<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
[LOGO]
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
<TABLE>
<S> <C>
HOME OFFICE LOCATION: MAILING ADDRESS:
900 COTTAGE GROVE ROAD CIGNA INDIVIDUAL INSURANCE
HARTFORD, CT 06152 VARIABLE PRODUCTS SERVICE CENTER, ROUTING
S-154
HARTFORD, CT 06152-2154
(800)(552-9898)
</TABLE>
- --------------------------------------------------------------------------------
THE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
- --------------------------------------------------------------------------------
This prospectus describes a flexible premium variable life insurance
contract ("Policy") offered by Connecticut General Life Insurance Company ("the
Company"). This Policy is intended to provide life insurance benefits. It allows
flexible premium payments, a choice of underlying funding options, and a choice
of two death benefit options. Its value will vary with the investment
performance of the underlying funding options selected, as may the death benefit
payable by the Company upon the death of the Insured. Policy values may be used
to continue the Policy in force, may be borrowed within certain limits, and may
be fully or partially surrendered. Full surrenders are subject to a surrender
charge. Annuity settlement options equivalent to the Death Benefit are available
for payment to the Beneficiary upon the death of the Insured.
The Company offers sixteen funding vehicles under a Policy through the
Separate Account, each a diversified open-end management investment company
(commonly called a mutual fund) with a different investment objective: Alger
American Fund -- Alger American Growth Portfolio, Alger American Leveraged
AllCap Portfolio, Alger American MidCap Growth Portfolio, and Alger American
Small Capitalization Portfolio; Fidelity Variable Insurance Products Fund --
Equity-Income Portfolio; Fidelity Variable Insurance Products Fund II -- Asset
Manager Portfolio and Investment Grade Bond Portfolio; MFS Variable Insurance
Trust -- MFS Total Return Series, MFS Utilities Series and MFS World Governments
Series; Neuberger & Berman Advisers Management Trust ("AMT") -- AMT Balanced
Portfolio, AMT Limited Maturity Bond Portfolio and AMT Partners Portfolio; Quest
for Value Accumulation Trust -- Quest Global Equity Portfolio, Quest Managed
Portfolio and Quest Small Cap Portfolio.
The fixed interest option offered under the Policy is the Fixed Account.
Amounts held in the Fixed Account are guaranteed and will earn a minimum
interest rate of 4% per year. Unless specifically mentioned, this prospectus
only describes the variable investment options.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance policy with this Policy. This
entire Prospectus, and those of the Funds, should be read carefully to
understand the Policy being offered.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE MUTUAL FUNDS AVAILABLE AS FUNDING OPTIONS FOR THE POLICIES OFFERED BY THIS
PROSPECTUS. ALL PROSPECTUSES SHOULD BE RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PROSPECTUS DATED: MAY 1, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Definitions..................................... 3
Highlights...................................... 6
Initial Choices............................... 6
Charges and Fees.............................. 6
The Company..................................... 7
The Fixed Account............................... 7
The Variable Account............................ 8
The Funds....................................... 8
Fund Annual Expenses.......................... 11
Alger Funds................................... 11
Fidelity Funds................................ 11
MFS Funds..................................... 11
Neuberger & Berman Funds...................... 11
Quest for Value Funds......................... 11
General....................................... 12
Substitution of Securities.................... 12
Voting Rights................................. 12
Fund Participation Agreements................. 12
Death Benefit................................... 13
Death Benefit Options....................... 13
Changes in Death Benefit Option............. 13
Guaranteed Death Benefit Provision.......... 13
Payment of Death Benefit.................... 14
Changes in Specified Amount................. 15
Premium Payments; Transfers..................... 15
Premium Payments............................ 15
Allocation of Net Premium Payments.......... 16
Transfers................................... 17
Dollar Cost Averaging....................... 17
Charges; Fees................................... 18
Premium Load................................ 18
Monthly Deductions.......................... 18
Transaction Fee for Excess Transfers........ 19
Mortality and Expense Risk Charge........... 19
Surrender Charge............................ 20
Policy Values................................... 20
Accumulation Value.......................... 20
Variable Accumulation Unit Value............ 21
Surrender Value............................. 21
Surrenders...................................... 22
Partial Surrenders.......................... 22
Full Surrenders............................. 22
<CAPTION>
PAGE
---------
<S> <C>
Deferral of Payment......................... 22
Lapse and Reinstatement......................... 22
Lapse of a Policy; Effect of Guaranteed
Death Benefit Provision.................... 22
Reinstatement of a Lapsed Policy............ 23
Policy Loans.................................... 23
Settlement Options.............................. 24
Other Policy Provisions......................... 24
Issuance.................................... 24
Short-Term Right to Cancel the Policy....... 24
Policy Owner................................ 25
Beneficiary................................. 25
Assignment.................................. 25
Right to Exchange for a Fixed Benefit
Policy..................................... 25
Incontestability............................ 26
Misstatement of Age or Sex.................. 26
Suicide..................................... 26
Nonparticipating Policies................... 26
Tax Matters..................................... 26
Policy Proceeds............................. 26
Taxation of the Company..................... 28
Section 848 Charges......................... 28
Other Considerations........................ 28
Other Matters................................... 28
Directors and Officers of the Company....... 28
Distribution of Policies.................... 29
Changes of Investment Policy................ 29
Other Contracts Issued by the Company....... 29
State Regulation............................ 30
Reports to Policy Owners.................... 30
Advertising................................. 30
Legal Proceedings........................... 30
Experts..................................... 31
Registration Statement...................... 31
Five Percent Owners......................... 31
Financial Statements........................ 31
Appendix 1...................................... 53
Illustration of Surrender Charges........... 53
Appendix 2...................................... 55
Illustration of Accumulation Values,
Surrender Values, and Death Benefits....... 55
</TABLE>
2
<PAGE>
DEFINITIONS
ACCUMULATION VALUE: The sum of the Fixed Account Value,
Variable Account Value and the Loan Account Value.
ACCUMULATION UNIT: A unit of measure used to calculate the
value of a Variable Account Sub-Account.
ADDITIONAL PREMIUMS: Any premium paid in addition to Planned
Premiums.
CODE: The Internal Revenue Code of 1986, as amended.
CORRIDOR DEATH BENEFIT: The Death Benefit calculated as a
percentage of the Accumulation Value rather than by
reference to the Specified Amount to satisfy the Internal
Revenue Service definition of "life insurance."
COST OF INSURANCE: The portion of the Monthly Deduction
attributable to the basic insurance coverage, not including
riders, supplemental benefits or monthly expense charges.
DEATH BENEFIT: The amount payable to the beneficiary upon
the death of the Insured in accordance with the Death
Benefit Option elected, before deduction of the amount
necessary to repay any loans in full, and overdue
deductions.
DEATH BENEFIT OPTION: Either of two methods for determining
the Death Benefit.
FIXED ACCOUNT: The account under which principal is
guaranteed and interest is credited at a rate of not less
than 4% per year. Fixed Account assets are general assets of
the Company held in the Company's General Account.
FIXED ACCOUNT VALUE: The portion of the Accumulation Value,
other than the Loan Account Value, held in the Company's
General Account.
FUND(S): One or more of Alger American Fund -- Alger
American Growth Portfolio, Alger American Leveraged AllCap
Portfolio, Alger American MidCap Growth Portfolio and Alger
American Small Capitalization Portfolio; Fidelity Variable
Insurance Products Fund -- Equity-Income Portfolio; Fidelity
Variable Insurance Products Fund II -- Asset Manager
Portfolio and Investment Grade Bond Portfolio; MFS Variable
Insurance Trust -- MFS Total Return Series, MFS Utilities
Series, MFS World Governments Series; Neuberger & Berman
Advisers Management Trust -- AMT Balanced Portfolio, AMT
Limited Maturity Bond Portfolio and AMT Partners Portfolio;
Quest for Value Accumulation Trust -- Quest Global Equity
Portfolio, Quest Managed Portfolio and Quest Small Cap
Portfolio. Each of them is an open-end management investment
company (mutual fund) whose shares are available to fund the
benefits provided by the Policy.
GENERAL ACCOUNT: The Company's general asset account, in
which assets attributable to the non-variable portion of
Policies are held.
GRACE PERIOD: The 61-day period following a Monthly
Anniversary Day on which the Policy's Surrender Value is
insufficient to cover the current Monthly Deduction. The
Company will send notice at least 31 days before the end of
the Grace Period that the Policy will lapse without value
unless a sufficient payment (described in the notification
letter) is received by the Company.
GUARANTEED INITIAL DEATH BENEFIT PREMIUM: The Premium
Payment(s) which must be made to guarantee the Initial
Specified Amount for the first five Policy Years after
issue, regardless of investment performance, assuming there
will be no loans or partial surrenders.
3
<PAGE>
GUIDELINE ANNUAL PREMIUM: The level amount, calculated in
accordance with Rule 6e-3(T) under the Investment Company
Act of 1940, required to mature the Policy under guaranteed
mortality and expense charges and an annual interest rate of
5%.
INITIAL SPECIFIED AMOUNT: The amount (at least $50,000),
originally chosen by the Policy Owner, initially equal to
the Death Benefit. The Initial Specified Amount may be
increased or decreased as described in this Prospectus.
INSURED: The person on whose life the Policy is issued.
ISSUE AGE: The age of the insured, to the nearest birthday,
on the Issue Date.
ISSUE DATE: The date on which the Policy becomes effective,
as shown in the Policy Specifications.
LOAN ACCOUNT VALUE: An amount equal to the sum of all unpaid
Policy loans and loan interest.
MONTHLY ANNIVERSARY DAY: The day of the month, as shown in
the Policy Specifications, or the next Valuation Day if that
day is not a Valuation Day or is nonexistent for that month,
when the Company makes the Monthly Deduction.
MONTHLY DEDUCTION: The monthly deduction made from the Net
Accumulation Value; this deduction includes the cost of
insurance, an administrative expense charge, and charges for
supplemental riders or benefits, if applicable.
NET ACCUMULATION VALUE: The Accumulation Value less the Loan
Account Value.
NET AMOUNT AT RISK: The Death Benefit before subtraction of
outstanding loans, if any, minus the Accumulation Value.
NET PREMIUM PAYMENT: The portion of a Premium Payment, after
deduction of 3.5% for the premium load, available for
allocation to the Fixed Account and the Variable Account
Sub-Accounts.
OWNER: The Owner on the Date of Issue will be the person
designated in the Policy Specifications. If no person is
designated as Owner, the Insured will be the Owner.
PLANNED PREMIUMS: The amount of premium the Policy Owner
chooses to pay the Company on a scheduled basis. This is the
amount for which the Company sends a premium reminder
notice.
POLICY: The life insurance contract described in this
Prospectus, under which flexible premium payments are
permitted and the death benefit and contract values may vary
with the investment performance of the funding option(s)
selected.
POLICY YEAR: Each twelve-month period, beginning on the
Issue Date, during which the Policy is in effect.
PREMIUM PAYMENT: A premium payment made under the Policy.
SETTLEMENT OPTION(S): Several ways in which the Beneficiary
may receive a Death Benefit, or in which the Insured may
choose to receive payments upon surrender
of the Policy.
SUB-ACCOUNT: That portion of the Variable Account which is
invested in shares of a specific Fund.
SURRENDER CHARGE: The amount retained by the Company upon
the full surrender of the Policy.
4
<PAGE>
SURRENDER VALUE: The amount a Policy Owner can receive in
cash by surrendering the Policy. This equals the Net
Accumulation Value minus the applicable Surrender Charge.
All of the Surrender Value may be applied to one or more of
the Settlement Options.
VALUATION DAY: Every day on which Accumulation Units are
valued; any day on which the New York Stock Exchange is
open, except any day on which trading on the Exchange is
restricted, or on which an emergency exists, as determined
by the Securities and Exchange Commission, so that valuation
or disposal of securities is not practicable.
VALUATION PERIOD: The period of time beginning on the day
following a Valuation Day and ending on the next Valuation
Day. A Valuation Period may be more than one day in length.
VARIABLE ACCOUNT: CG Variable Life Insurance Separate
Account I. Consists of all Sub-Accounts invested in shares
of the Funds. Variable Account assets are kept separate from
the general assets of the Company and are not chargeable
with the general liabilities of the Company.
VARIABLE ACCOUNT VALUE: The portion of the Accumulation
Value attributable to the Variable Account.
VARIABLE PRODUCTS SERVICE CENTER: The office of the Company
to which Premium Payments should be sent, notices given and
any customer service requests made. Mailing address: CIGNA
Individual Insurance, Variable Products Service Center,
Routing S-154, Hartford, CT 06152-2154.
5
<PAGE>
<TABLE>
<S> <C>
HIGHLIGHTS
The Policy is a flexible premium variable life
insurance policy. Its values may be accumulated
on a fixed or variable basis or a combination
of fixed and variable bases. The Policy's
provisions may vary in some states.
INITIAL When purchasing a Policy, the Owner makes three
CHOICES important choices:
TO BE MADE 1) Selecting one of the two Death Benefit
Options;
2) Selecting the amount of Premium Payments to
make; and
3) Selecting how Net Premium Payments will be
allocated among the available funding options.
LEVEL OR At the time of purchase, the Policy Owner (also
VARYING called the "Owner" in this Prospectus) must
DEATH BENEFIT choose between the two Death Benefit Options.
The amount payable under either option will be
determined as of the date of the Insured's
death. Under the level Death Benefit Option,
the Death Benefit will be the greater of the
Specified Amount, or the Corridor Death
Benefit. Under the varying Death Benefit
Option, the Death Benefit will be the greater
of the Specified Amount plus the Accumulation
Value, or the Corridor Death Benefit (See
"Death Benefit").
The Policy also offers a Guaranteed Initial
Death Benefit Provision which ensures that for
the first five Policy Years the Death Benefit
will not be less than the Initial Specified
Amount, regardless of market performance,
assuming there have been no loans or
surrenders, even if the Surrender Value is
insufficient to cover the current Monthly
Deductions (See "Guaranteed Death Benefit
Provision").
AMOUNT OF At the time of purchase, the Policy Owner must
PREMIUM also choose the amount of premium to be paid.
PAYMENT The Owner may vary Premium Payments to some
extent and still keep the Policy in force.
Premium reminder notices will be sent for
Planned Premiums and for premiums required to
continue this Policy in force. If the Policy
lapses it may be reinstated (See "Reinstatement
of a Lapsed Policy").
SELECTION OF The Policy Owner must choose how to allocate
FUNDING Net Premium Payments. Net Premium Payments
VEHICLE(S) allocated to the Variable Account may be
allocated to one or more Sub-Accounts of the
Variable Account, each of which invests in
shares of a particular Fund. The Fixed Account
may also be elected as an allocation option.
Allocations to any Sub-Account or to the Fixed
Account must be in whole percentages with a
minimum of 10% each. The variable portion of a
Policy is supported by the Fund(s) selected as
funding vehicle(s). The portion of the Variable
Account Value attributable to a particular Fund
through the Sub-Account of the Variable Account
is not guaranteed and will vary with the
investment performance of that Fund.
CHARGES There is a 3.5% premium load on all Premium
AND FEES Payments.
Monthly deductions are made for the Cost of
Insurance and any riders.
Monthly deductions ($15 per month during the
first Policy Year and, currently, $5 per month
thereafter) are also made for administrative
expenses.
Daily charges from Variable Account Value are
made for the mortality and expense risk,
currently at the annual rate of .45% during the
first ten Policy Years and .25% thereafter.
Investment results for each Sub-Account are
affected by each Fund's daily charge for
management fees; these charges vary by Fund and
are shown at page 11 of this Prospectus.
</TABLE>
6
<PAGE>
A transaction fee of $25 is imposed for partial surrenders
and for certain transfers in excess of 12 per Policy Year.
A surrender charge will be deducted upon full surrender of a
Policy within the first ten Policy Years or within ten years
after an increase in Specified Amount.
Interest is charged on Policy loans. The net interest spread
(the amount by which interest charged exceeds interest
credited) is currently 1% per year in the first ten Policy
Years and .25% per year thereafter.
The Company may derive a profit from its charges except from
the monthly deduction for administrative expenses and the
transaction fee.
THE COMPANY
The Company is a stock life insurance company incorporated
in Connecticut in 1865. Its Home Office mailing address is
Hartford, Connecticut 06152, Telephone (203) 726-6000. It
has obtained authorization to do business in fifty states,
the District of Columbia and Puerto Rico. The Company issues
group and individual life and health insurance policies and
annuities. The Company has various wholly-owned subsidiaries
which are generally engaged in the insurance business. The
Company is a wholly-owned subsidiary of Connecticut General
Corporation, Bloomfield, Connecticut. Connecticut General
Corporation is wholly-owned by CIGNA Holdings Inc.,
Philadelphia, Pennsylvania which is in turn wholly-owned by
CIGNA Corporation, Philadelphia, Pennsylvania. As of
December 31, 1994, certain entities reported voting power or
dispositive power of more than 5% of the Common Stock of
CIGNA Corporation. See "Five Percent Owners." Connecticut
General Corporation is the holding company of various
insurance companies, one of which is Connecticut General
Life Insurance Company.
The Company markets the Policies through independent
insurance brokers, general agents, and registered
representatives of broker-dealers who are members of the
National Association of Securities Dealers, Inc.
The Company, in common with other insurance companies, is
subject to regulation and supervision by the regulatory
authorities of the states in which it is licensed to do
business. A license from the state insurance department is a
prerequisite to the transaction of insurance business in
that state. In general, all states have statutory
administrative powers. Such regulation relates, among other
things, to licensing of insurers and their agents, the
approval of policy forms, the methods of computing reserves,
the form and content of statutory financial statements, the
amount of policyholders' and stockholders' dividends, and
the type of distribution of investments permitted. A blanket
bond for $10 million covers all of the officers and
employees of the Company.
THE FIXED
ACCOUNT
The Fixed Account is funded by the assets of the Company's
General Account. Amounts held in the Fixed Account are
guaranteed and will be credited with interest at rates as
determined from time to time by the Company, but not less
than 4% per year.
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").
7
<PAGE>
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 VARIABLE
ACCOUNT
CG Variable Life Insurance Separate Account I was
established pursuant to a July 6, 1994 resolution of the
Board of Directors of the Company. Under Connecticut
insurance law, the income, gains or losses of the Variable
Account are credited without regard to the other income,
gains or losses of the Company. The Company serves as the
custodian of the assets of the Variable Account. These
assets are held for the Policies. Although the assets
maintained in 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 Policies
are general corporate liabilities of the Company. Any and
all distributions made by the Funds with respect to shares
held by the Variable Account will be reinvested in
additional shares at net asset value. Deductions and
surrenders from the Variable Account will, in effect, be
made by surrendering shares of the Funds at net asset value.
On each Valuation Day of each Fund, the Variable Account
purchases or redeems Fund shares based on a netting of all
transactions for that day. Shares of the Funds held in the
Variable Account are held by the Company through an open
account system, which makes unnecessary the issuance and
delivery of stock certificates.
The Variable Account is registered with the Securities and
Exchange Commission ("Commission") as a unit investment
trust under the 1940 Act. Such registration does not involve
supervision of the Variable Account or the Company's
management of investment practices or policies by the
Commission. The Company does not guarantee the Variable
Account's investment performance.
The Company has two other separate accounts registered as
unit investment trusts with the Commission for the purpose
of funding the Company's variable annuity contracts.
THE FUNDS
Each of the sixteen Sub-Accounts of the Variable Account is
invested solely in the shares of one of the sixteen Funds
available as funding vehicles under the Policies. Each of
the Funds is a series of one of six entities, all
Massachusetts or Delaware business trusts, each of which is
registered as an open-end, diversified management investment
company under the 1940 Act. These trusts are collectively
referred to herein as the "Trusts".
The six Trusts and their Investment advisers and
distributors are:
Alger American Fund ("Alger Trust"), managed by Fred
Alger Management, Inc., 75 Maiden Lane, New York, NY
10038; and distributed by Fred Alger & Company,
Incorporated, 30 Montgomery Street, Jersey City, NJ
07302;
Variable Insurance Products Fund I ("Fidelity Trust I"),
and Variable Insurance Products Fund II ("Fidelity Trust
II"), managed by Fidelity Management & Research Company
and distributed by Fidelity Distribution Corporation, 82
Devonshire Street, Boston, MA 02103;
MFS Variable Insurance Trust ("MFS Trust"), managed by
Massachusetts Financial Services Company and distributed
by MFS Investor Services, Inc., 500 Boylston Street,
Boston, MA 02116;
8
<PAGE>
Neuberger & Berman Advisers Management Trust ("Neuberger
& Berman AMT Trust"), managed and distributed by
Neuberger & Berman Management Incorporated, 605 Third
Avenue, New York, NY 10158-0006;
Quest for Value Accumulation Trust ("Quest for Value
Trust"), managed by Quest for Value Advisors and
distributed by Quest for Value Distributors, One World
Financial Center, New York, NY 10281.
Four Funds of ALGER Trust are available under the Policies:
Alger American Growth Portfolio;
Alger American Leveraged AllCap Portfolio;
Alger American MidCap Growth Portfolio;
Alger American Small Capitalization Portfolio.
One Fund of FIDELITY Trust I is available under the
Policies:
Equity-Income Portfolio ("Fidelity Equity-Income
Portfolio").
Two Funds of FIDELITY Trust II are available under the
Policies:
Asset Manager Portfolio ("Fidelity Asset Manager
Portfolio");
Investment Grade Bond Portfolio ("Fidelity Bond
Portfolio").
Three Funds of MFS Trust are available under the Policies:
MFS Total Return Series;
MFS Utilities Series;
MFS World Governments Series.
Three Funds of NEUBERGER & BERMAN AMT Trust are available
under the Policies:
AMT Balanced Portfolio;
AMT Limited Maturity Bond Portfolio;
AMT Partners Portfolio.
Three Funds of QUEST FOR VALUE Trust are available under the
Policies:
Quest Global Equity Portfolio;
Quest Managed Portfolio;
Quest Small Cap Portfolio.
The investment advisory fees charged the Funds by their
advisers are shown on page 11 of this Prospectus.
There follows a brief description of the investment
objective of each Fund. There can be no assurance that any
of the stated investment objectives will be achieved.
ALGER AMERICAN GROWTH PORTFOLIO: Seeks long-term capital
appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with
total market capitalization of $1 billion or greater.
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO: Seeks long-term
capital appreciation by investing in a diversified, actively
managed portfolio of equity securities, with the ability to
engage in leveraging (up to one-third of assets) and options
and futures transactions.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO: Seeks long-term
capital appreciation by investing in a diversified, actively
managed portfolio of equity securities, primarily of
companies with total market capitalization between $750
million and $3.5 billion.
ALGER AMERICAN SMALL CAP PORTFOLIO: Seeks long-term capital
appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with
total market capitalization of less than $1 billion.
9
<PAGE>
FIDELITY ASSET MANAGER PORTFOLIO: Seeks high total return
with reduced risk over the long-term by allocating its
assets among domestic and foreign stocks, bonds and short-
term fixed-income instruments.
FIDELITY BOND PORTFOLIO: Seeks as high a level of current
income as is consistent with the preservation of capital by
investing in a broad range of investment-grade fixed-income
securities, with a dollar-weighted average portfolio
maturity of ten years or less.
FIDELITY EQUITY-INCOME PORTFOLIO: Seeks reasonable income by
investing primarily in income-producing equity securities,
with some potential for capital appreciation, seeking to
exceed the composite yield on the securities comprising the
Standard and Poor's 500 Composite Stock Price Index.
MFS TOTAL RETURN SERIES: Seeks primarily to obtain
above-average income (compared to a portfolio entirely
invested in equity securities), consistent with the prudent
employment of capital, and secondarily to provide a
reasonable opportunity for growth of capital and income.
MFS UTILITIES SERIES: Seeks capital growth and current
income (income above that obtainable from a portfolio
invested entirely in equity securities).
MFS WORLD GOVERNMENTS SERIES: Seeks not only preservation,
but also growth, of capital together with moderate current
income.
AMT BALANCED PORTFOLIO: Seeks long-term capital growth and
reasonable current income without undue risk to principal.
AMT LIMITED MATURITY BOND PORTFOLIO: Seeks the highest
current income consistent with low risk to principal and
liquidity; and secondarily, enhanced total return through
capital appreciation when market factors, such as falling
interest rates and rising bond prices, indicate that capital
appreciation may be available without significant risk to
principal.
AMT PARTNERS PORTFOLIO: Seeks capital growth.
QUEST GLOBAL EQUITY PORTFOLIO: Seeks long-term capital
appreciation through a global investment strategy primarily
involving equity securities.
QUEST MANAGED PORTFOLIO: Seeks growth of capital over time
through investment in a portfolio of common stocks, bonds
and cash equivalents, the percentage of which will vary
based on management's assessments of relative investment
values.
QUEST SMALL CAP PORTFOLIO: Seeks capital appreciation
through investments in a diversified portfolio of equity
securities of companies with market capitalizations of under
$1 billion.
10
<PAGE>
FUND ANNUAL EXPENSES
(as a percentage of Fund average net assets).
The management fees for each Fund are based on a percentage
of that Fund's assets under management. The fees below
represent the amounts payable to the investment adviser of
each of the Funds on an annual basis as of the date of this
Prospectus, plus estimated other expenses. See "The Funds"
in this Prospectus and the discussion in each Fund's
prospectus.
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
FEES EXPENSES EXPENSES
-------------- ------------ -------------
<C> <S> <C> <C> <C>
ALGER AMERICAN FUNDS Alger American Growth Portfolio.................. 0.75% 0.11% 0.86%
0.85% 0.94%* 1.79%
Alger American Leveraged AllCap Portfolio........
0.80% 0.17% 0.97%
Alger American MidCap Growth Portfolio...........
0.85% 0.11% 0.96%
Alger American Small Capitalization Portfolio....
FIDELITY FUNDS Asset Manager Portfolio.......................... 0.72% 0.08% 0.80%(1)
0.52% 0.06% 0.58%(1)
Equity-Income Portfolio..........................
0.46% 0.21% 0.67%
Investment Grade Bond Portfolio..................
MFS FUNDS(4) MFS Total Return Series.......................... 0.75% 0.25%(4) 1.00%(4)
0.75% 0.25%(4) 1.00%(4)
MFS Utilities Series.............................
0.75% 0.25%(4) 1.00%(4)
MFS World Governments Series.....................
NEUBERGER & BERMAN AMT Balanced Portfolio(1)........................ 0.80% 0.17% 0.97%
FUNDS AMT Limited Maturity Bond Portfolio.............. 0.60% 0.13% 0.73%
0.80% 0.50% 1.30%
AMT Partners Portfolio(2)........................
QUEST FOR VALUE Quest Global Equity Portfolio.................... 0.75% 0.50% 1.25%
FUNDS** Quest Managed Portfolio.......................... 0.60% 0.06% 0.66%
0.60% 0.14% 0.74%
Quest Small Cap Portfolio........................
<FN>
* Includes 0.75% estimated Interest Expense.
** The expenses for the Quest Managed, Small
Cap and Global Equity Portfolios will be
voluntarily limited by Quest for Value
Advisors so that annualized operating fund
expenses do not exceed 0.66%, 0.74%, and
1.25% for the Quest Managed, Small Cap and
Global Equity Portfolios, respectively,
through December 31, 1995. Variations in the
actual amount of average assets in any of
these Portfolios during 1995 can cause
significant variations in expenses expressed
as a percentage of that Portfolio's average
net assets. It is estimated by Quest
management that by the end of 1995, the net
assets of each of these Portfolios will be
sufficient such that the total annual
expenses of each Portfolio will, on an
annualized basis, be approximately equal to,
if not less than, the voluntary limits.
(1) Until May 1, 1995, all of these Portfolios
had a Distribution Plan ("Plan") pursuant to
Rule 12b-1 which provided for the
reimbursement of N&B Management for certain
Trust distribution expenses up to a maximum
of 0.25% on an annual basis of each
Portfolio's average daily net assets. The
"Total Annual Expenses" shown here for each
AMT Portfolio would be increased by 0.02% if
the 12b-1 fees for the months of January
through April, 1995 were taken into account.
(2) Other Expenses, and therefore Total Annual
Expenses, have been estimated and are
annualized for the Partners Portfolio.
(3) A portion of the brokerage commissions the
Portfolio paid was used to reduce its
expenses. Without this reduction, "Total
Annual Expenses" would have been 0.81% for
Asset Manager Portfolio and 0.60% for
Equity-Income Portfolio.
(4) The Funds' Adviser has agreed to bear,
subject to reimbursement, expenses for each
of the Total Return Series and Utilities
Series, such that each Series' aggregate
operating expense shall not exceed, on an
annualized basis, 1.00% of the average daily
net assets of the Series from November 2,
1994 through December 31, 1996, 1.25% of the
average daily net assets of the Series from
January 1, 1997 through December 31, 1998,
and 1.50% of the average daily net assets of
the Series from January 1, 1999 through
December 31, 2004; provided however, that
this obligation may be terminated or revised
at any time. Absent this expense
arrangement, "Other Expenses" and "Total
Annual Expenses" would be 0.62% and 1.37%,
respectively, for the Total Return Series,
and 0.93% and 1.68%, respectively, for the
Utilities Series, based upon estimated
expenses for the Series' current fiscal
year. The Adviser has agreed to bear,
subject to reimbursement, until December 31,
2004, expenses of the World Governments
Series such that the Series' aggregate
operating expenses do not exceed 1.00%, on
an annualized basis, of its average daily
net assets. Absent this expense arrangement,
"Other Expenses" and "Total Annual Expenses"
for the World Governments Series would be
0.63% and 1.38%, respectively.
</TABLE>
11
<PAGE>
The purpose of the foregoing Table on page 11 of this
Prospectus is to assist the Policy Owner in understanding
the various costs and expenses that a Policy Owner will
incur, directly or indirectly. For additional information,
see the discussion in each Fund's prospectus.
GENERAL
There is no assurance that the investment objective of any
of the Funds will be met. A Policy Owner bears the complete
investment risk for Accumulation Values allocated to a
Sub-Account. Each of the Sub-Accounts involves inherent
investment risk, and such risk varies significantly among
the Sub-Accounts. Policy 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 Policies. 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.")
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 investment
objectives of the Policies, the Company may substitute
shares of another Fund. No substitution of securities in any
Sub-Account may take place without prior approval of the
Commission and under such requirements as it may impose.
VOTING RIGHTS
In accordance with its view of present applicable law, the
Company will vote the shares of each Fund held in the
Variable Account at special meetings of the shareholders of
the particular Trust in accordance with written instructions
received from persons having the voting interest in the
Variable Account. The Company will vote shares for which it
has not received instructions, as well as shares
attributable to it, in the same proportion as it votes
shares for which it has received instructions. The Trusts do
not hold regular meetings of shareholders.
The number of shares which a person has a right to vote will
be determined as of a date to be chosen by the appropriate
Trust 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 Policy 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.
FUND PARTICIPATION AGREEMENTS
The Company has entered into agreements with the various
Trusts and their advisers or distributors under which the
Company makes the Funds available under the Policies and
performs certain administrative services. In some cases, the
advisers or distributors may compensate the Company
therefor.
12
<PAGE>
DEATH BENEFIT
DEATH BENEFIT OPTIONS
Two different Death Benefit Options are available. The
amount payable under either option will be determined as of
the date of the Insured's death.
Under OPTION 1 the Death Benefit will be the greater of the
Specified Amount (a minimum of $50,000 as of the date of
this Prospectus), or the applicable percentage (the
"Corridor Percentage") of the Accumulation Value required to
maintain the Policy as a "life insurance contract" for tax
purposes (the "Corridor Death Benefit.") The Corridor
Percentage is 250% through the Insured's age 40 and
decreases in accordance with the table at page 14 of this
Prospectus to 100% at the Insured's age 95. Option 1
provides a level Death Benefit until the Corridor Death
Benefit exceeds the Specified Amount.
Under OPTION 2 the Death Benefit will be the greater of the
Specified Amount (a minimum of $50,000 as of the date of
this Prospectus), plus the Accumulation Value, or the
Corridor Death Benefit. Option 2 provides a varying Death
Benefit which increases or decreases over time, depending on
the amount of premium paid and the investment performance of
the underlying funding options chosen.
Under both Option 1 and Option 2, the proceeds payable upon
death will be the Death Benefit, reduced by partial
surrenders and by the amount necessary to repay any loans in
full. Option 1 will be in effect unless Option 2 has been
elected in the application for the Policy or unless a change
has been allowed.
CHANGES IN DEATH BENEFIT OPTION
A Death Benefit Option change will be allowed upon the
Owner's written request to the Variable Products Service
Center in form satisfactory to the Company, subject to the
following conditions:
- The change will take effect on the Monthly Anniversary
Day or on the next Valuation Day following the date of
receipt of the request.
- There will be no change in the Surrender Charge, and
evidence of insurability may be required.
- No change in the Death Benefit Option may reduce the
Specified Amount below $50,000.
- For changes from Option 1 to Option 2, the new Specified
Amount will equal the Specified Amount less the
Accumulation Value at the time of the change.
- For changes from Option 2 to Option 1, the new Specified
Amount will equal the Specified Amount plus the
Accumulation Value at the time of the change.
GUARANTEED DEATH BENEFIT PROVISION
The Guaranteed Death Benefit Provision assures that, as long
as the Guaranteed Initial Death Benefit Premium is paid, the
Death Benefit will not be less than the Initial Specified
Amount during the first five Policy Years even if the
Surrender Value is insufficient to cover the current Monthly
Deductions, assuming there have been no loans or partial
surrenders.
Changes in Initial Specified Amount, partial surrenders, and
option changes during the first five Policy Years may affect
the Guaranteed Death Benefit Premium. These events and loans
may also affect the Policy's ability to remain in force.
13
<PAGE>
PAYMENT OF DEATH BENEFIT
The Death Benefit under the Policy will be paid in a lump
sum within seven days after receipt at the Variable Products
Service Center of due proof of the Insured's death (a
certified copy of the death certificate), unless the Owner
or the Beneficiary has elected that it be paid under one or
more of the Settlement Options (See "Settlement Options").
Payment of the Death Benefit may be delayed if the Policy is
being contested.
While the Insured is living, the Owner may elect a
Settlement Option for the Beneficiary and deem it
irrevocable, and may revoke or change a prior election. The
Beneficiary may make or change an election within 90 days of
the death of the Insured, unless the Owner has made an
irrevocable election.
All or a part of the Death Benefit may be applied under one
or more of the Settlement Options, or such other options as
the Company may make available in the future.
If the Policy is assigned as collateral security, the
Company will pay any amount due the assignee in one lump
sum. Any excess Death Benefit due will be paid as elected.
The Death Benefit under the Policy at any point in time must
be at least the following "Corridor Percentage" of the
Accumulation Value based on the Insured's attained age:
<TABLE>
<CAPTION>
INSURED'S CORRIDOR INSURED'S CORRIDOR
ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE
- ------------- ------------- --------------- -------------
<S> <C> <C> <C>
0-40 250% 70 115%
41 243 71 113
42 236 72 111
43 229 73 109
44 222 74 107
-- - --
45 215 75 105
46 209 76 105
47 203 77 105
48 197 78 105
49 191 79 105
-- - --
50 185 80 105
51 178 81 105
52 171 82 105
53 164 83 105
54 157 84 105
-- - --
55 150 85 105
56 146 86 105
57 142 87 105
58 138 88 105
59 134 89 105
-- - --
60 130 90 105
61 128 91 104
62 126 92 103
63 124 93 102
64 122 94 101
-- - --
65 120 95 100
66 119 96 100
67 118 97 100
68 117 98 100
69 116 99 100
-- - --
</TABLE>
14
<PAGE>
CHANGES IN SPECIFIED AMOUNT
Changes in the Specified Amount of a Policy can be made by
submitting a written request to the Variable Products
Service Center in form satisfactory to the Company.
Changes in the Specified Amount are subject to the following
conditions:
- Satisfactory evidence of insurability and a supplemental
application may be required for an increase in the
Specified Amount.
- An increase in the Specified Amount will increase the
Surrender Charge.
- As of the date of this Prospectus, the minimum allowable
increase in Specified Amount is $1,000.
- No decrease may reduce the Specified Amount to less than
$50,000.
- No decrease may reduce the Specified Amount below the
minimum required to maintain the Policy's status under
the Code as a life insurance policy.
PREMIUM
PAYMENTS;
TRANSFERS
PREMIUM PAYMENTS
The Policies provide for flexible premium payments. Premium
Payments are payable in the frequency and in the amount
selected by the Policy Owner. The initial Premium Payment is
due on the Issue Date and is payable in advance. The minimum
payment is the amount necessary to maintain a positive
Surrender Value or Guaranteed Minimum Death Benefit. Each
subsequent Premium Payment must be at least $100. The
Company reserves the right to decline any application or
Premium Payment.
After the initial Premium Payment, all Premium Payments must
be sent directly to the Variable Products Service Center and
will be deemed received when actually received there.
The Policy Owner may elect to increase, decrease or change
the frequency of Premium Payments.
PLANNED PREMIUMS are Premium Payments scheduled when a
Policy is applied for. They can be billed annually,
semiannually or quarterly. Pre-authorized automatic monthly
check payments may also be arranged.
ADDITIONAL PREMIUMS are any Premium Payments made ($100
minimum) in addition to Planned Premiums.
GUARANTEED INITIAL DEATH BENEFIT PREMIUM, if paid during the
first five Policy Years, enables the Policy to remain in
force regardless of investment performance, assuming no
surrenders or loans during that time. The Guaranteed Initial
Death Benefit Premium is stated in the Policy
Specifications. An increase in Specified Amount would
require a recalculation of the Guaranteed Initial Death
Benefit Premium. If this premium is not paid, or there are
partial surrenders or loans taken during the first five
Policy Years, the Policy will lapse during the first five
Policy Years if the Surrender Value is less than the next
Monthly Deduction, just as it would after the first five
Policy Years at any time the Surrender Value is less than
the next Monthly Deduction.
Payment of Planned Premiums or Additional Premiums in any
amount will not, except as noted above, guarantee that the
Policy will remain in force. Conversely, failure to pay
Planned Premiums or Additional Premiums will not necessarily
cause a Policy to lapse (See "Guaranteed Death Benefit
Provision").
15
<PAGE>
PREMIUM INCREASES. At any time, the Owner may increase
Planned Premiums, or pay Additional Premiums, but:
- Evidence of insurability may be required if the
Additional Premium or the new Planned Premium during the
current Policy Year would increase the difference between
the Death Benefit and the Accumulation Value. If
satisfactory evidence of insurability is requested and
not provided, the increase in premium will be refunded
without interest and without participation of such
amounts in any underlying funding options.
- In no event may the total of all Premium Payments exceed
the then-current maximum premium limitations established
by federal law for a Policy to qualify as life insurance.
If, at any time, a Premium Payment would result in total
premiums exceeding such maximum premium limitation, the
Company will only accept that portion of the Premium
Payment which will make total premiums equal the maximum.
Any part of the premium in excess of that amount will be
returned or applied as otherwise agreed and no further
Premium Payments will be accepted until allowed by the
then-current maximum premium limitations prescribed by
law.
- If there is any Policy indebtedness, any additional Net
Premium Payments will be used first as a loan repayment
with any excess applied as an additional Net Premium
Payment.
ALLOCATION OF NET PREMIUM PAYMENTS
At the time of purchase of the Policy, the Owner must decide
how to allocate Net Premium Payments among the Sub-Accounts
and the Fixed Account. Allocation to any one Variable
Account Sub-Account or to the Fixed Account cannot be less
than 10% of the Net Premium Payment, and must be in whole
percentages. For each Variable Account Sub-Account, the Net
Premium Payments are converted into Accumulation Units. The
number of Accumulation Units credited to the Policy is
determined by dividing the Net Premium Payment allocated to
the Sub-Account by the value of the Accumulation Unit for
the Sub-Account.
During the right-to-examine period, the Net Premium Payment
will be allocated to the Fixed Account, and interest
credited from the Issue Date if the Premium Payment was
received on or before the Issue Date. The Company will
allocate the initial Net Premium Payment directly to the
Sub-Account(s) selected by the Owner within three days after
expiration of the right-to-examine period.
Unless the Company is directed otherwise by the Policy
Owner, subsequent Net Premium Payments will be allocated on
the same basis as the most recent previous Net Premium
Payment. Such allocation will occur as of the next Valuation
Period after each payment is received.
The allocation for future Premium Payments may be changed at
any time free of charge. Any new allocation will apply to
Premium Payments made more than one week after the Company
receives the notice of the new allocation. Any new
allocation must allocate a minimum of 10% to any single
funding vehicle and must be expressed in whole percents.
16
<PAGE>
TRANSFERS
Before the Insured attains age 100, values may, at any time,
be transferred ($500 minimum) from one Sub-Account to
another, or from the Variable Account to the Fixed Account.
Within the 30 days after each Policy Anniversary, the Owner
may also transfer a portion of the Fixed Account Value to
one or more Sub-Accounts, until the Insured attains age 100.
Transfers from the Fixed Account are allowed in the 30-day
period after a Policy Anniversary and will be effective as
of the next Valuation Day after a request is received in
good order at the Variable Products Service Center. The
cumulative amount of transfers from the Fixed Account within
any such 30-day period cannot exceed 20% of the Fixed
Account Value on the most recent Policy Anniversary. The
Company may further limit transfers from the Fixed Account
at any time.
Subject to the above restrictions, up to 12 transfers may be
made in any Policy Year without charge, and any value
remaining in the Fixed Account or a Sub-Account after a
transfer must be at least $500. Transfers may be made in
writing or by telephone unless the Policy Owner has
indicated in writing in the application or otherwise that
telephone transfers are not to be permitted. To make a
telephone transfer, the Policy Owner must call the Variable
Products Service Center and provide, as identification, his
or her Policy Number and a requested portion of his or her
Social Security number. A customer service representative
will then come on the line and, upon ascertaining that
telephone transfers are permitted for that Policy, take the
transfer request, which will be processed as of the next
close of business and confirmed the day after that. The
Company disclaims all liability for losses resulting from
unauthorized or fraudulent telephone transactions, but
acknowledges that if it does not follow these procedures,
which it believes to be reasonable, it may be liable for
such losses.
Any transfer among the Funds or to the Fixed Account will
result in the crediting and cancellation of Accumulation
Units based on the Accumulation Unit values next determined
after a written request is received at the Variable Products
Service Center. Any transfer made which causes the remaining
value of Accumulation Units for a Sub-Account to be less
than $500 will result in those remaining Accumulation Units
being cancelled and their aggregate value reallocated
proportionately among the other funding options chosen. The
Policy Owner should carefully consider current market
conditions and each Fund's investment policies and related
risks before allocating money to the Sub-Accounts. See pages
8-11 of this Prospectus.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected,
enables a Policy Owner to systematically reallocate
specified dollar amounts from the Fixed Account to the Sub-
Accounts at regular intervals. By allocating on a regularly
scheduled basis as opposed to reallocating the total amount
at one particular time, a Policy Owner may be less
susceptible to the impact of market fluctuations.
Dollar Cost Averaging may be selected by establishing a
Fixed Account Value of at least $12,000. The minimum
transfer amount is $1,000. All Dollar Cost Averaging
transfers will be made effective the twentieth of the month
(or the next Valuation Day if the twentieth of the month is
not a Valuation Day). Election into this program may occur
at any time by properly completing the Dollar Cost Averaging
election form, returning it to the Company so it is received
by the tenth of the month, to be effective that month, and
ensuring that sufficient value is in the Fixed Account.
Dollar Cost Averaging will terminate when any of the
following occurs: (1) the number of designated transfers has
been completed; (2) the Fixed Account Value is insufficient
17
<PAGE>
to complete the next transfer; (3) the Owner requests
termination in writing and such writing is received by the
tenth of the month in order to cancel the transfer scheduled
to take effect that month; or (4) the Policy is surrendered.
There is currently no charge for Dollar Cost Averaging, and
Dollar Cost Averaging transfers are not counted against the
twelve free transfers per Policy Year, but the Company
reserves the right to charge for this program. In the event
there are additional transfers, a transfer fee may be
charged. The Company does not intend to profit from any such
charge.
CHARGES;
FEES
PREMIUM LOAD
A deduction of 3.5% of each Premium Payment will be made to
cover the premium load. This load represents state taxes and
federal income tax liabilities.
MONTHLY DEDUCTIONS
A Monthly Deduction is made from the Net Accumulation Value
for administrative expenses. The monthly administrative fee
is $15 during the first Policy Year and, currently, $5
during subsequent Policy Years. This charge is for items
such as premium billing and collection, policy value
calculation, confirmations and periodic reports and will not
exceed the Company's costs. For subsequent Policy Years,
this monthly fee will never exceed $10.
A Monthly Deduction is also made from the Net Accumulation
Value for the Cost of Insurance and any charges for
supplemental riders. The Cost of Insurance depends on the
attained age, risk class and gender classification (in
accordance with state law) of the Insured and the current
Net Amount at Risk.
The Cost of Insurance is determined by dividing the Death
Benefit at the previous Monthly Anniversary Day by
1.0032737, subtracting the Accumulation Value at the
previous Monthly Anniversary Day, and multiplying the result
(the Net Amount at Risk) by the applicable Cost of Insurance
Rate as determined by the Company. The Guaranteed Maximum
Cost of Insurance Rates, per $1,000 of Net Amount at Risk,
for standard risks are set forth in the following Table
based on the 1980 Commissioners Standard Ordinary Mortality
Tables, Age Nearest Birthday (1980 CSO); or, for unisex
rates, on the 1980 CSO-B Table.
<TABLE>
<CAPTION>
ATTAINED
AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- ----------- --------- --------- ---------
<S> <C> <C> <C>
0 0.34845 0.24089 0.32677
1 0.08917 0.07251 0.08667
2 0.08251 0.06750 0.07917
3 0.08167 0.06584 0.07834
4 0.07917 0.06417 0.07584
5 0.07501 0.06334 0.07251
6 0.07167 0.06084 0.06917
7 0.06667 0.06000 0.06584
8 0.06334 0.05834 0.06250
9 0.06167 0.05750 0.06084
10 0.06084 0.05667 0.06000
11 0.06417 0.05750 0.06250
12 0.07084 0.06000 0.06917
13 0.08251 0.06250 0.07834
14 0.09584 0.06887 0.09001
<CAPTION>
ATTAINED
AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- ----------- --------- --------- ---------
<S> <C> <C> <C>
15 0.11085 0.07084 0.10334
16 0.12585 0.07601 0.11585
17 0.13919 0.07917 0.12752
18 0.14836 0.08167 0.13502
19 0.15502 0.08501 0.14085
20 0.15836 0.08751 0.14502
21 0.15919 0.08917 0.14585
22 0.15752 0.09084 0.14419
23 0.15502 0.09251 0.14252
24 0.15189 0.09501 0.14085
25 0.14752 0.09668 0.13752
26 0.11419 0.09918 0.13585
27 0.14252 0.10168 0.13418
28 0.14169 0.10501 0.13418
29 0.14252 0.10635 0.13585
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
ATTAINED
AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- ----------- --------- --------- ---------
30 0.14419 0.11251 0.13752
<S> <C> <C> <C>
31 0.14836 0.11668 0.14169
32 0.15252 0.12085 0.14585
33 0.15919 0.12502 0.15252
34 0.16889 0.13168 0.15919
35 0.17586 0.13752 0.16836
36 0.18670 0.14669 0.17837
37 0.20004 0.15752 0.19170
38 0.21505 0.17003 0.20588
39 0.23255 0.18503 0.22338
40 0.25173 0.20171 0.24173
41 0.27424 0.22005 0.26340
42 0.29675 0.23922 0.28508
43 0.32260 0.25757 0.31010
44 0.34929 0.27674 0.33428
45 0.37931 0.29675 0.36263
46 0.41017 0.31677 0.39182
47 0.44353 0.33761 0.42268
48 0.47856 0.36096 0.45437
49 0.51777 0.38598 0.49107
50 0.55948 0.41350 0.53028
51 0.60870 0.44270 0.57533
52 0.66377 0.47523 0.62539
53 0.72636 0.51276 0.68297
54 0.79730 0.55114 0.74722
55 0.87326 0.59118 0.81566
56 0.95591 0.63123 0.88996
57 1.04192 0.66961 0.96593
58 1.13378 0.70633 1.04609
59 1.23236 0.74556 1.13211
60 1.34180 0.78979 1.22817
61 1.46381 0.84488 1.33511
62 1.60173 0.91417 1.45796
63 1.75809 1.00267 1.59922
64 1.93206 1.10539 1.75725
<CAPTION>
ATTAINED
AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- ----------- --------- --------- ---------
<S> <C> <C> <C>
65 2.12283 1.21731 1.92955
66 2.32623 1.33511 2.11195
67 2.54312 1.45461 2.30614
68 2.77350 1.57247 2.50878
69 3.02328 1.69955 2.72909
70 3.30338 1.84590 2.97466
71 3.62140 2.02325 3.25640
72 3.98666 2.24419 3.58279
73 4.40599 2.51548 3.95978
74 4.87280 2.83552 4.38330
75 5.37793 3.19685 4.84334
76 5.91225 3.59370 5.33245
77 6.46824 4.01942 5.84227
78 7.04089 4.47410 6.36948
79 7.64551 4.97042 6.92851
80 8.30507 5.52957 7.54229
81 9.03761 6.17118 8.22883
82 9.86724 6.91414 9.01216
83 10.80381 7.77075 9.90124
84 11.82571 8.72632 10.87533
85 12.91039 9.76952 11.92213
86 14.03509 10.89151 13.01471
87 15.18978 12.08770 14.15507
88 16.36948 13.35774 15.33494
89 17.57781 14.70820 16.56493
90 18.82881 16.15259 17.85746
91 20.14619 17.71416 19.23699
92 21.57655 19.43814 20.76665
93 23.20196 21.40786 22.49837
94 25.28174 23.63051 24.70915
95 28.27411 27.16158 27.82758
96 33.10577 32.32378 32.78845
97 41.68476 41.21204 41.45783
98 58.01259 57.81394 57.95663
99 90.90909 90.90909 90.90909
</TABLE>
These Monthly Deductions are deducted proportionately from
the value of each funding option. This is accomplished for
the Sub-Accounts by canceling Accumulation Units and
withdrawing the value of the canceled Accumulation Units
from each funding option in the same proportion as their
respective values have to the Net Accumulation Value. The
Monthly Deductions are made on the Monthly Anniversary Day.
If the Insured is still living at age 100 and the Policy has
not been surrendered, no further Monthly Deductions are
taken and any Variable Account Value is transferred to the
Fixed Account. The Policy will then remain in force until
surrender or the Insured's death.
TRANSACTION FEE FOR EXCESS TRANSFERS
There will be a $25 transaction fee for each transfer
between funding options in excess of 12 during any Policy
Year.
MORTALITY AND EXPENSE RISK CHARGE
For mortality and expense risks, a daily deduction,
currently equivalent to .45% per year during the first ten
Policy Years and .25% per year thereafter, is made from
amounts held in the Variable Account. This deduction is
guaranteed not to exceed .90% per year.
19
<PAGE>
SURRENDER CHARGE
Upon surrender of a Policy, a surrender charge may apply, as
described below. This charge is in part a deferred sales
charge and in part a recovery of certain first year
administrative costs.
The initial Surrender Charge, as specified in the Policy, is
based on the Initial Specified Amount and the amount of
Premium Payments during the first two Policy Years. Once
determined, the Surrender Charge will remain the same dollar
amount during the third through fifth Policy Years.
Thereafter, it declines monthly at a rate of 20% per year so
that after the end of the tenth Policy Year (assuming no
increases in the Specified Amount) the Surrender Charge will
be zero. Thus, the Surrender Charge at the end of the sixth
Policy Year would be 80% of the Surrender Charge at the end
of the fifth Policy Year, at the end of the seventh Policy
Year would be 60% of the Surrender Charge at the end of the
fifth Policy Year, and so forth. However, in no event will
the Surrender Charge exceed the maximum allowed by state or
federal law.
If the Specified Amount is increased, a new Surrender Charge
will be applicable, in addition to any existing Surrender
Charge. The Surrender Charge applicable to the increase will
be equal to the Surrender Charge on a new policy whose
Specified Amount equals the amount of the increase. As of
the date of this Prospectus, the minimum allowable increase
in Specified Amount is $1,000. The Company may change this
at any time.
If the Specified Amount is decreased while the Surrender
Charge applies, the Surrender Charge will remain the same.
No Surrender Charge is imposed on a partial surrender, but
an administrative fee of $25 is imposed, allocated pro-rata
among the Sub-Accounts (and, where applicable, the Fixed
Account) from which the partial surrender proceeds are taken
unless the Owner instructs the Company otherwise.
The portion of the Surrender Charge applied to reimburse the
Company for sales and promotional expense is at most 30% of
the sum of Premium Payments in the first two Policy Years up
to one Guideline Annual Premium, plus 10% of Premium
Payments in the first two Policy Years between one and two
times one Guideline Annual Premium plus 9% of Premium
Payments in the first two Policy Years in excess of two
times one Guideline Annual Premium. The portion applicable
to administrative expense is $6.00 per $1,000 of Initial
Specified Amount. Under certain circumstances involving the
payment of very large premiums during the first two Policy
Years, a lesser portion of the Surrender Charge will be
applied to reimburse the Company for sales and promotional
expense, to the extent required by federal or state law. Any
surrenders may result in tax implications. See "Tax
Matters".
Based on its actuarial determination, the Company does not
anticipate that the Surrender Charge will cover all sales
and administrative expenses which the Company will incur in
connection with the Policy. Any such shortfall, including
but not limited to payment of sales and distribution
expenses, would be available for recovery from the General
Account of the Company, which supports insurance and annuity
obligations.
POLICY VALUES
ACCUMULATION VALUE
Once a Policy has been issued, each Net Premium Payment
allocated to a Sub-Account of the Variable Account is
credited in the form of Accumulation Units, representing the
Fund in which assets of that Sub-Account are invested. Each
Net Premium Payment will
20
<PAGE>
be credited to the Policy as of the end of the Valuation
Period in which it is received at the Variable Products
Service Center (or portion thereof allocated to a particular
Sub-Account). The number of Accumulation Units credited is
determined by dividing the Net Premium Payment by the value
of an Accumulation Unit next computed after receipt. Since
each Sub-Account has a unique Accumulation Unit value, a
Policy Owner who has elected a combination of funding
options will have Accumulation Units credited from more than
one source.
The Accumulation Value of a Policy is determined by: (a)
multiplying the total number of Accumulation Units credited
to the Policy for each applicable Sub-Account by its
appropriate current Accumulation Unit value; (b) if a
combination of Sub-Accounts is elected, totaling the
resulting values; and (c) adding any values attributable to
the General Account (i.e., the Fixed Account Value and the
Loan Account Value).
The number of Accumulation Units credited to a Policy will
not be changed by any subsequent change in the value of an
Accumulation Unit. Such value may vary from Valuation Period
to Valuation Period to reflect the investment experience of
the Fund used in a particular Sub-Account.
The Fixed Account Value reflects amounts allocated to the
General Account through payment of premiums or transfers
from the Variable Account. The Fixed Account Value is
guaranteed; however, there is no assurance that the Variable
Account Value of the Policy will equal or exceed the Net
Premium Payments allocated to the Variable Account.
Each Policy Owner will be advised at least annually as to
the number of Accumulation Units which remain credited to
the Policy, the current Accumulation Unit values, the
Variable Account Value, the Fixed Account Value and the Loan
Account Value.
Accumulation Value will be affected by Monthly Deductions.
VARIABLE ACCUMULATION UNIT VALUE
The value of a Variable Accumulation Unit for any Valuation
Period is determined by multiplying the value of that
Variable Accumulation Unit for the immediately preceding
Valuation Period by the Net Investment Factor for the
current period for the appropriate Sub-Account. The Net
Investment Factor is determined separately for each
Sub-Account by dividing (a) by (b) and subtracting (c) from
the results where (a) equals the net asset value per share
of the Fund held in the Sub-Account at the end of a
Valuation Period plus the per share amount of any
distribution declared by the Fund if the "ex-dividend" date
is during the Valuation Period plus or minus taxes or
provisions for taxes, if any, attributable to the operation
of the Sub-Account during the Valuation Period; (b) equals
the net asset value per share of the Fund held in the
Sub-Account at the beginning of that Valuation Period, and
(c) is the daily charge for mortality and expense risk
multiplied by the number of days in the Valuation Period.
SURRENDER VALUE
The Surrender Value of a Policy is the amount the Owner can
receive in cash by surrendering the Policy. All or part of
the Surrender Value may be applied to one or more of the
Settlement Options. See "Surrender Charge".
21
<PAGE>
SURRENDERS
PARTIAL SURRENDERS
A partial surrender may be made at any time by written
request to the Variable Products Service Center during the
lifetime of the Insured and while the Policy is in force.
Such request may also be made by telephone if telephone
transfers have been previously authorized in writing. A $25
transaction fee is charged.
The amount of a partial surrender may not exceed 90% of the
Surrender Value at the end of the Valuation Period in which
the election becomes or would become effective, and may not
be less than $500.
For an Option 1 Policy (See "Death Benefit"): A partial
surrender will reduce the Accumulation Value, Death Benefit,
and Specified Amount. The Specified Amount and Accumulation
Value will be reduced by equal amounts and will reduce any
past increases in the reverse order in which they occurred.
For an Option 2 Policy (See "Death Benefit"): A partial
surrender will reduce the Accumulation Value and the Death
Benefit, but it will not reduce the Specified Amount.
The Specified Amount remaining in force after a partial
surrender may not be less than $50,000. Any request for a
partial surrender that would reduce the Specified Amount
below this amount will not be granted. In addition, if,
following the partial surrender and the corresponding
decrease in the Specified Amount, the Policy would not
comply with the maximum premium limitations required by
federal tax law, the decrease may be limited to the extent
necessary to meet the federal tax law requirements.
If, at the time of a partial surrender, the Net Accumulation
Value is attributable to more than one funding option, the
$25 transaction charge and the amount paid upon the
surrender will be taken proportionately from the values in
each funding option, unless the Policy Owner and the Company
agree otherwise.
FULL SURRENDERS
A full surrender may be made at any time. The Company will
pay the Surrender Value next computed after receiving the
Owner's written request at the Variable Products Service
Center in a form satisfactory to the Company. Payment of any
amount from the Variable Account on a full surrender will
usually be made within seven calendar days thereafter.
DEFERRAL OF PAYMENT
Payment of the surrendered amount from the Variable Account
may be postponed when the New York Stock Exchange is closed
and for such other periods as the Commission may require.
Payment from the Fixed Account may be deferred up to six
months at the Company's option. If the Company exercises its
right to defer such payments interest will be added as
required by law.
LAPSE AND
REINSTATEMENT
LAPSE OF A POLICY; EFFECT OF GUARANTEED DEATH BENEFIT
PROVISION
A Policy will not lapse during the five-year period after
its Issue Date regardless of investment performance if, on
each Monthly Anniversary Day within that period the sum of
premiums paid equals or exceeds the required amount of the
Guaranteed Initial Death
22
<PAGE>
Benefit Premium for that period, assuming there have been no
loans or partial surrenders. If there have been any loans or
partial surrenders, the Policy may lapse unless there is
sufficient Surrender Value to cover the Monthly Deduction.
After the five-year period expires, and depending on the
investment performance of the funding options, the
Accumulation Value may be insufficient to keep this Policy
in force, and payment of an additional premium may be
necessary.
A lapse occurs if a Monthly Deduction is greater than the
Surrender Value and no payment to cover the Monthly
Deduction is made within the Grace Period. The Company will
send the Owner a lapse notice at least 31 days before the
Grace Period expires.
REINSTATEMENT OF A LAPSED POLICY
The Owner can apply for reinstatement at any time during the
Insured's lifetime. To reinstate a Policy, the Company will
require satisfactory evidence of insurability and an amount
sufficient to pay for the current Monthly Deduction plus two
additional Monthly Deductions.
If the Policy is reinstated within five years of the Issue
Date, all values including the Loan Account Value will be
reinstated to the point they were on the date of lapse.
However, the Guaranteed Initial Death Benefit Option will
not be reinstated.
If the Policy is reinstated after five years following the
Issue Date, it will be reinstated on the Monthly Anniversary
Day following the Company approval. The Accumulation Value
at reinstatement will be the Net Premium Payment then made
less the Monthly Deduction due that day.
If the Surrender Value is not sufficient to cover the full
Surrender Charge at the time of lapse, the remaining portion
of the Surrender Charge will also be reinstated at the time
of Policy reinstatement.
POLICY LOANS
A Policy loan requires that a loan agreement be executed and
that the Policy be assigned to the Company. The loan may be
for any amount up to 100% of the Surrender Value; however,
the Company may limit the amount of such loan so that total
Policy indebtedness will not exceed 90% of an amount equal
to the Accumulation Value less the Surrender Charge which
would be imposed on a full surrender. The amount of a loan,
together with subsequent accrued but not paid interest on
the loan, becomes part of the Loan Account Value. If Policy
values are held in more than one funding option, withdrawals
from each funding option will be made in proportion to the
assets in each funding option at the time of the loan for
transfer to the Loan Account, unless the Company is
instructed otherwise in writing at the Variable Products
Service Center.
Interest on loans will accrue at an annual rate of 8%, and
net loan interest (interest charged less interest credited
as described below) is payable once a year in arrears on
each anniversary of the loan, or earlier upon full surrender
or other payment of proceeds of a Policy. Any interest not
paid when due becomes part of the loan and the net interest
will be withdrawn proportionately from the values in each
funding option.
The Company will credit interest on the Loan Account Value.
During the first ten Policy Years, the Company's current
practice is that interest will be credited at an annual rate
equal to the interest rate charged on the loan minus 1%
(guaranteed not to exceed 2%). Beginning with the eleventh
Policy Year, the Company's current practice is that interest
23
<PAGE>
will be credited at an annual rate equal to the interest
rate charged on the loan, less .25% annually (guaranteed not
to exceed 1%). In no case will the annual credited interest
rate be less than 6% in each of the first ten Policy Years
and 7% thereafter.
Repayments on the loan will be allocated among the funding
options according to current Net Premium Payment
allocations. The Loan Account Value will be reduced by the
amount of any loan repayment.
A Policy loan, whether or not repaid, will affect the
proceeds payable upon the Insured's death and the
Accumulation Value because the investment results of the
Variable Account or the Fixed Account will apply only to the
non-loaned portion of the Accumulation Value. The longer a
loan is outstanding, the greater the effect is likely to be.
Depending on the investment results of the Variable Account
or the Fixed Account while the loan is outstanding, the
effect could be favorable or unfavorable.
SETTLEMENT OPTIONS
Proceeds in the form of Settlement Options are payable by
the Company at the Beneficiary's election upon the Insured's
death, or while the Insured is alive upon election by the
Owner of one of the Settlement Options.
A written request may be made to elect, change, or revoke a
Settlement Option before payments begin under any Settlement
Option. This request must be in form satisfactory to the
Company, and will take effect upon its receipt at the
Variable Products Service Center. Payments after the first
payment will be made on the first day of each month.
FIRST OPTION -- Payments for the lifetime of the payee.
SECOND OPTION -- Payments for the lifetime of the payee,
guaranteed for 60, 120, 180, or 240 months;
THIRD OPTION -- Payment for a stated number of years, at
least five but no more than thirty;
FOURTH OPTION -- Payment of interest annually on the sum
left with the Company at a rate of at least 3% per year, and
upon the payee's death the amount on deposit will be paid.
ADDITIONAL OPTIONS -- Policy proceeds may also be settled
under any other method of settlement offered by the Company
at the time the request is made.
OTHER POLICY PROVISIONS
ISSUANCE
A Policy may only be issued upon receipt of satisfactory
evidence of insurability, and generally only where the
Insured is below the age of 80.
SHORT-TERM RIGHT TO CANCEL THE POLICY
A Policy may be returned for cancellation and a full refund
of premium within 10 days after the Policy is received,
unless otherwise stipulated by state law requirements, or
within 45 days after the application for the Policy is
signed, whichever occurs latest. The Initial Premium Payment
made when the Policy is issued will be held in the Fixed
Account and not allocated to the Variable Account even if
the Policy Owner may have so directed until three business
days following the expiration of the right-to-examine
period. If the Policy is returned for cancellation in a
timely fashion, the refund of
24
<PAGE>
premiums paid, without interest, will usually occur within
seven days of notice of cancellation, although a refund of
premiums paid by check may be delayed until the check
clears.
POLICY OWNER
While the Insured is living, all rights in this Policy are
vested in the Policy Owner named in the application or as
subsequently changed, subject to assignment, if any.
The Policy Owner may name a new Policy Owner while the
Insured is living. Any such change in ownership must be in a
written form satisfactory to the Company and recorded at the
Variable Products Service Center. Once recorded, the change
will be effective as of the date signed; however, the change
will not affect any payment made or action taken by the
Company before it was recorded. The Company may require that
the Policy be submitted for endorsement before making a
change.
If the Policy Owner is other than the Insured, names no
contingent Policy Owner and dies before the Insured, the
Policy Owner's rights in this Policy belong to the Policy
Owner's estate.
BENEFICIARY
The Beneficiary(ies) shall be as named in the application or
as subsequently changed, subject to assignment, if any.
The Policy Owner may name a new Beneficiary while the
Insured is living. Any change must be in a written form
satisfactory to the Company and recorded at the Variable
Products Service Center. Once recorded, the change will be
effective as of the date signed; however, the change will
not affect any payment made or action taken by the Company
before it was recorded.
If any Beneficiary predeceases the Insured, that
Beneficiary's interest passes to any surviving
Beneficiary(ies), unless otherwise provided. Multiple
Beneficiaries will be paid in equal shares, unless otherwise
provided. If no named Beneficiary survives the Insured, the
death proceeds shall be paid to the Policy Owner or the
Policy Owner's executor(s), administrator(s) or assigns.
ASSIGNMENT
While the Insured is living, the Policy Owner may assign his
or her rights in the Policy. The assignment must be in
writing, signed by the Policy Owner and recorded at the
Variable Products Service Center. No assignment will affect
any payment made or action taken by the Company before it
was recorded. The Company is not responsible for any
assignment not submitted for recording, nor is the Company
responsible for the sufficiency or validity of any
assignment. The assignment will be subject to any
indebtedness owed to the Company before it was recorded.
RIGHT TO EXCHANGE FOR A FIXED BENEFIT POLICY
The Policy Owner may, within the first two Policy Years,
exchange the Policy for a permanent life insurance policy
then being offered by the Company. The benefits for the new
policy will not vary with the investment experience of a
separate account. The exchange must be elected within 24
months from the Issue Date. No evidence of insurability will
be required.
The Policy Owner, the Insured and the Beneficiary under the
new policy will be the same as those under the exchanged
Policy on the effective date of the exchange. The
25
<PAGE>
new policy will have a Death Benefit on the exchange date
not more than the Death Benefit of the original Policy
immediately prior to the exchange date. The new policy will
have the same Issue Date and Issue Age as the original
Policy. The initial Specified Amount and any increases in
Specified Amount will have the same rate class as those of
the original Policy. Any indebtedness may be transferred to
the new policy.
The exchange may be subject to an equitable adjustment in
rates and values to reflect variances, if any, in the rates
and values between the two Policies. After adjustment, if
any excess is owed the Policy Owner, the Company will pay
the excess to the Policy Owner in cash. The exchange may be
subject to federal income tax withholding.
INCONTESTABILITY
The Company will not contest payment of the death proceeds
based on the Initial Specified Amount after the Policy has
been in force during the Insured's lifetime for two years
from the Issue Date. For any increase in Specified Amount
requiring evidence of insurability, the Company will not
contest payment of the death proceeds based on such an
increase after it has been in force during the Insured's
lifetime for two years from its effective date.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Insured has been misstated, the
affected benefits will be adjusted. The amount of the Death
Benefit will be 1. multiplied by 2. and then the result
added to 3. where:
1. is the Net Amount at Risk at the time of the Insured's
death;
2. is the ratio of the monthly cost of insurance applied in
the policy month of death to the monthly cost of
insurance that should have been applied at the true age
and sex in the policy month of death; and
3. is the Accumulation Value at the time of the Insured's
death.
SUICIDE
If the Insured dies by suicide, while sane or insane, within
two years from the Issue Date, the Company will pay no more
than the sum of the premiums paid, less any indebtedness. If
the Insured dies by suicide, while sane or insane, within
two years from the date an application is accepted for an
increase in the Specified Amount, the Company will pay no
more than a refund of the monthly charges for the cost of
such additional benefit.
NONPARTICIPATING POLICIES
These are nonparticipating Policies on which no dividends
are payable. These Policies do not share in the profits or
surplus earnings of the Company.
TAX MATTERS
POLICY PROCEEDS
Section 7702 of the Code provides that if certain tests are
met, a Policy will be treated as a life insurance policy for
federal tax purposes. The Company will monitor compliance
with these tests. The Policy should thus receive the same
federal income tax treatment as fixed benefit life
insurance. As a result, the death proceeds payable under a
Policy are excludable from gross income of the Beneficiary
under Section 101 of the Code.
26
<PAGE>
Section 7702A of the Code defines modified endowment
contracts as those policies issued or materially changed on
or after June 21, 1988 on which the total premiums paid
during the first seven years exceed the amount that would
have been paid if the policy provided for paid up benefits
after seven level annual premiums. The Code provides for
taxation of surrenders, partial surrenders, loans,
collateral assignments and other pre-death distributions
from modified endowment contracts in the same way annuities
are taxed. Modified endowment contract distributions are
defined by the Code as amounts not received as an annuity
and are taxable to the extent the cash value of the policy
exceeds, at the time of distribution, the premiums paid into
the policy. A 10% tax penalty generally applies to the
taxable portion of such distributions unless the Policy
Owner is over age 59 1/2 or disabled.
It may not be advantageous to replace existing insurance
with Policies described in this Prospectus. It may also be
disadvantageous to purchase a Policy to obtain additional
insurance protection if the purchaser already owns another
variable life insurance policy.
The Policies offered by this Prospectus may or may not be
issued as modified endowment contracts. The Company will
monitor premiums paid and will notify the Policy Owner when
the Policy's non-modified endowment contract status is in
jeopardy. If a Policy is not a modified endowment contract,
a cash distribution during the first 15 years after a policy
is issued which causes a reduction in death benefits may
still become fully or partially taxable to the Owner
pursuant to Section 7702(f)(7) of the Code. The Policy Owner
should carefully consider this potential effect and seek
further information before initiating any changes in the
terms of the Policy. Under certain conditions, a Policy may
become a modified endowment contract as a result of a
material change or a reduction in benefits as defined by
Section 7702A(c) of the Code.
In addition to meeting the tests required under Section 7702
and Section 7702A, Section 817(h) of the Code requires that
the investments of separate accounts such as the Variable
Account be adequately diversified. Regulations issued by the
Secretary of the Treasury set the standards for measuring
the adequacy of this diversification. A variable life
insurance policy not adequately diversified under these
regulations would not be treated as life insurance under
Section 7702 of the Code. To be adequately diversified, each
Sub-Account of the Variable Account must meet certain tests.
The Company believes the Variable Account investments meet
the applicable diversification standards.
Should the Secretary of the Treasury issue additional rules
or regulations limiting the number of funds, transfers
between funds, exchanges of funds or changes in investment
objectives of funds such that the Policy would no longer
qualify as life insurance under Section 7702 of the Code,
the Company will take whatever steps are available to remain
in compliance.
The Company will monitor compliance with these regulations
and, to the extent necessary, will change the objectives or
assets of the Sub-Account investments to remain in
compliance.
A total surrender or termination of the Policy by lapse may
have adverse tax consequences. If the amount received by the
Policy Owner plus total Policy indebtedness exceeds the
premiums paid into the Policy, the excess will generally be
treated as taxable income, regardless of whether or not the
Policy is a modified endowment contract.
Federal estate and state and local estate, inheritance and
other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Policy Owner or
Beneficiary.
27
<PAGE>
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under the
Code. Since the Variable Account is not a separate entity
from the Company and its operations form a part of the
Company, it will not be taxed separately as a "regulated
investment company" under Sub-chapter M of the Code.
Investment income and realized capital gains on the assets
of the Variable Account are reinvested and taken into
account in determining the value of Accumulation Units.
The Company does not initially expect to incur any Federal
income tax liability that would be chargeable to the
Variable Account. Based upon these expectations, no charge
is currently being made against the Variable Account for
federal income taxes. If, however, the Company determines
that on a separate company basis such taxes may be incurred,
it reserves the right to assess a charge for such taxes
against the Variable Account.
The Company may also incur state and local taxes in addition
to premium taxes in several states. At present, these taxes
are not significant. If they increase, however, additional
charges for such taxes may be made.
SECTION 848 CHARGES
The 3.5% premium load is assessed to cover state taxes and
federal income tax liabilities incurred by the Company. This
load is made up of 2.35% for state taxes and 1.15% for the
additional federal income tax burden under Section 848 of
the Code relating to the tax treatment of deferred
acquisition costs. The 1.15% charge for federal income tax
liabilities is reasonable in relation to the Company's
increased taxes under this Section of the Code.
OTHER CONSIDERATIONS
The foregoing discussion is general and is not intended as
tax advice. Counsel and other competent advisers should be
consulted for more complete information. This discussion is
based on the Company's understanding of Federal income tax
laws as they are currently interpreted by the Internal
Revenue Service. No representation is made as to the
likelihood of continuation of these current laws and
interpretations.
OTHER MATTERS
DIRECTORS AND OFFICERS OF THE COMPANY
The following persons are Directors and officers of the
Company. The address of each is 900 Cottage Grove Road,
Hartford, CT 06152 and each has been employed by the Company
for more than five years except Dr. Schaffer. Prior to May
1993, Dr. Schaffer was Vice President, Professional Affairs,
Aetna Health Plans, Aetna Life & Casualty and until 1990 was
Vice President, Quality Management, Humana, Inc.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE COMPANY
- ------------------------------ -----------------------------------
<S> <C>
Thomas C. Jones President
(Principal Executive Officer)
James T. Kohan Vice President and Actuary
(Principal Financial Officer)
Robert Moose Vice President
(Principal Accounting Officer)
David C. Kopp Corporate Secretary
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE COMPANY
- ------------------------------ -----------------------------------
<S> <C>
Kathy L. Hopkins Secretary
Stephen C. Stachelek Treasurer
Harold W. Albert Director
Martin A. Brennan Director and Senior Vice President
Robert W. Burgess Director
John G. Day Director and Chief Counsel
R. Chris Doerr Director, Senior Vice President and
Chief Financial Officer
Lawrence P. English Director and Chairman of the Board
Joseph M. Fitzgerald Director and Senior Vice President
Arthur C. Reeds, III Director and Senior Vice President
W. Allen Schaffer, M.D. Director and Senior Vice President
</TABLE>
DISTRIBUTION OF POLICIES
The Policies will be sold by licensed insurance agents in
those states where the Policies 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 Policies will be distributed by the
Company's principal underwriter, CIGNA Financial Advisors,
Inc. ("CFA"), whose address is the same as the Company's.
CFA is a Connecticut corporation organized in 1967, and is
the principal underwriter for the Company's other registered
separate accounts.
Gross first year commissions paid by the Company, including
expense reimbursement allowances, on the sale of these
Policies are not more than 12.6% of Premium Payments. Gross
renewal commissions paid by the Company will not exceed 5.4%
of Premium Payments, and will not be paid after the tenth
Policy Year.
CHANGES OF INVESTMENT POLICY
The Company may materially change the investment policy of
the Variable Account. The Company must inform the Policy
Owners and obtain all necessary regulatory approvals. Any
change must be submitted to the various state insurance
departments which shall disapprove it if deemed detrimental
to the interests of the Policy Owners or if it renders the
Company's operations hazardous to the public. If a Policy
Owner objects, the Policy may be converted to a
substantially comparable fixed benefit life insurance policy
offered by the Company on the life of the Insured. The
Policy Owner has the later of 60 days (6 months in
Pennsylvania) from the date of the investment policy change
or 60 days (6 months in Pennsylvania) from being informed of
such change to make this conversion. The Company will not
require evidence of insurability for this conversion.
The new policy will not be affected by the investment
experience of any separate account. The new policy will be
for an amount of insurance not exceeding the Death Benefit
of the Policy converted on the date of such conversion.
OTHER CONTRACTS ISSUED BY THE COMPANY
The Company does presently and will, from time to time,
offer other variable annuity contracts and variable life
insurance policies with benefits which vary in accordance
with the investment experience of a separate account of the
Company.
29
<PAGE>
STATE REGULATION
The Company is subject to the laws of Connecticut governing
insurance companies and to regulation by the Connecticut
Insurance Department. An annual statement in a prescribed
form is filed with the Insurance Department each year
covering the operation of the Company for the preceding year
and its financial condition as of the end of such year.
Regulation by the Insurance Department includes periodic
examination to determine the Company's contract liabilities
and reserves so that the Insurance Department may certify
the items are correct. The Company's books and accounts are
subject to review by the Insurance Department at all times
and a full examination of its operations is conducted
periodically by the Insurance Department. Such regulation
does not, however, involve any supervision of management or
investment practices or policies.
REPORTS TO POLICY OWNERS
The Company maintains Policy records and will mail to each
Policy Owner, at the last known address of record, an annual
statement showing the amount of the current death benefit,
the Accumulation Value, and Surrender Value, premiums paid
and monthly charges deducted since the last report, the
amounts invested in the Fixed Account and in the Variable
Account and in each Sub-Account of the Variable Account, and
any Loan Account Value.
Policy Owners will also be sent annual and semi-annual
reports containing financial statements for the Variable
Account as required by the 1940 Act.
In addition, Policy Owners will receive statements of
significant transactions, such as changes in Specified
Amount, changes in Death Benefit Option, changes in future
premium allocation, transfers among Sub-Accounts, Premium
Payments, loans, loan repayments, reinstatement and
termination.
ADVERTISING
The Company is also ranked and rated by independent
financial rating services, including Moody's, Standard &
Poor's, Duff & Phelps and A.M. Best Company. The purpose of
these ratings is to reflect the financial strength or
claims-paying ability of the Company. The ratings are not
intended to reflect the investment experience or financial
strength of the Variable Account. The Company may advertise
these ratings from time to time. In addition, the Company
may include in certain advertisements, endorsements in the
form of a list of organizations, individuals or other
parties which recommend the Company or the Policies.
Furthermore, the Company may occasionally include in
advertisements comparisons of currently taxable and tax
deferred investment programs, based on selected tax
brackets, or discussions of alternative investment vehicles
and general economic conditions.
LEGAL PROCEEDINGS
There are no material legal or administrative proceedings
pending or known to be contemplated, other than ordinary
routine litigation incidental to the business, to which the
Company and the Variable Account are parties or to which any
of their property is subject. The principal underwriter,
CFA, is not engaged in any material litigation of any
nature.
30
<PAGE>
EXPERTS
Actuarial opinions regarding Deferred Acquisition Cost Tax
(DAC Tax) and Mortality and Expense Charges included in this
Prospectus have been rendered by Michelle L. Kunzman, as
stated in the opinion filed as an Exhibit to the
Registration Statement given on the authority of Ms. Kunzman
as an expert in actuarial matters.
Legal matters in connection with the Policies described
herein are being passed upon by Robert A. Picarello, Esq.,
Chief Counsel, CIGNA Individual Insurance, 900 Cottage Grove
Road, Hartford, CT 06152 in the opinion filed as an Exhibit
to the Registration Statement given on his authority as an
expert in these matters.
The consolidated financial statements of Connecticut General
Life Insurance Company as of December 31, 1994 and 1993 and
for each of the three years in the period ended December 31,
1994 included in this Prospectus 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.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities
and Exchange Commission under the Securities Act of 1933, as
amended, with respect to the Policies offered hereby. This
Prospectus does not contain all the information set forth in
the Registration Statement and amendments thereto and
exhibits filed as a part thereof, to all of which reference
is hereby made for further information concerning the
Variable Account, the Company, and the Policies offered
hereby. Statements contained in this Prospectus as to the
content of Policies and other legal instruments are
summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
FIVE PERCENT OWNERS
CIGNA Corporation has no information that any person or
concern beneficially owns more than five percent of the
outstanding Common Stock, except as reported on three
Schedules 13G received in February 1995. Vanguard/Windsor
Fund, Inc. ("Windsor"), Vanguard Financial Center, Valley
Forge, Pennsylvania 19482, reported sole voting power and
shared dispositive power as to 6,268,500 shares of Common
Stock, or 8.68% of the outstanding Common Stock as of
December 31, 1994. Also, Wellington Management Company
("Wellington"), 75 State Street, Boston, Massachusetts
02109, in its capacity as investment advisor to Windsor and
other investment advisory clients, reported shared
dispositive power as to 7,136,400 shares (which includes the
shares reported by Windsor), or 9.88% of the outstanding
Common Stock as of December 31, 1994, and shared voting
power as to 301,200 of these shares. Finally, Sanford C.
Bernstein & Co., Inc. ("Bernstein"), One State Street Plaza,
New York, New York 10004, reported sole dispositive power as
to 5,788,890 of such shares, or 8.02% of the outstanding
Common Stock as of December 31, 1994 and sole voting power
as to 2,952,350 of these shares of Common Stock as of
December 31, 1994.
FINANCIAL STATEMENTS
There follow consolidated balance sheets of the Company and
its subsidiaries as of December 31, 1994 and 1993 and
related consolidated statements of income and retained
earnings and cash flows for the years ended December 31,
1994, 1993 and 1992.
The most current financial statements of the Company are
those as of the end of the most recent fiscal year. The
Company does not prepare financial statements more often
31
<PAGE>
than annually and believes that any incremental benefit to
prospective Policy Owners that may result from preparing and
delivering more current financial statements, though
unaudited, does not justify the additional cost that would
be incurred. In addition, the Company represents that there
have been no adverse changes in the financial condition or
operations of the Company between the end of 1994 and the
date of this Prospectus.
These financial statements should be considered only as
bearing upon the ability of the Company to meet its
obligations under the Policies. No financial statements of
the Variable Account are included, because the Variable
Account did not commence operations until April 10, 1995.
32
<PAGE>
NORTHEAST INSURANCE SERVICES Telephone 203 240 2000
One Financial Plaza Facsimile 203 249 0457
Hartford, CT 06103
PRICE WATERHOUSE LLP [LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
February 13, 1995
The Board of Directors and Shareholder
Connecticut General Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Connecticut
General Life Insurance Company and its subsidiaries at December 31, 1994 and
1993, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The Company implemented certain new accounting pronouncements as discussed in
Note 1 to the consolidated financial statements.
[SIG]
33
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS)
- -----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and fees................................................... $ 4,960 $ 4,704 $ 4,541
Net investment income............................................... 2,805 2,742 2,649
Realized investment gains (losses).................................. 27 (65) (13)
Other revenues...................................................... 8 15 20
--------- --------- ---------
Total revenues.................................................. 7,800 7,396 7,197
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses............................ 5,574 5,215 5,168
Policy acquisition expenses......................................... 89 84 75
Other operating expenses............................................ 1,363 1,351 1,368
--------- --------- ---------
Total benefits, losses and expenses............................. 7,026 6,650 6,611
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGES........................................................... 774 746 586
--------- --------- ---------
Income taxes (benefits):
Current........................................................... 220 433 131
Deferred.......................................................... 45 (197) (61)
--------- --------- ---------
Total taxes..................................................... 265 236 70
--------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES............... 509 510 516
Cumulative effect of accounting changes for postemployment and
postretirement benefits other than pensions, net of taxes......... -- -- (270)
Cumulative effect of accounting change for income taxes............. -- -- 105
--------- --------- ---------
NET INCOME.......................................................... 509 510 351
Dividends declared.................................................. (300) (190) (165)
Retained earnings, beginning of year................................ 2,759 2,439 2,253
--------- --------- ---------
RETAINED EARNINGS, END OF YEAR...................................... $ 2,968 $ 2,759 $ 2,439
- -----------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
34
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value, $10,075; $11,158).... $ 10,061 $ 9,950
Available for sale, at fair value (amortized cost, $8,571; $8,187).... 8,324 9,145
Mortgage loans.......................................................... 8,975 8,854
Equity securities, at fair value (cost, $109; $121)..................... 119 120
Policy loans............................................................ 5,237 3,623
Real estate............................................................. 1,442 1,484
Other long-term investments............................................. 128 94
Short-term investments.................................................. 143 96
--------- ---------
Total investments................................................... 34,429 33,366
Cash and cash equivalents................................................. 80 --
Accrued investment income................................................. 578 504
Premiums and accounts receivable.......................................... 911 1,021
Reinsurance recoverables.................................................. 2,533 2,815
Deferred policy acquisition costs......................................... 700 623
Property and equipment, net............................................... 346 364
Current income taxes...................................................... 119 --
Deferred income taxes, net................................................ 661 434
Goodwill.................................................................. 518 532
Other assets.............................................................. 135 203
Separate account assets................................................... 14,498 13,620
- ------------------------------------------------------------------------------------------------
Total............................................................... $ 55,508 $ 53,482
- ------------------------------------------------------------------------------------------------
--------------------
LIABILITIES
Contractholder deposit funds.............................................. $ 26,696 $ 25,054
Future policy benefits.................................................... 7,875 7,915
Unpaid claims and claim expenses.......................................... 1,096 1,210
Unearned premiums......................................................... 84 86
--------- ---------
Total insurance and contractholder liabilities...................... 35,751 34,265
Accounts payable, accrued expenses and other liabilities.................. 1,632 1,539
Current income taxes...................................................... -- 76
Separate account liabilities.............................................. 14,427 13,618
- ------------------------------------------------------------------------------------------------
Total liabilities................................................... 51,810 49,498
- ------------------------------------------------------------------------------------------------
--------------------
CONTINGENCIES -- NOTE 9
SHAREHOLDER'S EQUITY
Common stock (6 shares outstanding)....................................... 30 30
Additional paid-in capital................................................ 764 764
Net unrealized appreciation (depreciation) on investments................. (66) 428
Net translation of foreign currencies..................................... 2 3
Retained earnings......................................................... 2,968 2,759
- ------------------------------------------------------------------------------------------------
Total shareholder's equity.......................................... 3,698 3,984
- ------------------------------------------------------------------------------------------------
Total............................................................... $ 55,508 $ 53,482
- ------------------------------------------------------------------------------------------------
--------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
35
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before cumulative effect of accounting changes............. $ 509 $ 510 $ 516
Adjustments to reconcile income before cumulative effect of
accounting changes to net cash provided by (used in) operating
activities:
Insurance liabilities........................................... (249) 251 (360)
Reinsurance recoverables........................................ 282 (392) 128
Premiums and accounts receivable................................ (188) 85 199
Deferred income taxes, net...................................... 45 (197) (61)
Other assets.................................................... 68 54 (72)
Accounts payable, accrued expenses, other liabilities and
current income taxes........................................... (192) 5 43
Other, net...................................................... (24) (82) (68)
--------- --------- ---------
Net cash provided by operating activities..................... 251 234 325
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities -- available for sale.......................... 1,389 -- --
Fixed maturities -- held to maturity............................ 12 599 595
Mortgage loans.................................................. 496 1,004 362
Equity securities............................................... 41 41 14
Other (primarily short-term investments)........................ 1,247 3,840 2,340
Investment maturities and repayments:
Fixed maturities -- available for sale.......................... 686 -- --
Fixed maturities -- held to maturity............................ 1,764 3,167 2,972
Mortgage loans.................................................. 194 202 266
Investments purchased:
Fixed maturities -- available for sale.......................... (2,390) -- --
Fixed maturities -- held to maturity............................ (1,788) (5,128) (4,834)
Mortgage loans.................................................. (882) (823) (795)
Equity securities............................................... (12) (112) (35)
Policy loans.................................................... (1,614) (1,561) (434)
Other (primarily short-term investments)........................ (1,093) (3,587) (2,176)
Other, net........................................................ (129) (48) (68)
--------- --------- ---------
Net cash used in investing activities......................... (2,079) (2,406) (1,793)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds.... 6,388 7,537 5,294
Withdrawals from contractholder deposit funds..................... (4,216) (5,166) (4,073)
Dividends paid to Parent.......................................... (300) (190) (165)
Other, net........................................................ 36 (30) (47)
--------- --------- ---------
Net cash provided by financing activities................... 1,908 2,151 1,009
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents.............. 80 (21) (459)
Cash and cash equivalents, beginning of year...................... -- 21 480
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year............................ $ 80 $ -- $ 21
- ---------------------------------------------------------------------------------------------------
-------------------------------
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds............................... $ 411 $ 352 $ 301
Interest paid................................................... $ 5 $ 5 $ 3
- ---------------------------------------------------------------------------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
36
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Connecticut General Life Insurance Company (the Company) and its
wholly-owned subsidiaries, CIGNA Life Insurance Company, ICO, Inc., and First
Equicor Life Insurance Company (FELIC). During 1994, the Company sold FELIC, the
effects of which were not material to the financial statements. The Company is a
wholly-owned subsidiary of Connecticut General Corporation (the Parent), which
is an indirect wholly-owned subsidiary of CIGNA Corporation (CIGNA). These
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain reclassifications have been
made to prior years' amounts to conform with the 1994 presentation.
B) RECENT ACCOUNTING PRONOUNCEMENTS: In 1993, the Company implemented
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that
debt and equity securities be classified into different categories and carried
at fair value if they are not classified as held to maturity. SFAS No. 115 does
not permit retroactive application of its provisions. The effect of implementing
SFAS No. 115 as of December 31, 1993 resulted in an increase in investment
assets of $958 million and an increase in shareholder's equity of $443 million
resulting from the classification of certain fixed maturities previously carried
at amortized cost to available for sale. The increase in shareholder's equity is
net of policyholder share of $277 million and deferred income taxes of $238
million. See Note 2 for additional information.
In 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which provides guidance on
the accounting and disclosure for impaired loans, and must be implemented by the
first quarter of 1995, with the cumulative effect of implementation included in
net income. In October 1994, the FASB issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures," which
eliminates the income recognition requirements of SFAS No. 114. The Company will
adopt SFAS Nos. 114 and 118 in 1995. The effect on the Company's results of
operations and financial condition upon adoption is not expected to be material.
In 1992, the Company implemented SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions;" SFAS No. 109, "Accounting for
Income Taxes;" and SFAS No. 112, "Employers' Accounting for Postemployment
Benefits." These accounting changes were implemented as of January 1, 1992
through cumulative effect adjustments. Prior year financial statements were not
restated.
The cumulative effect of implementing SFAS Nos. 106, 109 and 112 as of January
1, 1992 resulted in non-cash after-tax charges (benefit) to net income of $263
million, ($105) million and $7 million, respectively. In addition, the
implementation of SFAS No. 106 increased 1992 other operating expenses by $23
million ($15 million after-tax). The effect on income tax expense for 1992 as a
result of implementation of SFAS No. 109 was immaterial. There was no
incremental effect on 1992 net income from adopting SFAS No. 112. For additional
information on SFAS No. 109, see Note 5; for additional information on SFAS Nos.
106 and 112, see Note 6.
In 1992, the Company adopted the American Institute of Certified Public
Accountants' Statement of Position (SOP) 92-3, "Accounting for Foreclosed
Assets," which resulted in a realized investment loss of $5 million ($3 million
after-tax).
C) FINANCIAL INSTRUMENTS: In the normal course of business, the Company
enters into transactions involving various types of financial instruments,
including investments such as fixed maturities and equity securities; and off-
balance-sheet financial instruments such as investment and loan commitments,
financial guarantees, and interest rate swap and futures contracts. These
instruments have credit risk and also may be subject to risk of loss due to
interest rate and market fluctuations. However, risk of loss due to interest
rate fluctuations is reduced through the use of certain derivative instruments.
The Company evaluates and monitors each financial instrument individually and,
where appropriate, obtains collateral or other forms of security to minimize
risk of loss.
D) INVESTMENTS: Investments in fixed maturities include bonds, asset-backed
securities, including collateralized mortgage obligations (CMOs); and redeemable
preferred stocks. Fixed maturities classified as held to maturity are
37
<PAGE>
carried at amortized cost, net of impairments, and those classified as available
for sale are carried at fair value, with unrealized appreciation or depreciation
included in Shareholder's Equity. Fixed maturities are considered impaired and
written down to fair value when a decline in value is considered to be other
than temporary.
Mortgage loans are carried principally at unpaid principal balances, net of
valuation reserves. Generally, mortgage loans are considered impaired and a
valuation reserve is established when a decline in the fair value of the
collateral below the carrying value is other than temporary.
Fixed maturities and mortgage loans that are delinquent or restructured to
modify basic financial terms, typically to reduce the interest rate and, in
certain cases, extend the term, are placed on non-accrual status, and thereafter
interest income is recognized only when payment is received.
Real estate investments are either held for the production of income or held
for sale. Real estate investments held for the production of income are carried
at depreciated cost less valuation reserves when a decline in value is other
than temporary. Depreciation is generally calculated using the straight-line
method based on the estimated useful lives of the assets. Real estate
investments held for sale are those which are acquired through the foreclosure
of mortgage loans. These assets are valued at their fair value at the time of
foreclosure. The fair value is established as the new cost basis and the asset
acquired is reclassified from mortgage loans to real estate held for sale.
Subsequent to foreclosure, these investments are carried at the lower of
depreciated cost or current fair value less estimated costs to sell. Adjustments
to the carrying value as a result of changes in fair value subsequent to
foreclosure are recorded as valuation reserves and reported in realized
investment gains and losses. The Company considers several methods in
determining fair value for real estate acquired through foreclosure, with
greater emphasis placed on the use of discounted cash flow analyses and, in some
cases, the use of third-party appraisals. Assets held for sale are depreciated
using the straight-line method based on the estimated useful lives of the
assets.
Equity securities, which include common and non-redeemable preferred stocks,
are carried at fair value. Short-term investments are carried at fair value,
which approximates cost. Equity securities and short-term investments are
classified as available for sale.
Policy loans are generally carried at unpaid principal balances.
Realized investment gains and losses result from sales, investment asset
write-downs and changes in valuation reserves, after deducting amounts
attributable to experience-rated pension policyholders' contracts and
participating life policies ("policyholder share"). Generally, realized
investment gains and losses are based upon specific identification of the
investment assets.
Unrealized investment gains and losses, after deducting policyholder share and
net of deferred income taxes, if applicable, for investments carried at fair
value are included in Shareholder's Equity.
See Note 2(F) for a discussion of the Company's accounting policies for
derivative financial instruments.
E) CASH AND CASH EQUIVALENTS: Short-term investments with a maturity of three
months or less at the time of purchase are reported as cash equivalents.
F) REINSURANCE RECOVERABLES: Reinsurance recoverables are estimates of
amounts to be received from reinsurers, including amounts under reinsurance
agreements with affiliated companies. Allowances are established for amounts
deemed uncollectible.
G) DEFERRED POLICY ACQUISITION COSTS: Acquisition costs consist of
commissions, premium taxes and other costs, which vary with, and are primarily
related to, the production of revenues. Group life and a portion of group health
insurance business acquisition costs are deferred and amortized over the terms
of the insurance policies. Acquisition costs related to universal life products
and contractholder deposit funds are deferred and amortized in proportion to
total estimated gross profits over the expected life of the contracts.
Acquisition costs related to annuity and other life insurance businesses are
deferred and amortized, generally in proportion to the ratio of annual revenue
to the estimated total revenues over the contract periods. Deferred acquisition
costs are reviewed to determine if they are recoverable from future income,
including investment income. If such costs are determined to be unrecoverable,
they are expensed at the time of determination.
38
<PAGE>
H) PROPERTY AND EQUIPMENT: Property and equipment are carried at cost less
accumulated depreciation. When applicable, cost includes interest and real
estate taxes incurred during construction and other construction-related costs.
Depreciation is calculated principally on the straight-line method based on the
estimated useful lives of the assets. Accumulated depreciation was $333 million
and $261 million at December 31, 1994 and 1993, respectively.
I) OTHER ASSETS: Other Assets consists of various insurance-related assets,
principally ceded unearned premiums, reinsurance deposits and other amounts due
from affiliated companies.
J) GOODWILL: Goodwill represents the excess of the cost of businesses
acquired over the fair value of their net assets. These costs are amortized on
systematic bases over periods, not exceeding 40 years, that correspond with the
benefits expected to be derived from the acquisition. The Company evaluates the
carrying amount of goodwill by analyzing historical and expected future income
and undiscounted cash flows of the related businesses. Write-downs of goodwill
are recognized when it is determined that the amount has been impaired. Also,
amortization periods are revised if it is determined that the remaining period
of benefit of the goodwill has changed. Accumulated amortization was $70 million
and $56 million at December 31, 1994 and 1993, respectively.
K) SEPARATE ACCOUNTS: Separate account assets and liabilities are principally
carried at market value, with less than 4% carried at amortized cost, and
represent policyholder funds maintained in accounts having specific investment
objectives. The investment income, gains and losses of these accounts generally
accrue to the policyholders and, therefore, are not included in the Company's
net income.
L) CONTRACTHOLDER DEPOSIT FUNDS: Contractholder Deposit Funds are liabilities
for investment-related and universal life products which were $18.6 billion and
$8.1 billion as of December 31, 1994, respectively, compared with $19.1 billion
and $6.0 billion as of December 31, 1993, respectively. These liabilities
consist of deposits received from customers and investment earnings on their
fund balances, less administrative charges and, for universal life fund
balances, mortality and surrender charges.
M) FUTURE POLICY BENEFITS: Future policy benefits are liabilities for life,
health and annuity products. Such liabilities are established in amounts
adequate to meet the estimated future obligations of policies in force. These
liabilities are computed using premium assumptions for group annuity policies
and the net level premium method for individual life and annuity policies, and
are based upon estimates as to future investment yield, mortality and
withdrawals that include provisions for adverse deviation. Future policy
benefits for individual life insurance and annuity policies are computed using
interest rates ranging from 2% to 11%, generally graded down after 10 to 30
years. Mortality, morbidity, and withdrawal assumptions for all policies are
based on either the Company's own experience or various actuarial tables.
N) UNPAID CLAIMS AND CLAIM EXPENSES: Liabilities for unpaid claims and claim
expenses are estimates of payments to be made on insurance claims for reported
losses and estimates of losses incurred but not reported. The Company's prior
year claims and claim adjustment expenses were not material.
O) UNEARNED PREMIUMS: Premiums for group life, and accident and health
insurance are reported as earned on a pro rata basis over the contract period.
The unexpired portion of these premiums is recorded as Unearned Premiums.
P) OTHER LIABILITIES: Other Liabilities consists principally of
postretirement and postemployment benefits and various insurance-related
liabilities, including amounts related to reinsurance contracts. Also included
in Other Liabilities are liabilities for guaranty fund assessments that can be
reasonably estimated.
Q) TRANSLATION OF FOREIGN CURRENCIES: Foreign operations primarily utilize
the local currencies as their functional currencies, and assets and liabilities
are translated at the rates of exchange as of the balance sheet date. Revenues
and expenses are translated at the average rates of exchange prevailing during
the year. The translation gain or loss on such functional currencies is
generally reflected in Shareholder's Equity, net of applicable taxes.
R) PREMIUM AND FEES, REVENUES AND RELATED EXPENSES: Premiums for group life
and accident and health insurance are recognized as revenue on a pro rata basis
over their contract periods. Premiums for individual life and health insurance
as well as individual and group annuity products, excluding universal life and
investment-related products, are recognized as revenue when due. Benefits,
losses and expenses are matched with premiums.
39
<PAGE>
Revenues for universal life products consist of net investment income and
mortality, administration and surrender fees assessed against the fund values
during the period. Benefit expenses for universal life products consist of
benefit claims in excess of fund values and net investment income credited to
fund values. Revenues for investment-related products consist of net investment
income and contract charges assessed against the fund values during the period.
Benefit expenses for investment-related products primarily consist of net
investment income credited to the fund values after deduction for investment and
risk fees.
S) PARTICIPATING BUSINESS: Certain life insurance policies contain dividend
payment provisions that enable the policyholder to participate in the earnings
of the Company's business. The participating insurance in force accounted for
5.2% of total insurance in force at December 31, 1994, compared with 3.6% at
December 31, 1993 and .4% at December 31, 1992.
T) INCOME TAXES: The Company and its subsidiaries are included in the
consolidated United States federal income tax return filed by CIGNA. In
accordance with United States federal income tax consolidated return
regulations, all corporations included in a consolidated tax return are jointly
and severally liable for all tax liabilities. In accordance with a tax sharing
agreement, the provision for federal income tax is computed as if the Company
was filing a separate federal income tax return, except that benefits arising
from tax credits and net operating losses are allocated to those subsidiaries
producing such attributes only to the extent they are utilized in the
consolidated federal income tax provision.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes. These
differences result primarily from loss reserves, policy acquisition expenses,
investments, reserves for postretirement benefits and unrealized appreciation or
depreciation on investments.
NOTE 2 -- INVESTMENTS
A) FIXED MATURITIES: Fixed maturities are net of cumulative write-downs of
$78 million and $76 million, including policyholder share, as of December 31,
1994 and 1993, respectively.
The amortized cost and fair value by contractual maturity periods for fixed
maturities, including policyholder share, as of December 31, 1994 were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Held to Maturity (Carried at Amortized Cost)
Due in one year or less.................................................. $ 201 $ 204
Due after one year through five years.................................... 2,275 2,272
Due after five years through ten years................................... 3,424 3,383
Due after ten years...................................................... 2,298 2,403
Asset-backed securities.................................................. 1,863 1,813
- ------------------------------------------------------------------------------------------------
Total.................................................................... $ 10,061 $ 10,075
- ------------------------------------------------------------------------------------------------
---------------------
Available for Sale (Carried at Fair Value)
Due in one year or less.................................................. $ 85 $ 93
Due after one year through five years.................................... 1,474 1,447
Due after five years through ten years................................... 1,769 1,681
Due after ten years...................................................... 2,290 2,250
Asset-backed securities.................................................. 2,953 2,853
- ------------------------------------------------------------------------------------------------
Total.................................................................... $ 8,571 $ 8,324
- ------------------------------------------------------------------------------------------------
---------------------
</TABLE>
Actual maturities could differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Also, the Company may extend maturities in some cases.
40
<PAGE>
As of December 31, 1994, gross unrealized appreciation (depreciation) for
fixed maturities, including policyholder share, by type of issuer was as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity (Carried at Amortized Cost)
State and local government bonds................. $ 61 $ 4 $ (1) $ 64
Foreign government bonds......................... 49 1 (1) 49
Corporate securities............................. 8,088 293 (232) 8,149
Asset-backed securities.......................... 1,863 46 (96) 1,813
- --------------------------------------------------------------------------------------------------
Total............................................ $ 10,061 $ 344 $ (330) $ 10,075
- --------------------------------------------------------------------------------------------------
-----------------------------------------------
Available for Sale (Carried at Fair Value)
Federal government bonds......................... $ 393 $ 35 $ (13) $ 415
State and local government bonds................. 48 -- (4) 44
Foreign government bonds......................... 135 1 (6) 130
Corporate securities............................. 5,042 84 (244) 4,882
Asset-backed securities.......................... 2,953 98 (198) 2,853
- --------------------------------------------------------------------------------------------------
Total............................................ $ 8,571 $ 218 $ (465) $ 8,324
- --------------------------------------------------------------------------------------------------
-----------------------------------------------
</TABLE>
As of December 31, 1993, gross unrealized appreciation (depreciation) for
fixed maturities, including policyholder share, by type of issuer was as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity (Carried at Amortized Cost)
State and local government bonds................. $ 56 $ 12 $ -- $ 68
Foreign government bonds......................... 25 2 -- 27
Corporate securities............................. 8,495 1,106 (13) 9,588
Asset-backed securities.......................... 1,374 107 (6) 1,475
- -------------------------------------------------------------------------------------------------
Total............................................ $ 9,950 $ 1,227 $ (19) $ 11,158
- -------------------------------------------------------------------------------------------------
----------------------------------------------
Available for Sale (Carried at Fair Value)
Federal government bonds......................... $ 77 $ 10 $ -- $ 87
State and local government bonds................. 43 4 -- 47
Foreign government bonds......................... 209 12 (2) 219
Corporate securities............................. 5,244 670 (28) 5,886
Asset-backed securities.......................... 2,614 311 (19) 2,906
- -------------------------------------------------------------------------------------------------
Total............................................ $ 8,187 $ 1,007 $ (49) $ 9,145
- -------------------------------------------------------------------------------------------------
----------------------------------------------
</TABLE>
At December 31, 1994, contractual fixed maturity investment commitments
approximated $226 million. The majority of investment commitments are for the
purchase of investment grade fixed maturities, bearing interest at a fixed
market rate, and require no collateral. These commitments are diversified by
issuer and maturity date, and it is estimated that the full amount will be
disbursed in 1995, with the majority occurring within the first three months.
B) SHORT-TERM INVESTMENTS: As of December 31, 1994 and 1993, short-term
investments include debt securities, principally corporate securities of $139
million and $36 million, respectively; federal government securities of $3
million and $53 million, respectively; and foreign government securities of $1
million and $7 million as of December 31, 1994 and 1993, respectively.
C) MORTGAGE LOANS AND REAL ESTATE: The Company's mortgage loans and real
estate investments are diversified by property type and location and, for
mortgage loans, by borrower. Mortgage loans are collateralized by the related
properties and generally approximate 80% of the property's value at the time the
original loan is made.
41
<PAGE>
At December 31, the carrying values of mortgage loans and real estate
investments, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage Loans............................................................ $ 8,975 $ 8,854
--------- ---------
Real estate:
Held for sale........................................................... 760 807
Held for production of income........................................... 682 677
--------- ---------
Total real estate......................................................... 1,442 1,484
- ------------------------------------------------------------------------------------------------
Total..................................................................... $ 10,417 $ 10,338
- ------------------------------------------------------------------------------------------------
--------------------
</TABLE>
Valuation reserves for mortgage loans, including policyholder share, were $115
million and $160 million as of December 31, 1994 and 1993, respectively.
Valuation reserves and cumulative write-downs related to real estate, including
policyholder share, were $294 million and $321 million as of December 31, 1994
and 1993, respectively.
During 1994, 1993 and 1992, non-cash investing activities included real estate
acquired through foreclosure of mortgage loans, which totaled $127 million, $458
million and $411 million, respectively.
At December 31, mortgage loans and real estate investments comprised the
following property types and geographic regions:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Property type:
Office buildings........................................................ $ 4,092 $ 4,252
Retail facilities....................................................... 3,867 3,650
Hotels.................................................................. 819 876
Apartment buildings..................................................... 997 905
Other................................................................... 642 655
- ------------------------------------------------------------------------------------------------
Total..................................................................... $ 10,417 $ 10,338
- ------------------------------------------------------------------------------------------------
--------------------
Geographic region:
Central................................................................. $ 3,664 $ 3,513
Pacific................................................................. 2,558 2,675
Middle Atlantic......................................................... 1,652 1,654
South Atlantic.......................................................... 1,585 1,557
New England............................................................. 958 939
- ------------------------------------------------------------------------------------------------
Total..................................................................... $ 10,417 $ 10,338
- ------------------------------------------------------------------------------------------------
--------------------
</TABLE>
At December 31, 1994, scheduled mortgage loan maturities were as follows: 1995
- -- $752 million; 1996 -- $1.0 billion; 1997 -- $1.1 billion; 1998 -- $743
million; 1999 -- $1.2 billion, and $4.2 billion thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties, and loans may be
refinanced. During 1994 and 1993, the Company refinanced approximately $600
million and $800 million, respectively, of its mortgage loans relating to
borrowers that were unable to obtain alternative financing.
At December 31, 1994, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $286 million, all
of which were at a fixed market rate of interest. These commitments generally
expire within one year, in most cases within three months, and are diversified
by property type and geographic region. Included in these commitments is
approximately $180 million of commitments to refinance mortgage loans, currently
in a separate account, relating to borrowers that are not expected to be able to
obtain alternative financing.
42
<PAGE>
D) NET UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS: Unrealized
appreciation and depreciation for investments carried at fair value as of
December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized appreciation:
Fixed maturities........................................................... $ 218 $ 1,007
Equity securities.......................................................... 22 4
--------- ---------
240 1,011
--------- ---------
Unrealized depreciation:
Fixed maturities........................................................... (465) (49)
Equity securities.......................................................... (12) (5)
--------- ---------
(477) (54)
--------- ---------
Less: Policyholder net unrealized appreciation (depreciation)................ (141) 298
--------- ---------
Shareholder net unrealized appreciation (depreciation)....................... (96) 659
Less: Deferred income tax expenses (benefits)................................ (30) 231
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)................................... $ (66) $ 428
- ---------------------------------------------------------------------------------------------------
--------------------
</TABLE>
Net unrealized appreciation (depreciation) on investments that are carried at
fair value is included as a separate component of Shareholders' Equity, net of
policyholder share and deferred income taxes. The increase (decrease) in net
unrealized appreciation/depreciation was ($494) million, $423 million and ($3)
million for the years ended December 31, 1994, 1993 and 1992, respectively,
including ($446) million and $443 million for fixed maturities that are carried
at fair value for the years ended December 31, 1994 and 1993.
The net unrealized appreciation on fixed maturities that are carried at
amortized cost is not recorded in the financial statements. The increase
(decrease) in such net unrealized appreciation was ($1,194) million, ($129)
million, and $115 million in 1994, 1993 and 1992, respectively.
E) NON-INCOME PRODUCING INVESTMENTS: At December 31, the carrying values of
investments that were non-income producing during the preceding 12 months,
including policyholder share, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities............................................................... $ 71 $ 83
Mortgage loans................................................................. 81 84
Real estate.................................................................... 280 270
Other long-term investments.................................................... 32 --
- -----------------------------------------------------------------------------------------------------
Total.......................................................................... $ 464 $ 437
- -----------------------------------------------------------------------------------------------------
--------------------
</TABLE>
F) DERIVATIVE FINANCIAL INSTRUMENTS: The Company's investment strategy is to
manage investment assets to reflect the underlying characteristics of related
insurance and contractholder liabilities such as liquidity, currency, yield and
duration, which vary among the Company's principal product lines. In connection
with this investment strategy, the Company uses derivative instruments through
hedging applications to manage market risk.
Generally, the Company uses interest rate swap contracts to create, when
combined with cash flows from variable rate bonds, fixed rate cash flows that
meet its portfolio investment strategy. Currency swaps are used to match the
currency of individual investments to that of the associated liabilities.
Interest rate futures are used to temporarily hedge against changes in market
values of bonds and mortgage loans to be purchased or sold, and stock index
futures may be used to hedge the temporary cash position of equity accounts.
Interest rate futures also are used to hedge interest rate risk associated with
withdrawals by contractholders over a scheduled time period.
Cash requirements arise as a result of the Company's derivative activities.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and variable rate
interest amounts calculated by reference to an agreed-upon notional principal
amount. Under futures contracts, initial margin requirements are settled with
cash or other instruments and changes in the contract values are settled
43
<PAGE>
in cash daily with the exchange on which the instrument is traded. Under
currency swaps, the parties generally exchange a principal amount in the two
relevant currencies, agreeing to re-exchange principal amounts at a specified
future date using an agreed-upon exchange rate, and agreeing to periodically
exchange amounts equal to interest payments using the agreed-upon exchange rate.
Because the Company's use of derivatives is limited to hedging applications,
changes in the market value of the derivatives are substantially offset by
changes in the market value of the hedged assets or underlying liabilities,
minimizing market risk. The Company routinely monitors, by individual
counterparty, exposure to credit risk associated with swap contracts. Futures
contracts are exchange-traded and, therefore, credit risk is limited since the
exchange assumes the obligations. The Company manages legal risks by following
industry standardized documentation procedures, by monitoring legal developments
and, consistent with its credit exposure policies, by limiting risks associated
with counterparty failure by diversifying the swaps portfolio among approved
dealers of high credit quality.
Changes in the market value of futures contracts that qualify as hedges are
deferred and recorded as adjustments to the carrying value of the related bond
or mortgage loan. Deferred gains and losses are amortized into net investment
income over the life of the investments purchased or recognized in full as
realized investment gains and losses in the event that the investment or futures
contract is sold prior to maturity. Futures contracts totaled $142 million and
$129 million as of December 31, 1994 and 1993, respectively, and were accounted
for as hedges. At December 31, 1994, gains and losses on futures contracts
deferred in anticipation of investment purchases were $1 million and $3 million,
respectively.
Net interest received or paid on an interest rate swap contract is recognized
currently as an adjustment to net investment income. Underlying notional
principal amounts associated with interest rate swap contracts outstanding were
$596 million and $542 million at December 31, 1994 and 1993, respectively.
The interest payment cash flows received in U.S. dollars from currency swaps
related to foreign currency denominated investment securities (primarily
Canadian dollars, pound sterling, Swiss francs, New Zealand dollars and Japanese
yen) are recognized as net investment income when received. Gains and losses
from changes in exchange rates related to foreign currency swaps are recognized
in realized investment gains and losses, offset by exchange rate gains and
losses on the related investments. Underlying principal amounts associated with
currency swap contracts outstanding were $325 million and $248 million at
December 31, 1994 and 1993, respectively.
As of December 31, 1994, the Company's variable rate investments consisted of
approximately $810 million of fixed maturities and the Company's fixed rate
investments consisted of $18 billion of fixed maturities and $9 billion of
mortgage loans. For the year ended December 31, 1994, the average yield on the
Company's investments in fixed maturities and mortgage loans was 8.7%. For the
year ended December 31, 1994, net investment income on bonds and mortgage loans
was increased by $7 million and $1 million, respectively, as a result of
recognizing amortization of deferred market value changes in futures contracts.
In addition, the increase in net investment income for bonds resulting from
interest rate swap contracts was $12 million, $19 million and $17 million for
the years ended December 31, 1994, 1993 and 1992, respectively.
G) OTHER: As of December 31, 1994 and 1993, the Company had no concentration
of investments in a single investee exceeding 10% of Shareholder's Equity.
44
<PAGE>
NOTE 3 -- INVESTMENT INCOME AND GAINS AND LOSSES
A) NET INVESTMENT INCOME: The components of net investment income, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities.................................................... $ 1,596 $ 1,547 $ 1,511
Mortgage loans...................................................... 776 892 931
Equity securities................................................... 20 16 9
Policy loans........................................................ 365 253 163
Real estate......................................................... 291 238 162
Other long-term investments......................................... 23 20 11
Short-term investments.............................................. 8 18 34
--------- --------- ---------
3,079 2,984 2,821
Less investment expenses............................................ 274 242 172
- -----------------------------------------------------------------------------------------------------
Net investment income............................................... $ 2,805 $ 2,742 $ 2,649
- -----------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
Net investment income attributable to policyholder contracts, which is
included in the Company's revenues and is primarily offset by amounts included
in Benefits, Losses and Settlement Expenses, was approximately $1.5 billion for
1994 and $1.6 billion for 1993 and 1992. Net investment income for separate
accounts, which is not reflected in the Company's revenues, was $693 million,
$604 million and $656 million for December 31, 1994, 1993 and 1992,
respectively.
As of December 31, 1994, fixed maturities and mortgage loans on non-accrual
status, including policyholder share, were $272 million and $743 million,
including restructured investments of $148 million and $543 million,
respectively. Amounts on non-accrual status as of December 31, 1993 were $332
million of fixed maturities and $827 million of mortgage loans, including
restructurings of $245 million and $689 million, respectively. If interest on
these investments had been recognized in accordance with their original terms,
net income would have been increased by $14 million, $17 million and $20 million
in 1994, 1993 and 1992, respectively.
B) REALIZED INVESTMENT GAINS AND LOSSES: Realized gains and losses on
investments, excluding policyholder share, for the year ended December 31 were
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities....................................................... $ 4 $ 28 $ 4
Mortgage loans......................................................... -- (5) (16)
Equity securities...................................................... 2 (5) 4
Real estate............................................................ 15 (66) (13)
Other.................................................................. 6 (17) 8
--
--- ---
27 (65) (13)
Income tax expenses (benefits)........................................... 12 (16) (31)
- ----------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses)................................... $ 15 $ (49) $ 18
- ----------------------------------------------------------------------------------------------------------------
--------------------
</TABLE>
Impairments in the value of investments, net of recoveries, that are included
in realized investment gains and losses were $33 million, $55 million and $38
million in 1994, 1993 and 1992, respectively.
Realized investment gains (losses) for separate accounts, which are not
reflected in the Company's revenues, were ($51) million, $612 million and $243
million for the years ended December 31, 1994, 1993 and 1992, respectively.
Realized investment (losses) attributable to policyholder contracts, which also
are not reflected in the Company's revenues, were ($5) million and ($103)
million for the years ended December 31, 1993 and 1992, respectively. Net
realized investment gains (losses) attributable to policyholder contracts were
zero for the year ended December 31, 1994.
45
<PAGE>
During 1994, proceeds from sales of available-for-sale fixed maturities and
equities, including policyholder share, were $1.4 billion. Such sales resulted
in gross realized gains and gross realized losses of $73 million and $70
million, respectively.
During 1994, the Company also sold $14 million of held to maturity fixed
maturities, including policyholder share, resulting in gross proceeds of $12
million and a pre-tax realized loss of $2 million. In addition, $82 million of
fixed maturities classified as held to maturity, including policyholder share,
were transferred to the available-for-sale category at fair value, which was not
significantly different from the carrying value. The sales of fixed maturities
classified as held to maturity and the transfer of such securities to the
available-for-sale category were the result of significant credit deterioration
of the issuers of the affected investments.
Prior to adoption of SFAS No. 115, proceeds from voluntary sales of
investments in fixed maturities, including policyholder share, were $599 million
and $595 million in 1993 and 1992, respectively. Such sales resulted in gross
realized gains and gross realized (losses), including policyholder share, of $36
million and ($3) million in 1993, compared with $36 million and ($14) million in
1992. These amounts exclude the effects of sales of fixed maturities that, prior
to the implementation of SFAS No. 115, were classified as short-term
investments.
NOTE 4 -- SHAREHOLDER'S EQUITY AND DIVIDEND RESTRICTIONS
The Connecticut Insurance Department (the Department) recognizes as net income
and surplus (shareholder's equity) those amounts determined in conformity with
statutory accounting practices prescribed or permitted by the Department, which
differ in certain respects from generally accepted accounting principles. As of
December 31, 1994, there were no material permitted accounting practices
utilized by the Company.
Capital stock of the Company at December 31, 1994 and 1993 consisted of
5,978,322 shares of common stock authorized, issued and outstanding (par value
$5.00).
Statutory surplus was $2.0 billion at both December 31, 1994 and 1993. The
Connecticut Insurance Holding Company Act limits the maximum amount of annual
dividends or other distributions available to shareholders of Connecticut
insurance companies without prior approval of the Insurance Commissioner. Under
current law, the maximum dividend distribution which may be made by the Company
during 1995 without prior approval is $429 million.
NOTE 5 -- INCOME TAXES
In accordance with SFAS No. 109, the Company adopted the liability method of
accounting for income taxes as discussed in Note 1.
As of December 31, 1994 and 1993, the net deferred tax asset was $661 million
and $434 million, respectively.
Management believes, based on the Company's earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize the net deferred tax asset. In determining the adequacy of
future taxable income, management considered the future reversal of its existing
taxable temporary differences and available tax planning strategies that could
be implemented, if necessary.
In accordance with the Life Insurance Company Income Tax Act of 1959, a
portion of the Company's statutory income was not subject to current income
taxation but was accumulated in an account designated Policyholders' Surplus
Account. Under the Tax Reform Act of 1984, no further additions may be made to
the Policyholders' Surplus Account for tax years ending after December 31, 1983.
The balance in the account of approximately $450 million at December 31, 1994
would result in a tax liability of $158 million (at a 35% rate), only if
distributed to the shareholders or if the account balance exceeded a prescribed
maximum. No income taxes have been provided on this amount because, in
management's opinion, the likelihood that these conditions will be met is
remote.
CIGNA's federal income tax returns are routinely audited by the Internal
Revenue Service (IRS), and provisions are made in the financial statements in
anticipation of the results of these audits. CIGNA resolved all issues relative
to the Company arising out of audits for 1982 through 1990 which resulted in an
increase to net income of $2 million, $3 million and $121 million for 1994, 1993
and 1992, respectively.
In management's opinion, adequate tax liabilities have been established for
all years.
46
<PAGE>
The tax effect of temporary differences which give rise to deferred income tax
assets and liabilities as of December 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Insurance and contractholder liabilities..................................... $337 $410
Employee and retiree benefit plans........................................... 175 166
Investments, net............................................................. 220 152
Unrealized depreciation on investments....................................... 30 --
Other........................................................................ 71 123
--- ---
Total deferred tax assets.................................................... 833 851
--- ---
Deferred tax liabilities:
Policy acquisition expenses.................................................. 60 68
Depreciation................................................................. 102 105
Unrealized appreciation on investments....................................... -- 235
Other........................................................................ 10 9
--- ---
Total deferred tax liabilities............................................... 172 417
- -----------------------------------------------------------------------------------------------------
Deferred income taxes, net................................................... $661 $434
- -----------------------------------------------------------------------------------------------------
--------------------
</TABLE>
As a result of the Omnibus Budget Reconciliation Act of 1993 (OBRA), the
federal corporate income tax rate increased by one percent to 35% retroactive to
January 1, 1993. Deferred income tax benefits for 1993 included $13 million
related to an increase in the Company's net deferred tax asset as of January 1,
1993, due to the effect of the tax rate increase.
Total income tax expense was less than the amount computed using the nominal
federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at nominal rate (35% for 1994 and 1993, 34% for 1992)....... $ 271 $ 261 $ 199
Tax-exempt interest income.............................................. (7) (6) (5)
Dividends received deduction............................................ (3) (4) (5)
Amortization of goodwill................................................ 4 5 5
Resolved federal tax audit issues....................................... (2) (3) (121)
Increase in deferred tax asset for tax rate change...................... -- (13) --
Other, net.............................................................. 2 (4) (3)
- ---------------------------------------------------------------------------------------------------------
Total income tax expense................................................ $ 265 $ 236 $ 70
- ---------------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
Temporary and other differences which resulted in the deferred tax expense
(benefit) for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Insurance and contractholder liabilities............................... $ 93 $ (80) $ (31)
Policy acquisition expenses............................................ (8) (39) (11)
Investments, net....................................................... (19) (36) (3)
Employee and retiree benefit plans..................................... (9) (16) (3)
Realized investment gains/losses....................................... (20) (24) (18)
Other.................................................................. 8 (2) 5
- --------------------------------------------------------------------------------------------------------
Deferred taxes (benefits).............................................. $ 45 $ (197) $ (61)
- --------------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
47
<PAGE>
NOTE 6 -- PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PLANS
A) PENSION PLANS: The Company provides retirement benefits to eligible
employees and agents. These benefits are provided through a single integrated
plan (the Plan) sponsored by CIGNA covering most domestic employees and by
several separate pension plans for various subsidiaries, agents and foreign
employees.
The Plan is a non-contributory, defined benefit, trusteed plan available to
eligible domestic employees. Benefits are based on employees' years of service
and compensation during the highest three or, if service commenced after
December 31, 1988, five consecutive years of employment, offset by a portion of
the Social Security benefit for which they are eligible. CIGNA funds at least
the minimum amount required by the Employee Retirement Income Security Act of
1974. Allocated pension cost for the Company was $31 million, $27 million and
$24 million in 1994, 1993 and 1992, respectively.
The Plan, and several separate pension plans for various subsidiaries and
agents, had deposits with the Company totalling approximately $1.7 billion and
$1.6 billion at December 31, 1994 and 1993, respectively.
B) OTHER POSTRETIREMENT BENEFITS PLANS: In addition to providing pension
benefits, the Company provides certain health care and life insurance benefits
to retired employees, spouses and other eligible dependents through various
plans sponsored by CIGNA. A substantial portion of the Company's employees may
become eligible for these benefits upon retirement. As of January 1, 1992, the
health care benefit plans required nominal contributions by retirees. In August
1992, CIGNA amended its plans effective January 1, 1993, whereby CIGNA's
contributions for health care benefits will depend upon a retiree's date of
retirement, age and years of service. In addition, the plan amendments increased
the level of other cost-sharing features, such as deductibles and coinsurance.
Under the terms of the benefit plans, benefit provisions and cost-sharing
features can continue to be adjusted. In general, retiree health care benefits
are not funded and are paid as covered expenses are incurred. Retiree life
insurance benefits are paid from plan assets or as covered expenses are
incurred.
Effective January 1, 1992, the Company adopted SFAS No. 106 for all of its
postretirement benefit plans (See Note 1). Under SFAS No. 106, an employer's
postretirement benefit liability is primarily measured by determining the
present value of the projected future costs of health benefits based on an
estimate of health care cost trend rates. Expense for postretirement benefits
other than pensions allocated to the Company totalled $28 million for 1994, $15
million for 1993 and $23 million for 1992. The other postretirement benefit
liability included in Accounts Payable, Accrued Expenses and Other Liabilities
as of December 31, 1994 and 1993 was $422 million and $415 million, including
net intercompany payables of $29 million and $32 million, respectively for
services provided by affiliates' employees.
C) OTHER POSTEMPLOYMENT BENEFITS: The Company provides certain salary
continuation (severance and disability), health care and life insurance benefits
to inactive and former employees, spouses and other eligible dependents through
various employee benefit plans sponsored by CIGNA. Those plans are unfunded and
noncontributory, except for the life insurance and health care plans.
Although severance benefits accumulate with additional service, the Company
recognizes severance expense when severance is probable and the costs can be
reasonably estimated. Postemployment benefits other than severance generally do
not vest or accumulate; therefore, the estimated cost of benefits is accrued
when determined to be probable and estimable, generally upon disability or
termination. See Note 1 for additional information regarding implementation of
SFAS No. 112.
D) CAPITAL ACCUMULATION PLANS: CIGNA sponsors various capital accumulation
plans in which employee contributions on a before-tax basis (401(k)) are
supplemented by CIGNA matching contributions. Contributions are invested, at the
election of the employee, in one or more of the following investments: CIGNA
common stock fund, several non-CIGNA stock and bond portfolios and a
fixed-income fund. The Company's expense for such plans totaled $14 million, $13
million and $12 million for December 31, 1994, 1993 and 1992, respectively.
NOTE 7 -- LEASES AND RENTALS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $62 million, $66 million and $65 million in 1994, 1993 and 1992,
respectively.
48
<PAGE>
As of December 31, 1994, future net minimum rental payments under
non-cancelable operating leases were $151 million, payable as follows: 1995 -
$48 million; 1996 - $43 million; 1997 - $27 million; 1998 - $14 million; 1999 -
$10 million; and $9 million thereafter.
NOTE 8 -- REINSURANCE
In the normal course of business, the Company enters into agreements,
primarily relating to short-duration contracts, to assume and cede reinsurance
with other insurance companies. Reinsurance is ceded primarily to limit losses
from large exposures and to permit recovery of a portion of direct losses,
although ceded reinsurance does not relieve the originating insurer of
liability. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of its reinsurers. Failure of reinsurers
to indemnify the Company, as a result of reinsurer insolvencies or disputes,
could result in losses. As of December 31, 1994 and 1993 there were no
allowances for uncollectible amounts. While future charges for unrecoverable
reinsurance may materially affect results of operations in future periods, such
amounts are not expected to have a material adverse effect on the Company's
liquidity or financial condition.
The effects of reinsurance on net earned premiums and fees for the year ended
December 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-DURATION CONTRACTS
Premiums and Fees:
Direct............................................................ $ 3,419 $ 2,666 $ 2,461
Assumed........................................................... 716 1,248 1,320
Ceded............................................................. (291) (329) (197)
- -----------------------------------------------------------------------------------------------------
Net earned premiums and fees...................................... $ 3,844 $ 3,585 $ 3,584
- -----------------------------------------------------------------------------------------------------
-------------------------------
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
LONG-DURATION CONTRACTS
Premiums and Fees:
Direct............................................................ $ 1,068 $ 1,023 $ 827
Assumed........................................................... 126 166 204
Ceded............................................................. (78) (70) (74)
- -----------------------------------------------------------------------------------------------------
Net earned premiums and fees...................................... $ 1,116 $ 1,119 $ 957
- -----------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
The effects of reinsurance on written premiums and fees for short-duration
contracts were not materially different from the amounts shown above. Benefits,
Losses and Settlement Expenses for 1994, 1993 and 1992 were net of reinsurance
recoveries of $149 million, $119 million and $124 million, respectively.
NOTE 9 -- CONTINGENCIES
A) FINANCIAL GUARANTEES: The Company is contingently liable for financial
guarantees provided in the ordinary course of business on the repayment of
principal and interest on certain industrial revenue bonds. The contractual
amounts of financial guarantees reflect the Company's maximum exposure to credit
loss in the event of nonperformance. To limit the Company's exposure in the
event of default of any guaranteed obligation, various programs are in place to
ascertain the creditworthiness of guaranteed parties and to monitor this status
on a periodic basis. Risk is further reduced through reinsurance and, in certain
programs, use of letters of credit and other types of security.
The industrial revenue bonds guaranteed directly by the Company have remaining
maturities of up to 21 years. The guarantees provide for payment of debt service
only as it becomes due; consequently, an event of default would not cause an
acceleration of scheduled principal and interest payments. The principal amount
of the bonds guaranteed by the Company at December 31, 1994 and 1993 was $296
million and $323 million, respectively. Revenues in connection with industrial
revenue bond guarantees are derived principally from equity participations in
the related projects and are included in Net Investment Income as earned. Loss
reserves for financial guarantees
49
<PAGE>
are established when a default has occurred or when the Company believes that a
loss has been incurred. During 1994 and 1992, losses for industrial revenue
bonds were $1 million, and $4 million, respectively. There were no such losses
in 1993.
Prior to 1993, the Company had an arrangement with CIGNA Property and Casualty
Insurance Company (CIGNA P&C), an affiliate, whereby the Company guaranteed the
performance of certain investments purchased to support a group accident and
health reinsurance agreement between the companies. (See Note 11 for additional
information.) In accordance with 1993 amendments to the reinsurance treaties,
the Company and CIGNA P&C mutually agreed to terminate this arrangement. The
principal amount of such investments guaranteed by the Company was $150 million
as of December 31, 1992. A loss of $2 million related to this guarantee was
reported by the Company in 1992.
The Company also guarantees a minimum level of benefits for certain separate
account contracts and, in the event that separate account assets are
insufficient to fund minimum policy benefits, the Company is obligated to fund
the difference. As of December 31, 1994 and 1993, the amount of minimum benefit
guarantees for separate account contracts was $4.8 billion and $4.9 billion,
respectively. Reserves in addition to the separate account liabilities are
established when the Company believes a payment will be required under one of
these guarantees. As of December 31, 1994 and 1993, reserves of $6 million were
recorded. Guarantee fees are part of the overall management fee charged to
separate accounts and are recognized in income as earned.
Although the ultimate outcome of any loss contingencies arising from the
Company's financial guarantees may adversely affect results of operations in
future periods, they are not expected to have a material adverse effect on the
Company's liquidity or financial condition.
B) REGULATORY AND INDUSTRY DEVELOPMENTS: The Company's businesses are subject
to a changing social, economic, legal, legislative and regulatory environment
which could adversely affect them. Some of the changes include initiatives to:
restrict insurance pricing and the application of underwriting standards; reform
health care; restrict investment practices; and expand regulation.
Proposals on national health care reform were under consideration in 1994
which could have significantly changed the way health care is financed and
delivered in the United States. Congress recessed in 1994 without enacting
health care reform. New legislation could be introduced in Congress in 1995;
however, comprehensive national reform is not likely to be proposed in 1995.
Instead, the Company expects federal and state proposals seeking modest
insurance reform and limitations on the formation and operation of efficient
health care networks. Due to uncertainties associated with the timing and
content of any health care legislation, the effect on the Company's future
results of operations, liquidity or financial condition cannot be reasonably
estimated at this time.
The National Association of Insurance Commissioners (NAIC) has developed model
solvency-related guidelines ("risk-based capital" rules) to strengthen solvency
regulation of insurance companies. Depending on the ratio of the insurer's
surplus to its risk-based capital, the insurer could be subject to various
regulatory actions ranging from increased scrutiny to conservatorship. As of
December 31, 1994, the Company was adequately capitalized under the risk-based
capital rules. Also, the NAIC is addressing a proposal that would limit the
types and amounts of investments held. The Company does not expect such
guidelines to have a material adverse effect on its future results of
operations, liquidity or financial condition.
Unfavorable economic conditions have contributed to an increase in the number
of insurance companies that are impaired or insolvent. This is expected to
result in an increase in mandatory assessments by state guaranty funds of, or
voluntary payments by, solvent insurance companies to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments,
which are subject to statutory limits, can be partially recovered through a
reduction in future premium taxes in some states. Assessments against the
Company were $12 million, $10 million and $7 million for 1994, 1993 and 1992,
respectively, before giving effect to future premium tax recoveries. Although
future assessments and payments may adversely affect results of operations in
future periods, such amounts are not expected to have a material adverse effect
on the Company's liquidity or financial condition.
The eventual effect on the Company of the changing environment in which it
operates remains uncertain.
50
<PAGE>
C) LITIGATION:
The Company is routinely engaged in litigation incidental to its business,
including litigation associated with syndicated investment products. While the
outcome of all litigation involving the Company, including insurance-related
litigation, cannot be determined, litigation is not expected to result in losses
that differ from recorded reserves by amounts that would be material to results
of operations, liquidity or financial condition.
NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that are subject to fair value disclosure requirements
(insurance contracts, real estate, goodwill and taxes are excluded) are carried
in the financial statements at amounts that approximate fair values, unless
otherwise indicated in the table below. The fair values used for financial
instruments are estimates that in many cases may differ significantly from the
amounts that could be realized upon immediate liquidation. In cases where market
prices are not available, estimates of fair value are based on discounted cash
flow analyses which utilize current interest rates for similar financial
instruments with comparable terms and credit quality. The fair value of
liabilities for contractholder deposit funds was estimated using the amount
payable on demand and, for those not payable on demand, discounted cash flow
analyses.
The following table presents carrying amounts and estimated fair values as of
December 31 for the Company's financial instruments that are not carried in the
financial statements at amounts approximating fair value.
<TABLE>
<CAPTION>
1994 1993
- ----------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(IN MILLIONS) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities-held to maturity....................... $ 10,061 $ 10,075 $ 9,950 $ 11,158
Mortgage loans.......................................... $ 8,975 $ 8,610 $ 8,854 $ 9,053
Contractholder deposit funds --
non-insurance products................................. $ 18,561 $ 18,512 $ 19,042 $ 20,249
- ----------------------------------------------------------------------------------------------------
</TABLE>
For additional information on fair values of fixed maturities, see Note 2(A).
Fair values of off-balance-sheet financial instruments as of December 31, 1994
and 1993 were not material.
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Company has ceded group accident and health business under an
experience-rated stop loss agreement to CIGNA P&C. Reinsurance recoverables from
CIGNA P&C were $1.3 billion and $1.5 billion at December 31, 1994 and 1993,
respectively. During 1993 and 1992, the Company earned experience-rated refunds
from CIGNA P&C, net of premiums ceded, of $63 million, and $25 million,
respectively. Effective January 1, 1995 the reinsurance arrangement was
terminated. Effective with this termination, reserves of $312 million, primarily
related to long-term disability business, were recaptured, with CIGNA P&C
assuming responsibility for runout claims on the remaining reserves. Assets,
principally mortgages, with a fair market value equal to reserves were received
as part of the recapture.
The Company has assumed the settlement annuity and group pension business
written by Life Insurance Company of North America (LINA), an affiliate.
Reserves held by the Company with respect to this business were $1.8 billion at
December 31, 1994 and 1993.
The Company cedes all long-term disability business to LINA. Reinsurance
recoverables from LINA at December 31, 1994 and 1993 were $921 million and $911
million, respectively.
The Company had lines of credit available from affiliates totaling $600
million at both December 31, 1994 and 1993. All borrowings are payable upon
demand with interest rates equivalent to CIGNA's average monthly short-term
borrowing rate plus 1/4 of 1%. Interest expense was $1 million for 1994 and $3
million for 1993 and 1992. As of December 31, 1994 and 1993, there were no
borrowings outstanding under such lines.
The Company extended lines of credit to affiliates totalling $600 million at
December 31, 1994 and 1993. All loans are payable upon demand with interest
rates equivalent to CIGNA's average monthly short-term borrowing rate. As of
December 31, 1994 and 1993, the Company had $1.5 million and $2.5 million,
respectively, in outstanding loans to affiliates under such lines.
51
<PAGE>
The Company, together with other CIGNA subsidiaries, has entered into a
pooling arrangement known as the CIGNA Corporate Liquidity Account (the Account)
for the purpose of maximizing earnings on funds available for short-term
investments. As of December 31, 1994 and 1993, the Company had a balance in the
Account of $259 million and $99 million, respectively.
CIGNA allocates to the Company its share of operating expenses incurred at the
corporate level. The Company also allocates a portion of its operating expenses
to affiliated companies on whose behalf it performs certain administrative
services.
52
<PAGE>
APPENDIX 1
ILLUSTRATION OF SURRENDER CHARGES
The Surrender Charge is calculated as (a) times (b), where
(a) is the sum of (i) a Deferred Sales Charge and (ii) a
Deferred Administrative Charge and (b) is the applicable
Surrender Charge Grading Factor. If the Specified Amount is
increased, a new Surrender Charge will be applicable, in
addition to any existing Surrender Charge.
Below are examples of Surrender Charge calculations, one
involving a level Specified Amount and one involving an
increase in the Specified Amount, followed by Definitions
and Tables used in the calculations.
EXAMPLE 1: A male nonsmoker, age 35, purchases a Policy with
a Specified Amount of $100,000 and a scheduled annual
premium of $1100. He now wants to surrender the Policy at
the end of the sixth Policy Year.
The Surrender Charge is as follows:
Sum of the premiums paid through the end of the second
Policy Year = $2200.00
Guideline Annual Premium Amount (Male, Age 35, $100,000
Specified Amount) = $1177.05
Surrender Charge =
(.3X$1177.05) + (.1X($2200-$1177.05)) = $353.12 +
$102.30 = $ 455.42(i)
$6.00 per $1000 of Specified Amount $ 600.00(ii)
---------------------------
$1055.42(a)
The total Surrender Charge is $1055.42(a) times the
surrender charge grading factor(b), ($1055.42 X 80%) =
$844.34.
EXAMPLE 2: A female nonsmoker, age 45, purchases a Policy
with an Initial Specified Amount of $200,000 and a scheduled
annual premium of $1500. She pays the scheduled annual
premium for the first five Policy Years. At the start of the
sixth Policy Year, she increases the Specified Amount to
$250,000 and continues to pay the scheduled annual premium
of $1500. She now wants to surrender the Policy at the end
of the eighth Policy Year. Separate Surrender Charges must
be calculated for the Initial Specified Amount and for the
increase in Specified Amount.
The Surrender Charges are as follows:
For the Initial Specified Amount,
Sum of the premiums paid through the end of the second
Policy Year = $3000.00
Guideline Annual Premium Amount (Female, Age 45, $200,000
Specified Amount = $2920.67
Surrender Charge for Initial Specified Amount =
(.3X$2920.67) + (.1X($3000.00-$2920.67)) = $876.20 +
$7.93 = $ 884.13(i)
$6.00 per $1000 of Initial Specified Amount $1200.00(ii)
---------------------------
$2084.13(a)
The total Surrender Charge for the Initial Specified Amount
is $2084.13(a) times the applicable surrender charge grading
factor(b), ($2084.13 X 40%) = $833.65.
For the increase in Specified Amount;
Sum of the premiums in the first two years following the
increase in Specified Amount, applicable to the increase in
Specified Amount =
($1500 X 2) X ($50,000 / $250,000) = $600.00.
Guideline Annual Premium Amount (Female, Age 50, $50,000
Specified Amount) = $978.23.
53
<PAGE>
Surrender Charge for the increase in Specified Amount =
(.3 X $600.00) $180.00(i)
$6.00 per $1000 of increase in Specified Amount $300.00(ii)
--------------------------
$480.00(a)
The total Surrender Charge for the increase in the Specified
Amount is $480.00(a) times the applicable surrender charge
grading factor(b), ($480.00 X 100%) = $480.00
The overall Surrender Charge for the Policy is ($833.65 +
$480.00) = $1313.65.
DEFINITIONS AND TABLES
(a)(i) The Deferred Sales Charge is based on the actual
premium paid and the applicable Guideline Annual
Premium Amount, and is calculated assuming the
following:
<TABLE>
<S> <C>
DURING POLICY YEAR:
1 and 2 30% of the sum of the premiums paid up to an
amount equal to the Guideline Annual Premium
Amount,* plus 10% of the sum of the premiums paid
between one and two times the Guideline Annual
Premium Amount, plus 9% of the sum of the premiums
paid in excess of two times the Guideline Annual
Premium Amount.
3 through 10 same dollar amount as of the end of Policy Year 2.
</TABLE>
In no event will the Deferred Sales Charge exceed the
maximum permitted under federal or state law.
(ii) The Deferred Administrative Charge is $6.00 per
$1,000 of Specified Amount.
(b) SURRENDER CHARGE GRADING FACTORS
<TABLE>
<S> <C>
Policy Years** 1-5 100%
Policy Year 6 80%
Policy Year 7 60%
Policy Year 8 40%
Policy Year 9 20%
Policy Year 10 0%
</TABLE>
If a Surrender Charge becomes effective at other than the
end of a Policy Year, any applicable surrender charge
grading factor will be applied on a pro rata basis as of
such effective date.
* Guideline Annual Premium Amount is the level annual
amount that would be payable through the latest maturity
date permitted under the policy but not less than 20
years after date of issue or (if earlier) age 95 for the
future benefits under the policy, subject to the
following provisions: (A) the payments were fixed by the
Life Insurer as to both timing and amount; and (B) the
payments were based on the 1980 Commissioners Standard
Ordinary Mortality Table, net investment earnings at the
greater of an annual effective of 5% or rate or rates
guaranteed at issue of the Policy, the sales load under
the policy, and the fees and charges specified in the
Policy. A new Guideline Annual Premium Amount is
determined for each increase in Specified Amount under
the policy; in such event, "Policy Years" are measured
from the effective date(s) of such increase(s).
** Number of Policy Years elapsed since the Date of Issue
and from the effective date(s) of any increase(s) in
Specified Amount.
54
<PAGE>
APPENDIX 2
ILLUSTRATIONS OF ACCUMULATION VALUES, SURRENDER VALUES,
AND DEATH BENEFITS
The illustrations in this Prospectus have been prepared to
help show how values under the Policies change with
investment performance. The illustrations illustrate how
Accumulation Values, Surrender Values and Death Benefits
under a Policy would vary over time if the hypothetical
gross investment rates of return were a uniform annual
effective rate of either 0%, 6% or 12%. If the hypothetical
gross investment rate of return averages 0%, 6%, or 12% over
a period of years, but fluctuates above or below those
averages for individual years, the Accumulation Values,
Surrender Values and Death Benefits may be different. The
illustrations also assume there are no Policy loans or
partial surrenders, no additional Premium Payments are made
other than shown, no Accumulation Values are allocated to
the Fixed Account, and there are no changes in the Specified
Amount or Death Benefit Option.
The amounts shown for the Accumulation Value, Surrender
Value and Death Benefit as of each Policy Anniversary
reflect the fact that the net investment return on the
assets held in the Sub-Accounts is lower than the gross
return. This is due to the daily charges made against the
assets of the Sub-Accounts for assuming mortality and
expense risks. The current mortality and expense risk
charges are equivalent to an annual effective rate of 0.45%
of the daily net asset value of the Variable Account. On
each Policy Anniversary beginning with the 11th, the
mortality and expense risk charge is reduced to 0.25% on an
annual basis of the daily net assets of the Variable
Account. In addition, the net investment returns also
reflect the deduction of Fund investment advisory fees and
other expenses which will vary depending on which funding
vehicle is chosen but which are assumed for purposes of
these illustrations to be equivalent to an annual effective
rate of 1.00% of the daily net asset value of the Variable
Account.
Considering current charges for mortality and expense risks
and the assumed Fund expenses, gross annual rates of return
of 0%, 6%, and 12% correspond to net investment experience
at constant annual rates of -1.45%, 4.55% and 10.55%. On
each Policy Anniversary beginning with the 11th, the gross
annual rates of return of 0%, 6%, and 12% correspond to net
investment experience at constant annual rates of -1.25%,
4.75%, and 10.75%. This is due to a current reduction in the
mortality and expense risk charge from an annual effective
rate of 0.45% to an annual effective rate of 0.25% after ten
Policy Years.
The illustrations also reflect the fact that the Company
makes monthly charges for providing insurance protection.
Current values reflect current Cost of Insurance charges and
guaranteed values reflect the maximum Cost of Insurance
charges guaranteed in the Policy. The values shown are for
Policies which are issued as standard. Policies issued on a
substandard basis would result in lower Accumulation Values
and Death Benefits than those illustrated.
The illustrations also reflect the fact that the Company
deducts a premium load from each Premium Payment. Current
and guaranteed values reflect a deduction of 3.5% of each
Premium Payment.
The Surrender Values shown in the illustrations reflect the
fact that the Company will deduct a Surrender Charge from
the Policy's Accumulation Value for any Policy surrendered
in full during the first ten years.
In addition, the illustrations reflect the fact that the
Company deducts a monthly administrative charge at the
beginning of each Policy Month. This monthly administrative
55
<PAGE>
expense charge is $15 per month in the first year. Current
values reflect a current monthly administrative expense
charge of $5 in renewal years, and guaranteed values reflect
the $10 maximum monthly administrative charge under the
Policy in renewal years.
Upon request, the Company will furnish a comparable
illustration based on the proposed insured's age, gender
classification, smoking classification, risk classification
and premium payment requested.
56
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE NONSMOKER ISSUE AGE 35
$2,720 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
NET NET NET NET NET NET NET NET NET
PREMIUMS -1.45% 4.55% 10.55% -1.45% 4.55% 10.55% -1.45% 4.55% 10.55%
ACCUMULATED IN YEARS 1-10 IN YEARS 1-10 IN YEARS 1-10
END OF AT NET NET NET NET NET NET NET NET NET
POLICY 5% INTEREST -1.25% 4.75% 10.75% -1.25% 4.75% 10.75% -1.25% 4.75% 10.75%
YEAR PER YEAR IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER
------ ----------- ------------------------------------- ---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,720 500,000 500,000 500,000 1,561 1,685 1,810 0 0 0
2 5,576 500,000 500,000 500,000 3,217 3,568 3,936 0 0 0
3 8,575 500,000 500,000 500,000 4,841 5,531 6,280 209 899 1,648
4 11,724 500,000 500,000 500,000 6,430 7,570 8,861 1,798 2,938 4,229
5 15,030 500,000 500,000 500,000 7,975 9,682 11,693 3,343 5,050 7,061
6 18,501 500,000 500,000 500,000 9,466 11,858 14,794 5,760 8,153 11,088
7 22,146 500,000 500,000 500,000 10,894 14,094 18,182 8,115 11,314 15,403
8 25,974 500,000 500,000 500,000 12,252 16,381 21,881 10,399 14,528 20,028
9 29,992 500,000 500,000 500,000 13,530 18,713 25,912 12,604 17,787 24,986
10 34,212 500,000 500,000 500,000 14,721 21,084 30,305 14,721 21,084 30,305
15 58,694 500,000 500,000 500,000 19,259 33,556 59,415 19,259 33,556 59,415
20 89,939 500,000 500,000 500,000 20,436 46,037 104,975 20,436 46,037 104,975
25 129,818 500,000 500,000 500,000 17,225 57,440 178,163 17,225 57,440 178,163
30 180,714 500,000 500,000 500,000 8,080 66,011 299,511 8,080 66,011 299,511
</TABLE>
If premiums are paid more frequently than annually,
the Death Benefits, Accumulation Values and
Surrender Values would be less than those
illustrated.
Assumes no policy loans or partial surrenders have
been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges,
administrative fees and premium load assumed.
These investment results are illustrative only and
should not be considered a representation of past
or future investment results. Actual investment
results may be more or less than those shown and
will depend on a number of factors, including the
Policy Owner's allocations and the Funds' rates of
return. Accumulation Values and Surrender Values
for a Policy would be different from those shown if
the actual investment rates of return averaged 0%,
6% and 12% over a period of years, but fluctuated
above or below those averages for individual Policy
Years. No representations can be made that these
rates of return will in fact be achieved for any
one year or sustained over a period of time.
57
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE NONSMOKER ISSUE AGE 45
$4,685 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
NET NET NET NET NET NET NET NET NET
PREMIUMS -1.45% 4.55% 10.55% -1.45% 4.55% 10.55% -1.45% 4.55% 10.55%
ACCUMULATED IN YEARS 1-10 IN YEARS 1-10 IN YEARS 1-10
END OF AT NET NET NET NET NET NET NET NET NET
POLICY 5% INTEREST -1.25% 4.75% 10.75% -1.25% 4.75% 10.75% -1.25% 4.75% 10.75%
YEAR PER YEAR IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER
------ ----------- ------------------------------------- ---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,685 500,000 500,000 500,000 3,025 3,250 3,476 0 0 0
2 9,604 500,000 500,000 500,000 6,041 6,685 7,357 257 901 1,574
3 14,769 500,000 500,000 500,000 8,919 10,180 11,551 3,136 4,396 5,768
4 20,193 500,000 500,000 500,000 11,653 13,731 16,084 5,869 7,947 10,300
5 25,888 500,000 500,000 500,000 14,235 17,332 20,985 8,452 11,548 15,201
6 31,867 500,000 500,000 500,000 16,660 20,977 26,286 12,033 16,351 21,659
7 38,145 500,000 500,000 500,000 18,921 24,662 32,025 15,451 21,192 28,554
8 44,738 500,000 500,000 500,000 21,011 28,380 38,243 18,697 26,067 35,929
9 51,659 500,000 500,000 500,000 22,924 32,126 44,988 21,767 30,970 43,831
10 58,927 500,000 500,000 500,000 24,653 35,895 52,313 24,653 35,895 52,313
15 101,096 500,000 500,000 500,000 30,617 55,389 100,953 30,617 55,389 100,953
20 154,914 500,000 500,000 500,000 30,599 74,543 178,543 30,599 74,543 178,543
25 223,601 500,000 500,000 500,000 20,949 90,039 306,538 20,949 90,039 306,538
30 311,266 500,000 500,000 565,097 0 91,616 528,128 0 91,616 528,128
</TABLE>
If premiums are paid more frequently than annually,
the Death Benefits, Accumulation Values and
Surrender Values would be less than those
illustrated.
Assumes no policy loans or partial surrenders have
been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges,
administrative fees and premium load assumed.
These investment results are illustrative only and
should not be considered a representation of past
or future investment results. Actual investment
results may be more or less than those shown and
will depend on a number of factors, including the
Policy Owner's allocations and the Funds' rates of
return. Accumulation Values and Surrender Values
for a Policy would be different from those shown if
the actual investment rates of return averaged 0%,
6% and 12% over a period of years, but fluctuated
above or below those averages for individual Policy
Years. No representations can be made that these
rates of return will in fact be achieved for any
one year or sustained over a period of time.
58
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE NONSMOKER ISSUE AGE 35
$2,075 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
GROSS GROSS GROSS
GROSS 0% GROSS 6% 12% GROSS 0% GROSS 6% 12% GROSS 0% GROSS 6% 12%
NET NET NET NET NET NET NET NET NET
PREMIUMS -1.45% 4.55% 10.55% -1.45% 4.55% 10.55% -1.45% 4.55% 10.55%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATED IN YEARS 1-10 IN YEARS 1-10 IN YEARS 1-10
END OF AT NET NET NET NET NET NET NET NET NET
POLICY 5% INTEREST -1.25% 4.75% 10.75% -1.25% 4.75% 10.75% -1.25% 4.75% 10.75%
YEAR PER YEAR IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER
- ------ ----------- ---------------------------- ---------------------------- ----------------------------
1 2,075 500,000 500,000 500,000 1,154 1,247 1,341 0 0 0
2 4,254 500,000 500,000 500,000 2,402 2,666 2,943 0 0 0
3 6,541 500,000 500,000 500,000 3,619 4,136 4,700 0 0 455
4 8,944 500,000 500,000 500,000 4,781 5,636 6,604 536 1,391 2,359
5 11,466 500,000 500,000 500,000 5,884 7,160 8,664 1,639 2,915 4,419
6 14,114 500,000 500,000 500,000 6,927 8,709 10,898 3,531 5,313 7,502
7 16,895 500,000 500,000 500,000 7,912 10,286 13,325 5,365 7,739 10,778
8 19,814 500,000 500,000 500,000 8,840 11,891 15,965 7,142 10,193 14,267
9 22,880 500,000 500,000 500,000 9,711 13,526 18,842 8,862 12,677 17,993
10 26,099 500,000 500,000 500,000 10,527 15,194 21,982 10,527 15,194 21,982
15 44,776 500,000 500,000 500,000 13,782 24,139 42,967 13,782 24,139 42,967
20 68,612 500,000 500,000 500,000 15,155 33,622 76,248 15,155 33,622 76,248
25 99,034 500,000 500,000 500,000 14,197 43,270 130,050 14,197 43,270 130,050
30 137,861 500,000 500,000 500,000 9,997 52,180 218,566 9,997 52,180 218,566
</TABLE>
If premiums are paid more frequently than annually,
the Death Benefits, Accumulation Values and
Surrender Values would be less than those
illustrated.
Assumes no policy loans or partial surrenders have
been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges,
administrative fees and premium load assumed.
These investment results are illustrative only and
should not be considered a representation of past
or future investment results. Actual investment
results may be more or less than those shown and
will depend on a number of factors, including the
Policy Owner's allocations and the Funds' rates of
return. Accumulation Values and Surrender Values
for a Policy would be different from those shown if
the actual investment rates of return averaged 0%,
6% and 12% over a period of years, but fluctuated
above or below those averages for individual Policy
Years. No representations can be made that these
rates of return will in fact be achieved for any
one year or sustained over a period of time.
59
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE NONSMOKER ISSUE AGE 45
$3,550 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
GROSS GROSS GROSS
GROSS 0% GROSS 6% 12% GROSS 0% GROSS 6% 12% GROSS 0% GROSS 6% 12%
NET NET NET NET NET NET NET NET NET
PREMIUMS -1.45% 4.55% 10.55% -1.45% 4.55% 10.55% -1.45% 4.55% 10.55%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATED IN YEARS 1-10 IN YEARS 1-10 IN YEARS 1-10
AT
END OF 5% NET NET NET NET NET NET NET NET NET
POLICY INTEREST -1.25% 4.75% 10.75% -1.25% 4.75% 10.75% -1.25% 4.75% 10.75%
YEAR PER YEAR IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER
- ------ --------- ---------------------------- ---------------------------- ----------------------------
1 3,550 500,000 500,000 500,000 2,174 2,341 2,508 0 0 0
2 7,278 500,000 500,000 500,000 4,387 4,861 5,356 0 0 226
3 11,191 500,000 500,000 500,000 6,514 7,441 8,450 1,384 2,311 3,320
4 15,301 500,000 500,000 500,000 8,553 10,081 11,812 3,423 4,951 6,682
5 19,616 500,000 500,000 500,000 10,501 12,780 15,467 5,371 7,650 10,337
6 24,147 500,000 500,000 500,000 12,355 15,536 19,445 8,251 11,432 15,341
7 28,904 500,000 500,000 500,000 14,113 18,349 23,777 11,035 15,271 20,699
8 33,899 500,000 500,000 500,000 15,772 21,219 28,498 13,720 19,167 26,446
9 39,144 500,000 500,000 500,000 17,329 24,144 33,647 16,303 23,118 32,621
10 44,652 500,000 500,000 500,000 18,782 27,124 39,270 18,782 27,124 39,270
15 76,604 500,000 500,000 500,000 24,612 43,212 77,089 24,612 43,212 77,089
20 117,384 500,000 500,000 500,000 27,014 60,447 137,860 27,014 60,447 137,860
25 169,431 500,000 500,000 500,000 24,279 77,481 237,386 24,279 77,481 237,386
30 235,858 500,000 500,000 500,000 12,642 90,961 405,165 12,642 90,961 405,165
</TABLE>
If premiums are paid more frequently than annually,
the Death Benefits, Accumulation Values and
Surrender Values would be less than those
illustrated.
Assumes no policy loans or partial surrenders have
been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges,
administrative fees and premium load assumed.
These investment results are illustrative only and
should not be considered a representation of past
or future investment results. Actual investment
results may be more or less than those shown and
will depend on a number of factors, including the
Policy Owner's allocations and the Funds' rates of
return. Accumulation Values and Surrender Values
for a Policy would be different from those shown if
the actual investment rates of return averaged 0%,
6% and 12% over a period of years, but fluctuated
above or below those averages for individual Policy
Years. No representations can be made that these
rates of return will in fact be achieved for any
one year or sustained over a period of time.
60
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX NONSMOKER ISSUE AGE 35
$2,600 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
GROSS GROSS GROSS
GROSS 0% GROSS 6% 12% GROSS 0% GROSS 6% 12% GROSS 0% GROSS 6% 12%
NET NET NET NET NET NET NET NET NET
PREMIUMS -1.45% 4.55% 10.55% -1.45% 4.55% 10.55% -1.45% 4.55% 10.55%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATED IN YEARS 1-10 IN YEARS 1-10 IN YEARS 1-10
END OF AT NET NET NET NET NET NET NET NET NET
POLICY 5% INTEREST -1.25% 4.75% 10.75% -1.25% 4.75% 10.75% -1.25% 4.75% 10.75%
YEAR PER YEAR IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER
- ------ ----------- ---------------------------- ---------------------------- ----------------------------
1 2,600 500,000 500,000 500,000 1,488 1,607 1,726 0 0 0
2 5,330 500,000 500,000 500,000 3,071 3,407 3,758 0 0 0
3 8,197 500,000 500,000 500,000 4,622 5,280 5,996 62 720 1,436
4 11,206 500,000 500,000 500,000 6,134 7,222 8,454 1,574 2,662 3,894
5 14,367 500,000 500,000 500,000 7,598 9,227 11,146 3,038 4,667 6,586
6 17,685 500,000 500,000 500,000 9,007 11,289 14,089 5,359 7,641 10,441
7 21,169 500,000 500,000 500,000 10,355 13,405 17,303 7,619 10,669 14,567
8 24,828 500,000 500,000 500,000 11,634 15,568 20,809 9,810 13,744 18,985
9 28,669 500,000 500,000 500,000 12,839 17,774 24,631 11,927 16,862 23,719
10 32,703 500,000 500,000 500,000 13,962 20,017 28,797 13,962 20,017 28,797
15 56,104 500,000 500,000 500,000 18,279 31,861 56,441 18,279 31,861 56,441
20 85,971 500,000 500,000 500,000 19,527 43,833 99,798 19,527 43,833 99,798
25 124,090 500,000 500,000 500,000 16,796 54,993 169,490 16,796 54,993 169,490
30 172,741 500,000 500,000 500,000 8,677 63,760 284,812 8,677 63,760 284,812
</TABLE>
If premiums are paid more frequently than annually,
the Death Benefits, Accumulation Values and
Surrender Values would be less than those
illustrated.
Assumes no policy loans or partial surrenders have
been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges,
administrative fees and premium load assumed.
These investment results are illustrative only and
should not be considered a representation of past
or future investment results. Actual investment
results may be more or less than those shown and
will depend on a number of factors, including the
Policy Owner's allocations and the Funds' rates of
return. Accumulation Values and Surrender Values
for a Policy would be different from those shown if
the actual investment rates of return averaged 0%,
6% and 12% over a period of years, but fluctuated
above or below those averages for individual Policy
Years. No representations can be made that these
rates of return will in fact be achieved for any
one year or sustained over a period of time.
61
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX NONSMOKER ISSUE AGE 45
$4,460 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
GROSS GROSS GROSS
GROSS 0% GROSS 6% 12% GROSS 0% GROSS 6% 12% GROSS 0% GROSS 6% 12%
NET NET NET NET NET NET NET NET NET
PREMIUMS -1.45% 4.55% 10.55% -1.45% 4.55% 10.55% -1.45% 4.55% 10.55%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATED IN YEARS 1-10 IN YEARS 1-10 IN YEARS 1-10
END OF AT NET NET NET NET NET NET NET NET NET
POLICY 5% INTEREST -1.25% 4.75% 10.75% -1.25% 4.75% 10.75% -1.25% 4.75% 10.75%
YEAR PER YEAR IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER IN YEARS 11 AND AFTER
- ------ ----------- ---------------------------- ---------------------------- ----------------------------
1 4,460 500,000 500,000 500,000 2,857 3,070 3,285 0 0 0
2 9,143 500,000 500,000 500,000 5,714 6,324 6,961 61 671 1,308
3 14,060 500,000 500,000 500,000 8,443 9,638 10,937 2,790 3,985 5,284
4 19,223 500,000 500,000 500,000 11,039 13,009 15,238 5,386 7,355 9,585
5 24,644 500,000 500,000 500,000 13,496 16,431 19,892 7,843 10,778 14,239
6 30,337 500,000 500,000 500,000 15,808 19,900 24,931 11,286 15,378 20,409
7 36,313 500,000 500,000 500,000 17,969 23,412 30,391 14,577 20,020 26,999
8 42,589 500,000 500,000 500,000 19,974 26,961 36,311 17,712 24,700 34,050
9 49,178 500,000 500,000 500,000 21,816 30,544 42,738 20,685 29,414 41,608
10 56,097 500,000 500,000 500,000 23,490 34,156 49,724 23,490 34,156 49,724
15 96,240 500,000 500,000 500,000 29,425 52,962 96,186 29,425 52,962 96,186
20 147,474 500,000 500,000 500,000 29,886 71,705 170,319 29,886 71,705 170,319
25 212,863 500,000 500,000 500,000 21,626 87,445 292,267 21,626 87,445 292,267
30 296,317 500,000 500,000 537,454 0 91,309 502,294 0 91,309 502,294
</TABLE>
If premiums are paid more frequently than annually,
the Death Benefits, Accumulation Values and
Surrender Values would be less than those
illustrated.
Assumes no policy loans or partial surrenders have
been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges,
administrative fees and premium load assumed.
These investment results are illustrative only and
should not be considered a representation of past
or future investment results. Actual investment
results may be more or less than those shown and
will depend on a number of factors, including the
Policy Owner's allocations and the Funds' rates of
return. Accumulation Values and Surrender Values
for a Policy would be different from those shown if
the actual investment rates of return averaged 0%,
6% and 12% over a period of years, but fluctuated
above or below those averages for individual Policy
Years. No representations can be made that these
rates of return will in fact be achieved for any
one year or sustained over a period of time.
62
<PAGE>
[LOGO]
537402 (5/95)
