File No. 811-07971
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM
N-8B-2
REGISTRATION STATEMENT OF UNIT INVESTMENT TRUSTS
WHICH ARE CURRENTLY ISSUING SECURITIES
PURSUANT TO SECTION 8(B) OF THE
INVESTMENT COMPANY ACT OF 1940
COVA VARIABLE LIFE ACCOUNT ONE
______________________________________________________________________
(NAME OF UNIT INVESTMENT TRUST)
I. ORGANIZATION AND GENERAL INFORMATION
1. (a) Furnish name of the trust and the Internal Revenue Service Employer
Identification Number.
Cova Variable Life Account One ("Separate Account").
IRS Employer Identification Number: N/A
(b) Furnish title of each class or series of securities issued by the trust.
Modified Single Premium Variable Life Insurance Policy ("Policy").
2. Furnish name and principal business address and ZIP Code and the
Internal Revenue Service Employer Identification Number of each depositor of
the trust.
Cova Financial Services Life Insurance Company ("Company")
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
IRS Employer Identification Number: 43-1236042
----------
3. Furnish name and principal business address and ZIP Code and the
Internal Revenue Service Employer Identification Number of each custodian or
trustee of the trust indicating for which class or series of securities each
custodian or trustee is acting.
Not Applicable
4. Furnish name and principal business address and ZIP Code and the
Internal Revenue Service Employer Identification Number of each principal
underwriter currently distributing securities of the trust.
The Policy is not currently being distributed. When such distribution
commences, Cova Life Sales Company will be the "Principal Underwriter."
Cova Life Sales Company ("Life Sales")
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
IRS Employer Identification Number: 36-3324851
----------
5. Furnish name of state or sovereign power, the laws of which govern with
respect to the organization of the trust.
Missouri
6. (a) Furnish the dates of execution and termination of any indenture or
agreement currently in effect under the terms of which the trust was organized
and issued or proposes to issue securities.
The Separate Account was established pursuant to a resolution of the
Board of Directors of the Company on February 24, 1987, and was designated as
an operational Separate Account on 10/23/91. The Separate Account will
continue in existence until its complete liquidation and the distribution of
its assets to the persons entitled to received them.
(b) Furnish the dates of execution and termination of any indenture or
agreement currently in effect pursuant to which the proceeds of payments on
securities issued or to be issued by the trust are held by the custodian or
trustee.
Not Applicable.
7. Furnish in chronological order the following information with respect
to each change of name of the trust since January 1, 1930. If the name has
never been changed, so state.
The Separate Account has never been known by any other name.
8. State the date on which the fiscal year of the trust ends.
The fiscal year of the Separate Account ends on December 31.
9. MATERIAL LITIGATION. Furnish a description of any pending legal
proceedings, material with respect to the security holders of the trust by
reason of the nature of the claim or the amount thereof, to which the trust,
the depositor, or the principal underwriter is a party or of which the assets
of the trust are the subject, including the substance of the claims involved
in such proceeding and the title of the proceeding. Furnish a similar
statement with respect to any pending administrative proceeding commenced by a
governmental authority or any such proceeding or legal proceeding known to be
contemplated by a governmental authority. Include any proceeding which,
altogether immaterial itself, is representative of, or one of, a group which
in the aggregate is material.
There are no legal proceedings to which the Separate Account or the Principal
Underwriter is a party. The Company is engaged in various kinds of routine
litigation, which in its judgement are not of material importance in relation
to the total capital and surplus of the Company.
II. GENERAL DESCRIPTION OF THE TRUST
AND SECURITIES OF THE TRUST
GENERAL INFORMATION CONCERNING THE SECURITIES OF THE TRUST AND THE RIGHTS OF
HOLDERS.
10. Furnish a brief statement with respect to the following matters for
each class or series of securities issued by the trust:
(a) Whether the securities are of the registered or bearer type;
The Policy which is to issued is of the registered type insofar as the Policy
is personal to the Owner, and the records concerning the Owner are maintained
by the Company.
(b) Whether the securities are of the cumulative or distributive type;
The Policy is of the cumulative type.
(c) The rights of security holders with respect to withdrawal or redemption;
The Owner may make withdrawals from the Policy for its Cash Surrender
Value.
(d) The rights of security holders with respect to conversion, transfer,
partial redemption, and similar matters;
The Owner may transfer a Policy's Account Value from one Sub-Account to
another Sub-Account.
(e) If the trust is the issuer of periodic payment plan certificates, the
substance of the provisions of any indenture or agreement with respect to
lapses or defaults by security holders in making principal payments, and with
respect to reinstatement;
Not Applicable
(f) The substance of the provisions of any indenture or agreement with respect
to voting rights, together with the names of any persons other than security
holders given the right to exercise voting rights pertaining to the trust's
securities or the underlying securities and the relationship of such persons
to the trust;
The underlying securities of the Separate Account are shares issued by:
Cova Series Trust, Lord Abbett Series Fund, Inc. and General American Capital
Company, collectively, the Funds.
The Company will vote the shares held in the Separate Account in
accordance with instructions received from persons having a voting interest in
the Separate Account. The Company will vote shares for which it has not
received instructions in the same proportion as it votes shares for which it
has received instructions. The Company will vote shares it owns in the same
proportion as it votes shares for which it has received instructions.
(g) Whether security holders must be given notice of any change in:
(1) the composition of the assets of the trust;
Notice must be given of any such proposed change.
(2) the terms and conditions of the securities issued by the trust;
Notice must be given of any such proposed change.
(3) the provisions of any indenture or agreement of the trust;
Notice must be given of any such proposed change.
(4) the identity of the depositor, trustee or custodian;
There is no provision requiring notice to or consent of Owners with
respect to any change in the identity of the Separate Account's depositor.
The Company's obligations under the Policy, however, cannot be transferred to
any other entity without notice to the Owner.
(h) Whether the consent of the security holders is required in order for
action to be taken concerning any change in:
(1) the composition of the assets of the trust;
Consent of Owners is not required when substituting the underlying
securities of the Separate Account. However, to substitute such securities,
approval of the Securities and Exchange Commission is required in compliance
with Section 26(b) of the Investment Company Act of 1940. The Company may,
however, add additional Sub-Accounts without the consent of Owners. Except as
required by federal or state law or regulation, no action will be taken by the
Company which will adversely affect the rights of Owners without their
consent.
(2) the terms and conditions of the securities issued by the trust;
No change in the terms and conditions of the Policy can be made without
the consent of the Owners except as required by federal or state law or
regulation.
(3) the provisions of any indenture or agreement of the trust;
Not Applicable.
(4) the identity of the depositor, trustee or custodian;
There is no provision requiring notice to or consent of Owners with
respect to any change in the identity of the Separate Account's depositor. The
Company's obligations under the Policy, however, cannot be transferred to any
other entity without compliance with state insurance law, which may under some
circumstances, require the Owner's consent.
(i) Any other principal feature of the securities issued by the trust or any
other principal right, privilege or obligation not covered by subdivisions (a)
to (g) or by any other item in this form.
In return for the payment of premiums, the Policy provides insurance
coverage on the life of the insured.
The Policy provides for the right to borrow from the Company using the
Policy's Cash Value as collateral.
INFORMATION CONCERNING THE SECURITIES UNDERLYING THE TRUST'S SECURITIES.
11. Describe briefly the kind or type of securities comprising the unit of
specified securities in which security holders have an interest.
The securities held in the Separate Account will be shares of Cova Series
Trust, Lord Abbett Series Fund, Inc. and General American Capital Company, all
of which are open-end, management investment companies of the series type.
12. If the trust is the issuer of periodic payment plan certificates and
if any underlying securities were issued by another investment company,
furnish the following information for each such company:
(a) Name of company;
Cova Series Trust
Lord Abbett Series Fund, Inc.
General American Capital Company
(b) Name and principal business address of depositor;
Cova Financial Services Life Insurance Company is the depositor of the Cova
Series Trust. Its address is: One Tower Lane, Suite 3000, Oakbrook Terrace,
IL 60181.
Lord, Abbett & Co. is the depositor of the Lord Abbett Series Fund, Inc. Its
address is: 767 Fifth Avenue, New York, NY 10153.
General American Life Insurance Company is the depositor of the General
American Capital Company. Its address is: 700 Market Street, St. Louis, MO
63101.
(c) Name and principal business address of trustee or custodian;
Investor's Bank & Trust Company is the custodian for the Cova Series Trust.
Its address is: 89 South Street, Boston, MA 02111.
The Bank of New York is the custodian for the Lord Abbett Series Fund, Inc.
Its address is: 40 Wall Street, New York, NY 10286.
The Bank of New York is the custodian for the General American Capital
Company. Its address is: 40 Wall Street, New York, NY 10286.
(d) Name and principal business address of principal underwriter;
Cova Series Trust and Lord Abbett Series Fund, Inc. distribute their own
shares.
Walnut Street Securities Inc, acts as the principal underwriter for General
American Capital Company.
(e) The period during which the securities of such company have been the
underlying securities.
No underlying securities have yet been acquired by the Separate Account.
INFORMATION CONCERNING LOADS, FEES, CHARGES AND EXPENSES.
13. (a)Furnish the following information with respect to each load, fee,
expense or charge to which: (1) principal payments; (2) underlying securities;
(3) distributions; (4) cumulated or reinvested distributions or income; and
(5) redeemed or liquidated assets of the trust's securities are subject; (A)
the nature of such load, fee, expense, or charge; (B) the amount thereof; (C)
the name of the person to whom such amounts are paid and his relationship to
the trust; (D) the nature of the services performed by such person in
consideration for such load, fee, expense or charge.
1. Principal Payments
MORTALITY AND EXPENSE RISK CHARGE. For the first ten years, the Company
deducts a charge equal, on an annual basis, to 0.90% of the Account Value
allocated to the Separate Account. For the eleventh year and after, the
charge is 0.75%. This compensates the Company for assuming the mortality and
expense risks under the Policy.
ADMINISTRATIVE CHARGE. The Company deducts a charge equal, on an annual
basis, to 0.40% of the Account Value. This compensates the Company for
expenses incurred in the operation of the Separate Account and for
administering the Policy.
TAX EXPENSE CHARGE. This deduction is the sum of the Premium Tax Charge and
the Federal Tax Charge. It is deducted monthly for the first ten years. It
is equal, on an annual basis, to .40% (.15% for Federal Tax Charge and .25%
for Premium Tax Charge) of the Account Value. This compensates the Company
for federal and state tax incurred as a result of issuing the Policy.
COST OF INSURANCE CHARGE. Each month the Company deducts a charge for the
cost of insurance which provides the Death Benefit for the following month.
ANNUAL POLICY MAINTENANCE FEE. Every year on the anniversary of the Policy
Date, Cova deducts $30 as a policy maintenance fee. Under some circumstances,
this charge is waived. This, in addition to the Administrative Charge,
compensates the Company for the administrative expenses incurred.
2. Underlying Securities
The Funds are charged management fees by their respective investment adviser
and incur operating expenses.
3. Distributions
Not Applicable.
4. Cumulated or reinvested distributions or income.
All investment income and other distributions are reinvested in Fund shares at
net asset value.
5. Redeemed or liquidated assets.
SURRENDER CHARGE. The surrender charge is taken out of the Account Value
surrendered during the first ten years which is not part of the Annual
Withdrawal Amount. The Surrender Charges, which are equal to a percent of
Premium surrendered are:
<TABLE>
<CAPTION>
<S> <C>
Policy Year Surrender Charge
- ----------- -----------------
1 7.5%
2 7.5%
3 7.5%
4 6.0%
5 5.0%
6 4.0%
7 3.0%
8 2.0%
9 1.0%
10 + 0%
</TABLE>
This compensates the Company for the expenses incurred in distributing the
Policy.
DEFERRED PREMIUM TAX CHARGE. This charge is assessed on premiums surrendered
from the Policy. It is equal to:
<TABLE>
<CAPTION>
<S> <C>
Policy Year Deferred Premium Tax Charge
- ----------- ----------------------------
1 2.25%
2 2.00%
3 1.75%
4 1.50%
5 1.25%
6 1.00%
7 .75%
8 .50%
9 .25%
10 + 0%
</TABLE>
This charge enables the Company to collect that portion of the Premium Tax
Charge it has not collected before the Policy is surrendered.
(b) For each installment payment type of periodic payment plan certificate of
the trust, furnish the following information with respect to sales load and
other deductions from principal payments.
See response to item 13(a)(1).
(c) State the amount of total deductions as a percentage of the net amount
invested for each type of security issued by the trust. State each different
sales charge available as a percentage of the public offering price and as a
percentage of the net amount invested. List any special purchase plans or
methods established by rule or exemptive order that reflect scheduled
variations in, or elimination of, the sales load, and identify each class of
individuals or transactions to which such plans apply.
(1) The amount of sales load as a percentage of the net amount invested is 0%.
(2) There is no charge deducted from premiums.
(d) Explain fully the reasons for any difference in the price at which
securities are offered generally to the public, and the price at which
securities are offered for any class of transactions to any class or group of
individuals, including officers, directors, or employees of the depositor,
trustee, custodian or principal underwriter.
Not Applicable.
(e) Furnish a brief description of any loads, fees, expenses or charges not
covered in Item 13(a) which may be paid by security holders in connection with
the trust or its securities.
None.
(f) State whether the depositor, principal underwriter, custodian or trustee,
or any affiliated person of the foregoing may receive profits or other
benefits not included in answer to Item 13(a) or 13 (d) through the sale or
purchase of the trust's securities or interests in such securities, or
underlying securities or interests in underlying securities, and describe
fully the nature and extent of such profits or benefits.
None.
(g) State the percentage that the aggregate annual charges and deductions for
maintenance and other expenses of the trust bear to the dividend and interest
income from the trust property during the period covered by the financial
statements filed herewith.
Not Applicable
INFORMATION CONCERNING THE OPERATIONS OF THE TRUST.
14. Describe the procedure with respect to applications (if any) and the
issuance and authentication of the trust's securities, and state the substance
of the provisions of any indenture or agreement pertaining thereto.
A person desiring to purchase a Policy must complete an application on a form
provided by the Company. The Company will underwrite the Policy before it is
issued and, if the applicant meets the underwriting standards of the Company,
the Policy will be issued.
15. Describe the procedure with respect to the receipt of payments from
purchasers of the trust's securities and the handling of the proceeds thereof,
and state the substance of the provisions of any indenture or agreement
pertaining thereto.
When a Policy is purchased, the Company will initially invest the premium in
the Money Market Portfolio. After 15 days (or longer in those states where
required) from the Policy Issue Date, the Company will allocate the Account
Value to the Investment Portfolios as requested in the application.
16. Describe the procedure with respect to the acquisition of underlying
securities and the disposition thereof, and state the substance of the
provisions of any indenture or agreement pertaining thereto.
The Company applies premiums to the purchase of Investment Portfolio shares at
their net asset value. Redemption of Investment Portfolio shares may be made
by the Company to permit the payment of benefits or amounts in connection with
requests for surrender or for other purposes contemplated by the Policy.
17. (a) Describe the procedure with respect to withdrawal or redemption by
security holders.
Any surrender by an owner may be made by communication in writing to the
Company at its service office. Upon written receipt of such request, the
Company will cancel accumulation units in the Policy and redeem Investment
Portfolio shares in sufficient amount to meet any requests. See Item 10.
(b) Furnish the names of any persons who may redeem or repurchase, or are
required to redeem or repurchase, the trust's securities or underlying
securities from security holders, and the substance of the provisions of any
indenture or agreement pertaining thereto.
The Company is required to honor surrender requests as described in Items
10(c) and 17(a). With respect to the Separate Account's underlying
securities, the Investment Options are required to redeem their shares at net
asset value and to make payment therefore within 3 business days.
(c) Indicate whether repurchased or redeemed securities will be canceled or
may be resold.
When there is a total withdrawal from a Policy, it is canceled.
18. (a) Describe the procedure with respect to the receipt, custody and
disposition of the income and other distributable funds of the trust and state
the substance of the provisions of any indenture or agreement pertaining
thereto.
All income and other distributable funds of the Separate Account are
reinvested in Investment Option shares and are added to the assets of the
Separate Account.
(b) Describe the procedure, if any, with respect to the reinvestment of
distributions to security holders and state the substance of the provisions of
any indenture or agreement pertaining thereto.
Not Applicable.
(c) If any reserves or special funds are created out of income or principal,
state with respect to each such reserve or fund the purpose and ultimate
disposition thereof, and describe the manner of handling of same.
Not Applicable.
(d) Submit a schedule showing the periodic and special distributions which
have been made to security holders during the three years covered by the
financial statements filed herewith. State for each distribution the
aggregate amount and amount per share. If distributions from sources other
than current income have been made, identify each such other source and
indicate whether such distribution represents the return of principal payments
to security holders. If payments other than cash were made describe the
nature thereof, the account charged and the basis of determining the amount of
such charge.
No distributions have been made.
19. Describe the procedure with respect to the keeping of records and
accounts of the trust, the making of reports and the furnishing of information
to security holders, and the substance of the provisions of any indenture or
agreement pertaining thereto.
The Company provides confirmations with respect to all premiums received, loan
transactions and any surrenders. The Company also provides each Policy owner
with an annual statement which will show the current amount of death benefit
payable under the Policy, the current Account Value, the current Cash
Surrender Value, current Debt and will show all transactions previously
confirmed. The statement will also show all premiums paid and all charges
deducted during the policy year.
20. State the substance of the provisions of any indenture or agreement
concerning the trust with respect to the following:
(a) Amendments to such indenture or agreement;
Not Applicable.
(b) The extension or termination of such indenture or agreement;
Not Applicable.
(c) The removal or resignation of the trustee or custodian, or the failure of
the trustee or custodian to perform its duties, obligations and functions;
Not Applicable.
(d) The appointment of a successor trustee and the procedure if a successor
trustee is not appointed;
The Separate Account has no trustees.
(e) The removal or resignation of the depositor, or the failure of the
depositor to perform its duties, obligations and functions;
There are no provisions relating to the removal or resignation of the
depositor or the failure of the depositor to perform its duties, obligations
and functions.
(f) The appointment of a successor depositor and the procedure if a successor
depositor is not appointed.
There are no provisions relating to the appointment of a successor
depositor or the procedure if a successor depositor is not appointed.
21. (a) State the substance of the provisions of any indenture or
agreement with respect to loans to security holders.
Policy owners may borrow from the Company using the Policy as the sole
security.
(b) Furnish a brief description of any procedure or arrangement by which loans
are made available to security holders by the depositor, principal
underwriter, trustee or custodian, or any affiliated person of the foregoing.
The following items should be covered.
(1) the name of each person who makes such agreements or arrangements with
security holders;
The Company will make a loan to an Owner with the Policy as the sole
security.
(2) the rate of interest payable on such loans;
The interest rate for a Policy loan is 6% per annum.
(3) the period for which loans may be made;
Loans can be made while the Policy is in force.
(4) costs or charges for default in repayment at maturity;
Not applicable.
(5) other material provisions of the agreements or arrangements;
A policy loan will result in accumulation units being redeemed from
the Investment Portfolios and the proceeds being transferred to the Loan
Account. The Company will pay interest on the Loan Account at an annual rate
of 4.0% (unless a Preferred Loan is in effect which earns 6%). An outstanding
loan reduces the amount of death proceeds and the cash surrender value.
(c) If such loans are made, furnish the aggregate amount of loans outstanding
at the end of the last fiscal year, the amount of interest collected during
the last fiscal year allocated to the depositor, principal underwriter,
trustee or custodian or affiliated person of the foregoing and the aggregate
amount of loans in default at the end of the last fiscal year covered by
financial statements filed herewith.
Not Applicable.
22. State the substance of the provisions of any indenture or agreement
with respect to limitations on the liabilities of the depositor, trustee or
custodian, or any other party to such indenture or agreement.
There is no such provision or agreement.
23. Describe any bonding arrangement for officers, directors, partners or
employees of the depositor or principal underwriter of the trust, including
the amount of coverage and the type of bond.
The officers and directors of the Company are covered under a fidelity
bond in the amount of $5,000,000. The officers and directors of Cova Life Sales
Company are covered under a fidelity bond in the amount of $5,000,000 for each
loss, $5,000,000 for aggregate losses with a $25,000 deductible.
24. State the substance of any other material provisions of any indenture
or agreement concerning the trust or its securities and a description of any
other material functions or duties of the depositor, trustee or custodian not
stated in Item 10 or Items 14 to 23 inclusive.
The Owner may assign his rights under the Policy. The Owner may change owners
during the life time of the Insured while the Policy is in force.
III. ORGANIZATION, PERSONNEL AND AFFILIATED
PERSONS OF DEPOSITOR
ORGANIZATION AND OPERATIONS OF DEPOSITOR.
25. State the form of organization of the depositor of the trust, the name
of the state or other sovereign power under the laws of which the depositor
was organized and the date of organization.
The Company was incorporated in Missouri in 1981 as a stock life insurance
company.
26. (a) Furnish the following information with respect to all fees
received by the depositor of the trust in connection with the exercise of any
functions or duties concerning securities of the trust during the period
covered by the financial statements filed herewith.
Not Applicable.
(b) Furnish the following information with respect to any fee or any
participation in fees received by the depositor from any underlying investment
company or any affiliated person or investment adviser of such company.
See Item 13(a).
27. Describe the general character of the business engaged in by the
depositor including a statement as to any business other than that of
depositor of the trust. If the depositor acts or has acted in any capacity
with respect to any investment company or companies other than the trust,
state the name or names of such company or companies, their relationship, if
any, to the trust, and the nature of the depositor's activities therewith. If
the depositor has ceased to act in such named capacity, state the date of and
circumstances surrounding such cessation.
The company conducts a life insurance business in all states except
California, Maine, New Hampshire, New York and Vermont and the District of
Columbia. It acts as the depositor of Cova Variable Annuity Account One and
the Cova Series Trust. The portfolios of Cova Series Trust represent some of
the Investment Portfolios under the Policies.
OFFICIALS AND AFFILIATED PERSONS OF DEPOSITOR.
28. (a) Furnish as at latest practicable date the following information
with respect to the depositor of the trust, with respect to each officer,
director, or partner of the depositor, and with respect to each natural person
directly or indirectly owning, controlling or holding with power to vote five
percent or more of the outstanding voting securities of the depositor.
See Item 29.
(b) Furnish a brief statement of the business experience during the last five
years of each officer, director or partner of the depositor.
The directors and executive officers of the Company are listed below:
<TABLE>
<CAPTION>
<S> <C>
Name Principal Occupation During the Past Five Years
- ------- -----------------------------------------------
William A. Anthony Vice President of Cova - 1989 to present;
Vice President of Cova Financial Life Insurance
Company (CFLIC) - 1989 to present; Vice
President of Cova Life Management Company (CLMC)-
1989 to present
John W. Barber Director of Cova - June, 1995 to present;
Director of First Cova Life Insurance Company
(FCLIC) - June, 1995 to present; Director of
CFLIC - June, 1995 to present; Vice President
and Controller of General American Life Insurance
Company - December, 1984 to present; President
and Director of Equity Intermediary Company -
October, 1988 to present.
Jerome P. Darga Vice President and Assistant Secretary of Cova -
1992 to present; Vice President and Assistant
Secretary of CFLIC - 1992 to present; Vice
President and Assistant Secretary of CLMC - 1992
to present.
Judy M. Drew Vice President of Cova - 1988 to present;
Vice President of CFLIC - 1988 to present;
Vice President of FCLIC - 1992 to present;
Senior Vice President of CLMC - 1996 to
present, prior thereto Vice President from 1989
to 1996; President, COO and Director of Cova
Life Sales Company (CLSC) - 1988 to present.
Patricia E. Gubbe Vice President of Cova - 1989 to present;
Vice President of CFLIC - 1989 to present;
Vice President of FCLIC - 1992 to present;
First Vice President of CLMC - 1996 to
present, prior thereto Vice President from 1989
to 1996; Vice President and Chief Compliance
Officer of CLSC - 1989 to present.
Philip A. Haley Vice President of Cova - 1990 to present;
Vice President of CFLIC - 1990 to present;
Vice President of FCLIC - 1992 to present;
Vice President of CLSC - 1991 to present;
Senior Vice President of CLMC - 1996 to
present; prior thereto Vice President from 1989
to 1996.
Christopher S. Harden Vice President of Cova - 1991 to present;
Vice President of CFLIC - 1991 to present;
First Vice President of CLMC - 1996 to present,
prior thereto Vice President - 1991 to 1996.
Jeffery K. Hoelzel Secretary and Director of Cova - 1993 to
present; Secretary and Director of CFLIC - 1993
to present; Secretary and Director FCLIC - 1993
to present; Secretary and Director of Cova
Investment Advisory Corporation (Advisory) -
1993 to present; Secretary and Director of
Cova Investment Allocation Corp. (Allocation) -
1994 to present; Secretary of CLSC - 1993 to
present; Senior Vice President, General Counsel,
Secretary and Director of CLMC - 1993 to
present; Senior Vice President, Secretary and
Director of Cova Series Trust (Trust) - 1996
to present. Prior to joining the Cova
organization, Mr. Hoelzel was an associate at the
Chicago law firm of Lord, Bissell & Brook.
Robert J. Hopson Vice President, Chief Actuary and Director of
Cova - 1991 to present; Vice President, Chief
Actuary and Director of CFLIC - 1991 to
present; Vice President, Chief Actuary and
Director of FCLIC - 1992 to present;
Senior Vice President, Chief Actuary and Director
of CLMC - 1996 to present, prior thereto Vice
President and Director from 1993 to 1996 and Vice
President from 1991 to 1993.
Thomas E. Hughes, Jr. Treasurer and Director of Cova - June, 1995 to
present; Treasurer and Director of CFLIC - June,
1995 to present; Treasurer of FCLIC - June, 1995
to present; Corporate Actuary and Treasurer of
General American Life Insurance Company -
October, 1994 to present. Formerly, Executive
Vice President - Group Pensions General
American Life Insurance Company - March, 1990 to
October, 1994. In addition to the Cova companies,
Director of the following General American
subsidiary companies: Paragon Life Insurance
Company and RGA Reinsurance Company - October,
1994 to present. Treasurer of the following
General American subsidiary companies: Paragon
Life Insurance Company, General Life Insurance
Company of America, General Life Insurance
Company, General American Holding Company, Red
Oak Realty Company, Gen Mark Incorporated,
Walnut Street Securities, Inc., Walnut Street
Adviser's Inc., White Oak Royalty Company,
Walnut Street Funds, Inc., and RGA Reinsurance
Company - October, 1994 to present.
Douglas E. Jacobs Vice President of Cova - 1985 to present;
Vice President of CFLIC - 1985 to present;
Vice President of CLMC - 1985 to present.
William C. Mair Vice President, Controller and Director of Cova
since 1995 to present, prior thereto Vice
President, Controller, Treasurer and Director.
Vice President, Controller and Director of CFLIC
since 1995 to present, prior thereto Vice
President, Controller, Treasurer and Director;
Vice President, Controller and Director of FCLIC -
from 1992 to present; Vice President, Treasurer,
Controller and Director of Advisory - 1993 to
present; Vice President, Treasurer, Controller
and Director of Allocation - 1994 to present;
Director of CLSC - 1992 to present; Senior Vice
President,Treasurer, Controller and Director of
CLMC - 1989 to present; Vice President,
Treasurer, Controller, Chief Financial Officer,
Chief Accounting Officer and Director of Trust -
1996 to present.
Matthew P. McCauley Assistant Secretary and Director of Cova - June,
1995 to present; Assistant Secretary and Director
of CFLIC - June, 1995 to present; Assistant
Secretary and Director of FCLIC - June, 1995 to
present; Associate General Counsel and Vice
President of General American Life Insurance
Company - 1973 to present; Also, Director, Vice
President, General Counsel and Secretary for
several other General American subsidiaries;
including Equity Intermediary Company, Red Oak
Realty Company, and White Oak Royalty Company;
General American Holding Company and Paragon
Life Insurance Company. General Counsel and
Secretary, Reinsurance Group of America,
Incorporated. Director and Secretary, General
American Capital Company. General Counsel and
Secretary, Conning Corporation. General Counsel,
Conning Asset Management Company. Director of
RGA Reinsurance Company, Walnut Street
Securities, Inc. Secretary to the Walnut Street
Funds, Inc.
Leonard M. Rubenstein Chairman of the Board of Directors of Cova,
CFLIC, FCLIC, and CLMC - January, 1996 to
present; Director of Advisory and Allocation from
1995 to present; Chairman of Board of Advisory
and Allocation - January, 1996 to present;
Executive Vice President and Director of General
American Life Insurance Company - 1992 to
present. Mr. Rubenstein also holds various
positions with the General American subsidiaries
as follows: Director and Treasurer of General
American Capital Company; Senior Vice President -
Investments, Treasurer and Director of
Reinsurance Group of America, Incorporated;
Director of Paragon Life Insurance Company;
Director of General American Holding Company;
Chief Executive Officer, Chairman and Director
for Conning Corporation; Director of the
following: General Life Insurance Company,
Security Equity Life Insurance Company, BHIF
America de Vida Seguros S.A. (Chile), Manatial
Seguros de Vida, S.A. (Argentina), Red Oak
Realty Company, General Life Insurance Company
of America; RGA Reinsurance Company;
Secretary and Director for RGA Sud America S.A.
Myron H. Sandberg Vice President of Cova - 1985 to present; Vice
President of CFLIC - 1985 to present; and CLMC -
1989 to present.
John W. Schaus Vice President of Cova - 1988 to present;
Vice President of CFLIC - 1988 to present; and
CLMC - 1989 to present.
Lorry J. Stensrud President and Director of Cova from June, 1995
to present, prior thereto Executive Vice
President; President and Director of CFLIC from
June, 1995 to present, prior thereto Executive
Vice President; President and Director of FCLIC
from June, 1995 to present, prior thereto
Executive Vice President; President and Director
of CLMC from June, 1995 to present, prior thereto
Executive Vice President only; President and
Director of Advisory from 1993 to present;
President and Director of Allocation from 1994 to
present. Director of CLSC from 1989 to
present; President, Chief Executive Officer and
Director of Trust - 1996 to present.
</TABLE>
COMPANIES OWNING SECURITIES OF DEPOSITOR.
29. Furnish as at latest practicable date the following information with
respect to each company which directly or indirectly owns, controls or holds
with power to vote five percent or more of the outstanding voting securities
of the depositor.
The Company is a wholly owned subsidiary of General American Life Insurance
Company.
CONTROLLING PERSONS.
30. Furnish as at latest practicable date the following information with
respect to any person, other than those covered by Items 28, 29, and 42 who
directly or indirectly controls the depositor.
None.
COMPENSATION OF OFFICERS AND DIRECTORS OF DEPOSITOR:
COMPENSATION OF OFFICERS OF DEPOSITOR.
31. Furnish the following information with respect to the remuneration for
services paid by the depositor during the last fiscal year covered by
financial statements filed herewith:
(a) Directly to each of the officers or partners of the depositor directly
receiving the three highest amounts of remuneration.
Not Applicable. As of the date hereof, the Separate Account had not yet
commenced operations.
(b) Directly to all officers or partners of the depositor as a group exclusive
of persons whose remuneration is included under Item 31(a), stating separately
the aggregate amount paid by the depositor itself and the aggregate amount
paid by all the subsidiaries.
Not Applicable. As of the date hereof, the Separate Account had not yet
commenced operations.
(c) Indirectly or through subsidiaries to each of the officers or partners of
the depositor.
Not Applicable. As of the date hereof, the Separate Account had not yet
commenced operations.
COMPENSATION OF DIRECTORS
32. Furnish the following information with respect to the remuneration for
services, exclusive of remuneration reported under Item 31, paid by the
depositor during the last fiscal year covered by financial statements filed
herewith:
(a) The aggregate direct remuneration to directors;
Not Applicable. See Item 31.
(b) Indirectly through subsidiaries to directors.
Not Applicable. See Item 31.
COMPENSATION TO EMPLOYEES.
33. (a) Furnish the following information with respect to the aggregate
amount of remuneration for services of all employees of the depositor
(exclusive of persons whose remuneration is reported in Items 31 and 32) who
received remuneration in excess of $10,000 during the last fiscal year covered
by financial statements filed herewith from the depositor and any of its
subsidiaries.
Not Applicable. See Item 31.
(b) Furnish the following information with respect to the remuneration for
services paid directly during the last fiscal year covered by financial
statements filed herewith to the following classes of persons (exclusive of
those person covered by Item 33(a)): (1) sales managers, branch managers,
district managers and other persons supervising the sale of registrant's
securities; (2) salesmen, sales agents, canvassers and other persons making
solicitations but not in a supervisory capacity; (3) administrative and
clerical employees; and (4) others (specify). If a person is employed in more
than one capacity, classify according to predominant type of work.
Not Applicable. See Item 31.
COMPENSATION TO OTHER PERSONS.
34. Furnish the following information with respect to the aggregate amount
of compensation for services paid any person (exclusive of persons whose
remuneration is reported in Items 31, 32, and 33), whose aggregate
compensation in connection with services rendered with respect to the trust in
all capacities exceeded $10,000 during the last fiscal year covered by
financial statements filed herewith from the depositor and any of its
subsidiaries:
Not Applicable. See Item 31.
IV. DISTRIBUTION AND REDEMPTION OF SECURITIES
DISTRIBUTION OF SECURITIES.
35. Furnish the names of the States in which sales of the trust's
securities: (a) are currently being made, (b) are presently proposed to be
made, and (c) have been discontinued, indicating by appropriate letter the
status with respect to each State.
No sales of the Policy have been made or are currently being made. It is
presently proposed to sell the Policy in the states where the Company is
licensed to do business.
36. If sales of the trust's securities have at any time since January 1,
1936 been suspended for more than a month describe briefly the reasons for
such suspension.
Not Applicable.
37. (a) Furnish the following information with respect to each instance
where subsequent to January 1, 1937, any Federal or State governmental
officer, agency, or regulatory body denied authority to distribute securities
of the trust, excluding a denial which was merely a procedural step prior to
any determination by such officer, etc. and which denial was subsequently
rescinded: (1) name of officer, agency or body; (2) date of denial; (3) brief
statement of reason given for denial.
Not Applicable.
(b) Furnish the following information with regard to each instance where,
subsequent to January 1, 1937, the authority to distribute securities of the
trust has been revoked by any Federal or State governmental officer, agency
or regulatory body: (1) name of officer, agency or body; (2) date of
revocation; (3) brief statement of reason given for revocation.
Not Applicable.
38. (a) Furnish a general description of the method of distribution of
securities of the trust.
The Policy issued by the Separate Account will be sold by licensed
insurance agents in those states where the Policy may be lawfully sold. Such
agents will be registered representatives of a broker-dealer registered under
the Securities Exchange Act of 1934 which is a member of the National
Association of Securities Dealers, Inc.
(b) State the substance of any current selling agreement between each
principal underwriter and the trust or the depositor, including a statement as
to the inception and termination dates of the agreement, any renewal and
termination provisions, and any assignment provisions.
The Company intends to execute an agreement with the Principal
Underwriter whereby it will distribute the Policy by executing selling
agreements with other broker-dealers. The agreement will be effective on the
date executed and will remain effective until terminated by either party upon
sixty (60) days notice, and may not be assigned.
(c) State the substance of any current agreements or arrangements of each
principal underwriter with dealers, agents, salesmen, etc. with respect to
commissions and overriding commissions, territories, franchises,
qualifications and revocations. If the trust is the issuer of periodic
payment plan certificates, furnish schedules of commissions and the bases
thereof. In lieu of a statement concerning schedules of commissions, such
schedules of commissions may be filed as Exhibit A(3)(c).
See Exhibit A(3)(c).
INFORMATION CONCERNING PRINCIPAL UNDERWRITER.
39. (a) State the form of organization of each principal underwriter of
securities of the trust, the name of the State or other sovereign power under
the laws of which each underwriter was organized and the date of the
organization.
Cova Life Sales Company is a corporation organized under the laws of
Illinois on 9/25/84.
(b) State whether any principal underwriter currently distributing securities
of the trust is a member of the National Association of Securities Dealers,
Inc.
Cova Life Sales Company is a member of the National Association of
Securities Dealers, Inc.
40. a) Furnish the following information with respect to all fees received
by each principal underwriter of the trust from the sale of securities of the
trust and any other functions in connection therewith exercised by such
underwriter in such capacity or otherwise during the period covered by the
financial statements filed herewith.
Not Applicable.
(b) Furnish the following information with respect to any fee or any
participation in fees received by each principal underwriter from any
underlying investment company or any affiliated person or investment adviser
of such company: (1) the nature of such fee or participation; (2) the name of
the person making payment; (3) the nature of the services rendered in
consideration for such fee or participation; (4) the aggregate amount received
during the last fiscal year covered by the financial statements filed
herewith.
Not Applicable.
41. (a) Describe the general character of the business engaged in by each
principal underwriter, including a statement as to any business other than the
distribution of securities of the trust. If a principal underwriter acts or
has acted in any capacity with respect to any investment company or companies
other than the trust, state the name or names of such company or companies,
their relationship, if any, to the trust and the nature of such activities.
If a principal underwriter has ceased to act in such named capacity, state the
date of and the circumstances surrounding such cessation.
Cova Life Sales Company also acts as the principal underwriter of
variable annuity contracts issued by the Company and its affiliated insurance
companies.
(b) Furnish as at latest practicable date the address of each branch office of
each principal underwriter currently selling securities of the trust and
furnish the name and residence address of the person in charge of such office.
Not Applicable.
(c) Furnish the number of individual salesmen of each principal underwriter
through whom any of the securities of the trust were distributed for the last
fiscal year of the trust covered by the financial statements filed herewith
and furnish the aggregate amount of compensation received by such salesmen in
such year.
Not Applicable.
42. Furnish as at latest practicable date the following information with
respect to each principal underwriter currently distributing securities of the
trust and with respect to each of the officers, directors, or partners of such
underwriter.
Not Applicable.
43. Furnish, for the last fiscal year covered by the financial statements
filed herewith, the amount of brokerage commissions received by any principal
underwriter who is a member of a national securities exchange and who is
currently distributing the securities of the trust or effecting transactions
for the trust in the portfolio securities of the trust.
None.
OFFERING PRICE OR ACQUISITION VALUATION OF SECURITIES OF THE TRUST.
44. (a) Furnish the following information with respect to the method of
valuation used by the trust for purposes of determining the offering price to
the public of securities issued by the trust or the valuation of shares or
interests in the underlying securities acquired by the holder of a periodic
payment plan certificate.
Account Values allocated to the Separate Account are invested at net
asset value in the Investment Portfolios in accordance with the selection made
by the owner.
Account Values will fluctuate in accordance with investment results of
the Investment Portfolios selected. In order to determine how these
fluctuations affect Account Value, accumulation units are used. Every
business day the Company determines the value of an accumulation unit for each
of the Investment Portfolios. The value of an accumulation unit for any given
business day is determined by multiplying a factor referred to as the net
investment factor times the value of an Accumulation unit for the previous
business day. The net investment factor is a number that reflects the change
(up or down) in an underlying Investment Portfolio share.
(b) Furnish a specimen schedule showing the components of the offering price
of the trust's securities as at the latest practicable date.
Not Applicable.
(c) If there is any variation in the offering price of the trust's securities
to any person or classes of persons other than underwriters, state the nature
and amount of such variation and indicate the person or classes of persons to
whom such offering is made.
Not Applicable.
45. Furnish the following information with respect to any suspension of
the redemption rights of securities issued by the trust during the three
fiscal years covered by the financial statements filed herewith: (a) by whose
action redemption rights were suspended; (b) the number of days' notice given
to security holders prior to suspension of redemption rights; (c) reason for
suspension; (d) period during which suspension was in effect.
Not Applicable.
REDEMPTION VALUATION OF SECURITIES OF THE TRUST.
46. (a) Furnish the following information with respect to the method of
determining the redemption or withdrawal valuation of securities issued by the
trust:
(1) the source of quotations used to determine the value of portfolio
securities;
The Custodians for the underlying series funds.
(2) whether opening, closing bid, asked or any other price is used;
Net asset value is used.
(3) whether price is as of the day of sale or as of any other time;
As of the next compute price.
(4) a brief description of the methods used by registrant for determining
other assets and liabilities including accrual for expenses and taxes
(including taxes on unrealized appreciation);
See item 13(a).
(5) other items which registrant deducts from the net asset value in
computing redemption value of its securities; and
See item 13(a).
(6) whether adjustments are made for fractions.
Not applicable.
(b) Furnish a specimen schedule showing the components of the redemption price
to the holders of the trust's securities as at the latest practicable date.
Not applicable.
PURCHASE AND SALE OF INTERESTS IN UNDERLYING SECURITIES FROM AND TO SECURITY
HOLDERS.
47. Furnish a statement as to the procedure with respect to the
maintenance of a position in the underlying securities or interests in the
underlying securities, the extent and nature thereof and the person who
maintains such a position. Include a description of the procedure with
respect to the purchase of underlying securities or interest in the underlying
securities from security holders who exercise redemption or withdrawal rights
and the sale of such underlying securities and interests in the underlying
securities to other security holders. State whether the method of valuation
of such underlying securities or interests in the underlying securities
differs from that set forth in Items 44 and 46. If any item of expenditure
included in the determination of the valuation is not or may not actually be
incurred or expended, explain the nature of such item and who may benefit from
the transaction.
The Company will maintain a position in Investment Portfolio shares by
purchasing Investment Portfolio shares at net asset value in connection with
premiums allocated to the Separate Account in accordance with instructions
from the Owners and to redeem Investment Portfolio shares at net asset value
for the purposes of making Policy obligations, or making adjustments in the
reserves held in the Separate Account. There are no procedures for the
purchase of underlying securities or interests therein from Owners who
exercise surrender rights in that Owners have no direct interest therein.
V. INFORMATION CONCERNING THE TRUSTEE
OR CUSTODIAN
48. Furnish the following information as to each trustee or custodian of
the trust:
(a) Name and principal business address;
None.
(b) Form of organization;
Not Applicable.
(c) State or other sovereign power under the laws of which the trustee or
custodian was organized;
Not Applicable.
(d) Name of governmental supervising or examining authority.
Not Applicable.
49. State the basis for payment of fees or expenses of the trustee or
custodian for services rendered with respect to the trust and its securities,
and the aggregate amount thereof for the last fiscal year. Indicate the
person paying such fees or expenses. If any fees or expenses are prepaid,
state the unearned amount.
Not Applicable.
50. State whether the trustee or custodian or any other person has or may
create a lien on the assets of the trust, and if so, give full particulars,
outlining the substance of the provisions of any indenture or agreement with
respect thereto.
Not Applicable.
VI. INFORMATION CONCERNING THE INSURANCE OF
HOLDERS OF SECURITIES
51. Furnish the following information with respect to insurance holders of
securities:
(a) The name and address of the insurance company;
Cova Financial Services Life Insurance Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
(b) The types of policies and whether individual or group policies;
The Policy is an individual modified single premium variable life
insurance policy.
(c) The types of risks insured and excluded;
The Policy provides for a death benefit upon the death of the Insured. Under
some circumstances, a portion of the death benefit will be paid out if the
Insured is terminally ill. The death benefit is the only insurance benefit
offered.
(d) The coverage of the policies;
While the Policy remains in force, it provides for a death benefit on the life
of the Insured.
(e) The beneficiaries of such policies and the uses to which the proceeds of
policies must be put;
The Owner designates one or more persons to be the beneficiaries of the
death benefit. There are no limitations on the use of the proceeds.
(f) The terms and manner of cancellation and of reinstatement;
The Policy will terminate if (1) the owner makes a total surrender of the
Policy, (2) the grace period has ended, or (3) the Insured has died. The
Policy can be reinstated if the owner did not make a total surrender and of
the Insured is still alive within five years after the end of the grace period.
To reinstate the Policy, the Insured must provide evidence of insurability and
either repay any outstanding loan and accrued interest or reinstate the loan
plus interest. A sufficient premium must be paid to (1) cover all deductions
that are due and unpaid and (2) be sufficient to keep the Policy in force for
2 months.
(g) The method of determining the amount of premiums to be paid by holders of
securities;
See Item 13(a) for information on the types of charges and methods of
assessing them.
(h) The amount of aggregate premiums paid to the insurance company during the
last fiscal year;
Not Applicable.
(i) Whether any person other than the insurance company receives any part of
such premiums, the name of each such person and the amounts involved, and the
nature of the services rendered therefor;
The Company may from time to time, enter into reinsurance treaties with
other insurers whereby such insurers may agree to reimburse the Company for
mortality expenses.
(j) The substance of any other material provisions of any indenture or
agreement of the trust relating to insurance.
Not Applicable.
VII. POLICY OF REGISTRANT
52. (a) Furnish the substance of the provisions of any indenture or
agreement with respect to the conditions upon which and the method of
selection by which particular portfolio securities must or may be eliminated
from assets of the trust or must or may be replaced by other portfolio
securities. If an investment adviser or other person is to be employed in
connection with such selection, elimination or substitution, state the name of
such person, the nature of any affiliation to the depositor, trustee or
custodian, any principal underwriter, and the amount of remuneration to be
received for such services. If any particular person is not designated in the
indenture or agreement, describe briefly the method of selection of such
person.
The Company will not substitute another security for the underlying
securities of the trust unless the Securities and Exchange Commission shall
have approved such substitution.
(b) Furnish the following information with respect to each transaction
involving the elimination of any underlying security during the period covered
by the financial statements filed herewith.
Not Applicable.
(c) Describe the policy of the trust with respect to the substitution and
elimination of the underlying securities of the trust with respect to: (1) the
grounds for elimination and substitution; (2) the type of securities which may
be substituted for any underlying security; (3) whether the acquisition of
such substituted security or securities would constitute the concentration of
investment in a particular industry or group of industries or would conform to
a policy of concentration of investment in a particular industry or group of
industries; (4) whether such substituted securities may be the securities of
another investment company; and (5) the substance of the provisions of any
indenture or agreement which authorize or restrict the policy of the
registrant in this regard.
Not Applicable.
(d) Furnish a description of any policy (exclusive of policies covered by
paragraphs (a) and (b) herein) of the trust which is deemed a matter of
fundamental policy and which is elected to be treated as such.
None.
REGULATED INVESTMENT COMPANY.
53. (a) State the taxable status of the trust.
The Company is taxed as a life insurance company under the Internal
Revenue Code. Since the Separate 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 the Subchapter M of the
Code.
(b) State whether the trust qualified for the last taxable year as a regulated
investment company as defined in Section 851 of the Internal Revenue Code of
1954, and state its present intention with respect to such qualifications
during the current taxable year.
Not Applicable.
VIII. FINANCIAL AND STATISTICAL INFORMATION
54. If the trust is not the issuer of periodic payment plan certificates,
furnish the following information with respect to each class or series of its
securities.
Not Applicable.
55. If the trust is the issuer of periodic payment plan certificates, a
transcript of a hypothetical account shall be filed in approximately the
following form on the basis of the certificate calling for the smallest amount
of payments. The schedule shall cover a certificate of the type currently
being sold assuming that such certificate had been sold at a date
approximately 10 years prior to the date of registration or at the approximate
date of organization of the trust.
Not Applicable.
56. If the trust is the issuer of periodic payment plan certificates,
furnish by years for the period covered by the financial statements filed
herewith in respect of certificates sold during such period, the following
information for each fully paid type and each installment payment type of
periodic payment plan certificate currently being issued by the trust.
Not Applicable.
57. If the trust is the issuer of periodic payment plan certificates,
furnish by years for the period covered by the financial statements filed
herewith the following information for each installment payment type of
periodic payment plan certificate currently being issued by the trust.
Not Applicable.
58. If the trust is the issuer of periodic payment plan certificates,
furnish the following information for each installment payment type of
periodic payment plan certificate outstanding as at the latest practicable
date.
Not Applicable.
59. Financial statements:
Financial Statements of the Trust
The financial statements have not been filed for the Separate Account.
It has not yet commenced operations, has no assets or liabilities and has
received no income nor incurred any expense.
Financial Statements of the Depositor
The financial statements of the Company are included herein.
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Cova Financial Services Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Cova Financial
Services Life Insurance Company and subsidiaries (a wholly owned subsidiary of
Cova Corporation) as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders equity and cash flows for the
year ended December 31, 1996 and the period from June 1, 1995 to December 31,
1995 (Successor periods), and from January 1, 1995 to May 31, 1995, and for
the year ended December 31, 1994 (Predecessor periods). These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cova
Financial Services Life Insurance Company and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
the Successor periods, in conformity with generally accepted accounting
principles. Also, in our opinion, the aforementioned Predecessor consolidated
financial statements present fairly, in all material respects, the results of
their operations and their cash flows for the Predecessor periods presented,
in conformity with generally accepted accounting principles.
St. Louis, Missouri
March 7, 1997
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
ASSETS 1996
1995
<S> <C> <C>
Investments:
Debt securities available for sale at market
(cost of $952,817 in 1996 and $583,868 in 1995) $ 949,611 $ 594,556
Mortgage loans (net) 244,103 77,472
Policy loans 22,336 19,125
Short-term investments at cost which approximates
market 4,404 7,859
---------- ----------
Total investments 1,220,454 699,012
---------- ----------
Cash and cash equivalents - interest bearing 38,322 59,312
Cash - non-interest bearing 5,501 2,944
Receivable from sale of securities 1,064 --
Accrued investment income 15,011 9,116
Deferred policy acquisition costs 49,833 14,468
Present value of future profits 46,389 38,155
Goodwill 20,849 23,358
Federal and state income taxes recoverable 1,461 397
Deferred tax benefits (net) 13,537 13,556
Receivable from OakRe 1,973,813 2,391,982
Reinsurance receivables 3,504 8,891
Other assets 2,205 2,425
Separate account assets 641,871 410,449
---------- ----------
Total Assets $4,033,814 $3,674,065
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets (Continued)
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS EQUITY 1996 1995
<S> <C> <C>
Policyholder deposits $3,135,325 $3,033,763
Future policy benefits 32,342 28,071
Payable on purchase of securities 15,978 5,327
Accounts payable and other liabilities 19,764 20,143
Future purchase price payable to OakRe 16,051 23,967
Guaranty fund assessments 12,409 14,259
Separate account liabilities 626,901 410,449
----------- -----------
Total Liabilities 3,858,770 3,535,979
----------- -----------
Shareholders equity:
Common stock, $2 par value. (Authorized
5,000,000 shares; issued and outstanding
2,899,446 shares in 1996 and 1995) 5,799 5,799
Additional paid-in capital 166,491 129,586
Retained earnings 3,538 (63)
Net unrealized appreciation/(depreciation)
on securities, net of tax (784) 2,764
----------- -----------
Total Shareholders Equity 175,044 138,086
----------- -----------
Total Liabilities and Shareholders Equity $4,033,814 $3,674,065
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Income
Years ended December 31, 1996, 1995, and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 3,154 $ 921 $ 1,097 $ 2,787
Net investment income 70,629 24,188 92,486 277,616
Net realized gain (loss) on sale of investments 472 1,324 (12,414) (101,361)
Separate Account charges 7,205 2,957 1,818 3,992
Other income 1,320 725 1,037 2,713
------- -------- ---------- -----------
Total revenues 82,780 30,115 84,024 185,747
------- -------- ---------- -----------
Benefits and expenses:
Interest on policyholder deposits 50,100 17,706 97,867 249,905
Current and future policy benefits 5,130 1,785 1,830 5,259
Operating and other expenses 14,573 7,126 12,777 24,479
Amortization of purchased intangible assets 2,332 3,030 -- --
Amortization of deferred acquisition costs 4,389 100 11,157 125,357
------- -------- ---------- -----------
Total Benefits and Expenses 76,524 29,747 123,631 405,000
------- -------- ---------- -----------
Income/(loss) before income taxes 6,256 368 (39,607) (219,253)
------- -------- ---------- -----------
Income Taxes:
Current 1,740 1,011 (16,404) (46,882)
Deferred 915 (580) 6,340 (30,118)
------- -------- ---------- -----------
Total income tax expense/(benefit) 2,655 431 (10,064) (77,000)
------- -------- ---------- -----------
Net Income/(Loss) $ 3,601 $ (63) $ (29,543) $(142,253))
======= ======== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholders Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Common stock ($2 par value common stock;
Authorized 5,000,000 shares; issued and
outstanding 2,899,446 in 1996, 1995 and 1994
Balance at beg. of period) $ 5,799 $ 5,799 $ 5,799 $ 5,632
Par value of additional shares issued -- -- -- 167
--------- --------- ----------
Balance at end of period 5,799 5,799 5,799 5,799
--------- --------- --------- ----------
Additional paid-in capital:
Balance at beginning of period 129,586 137,749 136,534 120,763
Adjustment to reflect purchase acquisition
indicated in note 2 -- (52,163) -- --
Capital contribution 36,905 44,000 1,215 15,771
--------- --------- --------- ----------
Balance at end of period 166,491 129,586 137,749 136,534
--------- --------- --------- ----------
Retained earnings/(deficit):
Balance at beginning of period (63) (36,441) 1,506 143,759
Adjustment to reflect purchase acquisition -- 36,441 -- --
indicated in note 2
Net income/(loss) 3,601 (63) (29,543) (142,253)
Dividends to shareholder -- -- (8,404) --
--------- --------- --------- ----------
Balance at end of period $ 3,538 $ (63) $(36,441) $ 1,506
--------- --------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholders Equity (Continued)
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Net unrealized appreciation/(depreciation)of securities:
Balance at beginning of period 2,764 $(28,837) $ (65,228) $ (321)
Adjustment to reflect purchase acquisition
indicated in note 2 -- 28,837 -- --
Implementation of change in accounting for
marketable debt and equity securities,
net of effects of deferred taxes
of $18,375 and deferred acquisition
costs of $42,955 -- -- -- 34,125
Change in unrealized appreciation/(depreciation)
of debt and equity securities (13,915) 10,724 178,010 (357,502)
Change in deferred Federal income taxes 1,910 (1,489) (18,458) 53,324
Change in deferred acquisition costs attributable
to unrealized losses/(gains) 1,561 -- (123,161) 205,146
Change in present value of future profits
attributable to unrealized losses/(gains) 6,896 (6,471) -- --
--------- --------- ----------
Balance at end of period (784) 2,764 (28,837) (65,228)
--------- --------- ---------- ----------
Total Shareholders Equity $175,044 $138,086 $ 78,270 $ 78,611
========= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Interest and dividend receipts $ 68,622 $ 18,744 $ 131,439 $ 309,856
Premiums received 3,154 921 1,097 2,787
Insurance and annuity benefit payments (3,729) (2,799) (1,809) (3,755)
Operating disbursements (17,158) (10,480) (9,689) (26,023)
Taxes on income refunded (paid) (3,016) 60 48,987 17,032
Commissions and acquisition costs paid (36,735) (17,456) (23,872) (26,454)
Other 937 529 1,120 836
---------- ---------- ----------- ------------
Net cash provided by/(used in) operating
activities 12,075 (10,481) 147,273 274,279
---------- ---------- ----------- ------------
Cash flows from investing activities:
Cash used for the purchase of investment
securities (715,274) (875,994) (575,891) (1,935,353)
Proceeds from investment securities sold and
matured 262,083 253,814 2,885,053 3,040,474
Other (14,166) 179 (8,557) (8,185)
---------- ---------- ----------- ------------
Net cash provided by/(used in) investing
activities $(467,357) $(622,003) $2,300,605 $ 1,096,936
---------- ---------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 446,784 $ 132,752 $ 130,660 $ 274,960
Transfers from/(to) OakRe 574,010 628,481 (3,048,531) --
Transfer to Separate Accounts (119,592) (37,946) (4,835) (33,548)
Return of policyholder deposits (491,025) (436,271) (290,586) (608,868)
Dividends to Shareholder -- -- (8,404) --
Capital contributions received 20,000 44,000 1,215 15,938
---------- ---------- ------------- -----------
Net cash provided by/(used in) financing
activities 430,177 331,016 (3,220,481) (351,518)
---------- ---------- ------------- -----------
Increase/(decrease) in cash and cash
equivalents (25,105) (301,468) (772,603) 1,019,697
Cash and cash equivalents at beginning of
period 62,256 363,724 1,136,327 116,630
CFLIC contributed cash (Note 9) 6,672 -- -- --
Cash and cash equivalents at end of period $ 43,823 $ 62,256 $ 363,724 $1,136,327
========== ========== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows, Continued
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Reconciliation of net income/(loss)to net cash
provided by operating activities:
Net income/(loss) $ 3,601 $ (63) $(29,543) $(142,253)
Adjustments to reconcile net income/(loss)
to net cash provided by operating activities:
Increase/(decrease) in future policy
benefits (net of reinsurance) 680 (1,013) 11 1,494
Increase/(decrease) in payables and accrued
liabilities 2,900 (392) (10,645) 3,830
Decrease/(increase) in accrued investment
income (4,778) (7,904) 32,010 21,393
Amortization of intangible assets 6,721 3,831 11,309 125,722
Amortization and accretion of securities
premiums and discounts 2,751 307 2,410 3,635
Recapture commissions paid to OakRe (4,483) (4,777) -- --
Net realized losson sale of
investments (472) (1,324) 12,414 101,361
Interest accumulated on policyholder
deposits 50,100 17,706 97,867 249,905
Investment expenses paid 1,151 642 2,373 7,296
Decrease/(Increase)in guaranty assessments -- (104) 5,070 (935)
Increase/(decrease) in current and deferred
Federal income taxes (351) 491 38,923 (59,263)
Separate account net loss (2,008) 1 1 2
Deferral of acquisition costs (34,803) (14,568) (13,354) (30,024)
Other (8,934) (3,314) (1,573) (7,884)
--------- ----------
Net cash provided by operating activities $ 12,075 $(10,481) $147,273 $ 274,279
========= ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Services Life Insurance Company (CFSLIC) and subsidiaries (the
Company), formerly Xerox Financial Services Life Insurance Company (the
Predecessor), market and service single premium deferred annuities, immediate
annuities, variable annuities, and single premium whole-life insurance
policies. The Company is licensed to do business in 47 states and the
District of Columbia. Most of the policies issued present no significant
mortality nor longevity risk to the Company, but rather represent investment
deposits by the policyholders. Life insurance policies provide policy
beneficiaries with mortality benefits amounting to a multiple, which declines
with age, of the original premium.
Under the deferred annuity contracts, interest rates credited to policyholder
deposits are guaranteed by the Company for periods from one to ten years, but
in no case may renewal rates be less than 3%. The Company may assess
surrender fees against amounts withdrawn prior to scheduled rate reset and
adjust account values based on current crediting rates. Policyholders also
may incur certain Federal income tax penalties on withdrawals.
Although the Company markets its products through numerous distributors,
including regional brokerage firms, national brokerage firms and banks,
approximately 66%, 59% and 57% of the companies sales have been through two
specific brokerage firms, A.G. Edwards & Sons, Incorporated. and Edward Jones
& Company in 1996, 1995 and 1994, respectively.
ORGANIZATION
Prior to June 1, 1995 Xerox Financial Services, Inc. (XFSI) owned 100% or
2,899,446 shares of the Predecessor. XFSI is a wholly owned subsidiary of
Xerox Corporation.
On June 1, 1995 XFSI sold 100% of the issued and outstanding shares of the
Predecessor to Cova Corporation, a subsidiary of General American Life
Insurance Company (GALIC), a Missouri domiciled life insurance company, in
exchange for approximately $91.4 million in cash and $22.7 million in future
payables. In conjunction with this Agreement, the Predecessor also entered
into a financing reinsurance transaction that caused OakRe Life Insurance
Company(OakRe),a subsidiary of the Predecessor, to assume the economic
benefits and risks of the existing single premium deferred annuity deposits
(SPDAs) of Cova Financial Services Life Insurance Company, which had an
aggregate carrying value at June 1, 1995 of $2,982.0 million. In exchange,
the Predecessor transferred specifically identified assets to OakRe with a
market value at June 1, 1995 of $2,986.0 million. Ownership of OakRe was
retained by XFSI subsequent to the sale of the Predecessor and other
affiliates. The Receivable from OakRe to the Company that was created by this
transaction will be liquidated over the remaining crediting rate guaranty
periods (which will be substantially expired in four years) by the transfer of
cash in the amount of the then current account value, less a recapture
commission fee to OakRe on policies retained beyond their 30-day no-fee
surrender window by the Company, upon the next crediting rate reset date of
each annuity policy. The Company may then reinvest that cash for those
policies that are retained and thereafter assume the benefits and risks of
those deposits.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
In the event that both OakRe and XFSI default on the receivable, the Company
may draw funds from a standby bank irrevocable letter of credit established by
XFSI in the amount of $500 million. No funds were drawn on this letter of
credit during the periods ending December 31, 1996 and 1995.
In substance, terms of the agreement have allowed the seller, XFSI, to retain
substantially all of the existing financial benefits and risks of the existing
business, while the purchaser, GALIC, obtained the corporate operating and
product licenses, marketing and administrative capabilities of the Company,
and access to the retention of the policyholder deposit base that persists
beyond the next crediting rate reset date.
The Company owns 100% of the outstanding shares of First Cova Life Insurance
Company (a New York domiciled insurance company) (FCLIC) and Cova Financial
Life Insurance Company (a California domiciled insurance company) (CFLIC).
Ownership of Cova Financial Life Insurance Company was obtained on December
31, 1996 as the result of a capital contribution by Cova Corporation. The
Company has presented the consolidated financial position and results of
operations for its subsidiaries from the dates of actual ownership (see note
9).
(2) CHANGE IN ACCOUNTING
Upon closing the sale, the Company restated its financial statements in
accordance with "push down purchase accounting", which allocates the net
purchase price for the Company and its then sole subsidiary FCLIC of $91.4
million according to the fair values of the acquired assets and liabilities,
including the estimated present value of future profits. These allocated
values were dependent upon policies in force and market conditions at the time
of closing, however, these allocations were not finalized until 1996. The
table below summarizes the final allocation of purchase price:
<TABLE>
<CAPTION>
(In Millions)
<S> <C> June 1, 1995
--------------
Assets acquired:
Debt securities $ 32.4
Policy loans 18.3
Cash and cash equivalents 363.7
Present value of future profits 47.4
Goodwill 20.5
Deferred tax benefit 24.9
Receivable from OakRe 2,969.0
Other assets 5.9
Separate account assets 332.7
--------------
3,814.8
--------------
Liabilities assumed:
Policyholder deposits 3,299.2
Future policy benefits 27.2
Future purchase price payable 22.7
Deferred Federal income taxes 12.6
Other liabilities 29.0
Separate account liabilities 332.7
--------------
3,723.4
--------------
Adjusted purchase price $ 91.4
==============
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
In addition to revaluing all material tangible assets and liabilities to their
respective estimated market values as of the closing date of the sale, the
Company also recorded in its financial statements the excess of cost over fair
value of net assets acquired (goodwill) as well as the present value of future
profits to be derived from the purchased and reinsured business. These amounts
were determined in accordance with the purchase method of accounting. This new
basis of accounting resulted in an increase in shareholders equity of $13.1
million in 1995 reflecting the application of push down purchase accounting.
The Companys consolidated financial statements subsequent to June 1, 1995
reflect this new basis of accounting.
All amounts for periods ended before June 1, 1995 are labeled Predecessor and
are based on predecessor historical costs. The periods ending on or after
such date are labeled The Company, and are based on the new cost basis of the
Company or fair values at June 1, 1995 and subsequent results of operations.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITIES
Investments in all debt securities and those equity securities with readily
determinable market values are classified into one of three categories:
held-to-maturity, trading, or available-for-sale. Classification of
investments is based on management's current intent. All debt and equity
securities at December 31, 1996 and 1995 were classified as
available-for-sale. Securities available-for-sale are carried at market value,
with unrealized holding gains and losses reported as a separate component of
stockholders equity, net of deferred effects of income tax and related effects
on deferred acquisition costs.
Amortization of the discount or premium from the purchase of mortgage-backed
bonds is recognized using a level-yield method which considers the estimated
timing and amount of prepayments of the underlying mortgage loans. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between the prepayments previously
anticipated and the actual prepayments received and currently anticipated.
When such a difference occurs, the net investment in the mortgage-backed bond
is adjusted to the amount that would have existed had the new effective yield
been applied since the acquisition of the bond, with a corresponding charge or
credit to interest income (the "retrospective method").
A realized loss is recognized and charged against income if the Company's
carrying value in a particular investment in the available-for-sale category
has experienced a significant decline in market value that is deemed to be
other than temporary.
Investment income is recorded when earned. Realized capital gains and losses
on the sale of investments are determined on the basis of specific costs of
investments and are credited or charged to income. Gains or losses on
financial future or option contracts which qualify as hedges of investments
are treated as basis adjustments and are recognized in income over the life of
the hedged investments.
MORTGAGE LOANS AND OTHER INVESTED ASSETS
Mortgage loans and policy loans are carried at their unpaid principal
balances. Real estate is carried at cost less accumulated depreciation.
Other invested assets are carried at lower of cost or market.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan (SFAS 114), indicate a likelihood of loss.
Prior to 1995, the Company evaluated its real estate-related assets (including
accrued interest) by estimating the probabilities of loss utilizing various
projections that included several factors relating to the borrower, property,
term of the loan, tenant composition, rental rates, other supply and demand
factors and overall economic conditions. Generally, at that time, the reserve
was based upon the excess of the loan amount over the estimated future cash
flows from the loan.
In 1995, the Company adopted Statement of Financial Accounting Standards No.
118, Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures (SFAS 118). SFAS 118 amends SFAS 114, providing clarification
of income recognition issues and requiring additional disclosures relating to
impaired loans. The adoption of SFAS 114 and 118 had no effect on the
Companys financial position or results of operations at or for the period
ended December 31, 1995. The Company had no impaired loans, but did establish
a valuation allowance for potential losses on mortgage loans of $88 thousand
at December 31, 1996.
Prior to 1995, when an investment supported by real estate collateral was
deemed "in-substance" foreclosed, the investment was reclassified as real
estate and recorded at its fair value, with any reduction in carrying value
recorded as a realized loss. The change in this valuation was recorded as a
realized capital gain or loss in the statements of income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in banks, US
Treasury bills, money market accounts, and commercial paper with maturities
under 90 days, which are not otherwise restricted.
SEPARATE ACCOUNT ASSETS
The separate account investments are assigned to the policyholders in the
separate accounts, and are not guaranteed or supported by the other general
investments of the Company. The Company earns mortality and expense risk fees
from the separate accounts and assesses withdrawal charges in the event of
early withdrawals. Separate accounts assets are valued at fair market value.
In order to provide for optimum policyholder returns, and to allow for the
replication of the investment performance of existing cloned mutual funds, the
Company has periodically transferred capital to the separate account to
provide for the initial purchase of investments in new portfolios. As
additional funds have been received through policyholder deposits, the Company
has periodically reduced its capital investment in the separate accounts. As
of December 31, 1996, approximately $15.0 million of capital investments
remained within the separate accounts.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business which vary with and are directly related
to the production of new business, principally commissions, premium taxes,
sales costs, and certain policy issuance and underwriting costs, are deferred.
These deferred costs are amortized in proportion to estimated future gross
profits derived from investment income, realized gains and losses on sales of
securities, unrealized securities gains and losses, interest credited to
accounts, surrender fees, mortality costs, and policy maintenance expenses.
The estimated gross profit streams are periodically reevaluated and the
unamortized balance of deferred acquisition costs is adjusted to the amount
that would have existed had the actual experience and revised estimates been
known and applied from the inception of the policies and contracts. The
amortization and adjustments resulting from unrealized gains and losses is not
recognized currently in income but as an offset to the unrealized gains and
losses reflected as a separate component of equity.
The components of deferred policy acquisition costs are shown below. The
effects on deferred policy acquisition costs of the consolidation of CFLIC
(see note 9) with the Company are presented separately.
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
(In Thousands) 1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Deferred policy acquisition costs,
beginning of period $14,468 $ 92,398 $ 213,362 $ 146,504
Effects of push down purchase
accounting -- (92,398) -- --
Commissions and expenses deferred 34,803 14,568 13,354 30,025
Amortization (4,389) (100) (11,157) (125,357)
Deferred policy acquisition costs
attributable to unrealized gains/(losses) 1,561 -- (123,161) 162,190
Effects on deferred policy acquisition
costs of CFLIC consolidation 3,390 -- -- --
--------
Deferred policy acquistion costs,
end of period $49,833 $ 14,468 $ 92,398 $ 213,362
======== ========= ========== ==========
</TABLE>
PURCHASE RELATED INTANGIBLE ASSETS AND LIABILITIES
In accordance with the purchase method of accounting for business
combinations, two intangible assets and a future payable related to accrued
purchase price consideration were established as of the purchase date:
PRESENT VALUE OF FUTURE PROFITS
As of June 1, 1995 the Company established an intangible asset which
represents the present value of future profits to be derived from both the
purchased and transferred blocks of business. Certain estimates were utilized
in the computation of this asset including estimates of future policy
retention, investment income, interest credited to policyholders, surrender
fees, mortality costs, and policy maintenance costs discounted at a pre-tax
rate of 18% (12% net after tax).
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
In addition, as the Company has the option of retaining its SPDA policies
after they reach their next interest rate reset date and are recaptured from
OakRe, a component of this asset represents estimates of future profits on
recaptured business. This asset will be amortized in proportion to estimated
future gross profits derived from investment income, realized gains and losses
on sales of securities, unrealized securities gains and losses, interest
credited to accounts, surrender fees, mortality costs, and policy maintenance
expenses. The estimated gross profit streams are periodically reevaluated and
the unamortized balance of present value of future profits will be adjusted to
the amount that would have existed had the actual experience and revised
estimates been known and applied from the inception. The amortization and
adjustments resulting from unrealized gains and losses is not recognized
currently in income but as an offset to the unrealized gains and losses
reflected as a separate component of equity. The amortization period is the
remaining life of the policies, which is estimated to be 20 years from the
date of original policy issue.
Based on current assumptions, amortization of the original in-force PVFP
asset, expressed as a percentage of the original in-force asset, are projected
to be 6.8%, 5.8%, 4.6%, 4.5% and 4.7% for the years ended December 31, 1997
through 2001, respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate actual results.
During 1996, the Company adjusted its original purchase accounting to include
a revised estimate of the ultimate renewal (recapture) rate. This adjustment
resulted in a re-allocation of the net purchased intangible asset between
present value of future profits, goodwill and the future payable. This final
allocation and the resulting impact on inception to date amortization was
recorded, in its entirety, in 1996. No restatement of the June 1, 1995
opening Balance Sheet was made.
The components of present value of future profits are below. The effects on
present value of future profits of the consolidation of CFLIC (see note 9)
with the Company are presented separately.
<TABLE>
<CAPTION>
The Company
7 Months
Ended
(In Thousands) 1996
12/31/95
<S> <C> <C>
Present value of future profits - beginning of period 38,155 46,709
Interest added 3,274 1,941
Net amortization (3,747) (4,024)
Present value of future profits attributable to unrealized gains 6,896 (6,471)
Adjustment due to revised push down purchase accounting 698 --
Effects on present value of future profits of CFLIC consolidation 1,113 --
Present value of future profits - end of period $46,389 $38,155
</TABLE>
Future payable
Pursuant to the financial reinsurance agreement with OakRe, the receivable
from OakRe becomes due in installments when the SPDA policies reach their next
crediting rate reset date. For any recaptured policies that continue in force
into the next guarantee period, the Company will pay a commission to OakRe of
1.75% up to 40% of policy account values originally reinsured and 3.5%
thereafter. On policies that are recaptured and subsequently exchanged to a
variable annuity policy, the Company will pay a commission to OakRe of 0.50%.
(continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The Company has recorded a future payable that represents the present value
ofthe anticipated future commission payments payable to OakRe over the
remaining life of the financial reinsurance agreement discounted at an
estimated borrowing rate of 6.5%. This liability represents a contingent
purchase price payable for the policies transferred to OakRe on the purchase
date and has been pushed down to the Company through the financial reinsurance
agreement. The Company expects that this payable will be substantially
extinguished by the year 2000.
The components of this future payable are below. The effects on the future
payable of the consolidation of CFLIC (see note 9) with the Company are
presented separately.
<TABLE>
<CAPTION>
The Company
7 Months
Ended
(In Thousands) 1996 12/31/95
<S> <C> <C>
Future payable - beginning of period $23,967 $27,797
Interest added 943 947
Payments to OakRe (4,483) (4,777)
Adjustment due to revised push down purchase accounting (5,059) --
Effects on future payable of CFLIC consolidation 683 --
--------
Future payable - end of period $16,051 $23,967
======== ========
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
Goodwill
Under the push down method of purchase accounting, the excess of purchase
price over the fair value of tangible and intangible assets and liabilities
acquired is established as an asset and referred to as Goodwill. The Company
has elected to amortize goodwill on the straight line basis over a 20 year
period. The components of goodwill are below. The effects on goodwill of the
consolidation of CFLIC (see note 9) with the Company are presented separately.
<TABLE>
<CAPTION>
<S> <C> <C>
(In Thousands) The Company
--------------------
7 Months Ended
1996 12/31/95
----------------
Goodwill - beginning of period $ 23,358 $ 24,060
Amortization (916) (702)
Adjustment due to revised push down purchase accounting
(3,626) --
Effects on goodwill of CFLIC consolidation 2,033 --
--------------------
Goodwill - end of period $ 20,849 $ 23,358
</TABLE>
Deferred Tax Assets and Liabilities
XFSI and GALIC agreed to file an election to treat the acquisition of the
Company as an asset acquisition under the provisions of Internal Revenue Code
Section 338(h)(10). As a result of that election, the tax basis of the
Companys assets as of the date of acquisition were revalued based upon fair
market values. The principal effect of the election was to establish a tax
asset on the tax-basis balance sheet of approximately $35.3 million for the
value of the business acquired that is amortizable for tax purposes over ten
to fifteen years.
POLICYHOLDER DEPOSITS
The Company recognizes its liability for policy amounts that are not subject
to policyholder mortality nor longevity risk at the stated contract value,
which is the sum of the original deposit and accumulated interest, less any
withdrawals. The average weighted interest crediting rate on the Companys
policyholder deposits as of December 31, 1996 was 5.77%.
FUTURE POLICY BENEFITS
Reserves are held for future annuity benefits that subject the Company to
risks to make payments contingent upon the continued survival of an individual
or couple (longevity risk). These reserves are valued at the present value of
estimated future benefits discounted for interest, expenses, and mortality.
The assumed mortality is the 1983 Individual Annuity Mortality Tables
discounted at 5.50% to 8.50%, depending upon year of issue.
Current mortality benefits payable are recorded for reported claims and
estimates of amounts incurred but not reported.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
PREMIUM REVENUE
The Company recognizes premium revenue at the time of issue on annuity
policies that subject it to longevity risks.
The Company currently assesses no explicit life insurance premium for its
commitment to make payments in excess of its recorded liability that are
contingent upon policyholder mortality. Benefits paid in excess of the
recorded liability are recognized when incurred as the amounts are not
material to the financial statements.
Amounts collected on policies not subject to any mortality or longevity risk
are recorded as increases in the policyholder deposits liability.
FEDERAL INCOME TAXES
Prior to June 1,1995 the revenues and expenses of the Predecessor were
included in a consolidated Federal income tax return with its parent company
and other affiliates. Allocations of Federal income taxes were based upon
separate return calculations.
Subsequent to June 1, 1995, the Company filed its own separate income tax
return, independent from its ultimate parent, GALIC.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income to the period that includes
the enactment date.
RISKS AND UNCERTAINTIES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
The following elements of the consolidated financial statements are most
affected by the use of estimates and assumptions:
- Investment market valuation
- Amortization of deferred policy acquisition costs
- Amortization of present value of future profits
- Recoverability of Goodwill
The market value of the Company's investments is subject to the risk that
interest rates will change and cause a temporary increase or decrease in the
liquidation value of debt securities. To the extent that fluctuations in
interest rates cause the cash flows of assets and liabilities to change, the
Company might have to liquidate assets prior to their maturity and recognize a
gain or loss. Interest rate exposure for the investment portfolio is managed
through asset/liability management techniques which attempt to control the
risks presented by differences in the probable cash flows and reinvestment of
assets with the timing of crediting rate changes in the Company's policies and
contracts. Changes in the estimated prepayments of mortgage-backed securities
also may cause retrospective changes in the amortization period of securities
and the related recognition of income.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The amortization of deferred acquisition costs is based on estimates of
long-term future gross profits from existing policies. These gross profits
are dependent upon policy retention and lapses, the spread between investment
earnings and crediting rates, and the level of maintenance expenses. Changes
in circumstances or estimates may cause retrospective adjustment to the
periodic amortization expense and the carrying value of the deferred expense.
In a similar manner, the amortization of present value of future profits is
based on estimates of long-term future profits from existing and recaptured
policies.
These gross profits are dependent upon policy retention and lapses, the spread
between investment earnings and crediting rates, and the level of maintenance
expenses. Changes in circumstances or estimates may cause retrospective
adjustment to the periodic amortization expense and the carrying value of the
asset.
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets
to be Disposed of (SFAS 121), which was adopted by the Company in the fourth
quarter of 1995, the Company has considered the recoverability of Goodwill and
has concluded that no circumstances have occurred which would give rise to
impairment of Goodwill for the period ending December 31, 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS #107) applies fair value disclosure
practices with regard to financial instruments, both assets and liabilities,
for which it is practical to estimate fair value. In cases where quoted
market prices are not readily available, fair values are based on estimates
that use present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Although fair value
estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, might
not be realized in the immediate settlement of the instruments. SFAS #107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Because of this, and further because a value of
a business is also based upon its anticipated earning power, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
The Predecessor adopted Statement of Financial Accounting Standard No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments" (SFAS #119), as of December 31, 1994. SFAS #119 requires
increased disclosures about derivative financial instruments including the
amount, nature, and terms of all derivative financial instruments as well as
disclosure of the purposes for which derivative financial instruments are
held, end-of-period fair values and any net gains or losses arising from
trading of derivative financial instruments.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS
AND ACCRUED INVESTMENT INCOME:
The carrying values amounts reported in the balance sheets for these
instruments approximate their fair values. Short-term debt securities are
considered "available for sale."
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES):
Fair values for debt securities are based on quoted market prices, where
available. For debt securities not actively traded, fair value estimates are
obtained from independent pricing services. In some cases, such as private
placements and certain mortgage-backed securities, fair values are estimated
by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments. (See
note 4 for fair value disclosures). Fair values for mortgages are based on
management estimates and incorporate independent appraisals of underlying real
property. As of December 31, 1996, fair value of the Companys mortgage loans
are equivalent to their carrying value.
INTEREST RATE SWAPS AND FINANCIAL FUTURES CONTRACTS:
The fair value of interest rate swaps and financial futures contracts are the
amounts the Company would receive or pay to terminate the contracts at the
reporting date, thereby taking into account the current unrealized gains or
losses of open contracts. Amounts are based on quoted market prices or
pricing models or formulas using current assumptions. (See note 6 for fair
value disclosures).
INVESTMENT CONTRACTS:
The Company's policy contracts require the beneficiaries to commence receipt
of payments by the later of age 85 or 10 years after purchase, and
substantially all permit earlier surrenders, generally subject to fees and
adjustments. Fair values for the Company's liabilities for investment type
contracts (Policyholder Deposits) are estimated as the amount payable on
demand. As of December 31, 1996 and 1995 the cash surrender value of
policyholder funds on deposit were approximately $29.1 million and $2.2
million less than their stated carrying value, respectively. Of the contracts
permitting surrender, 90% provide the option to surrender without fee or
adjustment during the 30 days following reset of guaranteed crediting rates.
The Company has not determined a practical method to determine the present
value of this option.
All of the Company's deposit obligations are fully guaranteed by the acquirer,
GALIC, and the receivable from OakRe equal to the SPDA obligations is
guaranteed by OakRe's parent, XFSI.
REINSURANCE:
The impact of reinsurance on the December 31, 1996 financial statements is not
considered material.
The financing reinsurance agreement entered into with OakRe does not meet the
conditions for reinsurance accounting under Generally Accepted Accounting
Principles (GAAP). The net assets initially transferred to OakRe were
established as a receivable and are subsequently increased as interest is
accrued on the underlying liabilities and decreased as funds are transferred
back to the Company when policies reach their crediting rate reset date or
benefits are claimed.
OTHER
Certain 1994 and 1995 amounts have been reclassified to conform to the 1996
presentation.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(4) INVESTMENTS
The Company's investments in debt and equity securities are considered
available for sale and carried at estimated fair value, with the aggregate
unrealized appreciation or depreciation being recorded as a separate component
of shareholder equity. The carrying value and amortized cost of investments at
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
AMORTIZED
VALUE GAINS LOSSES VALUE COST
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 7,175 $ 29 ($50) $ 7,175 $ 7,196
Collateralized mortgage obligations 382,335 985 (2,721) 382,335 384,071
Corporate, state, municipalities, and
political subdivisions 560,101 3,971 (5,427) 560,101 561,557
Total debt securities 949,611 4,985 (8,198) 949,611 952,824
Mortgage loans 244,103 -- -- 244,103 244,103
Policy loans 22,336 -- -- 22,336 22,336
Short term investments 4,404 21 -- 4,404 4,383
Total investments $1,220,454 $5,006 ($8,198) $1,220,454 $1,223,646
Companys beneficial interest in
separate accounts $ 14,970 -- -- $ 14,970 --
</TABLE>
<TABLE>
<CAPTION>
1995
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
AMORTIZED
VALUE GAINS LOSSES VALUE
COST
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 4,307 $ 156 -- $ 4,307 $ 4,151
Collateralized mortgage obligations 252,148 4,344 $ (237) 252,148 248,041
Corporate, state, municipalities, and
political subdivisions 338,101 7,261 (836) 338,101 331,676
-------- ------- --------- -------- --------
Total debt securities 594,556 11,761 (1,073) 594,556 583,868
-------- ------- --------- -------- --------
Mortgage loans 77,472 -- -- 77,472 77,472
Policy loans 19,125 -- -- 19,125 19,125
Short term investments 7,859 36 -- 7,859 7,823
-------- ------- --------- -------- --------
Total investments $699,012 $11,797 $ (1,073) $699,012 $688,288
======== ======= ========= ======== ========
<FN>
As of December 31, 1996, the Company had no impaired investments. The Company did
establish a valuation allowance for potential losses on mortgage loans of $88 thousand as
of December 31, 1996.
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The amortized cost and estimated market value of debt securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Maturities of mortgage-backed securities will be substantially shorter than
their contractual maturity because they require monthly principal installments
and mortgagees may prepay principal.
<TABLE>
<CAPTION>
1996
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
(in thousands of dollars)
Due after one year through five years $233,232 $234,493
Due after five years through ten years 283,884 281,155
Due after ten years 51,630 51,628
Mortgage-backed securities 384,078 382,335
Total $952,824 $949,611
<FN>
At December 31, 1996, approximately 98.7% of the Company's debt securities are
investment grade or are non-rated but considered to be of investment grade.
Of the 1.3% non-investment grade debt securities, all are rated as BB+.
</TABLE>
Included in debt securities in 1994 and the first five months of 1995 are
investments in interest-only mortgage-backed stripped securities (IOs) and
similar IOettes. Accounting for investments in "high risk" (interest only)
collateralized mortgage obligations (CMOs), is in accordance with the
provisions of EITF Nos. 89-4 and 93-18. An effective yield is calculated for
each high risk CMO based on the current amortized cost of the investment and
the current estimate of future cash flow. The recalculated effective yield is
used to record interest income in subsequent periods (the "prospective
method"). If the anticipated cash flow for any "high risk" CMO discounted at
the comparable risk-free rate is less than the unamortized cost, an impairment
loss is recorded and the unamortized cost adjusted. The write-down is treated
as a realized loss. Write-downs of $3,341,163 were recorded in 1994. No IOs
or IOettes were held by the Company at December 31, 1996 or 1995. The
weighted average of the effective yield that was used to accrue interest
income in 1994 was 11.88%.
The Company participates in a securities lending program whereby certain
securities are loaned to third parties, primarily major brokerage firms. The
agreement with a custodian bank facilitating such lending requires a minimum
of 102% of the initial market value of the domestic loaned securities to be
maintained in a collateral pool. To further minimize the credit risk related
to this lending program, the Company monitors the financial condition of the
counter parties to these agreements. Securities loaned at December 31, 1996
had market values totaling $16,612,411. Cash, letters of credit, and
government securities of $17,251,070 was held by the custodian bank as
collateral to secure this agreement. Income on the Companys security lending
program in 1996 was immaterial.
No debt securities were non-income producing during the years ended December
31, 1996 and 1995.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
Information related to troubled debt restructurings during 1994 is as follows:
<TABLE>
<CAPTION>
THE
PREDECESSOR
DEBT MORTGAGE
SECURITIES LOANS TOTAL
(in thousands of dollars)
<S> <C> <C> <C>
Aggregate carrying value at December 31, 1994 $3,306 -- $3,306
Gross interest income included in net income
during 1994 205 -- 205
Gross interest income that would have been
earned during 1994 if there had been no
restructuring 538 -- 538
</TABLE>
The components of net investment income, realized capital gains/(losses) and
unrealized gains/(losses) were as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
(in thousands of dollars)
<S> <C> <C> <C> <C>
Income on debt securities $53,632 $19,629 $ 63,581 $ 267,958
Income on equity securities -- -- 302 645
Income on short-term investments 2,156 2,778 28,060 11,705
Income on cash on deposit -- -- -- 316
Income on interest rate swaps -- -- 377 (244)
Income on policy loans 1,454 868 624 1,376
Interest on mortgage loans 13,633 1,444 248 1,162
Income on foreign exchange -- -- 184 (433)
Income of real estate -- -- 1,508 3,278
Income on separate account investments 772 -- (1) 2
Miscellaneous interest 133 109 (24) (853)
-------- --------- -----------------
Total investment income 71,780 24,828 94,859 284,912
---------
Investment expenses (1,151) (640) (2,373) (7,296)
-------- -------- ---------
Net investment income $70,629 $24,188 $ 92,486 $ 277,616
======== ======== ========= =================
Realized capital gains/(losses) were as follows:
Debt securities 469 $ 1,344 $(16,749) $ (79,300)
Mortgage loans 4 -- 1,431 (3,452)
Equity securities -- -- (423) (76)
Real estate -- -- (124) --
Short-term investments (1) (20) (1,933) (282)
Other assets -- -- (76) 147
Interest rate swaps -- -- 5,460 -- (18,398)
--------- -----------------
Net realized gains/(losses) on investments $ 472 $ 1,324 $(12,414) $ (101,361)
======== ======== ========= =================
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
(In thousands
of dollars)
<S> <C> <C> <C> <C>
Unrealized gains/(losses) were as follows:
Debt securities ($3,213) $10,688 $(85,410) $(261,947)
Short-term investments 21 36 879 (594)
Effects on deferred acquisition costs amortization 1,561 -- 39,030 162,190
Effects on present value of future profits 425 (6,471) -- --
Unrealized gains/(losses) before income tax (1,206) 4,253 (45,501) (100,351)
Unrealized income tax benefit/(expense) 422 (1,489) 16,664 35,123
Net unrealized gains (losses) on investments ($784) $ 2,764 $(28,837) ($65,228)
======== ========= ==========
</TABLE>
Proceeds from sales of investments in debt securities during 1996 were
$223,430,495. Gross gains of $1,158,518 and gross losses of $687,126 were
realized on those sales. Included in these amounts were $28,969 of gross
gains realized on the sale of non-investment grade securities.
Proceeds from sales of investments in debt securities for the Company during
1995 were $214,811,186, and for the Predecessor were $2,786,998,780. Gross
gains of $1,533,501 and gross losses of $190,899 were realized by the Company
on its sales. Included in these amounts for the Company are $373,768 of
gross gains realized on the sale of non-investment grade securities. The
Predecessor realized gross gains of $9,499,191 and gross losses of $26,249,279
on its sales. Included in these amounts are $6,367,297 of gross gains and
$7,607,167 of gross losses realized on the sale of non-investment grade
securities.
Proceeds from sales of investments in debt securities during 1994 were
$3,081,863,341. Gross gains of $59,472,808 and gross losses of $136,394,109
were realized on those sales. Included in these amounts are $6,455,887 of
gross gains and $6,692,683 of gross losses realized on the sale of
non-investment grade securities.
Unrealized appreciation/(depreciation) of debt securities for the Company in
1996 and 1995, and the Predecessor in 1995 and 1994 were $(13,900,000),
$10,688,000, $176,537,000, and $(357,401,000), respectively. Unrealized
appreciation/(depreciation)of debt securities is calculated as the change
between the cost and market values of debt securities for the years then
ended.
Securities with a book value of approximately $7,032,267 at December 31, 1996
were deposited with government authorities as required by law.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(5) SECURITIES GREATER THAN 10% OF SHAREHOLDERS EQUITY
As of December 31, 1996 the Company held the following individual securities
which exceeded 10% of shareholders equity:
<TABLE>
<CAPTION>
LONG-TERM DEBT CARRYING
SECURITIES VALUE
<S> <C>
Countrywide Mtg. 1993-12 A4 $19,347,536
FNMA Remic Tr 1996-50 A1 19,104,500
</TABLE>
As of December 31, 1995 the Company held the following individual securities
which exceeded 10% of shareholders equity:
<TABLE>
<CAPTION>
LONG-TERM DEBT CARRYING
SECURITIES VALUE
<S> <C>
Countrywide Mtg. 1993-12 A4 $18,726,875
American Airlines 15,080,392
</TABLE>
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
FINANCIAL FUTURES CONTRACTS
Futures contracts are contracts for delayed delivery of securities in which
the seller agrees to make delivery at a specified future date for a specific
price. Gains or losses are realized in daily cash settlements. Risks arise
from the possible inability of counter parties to meet the terms of their
contracts and from movements in securities values and interest rates. When
future contracts are designated as hedges, additional risks arise due to the
possibility that the futures contract will provide an imperfect correlation to
the hedged security.
The Company periodically enters into financial futures contracts in order to
hedge its short term investment spread risks encountered during occasional
periods of unusually large recapture activity. Gains and losses from these
anticipatory hedges are applied to the cost basis of the assets acquired with
recaptured funds. In 1996, $381,105 in net losses were recorded as basis
adjustments to hedged debt securities.
In order to limit its exposure to market fluctuations while it holds temporary
seed money investments within the separate account (see note 3), the Company
has adopted a hedging policy that involves holdings of futures contracts. As
of December 31, 1996, the Company held 35 S&P 500 index futures contracts, 5
5-year T-Note futures contracts and 10 10-year T-Note futures contracts with a
total notional face amount of $14,528,750 and a total fair market value of
$14,652,969. Collateral requirements set by the Chicago Board of Trade
averaged $9,800 per contract at December 31, 1996. At December 31, 1996, the
Company recorded as a component of net investment income, $1,639,717 of gross
losses from terminated contracts and $406,141 of gross gains from open
contracts. In 1996, the Company also recorded, as an offsetting component of
net investment income, a net gain of $2,007,720 from market appreciation on
the underlying hedged securities within the separate account.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(7) POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company has no direct employees and no retired employees. All personnel
used to support the operations of the Company are supplied by contract by Cova
Life Management Company (CLMC), a wholly owned subsidiary of Cova Corporation.
The Company is allocated a portion of certain health care and life insurance
benefits for future retired employees of CLMC. In 1996 and 1995, the Company
was allocated a portion of benefit costs including severance pay, accumulated
vacations, and disability benefits. At December 31, 1996 CLMC had no retired
employees nor any employees fully eligible for retirement and had no
disbursements for such benefit commitments. The expense arising from these
obligations is not material.
(8) INCOME TAXES
The Company will file a consolidated Federal Income Tax return with its
wholly-owned subsidiary, FCLIC. Amounts payable or recoverable related to
periods before June 1, 1995 are subject to an indemnification agreement with
XFSI, which has the effect that the Company is not at risk for any income
taxes nor entitled to recoveries related to those periods, except for
approximately $1.4 million of state income tax recoveries.
Income taxes are recorded in the statements of earnings and directly in
certain shareholders equity accounts. Income tax expense (benefit) for the
years ended December 31 was allocated as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
(In thousands of dollars)
<S> <C> <C> <C> <C>
Statements of income:
Operating income (excluded realized
investment gains and losses) $ 2,493 $ (85) $ (5,038) $ (39,511)
Realized investment gains/(losses) 162 516 (5,026) (37,489)
-------- -------
Income tax expense/(benefit) included
in the statements of income 2,655 431 (10,064) (77,000)
Shareholders equity:
Unrealized gains/(losses) on securities
available for sale and intangible assets (1,910) 1,489 18,458 (53,324)
Total income tax expense/(benefit) $ 745 $1,920 $ 8,394 $(130,324)
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of COVA Corporation)
Notes to Consolidated Financial Statements
The actual Federal income tax expense differed from the expected tax expense
computed by applying the US. Federal statutory rate to income before taxes on
income as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
1996 1995 1995 1994
7 MONTHS 5 MONTHS
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $2,190 35.0% $129 35.0% $(13,862) 35.0% $(76,739) 35.0%
State income taxes, net 77 1.23 11 3.0 (306) 0.8 (1,552) 0.7
Tax-exempt bond interest -- -- (22) (6.0) (332) 0.8 (1,208) 0.6
Amortization of intangible assets 320 5.12 254 69.0 -- -- 111 (0.1)
Permanent difference due to derivative transfer
-- -- -- -- 4,399 (11.1) -- --
Other 68 1.09 59 16.1 37 (.1) 2,388 (1.1)
Total $2,655 42.44% $431 117.1% $(10,064) 25.4% $(77,000) 35.1%
====== ====== ===== ====== ========= ====== ========= =====
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 &
1995 follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands of dollars)
<S> <C> <C>
Deferred tax assets:
PVFP $ 1,639 --
Policy Reserves 19,237 $ 7,601
Liability for commissions on recapture 6,073 8,868
Tax basis of intangible assets purchased 6,230 13,141
DAC Proxy Tax 9,032 4,749
Unrealized losses on investments 422 --
Other deferred tax assets 827 2,860
Total assets $43,460 $37,219
------- -------
Deferred tax liabilities:
PVFP $19,169 $16,774
Unrealized gains on investments -- 1,489
Deferred Acquisition Costs 10,694 5,316
Other deferred tax liabilities 60 84
Total liabilities 29,923 23,663
-------
Net Deferred Tax Asset $13,537 $13,556
======= =======
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
the deferred tax assets will be fully realized in the future based upon
expectation of the reversal of existing temporary differences, anticipated
future earnings, and consideration of all other available evidence.
Accordingly no valuation allowance is established.
(9) RELATED-PARTY TRANSACTIONS
The Company has entered into management, operations and services agreements
with both affiliated and unaffiliated companies. The affiliated companies are
Cova Life Management Company (CLMC), a Delaware corporation, which provides
management services and the employees necessary to conduct the activities of
the Company, and Conning Asset Management, which provides investment advice.
Additionally, a portion of overhead and other corporate expenses are allocated
by the Companys ultimate parent, GALIC. The unaffiliated companies are
Johnson & Higgins, a New Jersey corporation, and Johnson & Higgins/Kirke Van
Orsdel, a Delaware corporation, which provide various services for the Company
including underwriting, claims and administrative functions. The affiliated
and unaffiliated service providers are reimbursed for the cost of their
services and are paid a service fee. Expenses and fees paid to affiliated
companies during 1996 and the 7 months of 1995 for the Company were
$6,618,303, and $7,139,525, respectively, and the five months of 1995 and the
year 1994 for the Predecessor were 6,364,609, and $8,553,028, respectively.
On December 31, 1996 Cova Corporation transferred its ownership of Cova
Financial Life Insurance Company (CFLIC), an affiliated life insurer domiciled
in the state of California, to the Company. The transfer of ownership was
recorded as additional paid in capital and increased Shareholders Equity on
the Companys December 31, 1996 Balance Sheet by approximately $16.9 million.
This change in direct ownership had no effect on the operations of either the
Company or CFLIC as both entities had existed under common management and
control prior to the December 31, 1996 transfer. Although CFLICs Balance
Sheet is fully consolidated with the Companys December 31, 1996 Balance Sheet,
CFLICs 1996 Income Statement and Cash Flow have not been consolidated with the
Companys 1996 Income Statement or Cash Flow Statement. However, CFLICs
year-end cash balance of $6.7 million is included in the Cash Flow Statement.
(10) STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Generally accepted accounting principles (GAAP) differ in certain respects
from the accounting practices prescribed or permitted by insurance regulatory
authorities (statutory accounting principles).
The major differences arise principally from the immediate expense recognition
of policy acquisition costs and intangible assets for statutory reporting,
determination of policy reserves based on different discount rates and
methods, the recognition of deferred taxes under GAAP reporting, the
non-recognition of financial reinsurance for GAAP reporting, the establishment
of an Asset Valuation Reserve as a contingent liability based on the credit
quality of the Company's investment securities, and an Interest Maintenance
Reserve as an unearned liability to defer the realized gains and losses of
fixed income investments presumably resulting from changes to interest rates
and amortize them into income over the remaining life of the investment sold.
In addition, SFAS #115 adjustments to record the carrying values of debt
securities and certain equity securities at market are applied only under GAAP
reporting and capital contributions in the form of notes receivable from an
affiliated company are not recognized under GAAP reporting.
Purchase accounting creates another difference as it requires the restatement
of GAAP assets and liabilities to their estimated fair values and shareholders
equity to the net purchase price. Statutory accounting does not recognize the
purchase method of accounting.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
As of December 31, the differences between statutory capital and surplus and
shareholder's equity determined in conformity with generally accepted
accounting principles (GAAP) were as follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands of dollars)
<S> <C> <C>
Statutory Capital and Surplus $ 75,354 $ 59,682
Reconciling items:
GAAP investment valuation reserves (88) --
Statutory Asset Valuation Reserves 17,599 13,378
Interest Maintenance Reserve 2,301 1,892
GAAP investment adjustments to fair value (3,191) 10,724
Deferred policy acquisition costs 49,833 14,468
GAAP basis policy reserves (30,202) (11,233)
Deferred federal income taxes (net) 13,537 13,556
Modified coinsurance -- --
Goodwill 20,849 23,358
Present value of future profits 46,389 38,155
Future purchase price payable (16,051) (23,967)
Other (1,286) (1,927)
GAAP Shareholders' Equity $175,044 $138,086
========= =========
</TABLE>
Statutory net losses for CFSLIC for the years ended December 31, 1996, 1995
and 1994 were $(13,575,788), $(74,012,650), and $(92,952,989), respectively.
The maximum amount of dividends which can be paid by State of Missouri
insurance companies to shareholders without prior approval of the insurance
commissioner is the greater of 10% of statutory earned surplus or statutory
net gain from operations for the preceding year. Accordingly, the maximum
dividend permissible during 1997 will be $0.
The National Association of Insurance Commissioners has developed certain Risk
Based Capital (RBC) requirements for life insurers. If prescribed levels of
RBC are not maintained, certain actions may be required on the part of the
Company or its regulators. At December 31, 1996 the Company's Total Adjusted
Capital and Authorized Control Level - RBC were, $92,953,237, and $21,058,220
respectively. This level of adjusted capital qualifies under all tests.
(11) GUARANTY FUND ASSESSMENTS
The Company participates with all life insurance companies licensed throughout
the United States, in associations formed to guarantee benefits to
policyholders of insolvent life insurance companies. Under state laws, as a
condition for maintaining the Companys authority to issue new business, the
Company is contingently liable for its share of claims covered by the guaranty
associations for insolvencies incurred through 1996, but for which assessments
have not yet been determined nor assessed, to a maximum in each state
generally of 2% of statutory premiums per annum in the given state. Most
states then permit recovery of assessments as a credit against premium or
other state taxes over, most commonly, five years.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
At December 31, 1996, the National Organization of Life and Health Guaranty
Associations (NOLHGA) distributed a study of the major outstanding industry
insolvencies, with estimates of future assessments by state. Based on this
study, the Company has accrued a liability for approximately $12.4 million in
future assessments on insolvencies that occurred before December 31, 1996.
Under the coinsurance agreement between the Company and OakRe (see note 1),
OakRe is required to reimburse the Company for any future assessments that it
pays which relate to insolvencies occurring prior to June 1, 1995. As such,
the Company has recorded a receivable from Oakre for approximately $12.3
million.
At the same time, the Company is liable to OakRe for 80% of any future premium
tax recoveries that are realized from any such assessments, and may retain the
IX. EXHIBITS
A. (1) Resolution of Board of directors of the Company authorizing the
Separate Account.*
(2) None.
(3) (a) Principal Underwriter's Agreement*
(b) Sales Agreement**
(c) Schedules of sales commissions referred to in Item 38(c)**
(4) None
(5) Modified Single Premium Life Insurance Policy*
(6) (a) Articles of Incorporation of the Company*
(b) Bylaws of the Company*
(7) Not Applicable
(8) Not Applicable
(9) None
(10) Form of application*
* Filed with initial Registration Statement on Form S-6 for the Policy
(which is filed concurrently herewith) and are hereby incorporated
by reference.
** Filed with Pre-Effective Amendment to Form S-6 and incorporated herein by
reference.
B. Furnish copies of each of the following:
(1) Not Applicable
(2) Not Applicable
C. Not Applicable
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940 the
depositor of the Registrant has caused this registration statement to be duly
signed on behalf of the Registrant in the City of Oakbrook Terrace and State
of Illinois on the 20th day of March, 1997.
[SEAL]
COVA VARIABLE LIFE ACCOUNT ONE
By: COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
__________________________________________
By: /S/ JEFFERY K. HOELZEL
______________________________
Jeffery K. Hoelzel, Secretary
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
By: /S/ JEFFERY K. HOELZEL
______________________________
Jeffery K. Hoelzel, Secretary
Attest: /S/ J. ROBERT HOPSON
________________________________
(Name)
Vice President and Chief Actuary
_________________________________
(Title)
