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FILE NO. 2-27135
FILE NO. 811-1525
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-3
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
Pre-Effective Amendment No. ___
Post-Effective Amendment No. 47
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 21
(Check appropriate box or boxes)
Provident National Assurance Company Separate Account B
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(Exact Name of Registrant)
Provident National Assurance Company
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(Name of Insurance Company)
1 Fountain Square, Chattanooga, Tennessee 37402
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(Address of Insurance Company's Principal Executive Offices) (Zip Code)
Insurance Company's Telephone Number, including Area Code (423) 755-1901
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Susan N. Roth, Provident National Assurance Company,
1 Fountain Square, Chattanooga, Tennessee 37402
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(Name and Address of Agent for Service)
Appropriate Date of Proposed Public Offering Not Applicable
It is proposed that this filing will become effective (check appropriate space)
X immediately upon filing pursuant to paragraph (b)
-----
----- on (date) pursuant to paragraph (b)
----- 60 days after filing pursuant to paragraph (a) (1)
----- on (date) pursuant to paragraph (a) (1)
----- 75 days after filing pursuant to paragraph (a) (2)
----- on (date) pursuant to paragraph (a) (2) of Rule 485
If appropriate, check the following box:
----- this post-effective amendment designates a new effective date
----- for a previously filed post-effective amendment
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VARIABLE ANNUITY CONTRACTS
Cross Reference Sheet Pursuant to Rule 404(c)
By letter dated July 2, 1987, the Staff of the Insurance Products Office
Division of Investment Management, gave recognition to the fact that since it
was not intended for distribution to prospective new contract owners, the
"prospectus" for this Separate Account was not required to be comprehensive and
conforming to Form N-3. Provident National Assurance Company Separate Account B
had formulated and continued to use what it referred to as "Disclosure
Statement" in the place of the prospectus and Statement of Additional
Information called for by Form N-3. The staff agreed to the continued use of
this approach to disclosure by indicating its tacit endorsement of the continued
preparation and distribution of this "special disclosure piece."
The special disclosure piece which the staff acknowledged in its letter
of July 2, 1987 is a one-part document based upon the prior registration form
for a management type separate account. The following cross reference sheet
refers to the contents of the one-part document rather than Parts A and B of
Form N-3.
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Caption in
Item No. and Caption in Form N-3 Disclosure Statement*
PART A - INFORMATION REQUIRED IN A PROSPECTUS*
1. Cover Page Cover Page
2. Definitions Item Omitted*
3. Synopsis or Highlights Summary of Disclosure Statement
4. Condensed Financial Per Unit Income and Capital Changes
Information of Separate Account B
5. General Description of Summary of Disclosure Statement,
Registrant and Insurance Description of Separate Account B
Company and the Company
6. Management Board of Managers of Separate Account B
7. Deductions and Expenses Summary of Disclosure Statement,
Investment Advisory Services, Mortality
and Expense Assurances, Sales
and Administrative Services
8. General Description of Summary of Disclosure Statement
Variable Annuity Contracts
9. Annuity Period Item Omitted
10. Death Benefit Item Omitted
11. Purchases and Contract Summary of Disclosure Statement, Sales
Value and Administrative Services, Valuation
of Assets
12. Redemptions Summary of Disclosure Statement,
Surrender for Redemption
13. Taxes Summary of Disclosure Statement,
Federal Tax Status
14. Legal Proceedings Legal Proceedings
15. Table of Contents of the Not Applicable*
Statement of Additional
Information
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PART B - INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
16. Cover Page Not Applicable*
17. Table of Contents Not Applicable*
18. General Information and Summary of Disclosure Statement,
History Descriptions of Separate Account B
and the Company
19. Investment Objectives Summary of Disclosure Statement,
and Policies Investment Objectives and Policies
20. Management Board of Managers of Separate Account B
21. Investment Advisory and Summary of Disclosure Statement,
Other Services Investment Advisory Services
22. Brokerage Allocation Allocation of Portfolio Brokerage
23. Purchase and Pricing Sales and Administrative Services
of Securities Being Offered
24. Underwriters Summary of Disclosure Statement
Sales and Administrative Services
25. Calculation of Yield Not Applicable*
Quotations of Money Market
Sub-Account
26. Annuity Payments Item Omitted
27. Financial Statements Financial Statements
* Since the Registrant is not now and does not intend to make a public
offering of its contracts, this disclosure statement omits certain items
set forth in the contents page for Parts A and B of Form N-3 because they
are irrelevant and not applicable to the operation of this particular
Registrant. The only purpose of this document is to provide current
information to contract owners who purchased their contracts on or before
February 1984 and continued to hold such contracts. Pursuant to the
agreement with the staff of the Securities and Exchange Commission reached
in 1987, this Form N-3 does not contain a Statement of Additional
Information.
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PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
1 Fountain Square, Chattanooga, Tennessee 37402
(423) 755-1901
The investment objective of Provident National Assurance Company Separate
Account B (Separate Account) is long-term capital growth. The assets placed
into the Separate Account are normally invested in equity securities,
principally common stocks.
The principal underwriter of Separate Account B is Provident National Assurance
Company.
NOTE: The public offering of contracts of Separate Account B was discontinued
on February 1, 1984.
No further offering of contracts of the Separate Account is made hereby.
The information contained herein is intended solely for the information
and use of holders of contracts issued prior to February 1, 1984.
This disclosure statement should be read and retained for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS DISCLOSURE STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this disclosure statement is May 27, 1997.
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SUMMARY OF DISCLOSURE STATEMENT
I. Investment Adviser and Principal Underwriter
Provident National Assurance Company (the Company), a stock life insurance
company, acts as principal underwriter and as the investment adviser to the
Separate Account. The Company makes deductions from the Separate Account,
payable monthly, equal to .0048% of the current asset value of the Separate
Account per valuation day which is approximately 1.20% on an annual basis.
Of these fees, approximately .50% is received for investment advisory
services, approximately .50% is received for contingent mortality
assurances and approximately .20% for expense assurances.
II. Investment Objectives
The investment objective of the Separate Account is long-term capital
growth. The amounts in the Separate Account are normally placed in equity
investments, principally common stocks. However, depending on market
conditions, from time to time management may decide that investment of
some of the assets of the Separate Account in preferred stocks and debt
obligations will best serve their investment objectives. From time to
time, for the same reason or pending other investments, the Separate
Account may hold funds in U.S. Government securities, certificates of
deposit, and the like.
III. Type of Investment Company
The Separate Account is registered under the Investment Company Act of
1940 as an open-end diversified management investment company.
IV. Redemption
At any time during the accumulation period and prior to the commencement
of annuity payments, the variable annuity contracts may be surrendered for
redemption at the current net asset value. There is no charge or fee for
surrender for redemption.
V. Description of Variable Annuities
A variable annuity is similar to a fixed annuity. Both provide that the
contributions (less certain deductions) made by or on behalf of an
annuitant prior to his retirement date will be accumulated and that after
the retirement date the Company will make monthly payments to the retired
annuitant for the remainder of his lifetime. Also, in both cases, the
Company receives certain fees for assuming the mortality and expense risks
under the contract.
Under a fixed annuity, the Company assumes the risk of investment gain or
loss, assures a specified interest rate and assures a specified monthly
annuity payment. However, under a variable annuity, contributions (less
deductions) are placed in a Separate Account, and the contract owner or
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annuitant assumes the risks of investment gain or loss in that the value
of the contract or individual account (before retirement) and the monthly
annuity payments (after retirement) vary with the investment income and
gains or losses on the assets of the Separate Account.
The basic objective of the contracts is to provide the annuitant with
annuity payments which will tend to reflect the changes in the cost of
living both before and after his retirement. There has been no exact
correlation between the cost of living index and investment performance.
In some periods, they have moved in opposite directions. Therefore, there
is no assurance that this objective can be attained. The value of the
investments held in the Separate Account fluctuates daily and is subject
to all the risks of changing economic conditions. There is no assurance
that the value of an annuitant's account during the years prior to
retirement or the aggregate amount of the variable annuity payments
received during the years following retirement will equal or exceed the
purchase payments made by or on behalf of the annuitant.
VI. Miscellaneous
A deduction will be made when applicable for premium taxes imposed by some
states or municipalities. When imposed, these taxes currently range from
.5% to a maximum of 3.5%.
Purchase payments under the contracts, after deductions for sales and
administrative expenses and any applicable premium taxes, are added to
Separate Account B. The assets of the Separate Account are held for the
exclusive benefit of the holders of and persons entitled to payments under
the contracts.
The Board of Managers of the Separate Account is elected annually by the
owners of contracts for which reserves are maintained in the Separate
Account.
PER UNIT INCOME AND CAPITAL CHANGES OF SEPARATE ACCOUNT B
Information relating to per unit income and capital changes is included in
the financial statements which constitute a part of this disclosure statement.
DESCRIPTION OF SEPARATE ACCOUNT B AND THE COMPANY
Provident National Assurance Company (Company) is a stock life insurance
company organized under the provisions of Chapters 491 and 508 of the 1966 Code
of Iowa on June 28, 1967. In accordance with the provisions of the Iowa
Insurance Code, Separate Account B was established by the Company on August 21,
1967.
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On November 27, 1974, all of the outstanding shares of stock of the Company
were purchased by Provident Life and Accident Insurance Company (Provident),
Chattanooga, Tennessee. Provident was organized in 1887 under the laws of
Tennessee and is engaged in the sale of individual and group life and accident
and health insurance in all states (except New York), the District of Columbia,
the Dominion of Canada and all Canadian provinces and Puerto Rico.
On September 29, 1978, the Company changed its domicile from Des Moines,
Iowa, to Chattanooga, Tennessee, pursuant to Section 56-202(b) of the Tennessee
Code Annotated. As a result of the redomestication, the Company became a
Tennessee corporation, and the Company and the Separate Account are subject to
the laws and regulations of Tennessee pertaining to insurance. In early 1996, as
the result of corporate restructuring, the Company became a direct wholly-owned
subsidiary of Provident Companies, Inc., whose stock is publicly held and traded
on the New York Stock Exchange. The Home Office of the Company is located at 1
Fountain Square, Chattanooga, Tennessee.
Under the provisions of Tennessee law, the assets in the Separate Account are
not chargeable with liabilities arising out of any other business the Company
may conduct. The Separate Account, though an integral part of the Company, is
registered as an open-end diversified management investment company under the
Investment Company Act of 1940. Under Tennessee law, regulation of the Company
by the Insurance Commissioner of the State of Tennessee includes regulation of
the Separate Account. Registration with the Securities and Exchange Commission
does not involve supervision of management or investment practices or policies
of the Separate Account or the Company by the Commission.
INVESTMENT OBJECTIVES AND POLICIES
I. Fundamental
The investment policies enumerated below are, except as noted,
fundamental to Separate Account B and may not be changed without prior
approval by a vote of a majority of the outstanding voting securities.
1. The investment objective of the Separate Account is long-term capital
growth.
To the extent feasible, assets of the Separate Account will be kept
fully invested and amounts will be held in cash only (a) temporarily,
pending investment in accordance with the investment policy; and (b)
to the extent necessary to make normal contract payments.
The assets of the Separate Account will usually be invested in a
diversified portfolio of equities, which will be primarily common
stocks, with such changes as may seem advisable, from time to time,
to take into account changes in the outlook for particular industries
or companies. Historically, the value of a diversified portfolio of
common
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stocks held for an extended period of time has tended to rise during
periods of inflation. There has, however, been no exact correlation,
and for some periods, the prices of securities have declined while
the cost of living has risen. The value of the investments held in
the Separate Account fluctuates daily and is subject to the risks of
changing economic conditions, as well as the risks inherent in the
ability of management to make changes in such investments necessary
to meet changes in economic conditions.
There may be times when management feels that conditions are such
that continued investment in a portfolio made up primarily of common
stocks does not appear to be the best method of seeking the objective
of the Separate Account. At such times, a larger proportion of the
assets may be invested in preferred stocks, corporate bonds or
debentures (which may or may not be convertible into stocks), stock
warrants or options (puts or calls), or real estate.
Periodically, and in limited amounts, the Separate Account may hold
funds in the form of short-term obligations, such as U.S. Treasury
Bills, bankers' acceptances, certificates of deposit and commercial
paper. This permits a return on cash balances held prior to
investment of these funds in securities.
2. Investments will not be concentrated in particular industries or
group of industries and no more than 25% of the assets of the
Separate Account will be invested in any one industry.
3. The Separate Account does not intend to engage in the purchase and
sale of interests in real estate, but reserves freedom of action to
do so. However, it will not make any such purchase if the value of
any real estate held plus the amount proposed to be acquired (subject
to the provisions of policy 10 below) amounts to more than 10% of the
value of the Separate Account's assets. The Separate Account may
invest in deeds of trust to real estate or marketable interests in
real estate investment trusts.
4. No purchase or sale of commodities or of commodity contracts will be
made.
5. No money will be borrowed.
6. No loan of funds or other assets will be made, except through the
acquisition of a portion of an issue of bonds, debentures or other
evidence of indebtedness which are publicly distributed.
7. No securities of other issuers will be underwritten.
8. Not more than 5% of the voting securities of any one issuer will be
acquired.
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9. No purchase of securities will be made if, as a result of such
purchase, more than the greater of $5,000 or 5% of the total value of
the assets of the Separate Account will be invested in the securities
of any one issuer (other than the United States or its
instrumentalities).
10. The Separate Account will not invest more than 10% of the value of
its assets in securities or other investments (including real estate
and restricted securities) which are subject to legal or contractual
restrictions upon resale or are not otherwise readily marketable.
Since the inception of the Separate Account, no purchases of
restricted securities have been made. Moreover, management has no
current intention of investing in such securities in the future.
11. No purchase of warrants or options to purchase securities will be
made if, as a result of such purchase, more than 2% of the assets of
the Separate Account will be invested in such warrants and options.
Since the inception of the Separate Account, no purchases of warrants
or options have been made. Moreover, management has no current
intention of investing in such securities in the future.
12. Dividends from the net investment income and capital gains
distributions of the Separate Account will be retained and reinvested
by the Separate Account.
II. Other
The policies and objectives below may be changed by action of the Board
of Managers.
1. All investments of assets of the Separate Account are restricted to
those permitted under the regulations adopted by the Tennessee
Insurance Commissioner with respect to investments made by segregated
variable annuity accounts established by insurance companies.
Investments of the Separate Account will be in compliance with the
regulations, including the provision that all common stock
investments shall be in stock which is listed or admitted to trading
on a securities exchange registered under the Securities Exchange Act
of 1934 or which is publicly held and has been traded in the
over-the-counter market and as to which current stock market
quotations are readily available.
2. So long as the Company is licensed to do variable annuity business in
the State of New York, the investment of assets of the Separate
Account will be subject to the following restrictions, unless
otherwise
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permitted by New York law: (a) no investment shall be made which will
result in the ownership of more than 5% of the total outstanding
common stock of any corporation; or (b) not more than 10% of the
aggregate value of the assets of the Separate Account shall be
invested at any time in common stocks which do not meet the criteria
for investments by life insurance companies under New York law.
3. Purchases will not be made on the margin.
4. Short sales of securities will not be made.
5. Limited amounts of securities of one or more investment companies may
be acquired up to a maximum of 10%, in the aggregate, of the assets
of the Separate Account, provided that no investment will be made in
the securities of any one investment company if immediately after
such investment more than 3% of the outstanding voting securities of
such company will be owned by the Separate Account nor more than 5%
of the value of the Separate Account's assets will be invested in
such company.
6. No investments in the securities of a company will be made for the
purpose of exercising control of management.
7. Purchases will be made for investment purposes and not for short-term
trading purposes. However, freedom of action is reserved to make such
changes in the Separate Account's portfolio as are considered
necessary or desirable, including the realization of short-term
capital appreciation when appropriate.
8. No participation will be made in joint or joint and several
securities trading accounts.
III. Portfolio Turnover
The Separate Account will purchase securities for long-term capital
growth and not for short-term trading purposes, although in certain
circumstances (such as during periods of pronounced market instability)
it may sell securities held for a short period if considered necessary or
desirable. Accordingly, the Separate Account's annual rate of turnover
ordinarily will not exceed 50%. In 1996, the portfolio turnover rate was
28%.
FEDERAL TAX STATUS
Separate Account B is not qualified as "regulated investment company" under
Subchapter M of the Internal Revenue Code (Code) since it is not taxed
separately from the Company. The operations of the Separate Account form a part
of the Company's total operations under existing federal income tax law. The
Separate Account will make no distributions of investment income or realized
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capital gains. No changes in this status will be sought nor are any changes
otherwise anticipated.
The investment results credited to the contract are not taxable to the
contract owner or annuitant until such owner or annuitant either receives a
distribution under the contract or else commences receiving annuity payments.
Annuity payments received after the annuity starting date will be taxed as
ordinary income to the extent the benefits represent payments in excess of the
"annual exclusion" under the contract. The "annual exclusion" is determined by
dividing the annuitant's cost or investment in the contract by the number of
years during which the annuity payments are expected to be made under the
contracts.
The Company will be required to withhold federal income taxes on annuity
payments and other distributions made under the contract. Recipients of annuity
payments or other distributions may in many cases elect not to have such
payments withheld; however, withholding is mandatory in the case of certain
distributions from qualified plans that are not "rolled over" to another plan in
a direct transfer. The withholding rate will be applied only against the taxable
portion of the annuity payments for the distributions under the contract. Under
current regulations the Company is required to report to the IRS and the
recipient annuity payments in excess of $10 annually whether or not withholding
is elected.
No taxes are payable by the Company on the investment income or realized or
unrealized capital gains of the Separate Account which are taken into account in
determining the value of the accumulation unit and the value of the annuity
unit.
Also with respect to individual non tax qualified contracts, distributions
which represent partial surrenders made before the commencement date of annuity
payments will be treated for federal income tax purposes first as withdrawals of
income earned on investment (to the extent such income is received and subject
to tax), and then as return of capital. In addition, amounts received as a
result of an assignment or pledge of the contract will be treated as withdrawals
under the contract and consequently subject to tax. This provision will not,
however, apply to income amounts allocable to investments made prior to August
14, 1982.
For individual contract distributions made after December 31, 1986, and
before the commencement of annuity payments, a 10% penalty will be assessed by
the IRS against all amounts received under the contract to the extent amounts
received represent income generated under the contract. The penalty will not be
assessed against distributions made: (1) on or after the participant under the
contract attains age 59 1/2, (2) to a beneficiary as a result of the death of a
contractholder, (3) to the participant as a result of the disability, (4) on
amounts received which represent payments under an annuity for the life (or life
expectancy) of the payee, or (5) on amounts allocable to an investment made
prior to August 14, 1982.
The Code as amended by the Tax Reform Act of 1986 imposes restrictions on
distributions (i.e., redemptions in whole or part) from annuity contracts sold
to plans qualified under section 403(b) of the Code. These restrictions are
effective in tax years beginning after December 31, 1988. Section 403(b)(11) of
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the Code requires that for such annuity contracts to receive tax-deferred
treatment, they must provide that:
Distributions attributable to contributions made after December 31, 1988,
pursuant to a salary reduction agreement to be paid only:
(1) when the employee attains age 59 1/2, separates from service, dies, or
becomes disabled (within the meaning of section 72(m)(7)); or
(2) in the case of hardship. In hardship cases, only the distribution of
amounts contributed after December 31, 1988, is permitted; distribution
of any income attributable to these contributions is prohibited.
The contracts described in this disclosure statement have been amended to
comply with these changes in the Code. Disclosure relating to withdrawal of
amounts from the contracts and redemption of all or a portion of a Participant's
account should be read with the above restrictions in mind.
Distributions of assets held as of December 31, 1988, are not subject to
these Code restrictions.
Contracts issued in connection with qualified plans are also subject to the
minimum distribution requirements of the Code, and may be subject to additional
restrictions contained in the plans themselves.
NOTE: It should be recognized that the above discussion of federal income tax
aspects of amounts received under a variable annuity contract is not
exhaustive, does not purport to cover all situations and is not intended
as tax advice. A qualified tax adviser should always be consulted with
regard to application of the law to individual circumstances.
ALLOCATION OF PORTFOLIO BROKERAGE
The Company has responsibility for placing orders for the purchase and
sale of portfolio securities of the Separate Account under an 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 the Separate Account. 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.
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
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and supplemental research provided to the Company. Such information and
research is used by the Company for the benefit of all its investment accounts
and no allocation of services or the costs therefore is made nor is such an
allocation possible.
BOARD OF MANAGERS OF SEPARATE ACCOUNT B
The Separate Account is managed by a Board of Managers in accordance with
the Rules and Regulations adopted by the Board. The Chairman and Members of the
Board of Managers are as follows:
Present Position with the Separate
Account and Principal Occupation
Name and Address During the Last Five Years
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David G. Fussell* Chairman of the Board; Vice President,
1 Fountain Square Securities, Provident Companies, Inc.,
Chattanooga, Tennessee 37402 Provident Life and Accident Insurance
Age: 49 Company; Provident Life and Casualty
Insurance Company.
Henry E. Blaine# Board Member; Chairman of the Board,
293 West Haller Drive President and Chief Executive Officer
East Alton, Illinois 62024 Native American Lapidary Company
Age: 67 (NALCO), Colorado; B&B Enterprises, Partner
H. Grant Law, Jr.# Board Member; President and Chief Executive
213 W. Fleetwood Drive Officer, Newton Chevrolet - GEO, Inc.;
Lookout Mountain, TN 37350 President, Newton Oldsmobile - GMC Truck -
Age: 50 Mitsubishi, Inc.
*NOTE: Interested person of the Separate Account as that term is defined in the
Investment Company Act of 1940.
#NOTE: Member: Audit Committee of the Separate Account.
COMPENSATION OF CERTAIN AFFILIATED PERSONS
No person other than the Company receives any compensation from the Separate
Account since the Company pays all expenses relating to the operation of the
Separate Account.
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INVESTMENT ADVISORY SERVICES
Investment Advisory Agreement
The Company acts as the investment adviser of the Separate Account. In
performing this role, the Company continuously provides the Board of
Managers with an investment program and recommendations on the purchase and
sale of investments for their consideration. The Company also has the
responsibility for placing orders for purchases and sales. In performing
these functions, the Company is guided by the investment policies and
restrictions promulgated by the Board of Managers of the Separate Account.
Moreover, all actions taken by the Company with regard to investments as
investment adviser are reviewed by the Board.
For providing investment advice the Company receives a monthly fee from the
Separate Account in an amount equal to approximately 0.50% on an annual
basis. No part of the investment advisory fees are derived from the sales
and administrative expense fees described herein.
The Company furnishes these services to the Separate Account pursuant to a
written investment advisory agreement which was last approved on January 27,
1997 by the Board of Managers, including a majority of the members of each
Board of Managers who are not parties to the Agreement nor interested
persons of such party, at a meeting called for the purpose of voting on such
approval. The agreement was last submitted to and approved by the contract
owners of the Separate Account on April 12, 1977, and amendments thereto
were submitted to and approved by the contract owners on April 11, 1978.
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;
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3. Cannot be modified 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 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;
4. Will terminate automatically if assigned.
CONTRACT CHARGES
Mortality and Expense Assurances
Although variable annuity payments made under the contracts will vary in
accordance with the investment performance of the Separate Account, the payments
will not be affected by (a) the Company's actual expenses, if greater or lesser
than the deductions provided for in the contract, or (b) the Company's actual
mortality experience among annuitants after retirement.
The Company provides an expense assurance by assuming the risk that the
administrative fee may be insufficient to cover the actual administrative costs.
The Company also assumes the risk that actual mortality of annuitants may be
less than was assumed in calculating the annuity rates. The contingent
mortality assurance provided by the Company under the contracts is the Company's
contractual obligation to continue to make monthly annuity payments, determined
in accordance with the annuity tables and other provisions contained in the
contracts, to each annuitant regardless of how long he lives and regardless of
how long all annuitants as a group live. This obligation assures an annuitant
that neither his longevity nor an improvement in life expectancy generally will
have any adverse effect on the monthly annuity payments he will receive under
the contract and relieves the annuitant from the risk that he will outlive the
funds which he has accumulated for retirement. The assurance is based on the
Company's actuarial determination of expected mortality rates among annuitants.
If the future proves that the Company's actuarial determination of expected
mortality rates among annuitants was erroneous because, as a group, their
longevity is longer than anticipated, the Company must provide amounts from its
general funds to fulfill its contractual obligation. In that event, the Company
may incur a loss. Conversely, if longevity among annuitants is lower than
anticipated, a gain may result to the Company. The Company also provides a
minimum death benefit.
For providing expense assurances and for the assumption of the mortality
risks, a charge of approximately .70% on an annual basis is deducted from the
current net asset value of the Separate Account per valuation day.
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VOTING RIGHTS
Contract owners of the Separate Account will have the right to vote at annual
meetings of contract owners on the following matters:
1. Initial approval of and any amendment to the investment advisory agreement;
2. Ratification of the selection of independent auditors for the Separate
Account;
3. Election of members to the Board of Managers of the Separate Account;
4. Any change in the fundamental investment policies of the Separate Account or
other policies requiring contract owners' approval; and
5. The transaction of such other business as may properly come before the
meeting.
The number of votes which a contract owner may cast prior to the time annuity
payments begin is equal to the dollar value of the accumulation units in the
variable portion of his contract as of the record date, each dollar of value
representing one vote and each fraction of a dollar of value representing a like
fraction of a vote. Contract values will be rounded to the nearest cent to
determine the total vote a contract owner may be entitled to cast. After
annuity payments begin, a contract owner or annuitant may cast one vote for each
dollar and a fraction of a vote for each fraction of a dollar (rounded to the
nearest cent) of the value of the valuation reserves maintained by the Company
in the Separate Account with respect to the annuitant under the contract,
pursuant to the Tennessee Insurance Code and regulations thereunder. Once
annuity payments begin, the total number of votes which the annuitant may cast
will generally decrease during the payment period.
The determination of the number of votes to be cast will be made as of a date
(record date) within 90 days prior to the meeting of contract owners, and the
contract owner will receive at least 20 days written notice of the meeting and
of the number of votes to which he is entitled. The contract owner will be
entitled to vote only if he was the owner on the record date and on the date of
the meeting.
SURRENDER FOR REDEMPTION
At any time during the accumulation period and prior to the commencement of
annuity payments: (a) for contracts used in IRA's, the annuitant may surrender
the contract for redemption; (b) for contracts under HR-10 plans, the annuitant
may surrender the contract for redemption to the extent permitted in the plan;
and (c) for contracts used in plans qualifying under Section 403(b) of the Code,
an annuitant may surrender th above under "Federal Tax Status".
12
<PAGE>
With respect to other contracts, at any time prior to the commencement of
annuity payments, surrender for redemption may be effected by sending a written
request for surrender to the Company accompanied by the contract or certificate.
There is no charge or fee for surrender for redemption.
In addition, subject to possible plan and Internal Revenue Code restrictions,
a portion of the termination value of the contract or participant's account may
be surrendered subject to the following limitations:
1. No more than one such partial surrender for redemption may be allowed on
behalf of any annuitant in any one contract year; and
2. No partial surrender for redemption will be permitted as a result of which
the current value of the accumulation units remaining in the contract falls
below $10.
For IRA contracts, if annuity payments have not commenced prior to the close
of the annuitant's tax year in which he attains age 70 1/2, then, not later
than the close of such tax year, the Company will distribute in one sum to
the annuitant the annuitant's entire interest in the contract.
TRANSFERS BETWEEN ACCOUNTS
The contract owner may direct the transfer of the value of all or a portion
of the accumulation units between the fixed-dollar annuity portion of the
contract and the variable annuity portion. Such transfers shall not be
permitted more often than once each contract year. Such transfers shall be
effected without the imposition of additional sales and administrative expense
charges.
SALES AND ADMINISTRATIVE SERVICES
I. General
The Company acts as principal underwriter and provides all sales and
administrative services in connection with the contracts and Separate
Account B. The Company deducts a sales and administrative expense fee to
cover these services as set forth below.
Administrative expense includes such items as fees and expenses of the Board
of Managers, salaries, rent, postage, telephone, travel, legal, actuarial
and accounting fees, custodian fees, printing, office equipment, stationery
and plan administration cost. The charge for administrative expense is
designed only to reimburse the Company for its actual administrative
expense, and the Company does not expect to recover from the charge or any
modification thereof any amount above its accumulated expenses in
administering the contracts.
13
<PAGE>
When applicable, a deduction will be made for premium taxes imposed by some
states or municipalities. These taxes currently range from .5% to a maximum
of 3.5%.
II. Tax Qualified Contracts
Under contracts subject to Sections 401, 403(b) and 408 of the Code, the
annuity purchase rates and the deductions for sales and administrative
expenses, the investment advisory fee and the contingency fees, as contained
in the contracts when issued, will be applicable to cumulative purchase
payments made under the contract up to $100,000. Purchase payments made
thereafter may be made only upon approval by the Company and will be subject
to terms and conditions as required by the Company. The group contracts may
not be modified during the first contract year.
Under the individual contract used to fund IRA's and HR-10 plans, the
Company deducts a sales and administrative fee of 8.0% from each purchase
payment (of which 7.0% is for sales expense and 1.0% is for administrative
expense).
Under the individual or group contract used to fund plans qualifying under
Section 403(b) of the Code, the Company deducts sales and administrative
expense fees in accordance with the following schedule:
Cumulative Portion Portion For
Purchase Percentage For Sales Administrative
Payment Deduction Expense Expense
----------- ---------- --------- ---------------
First $10,000 6.0% 5.0% 1.0%
Balance 4.0% 3.0% 1.0%
III. Non Tax Qualified Contracts
Under non tax qualified single purchase payment variable annuity
contracts, the sales and administrative expense fee is calculated as
follows:
Single Portion Portion For
Purchase Percentage For Sales Administrative
Payment Deduction Expense Expense
-------- ----------- ---------- ---------------
First $25,000 6.0% 4.5% 1.5%
Next $25,000 5.0% 4.0% 1.0%
Next $25,000 3.0% 2.5% 0.5%
Balance 2.0% 1.5% 0.5%
14
<PAGE>
Under non tax qualified flexible installment purchase payment variable
annuity contracts, the sales and administrative expense fee is calculated as
follows:
Single Portion Portion For
Purchase Percentage For Sales Administrative
Payment Deduction Expense Expense
------------- ----------- ---------- ---------------
First $25,000 8.0% 7.0% 1.0%
Next $25,000 6.0% 5.0% 1.0%
Next $25,000 5.0% 4.0% 1.0%
Balance 4.0% 3.0% 1.0%
IV. Underwriting Agreement
The Company furnishes sales and administrative services to the Separate
Account pursuant to a written agreement which was last approved on January 27,
1997 by the Board of Managers of the Separate Account, including a majority of
members who are not parties to the Agreement nor interested persons of such
party, at a meeting called for the purpose of voting on such approval. The
Agreement was last submitted to and approved by the contract owners on April
12, 1977.
The Underwriting Agreement:
1. May not be terminated by the Company without the prior approval of an
underwriting 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 of the
Separate Account 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 modified without prior approval by the vote of a majority of the
outstanding voting securities of the Separate Account or by a vote of 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 in a meeting
called for the purpose of voting on such approval;
4. Will terminate automatically if assigned.
15
<PAGE>
VALUATION OF ASSETS
The value of assets held in the Separate Account are calculated each day the
New York Stock Exchange is open for trading.
STATE REGULATION OF COMPANY
As an insurance company organized under the provisions of Chapters 491 and
508 of the 1966 Code of Iowa and redomesticated to Tennessee pursuant to the
provisions of Chapter 511 of the Public Acts of 1978, Ninetieth Legislature,
State of Tennessee, the Company (including the Separate Account) is subject to
regulation by the Tennessee Commissioner of Insurance. Periodically, the
Commissioner examines the liabilities and reserves of the Company and its
Separate Account and certifies to their correctness.
In addition, the Company is subject to the insurance laws and regulations of
the other jurisdictions in which it is or may become licensed to operate.
Generally, the insurance departments of such jurisdictions
SECURITIES CUSTODIAN
The Chase Manhattan Bank, N.A. acts as the Custodian of portfolio securities
and other assets of the Separate Account, under an agreement among the Bank,
Separate Account and the Company.
LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company or the
Separate Account are a party, or to which their property is subject, which
depart from the ordinary routine litigation incident to the kinds of business
conducted by them.
LEGAL OPINION
Legal matters relating to Federal securities laws applicable to the contracts
as well as all matters relating to Federal income tax laws and the insurance
laws of Tennessee and other states in which contracts have been offered, have
been passed upon by Susan N. Roth, Vice President and Secretary of Provident
National Assurance Company.
EXPERTS
The financial statements of the Provident National Assurance Company Separate
Account B at December 31, 1996 and 1995 and for each of the three years in the
period ended December 31, 1996, and of Provident National Assurance Company at
December 31, 1996 and 1995, and for each of the two years in the period ended
December 31, 1996, appearing in this Disclosure Statement and Registration
16
<PAGE>
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
There have been filed with the Securities and Exchange Commission,
Washington, D.C., registration statements (Form S-5, now designated N-3) under
the Securities Act of 1933, as amended, with respect to the contracts. The
contracts are exhibits to the registration statements. If further information
is desired with respect to the Separate Account or the contracts, reference is
made to the registration statement and the exhibits filed as a part thereof.
17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Provident National Assurance Company
Separate Account B
We have audited the accompanying statements of assets and liabilities of
Provident National Assurance Company Separate Account B as of December 31, 1996
and 1995, including the schedule of investments as of December 31, 1996, and the
related statements of operations and changes in variable annuity contract
owners' equity for each of the three years in the period ended December 31,
1996, and the supplementary information for each of the ten years in the period
then ended. These financial statements and supplementary information are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and supplementary information 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 and supplementary
information are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 and 1995, by correspondence with the custodian and brokers. 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 financial statements and supplementary information referred
to above present fairly, in all material respects, the financial position of
Provident National Assurance Company Separate Account B at December 31, 1996 and
1995, the results of its operations and the changes in variable annuity contract
owners' equity for each of the three years in the period ended December 31,
1996, and the supplementary information for each of the ten years in the period
then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chattanooga, Tennessee
January 17, 1997
-1-
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
Provident National Assurance Company Separate Account B
<TABLE>
<CAPTION>
December 31
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Common stocks--at market value
(cost: 1996--$9,625,656; 1995--$10,391,006) $13,622,505 $13,200,097
Bonds--at market value
(cost: 1996--$100,000; 1995--$0) 106,500 0
Short-term investments--at cost plus
accrued interest (approximately market) 196,934 0
----------- -----------
13,925,939 13,200,097
Cash 902 29,854
Accrued dividends and interest 22,888 18,566
Amounts due from Provident National Assurance Company 999 19
----------- -----------
TOTAL ASSETS 13,950,728 13,248,536
----------- -----------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Amounts payable for terminations and variable annuity benefits 19,655 83,866
Management fee and other amounts due Provident
National Assurance Company 13,960 12,839
----------- -----------
TOTAL LIABILITIES 33,615 96,705
----------- -----------
Variable annuity contract owners' equity:
Deferred annuity contracts terminable by owners--(accumulation
units outstanding: 1996--1,538,926.064; 1995--1,767,394.226;
unit value: 1996--$8.435567; 1995--$6.908158) 12,981,714 12,209,438
Annuity contracts in pay-out period 935,399 942,393
----------- -----------
TOTAL CONTRACT OWNERS' EQUITY $13,917,113 $13,151,831
=========== ===========
</TABLE>
See notes to financial statements
-2-
<PAGE>
STATEMENTS OF OPERATIONS
Provident National Assurance Company Separate Account B
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income:
Dividends $ 193,196 $ 240,725 $ 298,329
Interest 8,347 24,937 76,107
----------- ----------- -----------
201,543 265,662 374,436
----------- ----------- -----------
Expenses--Note C:
Investment advisory services 67,237 63,922 64,398
Mortality and expense assurances 94,131 89,492 90,158
----------- ----------- -----------
161,368 153,414 154,556
----------- ----------- -----------
NET INVESTMENT INCOME 40,175 112,248 219,880
----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS--NOTE A
Net realized gain from investment
transactions (excluding short-term
securities):
Proceeds from sales 5,882,270 13,313,567 9,701,955
Cost of investments sold 4,404,304 11,434,739 9,214,091
Adjustment for impairment of value 0 (76,960) 0
----------- ---------- -----------
Net realized gain 1,477,966 1,801,868 487,864
----------- ---------- -----------
Net unrealized appreciation of
investments:
At end of year 4,003,349 2,809,091 1,635,016
At beginning of year 2,809,091 1,635,016 2,899,236
----------- ---------- -----------
Increase (decrease) in net
unrealized appreciation of
investments 1,194,258 1,174,075 (1,264,220)
----------- ---------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 2,672,224 2,975,943 (776,356)
----------- ---------- -----------
NET INCOME (LOSS) $ 2,712,399 $ 3,088,191 $ (556,476)
=========== =========== ==========
Ratio of expenses to total investment
income 80.07% 57.75% 41.28%
=========== ========== ==========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
STATEMENTS OF CHANGES IN VARIABLE ANNUITY CONTRACT OWNER'S EQUITY
Provident National Assurance Company Separate Account B
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period $13,151,831 $12,171,347 $13,594,156
----------- ----------- -----------
From investment activities:
Net investment income 40,175 112,248 219,880
Net realized gain on investments 1,477,966 1,801,868 487,864
Increase (decrease) in net unrealized appreciation of investments 1,194,258 1,174,075 (1,264,220)
----------- ----------- -----------
Increase (decrease) in contract owners' equity from
investment activities 2,712,399 3,088,191 (556,476)
----------- ----------- -----------
From variable annuity contract transactions:
Net contract purchase payments (Units purchased:
1996-- 4,869.798;
1995-- 8,835.033;
1994--13,985.385) 35,994 53,380 75,685
Terminations and death benefits (Units terminated:
1996--243,557.308;
1995--337,338.173;
1994--153,401.946) (1,866,405) (2,054,839) (841,067)
Variable annuity benefits paid (Number of units:
1996--15,310.532;
1995--17,171.953;
1994--18,478.239) (116,706) (106,248) (100,951)
----------- ----------- -----------
Decrease in contract owners' equity from variable
annuity contract transactions (1,947,117) (2,107,707) (866,333)
----------- ----------- -----------
Net increase (decrease) in contract owners' equity 765,282 980,484 (1,422,809)
----------- ----------- -----------
Balance at end of period $13,917,113 $13,151,831 $12,171,347
=========== =========== ===========
</TABLE>
See notes to financial statements.
-4-
<PAGE>
SCHEDULE OF INVESTMENTS
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Number of Market
Shares Value
--------- ----------
<S> <C> <C>
COMMON STOCKS
CAPITAL GOODS (5.7%)
Boeing Company 2,000 $ 213,000
General Electric Company 5,900 583,363
---------
796,363
CONSUMER (39.4%)
Bristol-Myers Squibb Company 4,500 490,500
Coca-Cola Company 9,000 473,625
Eckerd Jack Company 1,964 62,847
Exide Corporation 3,500 80,937
Gannett Company, Inc. 5,500 411,813
General Motors Corporation 7,000 390,250
McDonald's Corporation 10,500 476,438
Pentos PLC 160,000 0
PepsiCo, Inc. 8,000 234,000
Proctor & Gamble Company 3,500 376,687
Safeway, Inc. 4,200 179,550
Sara Lee Corporation 6,000 223,500
Sears, Roebuck & Company 5,000 230,000
Sprint Corporation 3,000 119,625
Teleport Communications Group, Inc.
Class A 10,000 305,000
Viacom, Inc. Class B 13,712 478,206
Wal-Mart Stores, Inc. 17,000 386,750
Worldcom, Inc. 21,500 560,355
---------
5,480,083
</TABLE>
See notes to financial statements.
-5-
<PAGE>
SCHEDULE OF INVESTMENTS - Continued
Provident National Assurance Company Separate Account B
December 31, 1996
<TABLE>
<CAPTION>
Number of Market
Shares Value
--------- ----------
<S> <C> <C>
COMMON STOCKS - Continued
FINANCIAL (10.3%)
American Express Company 8,000 $ 452,000
Corestates Financial Corporation 6,250 324,219
NationsBank Corporation 2,000 195,500
Wells Fargo & Company 1,700 458,575
----------
1,430,294
HEALTH CARE (12.9%)
Columbia Healthcare Corporation 6,750 275,063
Eli Lilly & Company 1,500 109,500
HealthSouth Corporation 9,500 366,937
Johnson & Johnson 9,032 449,342
Merck & Company, Inc. 7,500 597,188
-----------
1,798,030
HIGH GROWTH TECHNOLOGY (25.9%)
Airtouch Communications, Inc. 7,000 176,750
Comcast Corporation Class A Spl 14,500 258,288
Computer Associates International 7,000 348,250
Emerson Electric Company 5,000 484,375
Hewlett Packard Company 7,000 351,750
Intel Corporation 4,250 556,750
Lucent Technologies, Inc. 4,444 205,535
Microsoft Corporation 4,000 330,500
Motorola, Inc. 4,500 275,625
Oracle Corporation 5,000 208,750
SCI Systems, Inc. 5,000 223,125
3Com Corporation 2,500 183,437
----------
3,603,135
</TABLE>
See notes to financial statements.
-6-
<PAGE>
SCHEDULE OF INVESTMENTS - Continued
Provident National Assurance Company Separate Account B
December 31, 1996
<TABLE>
<CAPTION>
Number of Market
Shares Value
--------- -----------
<S> <C> <C>
COMMON STOCKS - Continued
MISCELLANEOUS (3.7%)
Minnesota Mining & Manufacturing Company 6,200 $ 514,600
-----------
TOTAL COMMON STOCKS (97.9%) 13,622,505
Principal
Amount
---------
BONDS (0.8%)
Tenet Healthcare Corporation 6.00%
Exchangeable Subordinated Notes
due December 1, 2005 $100,000 $ 106,500
=========
SHORT-TERM INVESTMENTS (1.4%)
Dynamic Funding Corporation
Commercial Paper
due January 3, 1997 $197,000 $ 196,934
========= -----------
TOTAL INVESTMENTS (100.1%) 13,925,939
CASH AND RECEIVABLES LESS LIABILITIES (-0.1%) (8,826)
-----------
TOTAL VARIABLE ANNUITY CONTRACT
OWNERS' EQUITY (100.0%) $13,917,113
===========
</TABLE>
See notes to financial statements.
-7-
<PAGE>
SUPPLEMENTARY INFORMATION
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
Selected data for an accumulation unit outstanding throughout each year
excluding sales loads:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $ .11 $ .13 $ .15 $ .14 $ .12
Expenses .09 .07 .07 .06 .06
------ ------ ------ ------ ------
Net investment income .02 .06 .08 .08 .06
Net realized and unrealized
gain (loss) on investments 1.51 1.44 (.32) .54 (.07)
------ ------ ------ ------ ------
Net increase (decrease) in
contract owners' equity 1.53 1.50 (.24) .62 (.01)
Net contract owners' equity:
Beginning of year 6.91 5.41 5.65 5.03 5.04
------ ------ ------ ------ ------
End of year $ 8.44 $ 6.91 $ 5.41 $ 5.65 $ 5.03
====== ====== ====== ====== ======
Ratio of expenses to average
contract owners' equity 1.20% 1.21% 1.21% 1.22% 1.21%
Ratio of net investment income to
average contract owners' equity 0.30% 0.89% 1.72% 1.39% 1.36%
Portfolio turnover 28% 101% 70% 57% 35%
Number of accumulation units
outstanding at end of year 1,538,926 1,767,394 2,097,793 2,242,809 2,655,895
See notes to financial statements
</TABLE>
-8-
<PAGE>
SUPPLEMENTARY INFORMATION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
<TABLE>
<CAPTION>
Year Ended December 31
1991 1990 1989 1988 1987
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $ .13 $ .13 $ .12 $ .11 $ .10
Expenses .05 .04 .04 .04 .04
------ ------ ------ ------ ------
Net investment income .08 .09 .08 .07 .06
Net realized and unrealized
gain (loss) on investments 1.22 ( .16) .64 .29 (.07)
------ ------ ------ ------ ------
Net increase (decrease) in
contract owners' equity 1.30 (.07) .72 .36 (.01)
Net contract owners' equity:
Beginning of year 3.74 3.81 3.09 2.73 2.74
------ ------ ------ ------ ------
End of year $5.04 $3.74 $3.81 $3.09 $2.73
====== ====== ====== ====== ======
Ratio of expenses to average
contract owners' equity 1.21% 1.22% 1.21% 1.22% 1.24%
Ratio of net investment income to
average contract owners' equity 1.91% 2.34% 2.36% 2.30% 1.80%
Portfolio turnover 42% 58% 104% 65% 62%
Number of accumulation units
outstanding at end of year 2,854,559 3,031,469 3,667,660 4,191,222 5,182,071
See notes to financial statements.
</TABLE>
-9-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Provident National Assurance Company Separate Account B
NOTE A--INVESTMENTS AND ACCOUNTING POLICIES
Separate Account B is a segregated investment account of Provident National
Assurance Company (a wholly-owned subsidiary of Provident Companies, Inc.) and
is registered under the Investment Company Act of 1940, as amended, as an open-
end diversified management investment company.
Common stocks and bonds are valued at published market quotations which
represent the closing sales price for securities traded on a national stock
exchange or the mean between the quoted bid and asked prices for those traded
over-the-counter. Short-term investments are valued at cost plus accrued
interest.
Realized and unrealized gains and losses are credited to or charged to variable
annuity contract owners' equity. The identified cost basis has been used in
determining realized gains and losses on sales of investments. If determined on
the average cost basis, the net realized gain would have been $1,369,834,
$1,798,019, and $563,363 for the years ended December 31, 1996, 1995, and 1994,
respectively. There were gross unrealized gains of $4,232,359 and gross
unrealized losses of $229,010 at December 31, 1996. Security transactions are
recorded on the date the securities are purchased or sold which is the common
practice of the industry. Dividends are taken into income on an accrual basis as
of the ex-dividend date.
A summary of the cost of investments purchased and proceeds from investments
sold for the three years in the period ended December 31, 1996 is shown below.
Year Ended December 31
1996 1995 1994
----------- ----------- -----------
Cost of investments purchased $ 9,751,620 $32,935,068 $36,509,262
Less: Short-term securities 6,012,666 20,637,665 28,013,052
----------- ----------- -----------
$ 3,738,954 $12,297,403 $ 8,496,210
=========== =========== ===========
Proceeds from investments sold $11,698,035 $34,650,485 $37,415,387
Less: Short-term securities 5,815,765 21,336,918 27,713,432
----------- ----------- -----------
$ 5,882,270 $13,313,567 $ 9,701,955
=========== =========== ===========
The aggregate cost of investments for federal income tax purposes is the same as
that presented in the Statements of Assets and Liabilities.
-10-
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
Provident National Assurance Company Separate Account B
NOTE B--FEDERAL INCOME TAXES
Operations of Separate Account B will form a part of the income tax return of
Provident National Assurance Company, which is taxed as a "life insurance
company" under the Internal Revenue Code.
Under current law, no federal income taxes are payable with respect to Separate
Account B.
NOTE C--EXPENSES
Deductions are made by Provident National Assurance Company at the end of each
valuation period for investment advisory services and for mortality and expense
assurances, which on an annual basis are approximately .50% and .70%,
respectively, of the net assets of Separate Account B.
-11-
<PAGE>
ACCUMULATION UNIT VALUE TABLE - Continued
(Unaudited)
Provident National Assurance Company Separate Account B
<TABLE>
<CAPTION>
End of Month Accumulation Unit Value End of Month Accumulation Unit Value
- ------------ ----------------------- ------------ -----------------------
<S> <C> <C> <C>
December 1968 1.036279 March 1992 4.735470
December 1969 1.080379 June 4.585274
December 1970 1.030039 September 4.694884
December 1971 1.178612 December 5.028547
December 1972 1.403795 March 1993 5.208499
December 1973 1.126624 June 5.190340
December 1974 .863269 September 5.441446
December 1975 1.022844 December 5.646864
December 1976 1.156853 March 1994 5.386379
December 1977 1.064425 June 5.274454
December 1978 1.094150 September 5.475394
December 1979 1.219189 December 5.410722
December 1980 1.555258 March 1995 5.656995
December 1981 1.473246 June 6.194660
December 1982 1.812441 September 6.505252
December 1983 2.132092 December 6.908158
December 1984 2.029912 January 1996 7.104573
December 1985 2.480050 February 7.177128
December 1986 2.743444 March 7.309625
December 1987 2.734169 April 7.390144
December 1988 3.087892 May 7.561813
December 1989 3.812606 June 7.593667
March 1990 3.729963 July 7.181787
June 4.080042 August 7.384505
September 3.435225 September 7.851947
December 3.736441 October 8.000702
March 1991 4.312244 November 8.674258
June 4.243108 December 8.435567
September 4.513598
December 5.036212
</TABLE>
-12-
<PAGE>
ACCUMULATION UNIT VALUE TABLE - Continued
(Unaudited)
Provident National Assurance Company Separate Account B
Initial contributions to Separate Account B were received on February 1, 1968,
prior to which time the unit value was set at 1.000000. The above indicates the
accumulation unit value on the last valuation day of each year from December
1968 through December 1989, on the last valuation day of each quarter from March
1990 through December 1995, and on the last valuation day of each month of 1996.
The results shown should not be considered as a representation of the results
which may be realized in the future.
-13-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Provident National Assurance Company
We have audited the accompanying statutory-basis statements of financial
condition of Provident National Assurance Company, a wholly-owned subsidiary of
Provident Companies, Inc., as of December 31, 1996 and 1995, and the related
statutory-basis statements of operations, capital and surplus, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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.
As described in Note 1, the Company presents its financial statements in
conformity with accounting practices prescribed or permitted by the Tennessee
Department of Commerce and Insurance, which practices differ from generally
accepted acounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the accompanying
financial statements are described in Notes 1 and 13.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Provident National Assurance Company at December 31, 1996 and 1995, or the
results of its operations or its cash flows for the years then ended.
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Provident National Assurance
Company at December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting practices
prescribed or permitted by the Tennessee Department of Commerce and Insurance.
ERNST & YOUNG LLP
Chattanooga, Tennessee
February 10, 1997, except for Note 14,
as to which the date is March 27, 1997
-1-
<PAGE>
STATEMENTS OF FINANCIAL CONDITION--STATUTORY BASIS
PROVIDENT NATIONAL ASSURANCE COMPANY
<TABLE>
<CAPTION>
December 31
1996 1995
(in thousands of dollars)
---------------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTED ASSETS--NOTE 3
Bonds $1,035,968 $1,910,317
Preferred Stocks - 43
Mortgage Loans - 36,682
Cash and Short-term Investments 73,333 139,255
---------- ----------
Total Cash and Invested Assets 1,109,301 2,086,297
OTHER ASSETS
Investment Income Due and Accrued 16,390 30,025
Receivable from Parent,
Subsidiaries, and Affiliates 1,345 892
Accounts Receivable - Investments 5,421 9,788
---------- ----------
TOTAL ASSETS EXCLUDING SEPARATE
ACCOUNTS BUSINESS 1,132,457 2,127,002
From Separate Accounts Statement 300,477 357,848
---------- ----------
TOTAL ADMITTED ASSETS $1,432,934 $2,484,850
========== ==========
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
December 31
1996 1995
(in thousands of dollars)
---------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Annuity Reserves $ 194,254 $ 197,085
Guaranteed Interest Contracts 762,787 1,619,217
Other Contract Deposit Funds 73,598 90,304
Asset Valuation Reserve 15,512 32,886
Insurance Expenses Due or Accrued 4,923 3,718
Federal Income Taxes 64 3,505
Remittances and Items not Allocated 39 1,428
Borrowed Money and Interest Thereon 7,118 1,245
Payable to Parent, Subsidiaries, and
Affiliates - 5,894
Deposits under Security Loan
Agreements - 8,598
Drafts Outstanding 6,240 1,863
Other Liabilities 605 1,336
---------- ----------
TOTAL LIABILITIES EXCLUDING SEPARATE
ACCOUNTS BUSINESS 1,065,140 1,967,079
From Separate Accounts Statement 300,477 357,848
---------- ----------
TOTAL LIABILITIES 1,365,617 2,324,927
---------- ----------
COMMITMENTS AND CONTINGENT
LIABILITIES--NOTE 11
CAPITAL AND SURPLUS
Common Capital Stock, $3.00 par
Authorized and Issued--1,000,000
shares 3,000 3,000
Gross Paid in and Contributed Surplus 58,457 148,121
Special Surplus Funds 1,023 1,011
Unassigned Surplus 4,837 7,791
---------- ----------
TOTAL CAPITAL AND SURPLUS 67,317 159,923
---------- ----------
TOTAL LIABILITIES AND CAPITAL AND
SURPLUS $1,432,934 $2,484,850
========== ==========
</TABLE>
See notes to financial statements--statutory basis
-3-
<PAGE>
STATEMENTS OF OPERATIONS--STATUTORY BASIS
PROVIDENT NATIONAL ASSURANCE COMPANY
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
(in thousands of dollars)
----------------------------
<S> <C> <C>
REVENUE
Premium Income $ 687 $ 1,158
Annuity and Other Fund Deposits 6,122 6,696
Net Investment Income 110,060 193,531
Amortization of Interest Maintenance
Reserve 604 2,120
Other Income 2,634 2,678
--------- -----------
TOTAL REVENUE 120,107 206,183
--------- -----------
BENEFITS AND EXPENSES
Annuity Benefits 20,267 20,197
Surrender Benefits and Other Fund
Withdrawals 955,517 1,446,514
Interest on Policy or Contract Funds 76,265 163,815
Change in Annuity Reserves (2,831) (4,323)
Change in Liability for Deposit Funds (949,394) (1,439,818)
Commissions 77 120
General Expenses 695 1,270
Insurance Taxes, Licenses, and Fees 2,087 4,425
--------- -----------
TOTAL BENEFITS AND EXPENSES 102,683 192,200
--------- -----------
NET GAIN FROM OPERATIONS BEFORE FEDERAL
INCOME TAXES AND NET REALIZED
CAPITAL LOSSES 17,424 13,983
Federal Income Taxes 4,539 1,621
--------- -----------
NET GAIN FROM OPERATIONS BEFORE NET
REALIZED CAPITAL LOSSES 12,885 12,362
Net Realized Capital Losses--Note 3 (15,693) (23,210)
--------- -----------
NET LOSS $ (2,808) $ (10,848)
========= ===========
</TABLE>
See notes to financial statements--statutory basis.
-4-
<PAGE>
STATEMENTS OF CAPITAL AND SURPLUS--STATUTORY BASIS
PROVIDENT NATIONAL ASSURANCE COMPANY
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
(in thousands of dollars)
----------------------------
<S> <C> <C>
COMMON CAPITAL STOCK
Balance at Beginning and End of Year $ 3,000 $ 3,000
-------- --------
GROSS PAID IN AND CONTRIBUTED SURPLUS
Balance at Beginning of Year 148,121 148,121
Return of Capital (89,664) -
-------- --------
Balance at End of Year 58,457 148,121
-------- --------
SPECIAL SURPLUS FUNDS
Balance at Beginning of Year 1,011 981
Increase During Year 12 30
-------- --------
Balance at End of Year 1,023 1,011
-------- --------
UNASSIGNED SURPLUS
Balance at Beginning of Year 7,791 8,743
Net Loss (2,808) (10,848)
Change in Net Unrealized Capital
Gains and Losses 27 (15)
Change in Non-admitted Assets and
Related Items (7,199) (1,709)
Change in Reserve on Account of
Change in Valuation Basis - (965)
Change in Asset Valuation Reserve 17,374 12,615
Transferred to Special Surplus Funds (12) (30)
Dividends to Stockholder (10,336) -
-------- --------
Balance at End of Year 4,837 7,791
-------- --------
TOTAL CAPITAL AND SURPLUS $ 67,317 $159,923
======== ========
</TABLE>
See notes to financial statements--statutory basis.
-5-
<PAGE>
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
PROVIDENT NATIONAL ASSURANCE COMPANY
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
(in thousands of dollars)
----------------------------
<S> <C> <C>
CASH FROM OPERATIONS
Premiums Received $ 687 $ 1,158
Annuity and Other Fund Deposits 6,122 6,696
Investment Income Received 122,550 208,481
Other Income Received 2,626 2,678
Surrender Benefits and Other Fund
Withdrawals Paid (955,517) (1,446,514)
Other Benefits Paid (20,267) (20,538)
Insurance Expenses Paid (1,651) (3,925)
Federal Income Taxes Paid (5,591) (1,064)
--------- -----------
NET CASH FROM OPERATIONS (851,041) (1,253,028)
--------- -----------
CASH FROM INVESTMENTS
Proceeds from Investments Sold,
Matured, or Repaid 946,541 1,546,559
Tax on Capital Gains and Losses
(Paid) Reimbursed (10,018) 5,164
Cost of Long-term Investments Acquired (54,045) (346,081)
--------- -----------
NET CASH FROM INVESTMENTS 882,478 1,205,642
--------- -----------
CASH FROM FINANCING AND MISCELLANEOUS
SOURCES
Return of Capital (89,664) -
Borrowed Money 5,872 -
Dividends Paid to Stockholder (10,336) -
Other Applications (3,231) (35,946)
--------- -----------
NET CASH FROM FINANCING AND
MISCELLANEOUS SOURCES (97,359) (35,946)
--------- -----------
NET DECREASE IN CASH AND SHORT-TERM
INVESTMENTS (65,922) (83,332)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF YEAR 139,255 222,587
--------- -----------
CASH AND SHORT-TERM INVESTMENTS AT END
OF YEAR $ 73,333 $ 139,255
========= ===========
</TABLE>
See notes to financial statements--statutory basis.
-6-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS: Provident National Assurance Company (the Company) is a wholly-
owned subsidiary of Provident Companies, Inc. (see Note 9). The Company is
domiciled in the State of Tennessee and 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 requires management
to make estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known, which could impact the amounts
reported and disclosed herein.
BASIS OF PRESENTATION: The accompanying financial statements have been prepared
in conformity with statutory accounting practices prescribed by or permitted by
the National Association of Insurance Commissioners (NAIC) and 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 NAIC. 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 standardize prescribed statutory
accounting practices. Accordingly, that project, which is expected to be
completed in 1998, will likely change, to some extent, prescribed statutory
accounting practices and may result in changes to the accounting practices the
Company uses to prepare its statutory financial statements.
Statutory accounting practices differ from generally accepted accounting
principles (GAAP). Specific differences are as follows:
Bonds and Preferred Stocks: Bonds and sinking fund preferred stocks are carried
at amortized cost with the discount or premium being amortized using the
interest method. For GAAP, bonds and stocks 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 and
are carried at fair value. Unrealized holding gains and losses for available-
for-sale bonds and stocks are reported as a separate component of stockholder's
equity. Bonds and stocks that the Company has the positive intent and ability
to hold to maturity are classified as held-to-maturity and are generally
reported at amortized cost.
Non-admitted Assets: Non-admitted assets, principally receivables and
disallowed interest maintenance reserve (IMR), are excluded from the statements
of financial condition, and changes therein are charged or credited directly to
unassigned surplus.
Asset Valuation Reserve: The asset valuation reserve is reported as a liability
rather than as capital, and changes in this reserve are charged or credited
directly to unassigned surplus.
Policy Reserves: Policy reserves are provided based on assumptions and methods
prescribed or permitted by insurance regulatory authorities rather than on
mortality, interest, and retirement assumptions deemed to be appropriate when
the contracts were issued.
Federal Income Taxes: Federal income taxes are provided based on the estimated
liability for taxes incurred. The tax effects of temporary differences in
reporting income for financial statement purposes and for income tax purposes
are not included in the liability for federal income taxes.
-7-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Revenue and Expense Recognition: Deposits to guaranteed interest and other
contract deposit funds are reported as revenue. Benefits include fund
withdrawals and the change in deposit fund liabilities. Under GAAP, deposits
collected from contract holders and withdrawals on guaranteed interest contracts
(GICs) and on other contract deposit funds are not reported as revenue and
benefit expense.
Realized Capital Gains and Losses: Realized capital gains and losses are
included net of tax in the determination of net income (loss) rather than on a
pre-tax basis. The Company defers the portion of realized capital gains and
losses, net of tax, on sales of fixed income investments, principally bonds and
mortgage loans, which are attributable to changes in the general level of
interest rates. The deferred gains and losses are accumulated in the IMR and
are amortized over the remaining period to maturity based on groupings of
securities sold in five-year bands.
For a reconciliation of net loss and capital and surplus determined on a
statutory basis to net income (loss) and stockholder's equity determined on a
GAAP basis, see Note 13.
Other significant accounting practices are as follows:
INVESTMENTS: Bonds not backed by other loans are generally carried at amortized
cost with the discount or premium on bonds being amortized using the interest
method. Loan-backed bonds and structured securities are generally carried at
amortized cost using the interest method including anticipated prepayments at
the date of purchase. The prepayment assumptions for loan-backed bonds and
structured securities are obtained from broker dealer survey values or internal
estimates and are consistent with the current interest rate and economic
environment; significant changes in estimated cash flows from the purchase
assumptions are accounted for using the retrospective method. Sinking fund
preferred stocks are carried at amortized cost. Mortgage loans are generally
carried at the unpaid balance. Short-term investments are carried at cost.
Realized capital gains and losses are determined based upon specific
identification of the investments sold and do not include amounts allocable to
separate accounts. At the time a decline in the value of an investment is
determined to be other than temporary, a provision for loss is recorded which is
included in realized capital gains and losses. Changes in admitted asset
carrying amounts of bonds and stocks are recorded directly in unassigned
surplus.
DERIVATIVE INSTRUMENTS: Derivative instruments, which consist of interest rate
swaps and exchange-traded interest rate futures contracts, are valued in
accordance with the NAIC "Accounting Practices and Procedures" manual and the
"Purposes and Procedures" manual of the Securities Valuation Office.
Interest Rate Swap Agreements are agreements in which the Company agrees with
other parties to exchange, at specified intervals, the difference between fixed
rate and variable rate interest amounts, calculated by reference to an agreed
upon notional principal amount. No cash is exchanged at the outset of the
contract, and no principal payments are made by either party. A single net
payment is usually made by one counterparty at each due date. 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, for cash, 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 are not reported in the
statements of financial condition. Amounts to be paid or received pursuant to
interest rate swap agreements are accrued and recognized in the statements of
operations as an adjustment to net investment income.
-8-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--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 amortized to net investment income over the
expected remaining life of the hedged item. If the hedged item matures or
terminates earlier than anticipated, the remaining unamortized gain or loss is
amortized to net investment income in the current period. Gains or losses
realized on interest rate swap agreements which are terminated when the hedged
assets are sold are allocated to the interest maintenance reserve and amortized
into earnings over the remaining life of the assets sold. Gains or losses on
interest rate swap agreements which are terminated because the hedged
anticipated transaction is no longer likely to occur are reported in the
statements of operations as a component of net realized capital gains and
losses. The Company regularly monitors the effectiveness of its hedging
programs. In the event a hedge becomes ineffective, it is marked-to-market,
resulting in a charge or credit to net investment income.
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
settled, for cash, on a daily basis. The notional amount of interest rate
futures contracts represents 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 contracts are not reported in the statements of
financial condition. Gains or losses realized on the termination of futures
contracts are accounted for in the same manner as interest rate swap agreements.
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 prescribed or permitted by
insurance regulatory authorities. The assumptions vary by year of issue.
Reserves for future policy and contract benefits on all products meet the
minimum valuation standards requirements by the Tennessee Department of Commerce
and Insurance.
GICS AND OTHER CONTRACT DEPOSIT FUNDS: GICs and other contract deposit funds
represent customer deposits plus interest credited at contract rates. 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 those cases where a guaranteed interest crediting rate exceeds
the minimum standards valuation interest rate, a reserve for interest guarantees
has been established. The Company controls its interest rate risk by investing
in quality assets which have an aggregate duration that closely matches the
expected duration of the liabilities. The Company has changed its investment
strategy from a duration matching approach to a cash flow matching approach.
The change was necessitated by the Company's announcement in 1994 that it had
discontinued the sale of new GIC business. The Company has no significant
business other than GICs. The Company will continue to service all of its
existing GICs.
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 $58,217,000 were surrendered under the
offer. The Company has no plans for another offer of this kind.
-9-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
SEPARATE ACCOUNTS: The separate account amounts shown in the accompanying
financial statements 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.
NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
December 31
(in thousands of dollars)
------------------------------------------------
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $1,035,968 $1,064,132 $1,910,317 $1,983,038
Preferred Stocks - - 43 42
Mortgage Loans - - 36,682 36,682
Cash 659 659 1,546 1,546
Short-term Investments 72,674 72,674 137,709 137,709
LIABILITIES
GICs 762,787 770,936 1,619,217 1,719,820
Borrowed Money 7,116 7,116 1,245 1,245
</TABLE>
The following methods and assumptions were used by the Company in estimating the
fair values of its financial instruments:
BONDS AND PREFERRED STOCKS: Fair values for bonds and preferred stocks are
estimated using values obtained from independent pricing services or, in the
case of private placements, 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 3 for the amortized cost and fair values
of bonds by security type and by maturity date.
MORTGAGE LOANS: At December 31, 1996, the Company held no mortgage loans. At
December 31, 1995, the fair value for mortgage loans is based on the estimated
sales price.
CASH AND SHORT-TERM INVESTMENTS: Carrying amounts for cash and short-term
investments approximate fair value.
-10-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED
GICS: 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.
BORROWED MONEY: The carrying amount of borrowed money approximates fair value.
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 or paid if the contracts had been settled or closed on December 31.
The fair values are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
(in thousands of dollars)
----------------------------
<S> <C> <C>
Interest Rate Swaps $(851) $(30,978)
</TABLE>
-11-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 3--INVESTMENTS
BONDS AND STOCKS:
The amortized cost and fair values of bonds and stocks by security type are as
follows:
<TABLE>
<CAPTION>
December 31, 1996
(in thousands of dollars)
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and
Government Agencies and Authorities $ 2,139 $ 1,004 $ - $ 3,143
Foreign Governments 110 - 2 108
Public Utilities 173,966 15,817 466 189,317
Mortgage-backed Securities 413,155 4,723 3,397 414,481
All Other Corporate Bonds 446,598 11,806 1,321 457,083
---------- ------- ------ ----------
Total $1,035,968 $33,350 $5,186 $1,064,132
========== ======= ====== ==========
December 31, 1995
(in thousands of dollars)
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and
Government Agencies and Authorities $ 1,244 $ 2,163 $ - $ 3,407
Foreign Governments 113 - - 113
Public Utilities 250,534 25,366 587 275,313
Mortgage-backed Securities 786,406 8,795 1,593 793,608
All Other Corporate Bonds 872,020 39,782 1,205 910,597
Preferred Stocks 43 - 1 42
---------- ------- ------ ----------
Total $1,910,360 $76,106 $3,386 $1,983,080
========== ======= ====== ==========
</TABLE>
-12-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--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, 1996
(in thousands of dollars)
-------------------------
Amortized Fair
Cost Value
-------------------------
<S> <C> <C>
1 year or less $ 132,779 $ 133,820
Over 1 year through 5 years 225,368 227,805
Over 5 years through 10 years 134,004 141,446
Over 10 years 130,662 146,580
---------- ----------
622,813 649,651
Mortgage-backed Securities 413,155 414,481
---------- ----------
$1,035,968 $1,064,132
========== ==========
</TABLE>
For the years ended December 31, 1996 and 1995, there were changes in net
unrealized gains and losses on bonds and preferred stocks of $(44,556,000) and
$145,638,000, respectively. These unrealized gains and losses are not reflected
in the financial statements.
At December 31, 1996, the total investment in below-investment-grade bonds
(securities rated below Baa3 by Moody's Investor Services or an equivalent
internal rating) was $65,471,000 or 5.9 percent of cash and invested assets.
The fair value of these investments was $66,290,000.
MORTGAGE LOANS:
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. The average recorded investment in
impaired loans during the year ended December 31, 1996, was approximately
$519,000. 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. For the
year ended December 31, 1996, the Company recognized interest income on impaired
loans of $54,000 using the cash basis method of income recognition.
Changes in the mortgage loan loss reserve are as follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands of dollars)
----------------------------
<S> <C> <C>
BALANCE AT JANUARY 1 $ 2,100 $12,750
Adjustments Credited to Realized
Capital Losses - (1,000)
Release Due to Sales or Direct
Write-Down of Loans (2,100) (9,650)
------- -------
BALANCE AT DECEMBER 31 $ - $ 2,100
======= ========
</TABLE>
-13-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 3--INVESTMENTS - CONTINUED
In February 1996, the Company sold eight mortgage loans with a principal amount
and a book value of $29,932,000. The transaction resulted in a realized capital
loss of $5,409,000 on a pre-tax basis and $3,516,000 after tax.
In October 1995, the Company sold mortgage loans with a principal amount and a
book value of $119,615,000 through a securitization collateralized by 37 loans.
The transaction resulted in a realized capital gain of $2,477,000 on a pre-tax
basis and $1,610,000 after tax.
In May 1995, the Company sold six restructured mortgage loans with a principal
amount of $28,923,000 and a book value of $24,013,000. The transaction resulted
in a realized capital loss of $5,770,000 on a pre-tax basis and $2,138,000 after
tax.
NET INVESTMENT INCOME:
Sources for net investment income are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
(in thousands of dollars)
----------------------------
<S> <C> <C>
Bonds $109,747 $183,106
Mortgage Loans 1,626 17,351
Real Estate (14) 852
Cash 4 22
Short-term Investments 1,531 2,768
Derivative Instruments 10 (5,302)
Other Invested Assets 28 828
-------- --------
Gross Investment Income 112,932 199,625
Investment Expenses 2,872 6,094
-------- --------
Net Investment Income $110,060 $193,531
======== ========
</TABLE>
-14-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 3--INVESTMENTS - CONTINUED
Due and accrued income on bonds where collection of interest is uncertain and on
mortgage loans more than 30 days delinquent or where collection of interest is
uncertain is excluded from investment income. The total amount excluded at
December 31, 1995, was $271,000.
REALIZED CAPITAL GAINS AND LOSSES:
Realized capital gains (losses) on investments are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
(in thousands of dollars)
----------------------------
<S> <C> <C>
Bonds $ 9,489 $ (3,221)
Common Stocks - (5)
Mortgage Loans (2,447) (3,168)
Real Estate 21 (281)
Derivative Financial Instruments (22,058) (19,955)
-------- --------
Total (14,995) (26,630)
Federal Income Tax (Credit) 7,629 (2,978)
-------- --------
Pre-IMR Capital Losses, Net of Tax (22,624) (23,652)
-------- --------
Transferred to IMR
Pre-tax Capital Losses (3,094) (680)
Federal Income Tax (Credit) 3,837 (238)
-------- --------
(6,931) (442)
-------- --------
Net Realized Capital Losses $(15,693) $(23,210)
======== ========
</TABLE>
Proceeds from sales of bonds for the years ended December 31, 1996 and 1995 were
$475,518,000 and $884,933,000, respectively. Gross gains of $11,449,000 and
$8,344,000 and gross losses of $1,960,000 and $11,565,000, respectively, were
realized during 1996 and 1995 on sales and calls of bonds.
The net realized capital losses include write-downs and provisions for losses on
mortgage loans of $1,500,000 for the year ended December 31, 1995.
-15-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--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.
DERIVATIVE RISKS
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
derivatives should generally offset the market risk associated with the hedged
financial instrument or liability. The credit exposure of derivatives is
limited to the value of those contracts in a net gain position. The Company
mitigates credit risk by entering into master agreements with its counterparties
whereby contracts in a gain position can be offset against contracts in a loss
position. Additionally, the Company typically enters into bilateral, cross-
collateralization agreements with its counterparties. 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, which is
limited to the value of those contracts in a net gain position, was $190,000 at
December 31, 1996.
HEDGING ACTIVITY
The table below summarizes by notional amounts the activity for each category of
derivatives.
<TABLE>
<CAPTION>
Interest Rate Swaps
---------------------------
Receive Receive
Variable/ Fixed/
Pay Fixed Pay Variable Futures Total
(in thousands of dollars)
-------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $500,000 $525,000 $205,000 $1,230,000
Additions - - 45,000 45,000
Terminations 200,000 258,821 250,000 708,821
-------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1995 300,000 266,179 - 566,179
Additions - 100,000 167,500 267,500
Terminations 300,000 238,561 167,500 706,061
-------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1996 $ - $127,618 $ - $ 127,618
======== ======== ======== ==========
</TABLE>
-16-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--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, 1996, and the related weighted average
interest receive rate or pay rate assuming current market conditions.
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 2002 Total
(in thousands of dollars)
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RECEIVE FIXED/PAY VARIABLE
Notional Value $83,879 $13,739 - - $10,000 $20,000 $127,618
Weighted Average Receive Rate 5.68% 5.00% - - 7.42% 7.44% 6.02%
Weighted Average Pay Rate 5.50 5.50 - - 5.50 5.50 5.50
</TABLE>
Derivative activity falls under four 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. The 1996 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 contracts are deferred and reported as
an adjustment of the carrying amount of the hedged asset or the asset backing
the hedged liability and are amortized into earnings over the lives of the
hedged items. The net deferred gain associated with this activity was $829,000
and $1,726,000 at December 31, 1996 and 1995, respectively. Overall, $898,000
and $1,046,000 of the deferred gain was amortized into earnings in 1996 and 1995
under this hedging program.
PROGRAM 2
In 1994 and 1993 the Company created $525,000,000 of synthetic variable rate
GICs consisting of fixed rate GICs combined with index amortizing swaps (receive
fixed/pay variable), which were then backed by variable rate mortgage-backed
securities. 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, 1996, the remaining swaps are expected to amortize fully over
the next two years.
Expense from settlements of payment streams on these interest rate swap
agreements was $204,000 and $4,697,000 for 1996 and 1995, respectively, and is
included in net investment income in the statements of operations.
In the event of early disposal of the hedged item, the swap is marked-to-market
and any resulting gain or loss is recognized in earnings as an adjustment to net
investment income. In 1996 and 1995, the Company recognized a $359,000 and
$694,000 mark-to-market loss on certain of these swaps due to the early disposal
of a portion of the GICs hedged under this program. The affected swaps have
been tagged to other GICs. The amount of the loss amortized back into earnings
in 1996 and 1995 was $573,000 and $89,000. The unamortized loss of $392,000 at
December 31, 1996, will be amortized into earnings over the remaining life of
the swaps.
-17-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED
PROGRAM 3
In 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 the risk of a decline in price on future sales of
assets which would be necessary to fund maturing liabilities by entering into
$500,000,000 notional amount of forward interest rate swaps (receive
variable/pay fixed) and $205,000,000 notional amount of short interest rate
futures contracts. The $205,000,000 futures position was terminated in 1995 as
planned when $208,696,000 of bonds were sold to fund maturing GICs. The Company
realized a $50,000 before-tax capital gain on the futures and a $5,600,000
before-tax capital loss on bonds, a net result which was consistent with the
original hedge expectations. The first $200,000,000 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 (see Note 3). The Company
realized a $20,005,000 before-tax capital loss on termination of this swap
position in 1995. The remaining $300,000,000 swap position was terminated in
1996, resulting in a before-tax capital loss of $19,347,000 on the swap
termination and a $5,615,000 before-tax capital gain on the sale of the
associated bonds.
PROGRAM 4
In 1996, the Company executed a series of cash flow hedges in the group single
premium annuity portfolio, hedging $30,000,000 of expected cash flows in the
years 2001 and 2002 using forward interest rate swaps (receive fixed/pay
variable). The purpose of this action was to lock in the reinvestment rates on
future cash flows and protect the Company from the potential adverse impact of
declining interest rates on the associated policy reserves. These swaps are
scheduled to be terminated in the years 2001 and 2002 as assets are purchased
with the future anticipated cash flows.
-18-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 5--FEDERAL INCOME TAXES
The Company is included along with the affiliates, Provident Life and Accident
Insurance Company and Provident Life and Casualty Insurance Company, in a
consolidated tax return filed by Provident Companies, Inc. The total federal
income tax liability of the consolidated group is allocated among the members of
the group in proportion to the consolidated federal taxable income of the group
directly attributable to each member. Reimbursement is made among members of
the group to the extent losses are used to offset income within the group. The
federal income tax liability presented in the statements of financial condition
represents payables to an affiliate under the tax allocation agreement.
A reconciliation of the federal income tax computed at the statutory corporate
tax rate and the federal income tax expense in the statements of operations
follows:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
-------------------------
<S> <C> <C>
Statutory Federal Income Tax Rate 35.0% 35.0%
Tax-preferred Investment Income (1.9) (4.8)
Accrual of Market Discount Bonds (4.5) (8.1)
Reserves 1.3 (5.4)
Amortization of IMR (1.2) (5.3)
Other Items, Net (2.6) 0.2
---- ----
Effective Federal Income Tax Rate 26.1% 11.6%
==== ====
</TABLE>
During the year, the Internal Revenue Service concluded its examination of the
Company's federal income tax returns for tax years 1990 through 1992 and began
its examination for years 1993 through 1995. Management believes these
examinations will have no material impact on the Company's financial statements.
NOTE 6--ANNUITY ACTUARIAL RESERVES AND DEPOSIT LIABILITIES
The withdrawal characteristics of annuity actuarial reserves and deposit
liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1996
(in thousands of dollars)
-------------------------
Amount %
-------------------------
<S> <C> <C>
Subject to Discretionary Withdrawal
With Adjustment
With Market Value Adjustment $ 822,590 61.9%
At Market Value 300,477 22.6
---------- -----
Total With Adjustment or at Market Value 1,123,067 84.5
Subject to Discretionary Withdrawal 13,795 1.0
Without Adjustment
Not Subject to Discretionary Withdrawal 192,838 14.5
---------- -----
$1,329,700 100.0%
========== =====
</TABLE>
-19-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 7--SEPARATE ACCOUNTS
Separate accounts held by the Company primarily represent funds which the
Company invests on behalf of the accounts' contract holders. These separate
accounts represent structured GICs with a minimum interest crediting rate,
variable annuity contracts, and investment vehicles for retirement plans. All
separate accounts are carried at fair value.
Information regarding the separate accounts for the year ended December 31,
1996, is as follows:
<TABLE>
<CAPTION>
Non-indexed Non-guaranteed
Guarantee Less Separate
Than or Equal to 4% Accounts Total
(in thousands of dollars)
------------------------------------------------
<S> <C> <C> <C>
Premiums, Considerations or Deposits $ 36 $ 6 $ 42
======= ======== ========
Reserves for Accounts With Assets at
Fair Value $82,250 $218,227 $300,477
======= ======== ========
By Withdrawal Characteristics:
At Fair Value $82,250 $218,227 $300,477
======= ======== ========
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
December 31, 1996
(in thousands of dollars)
---------------------------
<S> <C>
Transfers as Reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to Separate Accounts $ 42
Transfers from Separate Accounts 96,196
--------
Net Transfers from Separate Accounts (96,154)
Increase in Liability for Deposit
Funds and Reserves Less Investment Income 96,154
--------
Transfer as Reported in the Summary of Operations
of the Life, Accident and Health Annual Statement $ 0
========
</TABLE>
NOTE 8--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.
-20-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 9--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 and Provident Life and Casualty Insurance
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.
In March 1996, Provident Life and Accident Insurance Company of America and
Provident Life Capital Corporation were dissolved and their respective assets
and liabilities were distributed to and assumed by Provident Companies, Inc. As
such, the Company and its affiliates, Provident Life and Accident Insurance
Company and Provident Life and Casualty Insurance Company, are now wholly-owned
subsidiaries of Provident Companies, Inc.
NOTE 10--RELATED PARTY TRANSACTIONS
During 1996, the Company paid common stock dividends to Provident Companies,
Inc. of $10,336,000 and made a return of capital in the amount of $89,664,000,
both of which are considered extraordinary dividends and were approved by the
Tennessee Department of Commerce and Insurance.
During 1995, the Company sold mortgage loans with a principal amount and a book
value of $32,485,000 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 $243,916,000. The Company sold bonds
to Provident Life and Accident Insurance Company at the market value of
$292,609,000. These bonds had a book value of $292,309,000 and a par value of
$288,848,000, resulting in a gain to the Company of $300,000.
During 1996 and 1995, the Company borrowed short-term funds from its various
affiliates. The related interest expense is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
(in thousands of dollars)
---------------------------
<S> <C> <C>
Interest Expense
Provident Companies, Inc. $ 239 $ -
Provident Life Capital Corporation - 193
Provident Life and Accident Insurance Company 36 1,500
</TABLE>
Affiliated borrowings outstanding at December 31, 1996 consisted of a
$7,116,000, short-term note from Provident Companies, Inc. The note payable was
issued on December 31, 1996, and bears interest at 6.35%. The note matured and
was repaid in full on January 2, 1997.
Total interest paid during 1996 and 1995, including amounts to affiliates, was
$1,746,000 and $2,604,000. Interest expense was $1,748,000 and $2,604,000.
-21-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES
Various lawsuits against the Company have arisen in the normal course of
business. Contingent liabilities that might arise from litigation are not
considered material in relation to the financial position of the Company.
NOTE 12--SHAREHOLDER DIVIDEND RESTRICTIONS AND DEPOSITS
The Company is subject to various regulatory restrictions which limit the amount
of dividends available for distribution, without prior approval by regulatory
authorities, to the greater of ten percent of surplus as regards policyholders
as of the preceding year end or the net gain from operations of the preceding
year. Only the amount of statutory unassigned surplus is available for the
payment of dividends. Based upon these restrictions, the Company is permitted a
maximum of $4,837,000 in dividend distributions in 1997.
At December 31, 1996, the Company had on deposit with regulatory authorities
securities with a statement value of $2,941,000 held for the protection of
policyholders.
NOTE 13--GAAP RECONCILIATION
Following is a reconciliation of net loss and capital and surplus of the Company
as determined in accordance with statutory accounting practices to amounts
determined in accordance with GAAP:
<TABLE>
<CAPTION>
Net Income (Loss) Capital and Surplus
Year Ended December 31 December 31
1996 1995 1996 1995
------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Statutory basis amounts $(2,808) $(10,848) $ 67,317 $159,923
Add (deduct) adjustments:
Investments (6,930) 193 27,360 40,574
Asset Valuation Reserve and
Interest Maintenance Reserve (604) (2,120) 5,803 30,711
Reserve for future policy and
contract benefits 283 (1,472) (17,783) (33,603)
Non-admitted assets 9,855 2,656
Deferred income tax 11,728 5,116 2,725 (8,180)
------- -------- -------- --------
GAAP basis amounts $ 1,669 $ (9,131) $ 95,277 $192,081
======= ======== ======== ========
</TABLE>
-22-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--Continued
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 14--SUBSEQUENT EVENTS
On April 29, 1996, Provident Companies, Inc. entered into a definitive agreement
to acquire The Paul Revere Corporation (Paul Revere), a provider
of life and disability insurance products, at a price of approximately $1.2
billion.
On November 4, 1996, the definitive agreement was amended to affect only the
terms related to the acquisition of Textron Inc.'s 83 percent ownership interest
in Paul Revere. The transaction closed on March 27, 1997, and was financed
through common equity issued to Zurich Insurance Company, a Swiss insurer, and
various affiliates of Zurich, common equity issued to Paul Revere shareholders,
debt, and internally generated funds.
-23-
<PAGE>
TABLE OF CONTENTS
Summary of Disclosure Statement
I. Investment Adviser and Principal Underwriter 1
II. Investment Objectives 1
III. Type of Investment Company 1
IV. Redemption 1
V. Description of Variable Annuities 1
VI. Miscellaneous 2
Per Unit Income and Capital Changes of Separate Account B 2
Description of Separate Account B and the Company 2
Investment Objectives and Policies 3
I. Fundamental 3
II. Other 5
III. Portfolio Turnover 6
Federal Tax Status 6
Allocation of Portfolio Brokerage 8
Board of Managers of Separate Account B 9
Compensation of Certain Affiliated Persons 9
Investment Advisory Services 10
I. Investment Advisory Agreement 10
Contract Charges 11
Mortality and Expense Assurances 11
Voting Rights 12
Surrender for Redemption 12
Transfers Between Account 13
Sales and Administrative Services 13
I. General 13
II. Tax Qualified Contracts 14
III. Non Tax Qualified Contracts 14
IV. Underwriting Agreement 15
<PAGE>
TABLE OF CONTENTS
Valuation of Assets 16
State Regulation of Company 16
Securities Custodian 16
Legal Proceedings 16
Legal Opinion 16
Experts 16
Additional Information 17
<PAGE>
PART C OTHER INFORMATION
Item 28. Financial Statements and Exhibits
(a) Financial Statements:
(i) Provident National Assurance Company Separate Account B
-------------------------------------------------------
Report of Independent Auditors
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Variable Annuity Contract
Owners' Equity
Schedule of Investments
Supplementary Information
Notes to Financial Statements
Provident National Assurance Company
------------------------------------
Report of Independent Auditors
Statements of Financial Condition--Statutory Basis
Statements of Operation--Statutory Basis
Statements of Capital and Surplus--Statutory Basis
Statements of Cash Flows--Statutory Basis
Notes to Financial Statements--Statutory Basis
(ii) Included in Part C - Financial statements of Separate Account B
included in the registration statements, not included in the
disclosure statement:
Report of Independent Auditors
Statement of Sources of Assets
Statements of Net Investment Income
Statements of Net Realized Gain and Unrealized
Appreciation of Investments
(b) Exhibits:
The following exhibits which are marked with an asterisk (*) are
incorporated herein by reference (pursuant to Regulation Section 230.447
and Section 270.8b-32 and in accordance with Rule 24 of the Commission's
Rules of Practice) to the registration statement (Form S-5) filed by
Registrant under the Securities Act of 1933 or specified amendments
thereto.
* (1) Resolutions of Board of Directors of the Company creating
Separate Account B as filed with the original registration
statement
* (2) Rules and Regulations of the Registrant (Post-Effective Amendments
Nos. 26 and 27, December 17, 1979, and April 3, 1980)
<PAGE>
* (3) Custodian Agreement with respect to securities of the Registrant
(Post Effective Amendment No. 23; April 3, 1978)
* (4) Investment Advisory Agreement (Post-Effective Amendment No. 23;
April 3, 1978)
* (5) Underwriting or distribution contract (Post-Effective Amendment No.
23; April 3, 1978)
* (6) Form of variable annuity contracts (Post-Effective Amendment No.
26; December 17, 1979)
* (7) Form of variable annuity application (filed with variable annuity
contracts - see Item 6 above)
* (8) Certificate of Incorporation of the insurance company (Post-
Effective Amendment No. 37; April 30, 1987); By-Laws, (Post
Effective Amendment No. 41, April 30, 1991).
(9) None
(10) None
(11) None
* (12) Opinion of Counsel (filed with Registrant's original Registration
Statement)
(13) (A) Consent of Independent Auditors
(B) Consent of Counsel
(14) Financial statement not included in Item 27
(15) None
(16) None
(17) (Exhibit 27) Financial Data Schedule
<PAGE>
Item 29.
DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY
(3)
(1) (2) Position and
Name and Address Positions and Offices Offices with
Principal Address with Insurance Company Registrant
- -------------------------------------------------------------------------------
J. Harold Chandler President and CEO None
1 Fountain Square
Chattanooga, TN 37402
Thomas R. Watjen Vice Chairman and Chief None
1 Fountain Square Financial Officer, Director
Chattanooga, TN 37402
William L. Armstrong Director None
1625 Broadway, Suite 780
Denver, CO 80202
William H. Bolinder Director None
1400 American Lane
Schaumberg, IL 60196
Charlotte M. Heffner Director None
3655 Randall Hall, NW
Atlanta, GA 30327
Burton E. Sorensen Director None
Sand Spring Road
Morristown, NJ 07960
Robert O. Best Executive Vice President and None
1 Fountain Square Chief Information Officer
Chattanooga, TN 37402
Timothy C. Gartland Executive Vice President, None
1 Fountain Square Human Resources
Chattanooga, TN 37402
<PAGE>
Thomas B. Heys, Jr. Executive Vice President, None
1 Fountain Square Risk Management
Chattanooga, TN 37402
Peter C. Madeja Executive Vice President None
440 East Swedesford Road
Suite 3050
Wayne, PA 19087
Jeffrey F. Olingy Executive Vice President, None
1 Fountain Square Sales Management
Chattanooga, TN 37402
Donald E. Boggs Senior Vice President and None
18 Chestnut Street Deputy Risk Manager
Worcester, MA 01608
Gerald M. Gates Senior Vice President None
18 Chestnut Street
Worcester, MA 01608
Robert C. Greving Senior Vice President None
1 Fountain Square and Actuary
Chattanooga, TN 37402
Barry E. Lundquist Senior Vice President None
18 Chestnut Street
Worcester, MA 01608
Ralph W. Mohney Senior Vice President None
1 Fountain Square
Chattanooga, TN 37402
Ralph A. Rogers Senior Vice President None
1 Fountain Square and Controller
Chattanooga, TN 37402
Richard A. Wolf Senior Vice President None
1 Fountain Square
Chattanooga, TN 37402
Susan N. Roth Vice President, Secretary Secretary
1 Fountain Square and Counsel to the
Chattanooga, TN 37402 Board of
Managers
Vicki W. Corbett Vice President and None
1 Fountain Square Controller
Chattanooga,TN 37402
<PAGE>
Item 30. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
INSURANCE COMPANY OR THE REGISTRANT
Provident Companies, Inc. (Parent Company;
A Delaware Corporation)
Provident Life and Accident (A Tennessee Corporation)
Insurance Company*
Provident Life and Casualty (A Tennessee Corporation)
Insurance Company*
Provident National Assurance (A Tennessee Corporation)
Company*
Sponsor of the Registrant
The Paul Revere Corporation* (A Massachusetts Corporation)
The Paul Revere Life Insurance (A Massachusetts Corporation)
Company**
The Paul Revere Variable Annuity (A Massachusetts Corporation)
Insurance Company***
The Paul Revere Protective Life (A Delaware Corporation)
Insurance Company***
The Paul Revere Equity Sales (A Massachusetts Corporation)
Company***
* These companies are wholly owned subsidiaries of Provident Companies, Inc.
** This company is a direct wholly owned subsidiary of The Paul Revere
Corporation, a wholly owned subsidiary of Provident Companies, Inc.
*** These companies are direct wholly owned subsidiaries of The Paul Revere Life
Insurance Company, a wholly owned subsidiary of The Paul Revere Corporation.
Separate financial statements filed for Separate Account and Provident National
Assurance Company.
Financials for all other entities not required to be filed with this form.
<PAGE>
Item 31. Number of Contract Owners (As of April 8, 1997)
Separate Account B - 414
Item 32 Indemnification
Indemnification Agreement is included as part of
Exhibit 1 under Item 28(b).
Item 33. Business and Other Connections of Investment Advisor
The Investment Advisor is a life insurance company licensed to do
business in all 50 states and the District of Columbia. In addition to
providing services to variable contracts separate accounts, it also
engages in the sale of fixed annuity contracts on a group and
individual basis. For information concerning profession, location and
employment of officers and directors see Item 29 above. Investment
Advisor and principal underwriters share complete officer and director
commonality.
Item 34. Principal Underwriters
(a) The names and principal occupations of the principal executive
officers and directors of the Principal Underwriter are set forth
in Item 29 above.
(b) The following presents information concerning commissions and
other compensation received by the Principal Underwriter directly
or indirectly from the Registrant during the Registrant's last
fiscal year. Note: the Registrant ceased making a public offering
of its variable annuity contracts on February 1, 1984.
(c) Not applicable - total payments were less than $2,000.
Item 35. Location of Account and Records
Each account book or other document required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules (17
CAFI 270.31A-1 to 31A-3) promulgated thereunder are located within the
offices of Provident National Assurance Company, 1 Fountain Square,
Chattanooga, Tennessee 37402. Such records are in the custody and
control of Robert O. Best.
Item 36. Management Services
None
<PAGE>
Item 37. Undertakings
The Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure
that the audited financial statements in the registration statement
are never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted.
The Registrant hereby represents that any contract offered by the
prospectus and which is issued pursuant to Section 403(b) of the
Internal Revenue Code of 1986, as amended, is issued by the Registrant
in reliance upon, and in compliance with, the Securities and Exchange
Commission's industry-wide no-action letter to the American Council of
Life Insurance (publicly available November 28, 1988) which permits
withdrawal restrictions to the extent necessary to comply with IRC
Section 403(b)(11).
<PAGE>
SIGNATURES
As required by (the Securities Act of 1933 and) the Investment Company Act
of 1940 the Registrant certifies that it meets the requirements of Securities
Act Rule 486(b) for effectiveness of this Registration Statement and) has caused
this Registration Statement to be signed on its behalf, in the City of
Chattanooga, and State of Tennessee on the 23th day of May, 1997.
PROVIDENT NATIONAL ASSURANCE
COMPANY SEPARATE ACCOUNT B
By /s/David G. Fussell
----------------------------
Chairman, Board of Managers
PROVIDENT NATIONAL ASSURANCE
COMPANY
By /s/J. Harold Chandler
-----------------------------
President and Chief Executive Officer
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- --------- -----
/s/David G. Fussell Chairman and Member of May 23, 1997
- ------------------- The Board of Managers -------------
David G. Fussell (Principal Executive
Officer and Principal
Financial Accounting
Officer)
/s/Henry E. Blaine Member of the Board May 23, 1997
- ------------------ of Managers -------------
Henry E. Blaine
/s/H. Grant Law, Jr. Member of the Board May 23, 1997
- ------------------ of Managers -------------
H. Grant Law, Jr.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the registrant has duly caused this post-effective
amendment to its registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Chattanooga, State of
Tennessee, on the 23th day of May, 1997.
PROVIDENT NATIONAL ASSURANCE COMPANY
BY /s/J. Harold Chandler
-------------------------------------
J. Harold Chandler
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this post-effective
amendment to its registration statement has been signed below by the following
persons on May 23, 1997, in the capacities indicated.
/s/J. Harold Chandler President and Chief Executive Officer
- --------------------------- (Principal Executive Officer)
J. Harold Chandler
/s/Thomas R. Watjen Vice Chairman and
- --------------------------- Chief Financial Officer, Director
Thomas R. Watjen
/s/William L. Armstrong Director
- ---------------------------
William L. Armstrong
Director
- ---------------------------
William H. Bolinder
/s/Charlotte M. Heffner Director
- ---------------------------
Charlotte M. Heffner
/s/Burton E. Sorensen Director
- ---------------------------
Burton E. Sorensen
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE AUDITED FINANCIAL
STATEMENTS FOR PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 9,922,590
<INVESTMENTS-AT-VALUE> 13,925,939
<RECEIVABLES> 23,887
<ASSETS-OTHER> 902
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13,950,728
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,615
<TOTAL-LIABILITIES> 33,615
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,538,926<F1>
<SHARES-COMMON-PRIOR> 1,767,394
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,003,349
<NET-ASSETS> 13,917,113<F2>
<DIVIDEND-INCOME> 193,196
<INTEREST-INCOME> 8,347
<OTHER-INCOME> 0
<EXPENSES-NET> 161,368
<NET-INVESTMENT-INCOME> 40,175
<REALIZED-GAINS-CURRENT> 1,477,966
<APPREC-INCREASE-CURRENT> 1,194,258
<NET-CHANGE-FROM-OPS> 2,672,224
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,870
<NUMBER-OF-SHARES-REDEEMED> 258,868
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 765,282
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 67,237
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 161,368
<AVERAGE-NET-ASSETS> 13,491,612
<PER-SHARE-NAV-BEGIN> 6.91
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> 1.51
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.44
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Shares are reported as accumulation units only
<F2>Net Assets are also attributable to reserves for Contracts that are in the
payout phase. For that reason, net asset value per share given multiplied by
the accumulation units outstanding is less than the value shown for net assets.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.13A
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 10, 1997, except for Note 14, as to which the
date is March 27, 1997, with respect to the financial statements of Provident
National Assurance Company and of our reports dated January 17, 1997, with
respect to the financial statements and financial statement schedules of
Provident National Assurance Company Separate Account B in this Post-Effective
Amendment No. 47 under the Securities Act of 1933 and Amendment No. 21 under the
Investment Company Act of 1940 to the Registration Statement and in the
Disclosure Statement.
ERNST & YOUNG LLP
Chattanooga, Tennessee
May 23, 1997
<PAGE>
EXHIBIT 99.13B
Consent of Counsel
I hereby consent to the use of my name in the disclosure statement included as
part of this Post-Effective Amendment No. 47 to this Registration Statement and
to the reference made to me under the caption "Legal Opinion" in such disclosure
statement.
SUSAN N. ROTH
Chattanooga, Tennessee
May 27, 1997
<PAGE>
EXHIBIT 99.14
REPORT OF INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Provident National Assurance Company
Separate Account B
We have audited the consolidated financial statements of Provident National
Assurance Company Separate Account B as of December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, and have issued
our report thereon dated January 17, 1997 (included at Item 27 in this
Registration Statement). Our audits also included the financial statement
schedules listed in Item 28 (a)(ii) of this Registration Statement. These
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Chattanooga, Tennessee
January 17, 1997
-1-
<PAGE>
STATEMENT OF SOURCES OF ASSETS
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
CONTRACT OWNERS' EQUITY
Excess of net contract purchase payments
received over amounts paid on canceled
contracts (1,649,814 units outstanding) $ 87,818,456
Accumulated net realized gain on investments 19,075,225
Unrealized appreciation of investments 4,003,349
Accumulated net investment income 14,430,182
-------------
125,327,212
-------------
Accumulated terminations and death benefits (109,466,144)
Accumulated variable annuity benefits ( 1,943,955)
-------------
TOTAL CONTRACT OWNER'S EQUITY $ 13,917,113
=============
</TABLE>
See notes to financial statements--Part B (Item 27).
-2-
<PAGE>
STATEMENTS OF NET INVESTMENT INCOME
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31
1996 1995 1994
-------- -------- --------
NET INVESTMENT INCOME
Income:
Dividends $193,196 $240,725 $298,329
Interest 8,347 24,937 76,107
-------- -------- --------
201,543 265,662 374,436
-------- -------- --------
Expenses--Note C:
Investment advisory services 67,237 63,922 64,398
Mortality and expense assurances 94,131 89,492 90,158
-------- -------- --------
161,368 153,414 154,556
-------- -------- --------
NET INVESTMENT INCOME $ 40,175 $112,248 $219,880
======== ======== ========
Ratio of expenses to total
investment income 80.07% 57.75% 41.28%
======== ======== ========
</TABLE>
See notes to financial statements--Part B (Item 27).
-3-
<PAGE>
STATEMENTS OF NET REALIZED GAIN AND UNREALIZED APPRECIATION
OF INVESTMENTS
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
NET REALIZED GAIN FROM
INVESTMENT TRANSACTIONS
(excluding short-term securities)--Note A
Proceeds from sales $5,882,270 $13,313,567 $ 9,701,955
Cost of investments sold
(identified cost) 4,404,304 11,434,739 9,214,091
Adjustment for impairment of value 0 (76,960) 0
---------- ----------- -----------
NET REALIZED GAIN $1,477,966 $ 1,801,868 $ 487,864
========== =========== ===========
NET UNREALIZED APPRECIATION OF
INVESTMENTS
Balance at end of year $4,003,349 $ 2,809,091 $ 1,635,016
Balance at beginning of year 2,809,091 1,635,016 2,899,236
---------- ----------- -----------
INCREASE (DECREASE) IN NET
UNREALIZED APPRECIATION OF
INVESTMENTS $1,194,258 $ 1,174,075 $(1,264,220)
========== =========== ===========
</TABLE>
See Notes to financial statements--Part B (Item 27).
-4-
