<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No Filing Fee Required.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
1 FOUNTAIN SQUARE, CHATTANOOGA, TENNESSEE 37402 TELEPHONE: (423)755-8913
March 7, 1997
The Annual Meeting of Contractowners who hold contracts issued pursuant to
Provident National Assurance Company Separate Account B will be held on
April 8, 1997, at the Provident Life and Accident Insurance Company building,
Room 152A, 1 Fountain Square, Chattanooga, Tennessee 37402. You have the right
to cast votes at this meeting.
Enclosed are the Notice of Annual Meeting, Proxy Statement and Proxy Card.
Please execute and return the proxy in the enclosed envelope so that it will be
received by the Board of Managers of Separate Account B NO LATER THAN April 7,
1997. You may retain all other material. If you are present at the meeting,
you may vote by ballot even though you have sent in your proxy.
Your contract/certificate number and the total number of votes attributable
thereto are shown above on the proxy.
Yours sincerely,
/s/ SUSAN N. ROTH
-------------------------
Susan N. Roth
Secretary, Board of Managers
Enclosures
PLEASE COMPLETE THE REVERSE SIDE AND RETURN THIS PROXY
<PAGE>
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
1 Fountain Square, Chattanooga, Tennessee 37402
Telephone: (423) 755-8913
Mailed March 7, 1997
NOTICE OF ANNUAL MEETING OF CONTRACTOWNERS
April 8, 1997
Notice is hereby given of a meeting of the owners of contracts for which
reserves are held in Separate Account B (the "Separate Account") of Provident
National Assurance Company (the "Company"), which meeting shall be held at
8:30 a.m. on Tuesday, April 8, 1997, at the Provident Life and Accident
Insurance Company building, Room 152A, 1 Fountain Square, Chattanooga, Tennessee
37402. The purpose of the meeting is to consider the following:
1. Election of three (3) members of the Board of Managers of the
Separate Account whose terms shall run until the next annual meeting or
until their successors are duly elected and qualified;
2. Ratification of the selection and appointment of Ernst & Young LLP
as independent auditors for the Separate Account; and
3. Transaction of such other business as may properly come before the
meeting and any adjournment thereof.
The date fixed by the Board of Managers as the record date for the
determination of contract owners entitled to notice of and to vote at the
meeting is at the close of business on January 31, 1997. A contract owner will
be entitled to vote only if he was the owner on the record date and is still
the owner on the date of the meeting.
It is important that your vote be represented at the meeting. Please refer to
the enclosed material for detailed information on voting procedures and return
the proxy card as soon as possible.
/s/SUSAN N. ROTH
---------------------------
Susan N. Roth
Secretary, Board of Managers
Enclosures
<PAGE>
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of proxies
by the Board of Managers of Provident National Assurance Company Separate
Account B (the Separate Account) for use at the Annual Meeting of Contractowners
to be held on Tuesday, April 8, 1997, at 8:30 a.m. at the Provident Life and
Accident Insurance Company building, Room 152A, 1 Fountain Square, Chattanooga,
Tennessee 37402. The cost of soliciting the proxies will be borne by Provident
National Assurance Company (the Company). Proxies may be solicited by
telephone, by mail or in person by directors, officers, agents, or regular
employees of the Company who will not be compensated for such services.
Contractowners may revoke their proxies at any time prior to the voting thereof
by submitting written notice of revocation to the Company at 1 Fountain Square,
Chattanooga, Tennessee 37402. Any Contractowner attending the meeting may vote
in person, whether or not a proxy has been previously submitted.
The annual report to Contractowners covering operations of the Separate Account
for the fiscal year ended December 31, 1996, including financial statements, was
mailed to the Contractowners on February 12, 1997.
On the record date, January 31, 1997 there were outstanding 1,643,292.890 units
of the Separate Account with a total value of $14,821,869.20 entitling the
Contractowners to one vote for each dollar of value represented by units
credited to such persons as of such record date. Contractowners of record at
the close of business on January 31, 1997, who are still Contractowners on April
7, 1997, will be entitled to vote at the meeting.
ELECTION OF BOARD OF MANAGERS
(Proposal 1)
Contractowners are asked to vote for the re-election of nominees Henry E.
Blaine, Grant Law and David G. Fussell to serve as members of the Board of
Managers until the next annual meeting or until their successors are duly
elected and qualified. Mr. Blaine has served since 1977, Mr. Law since January,
1991, and Mr. Fussell, the Chairman, since April 1993. None of the nominees
owns or has any interest in Separate Account units. Each of the nominees has
consented to serve if elected. If any of the proposed nominees should become
unavailable for any reason, the Board of Managers may designate another person
to serve in his place.
The following table sets forth present position and principal occupation(s) of
each nominee:
<PAGE>
Present Positions and Principal
Nominees Occupations During Last Five Year
- ------------ ----------------------------------
David G. Fussell* Vice President, Securities, Provident
1 Fountain Square Companies, Inc., Provident Life and
Chattanooga, Tennessee 37402 Accident Insurance Company, Provident
Age: 49 Life and Casualty Insurance Company
Henry E. Blaine# Chairman of the Board, President and Chief
293 West Haller Drive Executive Officer, Native American Lapidary
East Alton, Illinois 62024 Company (NALCO), Colorado; B&B Enterprises,
Age: 67 Partner.
H. Grant Law, Jr.# President and Chief Executive Officer, Newton
213 W. Fleetwood Drive Chevrolet - GEO, Inc.; President, Newton
Lookout Mountain, Oldsmobile - GMC Truck - Mitsubishi, Inc.
Tennessee 37350
Age: 50
- ------------
# NOTE: Member: Audit Committee.
* NOTE: Interested person of Separate Account B as that term is defined in the
Investment Company Act of 1940.
The Separate Account does not have a nominating committee.
Mr. Fussell is an affiliated person of the Separate Account and the Company.
Susan N. Roth, Secretary of the Board of Managers, also serves as Secretary of
the Company.
During 1996 there were four meetings of the Board of Managers and two meetings
of the Audit Committee.
REMUNERATION OF MEMBERS OF THE BOARD OF MANAGERS
No member of the Board of Managers receives any remuneration from the Separate
Account. The Company, pursuant to its Underwriting Agreement with the Separate
Account, paid all expenses relative to the operation of the Separate Account.
Aggregate fees paid to members of the Board of Managers for service during 1996
were $4,000 payable on a monthly basis. Each Board member, other than
Mr. Fussell, will receive $2,000 per year for serving on the Board. Mr. Fussell
received no remuneration from the Company based on his membership on the Board.
<PAGE>
INVESTMENT ADVISER AND THE INVESTMENT ADVISORY AGREEMENT
The Company is a wholly owned subsidiary of Provident Companies, Inc. Provident
Companies, Inc., ("Provident") was organized in 1995 under the laws of Delaware
and is a holding company for its insurance company subsidiaries which are
together engaged in the sale of individual and group life and accident and
health insurance in all states, the District of Columbia, all the provinces and
territories of Canada and Puerto Rico.
On April 12, 1977, the Contractowners approved, and on April 11, 1978, amended,
an Investment Advisory Agreement, dated March 21, 1977, in compliance with the
requirements of the Investment Company Act of 1940. The most recent approval
of the Investment Advisory Agreement with the Company by the Board of Managers,
including a majority of members who are not parties to the agreement nor
interested persons of such parties, occurred on January 27, 1997.
Pursuant to the Investment Advisory Agreement between the Company and the
Separate Account, the Company continuously provides the Board of Managers of the
Separate Account with an investment program and recommendations on the purchase
and sale of investments for its consideration. The Company has the
responsibility for placing orders for purchases and sales. For providing
investment advice, the Company, under the Investment Advisory Agreement,
receives a monthly fee in an amount equal to .0020% of the value of the Separate
Account each business day (approximately 0.50% on an annual basis). The
aggregate amounts deducted by the Company during fiscal years 1994, 1995, and
1996 were $64,398, $63,923, and $67,237, respectively, for investment advice.
The Investment Advisory Agreement:
1. May not be terminated by the Company without the prior approval of a new
investment advisory agreement by a majority of the outstanding voting
securities of the Separate Account, but may be terminated without the payment
of any penalty, on 60 days written notice by the Board of Managers or by a
majority of the outstanding voting securities of the Separate Account;
2. Shall continue in effect for a period more than two years from the date of
its execution, only so long as such continuation is specifically approved at
least annually by (a) a majority of the Board of Managers of the Separate
Account, or (b) a majority of the outstanding voting securities of the
Separate Account; and in either event by a majority of the members of the
Board of Managers who are not parties to the Agreement or interested persons
of such party, casting their votes in person at a meeting called for the
purpose of voting on such approval;
3. Cannot be amended without prior approval by the vote of a majority of the
outstanding voting securities of the Separate Account and by a vote of a
majority of the members of the Board of Managers, including a vote by a
majority of the members of the Board of Managers who are not parties to the
agreement or interested persons of such party, cast in person at a meeting
called for the purpose of voting on such approval; and
4. Will terminate automatically if assigned.
<PAGE>
PRINCIPAL EXECUTIVE OFFICERS AND DIRECTORS OF
PROVIDENT NATIONAL ASSURANCE COMPANY
The names and principal occupations of the principal executive officers and
directors of the Company are set forth below. The business address of the
officers of the Company is Provident National Assurance Company, 1 Fountain
Square, Chattanooga, Tennessee 37402, unless otherwise specified.
Position with Investment Adviser and
Name Provident, and Principal Occupation
- ---- -------------------------------------
Eugene A. Jones President, the Company.
J. Harold Chandler Executive Vice President, the Company; Chairman,
President and Chief Executive Officer, and Director,
Provident; Provident Life and Accident Insurance,
Provident Life and Casualty Insurance Company;
Director, AmSouth Bancorporation; Director, Herman
Miller, Inc.; Director, Healthsource, Inc.
Thomas R. Watjen Executive Vice President and Chief Financial Officer,
and Director, the Company; Executive Vice President and
Chief Financial Officer, Provident; Provident Life and
Accident Insurance Company; Provident Life and Casualty
Insurance Company.
Susan N. Roth Secretary, the Company; Provident, Provident Life and
Accident Insurance Company, Provident Life and Casualty
Insurance Company.
George A. Shell. Jr. Treasurer, the Company; Provident, Provident Life and
Accident Insurance Company, Provident Life and Casualty
Insurance Company.
William L. Armstrong Director, the Company; Chairman of Ambassador Media
Corporation; Chairman of Cherry Creek Mortgage Company,
Inc.; Chairman of El Paso Mortgage Company; Chairman of
Centennial State Mortgage Company; Chairman of Frontier
Real Estate, Inc.; Chairman of Frontier Title, LLC;
Chairman of Transland Financial Services, Inc.; Director
of Storage Technology Corporation, Director of
International Family Entertainment, Inc.; and Director
of Helmerich and Payne, Inc.
Charlotte M. Heffner Director, the Company; Trustee of the Maclellan
Foundation.
William B. Johnson Director, the Company; Chairman of the Board and Chief
Executive Officer of The Ritz-Carlton Hotel
<PAGE>
Company, LLC; Director of SunTrust Bank, Atlanta and
SunTrust Banks of Georgia, Inc.
Hugh O. Maclellan, Jr. Director, the Company; President of the Maclellan
Foundation; Director of SunTrust Bank and Covenant
Transport.
Scott L. Probasco, Jr. Director, the Company; Chairman, Executive Committee,
SunTrust Bank; Director, Chattem, Inc.; Director of
SunTrust Banks, Inc.; Director of Coca Cola Enterprises.
Burton E. Sorensen Director, the Company; Director, ServiceMaster Company.
There were no directors or principal executive officers of the Company who owned
of record or beneficially more than 5% of the outstanding units in Separate
Account B on January 31, 1997. The statement of financial condition of the
Company as of December 31, 1996, certified by its Independent Auditors, the
notes to the statement of financial condition and the independent auditors'
report are attached hereto as Exhibit A.
AUDIT COMMITTEE OF THE BOARD OF MANAGERS
The Audit Committee met twice in 1996 and performed the following functions:
a. Review the scope, plan, timing and results of the audit;
b. Review with auditors and management the appropriateness and the
implementation of applicable procedures for internal auditing, accounting
and financial control; and
c. Review of auditors' opinion and discussion with auditors of their
experiences in conducting the audit.
RATIFICATION OF THE SELECTION AND APPOINTMENT OF
INDEPENDENT AUDITORS
(Proposal 2)
On January 27, 1997, the Board of Managers, including a majority of members who
are not interested persons of the Separate Account, selected Ernst & Young LLP
to continue as independent auditors for the ensuing year. This selection was
made pursuant to a recommendation of the Audit Committee of the Separate
Account. Ernst & Young LLP has served as independent auditors for the Separate
Account since August 21, 1967. This firm is also the independent auditor for
the Company. Ernst & Young LLP has no direct or indirect financial interest in
the Separate Account. All fees relating to audit services performed for the
Separate Account are paid by the Company. A representative of Ernst & Young LLP
will be available at the annual meeting and will be allowed to make a statement
if he desires and/or respond to
<PAGE>
appropriate questions. The Board of Managers recommends the ratification of the
selection of Ernst & Young LLP to serve until the next annual meeting.
BROKERAGE
The Company has responsibility for placing orders for the purchase and sale of
portfolio securities of Separate Account B under its Investment Advisory
Agreement. With respect to such purchases and sales, the primary objective is
to obtain the most favorable prices and execution of orders on behalf of
Separate Account B. With respect to transactions executed in the over-the-
counter market, the Company will deal only with principal market makers unless
more favorable prices are otherwise available.
The Company does not expect to use any one particular broker or dealer, but
subject to obtaining the best prices and executions, brokers who provide
statistical information and supplemental research to the Company for pricing and
appraisal services utilized by the Company may receive orders for transactions.
It is not possible to determine the exact value of such statistical information
and supplemental research provided to the Company. The total brokerage
commissions paid by the Separate Account during the periods ending December 31,
1994, 1995, and 1996 were $23,494, $36,153, and $10,619, respectively. The
portfolio turnover rates for 1994, 1995, and 1996 were 70%, 101% and 28%,
respectively.
DISTRIBUTION OF CONTRACTS
On February 1, 1984 the Company ceased making a public offering of variable
annuity contracts issued pursuant to Separate Account B. Prior to that time the
contracts were distributed through broker-dealers who are registered with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 and
are members of the National Association of Securities Dealers, Inc. During
1996, commissions of approximately $1,062 were paid to broker-dealers with
respect to the Separate Account variable annuity contracts. Of that amount,
approximately $-0- was paid to registered representatives affiliated with the
Company.
CONTRACTOWNER PROPOSALS
To be considered for presentation at the April 14, 1998 Annual Meeting of
Contractowners, Contractowners' proposals must be received by the Separate
Account at Fountain Square, Chattanooga, Tennessee 37402, no later than
December 31, 1997.
LITIGATION
There are no legal proceedings pending to which the Company or the Separate
Account is a party, or to which their property is subject.
<PAGE>
OTHER MATTERS
The Board of Managers of the Separate Account knows of no other matters which
may come before the meeting. However, if any matters other than those referred
to above should properly come before the meeting, it is the intention of the
persons named in the enclosed proxy to vote such proxy in accordance with their
best judgment.
BY ORDER OF THE BOARD OF MANAGERS
/s/ DAVID G. FUSSELL
---------------------------
David G. Fussell, Chairman
<PAGE>
"Exhibit A"
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Provident National Assurance Company
We have audited the accompanying statement of financial condition of Provident
National Assurance Company, a wholly-owned subsidiary of Provident Companies,
Inc., as of December 31, 1996. The statement of financial condition is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the statement of financial condition based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of financial condition is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of financial condition. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement of financial
condition presentation. We believe that our audit of the statement of financial
condition provides a reasonable basis for our opinion.
In our opinion, the statement of financial condition referred to above presents
fairly, in all material respects, the financial position of Provident National
Assurance Company at December 31, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chattanooga, Tennessee
February 10, 1997
-1-
<PAGE>
"Exhibit A"
STATEMENT OF FINANCIAL CONDITION
PROVIDENT NATIONAL ASSURANCE COMPANY
<TABLE>
<CAPTION>
December 31, 1996
(in millions of dollars)
------------------------
<S> <C>
ASSETS
INVESTMENTS
Bonds
Available-for-Sale - at fair value (amortized cost: $1,034.3) $1,061.6
Held-to-Maturity - at amortized cost (fair value: $2.6) 2.5
Short-term Investments 72.7
----------
TOTAL INVESTMENTS 1,136.8
OTHER ASSETS
Cash and Bank Deposits 0.7
Accounts Receivable 5.6
Receivable from Affiliates 1.3
Accrued Investment Income 16.4
Deferred Federal Income Tax Asset 2.7
Separate Account Assets 300.5
----------
TOTAL ASSETS $1,464.0
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Policyholders' Funds $ 837.6
Reserves for Future Policy and Contract Benefits 212.0
Current Federal Income Tax Liability 0.1
Short-term Note Payable to Affiliate 7.1
Other Liabilities 11.4
Separate Account Liabilities 300.5
----------
TOTAL LIABILITIES 1,368.7
----------
STOCKHOLDER'S EQUITY
Common Capital Stock, $3.00 par;
Authorized and Outstanding - 1,000,000 shares 3.0
Additional Paid-in Capital 58.5
Net Unrealized Gain on Securities 1.5
Retained Earnings 32.3
----------
TOTAL STOCKHOLDER'S EQUITY 95.3
----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,464.0
==========
</TABLE>
See notes to statement of financial condition.
-2-
<PAGE>
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statement has been prepared
on the basis of generally accepted accounting principles. Such accounting
principles differ from statutory accounting practices prescribed or permitted by
state regulatory authorities (see Note 9).
OPERATIONS: Provident National Assurance Company is a wholly-owned subsidiary
of Provident Companies, Inc. (see Note 7). The Company is licensed to do
business in the fifty states and the District of Columbia. The Company is
engaged in administering and maintaining fixed annuity products.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial statement 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.
INVESTMENTS: Available-for-sale bonds are reported at fair value; held-to-
maturity bonds are generally reported at amortized cost; and short-term
investments are carried at cost.
Bonds not bought and held for the purpose of selling in the near term but for
which the Company does not have the positive intent and ability to hold to
maturity are classified as available-for-sale. Bonds that the Company has the
positive intent and ability to hold to maturity are classified as held-to-
maturity. The Company determines the appropriate classification of bonds at the
time of purchase.
Investment carrying amounts reflect provisions for declines in the value of
investments determined to be other than temporary. Unrealized holding gains and
losses, resulting from carrying available-for-sale bonds at fair value, are
reported in stockholder's equity, net of deferred taxes of $0.8 million at
December 31, 1996.
DERIVATIVE FINANCIAL INSTRUMENTS:
Interest Rate Swap Agreements are agreements in which two parties agree to
exchange, at specified intervals, interest payment streams calculated on an
agreed-upon notional principal amount with at least one stream based on a
specified variable rate. The underlying notional principal is not exchanged
between the parties. The Company has certain forward interest rate swap
agreements where the exchange of interest payments does not begin until a
specified future date. The Company intends to settle the forward interest rate
swap agreements prior to the commencement of the exchange of interest payment
streams.
The fair values of interest rate swap agreements which hedge bonds are reported
in the statement of financial condition as a component of available-for-sale
bonds. The fair values of interest rate swap agreements which hedge liabilities
are not reported in the statement of financial condition. Amounts to be paid or
received pursuant to interest rate swap agreements are accrued.
The Company accounts for all of its interest rate swap agreements as hedges.
Accordingly, any gains or losses realized on closed or terminated interest rate
swap agreements are deferred and recognized as an adjustment of the carrying
amount of the hedged asset or liability. If the hedged item matures or
terminates earlier than anticipated, the remaining unamortized gain or loss is
written off in the current period. The Company regularly monitors the
effectiveness of its hedging programs. In the event a hedge becomes
ineffective, it is marked-to-market.
-3-
<PAGE>
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Futures contracts are commitments to either purchase or sell a financial
instrument at a specific future date for a specified price. The Company invests
only in futures contracts which have U.S. Treasury securities as the underlying
investments. Changes in the market value of contracts are generally settled on
a daily basis. The notional amount of futures contracts represent the extent of
the Company's involvement but not the future cash requirements, as the Company
intends to close out open positions prior to settlement. All of the Company's
futures contracts are accounted for as hedges.
The fair values of futures which hedge bonds are reported in the statement of
financial condition as a component of available-for-sale bonds. The fair values
of futures which hedge liabilities are not reported in the statement of
financial condition.
POLICYHOLDERS' FUNDS: Policyholders' funds represent customer deposits plus
interest credited at contract rates. The Company announced in December 1994
that it had discontinued the sale of traditional guaranteed investment contracts
(GICs). The Company will continue to service all of its existing GICs.
The liability for GICs comprises over 90 percent of the liability balance shown
on the statement of financial condition. The interest rate credited on a
contract is dependent upon the time to maturity with most contracts issued
having a three to five year maturity. Generally, if a policyholder terminates a
GIC prior to maturity, there is a surrender charge imposed which is based on the
length of the remaining life of the GIC and the change in interest rates from
the date the GIC was issued to the date of termination.
RESERVES FOR FUTURE POLICY AND CONTRACT BENEFITS: Reserves for future policy
and contract benefits on group single premium annuities have been provided on a
net single premium method. The reserves are calculated based upon assumptions
as to interest, mortality, and retirement that were appropriate at the date of
issue. Mortality assumptions are based upon industry standards adjusted as
appropriate to reflect actual Company experience. The assumptions vary by year
of issue and include a provision for adverse deviation.
SEPARATE ACCOUNTS: The separate account amounts shown in the accompanying
financial statement represent contributions by contract holders to variable-
benefits and fixed-benefits pension plans. The contract purchase payments and
the assets of the separate accounts are segregated from other Company funds for
both investment and administrative purposes. Contract purchase payments
received under variable annuity contracts are subject to deductions for sales
and administrative fees. Also, the Company receives management fees which are
based on the net asset values of the separate accounts.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 125 (SFAS 125), ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
AND STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 127 (SFAS 127), DEFERRAL OF
THE EFFECTIVE DATE OF CERTAIN PROVISIONS OF FASB STATEMENT NO. 125
In 1996, the Financial Accounting Standards Board (FASB) issued SFAS 125 which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards are based
on consistent application of a financial-components approach that focuses on
control. SFAS 125 also establishes new rules for determining whether a transfer
of financial assets constitutes a sale and, if so, the determination of any
resulting gain or loss. The provisions of SFAS 125 were to be applied to
transactions occurring after December 31, 1996. However, SFAS 127 was issued
which defers the effective date one year for those provisions of SFAS 125 that
deal with securities lending, repurchase and dollar repurchase agreements, and
the recognition of collateral. The Company does not expect the adoptions of
SFAS 125 and SFAS 127 to have a material effect on its financial position or
results of operations.
-4-
<PAGE>
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments are
as follows:
December 31, 1996
(in millions of dollars)
---------------------------
Carrying Fair
Amount Value
---------- ----------
ASSETS
Bonds
Available-for-Sale $1,061.4 $1,061.4
Derivatives Hedging Available-for-Sale 0.2 0.2
Held-to-Maturity 2.5 2.6
Short-term Investments 72.7 72.7
Cash and Bank Deposits 0.7 0.7
LIABILITIES
Policyholders' Funds
GICs 764.0 772.2
Derivatives Hedging GICs - 1.0
Short-term Note Payable 7.1 7.1
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Bonds: The fair value for bonds is based on quoted market prices, where
available. For bonds not actively traded, the fair value is estimated using
values obtained from independent pricing services or, in the case of private
placements, is estimated by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality, and maturity of the
investments. See Note 3 for the amortized cost and fair values of bonds by
security type and by maturity date.
Short-term Investments and Cash and Bank Deposits: Carrying amounts for short-
term investments and cash and bank deposits approximate fair value.
Policyholders' Funds: The fair value of the Company's liability for GICs is
estimated using discounted cash flow calculations, based on current market
interest rates available for similar contracts with maturities consistent with
those remaining for the contracts being valued.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed.
Short-term Note Payable: The carrying amount for the short-term note payable
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,
1996.
-5-
<PAGE>
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 3--INVESTMENTS
The amortized cost and fair values of bonds by security type are as follows:
<TABLE>
<CAPTION>
December 31, 1996
(in millions of dollars)
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE BONDS
United States Government and
Government Agencies and Authorities $ 0.5 $ - $ - $ 0.5
Foreign Governments 0.1 - - 0.1
Public Utilities 174.0 15.8 0.5 189.3
Mortgage-backed Securities 413.1 4.8 3.4 414.5
All Other Corporate Bonds 446.6 12.0 1.4 457.2
-------- ------- ------- --------
$1,034.3 $ 32.6 $ 5.3 $1,061.6
======== ======= ======= ========
HELD-TO-MATURITY BONDS
United States Government and
Government Agencies and Authorities $ 2.5 $ 0.1 $ - $ 2.6
======== ======= ======= ========
</TABLE>
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 millions of dollars)
----------------------------------------
Amortized Fair
Cost Value
---------- ---------
<S> <C> <C>
AVAILABLE-FOR-SALE BONDS
1 year or less $ 133.3 $ 133.5
Over 1 year through 5 years 225.4 227.9
Over 5 years through 10 years 134.0 141.5
Over 10 years 128.5 144.2
-------- ---------
621.2 647.1
Mortgage-backed Securities 413.1 414.5
-------- ---------
$1,034.3 $ 1,061.6
======== =========
HELD-TO-MATURITY BONDS
1 year or less $ 0.3 $ 0.3
Over 10 years 2.2 2.3
-------- ---------
$ 2.5 $ 2.6
======== =========
</TABLE>
-6-
<PAGE>
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 3--INVESTMENTS - CONTINUED
At December 31, 1996, the total investment in below-investment-grade bonds
(securities rated below Baa3 by Moody's Investor Services) was $66.3 million or
5.8 percent of invested assets. The amortized cost of these investments was
$65.5 million.
The adjustments related to Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, are as
follows:
December 31, 1996
(in millions of dollars)
------------------------
Available-for-Sale Bonds $ 27.3
Reserves for Future Policy and Contract Benefits 25.0
Deferred Federal Income Taxes 0.8
-------
Net Unrealized Gain on Securities $ 1.5
=======
-7-
<PAGE>
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 3--INVESTMENTS - CONTINUED
As of December 31, 1996, there were thirty-five entities in which the Company
had invested amounts greater than ten percent of total stockholder's equity.
These entities are listed below.
Book Value of Investments
Name of Entity (in millions of dollars)
-------------- -------------------------
BMW US Capital Corporation $45.0
Residential Funding Corporation 94-S5-A3 32.0
Marsh & McLennan Companies, Inc. 27.7
Rayonier-AG 25.0
Prudential Home Mortgage 93-13-A-3 23.4
Potlatch Corporation 22.0
G. E. Capital Mortgage 94-9-A8 20.9
TransCanada Pipelines, Ltd. 19.5
Volkswagen Credit, Inc. 19.0
Phillip Morris Companies, Inc. 18.6
Nynex Capital Funding Company 17.0
MDU Resources Group, Inc. 16.5
AB Electrolux 15.7
First Interstate Bancorp 15.5
Bear Stearns Mortgage 93-3-A-8 15.4
Dana Corporation 15.0
Georgia Power Company 14.5
National Equity Fund 1992 L.P. 14.3
Oyster Creek, Ltd. 13.5
Eaton Vance Management Company 12.6
Citicorp Mortgage 87-10 12.4
Columbus Southern Power Company 12.0
Fruit of the Loom, Inc. 10.5
Reliance Electric Company 10.5
Lincoln National Corporation 10.0
Lyondell Petrochemical Company 10.0
Greyhound Financial Corporation 10.0
Transok, Inc. 10.0
Polaroid Corporation 10.0
Metropolitan Edison Company 10.0
Niagara Mohawk Power Corporation 9.9
Commonwealth Edison Company 9.9
American General Finance Corporation 9.8
Texas Utilities Electric Company 9.8
Orix Credit Alliance, Inc. 9.8
-8-
<PAGE>
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate swaps and exchange-traded interest rate futures
contracts to hedge interest rate risks and to match assets with its insurance
liabilities. The basic types of risks associated with derivatives are market
risk (that the value of the derivative will be adversely impacted by changes in
the market, primarily the change in interest rates) and credit risk (that the
counterparty will not perform according to the terms of the contract). The
market risk of the derivatives should generally offset the market risk
associated with the hedged financial instrument or liability. To help limit the
credit exposure of the derivatives, the Company has entered into master netting
agreements with its counterparties whereby contracts in a gain position can be
offset against contracts in a loss position. The Company also typically enters
into bilateral, cross-collateralization agreements with its counterparties to
help limit the credit exposure of the derivatives. These agreements require the
counterparty in a loss position to submit acceptable collateral with the other
counterparty in the event the net loss position meets or exceeds an agreed upon
amount. The Company's current credit exposure on derivatives is limited to the
value of those contracts in a net gain position. At December 31, 1996, the
market value of such derivatives was $0.2 million.
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 millions of dollars)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 300.0 $ 266.2 $ - $ 566.2
Additions - 100.0 167.5 267.5
Terminations (300.0) (238.6) (167.5) (706.1)
------- ------- ------- -------
BALANCE AT DECEMBER 31, 1996 $ - $ 127.6 $ - $ 127.6
======= ======= ======= =======
</TABLE>
-9-
<PAGE>
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED
The following table summarizes the timing of anticipated settlements of interest
rate swaps outstanding at December 31, 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 millions of dollars)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RECEIVE FIXED/PAY VARIABLE
Notional Value $83.9 - $13.7 - $10.0 $20.0 $127.6
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.
PROGRAM 2
In 1994 and 1993 the Company created $525.0 million 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 mortgaged-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 three years.
PROGRAM 3
In December 1994, the Company announced that it would discontinue the sale of
traditional GICs. At that time, the Company decided to convert from a duration
matching investment approach to a cash flow matching investment approach for its
GIC business. The Company hedged to lock in the price on future sales of assets
which would be necessary to fund maturing liabilities by entering into $500.0
million notional amount of forward interest rate swaps (receive variable/pay
fixed). The first $200.0 million swap position was terminated in 1995, with the
remaining $300.0 million terminated in 1996.
PROGRAM 4
In 1996, the Company executed a series of cash flow hedges in the group single
premium annuity portfolio, hedging $30.0 million 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.
-10-
<PAGE>
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 5--FEDERAL INCOME TAXES
The Company is included in a consolidated tax return filed by Provident
Companies, Inc., the Company's parent. The total federal income tax liability
of the consolidated group is allocated among the members of the group in
proportion to each member's share of the consolidated federal taxable income of
the group. Reimbursement is made among members of the group to the extent
losses are used to offset income within the group. The current federal income
tax liability presented in the statement of financial condition represents
amounts due to an affiliate under the tax allocation agreement.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax asset are as follows:
December 31, 1996
(in millions of dollars)
------------------------
DEFERRED TAX LIABILITY
Reinsurance $ 9.8
Reserves 0.2
Bond Market Discount 0.7
Net Unrealized Investment Gains 0.8
Other 2.0
-------
Total Deferred Tax Liability 13.5
-------
DEFERRED TAX ASSET
Realized Investment Gains and Losses 16.2
-------
NET DEFERRED TAX ASSET $ 2.7
=======
The Company is required to establish a valuation allowance for any portion of
the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax asset and, therefore, no such valuation
allowance has been established.
NOTE 6--RETIREMENT BENEFITS
The Company has no employees and, therefore, has no retirement benefits. The
Company purchases services at cost from its affiliate, Provident Life and
Accident Insurance Company. The cost of these services includes the cost of the
affiliate's benefit plans; however, there is no obligation on the part of the
Company beyond the amounts paid as part of the cost of services rendered.
-11-
<PAGE>
"Exhibit A"
NOTES TO STATEMENT OF FINANCIAL CONDITION - CONTINUED
PROVIDENT NATIONAL ASSURANCE COMPANY
NOTE 7--CORPORATE REORGANIZATION
Effective December 27, 1995, Provident Life and Accident Insurance Company of
America completed a step in a corporate reorganization which created a new
parent holding company, Provident Companies, Inc., a non-insurance holding
company incorporated in Delaware. As part of the reorganization, all
outstanding shares of the Company, previously owned by Provident Life and
Accident Insurance Company, were transferred to Provident Life Capital
Corporation, a non-insurance holding company incorporated in Delaware. 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. The
Company is now a direct subsidiary of Provident Companies, Inc.
NOTE 8--RELATED PARTY TRANSACTIONS
At December 31, 1996, the Company had a short-term note payable to 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.
During 1996, the Company paid common stock dividends to Provident Companies,
Inc. of $10.4 million and made a return of capital in the amount of $89.6
million.
NOTE 9--STATUTORY FINANCIAL INFORMATION
Statutory stockholder's equity at December 31, 1996, was $67.3 million, of which
$4.8 million is available for dividend distributions in 1997 without prior
approval by regulatory authorities.
At December 31, 1996, the Company had on deposit with regulatory authorities
securities with a book value of $2.9 million held for the protection of
policyholders.
The Company, which is domiciled in Tennessee, prepares its statutory financial
statements in accordance with accounting principles and practices prescribed or
permitted by the Tennessee Department of Commerce and Insurance. Prescribed
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners. Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices may differ from state to state, may differ from company to company
within a state and may change in the future. The Company does not apply any
permitted statutory accounting practices that differ from prescribed statutory
accounting practices.
The NAIC currently is in the process of recodifying statutory accounting
practices, the result of which is expected to constitute the only source of
prescribed statutory accounting practices. Accordingly, that project, which is
expected to be completed in 1997, will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Company uses to prepare its statutory financial statements.
-12-
<PAGE>
PROXY
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
PROXY SOLICITED ON BEHALF OF
BOARD OF MANAGERS
The undersigned hereby appoints David G. Fussell and Susan N. Roth or either of
them, with full power of substitution and revocation, to represent and to cast
the votes of the undersigned as shown on the reverse side at the Annual Meeting
of Contractowners of Provident National Assurance Company Separate Account B to
be held at 8:30 a.m. on April 8, 1997, and at any adjournment thereof, with
respect to the proposals below and as set forth in the Notice.
1. ELECTION OF MEMBERS OF THE BOARD OF MANAGERS (Board of Managers favors
a vote FOR)
FOR all nominees listed below [ ] WITHHOLD AUTHORITY [ ]
(except as marked to the contrary below)
Instruction: To withhold authority to vote for any individual nominee
strike a line through the nominee's name in the list below.
Henry E. Blaine, David G. Fussell and H. Grant Law
<PAGE>
2. PROPOSAL TO RATIFY THE SELECTION AND APPOINTMENT OF ERNST & YOUNG LLP
AS THE INDEPENDENT AUDITORS FOR SEPARATE ACCOUNT B.
(Board of Managers favors a vote FOR)
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. In their discretion, upon such other business as may properly come
before the meeting and any adjournment thereof.
This proxy when properly executed will be voted as directed. IN THE ABSENCE OF
ACCOMPANYING DIRECTION BY THE UNDERSIGNED, THIS PROXY WILL BE VOTED FOR
PROPOSALS ONE AND TWO.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Contractowners and the Proxy Statement issued by the Board of Managers and
revokes any Proxy heretofore given with respect to the votes covered by this
Proxy.
Dated
----------------------------------
Contractowner
--------------------------
Signature
Title (If Applicable)
------------------
