 3,767,973 101,783
MFS Emerging Growth Series**....................................... 2,134,597 41,930
MFS Growth with Income Series****.................................. 2,729,062 7,933
MFS Research Series***............................................. 3,805,827 147,983
MFS Total Return Series............................................ 8,657,635 659,240
MFS Utilities Series............................................... 2,560,406 415,879
MFS World Governments Series....................................... 569,430 613,845
AMT Balanced Portfolio............................................. 2,296,440 767,536
AMT Limited Maturity Bond Portfolio................................ 4,359,908 1,480,553
AMT Partners Portfolio............................................. 22,831,233 2,805,176
OCC Global Equity Portfolio........................................ 8,917,830 962,662
OCC Managed Portfolio.............................................. 27,881,600 1,009,672
OCC Small Cap Portfolio............................................ 5,864,106 400,520
- -------------------------------------------------------------------------------------------
</TABLE>
* From 5/20/97, date deposits first received, to December 31, 1997.
** From 6/2/97, date deposits first received, to December 31, 1997.
*** From 6/9/97, date deposits first received, to December 31, 1997.
**** From 6/5/97, date deposits first received, to December 31, 1997.
4. CHARGES AND DEDUCTIONS
CG Life assumes the risk that annuitants may live longer than expected and
also assumes a mortality risk in connection with the death benefits of the
contract. CG Life also assumes a risk that its actual administrative expenses
may be higher than amounts deducted for such expenses. For all contracts sold
after April 30, 1997, CG Life charges each variable sub-account the daily
equivalent of 1.25%, on an annual basis, of the current value of each
sub-account's assets for the assumption of these risks. All contracts sold
before May 1, 1997, with the exception of contracts sold in the state of New
York from May 1, 1996 to April 30, 1997 (1.25% annual fee), have an annual fee
of 1.20% for mortality and expense risks.
CG Life also deducts a daily administrative fee from the assets of each
variable sub-account as partial reimbursement for administrative expenses
relating to the issuance and maintenance of the contract and the participant's
annuity
44
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
4. CHARGES AND DEDUCTIONS (CONTINUED)
account. For all contracts sold after April 30, 1997, this charge is at an
effective annual rate of .15%. All contracts sold before May 1, 1997, with the
exception of contracts sold in the state of New York from May 1, 1996 to April
30, 1997 (.15% annual fee), have an effective annual rate of .10%.
As partial compensation for administrative services provided, CG Life
additionally receives a $35 ($30 on New York contracts) annuity account fee per
year from each contract. This charge is deducted from the fixed or variable sub-
account of the participant or on a pro-rata basis from two or more fixed or
variable sub-accounts in relation to their values under the contract. Fixed
sub-accounts are part of the general account of CG Life and are not included in
these financial statements. 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. Annuity account fees, for the
variable sub-accounts, amounting to $71,683, were deducted for the periods ended
December 31, 1997.
For contracts sold prior to May 1, 1997 (excluding contracts sold in the
state of New York where the optional death benefit was not available), the
participant could have, for an additional charge, selected an optional death
benefit (optional death benefit fee). The optional death benefit fee will be
deducted from the participant's fixed or variable sub-account or on a pro-rata
basis from two or more fixed or variable sub-accounts in relation to their
values under the contract on the date of each contract anniversary. The optional
death benefit fees, for the variable sub-accounts, amounted to $4,356 for the
periods ended December 31, 1997.
Under certain circumstances, CG Life reserves the right to charge a transfer
fee of up to $10 for transfers between sub-accounts. No transfer fees, for the
variable sub-accounts, were deducted for the periods ended December 31, 1997.
45
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
4. CHARGES AND DEDUCTIONS (CONTINUED)
The fees charged by CG Life for mortality and expense risks and
administrative fees, from variable sub-accounts, for the periods ended December
31, 1997, amounted to:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
MORTALITY ASSET BASED
AND EXPENSE ADMINISTRATIVE
SUB-ACCOUNT RISK FEES FEES
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Growth Portfolio...................................... $ 304,868 $ 26,402
Alger American Leveraged AllCap Portfolio............................ 86,987 7,501
Alger American MidCap Growth Portfolio............................... 157,966 13,656
Alger American Small Capitalization Portfolio........................ 200,537 17,465
CIGNA Variable Products Money Market Fund*........................... 23,648 2,838
Fidelity Equity-Income Portfolio..................................... 489,324 42,440
Fidelity High Income Portfolio....................................... 130,361 11,610
Fidelity Money Market Portfolio...................................... 173,089 14,557
Fidelity Overseas Portfolio.......................................... 55,821 4,954
Fidelity Asset Manager Portfolio..................................... 70,643 6,115
Fidelity Contrafund Portfolio**...................................... 5,162 620
Fidelity Investment Grade Bond Portfolio............................. 96,220 8,297
Fidelity Growth Opportunities Portfolio***........................... 11,037 1,325
MFS Emerging Growth Series**......................................... 6,138 737
MFS Growth with Income Series****.................................... 7,652 918
MFS Research Series***............................................... 10,013 1,202
MFS Total Return Series.............................................. 174,760 15,354
MFS Utilities Series................................................. 53,426 4,542
MFS World Governments Series......................................... 16,724 1,418
AMT Balanced Portfolio............................................... 52,966 4,558
AMT Limited Maturity Bond Portfolio.................................. 60,458 5,241
AMT Partners Portfolio............................................... 263,923 23,647
OCC Global Equity Portfolio.......................................... 184,183 15,960
OCC Managed Portfolio................................................ 629,309 55,157
OCC Small Cap Portfolio.............................................. 68,834 6,066
- -----------------------------------------------------------------------------------------------
</TABLE>
* From 5/20/97, date deposits first received, to December 31, 1997.
** From 6/2/97, date deposits first received, to December 31, 1997.
*** From 6/9/97, date deposits first received, to December 31, 1997.
**** From 6/5/97, date deposits first received, to December 31, 1997.
No deduction for sales charges is made from a premium payment. However, if a
cash withdrawal is made, a withdrawal charge (contingent deferred sales charge)
may be assessed by CG Life. The withdrawal charge, if assessed, varies from 0-7%
depending upon the duration of each contract deposit. The withdrawal charge is
deducted from withdrawal proceeds for full withdrawals and reduces the remaining
account value for partial withdrawals. These charges are paid to CG Life as
reimbursement for services provided. These services include commissions paid to
sales personnel, the costs associated with preparation of sales literature and
other promotional costs and acquisition expenses. Withdrawal charges paid to CG
Life for the variable sub-accounts, for the periods ended December 31, 1997,
amounted to $145,226.
46
<PAGE>
CG VARIABLE ANNUITY SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
5. DISTRIBUTION OF NET INCOME
The Account does not expect to declare dividends to participants from
accumulated net income. The accumulated net income is distributed to
participants as part of surrenders, death benefits, transfers to other fixed or
variable sub-accounts or annuity payments in excess of net purchase payments.
6. DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code of 1986
(the Code), a variable annuity contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
an annuity contract for Federal tax purposes for any period for which the
investments of the segregated asset account, on which the contract is based, are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of the Treasury. CG Life believes, based on assurances from the
mutual fund managers, that the mutual funds satisfy the requirements of the
regulations.
47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Connecticut General
Life Insurance Company and Participants of the
CG Variable Annuity Separate Account II
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the sub-accounts, Alger
American Fund--Alger American Growth Portfolio, Alger American Leveraged AllCap
Portfolio, Alger American MidCap Growth Portfolio, Alger American Small
Capitalization Portfolio; CIGNA Variable Products Group--CIGNA Variable Products
Money Market Fund; Fidelity Variable Insurance Products Fund--Equity-Income
Portfolio, High Income Portfolio, Money Market Portfolio, Overseas Portfolio;
Fidelity Variable Insurance Products Fund II--Asset Manager Portfolio,
Contrafund Portfolio, Investment Grade Bond Portfolio; Fidelity Variable
Insurance Products Fund III--Growth Opportunities Portfolio; MFS Variable
Insurance Trust--MFS Emerging Growth Series, MFS Growth with Income Series, MFS
Research Series, MFS Total Return Series, MFS Utilities Series, MFS World
Governments Series; Neuberger & Berman Advisers Management Trust--AMT Balanced
Portfolio, AMT Limited Maturity Bond Portfolio, AMT Partners Portfolio; OCC
Accumulation Trust--OCC Global Equity Portfolio, OCC Managed Portfolio, OCC
Small Cap Portfolio (constituting the CG Variable Annuity Separate Account II,
hereafter referred to as "the Account") at December 31, 1997, the results of
each of their operations and the changes in each of their net assets for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Account's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodians, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Hartford, Connecticut
February 20, 1998
48
<PAGE>
PART C. OTHER INFORMATION
1
<PAGE>
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS*
* All exhibits, except exhibits (b)(3), (b)(4a), (b)(4b), (b)(5a), (b)(5b),
(b)(9), and (b)(10), are incorporated by reference to Post-Effective
Amendment No. 2 to this Form N-4 Registration Statement under the
Securities Act of 1933 (File No. 33-83020) filed June 21, 1995. Exhibits
(b)(4a) and (b)(5a) are incorporated by reference to Post-Effective
Amendment No. 5 to this Form N-4 Registration Statement filed February
29, 1996. Exhibits (b)(3), (b)(4b) and (b)(5b) are incorporated by
reference to Post-Effective Amendment No. 7 to this Form N-4 Registration
Statement filed April 22, 1997.
(a) Financial Statements provided in the Statement of Additional Information.
(1)
Registrant
(A) Statements of Assets and Liabilities as of December 31, 1997 and
December 31, 1996
(B) Statement of Operations for the Periods (as defined in the financial
statements) ended December 31, 1997.
(C) Statement of Changes in Net Assets for the Periods (as defined in the
financial statements) ended December 31, 1997.
(2)
Depositor
(A) Consolidated Statements of Income and Retained Earnings for the Years
Ended December 31, 1997, 1996 and 1995.
(B) Consolidated Balance Sheets as of December 31, 1997 and 1996.
(C) Consolidated Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995.
(b) Exhibits
(1)
Resolution of Board of Directors Authorizing Establishment of Registrant
(2)
Not Applicable
(3)
Form of Selling Agreement among Connecticut General Life Insurance
Company, CIGNA Financial Advisors, Inc. as principal underwriter, and
selling dealers.
(4a)
Form of Connecticut General Life Insurance Company Variable Annuity
Contract Form Number AN 421A, together with Form of Certificate Form
Number AN 422A and Optional Methods of Settlement Riders (Form Numbers AR
421X, AR 421X-U, AR 422 and AR 422).
(4b)
Form of Connecticut General Life Insurance Company Variable Annuity
Contract Form Number AN425 together with Form of Certificate Form Number
AN 426, Optional Methods of Settlement Riders (Form Numbers AR 425 and AR
426), Nursing Care Rider (Form Number AR 314), CRT Rider (Form Number
B10322).
(5a)
Forms of Application or Order to Purchase Which May Be Used in Connection
with the Contract and Certificate Shown As Exhibits (4), (4a) and (4b)
(Form Numbers B 10279, 10280 and 10281)
(5b)
Form of Application (Order to Purchase) which may be used in Connection
with the Contract and Certificate shown as Exhibits (4b).
(6)
(A) Certificate of Incorporation (Charter) of Connecticut General Life
Insurance Company, as amended
(B) By-Laws of Connecticut General Life Insurance Company
(7)
Not Applicable
(8)
Not Applicable
(9)
Opinion and Consent of Mark A. Parsons, Esq., Chief Counsel, Retirement
and Investment Services Division, of CIGNA Corporation
(10)
(A) Consent of Price Waterhouse LLP
(B) Consent of George N. Gingold, Esq.
(11)
Not Applicable
(12)
Not Applicable
(13)
Not Applicable
(14)
Not Applicable
2
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ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of each of the directors and officers of
Connecticut General Life Insurance Company (the "Company") is the Company's Home
Office, 900 Cottage Grove Road, Hartford, Connecticut 06152.
DIRECTORS AND OFFICERS OF DEPOSITOR
NAME POSITIONS AND OFFICES WITH DEPOSITOR
- ------------------------------ ---------------------------------------------
President (Principal Executive Officer) and
Thomas C. Jones Director
Vice President and Actuary (Principal
John Wilkinson Financial Officer)
Assistant Vice President (Principal
Dominic A. DellaVolpe Accounting Officer)
David C. Kopp Corporate Secretary
Andrew G. Helming Secretary
Stephen C. Stachelek Vice President and Treasurer
H. Edward Hanway Director and Chairman of the Board
Harold W. Albert Director
Robert W. Burgess Director
John G. Day Director and Chief Counsel
Joseph M. Fitzgerald Director and Senior Vice President
Carol M. Olsen Director and Senior Vice President
John E. Pacy Director and Senior Vice President
Director, Senior Vice President and Chief
Marc L. Preminger Financial Officer
Patricia L. Rowland Director and Senior Vice President
W. Allen Schaffer, MD Director and Senior Vice President
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
There follows a chart of persons controlled by or under common control with
the Depositor. The consolidated financial statements of the Depositor include
the accounts of the Depositor and its wholly-owned subsidiaries.
CIGNA CORPORATION
(A Delaware corporation and ultimate parent company)
<TABLE>
<S> <C>
CIGNA Holdings, Inc.
CIGNA Information Services, Inc.
CIGNA Investment Group, Inc.
CIGNA International Finance, Inc.
CIGNA International Investment Advisors, Ltd.
CIGNA International Investment Advisors Australia Limited
CIGNA International Investment Advisors K.K.
CIGNA Investment Advisory Company, Inc.
CIGNA Investments, Inc.
CIGNA Leveraged Capital Fund, Inc.
CIGNA Properties, Inc.
CIGNA Conference Facilities, Inc.
</TABLE>
3
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<TABLE>
<S> <C>
Connecticut General Corporation
CIGNA Associates, Inc.
CIGNA Dental Health, Inc.
(EI# 59-2308055 FL)
CIGNA Dental Health of California, Inc.
(EI# 59-2600475 CA)
CIGNA Dental Health of Colorado, Inc.
(EI# 59-2675861 CO)
CIGNA Dental Health of Delaware, Inc.
(EI# 59-2676987, NAIC# 47279 DE)
CIGNA Dental Health of Florida, Inc.
(EI# 59-1611217 FL, NAIC# 52021)
CIGNA Dental Health of Illinois, Inc.
(EI# 06-1351097 IL)
CIGNA Dental Health of Kansas, Inc.
(EI# 59-2625350 KS)
CIGNA Dental Health of Kentucky, Inc.
(EI# 59-2619589, NAIC# 52108 KY)
CIGNA Dental Health of Maryland, Inc.
(EI# 59-2740468, NAIC# 48119 DE)
CIGNA Dental Health of New Jersey, Inc.
(EI# 59-2308062 NJ)
CIGNA Dental Health of New Mexico, Inc.
(EI# 95-4452999 NM, NAIC# 47001)
CIGNA Dental Health of North Carolina, Inc.
(EI# 56-1803464 NC, NAIC# 95179)
CIGNA Dental Health of Ohio, Inc.
(EI# 59-2579774, NAIC# 47805 OH)
CIGNA Dental Health of Pennsylvania, Inc.
(EI# 52-1220578 PA)
CIGNA Dental Health of Texas, Inc.
(EI# 59-2676977 TX)
CIGNA Dental Health of Arizona, Inc.
(EI# 86-0807222 AZ)
CIGNA Financial Advisors, Inc.
(EI# 060841987)
CIGNA Health Corporation
CIGNA HealthCare of Arizona, Inc.
(EI# 86-0334392 AZ)
CIGNA Community Choice, Inc.
(EI# 86-0759133 AZ)
CIGNA HealthCare of California, Inc.
(EI# 95-3310115 CA)
</TABLE>
4
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<TABLE>
<S> <C>
CIGNA HealthCare of Colorado, Inc.
(EI# 84-1004500 CO)
CIGNA HealthCare of Connecticut, Inc.
(EI# 06-1141174 CT)
CIGNA HealthCare of Delaware, Inc.
(EI# 52-1347731 DE)
CIGNA HealthCare of Florida, Inc.
(EI# 59-2089259 FL)
CIGNA HealthCare of Georgia, Inc.
(EI# 58-1641057 GA)
CIGNA HealthCare of Illinois, Inc.
(EI# 36-3385638 DE)
CIGNA HealthCare of Louisiana, Inc.
(EI# 75-2076466 LA)
CIGNA HealthCare of Massachusetts, Inc.
(EI# 06-1141175 MA)
CIGNA HealthCare of Mid-Atlantic, Inc.
(EI# 52-1404350 MD)
CIGNA HealthCare of New Jersey, Inc.
(EI# 22-2623507 NJ)
CIGNA HealthCare of New York, Inc.
(EI# 11-2758941 NY)
CIGNA HealthCare of North Carolina, Inc.
(EI# 62-1230905 NC)
CIGNA HealthCare of North Louisiana, Inc.
(EI# 75-1965033 LA)
CIGNA HealthCare of Northern New Jersey, Inc.
(EI# 22-2720890 NJ)
CIGNA HealthCare of Ohio, Inc.
(EI# 31-1146142 OH)
CIGNA HealthCare of Oklahoma, Inc.
(EI# 73-1223871 OK)
CIGNA HealthCare of Pennsylvania, Inc.
(EI# 23-2301807 PA)
CIGNA HealthCare of St. Louis, Inc.
(EI# 36-3359925 MO)
CIGNA HealthCare of Tennessee, Inc.
(EI# 62-1218053 TN)
CIGNA HealthCare of Texas, Inc.
(EI# 75-1677631 TX)
CIGNA HealthCare of Utah, Inc.
(EI# 62-1230908 UT)
CIGNA HealthCare of Virginia, Inc.
(EI# 54-1252797 VA)
</TABLE>
5
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<TABLE>
<S> <C>
Lovelace Health Systems, Inc.
(EI# 85-0327237 NM)
Temple Insurance Company Limited (Bermuda)
*Connecticut General Life Insurance Company
(EI# 06-0303370, NAIC# 62308, CT)
All-Net Preferred Providers, Inc.
Capital Outdoor Acquisition Co., Inc.
(92.87% owned by CG Life; 7.13% owned by LINA)
*CIGNA Life Insurance Company
(EI# 06-1050034, NAIC# 93629, CT)
Cottage Grove Vessels, Inc. (72.48%)
(Remaining interests owned by Affiliate)
Don Ce Sar Resort Hotel, Ltd. (86% L.P. interest)
(Remaining Interest Owned by Rosado Grande Inc.-1% and
unaffiliated parties)
Goodwin Square LLC
(9.9% membership interest and managing member on behalf
of Separate Account Connecticut) (Remaining interests
owned by Unaffiliated Parties)
ICO, INC.
Quebec Street Investments, Inc.
Ridgedale REIT, Inc. - (49.9%)
(Remaining interests owned by Unaffiliated Parties)
1717 Main Street Corporation
Southland REIT, Inc. - (49.9%)
(Remaining interests owned by Unaffiliated Parties)
*INA Life Insurance Company of New York
(EI# 13-2556568, NAIC# 64548, NY)
International Rehabilitation Associates, Inc. d/b/a INTRACORP
*Life Insurance Company of North America
(EI# 23-1503749, NAIC# 65498, PA)
AIC Holdings, Inc.
*CIGNA Life Insurance Company of Canada (Canada)
CIGNA Private Equities, Inc. (51.43%)
(Remaining Interest Owned by Affiliates)
*INA Life Insurance Co., Ltd. (Japan) (90%)
MCC Behavioral Care, Inc.
Trilog, Inc.
INA Corporation
CIGNA International Holdings, Ltd.
Afia (CIGNA) Corporation, Limited
Afia (INA) Corporation, Limited
Afia Finance Corporation
</TABLE>
6
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<TABLE>
<S> <C>
*CIGNA Reinsurance New Zealand Limited (New Zealand)
CIGNA Thai Company Limited (Thailand) (49%)
*P.T. Asuransi CIGNA Indonesia (Indonesia) (50%)
CIGNA G. B. Holdings, Ltd.
*CIGNA Reinsurance Company (UK) Ltd. (United Kingdom)
*CIGNA Insurance Asia Pacific Limited (Australia)
*CIGNA Insurance Company of Puerto Rico
(EI# 66-0437305, NAIC# 30953, PR)
*CIGNA Overseas Insurance Company Ltd.
*CIGNA Accident and Fire Insurance Company, Ltd.
(Japan)
*CIGNA Insurance Company of Europe S.A.-N.V. (Belgium)
(97.07%)
(Remaining Interest Owned by Affiliate)
CIGNA Overseas Holdings, Inc.
*CIGNA Worldwide Insurance Company
(EI# 23-2088429, NAIC# 40819, DE)
*PCIB CIGNA Life Insurance Corporation (Philippines)
(50%)
*P.T. Asuransi Niaga CIGNA Life Indonesia (60%)
INACAN Holdings, Ltd.
Inversiones INA Limitada (Chile) (98.603%)
(Remaining Interest Owned by an Affiliate)
*CIGNA Compania de Seguros de Vida (Chile) S.A.
(Chile) (98.64%)
LATINA Holdings, Ltd.
*CIGNA Seguros de Colombia S.A. (Colombia) (85.763%)
(Remaining Interest Owned by Affiliates)
*COLINA Insurance Company Limited (Bahamas)
*Empresa Guatemalteca CIGNA de Seguros, Sociedad
Anonima (Guatemala (97.365%)
INA Financial Corporation
Brandywine Holdings Corporation
Assurex Development
*CIGNA International Reinsurance Company, Ltd.
(Bermuda)
*Century Indemnity Company
(EI# 05-6105395, NAIC# 20710, PA)
*Century Reinsurance Company
(EI# 06-0988117, NAIC# 35130, PA)
*CIGNA Reinsurance Company
(EI# 23-1740414, NAIC# 22705, PA)
*CIGNA Reinsurance Company, S.A.-N.V.
(Belgium)
(98.35%) (1.65% owned by an affiliate)
The 1792 Company
</TABLE>
7
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<TABLE>
<S> <C>
CIGNA Run-Off Services
Cravens, Dargan & Company, Pacific Coast
Cravens, Dargan & Company, Pacific Coast,
(Illinois)
International Surplus Adjusting Services
National Employee Benefits Corporation
Self-Insurers' Management Corporation
Robert F. Coleman, Inc.
Lewis & Norwood, General Agents
Premium Recovery Services, Inc.
Western Agency Management, Inc.
INA Holdings Corporation
American Adjustment Company, Inc.
American Lenders Facilities, Inc.
*Bankers Standard Insurance Company
(EI# 75-1320184, NAIC# 18279, PA)
*Bankers Standard Fire and Marine Company
(EI# 75-6014863, NAIC# 20591, TX)
Global Surety Network, Inc.
CIGNA Excess & Surplus Insurance Services, (CA)
CIGNA Excess & Surplus Insurance Services, (GA)
CIGNA Excess & Surplus Insurance Services, (IL)
CIGNA Excess & Surplus Insurance Services, (PA)
*CIGNA Property and Casualty Insurance Company
(EI# 06-0237820, NAIC# 20699, CT)
ALIC Incorporated (Management Company and
Attorney-In-Fact)
*CIGNA Lloyds Insurance Company (Sponsored
Lloyds Association
(EI# 75-1365570, NAIC# 18511, TX)
*CIGNA Fire Underwriters Insurance Company
(EI# 06-6032187, NAIC# 20702, PA)
*CIGNA Insurance Company
(EI# 95-2371728, NAIC# 22667 CA)
*Pacific Employers Insurance Company
(EI# 95-1077060, NAIC# 22748, CA)
*CIGNA Insurance Company of Texas
(EI# 74-1480965, NAIC# 22721, 22920, TX)
*Illinois Union Insurance Company
(EI# 36-2759195, NAIC# 27960, IL)
*CIGNA Insurance Company of the Midwest
(EI# 06-0884361, NAIC# 26417, IN)
CIGNA Real Estate, Inc.
</TABLE>
8
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<TABLE>
<S> <C>
2525 East Arizona Biltmore Circle Corporation
Congen Properties, Inc.
LP Associates (75%)
(Remaining Interest Owned by Affiliates)
ESIS, Inc
Excess & Surplus Insurance Services, Inc.
INAC Corp.
INAC Corp. of California
INAMAR Insurance Underwriting Agency, Inc.
INAPRO, Inc.
INA Special Risk Facilities, Inc.
Railroad Insurance Brokers, Inc
*Insurance Company of North America
(EI# 23-0723970, NAIC# 22713, PA)
*Atlantic Employers Insurance Company
(EI# 23-2173820, NAIC# 38938, NJ)
*CIGNA Employers Insurance Company
(EI# 23-2137343, NAIC# 38741, PA)
*CIGNA Insurance Company of Ohio
(EI# 23-1859893, NAIC# 22764, OH)
CIGNA International Stock Fund
(A series of shares of CIGNA Institutional Fund
Group)
*Indemnity Insurance Company of North America
(EI# 06-1016108, NAIC# 43575, PA)
*Allied Insurance Company
(EI# 23-2021364, NAIC# 36528, CA)
*CIGNA Indemnity Insurance Company
(EI# 92-0040526, NAIC# 10030, PA)
*CIGNA Insurance Company of Illinois
(EI# 36-2709121, NAIC# 22691, IL)
Rain & Hail Insuance Services Incorporated
*INA Surplus Insurance Company
(formerly Delaware Reinsurance Company)
(EI# 52-1208598, NAIC# 42072, PA)
Marketdyne International, Inc.
Recovery Services International, Inc.
</TABLE>
ITEM 27. NUMBER OF PURCHASERS
As of December 31, 1997 there were 5,216 Contract Owners of variable annuity
contracts funded through Registrant.
9
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ITEM 28. INDEMNIFICATION
Indemnification of directors, officers, employees and agents of the
Depositor is governed, effective January 1, 1997, by Sections 33-770 through
33-778 of the Connecticut Stock Corporation Act. ("Act"). The Act sets forth the
fullest indemnification which a Connecticut corporation such as Depositor is
permitted to provide. The Act also permits a corporation to purchase and
maintain insurance with respect to liabilities asserted against or incurred by
persons in the capacity or status of directors, officers, employees or agents
regardless of whether direct indemnification by the corporation would be
permitted. The Act allows a corporation to adopt provisions in its certificate
of incorporation narrowing the scope of indemnification which would otherwise be
permitted by the Act, and Depositor is currently considering amending its
certificate of incorporation to provide for narrower indemnification. Until and
unless such an amendment is adopted, Depositor is obligated to provide the
fullest indemnification permitted by the Act, on condition that a determination
has been made by Depositor's Board of Directors (or, in special circumstances,
by shareholders or special legal counsel) that the person to be indemnified
acted in good faith, reasonably believed his conduct was in the corporation's
best interest, and had no reasonable cause to believe his conduct was unlawful.
ITEM 29. PRINCIPAL UNDERWRITER
The Registrant's principal underwriter is CIGNA Financial Advisors, Inc.
("CFA"). CFA also acts as the general distributor of certain other variable
annuity contracts and variable life insurance policies issued by the Company,
and by CIGNA Life Insurance Company. CFA is located at 900 Cottage Grove Road,
Bloomfield, Connecticut (mailing address Hartford, CT 06152). Deferred sales
charges of $145,226 were paid on the variable portion of the Contracts issued
pursuant to CG Variable Annuity Separate Account II during the year ended
December 31, 1997.
The investment companies for which CFA acts as a principal underwriter are:
CG Variable Annuity Separate Account
CG Variable Annuity Separate Account II
CG Variable Life Insurance Separate Account I
CG Variable Life Insurance Separate Account II
CIGNA Variable Annuity Separate Account I
DIRECTORS AND OFFICERS OF PRINCIPAL UNDERWRITER
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH DEPOSITOR
------------------------------ -------------------------------------------------------
<S> <C>
J. Michael Hemp President
Todd R. Stephenson Senior Vice President and Chief Operating Officer
Carolyn P. Brody Vice President
Joy P. McConnell Vice President
Priscilla S. Brown Vice President
Philip L. Holstein Vice President
Karen R. Matheson Director and Vice President
John M. Behrendt Vice President
Janet C. Whitney Vice President and Treasurer
Robert A. Picarello Chief Counsel and Assistant Secretary
H. Edward Cohen Assistant Vice President
Karen E. Goldman Assistant Vice President
C. Suzanne Womack Secretary
Gil L. Bearman Assistant Secretary
Brian S. Becker Assistant Secretary
Renee L. Beeks Assistant Secretary
Gail Black Assistant Treasurer
Walter W. Bonham, Jr. Assistant Treasurer
</TABLE>
10
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ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder are
maintained by Connecticut General Life Insurance Company at its Home Office at
900 Cottage Grove Road, Bloomfield, Connecticut (mailing address: Hartford, CT
06152).
ITEM 31. MANAGEMENT SERVICES
All management policies are discussed in Part A or Part B.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes that it will file a post effective amendment to
this registration statement under the Securities Act of 1933 as frequently as
necessary to ensure that the audited financial statements in the registration
statement are never more than 16 months old for so long as Premium Payments
under the Contracts may be accepted.
(b) Registrant undertakes that it will include either (i) a postcard or
similar written communication affixed to or included in the Prospectus that the
applicant can remove to send for a Statement of Additional Information or (ii) a
space in the Contract application or order to purchase that an applicant can
check to request a Statement of Additional Information.
(c) Registrant undertakes to deliver promptly, upon written or oral request
made to Connecticut General Life Insurance Company at the address or phone
number listed in the Prospectus, any Statement of Additional Information and any
financial statements required by Form N-4 to be made available to applicants or
owners.
FEES AND CHARGES REPRESENTATION
The Company represents that the fees and charges deducted under the
Contracts, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by the
Company.
SECTION 403(b) REPRESENTATION
Registrant represents that it is relying on a no-action letter dated
November 28, 1988, to the American Council of Life Insurance (Ref. No. IP-6-88),
regarding Sections 22(e), 27(c)(1) and 27(d) of the Investment Company Act of
1940, in connection with redeemability restrictions on Section 403(b) Contracts,
and that paragraphs numbered (1) through (4) of that letter will be complied
with.
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SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, has duly caused this Post-Effective Amendment No. 8 to its
Registration Statement on Form N-4 (File No. 33-83020) to be signed on its
behalf by the undersigned thereunto duly authorized, in the Town of Bloomfield
and State of Connecticut on the 13th day of April, 1998. Registrant certifies
that this amendment meets all of the requirements for effectiveness pursuant to
Rule 485(b) under the Securities Act of 1933.
CG VARIABLE ANNUITY SEPARATE ACCOUNT
II
(Name of Registrant)
By: /s/ THOMAS C. JONES
-----------------------------------
Thomas C. Jones
PRESIDENT AND DIRECTOR
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY
(Name of Depositor)
By: /s/ THOMAS C. JONES (Seal)
-----------------------------------
Thomas C. Jones
PRESIDENT AND DIRECTOR
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 3 to this Registration Statement (File No.
33-89238) has been signed below on April 13, 1998 by the following persons, as
officers and directors of the Depositor, in the capacities indicated:
SIGNATURE TITLE
- -------------------------------------------------- -------------------------
/s/ THOMAS C. JONES * President and Director
------------------------------------------- (Principal Executive
Thomas C. Jones Officer)
VICE PRESIDENT AND
/s/ JOHN WILKINSON ACTUARY
------------------------------------------- (PRINCIPAL FINANCIAL
JOHN WILKINSON OFFICER)
/S/ DOMINIC A. DELLAVOLPE * Assistant Vice President
------------------------------------------- (Principal Accounting
Dominic A. DellaVolpe Officer)
/s/ HAROLD W. ALBERT *
------------------------------------------- Director
Harold W. Albert
/s/ ROBERT W. BURGESS *
------------------------------------------- Director
Robert W. Burgess
/s/ JOHN G. DAY *
------------------------------------------- Director
John G. Day
/s/ JOSEPH M. FITZGERALD *
------------------------------------------- Director
Joseph M. Fitzgerald
/s/ H. EDWARD HANWAY *
------------------------------------------- Director
H. Edward Hanway
/s/ CAROL M. OLSEN *
------------------------------------------- Director
Carol M. Olsen
/s/ JOHN E. PACY *
------------------------------------------- Director
John E. Pacy
/s/ MARC L. PREMINGER *
------------------------------------------- Director
Marc L. Preminger
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------- -------------------------
<C> <S>
/s/ PATRICIA L. ROWLAND *
------------------------------------------- Director
Patricia L. Rowland
/s/ W. ALLEN SCHAFFER, M.D. *
------------------------------------------- Director
W. Allen Schaffer, M.D.
*By /s/ JOHN WILKINSON
-------------------------------------------
John Wilkinson
ATTORNEY-IN-FACT
(A Majority of the Directors)
</TABLE>
<PAGE>
POWER OF ATTORNEY*
We, the undersigned directors and officers of Connecticut General Life
Insurance Company, hereby severally constitute and appoint John Wilkinson, Mark
A. Parsons and David C. Kopp, and each of them individually, our true and lawful
attorneys-in-fact, with full power to them and each of them to sign for us, in
our names and in the capacities indicated below, any and all amendments to
Registration Statement No. 33-83020 filed with the Securities and Exchange
Commission under the Securities Act of 1933, on behalf of the Company in its own
name or in the name of one of its Separate Accounts, hereby ratifying and
confirming our signatures as they may be signed by either of our attorneys-in-
fact to any such Registration Statement.
WITNESS our hands and common seal on this 10th day of April, 1998.
SIGNATURE TITLE
- ----------------------------------- -----------------------------------
/S/ THOMAS C. JONES
- ----------------------------------- President and Director
Thomas C. Jones (Principal Executive Officer)
/S/ JOHN WILKINSON
- ----------------------------------- Vice President and Actuary
John Wilkinson (Principal Financial Officer)
/S/ DOMINIC A. DELLAVOLPE
- ----------------------------------- Assistant Vice President
Dominic A. DellaVolpe (Principal Accounting Officer)
/S/ HAROLD W. ALBERT
- ----------------------------------- Director
Harold W. Albert
/S/ ROBERT W. BURGESS
- ----------------------------------- Director
Robert W. Burgess
/S/ JOHN G. DAY
- ----------------------------------- Director
John G. Day
/S/ JOSEPH M. FITZGERALD
- ----------------------------------- Director
Joseph M. Fitzgerald
/S/ H. EDWARD HANWAY
- ----------------------------------- Director
H. Edward Hanway
/S/ CAROL M. OLSEN
- ----------------------------------- Director
Carol M. Olsen
/S/ JOHN E. PACY
- ----------------------------------- Director
John E. Pacy
<PAGE>
<TABLE>
<C> <S>
/S/ MARC L. PREMINGER
- ----------------------------------- Director
Marc L. Preminger
/S/ PATRICIA L. ROWLAND
- ----------------------------------- Director
Patricia L. Rowland
/S/ W. ALLEN SCHAFFER, M.D.
- ----------------------------------- Director
W. Allen Schaffer, M.D.
</TABLE>
<PAGE>
EXHIBIT (b)(9)
[LOGO]
Legal Department, S-215
Hartford, CT 06152-2215
Telephone: (860) 726-7673
Facsimile: (860) 572-8885
April 13, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Connecticut General Life Insurance Company
CG Variable Annuity Separate Account II
File No. 33-83020
Post-Effective Amendment No. 8
Dear Sirs:
As Chief Counsel of the Retirement and Investment Services Division of CIGNA
Corporation, I am familiar with the actions of the Board of Directors of
Connecticut General Life Insurance Company (the "Company"), establishing the
Account and its method of operation and authorizing the filing of a Registration
Statement under the Securities Act of 1933 (and amendments thereto) for the
securities to be issued by the Account and the Investment Company Act of 1940
for the Account itself.
In the course of preparing this opinion, I have reviewed the Certificate of
Incorporation and the By-Laws of the Company, the Board actions with respect to
the Account, and such other matters as I deemed necessary or appropriate. Based
on such review, I am of the opinion that the variable annuity contracts (and
interests therein) which are the subject of the Registration Statement under the
Securities Act of 1933, as amended, for the Account will, when issued, be
legally issued and will represent binding obligations of the Company, the
depositor for the Account.
I further consent to the use of this opinion as an Exhibit to Post-Effective
Amendment No. 8 to said Registration Statement and to the reference to me under
the heading Experts in said Registration Statement, as amended.
Very truly yours,
/s/ Mark A. Parsons
Mark A. Parsons
Chief Counsel
<PAGE>
EXHIBIT (b)(10)(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statements of Additional Information
constituting part of this Post-Effective Amendment No. 8 under the Securities
Act of 1933 and Amendment No. 9 under the Investment Company Act of 1940 to the
registration statement of the CG Variable Annuity Separate Account II on Form
N-4 of our reports dated February 10, 1998 and February 20, 1998, relating to
the consolidated financial statements of Connecticut General Life Insurance
Company and the financial statements of CG Variable Annuity Separate Account II
of Connecticut General Life Insurance Company, respectively, which appear in
such Statements of Additional Information. We also consent to the reference to
us under the heading "Experts" in such Statements of Additional Information.
PRICE WATERHOUSE LLP
Hartford, Connecticut
April 22, 1998
<PAGE>
EXHIBIT (b)(10)(B)
GEORGE N. GINGOLD, ESQ.
ATTORNEY AT LAW
197 KING PHILIP DRIVE
WEST HARTFORD, CONNECTICUT
06117-1409
April 13, 1998
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Commissioners:
I hereby consent to the reference to my name under the caption "Legal Matters"
in the Statement of Additional Information contained in Post-Effective Amendment
No. 8 to the Registration Statement on Form N-4 (File No. 33-83020) to be filed
by Connecticut General Life Insurance Company and Connecticut General Variable
Annuity Separate Account II with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and the Investment Company Act of 1940,
as amended.
Very truly yours,
/s/ George N. Gingold, Esquire
George N. Gingold, Esquire
