-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M3nqS1mQMRRNagg5gFb2xjGXeYIp1oriZhVrBcqI91inr6o6kPdtZ8e8N+3mK+rI 6739TYvJA51npeAxyPCtKw== 0000912057-96-008266.txt : 19960508 0000912057-96-008266.hdr.sgml : 19960508 ACCESSION NUMBER: 0000912057-96-008266 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960507 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I CENTRAL INDEX KEY: 0000930597 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-84426 FILM NUMBER: 96557068 BUSINESS ADDRESS: STREET 1: 900 COTTAGE GROVE RD CITY: BLOOMFIELD STATE: CT ZIP: 06002 BUSINESS PHONE: 2037266000 MAIL ADDRESS: STREET 1: 900 COTTAGE GROVE RD CITY: HARTFORD STATE: CT ZIP: 06152-2251 497 1 497 CONNECTICUT GENERAL LIFE INSURANCE COMPANY [LOGO] CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I HOME OFFICE LOCATION: MAILING ADDRESS: 900 COTTAGE GROVE ROAD CIGNA INDIVIDUAL INSURANCE HARTFORD, CT 06152 ANNUITY & VARIABLE LIFE SERVICES CENTER, ROUTING S-249 HARTFORD, CT 06152-2249 (800)(552-9898)
- -------------------------------------------------------------------------------- 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-Registered Trademark- Variable Insurance Trust -- MFS Total Return Series, MFS Utilities Series and MFS World Governments Series; Neuberger & Berman Advisers Management Trust -- Balanced Portfolio, Limited Maturity Bond Portfolio and Partners Portfolio; OCC Accumulation Trust -- Global Equity Portfolio, Managed Portfolio and Small Cap Portfolio. The fixed interest option offered under 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, 1996 TABLE OF CONTENTS
PAGE --------- Definitions..................................... 3 Highlights...................................... 5 Initial Choices............................... 5 Charges and Fees.............................. 6 The Company..................................... 6 The Variable Account............................ 7 The Funds....................................... 7 Expense Data/Fee Table........................ 10 General....................................... 12 Substitution of Securities.................... 12 Voting Rights................................. 12 Fund Participation Agreements................. 13 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 Optional Variable Account Sub-Account Allocation Programs........................ 17 Dollar Cost Averaging..................... 17 Automatic Rebalancing..................... 18 Charges; Fees................................... 18 Premium Load................................ 18 Monthly Deductions.......................... 19 Transaction Fee for Excess Transfers........ 20 Mortality and Expense Risk Charge........... 20 Surrender Charge............................ 20 The Fixed Account............................... 21 Policy Values................................... 21 Accumulation Value.......................... 21 Variable Accumulation Unit Value............ 22 Surrender Value............................. 22 Surrenders...................................... 23 Partial Surrenders.......................... 23 Full Surrenders............................. 23 Deferral of Payment and Transfers........... 23 Lapse and Reinstatement......................... 23 Lapse of a Policy; Effect of Guaranteed Death Benefit Provision.................... 23 PAGE --------- Reinstatement of a Lapsed Policy............ 24 Policy Loans.................................... 24 Settlement Options.............................. 25 Other Policy Provisions......................... 25 Issuance.................................... 25 Short-Term Right to Cancel the Policy....... 25 Policy Owner................................ 26 Beneficiary................................. 26 Assignment.................................. 26 Right to Exchange for a Fixed Benefit Policy..................................... 26 Incontestability............................ 27 Misstatement of Age or Sex.................. 27 Suicide..................................... 27 Nonparticipating Policies................... 27 Tax Matters..................................... 27 Policy Proceeds............................. 27 Taxation of the Company..................... 29 Section 848 Charges......................... 29 Other Considerations........................ 29 Other Matters................................... 29 Directors and Officers of the Company....... 29 Distribution of Policies.................... 30 Changes of Investment Policy................ 30 Other Contracts Issued by the Company....... 31 State Regulation............................ 31 Reports to Policy Owners.................... 31 Advertising................................. 31 Legal Proceedings........................... 32 Experts..................................... 32 Registration Statement...................... 32 Financial Statements............................ 32 Connecticut General Life Insurance Company.................................... 33 CG Variable Life Insurance Separate Account I.......................................... 53 Appendix 1...................................... 72 Illustration of Surrender Charges........... 72 Appendix 2...................................... 74 Illustration of Accumulation Values, Surrender Values, and Death Benefits....... 74 Appendix 3...................................... 84 Tax Information............................. 84
2 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. ANNUITY & VARIABLE LIFE SERVICES 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, Annuity & Variable Life Services Center, Routing S-249, Hartford, CT 06152-2249. 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-Registered Trademark- Variable Insurance Trust -- MFS Total Return Series, MFS Utilities Series, MFS World Governments Series; Neuberger & Berman Advisers Management Trust -- Balanced Portfolio, Limited Maturity Bond Portfolio and Partners Portfolio; OCC Accumulation Trust -- Global Equity Portfolio, Managed Portfolio and Small Cap Portfolio. Each 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 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. RIGHT-TO-EXAMINE PERIOD: The period of time following the issuance of the Policy during which the Owner may return the Policy and receive a refund of premiums paid, the latest of (a) 10 days after the Policy is received, unless otherwise stipulated by state law requirements, (b) 10 days after the Company mails or personally delivers a Notice of Withdrawal Right to the Owner, or (c) 45 days after the application for the Policy is signed. 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 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. 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"). Premium Payments are refundable during the Right-to-Examine Period.
5 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 Initial Premium Payment will not be allocated to the Variable Account until three days following the expiration of the Right-to-Examine Period. 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. No allocation can be made which would result in a Sub-Account value of less than $50 or a Fixed Account value of less than $2,500. Further, at this time, no more than 18 Sub-Accounts may be opened during the life of the Policy. The Company may expand this number at a future date. 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 Payments. AND FEES 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 deductions 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 pages 10 and 11 of this Prospectus.
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. Connecticut General Corporation is the holding company of various insurance companies, one of which is Connecticut General Life Insurance Company. 6 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 $100 million covers all of the officers and employees of the Company. 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 or investment practices or policies by the Commission. The Company does not guarantee the Variable Account's investment performance. The Company has several other separate accounts registered as unit investment trusts with the Commission for the purpose of funding the variable annuity contracts and variable life insurance policies of the Company. 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 ("Fidelity Trust"), 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; 7 MFS-Registered Trademark- Variable Insurance Trust ("MFS Trust"), managed by Massachusetts Financial Services Company and distributed by MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116; Neuberger & Berman Advisers Management Trust ("AMT Trust"), managed and distributed by Neuberger & Berman Management Incorporated, 605 Third Avenue, New York, NY 10158-0006; OCC Accumulation Trust ("OCC Trust")(formerly Quest for Value Accumulation Trust), managed by OpCap Advisors (formerly Quest for Value Advisors) and distributed by OCC Distributors (formerly Quest for Value Distributors), One World Financial Center, New York, NY 10281. Four Funds of ALGER Trust are available under the 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 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 AMT Trust are available under the Policies: Balanced Portfolio; Limited Maturity Bond Portfolio; Partners Portfolio. Three Funds of OCC Trust are available under the Policies: Global Equity Portfolio; Managed Portfolio; Small Cap Portfolio. The investment advisory fees charged the Funds by their advisers are shown on pages 10 and 11 of this Prospectus. There follows a brief description of the investment objective and program of each Fund. There can be no assurance that any of the stated investment objectives will be achieved. ALGER AMERICAN GROWTH PORTFOLIO (Large Cap Stocks): Seeks long-term capital appreciation by investing in a diversified, actively managed portfolio of equity securities, primarily of companies with total market capitalization of $1 billion or greater. ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO (Large Cap Stocks): Seeks long-term capital appreciation by investing in a diversified, actively managed portfolio of equity securities, with the ability to engage in leveraging (up to one-third of assets) and options and futures transactions. ALGER AMERICAN MIDCAP GROWTH PORTFOLIO (Small Cap Stocks): Seeks long-term capital appreciation by investing in a diversified, actively managed portfolio of equity securities, primarily of companies whose total market capitalization lies within the range of companies included in the S & P MidCap 400 Index. ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO (Small Cap Stocks): Seeks long-term capital appreciation by investing in a diversified, actively managed portfolio of equity securities, primarily of companies whose total market capitalization lies within the range of companies included in the Russell 2000 Growth Index. 8 FIDELITY ASSET MANAGER PORTFOLIO (Balanced or Total Return): Seeks high total return with reduced risk over the long-term by allocating its assets among domestic and foreign stocks, bonds and short-term fixed-income instruments. FIDELITY INVESTMENT GRADE BOND PORTFOLIO (Fixed Income - Intermediate Term Bonds): Seeks as high a level of current income as is consistent with the preservation of capital by investing in a broad range of investment-grade fixed-income securities. FIDELITY EQUITY-INCOME PORTFOLIO (Large Cap Stocks): Seeks reasonable income by investing primarily in income-producing equity securities, with some potential for capital appreciation, seeking a yield that exceeds the composite yield on the securities comprising the Standard and Poor's Composite Index of 500 Stocks. MFS TOTAL RETURN SERIES (Balanced or Total Return): Seeks primarily to obtain above-average income (compared to a portfolio invested entirely in equity securities), consistent with the prudent employment of capital, and secondarily to provide a reasonable opportunity for growth of capital and income. MFS UTILITIES SERIES (Specialty): Seeks capital growth and current income (income above that available from a portfolio invested entirely in equity securities) by investing, under normal circumstances, at least 65% of its assets in equity and debt securities of utility companies. MFS WORLD GOVERNMENTS SERIES (International Fixed Income): Seeks not only preservation, but also growth, of capital together with moderate current income through a professionally managed, internationally diversified portfolio consisting primarily of debt securities and to a lesser extent equity securities. AMT BALANCED PORTFOLIO (Balanced or Total Return): Seeks long-term capital growth and reasonable current income without undue risk to principal. AMT LIMITED MATURITY BOND PORTFOLIO (Short-Term Bonds): 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 (Large Cap Stocks): Seeks capital growth. Invests primarily in common stocks of established companies, using the value-oriented investment approach. The Portfolio seeks capital growth through an investment approach that is designed to increase capital with reasonable risk. Its investment program seeks securities believed to be undervalued based on strong fundamentals such as low price-to-earnings ratios, consistent cash flow, and support from asset values. OCC GLOBAL EQUITY PORTFOLIO (International Stocks): Seeks long-term capital appreciation through a global investment strategy primarily involving equity securities. OCC MANAGED PORTFOLIO (Balanced or Total Return): Seeks growth of capital over time through investment in a portfolio of common stocks, bonds and cash equivalents, the percentage of which will vary based on management's assessments of relative investment values. OCC SMALL CAP PORTFOLIO (Small Cap Stocks): Seeks capital appreciation through investments in a diversified portfolio of equity securities of companies with market capitalizations of under $1 billion. 9 EXPENSE DATA The purpose of the following Table is to help Purchasers and prospective purchasers understand the costs and expenses that are borne, directly and indirectly, by Purchasers assuming that all Net Premium Payments are allocated to the Variable Account. The table reflects expenses of the Variable Account as well as of the individual Funds underlying the Variable Sub-Accounts. The Mortality and Expense Risk Charge shown is the currently charged rate during the first ten Policy Years. It currently declines to .25% per year thereafter and is guaranteed not to exceed .90% per year. FEE TABLE
FIDELITY VARIABLE INSURANCE PRODUCTS FUNDS ALGER AMERICAN FUND --------------------------------- ---------------------------------------------------------------------- INVESTMENT ALGER AMERICAN ALGER AMERICAN ALGER AMERICAN ASSET EQUITY GRADE ALGER AMERICAN LEVERAGED MIDCAP GROWTH SMALL CAP MANAGER INCOME BOND GROWTH PORTFOLIO ALLCAP PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ----------------- ----------------- --------------- --------------- ----------- --------- --------- SEPARATE ACCOUNT ANNUAL EXPENSES Mortality and Expense Risk Charge............. 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% Total Separate Account Annual Expenses........... 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% FUND PORTFOLIO ANNUAL EXPENSES Management Fees..... 0.75% 0.85% 0.80% 0.85% 0.71% 0.51% 0.45% Other Expenses...... 0.10% 0.71% 0.10% 0.07% 0.08% 0.10% 0.14% Total Fund Portfolio Annual Expenses.... 0.85% 1.56%(1) 0.90% 0.92% 0.79%(2) 0.61% 0.59%
- ------------------------ (1) Included in Other Expenses of the Alger American Leveraged AllCap Portfolio is .06% of interest expense. Absent reimbursements, the amounts of Other Expenses and Total Fund Expenses would be 3.07% and 3.92% respectively, for the Alger American Leveraged AllCap Portfolio. (2) A portion of the brokerage commissions the Fund paid was used to reduce its expenses. Without this reduction, Total Fund Portfolio Annual Expenses would have been 0.81% for the Asset Manager Portfolio.
10 The table does not reflect the monthly deductions for the cost of insurance and any riders, nor does it reflect the monthly deduction of $15 during the first Policy Year, and currently, $5 thereafter for administrative expenses. The information set forth should be considered together with the information provided in this Prospectus under the heading "Charges and Fees", and in each Fund's Prospectus. All expenses are expressed as a percentage of average account value.
MFS VARIABLE INSURANCE TRUST NEUBERGER&BERMAN - --------------------------------------------- ADVISERS MANAGEMENT TRUST (5) OCC ACCUMULATION TRUST MFS MFS WORLD ----------------------------------------- -------------------------- TOTAL RETURN MFS UTILITIES GOVERNMENTS BALANCED LIMITED MATURITY PARTNERS GLOBAL EQUITY MANAGED SERIES SERIES SERIES PORTFOLIO BOND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - ------------- ------------- ------------- --------- ----------------- --------- -------------- --------- 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.75% 0.75% 0.75% 0.85% 0.65% 0.85% 0.80% 0.80% 0.25% 0.25% 0.25% 0.19% 0.10% 0.30% 0.45% 0.14% 1.00%(3) 1.00%(3) 1.00%(4) 1.04% 0.75% 1.15% 1.25%(6) 0.94%(6) MFS V - ------------- MFS TOTAL RETURN SMALL CAP SERIES PORTFOLIO - ------------- ------------- 0.45% 0.45% 0.45% 0.45% 0.75% 0.80% 0.25% 0.20% 1.00%(3) 1.00%(6)
- ------------------------ (3) 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 2.02% and 2.77%, respectively, for the Total Return Series, and 2.33% and 3.08%, respectively, for the Utility Series. (4) The Funds' 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 1.24% and 1.99%, respectively. (5) Neuberger&Berman Advisers Management Trust (the "Trust") is divided into portfolios ("Portfolios"), each of which invests all of its net investable assets in a corresponding series ("Series") of Advisers Managers Trust. Expenses in the table reflect expenses of the Portfolios and include each Portfolio's pro rata portion of the operating expenses of each Portfolio's corresponding Series. The Portfolios pay Neuberger&Berman Management Inc. ("NBMI") an administration fee based on the Portfolios' net asset value. Each Portfolio's corresponding Series pays NBMI a management fee based on the Series' average daily net assets. Accordingly, this table combines management fees at the Series level and administration fees at the Portfolio level in a unified fee rate. See "Expenses" in the Trust's Prospectus. (6) The annual expenses of the OCC Accumulation Trust Portfolios as of December 31, 1995 have been restated to reflect new management fee and expense limitation arrangements in effect as of May 1, 1996. Effective May 1, 1996, the expenses of the Portfolios of the OCC Accumulation Trust are contractually limited by OpCap Advisors so that their respective annualized operating expenses do not exceed 1.25% of their respective average daily net assets. Furthermore, through April 30, 1997, the annualized operating expenses of the Managed and Small Cap Portfolios will be voluntarily limited by OpCap Advisors so that annualized operating expenses of these Portfolios do not exceed 1.00% of their respective average daily net assets. Without such voluntary expense limitations, and taking into account the revised contractual provisions effective May 1, 1996 concerning management fees and expense limitations, the Management Fees, Other Expenses and Total Portfolio Annual Expenses incurred for the fiscal year ended December 31, 1995 would have been: .80%, .45% and 1.25%, respectively, for the Global Equity Portfolio; .80%, .14% and .94%, respectively, for the Managed Portfolio; and .80%, .39% and 1.19%, respectively, for the Small Cap Portfolio.
11 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.") Required premium levels will vary based on market performance. In a prolonged market downturn, affecting all Sub-Accounts, additional Premium Payments may be necessary to maintain the level of coverage or to avoid lapsing of the Policy. Review of periodic contract statements is strongly suggested to determine appropriate premium requirements. 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. 12 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. 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 in "Payment of Death Benefit" 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 Annuity & Variable Life Services 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 13 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 Death Benefit 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. PAYMENT OF DEATH BENEFIT The Death Benefit under the Policy will be paid in a lump sum within seven days after receipt at the Annuity & Variable Life Services 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:
INSURED'S CORRIDOR INSURED'S CORRIDOR ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE - ------------- ------------- --------------- ------------- 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
14
INSURED'S CORRIDOR INSURED'S CORRIDOR ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE - ------------- ------------- --------------- ------------- 64 122 94 101 -- - -- 65 120 95 100 66 119 96 100 67 118 97 100 68 117 98 100 69 116 99 100 -- - --
CHANGES IN SPECIFIED AMOUNT Changes in the Specified Amount of a Policy can be made by submitting a written request to the Annuity & Variable Life Services 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 Annuity & Variable Life Services 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 15 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"). 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 must be in whole percentages. No allocation can be made which would result in a Sub-Account of less than $50 or a Fixed Account value of less than $2,500. Further, at this time, no more than 18 Sub-Accounts may be opened during the life of the Policy. The Company may expand this number at a future date. 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 Net Premium Payments may be changed at any time free of charge. Any new allocation will apply to Premium Payments made more than one week 16 after the Company receives the notice of the new allocation. Any new allocation is subject to the same requirements as the initial allocation. The Company may, at its sole discretion, waive minimum premium allocation requirements. 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 Annuity & Variable Life Services 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 Annuity & Variable Life Services 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 Sub-Accounts 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 Annuity & Variable Services Center. Transfer requests must be received by the Variable Products Center by 4:00 Eastern Time in order to be effective that day. 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 Sub-Account's investment policies and related risks before allocating money to the Sub-Accounts. See pages 9-13 of this Prospectus. The Company, at its sole discretion, may waive minimum balance requirements on the Sub-Accounts. OPTIONAL VARIABLE ACCOUNT SUB-ACCOUNT ALLOCATION PROGRAM The Owner may elect to enroll in either of the following programs. However, both programs cannot be in effect at the same time. DOLLAR COST AVERAGING Dollar Cost Averaging is a program which, if elected by the Owner, systematically allocates specified dollar amounts from the Fixed Account to one or more of the Contract's Variable Account Sub-Accounts at regular intervals as selected by the Owner. 17 By allocating on a regularly scheduled basis as opposed to allocating the total amount at one particular time, an Owner may be less susceptible to the impact of market fluctuations. Dollar Cost Averaging may be selected by establishing a Fixed Account value of at least $1,000. The minimum amount per month to allocate is $50 (subject to the 18 Sub-Account Limitation described under "Allocation of Net Premium Payments" above). Enrollment in this program may occur at any time by calling the Annuity & Variable Life Services Center or by providing the information requested on the Dollar Cost Averaging election form to the Company and ensuring that sufficient value is in the Fixed Account. Transfers to any Fixed Account are not permitted under Dollar Cost Averaging. The Company may, at its sole discretion, waive Dollar Cost Averaging minimum deposit and transfer requirements. Dollar Cost Averaging will terminate when any of the following occurs: (1) the number of designated transfers has been completed; (2) the value of the Fixed Account is insufficient to complete the next transfer; (3) the Owner requests termination by telephone or in writing and such request is received at least one week prior to the next scheduled transfer date to take effect that month; or (4) the Policy is surrendered. There is no current charge for Dollar Cost Averaging but the Company reserves the right to charge for this program. AUTOMATIC REBALANCING Automatic Rebalancing is an option which, if elected by the Owner, periodically restores to a pre-determined level the percentage of Policy Value allocated to each Sub-Account (e.g. 20% Balanced, 50% Growth, 30% Utilities). This pre-determined level will be the allocation initially selected on the application, unless subsequently changed. The Automatic Rebalancing allocation may be changed at any time by submitting a request to the Company. If Automatic Rebalancing is elected, all Net Premium Payments allocated to the Sub-Accounts must be subject to Automatic Rebalancing. The Fixed Account is not available for Automatic Rebalancing. Automatic Rebalancing may take place on either a quarterly, semi-annual or annual basis, as selected by the Owner. Once the rebalancing option is activated, any Sub-Account transfers executed outside of the rebalancing option will terminate the Automatic Rebalancing option. Any subsequent premium payment or withdrawal that modifies the net account balance within each Sub-Account may also cause termination of the Automatic Rebalancing option. Any such termination will be confirmed to the Owner. The Owner may terminate the Automatic Rebalancing option or re-enroll at any time by calling or writing the Annuity & Variable Life Services Center. There is no current charge for Automatic Rebalancing but the Company reserves the right to charge for this program. 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. The 2.35% portion of this deduction for premium taxes may be higher or lower than the actual tax imposed by the applicable jurisdiction; it is in the mid-range of state premium taxes, 18 which range from 1.75% to 5.0%. The Company estimates 1.15% of each Premium Payment will be used to meet federal income tax liabilities attributable to the treatment of deferred acquisition costs. 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.
ATTAINED AGE MALE FEMALE UNISEX (NEAREST MONTHLY MONTHLY MONTHLY BIRTHDAY) RATE RATE RATE - ----------- --------- --------- --------- 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 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 ATTAINED AGE MALE FEMALE UNISEX (NEAREST MONTHLY MONTHLY MONTHLY BIRTHDAY) RATE RATE RATE - ----------- --------- --------- --------- 30 0.14419 0.11251 0.13752 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
19
ATTAINED AGE MALE FEMALE UNISEX (NEAREST MONTHLY MONTHLY MONTHLY BIRTHDAY) RATE RATE RATE - ----------- --------- --------- --------- 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 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 ATTAINED AGE MALE FEMALE UNISEX (NEAREST MONTHLY MONTHLY MONTHLY BIRTHDAY) RATE RATE RATE - ----------- --------- --------- --------- 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
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. 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. 20 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. 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"). 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. 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 21 be credited to the Policy as of the end of the Valuation Period in which it is received at the Annuity & Variable Life Services 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". 22 SURRENDERS PARTIAL SURRENDERS A partial surrender may be made at any time by written request to the Annuity & Variable Life Services 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 Annuity & Variable Life Services 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 AND TRANSFERS 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 or transfer 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 payment or transfer 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 23 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 Annuity & Variable Life Services 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 24 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 Annuity & Variable Life Services 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, within 10 days after the Company mails or personally delivers a Notice of Withdrawal Right to the Owner, 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 25 of 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 Annuity & Variable Life Services 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 Annuity & Variable Life Services 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 Annuity & Variable Life Services 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 26 Accumulation Value under the new Policy will be equal to the Accumulation Value under the old Policy on the date the exchange request is received. The 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. If the Accumulation Value is insufficient to support the Death Benefit, the Policy Owner will be required to make additional Premium Payments in order to effect the exchange. 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 27 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. 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. 28 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. 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 Mr. Jones, Mr. Alexander and Dr. Schaffer. Prior to February 1994, Mr. Jones was Executive Vice President, Chief Administrative Officer, Chief Operating Officer and Director, NAC Re Corporation and NAC Reinsurance Corporation (Chief Operating Officer of NAC Re Corporation beginning June 1993). Prior to December 1994, Mr. Alexander was Director, Human Development, E.I. Dupont De Nemours, Inc. Prior to May 1993, Dr. Schaffer was Vice President, Professional Affairs, Aetna Health Plans, Aetna Life & Casualty. 29
POSITIONS AND OFFICES NAME AND ADDRESS WITH THE COMPANY - ------------------------------ ----------------------------------- 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 Andrew G. Helming Secretary Stephen C. Stachelek Vice President and Treasurer Harold W. Albert Director S. Tyrone Alexander Director and Senior Vice President Martin A. Brennan Director and Senior Vice President Robert W. Burgess Director John G. Day Director and Chief Counsel Joseph M. Fitzgerald Director and Senior Vice President H. Edward Hanway Director and Chairman of the Board Arthur C. Reeds, III Director and Senior Vice President Patricia L. Rowland Director and Senior Vice President W. Allen Schaffer, M.D. Director and Senior Vice President John Wilkinson Director, Senior Vice President and Chief Financial Officer
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"), located at 900 Cottage Grove Road, Bloomfield, CT. 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. 30 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. 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 Connecticut Department of Insurance. 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 reports containing financial statements for the Variable Account and annual and semi-annual reports of the Funds 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. 31 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. 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, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 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. Price Waterhouse LLP's consent to this reference to the firm as an "expert" is filed as an exhibit to the registration statement of which this Prospectus is a part. 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. FINANCIAL STATEMENTS There follow consolidated balance sheets of the Company and its subsidiaries as of December 31, 1995 and 1994 and related consolidated statements of income and retained earnings and cash flows for the years ended December 31, 1995, 1994 and 1993. The most current financial statements of the Company are those as of the end of the most recent fiscal year. The Company represents that there have been no adverse changes in the financial condition or operations of the Company between the end of 1995 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. There also follow the financial statements of the Variable Account as of and for the periods (as defined in the financial statements) ended December 31, 1995. 32 NORTHEAST INSURANCE SERVICES Telephone 860 240 2000 One Financial Plaza Facsimile 860 240 2282 Hartford, CT 06103 PRICE WATERHOUSE LLP [LOGO] REPORT OF INDEPENDENT ACCOUNTANTS February 13, 1996 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. [SIG] 33 CONNECTICUT GENERAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
- ----------------------------------------------------------------------------------------------------- (IN MILLIONS) - ----------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- REVENUES Premiums and fees................................................... $ 4,998 $ 4,960 $ 4,704 Net investment income............................................... 3,138 2,805 2,742 Realized investment gains (losses).................................. (7) 27 (65) Other revenues...................................................... 9 8 15 --------- --------- --------- Total revenues.................................................. 8,138 7,800 7,396 --------- --------- --------- BENEFITS, LOSSES AND EXPENSES Benefits, losses and settlement expenses............................ 5,892 5,574 5,215 Policy acquisition expenses......................................... 127 89 84 Other operating expenses............................................ 1,358 1,363 1,351 --------- --------- --------- Total benefits, losses and expenses............................. 7,377 7,026 6,650 --------- --------- --------- INCOME BEFORE INCOME TAXES.......................................... 761 774 746 --------- --------- --------- Income taxes (benefits): Current........................................................... 301 220 433 Deferred.......................................................... (44) 45 (197) --------- --------- --------- Total taxes..................................................... 257 265 236 --------- --------- --------- NET INCOME.......................................................... 504 509 510 Dividends declared.................................................. (252) (300) (190) Retained earnings, beginning of year................................ 2,968 2,759 2,439 --------- --------- --------- RETAINED EARNINGS, END OF YEAR...................................... $ 3,220 $ 2,968 $ 2,759 - ----------------------------------------------------------------------------------------------------- -------------------------------
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 34 CONNECTICUT GENERAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------ (IN MILLIONS) - ------------------------------------------------------------------------------------------------ AS OF DECEMBER 31, 1994 1993 - ------------------------------------------------------------------------------------------------ ASSETS Investments: Fixed maturities: Available for sale, at fair value (amortized cost, $20,031; $8,571)... $ 22,046 $ 8,324 Held to maturity, at amortized cost (fair value, $10,075)............. -- 10,061 Mortgage loans.......................................................... 10,218 8,975 Equity securities, at fair value (cost, $54; $109)...................... 66 119 Policy loans............................................................ 6,925 5,237 Real estate............................................................. 1,158 1,442 Other long-term investments............................................. 193 128 Short-term investments.................................................. 254 143 --------- --------- Total investments................................................... 40,860 34,429 Cash and cash equivalents................................................. -- 80 Accrued investment income................................................. 626 578 Premiums and accounts receivable.......................................... 991 911 Reinsurance recoverables.................................................. 1,258 2,533 Deferred policy acquisition costs......................................... 689 700 Property and equipment, net............................................... 319 346 Current income taxes...................................................... 21 119 Deferred income taxes, net................................................ 403 661 Goodwill.................................................................. 503 518 Other assets.............................................................. 149 135 Separate account assets................................................... 18,177 14,498 - ------------------------------------------------------------------------------------------------ Total............................................................... $ 63,996 $ 55,508 - ------------------------------------------------------------------------------------------------ -------------------- LIABILITIES LIABILITIES Contractholder deposit funds.............................................. $ 29,762 $ 26,696 Future policy benefits.................................................... 8,547 7,875 Unpaid claims and claim expenses.......................................... 1,151 1,096 Unearned premiums......................................................... 95 84 --------- --------- Total insurance and contractholder liabilities...................... 39,555 35,751 Accounts payable, accrued expenses and other liabilities..................................................... 1,872 1,632 Separate account liabilities.............................................. 18,075 14,427 - ------------------------------------------------------------------------------------------------ Total liabilities................................................... 59,502 51,810 - ------------------------------------------------------------------------------------------------ -------------------- CONTINGENCIES -- NOTE 9 SHAREHOLDER'S EQUITY Common stock (6 shares outstanding)....................................... 30 30 Additional paid-in capital................................................ 766 764 Net unrealized appreciation (depreciation) on investments................. 476 (66) Net translation of foreign currencies..................................... 2 2 Retained earnings......................................................... 3,220 2,968 - ------------------------------------------------------------------------------------------------ Total shareholder's equity.......................................... 4,494 3,698 - ------------------------------------------------------------------------------------------------ Total............................................................... $ 63,996 $ 55,508 - ------------------------------------------------------------------------------------------------ --------------------
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 35 CONNECTICUT GENERAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------- (IN MILLIONS) - --------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................................ $ 504 $ 509 $ 510 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Insurance liabilities........................................... (90) (249) 251 Reinsurance recoverables........................................ 1,201 282 (392) Premiums and accounts receivable................................ 32 (188) 85 Deferred income taxes, net...................................... (44) 45 (197) Other assets.................................................... (14) 68 54 Accounts payable, accrued expenses, other liabilities and current income taxes........................................... 212 (192) 5 Other, net...................................................... 22 (24) (82) --------- --------- --------- Net cash provided by operating activities..................... 1,823 251 234 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from investments sold: Fixed maturities -- available for sale.......................... 1,070 1,389 -- Fixed maturities -- held to maturity............................ -- 12 599 Mortgage loans.................................................. 383 496 1,004 Equity securities............................................... 119 41 41 Real Estate..................................................... 299 242 78 Other (primarily short-term investments)........................ 2,268 1,005 3,762 Investment maturities and repayments: Fixed maturities--available for sale............................ 478 686 -- Fixed maturities--held to maturity.............................. 1,756 1,764 3,167 Mortgage loans.................................................. 420 194 202 Investments purchased: Fixed maturities--available for sale............................ (3,054) (2,390) -- Fixed maturities--held to maturity.............................. (1,385) (1,788) (5,128) Mortgage loans.................................................. (1,908) (882) (823) Equity securities............................................... (20) (12) (112) Policy loans.................................................... (2,129) (1,614) (1,561) Other (primarily short-term investments)........................ (2,334) (1,093) (3,587) Other, net........................................................ (119) (129) (48) --------- --------- --------- Net cash used in investing activities......................... (4,156) (2,079) (2,406) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits and interest credited to contractholder deposit funds.... 7,489 6,388 7,537 Withdrawals and benefit payments from contractholder deposit funds........................................................... (4,985) (4,216) (5,166) Dividends paid to Parent.......................................... (252) (300) (190) Other, net........................................................ 1 36 (30) --------- --------- --------- Net cash provided by financing activities................... 2,253 1,908 2,151 - --------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents.............. (80) 80 (21) Cash and cash equivalents, beginning of year...................... 80 -- 21 - --------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year............................ $ -- $ 80 $ -- - --------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Information: Income taxes paid, net of refunds............................... $ 211 $ 411 $ 352 Interest paid................................................... $ 7 $ 5 $ 5 - ---------------------------------------------------------------------------------------------------
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 36 CONNECTICUT GENERAL LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS NOTE 1 -- DESCRIPTION OF BUSINESS Connecticut General Life Insurance Company and its subsidiaries (the Company) provide insurance and related financial services throughout the United States and in many locations worldwide. Principal products and services include group life and health insurance, individual life insurance and annuity products, and retirement and investment products and services. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and all significant subsidiaries. The Company is a wholly-owned subsidiary of Connecticut General Corporation, 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, and reflect management's estimates and assumptions, such as those regarding medical costs and interest rates, that affect the recorded amounts. Significant estimates used in determining insurance and contractholder liabilities, related reinsurance recoverables, and valuation allowances for investment assets are discussed throughout the Notes to the Financial Statements. Certain reclassifications have been made to prior years' amounts to conform with the 1995 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. During the fourth quarter of 1995, the Financial Accounting Standards Board (FASB) issued a guide to implementation of SFAS No. 115, which permits a one-time opportunity to reclassify securities subject to SFAS No. 115. Consequently, the Company reclassified all held-to-maturity securities to available-for-sale as of December 31, 1995. The non-cash reclassification of these securities, which had an aggregate amortized cost of $9.2 billion and fair value of $10.1 billion, resulted in an increase of approximately $396 million, net of policyholder-related amounts and deferred income taxes, in net unrealized appreciation included in Shareholders' Equity as of December 31, 1995. 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. In 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 adopted SFAS Nos. 114 and 118 in the first quarter of 1995, which resulted in a $6 million increase in net income. In 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires write-down to fair value when long-lived assets to be held and used are impaired. Long-lived assets to be disposed of, including real estate held for sale, must be carried at the lower of cost or fair value less costs to sell. Depreciation of assets to be disposed of is prohibited. The Company will adopt this standard in the first quarter of 1996. The effect on the Company's results of operations, liquidity and financial condition is not expected to be material. C) FINANCIAL INSTRUMENTS: In the normal course of business, the Company enters into transactions involving various types of financial instruments, including investments such as fixed maturities and equity securities and off- balance-sheet financial instruments such as investment and loan commitments and financial guarantees. These instruments have credit risk and also may be subject to risk of loss due to interest rate and market fluctuations. The Company evaluates and monitors each financial instrument individually and, where appropriate, uses certain derivative instruments or obtains collateral or other forms of security to minimize risk of loss. See Note 12 for additional information on the fair value of financial instruments. 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 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. Mortgage loans are considered impaired when it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement. If impaired, a valuation reserve is utilized when a decline in the fair value of the underlying collateral is below the carrying value. 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 generally 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-related amounts and net of deferred income taxes, if applicable, for investments carried at fair value are included in Shareholder's Equity. See Note 3(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 estimated to be unrecoverable, they are expensed. If such costs are estimated 38 to be unrecoverable or are accelerated as a result of treating unrealized investment gains and losses as though they had been realized, a deferred acquisition cost valuation allowance may be established or adjusted, with a comparable offset in net unrealized appreciation (depreciation). H) PROPERTY AND EQUIPMENT: Property and equipment are carried at cost less accumulated depreciation. When applicable, cost includes interest and real estate taxes incurred during construction and other construction-related costs. Depreciation is calculated principally on the straight-line method based on the estimated useful lives of the assets. Accumulated depreciation was $387 million and $333 million at December 31, 1995 and 1994, 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 estimated to be derived from the acquisitions. The Company evaluates the carrying amount of goodwill by analyzing historical and estimated future income and undiscounted estimated cash flows of the related businesses. Goodwill is written down when impaired. Amortization periods are revised if it is estimated that the remaining period of benefit of the goodwill has changed. Accumulated amortization was $84 million and $70 million at December 31, 1995 and 1994, respectively. K) SEPARATE ACCOUNTS: Separate account assets and liabilities are principally carried at market value, with less than 5% 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 $19.8 billion and $10.0 billion, respectively, as of December 31, 1995, compared with $18.6 billion and $8.1 billion, respectively, as of December 31, 1994. 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 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 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. 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. The translation gain or loss on such functional currencies, net of applicable taxes, is generally reflected in Shareholder's Equity. Revenues and expenses are translated at the average rates of exchange prevailing during the year. 39 R) PREMIUM AND FEES, REVENUES AND RELATED EXPENSES: Premiums for group life and accident and health insurance are recognized as revenue on a pro rata basis over their contract periods. Premiums for individual life and health insurance as well as individual and group annuity products, excluding universal life and investment-related products, are recognized as revenue when due. Benefits, losses and expenses are matched with premiums. Revenues for universal life products consist of net investment income and mortality, administration and surrender fees assessed against the fund values during the period. Benefit expenses for universal life products consist of benefit claims in excess of fund values and interest 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 interest 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 7.0% of total insurance in force at December 31, 1995, compared with 5.2% at December 31, 1994 and 3.6% at December 31, 1993. T) INCOME TAXES: The Company and its domestic subsidiaries are included in the consolidated United States federal income tax return filed by CIGNA. In accordance with a tax sharing agreement with CIGNA, the provision for federal income tax is computed as if the Company were filing a separate federal income tax return, except that benefits arising from tax credits and net operating and capital losses are allocated to those subsidiaries producing such attributes to the extent they are utilized in CIGNA's consolidated federal income tax provision. Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes. See Note 6 for additional information. NOTE 3 -- INVESTMENTS A) FIXED MATURITIES: Fixed maturities are net of cumulative write-downs of $103 million and $78 million, including policyholder share, as of December 31, 1995 and 1994, respectively. As of December 31, 1995, all fixed maturities are classified as available for sale and are carried at fair value. See Note 2(B) for additional information. The amortized cost and fair value by contractual maturity periods for available-for-sale fixed maturities (carried at fair value), including policyholder share, as of December 31, 1995 were as follows:
- ------------------------------------------------------------------------------------------------ Amortized Fair (IN MILLIONS) Cost Value - ------------------------------------------------------------------------------------------------ Due in one year or less.................................................. $ 944 $ 980 Due after one year through five years.................................... 5,260 5,566 Due after five years through ten years................................... 4,936 5,404 Due after ten years...................................................... 3,401 4,276 Asset-backed securities.................................................. 5,490 5,820 - ------------------------------------------------------------------------------------------------ Total.................................................................... $ 20,031 $ 22,046 - ------------------------------------------------------------------------------------------------ ---------------------
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 Gross unrealized appreciation (depreciation) for fixed maturities, including policyholder share, by type of issuer was as follows: - ----------------------------------------------------------------------------------------------------- December 31, 1995 - ----------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------
Amortized Fair (IN MILLIONS) Cost Appreciation Depreciation Value - ----------------------------------------------------------------------------------------------------- Available for Sale (Carried at Fair Value) Federal government bonds......................... $ 497 $ 300 $ -- $ 797 State and local government bonds................. 161 24 (1) 184 Foreign government bonds......................... 131 9 (1) 139 Corporate securities............................. 13,752 1,427 (73) 15,106 Asset-backed securities.......................... 5,490 371 (41) 5,820 - ----------------------------------------------------------------------------------------------------- Total............................................ $ 20,031 $ 2,131 $ (116) $ 22,046 - ----------------------------------------------------------------------------------------------------- --------------------------------------------------
- ----------------------------------------------------------------------------------------------------- December 31, 1995 - ----------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------
Amortized Fair (IN MILLIONS) Cost Appreciation Depreciation Value - ----------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------- -------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------- --------------------------------------------------
Asset-backed securities include investments in CMOs as of December 31, 1995 of $2.1 billion carried at fair value (amortized cost, $2.0 billion). As of December 31, 1994, investments in CMOs consisted of $1.5 billion carried at fair value (amortized cost, $1.6 billion), and $150 million carried at amortized cost (fair value, $160 million). Certain of these securities are backed by Aaa/AAA-rated government agencies. All other CMO securities have high quality standards through use of credit enhancement provided by subordinated securities or mortgage insurance from an Aaa/AAA-rated insurance company. CMO holdings are concentrated in securities with limited prepayment, extension and default risk, such as planned amortization class bonds. The Company's investments in interest-only and principal-only CMOs, which are also subject to interest rate risk resulting from accelerated prepayments, represented approximately 2% and 6% of total CMO investments at December 31, 1995 and 1994, respectively. 41 At December 31, 1995, contractual fixed maturity investment commitments approximated $229 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 1996, with the majority occurring within the first three months. B) SHORT-TERM INVESTMENTS AND CASH EQUIVALENTS: Short-term investments and cash equivalents, in the aggregate, included debt securities, principally corporate securities of $259 million and $323 million and federal government securities of $70 million and $7 million at December 31, 1995 and 1994, respectively, and foreign government securities of $1 million at December 31, 1994. C) MORTGAGE LOANS AND REAL ESTATE: The Company's mortgage loans and real estate investments are diversified by property type and location and, for mortgage loans, by borrower. Mortgage loans are collateralized by the related properties and generally approximate 80% of the property's value at the time the original loan is made. At December 31, the carrying values of mortgage loans and real estate investments, including policyholder share, were as follows:
- ------------------------------------------------------------------------------------------------ (IN MILLIONS) 1995 1994 - ------------------------------------------------------------------------------------------------ Mortgage Loans............................................................ $ 10,218 $ 8,975 --------- --------- Real estate: Held for sale............................................................. 671 760 Held for production of income............................................. 487 682 --------- --------- Total real estate......................................................... 1,158 1,442 - ------------------------------------------------------------------------------------------------ Total..................................................................... $ 11,376 $ 10,417 - ------------------------------------------------------------------------------------------------ --------------------
Valuation reserves for mortgage loans, including policyholder share, were $82 million and $115 million as of December 31, 1995 and 1994, respectively. Valuation reserves and cumulative write-downs related to real estate, including policyholder share, were $310 million and $309 million as of December 31, 1995 and 1994, respectively. During 1995, 1994 and 1993, non-cash investing activities included real estate acquired through foreclosure of mortgage loans, which totaled $144 million, $127 million and $458 million, respectively. At December 31, mortgage loans and real estate investments comprised the following property types and geographic regions:
- ------------------------------------------------------------------------------------------------ (IN MILLIONS) 1995 1994 - ------------------------------------------------------------------------------------------------ Property type: Office buildings........................................................ $ 4,493 $ 4,092 Retail facilities....................................................... 4,327 3,867 Hotels.................................................................. 711 819 Apartment buildings..................................................... 1,246 997 Other................................................................... 599 642 - ------------------------------------------------------------------------------------------------ Total..................................................................... $ 11,376 $ 10,417 - ------------------------------------------------------------------------------------------------ -------------------- Geographic region: Central................................................................. $ 4,032 $ 3,664 Pacific................................................................. 2,580 2,558 Middle Atlantic......................................................... 1,951 1,652 South Atlantic.......................................................... 1,647 1,585 New England............................................................. 1,166 958 - ------------------------------------------------------------------------------------------------ Total..................................................................... $ 11,376 $ 10,417 - ------------------------------------------------------------------------------------------------ --------------------
At December 31, 1995, scheduled mortgage loan maturities were as follows: 1996 - -- $1.1 billion; 1997 -- $1 billion; 1998 -- $750 million; 1999 -- $1.3 billion; 2000 -- $1.6 billion; and $4.5 billion thereafter. Actual 42 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 1995 and 1994, the Company refinanced approximately $379 million and $600 million, respectively, of its mortgage loans relating to borrowers that were unable to obtain alternative financing. At December 31, 1995, the Company's total investment in impaired mortgage loans was $838 million, including $447 million, before valuation reserves totaling $82 million, and $391 million, which had no valuation reserves. During 1995, valuation reserves for mortgage loans, including policyholder share, decreased from $127 million as of December 31, 1994 to $82 million as of December 31, 1995. The net decrease for the year reflects: (1) $27 million of mortgage loan reserves transferred to foreclosed real estate, (2) $33 million of charge-offs, and (3) a $15 million net increase in valuation reserves. During 1995, the average total investment in impaired mortgage loans, before valuation reserves, was approximately $935 million, and interest income recorded and cash received on these loans was approximately $71 million. At December 31, 1995, contractual commitments to extend credit under commercial mortgage loan agreements amounted to approximately $580 million, all of which were at a fixed market rate of interest. These commitments expire within three months, and are diversified by property type and geographic region. D) NET UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS: Unrealized appreciation (depreciation) for investments carried at fair value as of December 31 were as follows:
- --------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 - --------------------------------------------------------------------------------------------------- Unrealized appreciation: Fixed maturities........................................................... $ 2,131 $ 218 Equity securities.......................................................... 23 22 --------- --------- 2,154 240 --------- --------- Unrealized depreciation: Fixed maturities........................................................... (116) (465) Equity securities.......................................................... (11) (12) --------- --------- (127) (477) --------- --------- Less policyholder-related amounts............................................ 1,279 (141) --------- --------- Shareholder net unrealized appreciation (depreciation)....................... 748 (96) Less deferred income taxes (benefits)........................................ 272 (30) - --------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation)................................... $ 476 $ (66) - --------------------------------------------------------------------------------------------------- --------------------
Net unrealized appreciation (depreciation) for investments carried at fair value is included as a separate component of Shareholders' Equity, net of policyholder-related amounts and deferred income taxes. The net unrealized appreciation (depreciation) for these investments, primarily fixed maturities, during 1995, 1994 and 1993 was $542 million, ($494) million and $423 million, respectively. During 1995, 1994 and 1993, the net unrealized appreciation (depreciation) for fixed maturities that were carried at amortized cost in the financial statements was ($14) million, ($1.2) billion and $129 million, 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:
- ----------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 - ----------------------------------------------------------------------------------------------------- Fixed maturities............................................................... $ 75 $ 71 Mortgage loans................................................................. 17 81 Real estate.................................................................... 234 280 - ----------------------------------------------------------------------------------------------------- Total.......................................................................... $ 326 $ 432 - ----------------------------------------------------------------------------------------------------- --------------------
43 F) DERIVATIVE FINANCIAL INSTRUMENTS: The Company's investment strategy is to manage the characteristics of investment assets, such as liquidity, currency, yield and duration, to reflect the underlying characteristics of the related insurance and contractholder liabilities, which vary among the Company's principal product lines. In connection with this investment strategy, the Company uses derivative instruments through hedging applications to manage market risk. Generally, the Company uses interest rate swap contracts to create, when combined with cash flows from variable rate bonds, fixed rate cash flows that meet its portfolio investment strategy. Currency swaps are used to match the currency of individual investments to that of the associated liabilities. Interest rate futures are used to temporarily hedge against changes in market values of bonds and mortgage loans to be purchased or sold, and stock index futures may be used to hedge the temporary cash position of equity accounts. Interest rate futures also are used to hedge interest rate risk associated with withdrawals by contractholders over a scheduled time period. Cash requirements arise as a result of the Company's derivative activities. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. Under futures contracts, initial margin requirements are settled with cash or other instruments and changes in the contract values are settled in cash daily with the exchange on which the instrument is traded. Under currency swaps, the parties generally exchange a principal amount in the two relevant currencies, agreeing to re-exchange principal amounts at a specified future date using an agreed-upon exchange rate, and agreeing to periodically exchange amounts equal to interest payments using the agreed-upon exchange rate. Because the Company's use of derivatives is limited to hedging applications, changes in the market value of the derivatives are substantially offset by changes in the market value of the hedged assets or underlying liabilities, minimizing market risk. The Company routinely monitors, by individual counterparty, exposure to credit risk associated with swap contracts. Futures contracts are exchange-traded and, therefore, credit risk is limited since the exchange assumes the obligations. The Company manages legal risks by following industry standardized documentation procedures, by monitoring legal developments and, consistent with its credit exposure policies, by limiting risks associated with counterparty failure by diversifying the swaps portfolio among approved dealers of high credit quality. Changes in the market value of futures contracts that qualify for hedge accounting 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 $22 million and $142 million as of December 31, 1995 and 1994, respectively, and were accounted for as hedges. At December 31, 1995, gains and losses on futures contracts deferred in anticipation of investment purchases were $4 million and $1 million, respectively. 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. The fair value of interest rate swap contracts is reported as an adjustment to the fair value of the related investment. Underlying notional principal amounts associated with interest rate swap contracts outstanding were $508 million and $596 million at December 31, 1995 and 1994, 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 and Japanese yen) are recognized as net investment income when received. The fair value of currency swaps is reported as an adjustment to the fair value of the related investment. Underlying principal amounts associated with currency swap contracts outstanding were $335 million and $325 million at December 31, 1995 and 1994, respectively. As of December 31, 1995 and 1994, respectively, the Company's variable rate investments consisted of approximately $1.4 billion and $810 million of fixed maturities, respectively. As of December 31, 1995 and 1994, the Company's fixed rate investments consisted of $20.6 billion and $17.6 billion, respectively, of fixed maturities and $10 billion and $9 billion, respectively, of mortgage loans. As a result of recognizing amortization of deferred market value changes in futures contracts, net investment income on bonds and mortgage loans was increased by $10 million and $1 million, respectively, for the year ended December 31, 1995 and by $7 million and $1 million, 44 respectively, for the year ended December 31, 1994. In addition, the increase in net investment income for bonds resulting from interest rate swap contracts was $3 million, $12 million and $19 million for 1995, 1994 and 1993, respectively. G) OTHER: As of December 31, 1995 and 1994, the Company had no concentration of investments in a single investee exceeding 10% of Shareholder's Equity. NOTE 4 -- 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:
- ----------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- Fixed maturities.................................................... $ 1,669 $ 1,596 $ 1,547 Mortgage loans...................................................... 866 776 892 Equity securities................................................... 15 20 16 Policy loans........................................................ 499 365 253 Real estate......................................................... 301 291 238 Other long-term investments......................................... 33 23 20 Short-term investments.............................................. 40 8 18 --------- --------- --------- 3,423 3,079 2,984 Less investment expenses............................................ 285 274 242 - ----------------------------------------------------------------------------------------------------- Net investment income............................................... $ 3,138 $ 2,805 $ 2,742 - ----------------------------------------------------------------------------------------------------- -------------------------------
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 $1.8 billion, $1.5 billion and $1.6 billion for 1995, 1994 and 1993, respectively. Net investment income for separate accounts, which is not reflected in the Company's revenues, was $885 million, $693 million and $604 million for December 31, 1995, 1994 and 1993, respectively. As of December 31, 1995, fixed maturities and mortgage loans on non-accrual status, including policyholder share, were $149 million and $523 million, including restructured investments of $105 million and $447 million, respectively. Amounts on non-accrual status as of December 31, 1994 were $272 million of fixed maturities and $743 million of mortgage loans, including restructurings of $148 million and $543 million, respectively. If interest on these investments had been recognized in accordance with their original terms, net income would have been increased by $12 million, $14 million and $17 million in 1995, 1994 and 1993, 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:
- ---------------------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- Realized investment gains (losses): Fixed maturities....................................................... $ (10) $ 4 $ 28 Mortgage loans......................................................... (5) -- (5) Equity securities...................................................... 5 2 (5) Real estate............................................................ 4 15 (66) Other.................................................................. (1) 6 (17) --- --- --- (7) 27 (65) Income tax (benefits) expenses........................................... (2) 12 (16) - ---------------------------------------------------------------------------------------------------------------- Net realized investment gains (losses)................................... $ (5) $ 15 $ (49) - ---------------------------------------------------------------------------------------------------------------- --------------------
Impairments in the value of investments, net of recoveries, that are included in realized investment gains and losses were $27 million, $33 million and $55 million in 1995, 1994 and 1993, respectively. 45 Realized investment gains (losses) for separate accounts, which are not reflected in the Company's revenues, were $412 million, ($51) million and $612 million for the years ended December 31, 1995, 1994 and 1993, respectively. Realized investment (losses) attributable to policyholder contracts, which also are not reflected in the Company's revenues, were ($6) million and ($5) million for the years ended December 31, 1995 and 1993, respectively. Realized investment gains (losses) attributable to policyholder contracts were zero for the year ended December 31, 1994. Sale of available-for-sale fixed maturities and equity securities, including policyholder share, for the year ended December 31 were as follows:
- ------------------------------------------------------------------------------------------------ (IN MILLIONS) 1995 1994 - ------------------------------------------------------------------------------------------------ Proceeds from sales....................................................... $ 1,667 $ 2,116 Gross gains on sales...................................................... $ 78 $ 73 Gross losses on sales..................................................... $ (53) $ (70) - ------------------------------------------------------------------------------------------------ --------------------
Prior to the SFAS No. 115 reclassification described in Note 2(B), $171 million of fixed maturities classified as held-to-maturity, including policyholder share, were transferred to the available-for-sale category in 1995 resulting in the recognition in Shareholder's Equity of unrealized depreciation of $15 million, net of policyholder-related amounts and deferred income taxes. During 1994, the Company 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, in 1994 $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 in 1993. Such sales resulted in gross realized gains and gross realized (losses), including policyholder share, of $36 million and ($3) million, respectively. 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 5 -- 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 permitted accounting practices utilized by the Company that were materially different from those prescribed by the Department. Capital stock of the Company at December 31, 1995 and 1994 consisted of 5,978,322 shares of common stock authorized, issued and outstanding (par value $5.00). The Company's statutory net income was $390 million, $428 million and $397 million for 1995, 1994 and 1993, respectively. Statutory surplus was $2.1 billion and $2.0 billion at December 31, 1995 and 1994, respectively. The Connecticut Insurance Holding Company Act limits the 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 that may be made by the Company during 1996 without prior approval is $432 million. The amount of restricted net assets as of December 31, 1995 was approximately $4.1 billion. 46 NOTE 6 -- INCOME TAXES The Company's net deferred tax asset of $403 million and $661 million as of December 31, 1995 and 1994, respectively, reflects management's belief that the Company's taxable income in future years will be sufficient to realize the net deferred tax asset based on the Company's earnings history and its future expectations. In determining the adequacy of future taxable income, management considered the future reversal of its existing taxable temporary differences and available tax planning strategies that could be implemented, if necessary. In accordance with the Life Insurance Company Income Tax Act of 1959, a portion of the Company's statutory income was not subject to current income taxation but was accumulated in an account designated Policyholders' Surplus Account. Under the Tax Reform Act of 1984, no further additions may be made to the Policyholders' Surplus Account for tax years ending after December 31, 1983. The balance in the account of approximately $450 million at December 31, 1995 would result in a tax liability of $158 million, 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 CIGNA's financial statements in anticipation of the results of these audits. In management's opinion, adequate tax liabilities have been established for all years. The tax effect of temporary differences which give rise to deferred income tax assets and liabilities as of December 31 were as follows:
- -------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 - -------------------------------------------------------------------------------------------------- Deferred tax assets: Insurance and contractholder liabilities.................................. $ 324 $ 337 Employee and retiree benefit plans........................................ 176 175 Investments, net.......................................................... 225 220 Unrealized depreciation on investments.................................... -- 30 Other..................................................................... 72 71 --------- --------- Total deferred tax assets................................................. 797 833 --------- --------- Deferred tax liabilities: Policy acquisition expenses............................................... 25 60 Depreciation.............................................................. 97 102 Unrealized appreciation on investments.................................... 272 -- Other..................................................................... -- 10 --------- --------- Total deferred tax liabilities............................................ 394 172 - -------------------------------------------------------------------------------------------------- Deferred income taxes, net................................................ $ 403 $ 661 - -------------------------------------------------------------------------------------------------- --------------------
Total income tax expense was less than the amount computed using the nominal federal income tax rate of 35% for the following reasons:
- ---------------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- Tax expense at nominal rate.............................................. $ 266 $ 271 $ 261 Tax-exempt interest income............................................... (6) (7) (6) Dividends received deduction............................................. (7) (3) (4) Amortization of goodwill................................................. 4 4 5 Resolved federal tax audit issues........................................ -- (2) (3) Increase in deferred tax asset for tax rate change....................... -- -- (13) Other, net............................................................... -- 2 (4) - ---------------------------------------------------------------------------------------------------------- Total income tax expense................................................. $ 257 $ 265 $ 236 - ---------------------------------------------------------------------------------------------------------- -------------------------------
47 Temporary and other differences which resulted in the deferred tax expense (benefit) for the year ended December 31 were as follows:
- -------------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------- Insurance and contractholder liabilities............................... $ 13 $ 93 $ (80) Policy acquisition expenses............................................ (35) (8) (39) Investments, net....................................................... (21) (19) (36) Employee and retiree benefit plans..................................... (1) (9) (16) Realized investment (gains) losses..................................... 16 (20) (24) Other.................................................................. (16) 8 (2) - -------------------------------------------------------------------------------------------------------- Deferred taxes (benefits).............................................. $ (44) $ 45 $ (197) - -------------------------------------------------------------------------------------------------------- -------------------------------
NOTE 7 -- PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PLANS A) PENSION PLANS: The Company provides retirement benefits to eligible employees and agents. These benefits are provided through a plan sponsored by CIGNA covering most domestic employees (the Plan) and by several separate pension plans for various subsidiaries, agents and foreign employees. The Plan is a non-contributory, defined benefit, trusteed plan available to eligible domestic employees. 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 $23 million, $31 million and $27 million in 1995, 1994 and 1993, respectively. The Plan, and several separate pension plans for various subsidiaries and agents, had deposits with the Company totalling approximately $2.0 billion and $1.7 billion at December 31, 1995 and 1994, respectively. B) OTHER POSTRETIREMENT BENEFITS PLANS: In addition to providing pension benefits, the Company provides certain health care and life insurance benefits to retired employees, spouses and other eligible dependents through various plans sponsored by CIGNA. A substantial portion of the Company's employees may become eligible for these benefits upon retirement. CIGNA's contributions for health care benefits depend upon a retiree's date of retirement, age, years of service and other cost-sharing features, such as deductibles and coinsurance. Under the terms of the benefit plans, benefit provisions and cost-sharing features can be adjusted. In general, retiree health care benefits are not funded by CIGNA, but are paid as covered expenses are incurred. Retiree life insurance benefits are paid from plan assets or as covered expenses are incurred. 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 $20 million for 1995, $28 million for 1994 and $15 million for 1993. The other postretirement benefit liability included in Accounts Payable, Accrued Expenses and Other Liabilities as of December 31, 1995 and 1994 was $427 million and $422 million, including net intercompany payables of $28 million and $29 million, respectively, for services provided by affiliates' employees. C) OTHER POSTEMPLOYMENT BENEFITS: The Company provides certain salary continuation (severance and disability), health care and life insurance benefits to inactive and former employees, spouses and other eligible dependents through various employee benefit plans sponsored by CIGNA. Although severance benefits accumulate with additional service, the Company recognizes severance expense when severance is probable and the costs can be reasonably estimated. Postemployment benefits other than severance generally do not vest or accumulate; therefore, the estimated cost of benefits is accrued when determined to be probable and estimable, generally upon disability or termination. See Note 8 for additional information regarding severance accrued as part of cost reduction initiatives. D) CAPITAL ACCUMULATION PLANS: CIGNA sponsors various capital accumulation plans in which employee contributions on a pre-tax basis (401(k)) are supplemented by CIGNA matching contributions. Contributions are 48 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 for 1995 and 1994 and $13 million for 1993. NOTE 8 -- SEGMENT INFORMATION The Company operates principally in three segments: Employee Life and Health Benefits, Employee Retirement and Savings Benefits, and Individual Financial Services. Other Operations consists principally of the results of the Company's settlement annuity business. Summarized financial information with respect to the business segments for the year ended and as of December 31 was as follows:
- -------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- REVENUES Employee Life and Health Benefits................................ $ 4,243 $ 4,194 $ 3,811 Employee Retirement and Savings Benefits......................... 1,914 1,887 2,044 Individual Financial Services.................................... 1,800 1,546 1,351 Other Operations................................................. 181 173 190 - -------------------------------------------------------------------------------------------------- Total............................................................ $ 8,138 $ 7,800 $ 7,396 - -------------------------------------------------------------------------------------------------- ------------------------------- - -------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES Employee Life and Health Benefits................................ $ 294 $ 323 $ 378 Employee Retirement and Savings Benefits......................... 232 258 172 Individual Financial Services.................................... 252 237 198 Other Operations................................................. (17) (44) (2) - -------------------------------------------------------------------------------------------------- Total............................................................ $ 761 $ 774 $ 746 - -------------------------------------------------------------------------------------------------- ------------------------------- - -------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- IDENTIFIABLE ASSETS Employee Life and Health Benefits................................ $ 7,629 $ 7,197 $ 7,307 Employee Retirement and Savings Benefits......................... 37,609 33,588 34,068 Individual Financial Services.................................... 16,189 12,612 9,824 Other Operations................................................. 2,569 2,111 2,283 - -------------------------------------------------------------------------------------------------- Total............................................................ $ 63,996 $ 55,508 $ 53,482 - -------------------------------------------------------------------------------------------------- -------------------------------
During 1995, the Company recorded a $13 million pre-tax charge, included in Other Operating Expenses, for cost reduction initiatives in the Employee Life and Health Benefits segment. The charge consisted primarily of severance-related expenses representing costs associated with nonvoluntary employee terminations covering approximately 1,100 employees. The cash outlays associated with the restructuring initiatives began in the third quarter of 1995 and will continue through 1997, with most of the cash outlays expected to occur in 1996. During 1995, $3 million of severance was paid to 500 terminated employees. During 1993, the Company implemented cost reduction initiatives in the Employee Life and Health Benefits segment to reduce operating expenses. Results for 1993 reflected a pre-tax charge of $8 million for the estimated costs of these cost reduction actions. The Company has funded, and will continue to fund, these costs through liquid assets, and such funding will not have a material adverse effect on its liquidity. 49 NOTE 9 -- LEASES AND RENTALS Rental expenses for operating leases, principally with respect to buildings, amounted to $60 million, $62 million and $66 million in 1995, 1994 and 1993, respectively. As of December 31, 1995, future net minimum rental payments under non-cancelable operating leases were $92 million, payable as follows: 1996 - $37 million; 1997 - $24 million; 1998 - $13 million; 1999 - $9 million; 2000 - $4 million; and $5 million thereafter. NOTE 10 -- 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 characteristic of its reinsurers. Failure of reinsurers to indemnify the Company, as a result of reinsurer insolvencies and disputes, could result in losses. As of December 31, 1995 and 1994 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:
- ----------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- SHORT-DURATION CONTRACTS Premiums and Fees: Direct............................................................ $ 3,374 $ 3,419 $ 2,666 Assumed........................................................... 818 716 1,248 Ceded............................................................. (391) (291) (329) - ----------------------------------------------------------------------------------------------------- Net earned premiums and fees...................................... $ 3,801 $ 3,844 $ 3,585 - ----------------------------------------------------------------------------------------------------- ------------------------------- - ----------------------------------------------------------------------------------------------------- (IN MILLIONS) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- LONG-DURATION CONTRACTS Premiums and Fees: Direct............................................................ $ 1,189 $ 1,068 $ 1,023 Assumed........................................................... 127 126 166 Ceded............................................................. (119) (78) (70) - ----------------------------------------------------------------------------------------------------- Net earned premiums and fees...................................... $ 1,197 $ 1,116 $ 1,119 - ----------------------------------------------------------------------------------------------------- -------------------------------
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 1995, 1994 and 1993 were net of reinsurance recoveries of $574 million, $415 million and $603 million, respectively. NOTE 11 -- 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, to monitor this status on a periodic basis and to reduce risk through security arrangements. 50 The industrial revenue bonds guaranteed directly by the Company have remaining maturities of up to 20 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, 1995 and 1994 was $266 million and $296 million, respectively. Revenues in connection with industrial revenue bond guarantees are derived principally from equity participations in the related projects and are included in Net Investment Income as earned. Loss reserves for financial guarantees are established when a default has occurred or when the Company believes that a loss has been incurred. During 1994, losses for industrial revenue bonds were $1 million. There were no such losses in 1995 and 1993. 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, 1995 and 1994, the amount of minimum benefit guarantees for separate account contracts was $5.1 billion and $4.8 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, reserves of $6 million were recorded. No such reserves were required as of December 31, 1995. Guarantee fees are part of the overall management fee charged to separate accounts and are recognized in income as earned. Although the ultimate outcome of any loss contingencies arising from the Company's financial guarantees may adversely affect results of operations in future periods, they are not expected to have a material adverse effect on the Company's liquidity or financial condition. B) REGULATORY AND INDUSTRY DEVELOPMENTS: The Company's businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to: reform the federal tax system; restrict insurance pricing and the application of underwriting standards; reform health care; and expand regulation. Some of the more significant issues are discussed below. Legislation is expected to be considered by Congress that is likely to limit, and eventually substantially eliminate, the tax deductibility of policy loan interest for corporate-owned life insurance. The outcome of such legislation is uncertain and, although it could have a material adverse effect on results of operations for the Individual Financial Services segment, it is not expected to be material to the Company's consolidated results of operations, liquidity or financial condition. The Company expects proposals for federal and state legislation seeking some health care insurance reforms. 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. In recent years, the number of insurance companies that are impaired or insolvent has increased. 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. The Company recorded pre-tax charges of $17 million, $12 million and $10 million for 1995, 1994 and 1993, respectively, for guaranty fund assessments that can be reasonably estimated before giving effect to future premium tax recoveries. Although future assessments and payments may adversely affect results of operations in future periods, such amounts are not expected to have a material adverse effect on the Company's liquidity or financial condition. The eventual effect on the Company of the changing environment in which it operates remains uncertain. C) LITIGATION: The Company is routinely engaged in litigation incidental to its business, 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 12 -- 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 following table. The fair values used for financial instruments are estimates that in 51 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.
1995 1994 - ---------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (IN MILLIONS) Amount Value Amount Value - ---------------------------------------------------------------------------------------------------- Assets: Fixed maturities-held to maturity..................... $ -- $ -- $ 10,061 $ 10,075 Mortgage loans........................................ $ 10,218 $ 10,364 $ 8,975 $ 8,610 Liabilities: Contractholder deposit funds non-insurance products............................... $ 19,797 $ 19,890 $ 18,561 $ 18,381 - ----------------------------------------------------------------------------------------------------
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, 1995 and 1994 were not material. NOTE 13 -- 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 at December 31, 1994. During 1993, the Company earned experience-rated refunds from CIGNA P&C, net of premiums ceded, of $63 million. Effective January 1, 1995 the treaty was cancelled. Reserves of approximately $300 million, primarily related to long-term disability business, were recaptured in 1995, 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 $1.7 billion at December 31, 1995 and 1994. The Company cedes long-term disability business to LINA. Reinsurance recoverables from LINA at December 31, 1995 and 1994 were $996 million and $992 million, respectively. The Company had lines of credit available from affiliates totaling $600 million at both December 31, 1995 and 1994. 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 and $3 million for 1994 and 1993 respectively. As of December 31, 1995 and 1994, there were no borrowings outstanding under such lines. The Company extended lines of credit to affiliates totalling $600 million at December 31, 1995 and 1994. All loans are payable upon demand with interest rates equivalent to CIGNA's average monthly short-term borrowing rate. As of December 31, 1994, the Company had $1.5 million in outstanding loans to affiliates under such lines. There were no amounts outstanding as of December 31, 1995. The Company, together with other CIGNA subsidiaries, has entered into a pooling arrangement known as the CIGNA Corporate Liquidity Account (the Account) for the purpose of maximizing earnings on funds available for short-term investments. Withdrawals from the Account, up to the total amount of the participant's investment in the Account, are allowed on a demand basis. As of December 31, 1995 and 1994, the Company had a balance in the Account of $212 million and $259 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 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I ALGER AMERICAN GROWTH PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in Alger American Fund-Alger American Growth Portfolio at value............... $ 34,431 --------- Total assets.................... $ 34,431 --------- --------- Accumulation units outstanding.... 2,828 Net asset value per accumulation unit............................. $12.175146 STATEMENT OF OPERATIONS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ -- EXPENSES: Mortality and expense risk charges.......................... 23 --------- Net investment loss............. (23) --------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss................. (3) Net unrealized gain............... 424 --------- Net realized and unrealized gain on investments................. 421 --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 398 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment loss......................................... $ (23) Net realized loss........................................... (3) Net unrealized gain......................................... 424 ---------- Net increase from operations.............................. 398 ---------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits net of premium load**.................. 3,930 Participant transfers....................................... 30,447 Participant withdrawals..................................... (344) ---------- Net increase from participant transactions................ 34,033 ---------- Total increase in net assets............................ 34,431 ---------- NET ASSETS: Beginning of period......................................... -- ---------- End of period............................................... $ 34,431 ---------- ---------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant deposits........................................ 349 Participant transfers....................................... 2,508 Participant withdrawals..................................... (29) ---------- Net increase in units from participant transactions....... 2,828 ---------- ----------
* Date deposits first received. **Premium load reduced by $22 due to waiver of 1.15% of premium load from May 5, 1995 through August 1, 1995. The Notes to Financial Statements are an integral part of these statements 53 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investments in Alger American Fund-Alger American Leveraged AllCap Portfolio at value........ $ 5,670 Receivable from Connecticut General Life Insurance Company... 1,303 --------- Total assets.................... 6,973 --------- LIABILITIES: Payable for fund shares purchased........................ 1,303 --------- Net assets...................... $ 5,670 --------- --------- Accumulation units outstanding.... 384 Net asset value per accumulation unit............................. $14.765068 STATEMENT OF OPERATIONS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ -- EXPENSES: Mortality and expense risk charges.......................... 8 --------- Net investment loss............. (8) --------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain................. 12 Net unrealized gain............... 839 --------- Net realized and unrealized gain on investments................. 851 --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 843 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment loss............................................................. $ (8) Net realized gain............................................................... 12 Net unrealized gain............................................................. 839 --------- Net increase from operations.................................................. 843 --------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits net of premium load**...................................... 3,178 Participant transfers........................................................... 1,857 Participant withdrawals......................................................... (208) --------- Net increase from participant transactions.................................... 4,827 --------- Total increase in net assets................................................ 5,670 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 5,670 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant deposits............................................................ 268 Participant transfers........................................................... 131 Participant withdrawals......................................................... (15) --------- Net increase in units from participant transactions........................... 384 --------- ---------
* Date deposits first received. **Premium load reduced by $22 due to waiver of 1.15% of premium load from May 5, 1995 through August 1, 1995. The Notes to Financial Statements are an integral part of these statements 54 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I ALGER AMERICAN MIDCAP GROWTH PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in Alger American Fund-Alger American MidCap Growth Portfolio at value............... $ 12,863 --------- Total assets.................... $ 12,863 --------- --------- Accumulation units outstanding.... 992 Net asset value per accumulation unit............................. $12.966604 STATEMENT OF OPERATIONS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ -- EXPENSES: Mortality and expense risk charges.......................... 13 --------- Net investment loss............. (13) --------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain................. 1 Net unrealized gain............... 498 --------- Net realized and unrealized gain on investments................. 499 --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 486 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment loss............................................................. $ (13) Net realized gain............................................................... 1 Net unrealized gain............................................................. 498 --------- Net increase from operations.................................................. 486 --------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits net of premium load**...................................... 3,910 Participant transfers........................................................... 8,745 Participant withdrawals......................................................... (278) --------- Net increase from participant transactions.................................... 12,377 --------- Total increase in net assets................................................ 12,863 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 12,863 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant deposits............................................................ 336 Participant transfers........................................................... 678 Participant withdrawals......................................................... (22) --------- Net increase in units from participant transactions........................... 992 --------- ---------
* Date deposits first received. **Premium load reduced by $22 due to waiver of 1.15% of premium load from May 5, 1995 through August 1, 1995. The Notes to Financial Statements are an integral part of these statements 55 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in Alger American Fund-Alger American Small Capitalization Portfolio at value............................ $ 59,242 Receivable from Connecticut General Life Insurance Company... 1,084 --------- Total assets.................... 60,326 --------- LIABILITIES: Payable for fund shares purchased........................ 1,084 --------- Net assets...................... $ 59,242 --------- --------- Accumulation units outstanding.... 4,612 Net asset value per accumulation unit............................. $12.845183 STATEMENT OF OPERATIONS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ -- EXPENSES: Mortality and expense risk charges.......................... 52 --------- Net investment loss............. (52) --------- NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss................. (15) Net unrealized loss............... (4,213) --------- Net realized and unrealized loss on investments................. (4,228) --------- DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ (4,280) --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment loss............................................................. $ (52) Net realized loss............................................................... (15) Net unrealized loss............................................................. (4,213) --------- Net decrease from operations.................................................. (4,280) --------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits net of premium load**...................................... 2,938 Participant transfers........................................................... 61,383 Participant withdrawals......................................................... (799) --------- Net increase from participant transactions.................................... 63,522 --------- Total increase in net assets................................................ 59,242 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 59,242 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant deposits............................................................ 266 Participant transfers........................................................... 4,408 Participant withdrawals......................................................... (62) --------- Net increase in units from participant transactions........................... 4,612 --------- ---------
* Date deposits first received. **Premium load reduced by $22 due to waiver of 1.15% of premium load from May 5, 1995 through August 1, 1995. The Notes to Financial Statements are an integral part of these statements 56 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I FIDELITY EQUITY-INCOME PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in Variable Insurance Products Fund-Equity-Income Portfolio at value............... $ 56,056 Receivable from Connecticut General Life Insurance Company... 867 --------- Total assets.................... 56,923 --------- LIABILITIES: Payable for fund shares purchased........................ 867 --------- Net assets...................... $ 56,056 --------- --------- Accumulation units outstanding.... 4,683 Net asset value per accumulation unit............................. $11.970125 STATEMENT OF OPERATIONS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ 502 EXPENSES: Mortality and expense risk charges.......................... 63 --------- Net investment income........... 439 --------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss................. (2) Net unrealized gain............... 2,857 --------- Net realized and unrealized gain on investments................. 2,855 --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 3,294 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment income........................................................... $ 439 Net realized loss............................................................... (2) Net unrealized gain............................................................. 2,857 --------- Net increase from operations.................................................. 3,294 --------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits net of premium load**...................................... 2,731 Participant transfers........................................................... 50,773 Participant withdrawals......................................................... (742) --------- Net increase from participant transactions.................................... 52,762 --------- Total increase in net assets................................................ 56,056 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 56,056 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant deposits............................................................ 256 Participant transfers........................................................... 4,492 Participant withdrawals......................................................... (65) --------- Net increase in units from participant transactions........................... 4,683 --------- ---------
* Date deposits first received. **Premium load reduced by $22 due to waiver of 1.15% of premium load from May 5, 1995 through August 1, 1995. The Notes to Financial Statements are an integral part of these statements 57 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I FIDELITY ASSET MANAGER PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in Variable Insurance Products Fund II-Asset Manager Portfolio at value............... $ 24,659 --------- Total assets.................... $ 24,659 --------- --------- Accumulation units outstanding.... 2,350 Net asset value per accumulation unit............................. $10.493126 STATEMENT OF OPERATIONS PERIOD FROM NOVEMBER 16, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ -- EXPENSES: Mortality and expense risk charges.......................... 9 --------- Net investment loss............. (9) --------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain................. -- Net unrealized gain............... 794 --------- Net realized and unrealized gain on investments................. 794 --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 785 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM NOVEMBER 16, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment loss............................................................. $ (9) Net unrealized gain............................................................. 794 --------- Net increase from operations.................................................. 785 --------- ACCUMULATION UNIT TRANSACTIONS: Participant transfers........................................................... 23,939 Participant withdrawals......................................................... (65) --------- Net increase from participant transactions.................................... 23,874 --------- Total increase in net assets................................................ 24,659 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 24,659 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant transfers........................................................... 2,356 Participant withdrawals......................................................... (6) --------- Net increase in units from participant transactions........................... 2,350 --------- ---------
* Date deposits first received. The Notes to Financial Statements are an integral part of these statements 58 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I FIDELITY INVESTMENT GRADE BOND PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in Variable Insurance Products Fund II-Investment Grade Bond Portfolio at value.......... $ 37,461 --------- Total assets.................... $ 37,461 --------- --------- Accumulation units outstanding.... 3,667 Net asset value per accumulation unit............................. $10.215729 STATEMENT OF OPERATIONS PERIOD FROM NOVEMBER 16, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ -- EXPENSES: Mortality and expense risk charges.......................... 14 --------- Net investment loss............. (14) --------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain................. -- Net unrealized gain............... 606 --------- Net realized and unrealized gain on investments................. 606 --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 592 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM NOVEMBER 16, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment loss............................................................. $ (14) Net unrealized gain............................................................. 606 --------- Net increase from operations.................................................. 592 --------- ACCUMULATION UNIT TRANSACTIONS: Participant transfers........................................................... 36,925 Participant withdrawals......................................................... (56) --------- Net increase from participant transactions.................................... 36,869 --------- Total increase in net assets................................................ 37,461 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 37,461 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant transfers........................................................... 3,672 Participant withdrawals......................................................... (5) --------- Net increase in units from participant transactions........................... 3,667 --------- ---------
* Date deposits first received. The Notes to Financial Statements are an integral part of these statements 59 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I MFS TOTAL RETURN SERIES SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in MFS Variable Insurance Trust-MFS Total Return Series at value.................. $ 8,506 --------- Total assets.................... $ 8,506 --------- --------- Accumulation units outstanding.... 801 Net asset value per accumulation unit............................. $10.618988 STATEMENT OF OPERATIONS PERIOD FROM OCTOBER 10, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ 166 EXPENSES: Mortality and expense risk charges.......................... 7 --------- Net investment income........... 159 --------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Capital distribution from portfolio sponsor................ 156 Realized gain on share transactions..................... 1 --------- Net realized gain............... 157 Net unrealized gain............. 164 --------- Net realized and unrealized gain on investments.......... 321 --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 480 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM OCTOBER 10, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment income........................................................... $ 159 Net realized gain............................................................... 157 Net unrealized gain............................................................. 164 --------- Increase from operations...................................................... 480 --------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits net of premium load........................................ 2,123 Participant transfers........................................................... 5,933 Participant withdrawals......................................................... (30) --------- Net increase from participant transactions.................................... 8,026 --------- Total increase in net assets................................................ 8,506 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 8,506 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant deposits............................................................ 213 Participant transfers........................................................... 591 Participant withdrawals......................................................... (3) --------- Net increase in units from participant transactions........................... 801 --------- ---------
* Date deposits first received. The Notes to Financial Statements are an integral part of these statements 60 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I MFS UTILITIES SERIES SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in MFS Variable Insurance Trust-MFS Utilities Series at value.................. $ 1,400 --------- Total assets.................... $ 1,400 --------- --------- Accumulation units outstanding.... 139 Net asset value per accumulation unit............................. $10.070410 STATEMENT OF OPERATIONS PERIOD FROM DECEMBER 26, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ 25 EXPENSES: Mortality and expense risk charges.......................... -- --------- Net investment income........... 25 --------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Capital distribution from portfolio sponsor................ 61 Realized gain on share transactions..................... -- --------- Net realized gain............... 61 Net unrealized loss............. (76) --------- Net realized and unrealized loss on investments.......... (15) --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 10 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM DECEMBER 26, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment income........................................................... $ 25 Net realized gain............................................................... 61 Net unrealized loss............................................................. (76) --------- Net increase from operations.................................................. 10 --------- ACCUMULATION UNIT TRANSACTIONS: Participant transfers........................................................... 1,390 --------- Total increase in net assets................................................ 1,400 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 1,400 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant transfers........................................................... 139 --------- ---------
* Date deposits first received. The Notes to Financial Statements are an integral part of these statements 61 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I MFS WORLD GOVERNMENTS SERIES SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in MFS Variable Insurance Trust-MFS World Governments Series at value...... $ 20,460 --------- Total assets.................... $ 20,460 --------- --------- Accumulation units outstanding.... 1,964 Net asset value per accumulation unit............................. $10.417540 STATEMENT OF OPERATIONS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ 1,931 EXPENSES: Mortality and expense risk charges.......................... 12 --------- Net investment income........... 1,919 --------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain................. -- Net unrealized loss............... (1,668) --------- Net realized and unrealized loss on investments................. (1,668) --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 251 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment income........................................................... $ 1,919 Net unrealized loss............................................................. (1,668) --------- Net increase from operations.................................................. 251 --------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits net of premium load**...................................... 1,861 Participant transfers........................................................... 18,466 Participant withdrawals......................................................... (118) --------- Net increase from participant transactions.................................... 20,209 --------- Total increase in net assets................................................ 20,460 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 20,460 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant deposits............................................................ 185 Participant transfers........................................................... 1,791 Participant withdrawals......................................................... (12) --------- Net increase in units from participant transactions........................... 1,964 --------- ---------
* Date deposits first received. **Premium load reduced by $22 due to waiver of 1.15% of premium load from May 5, 1995 through August 1, 1995. The Notes to Financial Statements are an integral part of these statements 62 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I AMT BALANCED PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in Neuberger & Berman Advisers Management Trust-Balanced Portfolio at value............................ $ 48,410 --------- Total assets.................... $ 48,410 --------- --------- Accumulation units outstanding.... 4,936 Net asset value per accumulation unit............................. $9.807578 STATEMENT OF OPERATIONS PERIOD FROM SEPTEMBER 12, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ -- EXPENSES: Mortality and expense risk charges.......................... 55 --------- Net investment loss............. (55) --------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain................. -- Net unrealized loss............... (621) --------- Net realized and unrealized loss on investments................. (621) --------- DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (676) --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM SEPTEMBER 12, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment loss............................................................. $ (55) Net unrealized loss............................................................. (621) --------- Decrease from operations...................................................... (676) --------- ACCUMULATION UNIT TRANSACTIONS: Participant transfers........................................................... 49,657 Participant withdrawals......................................................... (571) --------- Net increase from participant transactions.................................... 49,086 --------- Total increase in net assets................................................ 48,410 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 48,410 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant transfers........................................................... 4,994 Participant withdrawals......................................................... (58) --------- Net increase in units from participant transactions........................... 4,936 --------- ---------
* Date deposits first received. The Notes to Financial Statements are an integral part of these statements 63 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I AMT PARTNERS PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in Neuberger & Berman Advisers Management Trust-Partners Portfolio at value............................ $ 23,241 Receivable from Connecticut General Life Insurance Company... 1,085 --------- Total assets.................... 24,326 --------- LIABILITIES: Payable for fund shares purchased........................ 1,085 --------- Net assets...................... $ 23,241 --------- --------- Accumulation units outstanding.... 1,924 Net asset value per accumulation unit............................. $12.079554 STATEMENT OF OPERATIONS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ -- EXPENSES: Mortality and expense risk charges.......................... 15 --------- Net investment loss............. (15) --------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain................. 8 Net unrealized gain............... 857 --------- Net realized and unrealized gain on investments................. 865 --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 850 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment loss............................................................. $ (15) Net realized gain............................................................... 8 Net unrealized gain............................................................. 857 --------- Net increase from operations.................................................. 850 --------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits net of premium load**...................................... 2,943 Participant transfers........................................................... 19,642 Participant withdrawals......................................................... (194) --------- Net increase from participant transactions.................................... 22,391 --------- Total increase in net assets................................................ 23,241 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 23,241 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant deposits............................................................ 273 Participant transfers........................................................... 1,668 Participant withdrawals......................................................... (17) --------- Net increase in units from participant transactions........................... 1,924 --------- ---------
* Date deposits first received. **Premium load reduced by $22 due to waiver of 1.15% of premium load from May 5, 1995 through August 1, 1995. The Notes to Financial Statements are an integral part of these statements 64 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I QUEST GLOBAL EQUITY PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in Quest for Value Accumulation Trust-Global Equity Portfolio at value............... $ 62,285 --------- Total assets.................... $ 62,285 --------- --------- Accumulation units outstanding.... 6,197 Net asset value per accumulation unit............................. $10.050817 STATEMENT OF OPERATIONS PERIOD FROM SEPTEMBER 12, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ 181 EXPENSES: Mortality and expense risk charges.......................... 58 --------- Net investment income........... 123 --------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Capital distribution from portfolio sponsor................ 1,262 Realized gain on share transactions..................... -- --------- Net realized gain............... 1,262 Net unrealized loss............. (981) --------- Net realized and unrealized gain on investments.......... 281 --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 404 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM SEPTEMBER 12, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment income........................................................... $ 123 Net realized gain............................................................... 1,262 Net unrealized loss............................................................. (981) --------- Net increase from operations.................................................. 404 --------- ACCUMULATION UNIT TRANSACTIONS: Participant transfers........................................................... 62,563 Participant withdrawals......................................................... (682) --------- Net increase from participant transactions.................................... 61,881 --------- Total increase in net assets................................................ 62,285 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 62,285 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant transfers........................................................... 6,245 Participant withdrawals......................................................... (48) --------- Net increase in units from participant transactions........................... 6,197 --------- ---------
* Date deposits first received. The Notes to Financial Statements are an integral part of these statements 65 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I QUEST MANAGED PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in Quest for Value Accumulation Trust-Managed Portfolio at value............... $ 3,320 --------- Total assets.................... $ 3,320 --------- --------- Accumulation units outstanding.... 271 Net asset value per accumulation unit............................. $12.250674 STATEMENT OF OPERATIONS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ -- EXPENSES: Mortality and expense risk charges.......................... 7 --------- Net investment loss............. (7) --------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain................. 3 Net unrealized gain............... 413 --------- Net realized and unrealized gain on investments................. 416 --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 409 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM MAY 5, 1995* TO DECEMBER 31, 1995 OPERATIONS: Net investment loss............................................................. $ (7) Net realized gain............................................................... 3 Net unrealized gain............................................................. 413 --------- Net increase from operations.................................................. 409 --------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits net of premium load**...................................... 1,867 Participant transfers........................................................... 1,268 Participant withdrawals......................................................... (224) --------- Net increase from participant transactions.................................... 2,911 --------- Total increase in net assets................................................ 3,320 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 3,320 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant deposits............................................................ 182 Participant transfers........................................................... 108 Participant withdrawals......................................................... (19) --------- Net increase in units from participant transactions........................... 271 --------- ---------
* Date deposits first received. **Premium load reduced by $22 due to waiver of 1.15% of premium load from May 5, 1995 through August 1, 1995. The Notes to Financial Statements are an integral part of these statements 66 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I QUEST SMALL CAP PORTFOLIO SUB-ACCOUNT - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995 ASSETS: Investment in Quest for Value Accumulation Trust-Small Cap Portfolio at value............... $ 4,145 --------- Total assets.................... $ 4,145 --------- --------- Accumulation units outstanding.... 405 Net asset value per accumulation unit............................. $10.235194 STATEMENT OF OPERATIONS PERIOD FROM SEPTEMBER 26, 1995* TO DECEMBER 31, 1995 INVESTMENT INCOME: Dividends......................... $ -- EXPENSES: Mortality and expense risk charges.......................... 3 --------- Net investment loss............. (3) --------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain................. 1 Net unrealized gain............... 186 --------- Net realized and unrealized gain on investments................. 187 --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 184 --------- ---------
STATEMENT OF CHANGES IN NET ASSETS PERIOD FROM SEPTEMBER 26, 1995* TO DECEMBER 31, 1995 OPERATIONS Net investment loss............................................................. $ (3) Net realized gain............................................................... 1 Net unrealized gain............................................................. 186 --------- Net increase from operations.................................................. 184 --------- ACCUMULATION UNIT TRANSACTIONS: Participant transfers........................................................... 4,095 Participant withdrawals......................................................... (134) --------- Net increase from participant transactions.................................... 3,961 --------- Total increase in net assets................................................ 4,145 --------- NET ASSETS: Beginning of period............................................................. -- --------- End of period................................................................... $ 4,145 --------- --------- PARTICIPANT ACCUMULATION UNIT TRANSACTIONS (IN UNITS): Participant transfers........................................................... 419 Participant withdrawals......................................................... (14) --------- Net increase in units from participant transactions........................... 405 --------- ---------
* Date deposits first received. The Notes to Financial Statements are an integral part of these statements 67 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- 1. ORGANIZATION CG Variable Life Insurance Separate Account I (the Account) is registered as a Unit Investment Trust under the Investment Company Act of 1940, as amended. The operations of the Account are part of the operations of Connecticut General Life Insurance Company (CG Life). The assets and liabilities of the Account are clearly identified and distinguished from other assets and liabilities of CG Life. The assets of the Account are not available to meet the general obligations of CG Life and are held for the exclusive benefit of the participants. The assets of the Account are divided into variable sub-accounts each of which is invested in shares of one of sixteen portfolios (mutual funds) of six diversified open-end management investment companies, each portfolio with its own investment objective. The variable sub-accounts are: ALGER AMERICAN FUND: -- Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Alger American MidCap Growth Portfolio Alger American Small Capitalization Portfolio FIDELITY VARIABLE INSURANCE PRODUCTS FUND: -- Equity-Income Portfolio FIDELITY VARIABLE INSURANCE PRODUCTS FUND II: -- Asset Manager Portfolio 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* AMT Partners Portfolio QUEST FOR VALUE ACCUMULATION TRUST: -- Quest Global Equity Portfolio Quest Managed Portfolio Quest Small Cap Portfolio
* Not active. As of December 31, 1995, deposits not received. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in conformity with generally accepted accounting principles. The following is a summary of significant accounting policies consistently followed in the preparation of the Account's financial statements. A. INVESTMENT VALUATION: Investments held by the sub-accounts are valued at their respective closing net asset values per share as determined by the mutual funds as of December 29, 1995, the last business day of 1995. The change in the difference between cost and value is reflected as unrealized gain (loss) in the Statements of Operations. B. INVESTMENT TRANSACTIONS: Investment transactions are recorded on the trade date (date the order to buy or sell is executed). Realized gains and losses on sales of investments are determined by the last-in, first-out cost basis of the investment sold. Dividend and capital gain distributions are recorded on the ex-dividend date. Investment transactions are settled through CG Life. C. FEDERAL INCOME TAXES: The operations of the Account form a part of, and are taxed with, the total operations of CG Life, which is taxed as a life insurance company. Under existing federal income tax law, investment income (dividends) and capital gains attributable to the Account are not taxed. 68 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- 3. INVESTMENTS Total shares held and cost of investments at December 31, 1995 were:
- --------------------------------------------------------------------------------------------------------- Cost Of Sub-Account Shares Held Investments - --------------------------------------------------------------------------------------------------------- Alger American Growth Portfolio.............................................. 1,105 $ 34,007 Alger American Leveraged AllCap Portfolio.................................... 325 4,831 Alger American MidCap Growth Portfolio....................................... 662 12,365 Alger American Small Capitalization Portfolio................................ 1,503 63,455 Fidelity Equity-Income Portfolio............................................. 2,909 53,199 Fidelity Asset Manager Portfolio............................................. 1,562 23,865 Fidelity Investment Grade Bond Portfolio..................................... 3,002 36,855 MFS Total Return Series...................................................... 694 8,342 MFS Utilities Series......................................................... 111 1,476 MFS World Governments Series................................................. 2,012 22,128 AMT Balanced Portfolio....................................................... 2,763 49,031 AMT Partners Portfolio....................................................... 1,757 22,384 Quest Global Equity Portfolio................................................ 5,365 63,266 Quest Managed Portfolio...................................................... 110 2,907 Quest Small Cap Portfolio.................................................... 208 3,959 - ---------------------------------------------------------------------------------------------------------
Total purchases and sales of shares of each mutual fund, for the periods noted, amounted to:
- ---------------------------------------------------------------------------------------------------------- Sub-Account Period Purchases Sales - ---------------------------------------------------------------------------------------------------------- Alger American Growth Portfolio.......... May 5, 1995** to December 31, 1995 $ 34,242 $ 232 Alger American Leveraged AllCap Portfolio............................... May 5, 1995** to December 31, 1995 6,237 1,418 Alger American MidCap Growth Portfolio... May 5, 1995** to December 31, 1995 12,557 193 Alger American Small Capitalization Portfolio............................... May 5, 1995** to December 31, 1995 64,932 1,462 Fidelity Equity-Income Portfolio......... May 5, 1995** to December 31, 1995 54,496 1,295 November 16, 1995** to December 31, Fidelity Asset Manager Portfolio......... 1995 23,886 21 Fidelity Investment Grade Bond November 16, 1995** to December 31, Portfolio............................... 1995 36,878 23 MFS Total Return Series.................. October 10, 1995** to December 31, 1995 8,375 34 December 26, 1995** to December 31, MFS Utilities Series..................... 1995 1,476 -- MFS World Governments Series............. May 5, 1995** to December 31, 1995 22,232 104 September 12, 1995** to December 31, AMT Balanced Portfolio................... 1995 49,357 326 AMT Partners Portfolio................... May 5, 1995** to December 31, 1995 23,600 1,224 September 12, 1995** to December 31, Quest Global Equity Portfolio............ 1995 63,665 399 Quest Managed Portfolio.................. May 5, 1995** to December 31, 1995 3,059 155 September 26, 1995** to December 31, Quest Small Cap Portfolio................ 1995 4,083 125 - ----------------------------------------------------------------------------------------------------------
**Date deposits first received. 4. CHARGES AND DEDUCTIONS CG Life charges each variable sub-account, for mortality and expense risks, a daily deduction, equivalent to .45% per year during the first ten policy years and .25% per year thereafter. The mortality and expense risk charges, for each sub-account, are reported on the Statements of Operations. CG Life deducts a premium load of 3.5% of each premium payment to cover state taxes and federal income tax liabilities. From inception through August 1, 1995, CG Life deducted only 2.35%, from each premium payment, as premium load. CG Life charges a monthly administrative fee of $15 in the first policy year and $5 in subsequent policy years. This charge is for items such as premium billing and collection, policy value calculation, confirmations and periodic reports. CG Life charges a monthly deduction for the cost of insurance and any charges for supplemental riders. The cost of insurance charge depends on the attained age, risk classification, gender classification (in accordance with state law) and the current net amount at risk. On a monthly basis, the administrative fee and the cost of insurance charge are deducted proportionately from the value of each variable sub-account and/or the fixed account funding option. The fixed account is part of the general account of CG Life and is not included in these financial statements. 69 CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- 4. CHARGES AND DEDUCTIONS (CONTINUED) The fees charged by CG Life for premium loads (deducted from premium payments), administrative fees and the amount deducted for the cost of insurance, both of which are included in participant withdrawals, for variable sub-accounts for the periods noted, amounted to:
- ----------------------------------------------------------------------------------------------------------- Cost of Premium Administrative Insurance Sub-Account Period Loads Fees Deduction - ----------------------------------------------------------------------------------------------------------- Alger American Growth Portfolio................ May 5, 1995** to December 31, 1995 $119*** $54 $290 Alger American Leveraged AllCap Portfolio......... May 5, 1995** to December 31, 1995 92*** 27 170 Alger American MidCap Growth Portfolio......... May 5, 1995** to December 31, 1995 119*** 43 235 Alger American Small Capitalization Portfolio................ May 5, 1995** to December 31, 1995 84*** 55 744 Fidelity Equity-Income Portfolio................ May 5, 1995** to December 31, 1995 76*** 47 695 Fidelity Asset Manager Portfolio................ November 16, 1995** to December 31, 1995 9 55 Fidelity Investment Grade Bond Portfolio........... November 16, 1995** to December 31, 1995 6 49 MFS Total Return Series... October 10, 1995** to December 31, 1995 77 15 15 MFS World Governments Series................... May 5, 1995** to December 31, 1995 44*** 14 104 AMT Balanced Portfolio.... September 12, 1995** to December 31, 1995 26 545 AMT Partners Portfolio.... May 5, 1995** to December 31, 1995 84*** 26 168 Quest Global Equity Portfolio................ September 12, 1995** to December 31, 1995 33 649 Quest Managed Portfolio... May 5, 1995** to December 31, 1995 44*** 27 197 Quest Small Cap Portfolio................ September 26, 1995** to December 31, 1995 19 115 - -----------------------------------------------------------------------------------------------------------
** Date deposits first received. ***Premium load charges of $22 for each variable sub-account totalling $176 were waived, from May 5, 1995** to August 1, 1995. CG Life, upon full surrender of a policy, may charge a surrender charge. This charge is in part a deferred sales charge and in part a recovery of certain first year administrative costs. The amount of the surrender charge, if any, will depend on the amount of the death benefit, the amount of premium payments made during the first two policy years and the age of the policy. In no event will the surrender charge exceed the maximum allowed by state or federal law. No surrender charge is imposed on a partial surrender, but an administrative fee of $25 is imposed, allocated pro-rata among the variable sub-accounts (and, where applicable, the fixed account) from which the partial surrender proceeds are taken. No full surrender charges or partial surrender administrative charges were paid to CG Life, attributable to the variable sub-accounts, for the periods ended December 31, 1995. 5. DISTRIBUTION OF NET INCOME The Account does not expect to declare dividends to participants from accumulated net income. The accumulated net income is distributed to participants as part of death benefits, surrenders, and transfers to other fixed or variable sub-accounts. 6. DIVERSIFICATION REQUIREMENTS Under the provisions of Section 817(h) of the Internal Revenue Code of 1986 (the Code), a variable life insurance policy will not be treated as life insurance under Section 7702 of the Code for any period for which the investments of the segregated asset account, on which the policy is based, are not adequately diversified. The Code provides that the "adequately diversified" requirement may be met if the underlying investments satisfy either a statutory safe harbor test or diversification requirements set forth in regulations issued by the Secretary of Treasury. CG Life believes, based on assurances from the mutual funds, that the mutual funds satisfy the requirements of the regulations. 70 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Connecticut General Life Insurance Company and Participants of the CG Variable Life Insurance Separate Account I In our opinion, the accompanying statements of assets and liabilities and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of each of the sub-accounts, Alger American Fund -- Alger American Growth Portfolio, Alger American Leveraged AllCap Portfolio, Alger American MidCap Growth Portfolio, and Alger American Small Capitalization Portfolio; Fidelity Variable Insurance Products Fund -- Fidelity Equity-Income Portfolio; Fidelity Variable Insurance Products Fund II - -- Fidelity Asset Manager Portfolio and Fidelity Investment Grade Bond Portfolio; MFS Variable Insurance Trust -- MFS Total Return Series, MFS Utilities Series and MFS World Government Series; Neuberger & Berman Advisers Management Trust -- AMT Balanced Portfolio and AMT Partners Portfolio; Quest for Value Accumulation Trust -- Quest Global Equity Portfolio, Quest Managed Portfolio and Quest Small Cap Portfolio (constituting the CG Variable Life Insurance Separate Account I, hereafter referred to as "the Account") at December 31, 1995, and the results of each of their operations and the changes in each of their net assets for the periods since inception (as indicated in the financial statements) through December 31, 1995, in conformity with generally accepted accounting priniciples. These financial statements are the responsibility of the Account's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting priniciples used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1995 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Hartford, Connecticut February 26, 1996 71 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. 72 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: 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.
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 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%
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. 73 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 74 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. 75 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE NONSMOKER ISSUE AGE 35 $2,720 ANNUAL PREMIUM FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1 GUARANTEED BASIS
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 ------ ----------- ------------------------------------- ---------------------------------- ---------------------------------- 1 2,856 500,000 500,000 500,000 1,360 1,478 1,597 0 0 0 2 5,855 500,000 500,000 500,000 2,693 3,015 3,354 0 0 0 3 9,004 500,000 500,000 500,000 3,925 4,539 5,209 0 0 577 4 12,310 500,000 500,000 500,000 5,049 6,038 7,164 417 1,406 2,532 5 15,781 500,000 500,000 500,000 6,052 7,497 9,213 1,420 2,865 4,581 6 19,426 500,000 500,000 500,000 6,926 8,905 11,357 3,221 5,199 7,652 7 23,254 500,000 500,000 500,000 7,656 10,240 13,587 4,877 7,461 10,808 8 27,272 500,000 500,000 500,000 8,243 11,500 15,913 6,390 9,647 14,060 9 31,492 500,000 500,000 500,000 8,671 12,663 18,325 7,745 11,736 17,399 10 35,922 500,000 500,000 500,000 8,938 13,719 20,831 8,938 13,719 20,831 15 61,628 500,000 500,000 500,000 7,457 16,739 34,646 7,457 16,739 34,646 20 94,436 -- 500,000 500,000 -- 13,283 49,735 -- 13,283 49,735 25 136,309 -- -- 500,000 -- -- 62,239 -- -- 62,239 30 189,749 -- -- 500,000 -- -- 64,388 -- -- 64,388
All Amounts are in Dollars 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. Guaranteed cost of insurance rates, 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. The net rates of return referred to above reflect the deduction of 0.45% per year in years 1-10 and 0.25% thereafter for the mortality and expense risk charge and Fund expenses assumed to be 1.00% per year but which may be higher or lower (see pages 10 and 11 of this prospectus). 76 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE NONSMOKER ISSUE AGE 35 $2,720 ANNUAL PREMIUM FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1 CURRENT BASIS
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 ------ ----------- ------------------------------------- ---------------------------------- ---------------------------------- 1 2,856 500,000 500,000 500,000 1,561 1,685 1,810 0 0 0 2 5,855 500,000 500,000 500,000 3,217 3,568 3,936 0 0 0 3 9,004 500,000 500,000 500,000 4,841 5,531 6,280 209 899 1,648 4 12,310 500,000 500,000 500,000 6,430 7,570 8,861 1,798 2,938 4,229 5 15,781 500,000 500,000 500,000 7,975 9,682 11,693 3,343 5,050 7,061 6 19,426 500,000 500,000 500,000 9,466 11,858 14,794 5,760 8,153 11,088 7 23,254 500,000 500,000 500,000 10,894 14,094 18,182 8,115 11,314 15,403 8 27,272 500,000 500,000 500,000 12,252 16,381 21,881 10,399 14,528 20,028 9 31,492 500,000 500,000 500,000 13,530 18,713 25,912 12,604 17,787 24,986 10 35,922 500,000 500,000 500,000 14,721 21,084 30,305 14,721 21,084 30,305 15 61,628 500,000 500,000 500,000 19,259 33,556 59,415 19,259 33,556 59,415 20 94,436 500,000 500,000 500,000 20,436 46,037 104,975 20,436 46,037 104,975 25 136,309 500,000 500,000 500,000 17,225 57,440 178,163 17,225 57,440 178,163 30 189,749 500,000 500,000 500,000 8,080 66,011 299,511 8,080 66,011 299,511
All Amounts are in Dollars 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. The net rates of return referred to above reflect the deduction of 0.45% per year in years 1-10 and 0.25% thereafter for the mortality and expense risk charge and Fund expenses assumed to be 1.00% per year but which may be higher or lower (see pages 10 and 11 of this prospectus). 77 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE NONSMOKER ISSUE AGE 45 $4,685 ANNUAL PREMIUM FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1 GUARANTEED BASIS
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 ------ ----------- ------------------------------------- ---------------------------------- ---------------------------------- 1 4,919 500,000 500,000 500,000 2,027 2,220 2,414 0 0 0 2 10,084 500,000 500,000 500,000 3,903 4,416 4,956 0 0 0 3 15,508 500,000 500,000 500,000 5,558 6,513 7,560 0 729 1,777 4 21,203 500,000 500,000 500,000 6,985 8,496 10,227 1,201 2,713 4,443 5 27,182 500,000 500,000 500,000 8,165 10,338 12,939 2,382 4,555 7,155 6 33,460 500,000 500,000 500,000 9,088 12,019 15,688 4,462 7,392 11,061 7 40,053 500,000 500,000 500,000 9,715 13,488 18,437 6,245 10,018 14,967 8 46,974 500,000 500,000 500,000 10,015 14,702 21,153 7,701 12,389 18,839 9 54,242 500,000 500,000 500,000 9,949 15,606 23,790 8,792 14,449 22,633 10 61,874 500,000 500,000 500,000 9,472 16,135 26,295 9,472 16,135 26,295 15 106,150 -- 500,000 500,000 -- 11,290 35,182 -- 11,290 35,182 20 162,660 -- -- 500,000 -- -- 29,787 -- -- 29,787 25 234,782 -- -- -- -- -- -- -- -- -- 30 326,828 -- -- -- -- -- -- -- -- --
All Amounts are in Dollars 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. Guaranteed cost of insurance rates, 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. The net rates of return referred to above reflect the deduction of 0.45% per year in years 1-10 and 0.25% thereafter for the mortality and expense risk charge and Fund expenses assumed to be 1.00% per year but which may be higher or lower (see pages 10 and 11 of this prospectus). 78 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE NONSMOKER ISSUE AGE 45 $4,685 ANNUAL PREMIUM FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1 CURRENT BASIS
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 ------ ----------- ------------------------------------- ---------------------------------- ---------------------------------- 1 4,919 500,000 500,000 500,000 3,025 3,250 3,476 0 0 0 2 10,084 500,000 500,000 500,000 6,041 6,685 7,357 257 901 1,574 3 15,508 500,000 500,000 500,000 8,919 10,180 11,551 3,136 4,396 5,768 4 21,203 500,000 500,000 500,000 11,653 13,731 16,084 5,869 7,947 10,300 5 27,182 500,000 500,000 500,000 14,235 17,332 20,985 8,452 11,548 15,201 6 33,460 500,000 500,000 500,000 16,660 20,977 26,286 12,033 15,351 21,659 7 40,053 500,000 500,000 500,000 18,921 24,662 32,025 15,451 21,192 28,554 8 46,974 500,000 500,000 500,000 21,011 28,380 38,243 18,697 26,067 35,929 9 54,242 500,000 500,000 500,000 22,924 32,126 44,988 21,767 30,970 43,831 10 61,874 500,000 500,000 500,000 24,653 35,895 52,313 24,653 35,895 52,313 15 106,150 500,000 500,000 500,000 30,617 55,389 100,953 30,617 55,389 100,953 20 162,660 500,000 500,000 500,000 30,599 74,543 178,543 30,599 74,543 178,543 25 234,782 500,000 500,000 500,000 20,949 90,039 306,538 20,949 30,039 306,538 30 326,829 500,000 500,000 565,097 0 91,616 528,128 0 91,616 528,128
All Amounts are in Dollars 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. Guaranteed cost of insurance rates, 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. The net rates of return referred to above reflect the deduction of 0.45% per year in years 1-10 and 0.25% thereafter for the mortality and expense risk charge and Fund expenses assumed to be 1.00% per year but which may be higher or lower (see pages 10 and 11 of this prospectus). 79 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY FEMALE NONSMOKER ISSUE AGE 35 $2,075 ANNUAL PREMIUM FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1 GUARANTEED BASIS
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 ------ ----------- ------------------------------------- ---------------------------------- ---------------------------------- 1 2,179 500,000 500,000 500,000 975 1,063 1,151 0 0 0 2 4,466 500,000 500,000 500,000 1,938 2,176 2,426 0 0 0 3 6,869 500,000 500,000 500,000 2,821 3,272 3,765 0 0 0 4 9,391 500,000 500,000 500,000 3,615 4,338 5,163 0 93 918 5 12,039 500,000 500,000 500,000 4,308 5,360 6,613 63 1,115 2,368 6 14,820 500,000 500,000 500,000 4,891 6,326 8,109 1,495 2,930 4,713 7 17,739 500,000 500,000 500,000 5,357 7,223 9,647 2,810 4,676 7,100 8 20,805 500,000 500,000 500,000 5,704 8,045 11,226 4,006 6,347 9,528 9 24,024 500,000 500,000 500,000 5,938 8,792 12,857 5,089 7,943 12,008 10 27,404 500,000 500,000 500,000 6,056 9,457 14,541 6,056 9,457 14,541 15 47,014 500,000 500,000 500,000 4,817 11,264 23,825 4,817 11,264 23,825 20 72,042 -- 500,000 500,000 -- 8,987 34,132 -- 8,987 34,132 25 103,985 -- -- 500,000 -- -- 44,484 -- -- 44,484 30 144,754 -- -- 500,000 -- -- 52,904 -- -- 52,904
All Amounts are in Dollars 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. Guaranteed cost of insurance rates, 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. The net rates of return referred to above reflect the deduction of 0.45% per year in years 1-10 and 0.25% thereafter for the mortality and expense risk charge and Fund expenses assumed to be 1.00% per year but which may be higher or lower (see pages 10 and 11 of this prospectus). 80 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY FEMALE NONSMOKER ISSUE AGE 35 $2,075 ANNUAL PREMIUM FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1 CURRENT BASIS
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% 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 2,179 500,000 500,000 500,000 1,154 1,247 1,341 0 0 0 2 4,466 500,000 500,000 500,000 2,402 2,666 2,943 0 0 0 3 6,869 500,000 500,000 500,000 3,619 4,136 4,700 0 0 455 4 9,391 500,000 500,000 500,000 4,781 5,636 6,604 536 1,391 2,359 5 12,039 500,000 500,000 500,000 5,884 7,160 8,664 1,639 2,915 4,419 6 14,820 500,000 500,000 500,000 6,927 8,709 10,898 3,531 5,313 7,502 7 17,739 500,000 500,000 500,000 7,912 10,286 13,325 5,365 7,739 10,778 8 20,805 500,000 500,000 500,000 8,840 11,891 15,965 7,142 10,193 14,267 9 24,024 500,000 500,000 500,000 9,711 13,526 18,842 8,862 12,677 17,993 10 27,404 500,000 500,000 500,000 10,527 15,194 21,982 10,527 15,194 21,982 15 47,014 500,000 500,000 500,000 13,782 24,139 42,967 13,782 24,139 42,967 20 72,042 500,000 500,000 500,000 15,155 33,622 76,248 15,155 33,622 76,248 25 103,985 500,000 500,000 500,000 14,197 43,270 130,050 14,197 43,270 130,050 30 144,754 500,000 500,000 500,000 9,997 52,180 218,566 9,997 52,180 218,566
All Amounts are in Dollars 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. The net rates of return referred to above reflect the deduction of 0.45% per year in years 1-10 and 0.25% thereafter for the mortality and expense risk charge and Fund expenses assumed to be 1.00% per year but which may be higher or lower (see pages 10 and 11 of this prospectus). 81 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY FEMALE NONSMOKER ISSUE AGE 35 $3,550 ANNUAL PREMIUM FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1 GUARANTEED BASIS
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% 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 3,728 500,000 500,000 500,000 1,435 1,578 1,722 0 0 0 2 7,641 500,000 500,000 500,000 2,789 3,166 3,562 0 0 0 3 11,751 500,000 500,000 500,000 4,001 4,699 5,466 0 0 336 4 16,066 500,000 500,000 500,000 5,057 6,161 7,426 0 1,031 2,296 5 20,597 500,000 500,000 500,000 5,952 7,539 9,438 822 2,409 4,308 6 25,354 500,000 500,000 500,000 6,673 8,815 11,495 2,569 4,711 7,391 7 30,349 500,000 500,000 500,000 7,214 9,975 13,591 4,136 6,897 10,513 8 35,594 500,000 500,000 500,000 7,558 10,994 15,712 5,506 8,942 13,660 9 41,102 500,000 500,000 500,000 7,679 11,838 17,833 6,653 10,812 16,807 10 45,884 500,000 500,000 500,000 7,575 12,492 19,950 7,575 12,492 19,950 15 80,434 500,000 500,000 500,000 3,692 12,535 30,446 3,692 12,535 30,446 20 123,253 -- 500,000 500,000 -- 4,013 38,841 -- 4,013 38,841 25 177,903 -- -- 500,000 -- -- 34,340 -- -- 34,340 30 247,651 -- -- -- -- -- -- -- -- --
All Amounts are in Dollars 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. Guaranteed cost of insurance rates, 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. The net rates of return referred to above reflect the deduction of 0.45% per year in years 1-10 and 0.25% thereafter for the mortality and expense risk charge and Fund expenses assumed to be 1.00% per year but which may be higher or lower (see pages 10 and 11 of this prospectus). 82 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY FEMALE NONSMOKER ISSUE AGE 45 $3,550 ANNUAL PREMIUM FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1 CURRENT BASIS
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% 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 3,728 500,000 500,000 500,000 2,174 2,341 2,508 0 0 0 2 7,641 500,000 500,000 500,000 4,387 4,861 5,356 0 0 226 3 11,751 500,000 500,000 500,000 6,514 7,441 8,450 1,384 2,311 3,320 4 16,066 500,000 500,000 500,000 8,553 10,081 11,812 3,423 4,951 6,682 5 20,597 500,000 500,000 500,000 10,501 12,780 15,467 5,371 7,650 10,337 6 25,354 500,000 500,000 500,000 12,355 15,536 19,445 8,251 11,432 15,341 7 30,349 500,000 500,000 500,000 14,113 18,349 23,777 11,035 15,271 20,699 8 35,594 500,000 500,000 500,000 15,772 21,219 28,498 13,720 19,167 26,446 9 41,102 500,000 500,000 500,000 17,329 24,144 33,647 16,303 23,118 32,621 10 46,884 500,000 500,000 500,000 18,782 27,124 39,270 18,782 27,124 39,270 15 80,434 500,000 500,000 500,000 24,612 43,212 77,089 24,612 43,212 77,089 20 123,253 500,000 500,000 500,000 27,014 60,447 137,860 27,014 60,447 137,860 25 177,903 500,000 500,000 500,000 24,279 77,481 237,386 24,279 77,481 237,386 30 247,651 500,000 500,000 500,000 12,642 90,961 405,165 12,642 90,961 405,165
All Amounts are in Dollars 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. The net rates of return referred to above reflect the deduction of 0.45% per year in years 1-10 and 0.25% thereafter for the mortality and expense risk charge and Fund expenses assumed to be 1.00% per year but which may be higher or lower (see pages 10 and 11 of this prospectus). 83 APPENDIX 3 TAX INFORMATION The Office of Tax Analysis of the U.S. Department of the Treasury published a "Report to the Congress on the Taxation of Life Insurance Company Products" in March 1990. Page 4 of this report is Table 1.1, a "Comparison of Tax Treatment of Life Insurance Products and Other Retirement Savings Plans". Because it is a convenient summary of the relevant tax characteristics of these products and plans, it is reprinted here, with added footnotes to reflect exceptions to the general rules. ------------------------ TABLE 1.1 COMPARISON OF TAX TREATMENT OF LIFE INSURANCE PRODUCTS AND OTHER RETIREMENT SAVINGS PLANS
CASH-VALUE LIFE NON-QUALIFIED QUALIFIED INSURANCE ANNUITIES IRA'S PENSION --------------- ----------------- -------------- ----------- Annual Contribution Limits No No Yes Yes Income Eligibility Limits No No Yes** No Borrowing Treated as Distributions No* Yes Loans not Yes, allowed beyond $50,000 Income Ordering Rules (Income included in First No* Yes Yes Yes Distribution) Early Withdrawal Penalties No* Yes*** Yes*** Yes*** Minimum Distribution Rules by Age 70 1/2 No No Yes Yes Maximum Annual Distribution Rules No No Yes Yes Anti-discrimination Rules No No No Yes
- ------------------------ Department of the Treasury March 1990 Office of Tax Analysis *If the Policy is not a modified endowment contract. **If amounts paid in to fund the IRA are deductible; once over the income eligibility limits amounts paid into an IRA are permitted but not deductible. ***There are several exceptions to the application of the early withdrawal penalties for annuities, IRAs and qualified pensions. The foregoing information is not intended as tax advice. You should consult with your own tax advisor for more complete information. 84 [LOGO] 543778 (5/96) -----END PRIVACY-ENHANCED MESSAGE-----