<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
1 Fountain Square, Chattanooga, Tennessee 37402
Telephone: (423) 755-8913
Mailed March 8, 1996
NOTICE OF ANNUAL MEETING OF CONTRACTOWNERS
April 9, 1996
Notice is hereby given of a meeting of the owners of contracts for which
reserves are held in Separate Account B (the "Separate Account") of Provident
National Assurance Company (the "Company"), which meeting shall be held at 8:30
a.m. on Tuesday, April 9, 1996, at the Provident Life and Accident Insurance
Company building, Room 152A, 1 Fountain Square, Chattanooga, Tennessee 37402.
The purpose of the meeting is to consider the following:
1. Election of three (3) members of the Board of Managers of the Separate
Account whose terms shall run until the next annual meeting or until their
successors are duly elected and qualified;
2. Ratification of the selection and appointment of Ernst & Young LLP as
independent auditors for the Separate Account; and
3. Transaction of such other business as may properly come before the
meeting and any adjournment thereof.
The date fixed by the Board of Managers as the record date for the
determination of contract owners entitled to notice of and to vote at the
meeting is at the close of business on January 31, 1996. A contract owner will
be entitled to vote only if he was the owner on the record date and is still
the owner on the date of the meeting.
It is important that your vote be represented at the meeting. Please refer to
the enclosed material for detailed information on voting procedures and return
the proxy card as soon as possible.
/s/ Susan N. Roth
Susan N. Roth
Secretary, Board of Managers
Enclosures
<PAGE> 3
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Managers of Provident National Assurance Company
Separate Account B (the Separate Account) for use at the Annual Meeting of
Contractowners to be held on Tuesday, April 9, 1996, at 8:30 a.m. at the
Provident Life and Accident Insurance Company building, Room 152A, 1 Fountain
Square, Chattanooga, Tennessee 37402. The cost of soliciting the proxies will
be borne by Provident National Assurance Company (the Company). Proxies may be
solicited by telephone, by mail or in person by directors, officers, agents, or
regular employees of the Company who will not be compensated for such services.
Contractowners may revoke their proxies at any time prior to the voting
thereof by submitting written notice of revocation to the Company at 1 Fountain
Square, Chattanooga, Tennessee 37402. Any Contractowner attending the meeting
may vote in person, whether or not a proxy has been previously submitted.
The annual report to Contractowners covering operations of the Separate Account
for the fiscal year ended December 31, 1995, including financial statements,
was mailed to the Contractowners on February 13, 1996.
On the record date, January 31, 1996 there were outstanding 1,976,904.857 units
of the Separate Account with a total value of $13,334,607.57 entitling the
Contractowners to one vote for each dollar of value represented by units
credited to such persons as of such record date. Contractowners of record at
the close of business on January 31, 1996, who are still Contractowners on
April 8, 1996, will be entitled to vote at the meeting.
ELECTION OF BOARD OF MANAGERS
(Proposal 1)
Contractowners are asked to vote for the re-election of nominees Henry E.
Blaine, Grant Law and David G. Fussell to serve as members of the Board of
Managers until the next annual meeting or until their successors are duly
elected and qualified. Mr. Blaine has served since 1977, Mr. Law since
January, 1991, and Mr. Fussell, the Chairman, since April 1993. None of the
nominees owns or has any interest in Separate Account units. Each of the
nominees has consented to serve if elected. If any of the proposed nominees
should become unavailable for any reason, the Board of Managers may designate
another person to serve in his place.
The following table sets forth present position and principal occupation(s) of
each nominee:
<TABLE>
<CAPTION>
Present Positions and Principal
Nominees Occupations During Last Five Year
- -------- ---------------------------------
<S> <C>
David G. Fussell* Vice President, Securities, Provident Companies, Inc.,
1 Fountain Square Provident Life and Accident Insurance Company, Provident
Chattanooga, Tennessee 37402 Life and Casualty Insurance Company
Age: 48
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
Henry E. Blaine# Chairman of the Board, President and Chief
293 West Haller Drive Executive Officer, Native American Lapidary
East Alton, Illinois 62024 Company (NALCO), Colorado; previously
Age: 66 Private Consultant; previously President,
Winchester Group, Olin Corp.
H. Grant Law, Jr.# President and Chief Executive Officer,
213 W. Fleetwood Drive Newton Chevrolet - GEO, Inc.; President,
Lookout Mountain, Tennessee 37350 Newton Oldsmobile - GMC Truck - Mitsubishi,
Age: 49 Inc.
</TABLE>
#NOTE: Member: Audit Committee.
*NOTE: Interested person of Separate Account B as that term is defined in the
Investment Company Act of 1940.
The Separate Account does not have a nominating committee.
Mr. Fussell is an affiliated person of the Separate Account and the Company.
Susan N. Roth, Secretary of the Board of Managers, also serves as Secretary of
the Company.
During 1995 there were four meetings of the Board of Managers and two meetings
of the Audit Committee.
REMUNERATION OF MEMBERS OF THE BOARD OF MANAGERS
No member of the Board of Managers receives any remuneration from the Separate
Account. The Company, pursuant to its Underwriting Agreement with the Separate
Account, paid all expenses relative to the operation of the Separate Account.
Aggregate fees paid to members of the Board of Managers for service during 1995
were $4,000 payable on a monthly basis. Each Board member, other than Mr.
Fussell, will receive $2,000 per year for serving on the Board. Mr. Fussell
received no remuneration from the Company based on his membership on the Board.
INVESTMENT ADVISER AND THE INVESTMENT ADVISORY AGREEMENT
The Company is a wholly owned subsidiary of Provident Companies, Inc.
Provident Companies, Inc., ("Provident") was organized in 1995 under the laws
of Delaware and is a holding company for its insurance company subsidiaries
which are together engaged in the sale of individual and group life and
accident and health insurance in all states, the District of Columbia, all the
provinces and territories of Canada and Puerto Rico.
On April 12, 1977, the Contractowners approved, and on April 11, 1978, amended,
an Investment Advisory Agreement, dated March 21, 1977, in compliance with the
requirements of the Investment Company Act of 1940. The most recent approval
of the Investment Advisory Agreement with the Company by the Board of Managers,
including a majority of members who are not parties to the agreement nor
interested persons of such parties, occurred on February 22, 1996.
Pursuant to the Investment Advisory Agreement between the Company and the
Separate Account, the Company continuously provides the Board of Managers of
the Separate Account with an
<PAGE> 5
investment program and recommendations on the purchase and sale of
investments for its consideration. The Company has the responsibility for
placing orders for purchases and sales. For providing investment advice, the
Company, under the Investment Advisory Agreement, receives a monthly fee in an
amount equal to .0020% of the value of the Separate Account each business day
(approximately 0.50% on an annual basis). The aggregate amounts deducted by the
Company during fiscal years 1993, 1994, and 1995 were $70,790, $64,398 and
$63,923, respectively, for investment advice.
The Investment Advisory Agreement:
1. May not be terminated by the Company without the prior approval of a new
investment advisory agreement by a majority of the outstanding voting
securities of the Separate Account, but may be terminated without the
payment of any penalty, on 60 days written notice by the Board of Managers
or by a majority of the outstanding voting securities of the Separate
Account;
2. Shall continue in effect for a period more than two years from the date
of its execution, only so long as such continuation is specifically
approved at least annually by (a) a majority of the Board of Managers of
the Separate Account, or (b) a majority of the outstanding voting
securities of the Separate Account; and in either event by a majority of
the members of the Board of Managers who are not parties to the Agreement
or interested persons of such party, casting their votes in person at a
meeting called for the purpose of voting on such approval;
3. Cannot be amended without prior approval by the vote of a majority of the
outstanding voting securities of the Separate Account and by a vote of a
majority of the members of the Board of Managers, including a vote by a
majority of the members of the Board of Managers who are not parties to
the agreement or interested persons of such party, cast in person at a
meeting called for the purpose of voting on such approval; and
4. Will terminate automatically if assigned.
<PAGE> 6
PRINCIPAL EXECUTIVE OFFICERS AND DIRECTORS OF
PROVIDENT NATIONAL ASSURANCE COMPANY
The names and principal occupations of the principal executive officers and
directors of the Company are set forth below. The business address of the
officers of the Company is Provident National Assurance Company, 1 Fountain
Square, Chattanooga, Tennessee 37402, unless otherwise specified.
Position with Investment Adviser and
Name Provident, and Principal Occupation
- --------------- ------------------------------------
Eugene A. Jones President, the Company.
J. Harold Chandler Executive Vice President, the Company; President, Chief
Executive Officer and Director, Provident; Provident
Life and Accident Insurance, Provident Life and
Casualty Insurance Company; Director, AmSouth
Bancorporation; Director, Herman Miller.
Thomas R. Watjen Executive Vice President and Chief Financial Officer
and Director, the Company, Executive Vice President and
Chief Financial Officer, Provident; Provident Life and
Accident Insurance Company; Provident Life and Casualty
Insurance Company.
Susan N. Roth Secretary, the Company; Provident, Provident Life and
Accident Insurance Company, Provident Life and Casualty
Insurance Company.
George A. Shell, Jr. Treasurer, the Company, Provident; Provident Life and
Accident Insurance Company, Provident Life and Casualty
Insurance Company.
William L. Armstrong Director, the Company; Chairman of Ambassador Media
Corporation; Chairman of Cherry Creek Mortgage Company;
Inc., Chairman of El Paso Mortgage Company; Chairman of
Centennial State Mortgage Company; Chairman of Frontier
Real Estate, Inc.; Chairman of Frontier Title, LLC;
Director of Storage Technology Corporation, Director of
International Family Entertainment, Inc., and Director
of Helmerich and Payne, Inc.
Charlotte M. Heffner Director, the Company; Trustee of the Maclellan
Foundation.
William B. Johnson Director, the Company; Chairman of the Board and Chief
Executive Officer of The Ritz-Carlton Hotel Company,
LLC; Director of SunTrust Bank, Atlanta and SunTrust
Banks of Georgia, Inc.
Hugh O. Maclellan, Jr. Director, the Company; President of the Maclellan
Foundation; Director of SunTrust Bank and Covenant
Transport.
<PAGE> 7
Scott L. Probasco, Jr. Director, the Company; Chairman, Executive Committee,
SunTrust Bank; Director, Chattem, Inc.; Director of
SunTrust Banks, Inc.; Director of Coca Cola
Enterprises.
Burton E. Sorensen Director, the Company; Director, ServiceMaster Company.
There were no directors or principal executive officers of the Company who
owned of record or beneficially more than 5% of the outstanding units in
Separate Account B on January 31, 1996. The statement of financial condition
of the Company as of December 31, 1995, certified by its Independent Auditors,
the notes to the statement of financial condition and the independent auditors'
report are attached hereto as Exhibit A.
AUDIT COMMITTEE OF THE BOARD OF MANAGERS
The Audit Committee met twice in 1995 and performed the following
functions:
a. Review the scope, plan, timing and results of the audit;
b. Review with auditors and management the appropriateness and the
implementation of applicable procedures for internal auditing,
accounting and financial control; and
c. Review of auditors' opinion and discussion with auditors of their
experiences in conducting the audit.
RATIFICATION OF THE SELECTION AND APPOINTMENT OF
INDEPENDENT AUDITORS
(Proposal 2)
On February 22, 1996, the Board of Managers, including a majority of members
who are not interested persons of the Separate Account, selected Ernst & Young
LLP to continue as independent auditors for the ensuing year. This selection
was made pursuant to a recommendation of the Audit Committee of the Separate
Account. Ernst & Young LLP has served as independent auditors for the Separate
Account since August 21, 1967. This firm is also the independent auditor for
the Company. Ernst & Young LLP has no direct or indirect financial interest in
the Separate Account. All fees relating to audit services performed for the
Separate Account are paid by the Company. A representative of Ernst & Young
LLP will be available at the annual meeting and will be allowed to make a
statement if he desires and/or respond to appropriate questions. The Board of
Managers recommends the ratification of the selection of Ernst & Young LLP to
serve until the next annual meeting.
BROKERAGE
The Company has responsibility for placing orders for the purchase and sale of
portfolio securities of Separate Account B under its Investment Advisory
Agreement. With respect to such purchases and sales, the primary objective is
to obtain the most favorable prices and execution of orders on behalf of
Separate Account B. With respect to transactions executed in the
over-the-counter market, the Company will deal only with principal market
makers unless more favorable prices are otherwise available.
<PAGE> 8
The Company does not expect to use any one particular broker or dealer, but
subject to obtaining the best prices and executions, brokers who provide
statistical information and supplemental research to the Company for pricing
and appraisal services utilized by the Company may receive orders for
transactions. It is not possible to determine the exact value of such
statistical information and supplemental research provided to the Company. The
total brokerage commissions paid by the Separate Account during the periods
ending December 31, 1993, 1994 and 1995 were $52,778, $23,494, and $36,153,
respectively. The portfolio turnover rates for 1993, 1994, and 1995 were 57%,
70% and 101%, respectively.
DISTRIBUTION OF CONTRACTS
On February 1, 1984 the Company ceased making a public offering of variable
annuity contracts issued pursuant to Separate Account B. Prior to that time
the contracts were distributed through broker-dealers who are registered with
the Securities and Exchange Commission under the Securities Exchange Act of
1934 and are members of the National Association of Securities Dealers, Inc.
During 1995, commissions of approximately $1,245 were paid to broker-dealers
with respect to the Separate Account variable annuity contracts. Of that
amount, approximately $-0- was paid to registered representatives affiliated
with the Company.
CONTRACTOWNER PROPOSALS
To be considered for presentation at the April 8, 1997 Annual Meeting of
Contractowners, Contractowners' proposals must be received by the Separate
Account at Fountain Square, Chattanooga, Tennessee 37402, no later than
December 6, 1996.
LITIGATION
There are no legal proceedings pending to which the Company or the Separate
Account is a party, or to which their property is subject.
OTHER MATTERS
The Board of Managers of the Separate Account knows of no other matters which
may come before the meeting. However, if any matters other than those referred
to above should properly come before the meeting, it is the intention of the
persons named in the enclosed proxy to vote such proxy in accordance with their
best judgment.
BY ORDER OF THE BOARD OF MANAGERS
/s/ David G. Fussell
David G. Fussell, Chairman
<PAGE> 9
"Exhibit A"
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Provident National Assurance Company
We have audited the accompanying statement of financial condition of Provident
National Assurance Company, a wholly-owned subsidiary of Provident Life Capital
Corporation, as of December 31, 1995. The statement of financial condition is
the responsibility of the Company's management. Our responsibility is to
express an opinion on the statement of financial condition based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of financial condition
is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the statement of
financial condition. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement of financial condition presentation. We
believe that our audit of the statement of financial condition provides a
reasonable basis for our opinion.
In our opinion, the statement of financial condition referred to above presents
fairly, in all material respects, the financial position of Provident National
Assurance Company at December 31, 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chattanooga, Tennessee
February 8, 1996
A-1
<PAGE> 10
"Exhibit A"
STATEMENT OF FINANCIAL CONDITION
PROVIDENT NATIONAL ASSURANCE COMPANY
<TABLE>
<CAPTION>
December 31, 1995
(in millions of dollars)
--------------------------
<S> <C>
ASSETS
INVESTMENTS
Bonds
Available-for-Sale - at fair value (amortized cost: $1,909.6) $1,950.1
Held-to-Maturity - at amortized cost (fair value: $2.9) 2.5
Mortgage Loans 36.7
Short-term Investments 137.7
--------
TOTAL INVESTMENTS 2,127.0
OTHER ASSETS
Cash and Bank Deposits 1.6
Accounts Receivable 10.3
Receivable from Affiliates 0.9
Accrued Investment Income 30.0
Separate Account Assets 357.8
--------
TOTAL ASSETS $2,527.6
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Policyholders' Funds $1,711.8
Reserves for Future Policy and Contract Benefits 230.7
Payable to Affiliate 5.9
Federal Income Tax Liability
Current 3.5
Deferred 8.2
Other Liabilities 17.6
Separate Account Liabilities 357.8
--------
TOTAL LIABILITIES $2,335.5
========
STOCKHOLDER'S EQUITY
Common Capital Stock, $3.00 par;
Authorized and Outstanding - 1,000,000 shares 3.0
Additional Paid-in Capital 148.1
Retained Earnings 41.0
--------
TOTAL STOCKHOLDER'S EQUITY 192.1
--------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,527.6
========
</TABLE>
See notes to statement of financial condition.
A-2
<PAGE> 11
EXHIBIT A
NOTES TO STATEMENT OF FINANCIAL CONDITION
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statement has been prepared
on the basis of generally accepted accounting principles. Such accounting
principles differ from statutory accounting practices prescribed or permitted
by state regulatory authorities (see Note 9).
OPERATIONS: Provident National Assurance Company is a wholly-owned subsidiary
of Provident Life Capital Corporation (see Note 7). The Company is licensed to
do business in the fifty states and the District of Columbia. The Company is
engaged in administering and maintaining fixed annuity products.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statement and
accompanying notes. For reserves for future policy and contract benefits,
fluctuations in actual experience from such assumptions are normal, given that
assumptions for these reserves are a long-term prediction of future events and
conditions. These assumptions are long-term averages of the experience that
the Company expects to realize over the duration of the policies and do not
attempt to predict each short-term rise or decline in interest rates,
mortality, retirement, or other factors. Variations between actual experience
and such long-term averages are monitored through a variety of ongoing
statistical studies. Such variations over a one or two year period do not
necessarily indicate that a change in the long-term assumptions is necessary or
that higher or lower reserves are required.
INVESTMENTS: Available-for-sale bonds are reported at fair value;
held-to-maturity bonds are generally reported at amortized cost; mortgage loans
are generally carried at the unpaid balance; mortgage loans that are considered
impaired are carried at the lower of the unpaid balance or the fair value of the
collateral; and short-term investments are carried at cost.
Bonds not bought and held for the purpose of selling in the near term but for
which the Company does not have the positive intent and ability to hold to
maturity are classified as available-for-sale. Bonds that the Company has the
positive intent and ability to hold to maturity are classified as
held-to-maturity. The Company determines the appropriate classification of
bonds at the time of purchase.
Investment carrying amounts reflect provisions for declines in the value of
investments determined to be other than temporary.
DERIVATIVE FINANCIAL INSTRUMENTS:
Interest Rate Swap Agreements
An interest rate swap is an agreement in which two parties agree to exchange,
at specified intervals, interest payment streams calculated on an agreed-upon
notional principal amount with at least one stream based on a specified
floating-rate index. The underlying notional principal is not exchanged
between the parties. The Company has certain forward interest rate swap
agreements where the exchange of interest payments does not begin until a
specified future date. The Company intends to settle the forward interest rate
swap agreements prior to the commencement of the exchange of interest payment
streams.
The fair values of interest rate swap agreements which hedge bonds are reported
in the statement of financial condition as a component of available-for-sale
bonds. The fair values of interest rate swap agreements which hedge
liabilities are not reported in the statement of financial condition. Amounts
to be paid or received pursuant to interest rate swap agreements are accrued.
A-3
<PAGE> 12
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Company accounts for all of its interest rate swap agreements as hedges.
Accordingly, any gains or losses realized on closed or terminated interest rate
swap agreements are deferred and recognized as an adjustment of the carrying
amount of the hedged asset or liability. If the hedged item matures or
terminates earlier than anticipated, the remaining unamortized gain or loss is
written off in the current period. The Company regularly monitors the
effectiveness of its hedging programs. In the event a hedge becomes
ineffective, it is marked-to-market.
Futures
Interest rate futures contracts are commitments to either purchase or sell a
financial instrument at a specific future date for a specified price. The
Company invests only in futures contracts which have U.S. Treasury securities
as the underlying investments. Changes in the market value of contracts are
generally settled on a daily basis. The notional amount of futures contracts
represent the extent of the Company's involvement but not the future cash
requirements, as the Company intends to close out open positions prior to
settlement. All of the Company's futures contracts are accounted for as
hedges.
The fair values of futures which hedge bonds are reported in the statement of
financial condition as a component of available-for-sale bonds. The fair
values of futures which hedge liabilities are not reported in the statement of
financial condition.
POLICYHOLDERS' FUNDS: Policyholders' funds represent customer deposits plus
interest credited at contract rates. The Company announced in December 1994
that it had discontinued the sale of traditional guaranteed investment
contracts (GICs). The Company has changed its investment strategy from a
duration matching approach to a cash flow matching approach since it has no
significant business other than GICs. The Company will continue to service all
of its existing GICs.
The liability for GICs comprises over 94 percent of the liability balance shown
on the statement of financial condition. The interest rate credited on a
contract is dependent upon the time to maturity with most contracts issued
having a three to five year maturity. Generally, if a policyholder terminates
a GIC prior to maturity, there is a surrender charge imposed which is based on
the length of the remaining life of the GIC and the change in interest rates
from the date the GIC was issued to the date of termination. In October 1995,
the Company extended an offer to GIC policyholders to surrender their contracts
on a more favorable basis than would otherwise be available to them. Contracts
with a book value of $58.2 million were surrendered under the offer which ended
October 31, 1995.
RESERVES FOR FUTURE POLICY AND CONTRACT BENEFITS: Reserves for future policy
and contract benefits on group single premium annuities have been provided on a
net single premium method. The reserves are calculated based upon assumptions
as to interest, mortality, and retirement that were appropriate at the date of
issue. Mortality assumptions are based upon industry standards adjusted as
appropriate to reflect actual Company experience. The assumptions vary by year
of issue and include a provision for adverse deviation.
SEPARATE ACCOUNTS: The separate account amounts shown in the accompanying
financial statement represent contributions by contract holders to
variable-benefits and fixed-benefits pension plans. The contract purchase
payments and the assets of the separate accounts are segregated from other
Company funds for both investment and administrative purposes. Contract
purchase payments received under variable annuity contracts are subject to
deductions for sales and administrative fees. Also, the Company receives
management fees which are based on the net asset values of the separate
accounts.
A-4
<PAGE> 13
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 114 (SFAS 114), ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN AND STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 118 (SFAS 118), ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A
LOAN - INCOME RECOGNITION AND DISCLOSURES
In 1995, the Company adopted the provisions of SFAS 114 and SFAS 118. SFAS 114
requires that certain impaired loans of creditors be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or at the fair value of
the collateral if the loan is collateral dependent. SFAS 118 amends the
disclosure requirements of SFAS 114 to require information about the recorded
investment in certain impaired loans. The adoption of SFAS 114 and SFAS 118
did not affect the Company's financial position (see Note 3).
NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments are
as follows:
December 31, 1995
(in millions of dollars)
-------------------------------
Carrying Fair
Amount Value
------------ -----------
ASSETS
Bonds
Available-for-Sale $1,980.2 $1,980.2
Derivatives Hedging Available-for-Sale (30.1) (30.1)
Held-to-Maturity 2.5 2.9
Mortgage Loans 36.7 36.7
Short-term Investments 137.7 137.7
Cash and Bank Deposits 1.6 1.6
LIABILITIES
Policyholders' Funds
GICs 1,621.5 1,722.2
Derivatives Hedging GICs - 0.9
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Bonds: The fair value for bonds is based on quoted market prices, where
available. For bonds not actively traded, the fair value is estimated using
values obtained from independent pricing services or, in the case of private
placements, is 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 3 for the amortized cost and fair values of bonds by
security type and by maturity date.
Mortgage Loans: The fair value for mortgage loans is based on the estimated
sales price.
Short-term Investments and Cash and Bank Deposits: Carrying amounts for
short-term investments and cash and bank deposits approximate fair value.
A-5
<PAGE> 14
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED
Policyholders' Funds: The fair value of the Company's liability for GICs is
estimated using discounted cash flow calculations, based on current market
interest rates available for similar contracts with maturities consistent with
those remaining for the contracts being valued.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed.
Derivatives: Fair values of the Company's derivative financial instruments are
based on market quotes, pricing models, or formulas using current interest
rates and assumptions and represent the net amount of cash the Company would
have received (paid) if the contracts had been settled or closed on December
31, 1995.
NOTE 3--INVESTMENTS
The amortized cost and fair values of bonds by security type are as follows:
<TABLE>
<CAPTION>
December 31, 1995
(in millions of dollars)
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
United States Government and
Government Agencies and Authorities $ 0.5 $ - $ - $ 0.5
Foreign Governments 0.1 - - 0.1
Public Utilities 250.5 25.4 0.6 275.3
Mortgage-backed Securities 786.4 8.8 1.6 793.6
All Other Corporate Bonds 872.1 39.7 31.2 880.6
-------- ------ ----- --------
$1,909.6 $ 73.9 $33.4 $1,950.1
======== ====== ===== ========
HELD-TO-MATURITY SECURITIES
United States Government and
Government Agencies and Authorities $ 2.5 $ 0.4 $ - $ 2.9
======== ====== ===== ========
</TABLE>
A-6
<PAGE> 15
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 3--INVESTMENTS - CONTINUED
The amortized cost and fair values of bonds by maturity date are shown below.
The maturity dates have not been adjusted for possible calls or prepayments.
<TABLE>
<CAPTION>
December 31, 1995
(in millions of dollars)
-----------------------------------
Amortized Fair
Cost Value
-----------------------------------
<S> <C> <C>
AVAILABLE-FOR-SALE BONDS
1 year or less $ 200.4 $ 201.7
Over 1 year through 5 years 528.6 510.6
Over 5 years through 10 years 159.1 166.3
Over 10 years 235.1 277.9
-------- --------
1,123.2 1,156.5
Mortgage-backed Securities 786.4 793.6
-------- --------
$1,909.6 $1,950.1
======== ========
HELD-TO-MATURITY BONDS
1 year or less $ - $ -
Over 1 year through 5 years 0.3 0.3
Over 5 years through 10 years - -
Over 10 years 2.2 2.6
-------- --------
$ 2.5 $ 2.9
======== ========
</TABLE>
At December 31, 1995, the total investment in below-investment-grade bonds
(securities rated below Baa3 by Moody's Investor Services) was $119.6 million
or 5.6 percent of invested assets. The amortized cost of these investments was
$120.9 million.
The adjustments related to Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, are as
follows:
December 31, 1995
(in millions of dollars)
-------------------------
Available-for-Sale Bonds $40.5
Reserves for Future Policy and Contract Benefits 40.5
-----
Net Unrealized Gain (Loss) on Securities $ -
=====
A-7
<PAGE> 16
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 3--INVESTMENTS - CONTINUED
Mortgage loans are impaired when, based on current information and events, it
is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. As of December 31,
1995, the recorded investment in mortgage loans considered to be impaired was
$6.7 million, with a related loss reserve of $1.7 million. The average
recorded investment in impaired loans during the year ended December 31, 1995,
was approximately $6.6 million. When a loan is determined to be impaired,
unpaid interest credited to income in the current year is reversed and unpaid
interest accrued in prior years is charged against current year income.
Interest received is either applied against the related principal or reported
as interest income, according to management's judgment as to the collectibility
of the principal.
The provisions of SFAS 114 require that loss reserves related to mortgage loans
that are identified for evaluation be based on discounted cash flows using the
mortgage loan's initial effective interest rate or the difference between the
unpaid principal balance of the loan and the fair value of collateral for the
loan. Prior to 1995, the loss reserve was based on the difference between the
unpaid principal balance of the loan and the fair value of collateral for the
loan, which is consistent with the requirements of SFAS 114. The adoption of
SFAS 114, therefore, did not affect the Company's financial position.
In May 1995, the Company sold six restructured mortgage loans with a principal
amount of $28.9 million and a book value of $24.3 million.
In October 1995, the Company sold mortgage loans with a principal amount and a
book value of $119.6 million through a securitization collateralized by
thirty-seven loans.
As of December 31, 1995, there were fifteen entities in which the Company had
invested amounts greater than ten percent of total stockholder's equity. These
entities are listed below:
Book Value of Investments
Name of Entity (in millions of dollars)
- -------------- -------------------------
Residential Funding Corporation 94-S5-A3 $32.0
Prudential Home Mortgage 93-13-A-3 31.4
Petrofina Delaware, Inc. 31.0
Phillip Morris Companies, Inc. 29.1
IBM Credit Corporation 25.0
Pepsico, Inc. 25.0
Rayonier - AG 25.0
NationsBank Credit Card Master Trust 93-1-A 24.4
Potlatch Corporation 22.0
Ford Motor Credit Company 21.5
G. E. Capital Mortgage 94-9-A8 20.9
G. E. Capital Mortgage 94-13-A1 20.5
Chase Mortgage 93-P-A2 20.0
Smith Barney Holdings, Inc. 20.0
TransCanada Pipelines, Ltd. 19.5
A-8
<PAGE> 17
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate swaps and exchange-traded interest rate futures
contracts to hedge interest rate risks and to match assets with its insurance
liabilities. The basic types of risks associated with derivatives are market
risk (that the value of the derivative will be adversely impacted by changes in
the market, primarily the change in interest rates) and credit risk (that the
counterparty will not perform according to the terms of the contract). The
market risk of the derivatives should generally offset the market risk
associated with the hedged financial instrument or liability. To help limit
the credit exposure of the derivatives, the Company has entered into master
netting agreements with its counterparties whereby contracts in a gain position
can be offset against contracts in a loss position. The Company also typically
enters into bilateral, cross-collateralization agreements with its
counterparties to help limit the credit exposure of the derivatives. These
agreements require the counterparty in a loss position to submit acceptable
collateral with the other counterparty in the event the net loss position meets
or exceeds an agreed upon amount. The Company's current credit exposure on
derivatives is limited to the value of those contracts in a net gain position.
At December 31, 1995, the Company had no derivatives in a net gain position.
The table below summarizes by notional amounts the activity for each category
of derivatives:
<TABLE>
<CAPTION>
Interest Rate Swaps
----------------------------
Receive Receive
Floating/ Fixed/
Pay Fixed Pay Floating Futures Total
(in millions of dollars)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ 500.0 $ 525.0 $ 205.0 $1,230.0
Additions - - 45.0 45.0
Terminations (200.0) (258.8) (250.0) (708.8)
------- ------- ------- --------
BALANCE AT DECEMBER 31, 1995 $ 300.0 $ 266.2 $ - $ 566.2
======= ======= ======= ========
</TABLE>
A-9
<PAGE> 18
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED
The following table summarizes the timing of anticipated settlements of
interest rate swaps outstanding at December 31, 1995, and the related weighted
average interest pay rate or receive rate assuming current market conditions:
<TABLE>
<CAPTION>
1996 1997 Total
(in millions of dollars)
------------------------------------
<S> <C> <C> <C>
PAY FIXED/RECEIVE VARIABLE
Notional value $300.0 - $300.0
Weighted average pay rate 8.45% - 8.45%
Weighted average receive rate 5.63 - 5.63
PAY VARIABLE/RECEIVE FIXED
Notional value $154.2 $112.0 $266.2
Weighted average pay rate 5.68% 5.69% 5.68%
Weighted average receive rate 4.87 5.51 5.14
TOTAL INTEREST RATE SWAPS $454.2 $112.0 $566.2
TOTAL WEIGHTED AVERAGE PAY RATE 7.51% 5.69% 7.15%
TOTAL WEIGHTED AVERAGE RECEIVE RATE 5.37 5.51 5.40
</TABLE>
Derivative activity falls under three programs as follows:
PROGRAM 1
The Company routinely uses futures to protect margins by reducing the risk of
changes in interest rates between the time of asset purchase and the associated
sale of an asset or sale of new business. The 1995 activity was a hedge to
lock in the price on sales of bonds needed to fund maturing liabilities.
Gains or losses on termination of these futures are deferred and reported as an
adjustment of the carrying amount of the hedged asset or liability. The net
deferred gain associated with this activity was $1.7 million at December 31,
1995.
PROGRAM 2
In 1994 and 1993 the Company created $525.0 million of synthetic fixed rate
assets consisting of floating rate mortgage-backed securities combined with
index amortizing swaps (receive fixed/pay floating). These synthetic fixed
rate assets back fixed rate GICs. The notional amount of these swaps reduces
based on an amortization schedule indexed to a constant maturity treasury rate.
Under market conditions at December 31, 1995, the remaining swaps are expected
to amortize fully over the next two years.
A-10
<PAGE> 19
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED
PROGRAM 3
In December 1994, the Company announced that it would discontinue the sale of
traditional GICs. At that time, the Company decided to convert from a duration
matching investment approach to a cash flow matching investment approach for
its GIC business. The Company hedged to lock in the price on future sales of
assets which would be necessary to fund maturing liabilities by entering into
$500.0 million notional amount of forward interest rate swaps (receive
floating/pay fixed) and $205.0 million notional amount of short interest rate
futures contracts. The $205.0 million futures position was terminated in 1995
as planned when $208.7 million of bonds were sold to fund maturing GICs. The
first $200.0 million swap position was terminated in 1995; however, bond sales
did not occur as originally anticipated because the Company had adequate cash
flow from other sources to fund the maturing GICs. The primary source of this
other cash flow was the securitization of the commercial mortgage loan
portfolio, which had not been anticipated at the time this hedge was initiated.
The remainder of these interest rate swaps will be terminated as scheduled in
1996 and 1997. At December 31, 1995, the Company had an unrealized loss of
$30.1 million on these outstanding interest rate swaps and an unrealized gain
of $10.4 million on the associated bonds.
NOTE 5--FEDERAL INCOME TAXES
The Company is included in a consolidated tax return filed by Provident
Companies, Inc., the ultimate parent of the Company. The total federal income
tax liability of the consolidated group is allocated among the members of the
group in proportion to each member's share of the consolidated federal taxable
income of the group. Reimbursement is made among members of the group to the
extent losses are used to offset income within the group. The current federal
income tax liability of $3.5 million presented in the statement of financial
condition represents amounts due to an affiliate under the tax allocation
agreement.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31, 1995
(in millions of dollars)
-----------------------------
<S> <C>
DEFERRED TAX LIABILITY
Reinsurance $15.0
Bond Market Discount 0.7
Other 2.4
-----
Total Deferred Tax Liability 18.1
-----
DEFERRED TAX ASSET
Realized Investment Gains and Losses 9.7
Reserves 0.2
-----
Total Deferred Tax Asset 9.9
Valuation Allowance for Deferred Tax Asset 0
-----
Net Deferred Tax Asset 9.9
-----
NET DEFERRED TAX LIABILITY $ 8.2
=====
</TABLE>
A-11
<PAGE> 20
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 6--RETIREMENT BENEFITS
The Company has no employees and, therefore, has no retirement benefits. The
Company purchases services at cost from its affiliate, Provident Life and
Accident Insurance Company. The cost of these services includes the cost of
the affiliate's benefit plans; however, there is no obligation on the part of
the Company beyond the amounts paid as part of the cost of services rendered.
NOTE 7--CORPORATE REORGANIZATION
Effective December 27, 1995, Provident Life and Accident Insurance Company of
America completed a step in a corporate reorganization which created a new
parent holding company, Provident Companies, Inc., a non-insurance holding
company incorporated in Delaware. As part of the reorganization, all
outstanding shares of the Company, previously owned by Provident Life and
Accident Insurance Company, were transferred to Provident Life Capital
Corporation, a non-insurance holding company incorporated in Delaware. At
December 31, 1995, Provident Life Capital Corporation was a wholly-owned
subsidiary of Provident Life and Accident Insurance Company of America, and
Provident Life and Accident Insurance Company was a wholly-owned subsidiary of
Provident Life Capital Corporation.
When the reorganization is completed during 1996, the Company will become a
wholly-owned subsidiary of Provident Companies, Inc., and Provident Life and
Accident Insurance Company of America and Provident Life Capital Corporation
will be dissolved.
NOTE 8--RELATED PARTY TRANSACTIONS
During 1995, the Company sold mortgage loans with a principal amount and a book
value of $32.5 million to Provident Life and Accident Insurance Company.
During 1995, the Company purchased bonds from Provident Life and Accident
Insurance Company at the market value of $243.9 million. The Company sold
bonds to Provident Life and Accident Insurance Company at the market value of
$292.6 million. These bonds had a book value of $292.3 million and a par value
of $288.8 million.
A-12
<PAGE> 21
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 9--STATUTORY FINANCIAL INFORMATION
Statutory surplus at December 31, 1995, was $159.9 million, of which $15.9
million is available for dividend distributions without prior approval by
regulatory authorities in 1996.
At December 31, 1995, the Company had on deposit with regulatory authorities
securities with a book value of $2.9 million held for the protection of
policyholders.
The Company, which is domiciled in Tennessee, prepares its statutory financial
statements in accordance with accounting principles and practices prescribed or
permitted by the Tennessee Department of Commerce and Insurance. Prescribed
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners. Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices may differ from state to state, may differ from company to company
within a state and may change in the future. The Company does not apply any
permitted statutory accounting practices that differ from prescribed statutory
accounting practices.
The NAIC currently is in the process of recodifying statutory accounting
practices, the result of which is expected to constitute the only source of
prescribed statutory accounting practices. Accordingly, that project, which is
expected to be completed in 1997, will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that the Company uses to prepare its statutory financial
statements.
A-13
<PAGE> 22
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
1 FOUNTAIN SQUARE, CHATTANOOGA, TENNESSEE 37402 TELEPHONE: (423)755-8913
March 8, 1996
The Annual Meeting of Contractowners who hold contracts issued pursuant to
Provident National Assurance Company Separate Account B will be held on April
9, 1996, at the Provident Life and Accident Insurance Company building, Room
152A, 1 Fountain Square, Chattanooga, Tennessee 37402. You have the right to
cast votes at this meeting.
Enclosed are the Notice of Annual Meeting, Proxy Statement and Proxy Card.
Please execute and return the proxy in the enclosed envelope so that it will be
received by the Board of Managers of Separate Account B NO LATER THAN April 8,
1996. You may retain all other material. If you are present at the meeting,
you may vote by ballot even though you have sent in your proxy.
Your contract/certificate number and the total number of votes attributable
thereto are shown above on the proxy.
Yours sincerely,
/s/ Susan N. Roth
Susan N. Roth
Secretary, Board of Managers
Enclosures
PLEASE COMPLETE THE REVERSE SIDE AND RETURN THIS PROXY
<PAGE> 23
PROXY
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
PROXY SOLICITED ON BEHALF OF
BOARD OF MANAGERS
The undersigned hereby appoints David G. Fussell and Susan N. Roth or either of
them, with full power of substitution and revocation, to represent and to cast
the votes of the undersigned as shown on the reverse side at the Annual Meeting
of Contractowners of Provident National Assurance Company Separate Account B to
be held at 8:30 a.m. on April 9, 1996, and at any adjournment thereof, with
respect to the proposals below and as set forth in the Notice.
1. ELECTION OF MEMBERS OF THE BOARD OF MANAGERS (Board of Managers favors a
vote FOR)
FOR all nominees listed below [ ] WITHHOLD AUTHORITY [ ]
(except as marked to the contrary below)
Instruction: To withhold authority to vote for any individual nominee
strike a line through the nominee's name in the list below.
Henry E. Blaine, David G. Fussell and H. Grant Law
2. PROPOSAL TO RATIFY THE SELECTION AND APPOINTMENT OF ERNST & YOUNG LLP AS
THE INDEPENDENT AUDITORS FOR SEPARATE ACCOUNT B.
(Board of Managers favors a vote FOR)
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. In their discretion, upon such other business as may properly come before
the meeting and any adjournment thereof.
This proxy when properly executed will be voted as directed. IN THE ABSENCE OF
ACCOMPANYING DIRECTION BY THE UNDERSIGNED, THIS PROXY WILL BE VOTED FOR
PROPOSALS ONE AND TWO.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Contractowners and the Proxy Statement issued by the Board of Managers and
revokes any Proxy heretofore given with respect to the votes covered by this
Proxy.
Dated
-----------------------------------
Contractowner
---------------------------
Signature
Title (If Applicable)
-------------------
