- --------------------------------------------------------------------------------
CG Variable Annuity Accounts I & II 1
Dear Investor:
We're pleased to provide you with this annual report for Connecticut General
Variable Annuity Accounts I & II for the six months ended June 30, 2004.
Following is a summary of key performance results:
For qualified contractholders
o Accumulation unit values for the Flexible Annuity increased 1.22% from the
December 31, 2003 level, from $186.085 to $188.357.
o For all other qualified individual contracts, accumulation unit values
increased 1.76%, from $200.952 to $204.480.
o Accumulation unit values for group qualified contracts with 50 participants
or more increased 2.52% from $239.503 to $245.543 during the period from
January 1, 2004 to June 30, 2004.
For non-qualified contractholders
o Accumulation unit values for the Flexible Annuity increased 2.34% from the
December 31, 2003 level, from $164.114 to $167.961.
o For all other non-qualified individual contracts, accumulation unit values
increased 2.53%, from $178.372 to $182.875.
o Accumulation unit values for group non-qualified contracts increased 2.78%
from $212.573 to $218.480 during the period from January 1, 2004 to June
30, 2004.
In addition to the financial statements for your annuity contracts, this report
includes the financial statements and a list of holdings for the TimesSquare VP
S&P 500 Index Fund [RegTM], the mutual fund supporting Variable Annuity
Accounts I and II.
Thank you for letting us serve your investment needs. We look forward to our
continuing relationship in the coming years.
/s/ John Y. Kim
John Y. Kim
President,
CIGNA Retirement & Investment Services
- --------------------------------------------------------------------------------
CG Variable Annuity Account I 2
Statement of Assets and Liabilities
June 30, 2004 (Unaudited)
Assets:
Investment in TimesSquare VP S&P 500 Index Fund[RegTM] at net asset value, 2,847,361.279
shares
at $16.36 per share (cost $25,465,462; net unrealized appreciation $21,117,369) $46,582,831
Receivable from Connecticut General Life Insurance Company 51,955
-----------
Total assets 46,634,786
-----------
Liabilities
Payable to Connecticut General Life Insurance Company 455,739
-----------
Total liabilities 455,739
-----------
Net Assets $46,179,047
===========
Net Assets Represented By:
Unit
Units Valu e
----- ----
Accumulation Contracts
Group contracts:
50 participants or more (50-1) 109,688 $ 245.543 $26,933,121
Less than 50 participants (51-1) 13,995 223.804 3,132,137
Tax-deferred annuity contracts issued after May 1, 1976 (52-1) 50,963 195.708 9,973,867
Individual contracts:
Variable annuity contracts (53-1) 7,135 204.480 1,458,965
Flexible annuity contracts (54-1) 9,592 188.357 1,806,720
Annuity Contracts
Group contracts:
50 participants or more (50-3) 225,240 4.445 1,001,192
Tax-deferred annuity contracts issued after May 1, 1976 (52-3) 10,106 5.364 54,209
Individual contracts:
Variable annuity contracts (53-3) 11,593 5.781 67,019
Variable annuity contracts (53-5) 307,686 4.846 1,491,046
Flexible annuity contracts (54-5) 47,927 5.441 260,771
-----------
$46,179,047
===========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CG Variable Annuity Account I 3
Statements of Operations
Six Months Ended June 30, 2004 (Unaudited)
Loss on Investment
Dividends $ 0
Mortality expense risk and administrative charges 95,257
-----------
Net loss on investment (95,257)
-----------
Realized Gain on Investments
Proceeds from sale of shares 1,762,709
Cost of shares sold 1,682,351
-----------
Realized gain from security transactions - net 80,358
Capital gain distribution 0
-----------
Realized gain on investments - net 80,358
-----------
Unrealized Appreciation (Depreciation) on Investments
Beginning of year 19,672,665
End of year 21,117,369
-----------
Change in unrealized appreciation (depreciation) on investments 1,444,704
-----------
Increase (Decrease) in Net Assets Resulting from Operations $ 1,429,805
===========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CG Variable Annuity Account I 4
Statements of Changes in Net Assets
Six Months Ended June 30, 2004 (Unaudited)
From Operations
Net loss on investment $ (95,257)
Realized gain on investments - net 80,358
Change in unrealized appreciation (depreciation) on investments 1,444,704
------------
Increase (decrease) in net assets resulting from operations 1,429,805
------------
From Unit Transactions
Participant contributions 104,503
Transfers to/from fixed fund - net (37,794)
Withdrawal of funds on terminated/matured contracts (1,902,260)
Annuity benefit distributions (222,011)
Mortality guarantee adjustment (39,742)
Equalization adjustment - net (338)
------------
Decrease in net assets derived from unit transactions (2,097,642)
------------
Increase (Decrease) in Net Assets (667,837)
------------
Net Assets, Beginning of Year 46,846,884
------------
Net Assets, End of Year $ 46,179,047
============
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CG Variable Annuity Account I Notes to Financial Statements 5
1. Organization
The CG Variable Annuity 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). These financial statements have been prepared
in conformity with accounting principles generally accepted in the United
States of America, and reflect management's estimates and assumptions, such as
those regarding fair market value and reserve assumptions, that affect recorded
amounts. Actual results could differ from those estimates. Significant
estimates are discussed throughout the Notes to Financial Statements.
Under the terms of the annuity contracts, the individual participant can elect
either a fixed or variable annuity benefit at retirement. The group participant
can elect either a fixed or variable annuity benefit during the accumulation
phase and at retirement. The assets providing for the variable annuity benefit
will be invested in the TimesSquare VP S&P 500 Index Fund[RegTM] (the Fund),
and the fixed annuity contract will be purchased from the Account's sponsor, CG
Life. The Fund was organized by CG Life in 1968.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies consistently
applied in the preparation of the Account's financial statements:
A. The investment in the Fund's shares is valued at the closing net asset
value per share as determined by the Fund on June 30, 2004. The difference
between cost and fair value is reflected as unrealized appreciation on
investments.
B. The amount of the reserve for contracts in the distribution period is
determined by actuarial assumptions which meet statutory requirements.
Gains or losses resulting from actual mortality experience, the full
responsibility for which is assumed by CG Life, are represented in the
mortality guarantee adjustment.
C. Investment transactions are accounted for on the trade date (date the order
to buy or sell is executed), and income is recorded on the ex-dividend
date. Cost of investments sold is determined on the basis of the last-in,
first-out method.
D. The operations of the Account are included in, and taxed as part of CG Life
as a life insurance company. Under Internal Revenue Code Section 817(h),
there is no taxable income attributable to the Account (See note 7).
3. Cost of Investments
The cost of investments represents the accumulated cost of the Fund's shares
purchased and sold by the Account at net asset value with net participant
contributions received and from reinvestment of all distributions made by the
Fund. The cost of purchases and the proceeds from sales of investments were
$274,579 and $1,762,708, respectively, for the six months ended June 30, 2004.
4. Changes in Units Outstanding
Accumulation units issued and redeemed were 440 and 7,118, respectively, for
the six months ended June 30, 2004. There were no annuity units issued in 2004.
Annuity units distributed were 45,645, for the six months ended June 30, 2004.
Mortality units issued were 1,272 for the six months ended June 30, 2004.
Annuity units are issued in the event of an annuitization.
5. Expenses and Related Party Transactions
Participant contributions are net of premium taxes (if any) and sales load of
$1,839 for the six months ended June 30, 2004. These amounts are deducted from
participant contributions before amounts are invested in the Account and paid
to CG Life in accordance with the underlying
- --------------------------------------------------------------------------------
CG Variable Annuity Account I Notes to Financial Statements (Continued) 6
contract. Mortality and expense risk charges, which generally range from 0.25%
to 1.10%, depending on contract size, are also paid to CG Life.
Withdrawal of funds on terminated contracts is net of administrative charges of
$3,031 for the six months ended June 30, 2004. These amounts are paid to CG
Life in accordance with the underlying contract.
During the six months ended June 30, 2004, management fees were paid to
TimesSquare Capital Management, an affiliate of CG Life, in its capacity as
advisor to the Fund. The advisory agreement provides for a fee at the annual
rate of 0.25% of the average net assets of the Fund for the years then ended.
Contracts were sold primarily by persons who were insurance agents of or
brokers for CG Life. These persons were authorized by applicable law to sell
life and other forms of personal insurance. Contracts are no longer actively
sold.
6. Financial Highlights
A summary of changes in unit values and various performance ratios follows.
For the six
months ended
June 30, 2004
----------------
Accumulation Contracts:
Group Contracts:
50 or more participants (50-1)
Unit value, beginning of period 239.503
Net investment income ( 0.909)
Net realized and unrealized gain (loss) on investment
transactions 6.949
--------
Unit value, end of period 245.543
========
Total Return * 2.521%
Ratios (as a % of average net assets):
Expenses ** 0.250%
Net Investment Income *** 0.000%
For the six
months ended
June 30, 2004
----------------
Less than 50 participants (51-1)
Unit value, beginning of period 219.155
Net investment income ( 1.696)
Net realized and unrealized gain (loss) on investment
transactions 6.345
--------
Unit value, end of period 223.804
========
Total Return * 2.121%
Ratios (as a % of average net assets):
Expenses ** 0.511%
Net Investment Income *** 0.000%
Tax-deferred annuity contracts issued after
May 1, 1976 (52-1)
Unit value, beginning of period 191.899
Net investment income ( 1.755)
Net realized and unrealized gain (loss) on investment
transactions 5.564
--------
Unit value, end of period 195.708
========
Total Return * 1.984%
Ratios (as a % of average net assets):
Expenses ** 0.600%
Net Investment Income *** 0.000%
Individual Contracts:
Variable annuity contracts (53-1)
Unit value, beginning of period 200.952
Net investment income ( 2.260)
Net realized and unrealized gain (loss) on investment
transactions 5.788
--------
Unit value, end of period 204.480
========
Total Return * 1.755%
Ratios (as a % of average net assets):
Expenses ** 0.750%
Net Investment Income *** 0.000%
- --------------------------------------------------------------------------------
CG Variable Annuity Account I Notes to Financial Statements (Continued) 7
For the six
months ended
June 30, 2004
----------------
Flexible annuity contracts (54-1)
Unit value, beginning of period 186.085
Net investment income ( 3.114)
Net realized and unrealized gain (loss) on investment
transactions 5.386
--------
Unit value, end of period 188.357
========
Total Return * 1.220%
Ratios (as a % of average net assets):
Expenses ** 1.100%
Net Investment Income *** 0.000%
Payout Contracts:
Group Contracts:
50-3
Unit value, beginning of period 4.402
Net investment income ( .145)
Net realized and unrealized gain (loss) on investment
transactions 0.188
--------
Unit value, end of period 4.445
========
Total Return * 0.977%
Ratios (as a % of average net assets):
Expenses **** 4.750%
Net Investment Income *** 0.000%
52-3
Unit value, beginning of period 5.321
Net investment income ( 0.171)
Net realized and unrealized gain (loss) on investment
transactions 0.214
--------
Unit value, end of period 5.364
========
Total Return * 0.808%
Ratios (as a % of average net assets):
Expenses **** 5.100%
Net Investment Income *** 0.000%
For the six
months ended
June 30, 2004
----------------
Individual Contracts:
53-3
Unit value, beginning of period 5.712
Net investment income ( 0.152)
Net realized and unrealized gain (loss) on investment
transactions 0.221
--------
Unit value, end of period 5.781
========
Total Return * 1.208%
Ratios (as a % of average net assets):
Expenses **** 4.250%
Net Investment Income *** 0.000%
53-5
Unit value, beginning of period 4.800
Net investment income ( 0.114)
Net realized and unrealized gain (loss) on investment
transactions 0.160
--------
Unit value, end of period 4.846
========
Total Return * 0.958%
Ratios (as a % of average net assets):
Expenses **** 4.750%
Net Investment Income *** 0.000%
54-5
Unit value, beginning of period 5.398
Net investment income ( 0.138)
Net realized and unrealized gain (loss) on investment
transactions 0.181
--------
Unit value, end of period 5.441
========
Total Return * 0.797%
Ratios (as a % of average net assets):
Expenses **** 5.100%
Net Investment Income *** 0.000%
- --------------------------------------------------------------------------------
CG Variable Annuity Account I Notes to Financial Statements (Continued) 8
*These amounts represent the total return for the years indicated, including
changes in the value of the underlying fund, and reflect deductions for all
items included in the expense ratio. The total return does not include any
expenses assessed through the redemption of units; inclusion of these expenses
in the calculation would result in a reduction in the total return presented.
**These ratios represent the annualized contract expenses, consisting of
mortality and expense charges, for the years indicated. The ratios include only
those expenses that result in a direct reduction to unit values. Charges made
directly to contract owner accounts through the redemption of units and
expenses of the underlying fund are excluded.
***These amounts represent the dividends, excluding distributions of capital
gains, received by the subaccount from the underlying mutual fund, net of
management fees assessed by the fund manager, divided by the average assets.
These ratios exclude those expenses, such as mortality and expense charges,
that result in direct reductions in the unit values. The recognition of
investment income by the subaccount is affected by the timing of the dividends
by the underlying fund in which the subaccounts invest.
****These ratios represent the annualized contract expenses, consisting of
mortality and expense, and assumed investment return charges, for the years
indicated. The assumed investment returns of 3% to 5% are normally available.
The selection of the assumed investment return is made by the Contractholder
from a range made available by CG Life, and is used to determine the purchase
rates for all annuities affected under the Contract. The ratios include only
those expenses that result in a direct reduction to unit values. Charges made
directly to contract owner accounts through the redemption of units and
expenses of the underlying fund are excluded.
7. Diversification Requirements
Under the provisions of Section 817(h) of the Internal Revenue Code (Code), a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal tax purposes for any period for which the investments of
the segregated asset account on which the contract is based are not adequately
diversified. The Code provides that the "adequately diversified" requirement
may be met if the underlying investments satisfy either a statutory safe harbor
test or diversification requirements, as set forth in regulations issued by the
Secretary of the Treasury.
The Secretary of the Treasury has issued regulations under Section 817(h) of
the Code. CG Life believes that the Account satisfies the current requirements
of the regulations, and it intends for the Account to continue to meet such
requirements.
- --------------------------------------------------------------------------------
CG Variable Annuity Account II 9
Statement of Assets and Liabilities
June 30, 2004
Assets:
Investment in TimesSquare VP S&P 500 Index Fund at net asset
value, 295,926.801 shares at $16.36 per share
(cost $3,753,776; net unrealized appreciation $1,087,586) $4,841,362
Receivable from Connecticut General Life Insurance Company 58,567
----------
Total assets 4,899,929
----------
Liabilities
Payable to Connecticut General Life Insurance Company 4,127
----------
Total liabilities 4,127
----------
Net Assets $4,895,802
==========
Net Assets Represented By:
Unit
Units Valu e
---- ----
Accumulation Contracts
Group contracts (50-2) 2,315 $ 218.480 $ 505,781
Individual contracts:
Variable annuity contracts (53-2) 4,231 182.875 773,744
Flexible annuity contracts (54-2) 8,535 167.961 1,433,547
Annuity Contracts
Group contracts (50-4) 248 4.326 1,073
Individual contracts:
Variable annuity contracts (53-4) 1,734 5.134 8,902
Variable annuity contracts (53-6) 291,783 4.305 1,256,126
Flexible annuity contracts (54-6) 191,044 4.798 916,629
----------
$4,895,802
==========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CG Variable Annuity Account II 10
Statements of Operations
Six Months Ended June 30, 2004 (Unaudited)
Investment Income
Dividends $ 0
Mortality expense risk and administrative charges (20,055)
----------
Net loss on investment (20,055)
----------
Realized Gain on Investments
Proceeds from sale of shares 190,320
Cost of shares sold 187,470
----------
Realized gain from security transactions - net 2,850
Capital gain distribution 0
----------
Realized gain on investments - net 2,850
----------
Unrealized Appreciation (Depreciation) on Investments
Beginning of year 951,703
End of year 1,087,587
----------
Change in unrealized appreciation (depreciation) on investments 135,884
----------
Increase (Decrease) in Net Assets Resulting from Operations $ 118,679
==========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CG Variable Annuity Account II 11
Statements of Changes in Net Assets
Six Months Ended June 30, 2004 (Unaudited)
From Operations
Net loss on investment $ (20,055)
Realized gain on investments - net 2,850
Change in unrealized appreciation (depreciation) on investments 135,884
----------
Increase (decrease) in net assets resulting from operations 118,679
----------
From Unit Transactions
Participant contributions 59
Transfers to/from fixed fund - net
Withdrawal of funds on terminated/matured contracts (123,960)
Annuity benefit distributions (138,320)
Mortality guarantee adjustment 67,246
Equalization adjustment - net 0
----------
Decrease in net assets derived from unit transactions (194,975)
----------
Decrease in Net Assets (76,296)
----------
Net Assets, Beginning of Year 4,972,098
----------
Net Assets, End of Year $4,895,802
==========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CG Variable Annuity Account II Notes to Financial Statements 12
1. Organization
The CG Variable Annuity Account II (the Account) is registered as a Unit
Investment Trust under the Investment Company Act of 1940, as amended. The
operations of the Account are part of the operations of Connecticut General
Life Insurance Company (CG Life). These financial statements have been prepared
in conformity with accounting principles generally accepted in the United
States of America, and reflect management's estimates and assumptions, such as
those regarding fair market value and reserve assumptions, that affect recorded
amounts. Actual results could differ from those estimates. Significant
estimates are discussed throughout the Notes to Financial Statements.
Under the terms of the annuity contracts, the individual participant can elect
either a fixed or variable annuity benefit at retirement. The group participant
can elect either a fixed or variable annuity benefit during the accumulation
phase and at retirement. The assets providing for the variable annuity benefit
will be invested in the TimesSquare VP S&P 500 Index Fund[RegTM] (the Fund),
and the fixed annuity contract will be purchased from the Account's sponsor, CG
Life. The Fund was organized by CG Life in 1968.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies consistently
applied in the preparation of the Account's financial statements:
A. The investment in the Fund's shares is valued at the closing net asset
value per share as determined by the Fund on June 30, 2004. The difference
between cost and fair value is reflected as unrealized appreciation on
investments.
B. The amount of the reserve for contracts in the distribution period is
determined by actuarial assumptions which meet statutory requirements.
Gains or losses resulting from actual mortality experience, the full
responsibility for which is assumed by CG Life, are represented in the
mortality guarantee adjustment.
C. Investment transactions are accounted for on the trade date (date the order
to buy or sell is executed), and income is recorded on the ex-dividend
date. Cost of investments sold is determined on the basis of the last-in,
first-out method.
D. The operations of the Account are included in, and taxed as part of CG Life
as a life insurance company. Under Internal Revenue Code Section 817(h),
there is no taxable income attributable to the Account (See note 7).
3. Cost of Investments
The cost of investments represents the accumulated cost of the Fund's shares
purchased and sold by the Account at net asset value with net participant
contributions received and from reinvestment of all distributions made by the
Fund. The cost of purchases and the proceeds from sales of investments were
$685,574 and $190,320, respectively, for the six months ended June 2004.
4. Changes in Units Outstanding
Accumulation units issued and redeemed were 0 and 651, respectively, for the
six months ended June 30, 2004. Annuity units distributed were 31,099 for the
six months ended June 30, 2004. Mortality units issued were 20,302 for the six
months ended June 30, 2004. Annuity units are issued in the event of an
annuitization.
5. Expenses and Related Party Transactions
Participant contributions are net of premium taxes (if any) and sales load of
$1 for the six months ended June 30, 2004. These amounts are deducted from
participant contributions before amounts are invested in the Account and paid
to CG Life in accordance with the underlying contract. Mortality and expense
risk charges, which
- --------------------------------------------------------------------------------
CG Variable Annuity Account II Notes to Financial Statements (Continued) 13
generally range from 0.25% to 1.10%, depending on contract size, are also paid
to CG Life.
Withdrawal of funds on terminated contracts is net of administrative charges of
$41 for the six months ended June 30, 2004 . These amounts are paid to CG Life
in accordance with the underlying contract.
During the six months ended June 30, 2004, management fees were paid to
TimesSquare Capital Management, an affiliate of CG Life, in its capacity as
advisor to the Fund. The advisory agreement provides for a fee at the annual
rate of 0.25 % of the average net assets of the Fund for the years then ended.
Contracts were sold primarily by persons who were insurance agents of or
brokers for CG Life. These persons were authorized by applicable law to sell
life and other forms of personal insurance. Contracts are no longer actively
sold.
6. Financial Highlights
A summary of changes in unit values and various performance ratios follows.
For the six
months ended
June 30, 2004
----------------
Accumulation Contracts:
Group Contracts: (50-2)
Unit value, beginning of period 212.573
Net investment income ( 0.268)
Net Realized and unrealized gain (loss) on investment
transactions 6.175
--------
Unit value, end of period 218.480
========
Total Return * 2.778%
Ratios (as a % of average net assets):
Expenses ** 0.250%
Net Investment Income *** 0.000%
For the six
months ended
June 30, 2004
----------------
Individual Contracts:
Variable annuity contracts (53-2)
Unit value, beginning of period 178.372
Net investment income ( 0.675)
Net Realized and unrealized gain (loss) on investment
transactions 5.178
--------
Unit value, end of period 182.875
========
Total Return * 2.524%
Ratios (as a % of average net assets):
Expenses ** 0.750%
Net Investment Income *** 0.000%
Flexible annuity contracts (54-2)
Unit value, beginning of period 164.110
Net investment income ( 0.909)
Net Realized and unrealized gain (loss) on investment
transactions 4.760
--------
Unit value, end of period 167.961
========
Total Return * 2.346%
Ratios (as a % of average net assets):
Expenses ** 1.100%
Net Investment Income *** 0.000%
Annuity Contracts:
Group contracts (50-4)
Unit value, beginning of period 4.284
Net investment income ( 0.129)
Net Realized and unrealized gain (loss) on investment
transactions 0.171
--------
Unit value, end of period 4.326
========
Total Return * 0.980%
Ratios (as a % of average net assets):
Expenses **** 4.750%
Net Investment Income *** 0.000%
- --------------------------------------------------------------------------------
CG Variable Annuity Account II Notes to Financial Statements (Continued) 14
For the six
months ended
June 30, 2004
--------------
Individual Contracts:
Variable annuity contracts (53-4)
Unit value, beginning of period 5.073
Net investment income (0.113)
Net Realized and unrealized gain (loss) on investment
transactions 0.174
------
Unit value, end of period 5.134
======
Total Return * 1.202%
Ratios (as a % of average net assets):
Expenses **** 4.25%
Net Investment Income *** 0.000%
Variable annuity contracts (53-6)
Unit value, beginning of period 4.263
Net investment income (0.100)
Net Realized and unrealized gain (loss) on investment
transactions 0.142
------
Unit value, end of period 4.305
======
Total Return * 0.985%
Ratios (as a % of average net assets):
Expenses **** 4.750%
Net Investment Income *** 0.000%
Flexible annuity contracts (54-6)
Unit value, beginning of period 4.760
Net investment income (0.165)
Net Realized and unrealized gain (loss) on investment
transactions 0.203
------
Unit value, end of period 4.798
======
Total Return * 0.798%
Ratios (as a % of average net assets):
Expenses **** 5.100%
Net Investment Income *** 0.000%
*These amounts represent the total return for the years indicated, including
changes in the value of the underlying fund, and reflect deductions for all
items included in the expense ratio. The total return does not include any
expenses assessed through the redemption of units; inclusion of these expenses
in the calculation would result in a reduction in the total return presented.
**These ratios represent the annualized contract expenses, consisting of
mortality and expense charges, for the years indicated. The ratios include only
those expenses that result in a direct reduction to unit values. Charges made
directly to contract owner accounts through the redemption of units and
expenses of the underlying fund are excluded.
***These amounts represent the dividends, excluding distributions of capital
gains, received by the subaccount from the underlying mutual fund, net of
management fees assessed by the fund manager, divided by the average assets.
These ratios exclude those expenses, such as mortality and expense charges,
that result in direct reductions in the unit values. The recognition of
investment income by the subaccount is affected by the timing of the dividends
by the underlying fund in which the subaccounts invest.
****These ratios represent the annualized contract expenses, consisting of
mortality and expense, and assumed investment return charges, for the years
indicated. The assumed investment returns of 3% to 5% are normally available.
The selection of the assumed investment return is made by the Contractholder
from a range made available by CG Life, and is used to determine the purchase
rates for all annuities affected under the Contract. The ratios include only
those expenses that result in a direct reduction to unit values. Charges made
directly to contract owner accounts through the redemption of units and
expenses of the underlying fund are excluded.
- --------------------------------------------------------------------------------
CG Variable Annuity Account II Notes to Financial Statements (Continued) 15
7. Diversification Requirements
Under the provisions of Section 817(h) of the Internal Revenue Code (Code), a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal tax purposes for any period for which the investments of
the segregated asset account on which the contract is based are not adequately
diversified. The Code provides that the "adequately diversified" requirement
may be met if the underlying investments satisfy either a statutory safe harbor
test or diversification requirements, as set forth in regulations issued by the
Secretary of the Treasury.
The Secretary of the Treasury has issued regulations under Section 817(h) of
the Code. CG Life believes that the Account satisfies the current requirements
of the regulations, and it intends for the Account to continue to meet such
requirements.