STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL SINGLE PURCHASE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACTS
issued by
COVA VARIABLE ANNUITY ACCOUNT ONE
(FORMERLY, XEROX VARIABLE ANNUITY ACCOUNT ONE)
AND
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
(FORMERLY, XEROX FINANCIAL SERVICES LIFE INSURANCE COMPANY)
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED DECEMBER 2, 1996, FOR THE
INDIVIDUAL SINGLE PURCHASE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS WHICH ARE
REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE
THE COMPANY AT: One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois
60181-4644, (800) 831-LIFE.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED DECEMBER 2, 1996.
TABLE OF CONTENTS
PAGE
Company................................................................ 3
Experts................................................................ 3
Legal Opinion.......................................................... 3
Distributor............................................................ 3
Yield Calculation for Money Market Sub-Account......................... 3
Performance Information................................................ 4
Annuity Provisions..................................................... 5
Variable Annuity..................................................... 5
Fixed Annuity........................................................ 6
Annuity Unit......................................................... 6
Net Investment Factor................................................ 6
Mortality and Expense Guarantee...................................... 6
Financial Statements................................................... 6
COMPANY
Information regarding Cova Financial Services Life Insurance Company (the
"Company") and its ownership is contained in the Prospectus. On June 1, 1995,
the Company changed its name from Xerox Financial Services Life Insurance
Company to its present name.
On April 1, 1996, the Company contributed initial capital to the Large Cap Stock
and Quality Bond Sub-Accounts of the Separate Account. As of September 30, 1996,
the capital contributed to the Quality Bond Sub-Account by the Company
represented approximately 67% of the total assets of such Sub-Account and the
capital contributed to the Large Cap Stock Sub-Account by the Company
represented approximately 88% of the total assets of such Sub-Account. The
Company currently intends to remove these assets from the Sub-Accounts on a
prorata basis in proportion to money invested in the Sub-Accounts by Contract
Owners.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995 and
1994 and for each of the years in the three-year period ended December 31, 1995,
and the financial statements of the Separate Account as of December 31, 1995 and
1994, included herein, have been included herein in reliance upon the reports of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
LEGAL OPINIONS
Legal matters in connection with the Contracts described herein are being passed
upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
DISTRIBUTOR
Cova Life Sales Company ("Life Sales") acts as the distributor. Prior to June 1,
1995, Cova Life Sales Company was known as Xerox Life Sales Company. Life Sales
is an affiliate of the Company. The offering is on a continuous basis.
YIELD CALCULATION FOR MONEY MARKET SUB-ACCOUNT
The Money Market Sub-Account of the Variable Account will calculate its current
yield based upon the seven days ended on the date of calculation. The current
yield of the Money Market Sub-Account is computed by determining the net change
(exclusive of capital changes) in the value of a hypothetical pre-existing
Contract Owner account having a balance of one Accumulation Unit of the
Sub-Account at the beginning of the period, subtracting the Mortality and
Expense Risk Premium, the Administrative Expense Charge and the Contract
Maintenance Charge, dividing the difference by the value of the account at the
beginning of the same period to obtain the base period return and multiplying
the result by (365/7).
The Money Market Sub-Account computes its effective compound yield according to
the method prescribed by the Securities and Exchange Commission. The effective
yield reflects the reinvestment of net income earned daily on Money Market
Sub-Account assets.
Net investment income for yield quotation purposes will not include either
realized capital gains and losses or unrealized appreciation and depreciation,
whether reinvested or not. The Company does not currently advertise yield
information for the Money Market Sub-Account.
The yields quoted should not be considered a representation of the yield of the
Money Market Sub-Account in the future since the yield is not fixed. Actual
yields will depend not only on the type, quality and maturities of the
investments held by the Money Market Sub-Account and changes in the interest
rates on such investments, but also on changes in the Money Market Sub-Account's
expenses during the period.
Yield information may be useful in reviewing the performance of the Money Market
Sub-Account and for providing a basis for comparison with other investment
alternatives. However, the Money Market Sub-Account's yield fluctuates, unlike
bank deposits or other investments which typically pay a fixed yield for a
stated period of time. The yield information does not reflect the deduction of
any applicable Withdrawal Charge at the time of the surrender. (See "Charges and
Deductions - Deduction for Withdrawal Charge (Sales Load)" in the Prospectus.)
PERFORMANCE INFORMATION
From time to time, the Company may advertise performance data as described in
the Prospectus. Any such advertisement will include total return figures for the
time periods indicated in the advertisement. Such total return figures will
reflect the deduction of a 1.25% Mortality and Expense Risk Premium, a .15%
Administrative Expense Charge, the investment advisory fee and expenses for the
underlying Portfolio being advertised and any applicable Contract Maintenance
Charges and Withdrawal Charges.
The hypothetical value of a Contract purchased for the time periods described in
the advertisement will be determined by using the actual Accumulation Unit
values for an initial $1,000 purchase payment, and deducting any applicable
Contract Maintenance Charge and any applicable Withdrawal Charge to arrive at
the ending hypothetical value. The average annual total return is then
determined by computing the fixed interest rate that a $1,000 purchase payment
would have to earn annually, compounded annually, to grow to the hypothetical
value at the end of the time periods described. The formula used in these
calculations is:
n
P(1 + T) = ERV
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used (or
fractional portion thereof) of a hypothetical $1,000 payment made
at the beginning of the time periods used.
In addition to total return data, the Company may include yield information in
its advertisements. For each Sub-Account (other than the Money Market
Sub-Account) for which the Company will advertise yield, it will show a yield
quotation based on a 30 day (or one month) period ended on the date of the most
recent balance sheet of the Separate Account included in the registration
statement, computed by dividing the net investment income per Accumulation Unit
earned during the period by the maximum offering price per Unit on the last day
of the period, according to the following formula:
6
(a - b)
Yield = 2[(_______ + 1) - 1]
(cd)
Where:
a = Net investment income earned during the period by the Trust
or Fund attributable to shares owned by the Sub-Account.
b = Expenses accrued for the period (net of reimbursements).
c = The average daily number of Accumulation Units outstanding
during the period.
d = The maximum offering price per Accumulation Unit on the last
day of the period.
The Company may also advertise performance data which will be calculated in the
same manner as described above but which will not reflect the deduction of any
Withdrawal Charge.
Contract Owners should note that the investment results of each Sub-Account will
fluctuate over time, and any presentation of the Sub-Account's total return or
yield for any period should not be considered as a representation of what an
investment may earn or what a Contract Owner's total return or yield may be in
any future period.
ANNUITY PROVISIONS
VARIABLE ANNUITY
A variable annuity is an annuity with payments which: (1) are not predetermined
as to dollar amount; and (2) will vary in amount with the net investment results
of the applicable Sub-Account(s) of the Variable Account. At the Annuity Date,
the Contract Value in each Sub-Account will be applied to the applicable Annuity
Tables. The Annuity Table used will depend upon the Annuity Option chosen. If,
as of the Annuity Date, the then current Annuity Option rates applicable to this
class of Contracts provide a first Annuity Payment greater than guaranteed under
the same Annuity Option under this Contract, the greater payment will be made.
The dollar amount of Annuity Payments after the first is determined as follows:
(1) the dollar amount of the first Annuity Payment is divided by the value
of an Annuity Unit as of the Annuity Date. This establishes the number of
Annuity Units for each monthly payment. The number of Annuity Units remains
fixed during the Annuity Payment period.
(2) the fixed number of Annuity Units is multiplied by the Annuity Unit
value for the last Valuation Period of the month preceding the month for which
the payment is due. This result is the dollar amount of the payment.
The total dollar amount of each Variable Annuity Payment is the sum of all
Sub-Account Variable Annuity Payments reduced by the Contract Maintenance
Charge.
FIXED ANNUITY
A fixed annuity is a series of payments made during the Annuity Period which are
guaranteed as to dollar amount by the Company and do not vary with the
investment experience of the Separate Account. The General Account Value on the
day immediately preceding the Annuity Date will be used to determine the Fixed
Annuity monthly payment. The first monthly Annuity Payment will be based upon
the Annuity Option elected and the appropriate Annuity Option Table.
ANNUITY UNIT
The value of an Annuity Unit for each Sub-Account was arbitrarily set initially
at $10. This was done when the first Eligible Investment shares were purchased.
The Sub-Account Annuity Unit value at the end of any subsequent Valuation Period
is determined by multiplying the Sub-Account Annuity Unit value for the
immediately preceding Valuation Period by the product of (a) the Net Investment
Factor for the day for which the Annuity Unit Value is being calculated, and (b)
0.999919.
NET INVESTMENT FACTOR
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing:
(a) the Accumulation Unit value as of the close of the current Valuation
Period, by
(b) the Accumulation Unit value as of the close of the immediately
preceding Valuation Period.
The Net Investment Factor may be greater or less than one, as the Annuity Unit
value may increase or decrease.
MORTALITY AND EXPENSE GUARANTEE
The Company guarantees that the dollar amount of each Annuity Payment after the
first Annuity Payment will not be affected by variations in mortality or expense
experience.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts.
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996 (Unaudited)
(In thousands of dollars)
ASSETS
INVESTMENTS:
<TABLE>
<CAPTION>
<S> <C>
COVA SERIES TRUST:
Quality Income Portfolio - 5,007,520 shares at a net asset value of $10.53 per share (cost $52,549) $ 52,754
High Yield Portfolio - 3,906,238 shares at a net asset value of $10.70 per share (cost $40,993) 41,787
Growth and Income Portfolio - 2,096,504 shares at a net asset value of $13.58 per share (cost $25,017) 28,461
Money Market Portfolio - 32,959,900 shares at a net asset value of $1.00 per share (cost $32,960) 32,960
Stock Index Portfolio - 5,389,275 shares at a net asset value of $15.52 per share (cost $66,086) 83,643
Bond Debenture Portfolio - 460,658 shares at a net asset value of $10.81 per share (cost $4,757) $ 4,981
Quality Bond Portfolio - 605,241 shares at a net asset value of $10.04 per share (cost $6,035) 6,075
Small Cap Stock Portfolio - 757,132 shares at a net asset value of $10.64 per share (cost 7,776) 8,053
Large Cap Stock Portfolio - 1,452,014 shares at a net asset value of $10.44 per share (cost $14,524) 15,163
Select Equity Portfolio - 1,198,070 shares at a net asset value of $10.11 per share (cost $11,855) 12,118
International Equity Portfolio - 838,077 shares at a net asset value of $10.37 per share (cost $8,502) 8,687
LORD ABBETT SERIES FUND, INC:
Growth and Income Portfolio - 15,566,544 shares at a net asset value of $16.93 per share (cost $217,362) 263,506
Global Equity Portfolio - 209,576 shares at a net asset value of $12.26 per share (cost $2,259) 2,570
GENERAL AMERICAN CAPITAL COMPANY
Money Market Portfolio - 14,120 shares at a net asset value of $17.01 per share (cost $238) 240
TOTAL ASSETS $ 560,998
==========
LIABILITIES AND CONTRACT OWNERS' EQUITY
FEES PAYABLE TO COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY $ 129
CONTRACT OWNERS' EQUITY:
Trust Quality Income - 3,485,260 accumulation units at $15.132856 per unit 52,742
Trust High Yield - 2,015,197 accumulation units at $20.731096 per unit 41,777
Trust Growth and Income - 1,799,637 accumulation units at $15.811166 per unit 28,454
Trust Money Market - 2,802,025 accumulation units at $11.760162 per unit 32,952
Trust Stock Index - 4,732,539 accumulation units at $17.669922 per unit 83,624
Trust Bond Debenture Portfolio - 459,511 accumulation units at $10.837855 per unit 4,980
Trust Quality Bond Portfolio -600,904 accumulation units at $10.107693 per unit 6,074
Trust Small Cap Stock Portfolio - 759,505 accumulation units at $10.601053 per unit 8,052
Trust Large Cap Stock Portfolio - 1,452,773 accumulation units at $10.434763 per unit 15,159
Trust Select Equity Portfolio - 1,199,716 accumulation units at $10.098491 per unit 12,115
Trust International Equity Portfolio - 838,318 accumulation units at $10.359859 per unit 8,685
Fund Growth and Income - 11,249,326 accumulation units at $23.418841 per unit 263,446
Fund Global Equity - 167,133 accumulation units at $15.371697 per unit 2,569
GACC Money Market Portfolio - 23,703 accumulation units at $10.131477 per unit 240
----------
TOTAL CONTRACT OWNERS' EQUITY 560,869
----------
TOTAL LIABILITIES AND CONTRACT OWNERS' EQUITY $ 560,998
==========
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1996 (Unaudited)
(In thousands of dollars)
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC. GACC
<TABLE>
<CAPTION>
QUALITY HIGH GROWTH & MONEY STOCK BOND QUALITY INTL SMALL
INCOME YIELD INCOME MARKET INDEX DEBENTURE BOND EQUITY CAP STOCK
--------- ------- ---------- ------- ------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 1,370 $1,667 $ 208 $ 1,314 $ 796 $ 15 $ 68 $ 36 $ 13
Total Income 1,370 1,667 208 1,314 796 15 68 36 13
EXPENSES:
Mortality and Expense `
Risk Fee 461 357 226 315 811 13 28 34 32
Administrative Fee 55 43 27 38 97 2 3 4 4
Total Expenses 516 400 253 353 908 15 31 38 36
Net Investment Income 854 1,267 (45) 961 (112) 0 37 (2) (23)
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS (27) (204) 105 -- 3,308 6 (6) 71 46
NET CHANGE IN UNREALIZED
GAIN/(LOSS) ON INVESTMENTS (1,265) 1,255 1,808 -- 6,580 224 40 184 278
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS (1,292) 1,051 1,913 -- 9,888 230 34 255 324
NET INCREASE/(DECREASE) IN
CONTRACT OWNERS' EQUITY
RESULTING FROM OPERATIONS ($438) $2,318 $ 1,868 $ 961 $9,776 $ 230 $ 71 $ 253 $ 301
LARGE SELECT GROWTH & GLOBAL Money
CAP STOCK EQUITY INCOME EQUITY Market Total
----------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 69 $ 23 -- -- -- $ 5,579
Total Income 69 23 -- -- -- 5,579
EXPENSES:
Mortality and Expense
Risk Fee 70 37 2,135 24 1 4,544
Administrative Fee 9 4 256 3 -- 545
Total Expenses 79 41 2,391 27 1 5,089
Net Investment Income (10) (18) (2,391) (27) (1) 490
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS 5 (17) 92 14 -- 3,393
NET CHANGE IN UNREALIZED
GAIN/(LOSS) ON INVESTMENTS 639 263 23,676 159 2 33,843
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS 644 246 23,768 173 2 37,236
NET INCREASE/(DECREASE) IN
CONTRACT OWNERS' EQUITY
RESULTING FROM OPERATIONS $ 634 $ 228 $ 21,377 $ 146 $ 1 $37,726
</TABLE>
See Accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
For the Nine Months Ended September 30, 1996 (Unaudited)
(In thousands of dollars)
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC. GACC
________
<TABLE>
<CAPTION>
QUALITY HIGH GROWTH & MONEY STOCK BOND QUALITY INTL
INCOME YIELD INCOME MARKET INDEX DEBENTURE BOND EQUITY
--------- -------- ---------- --------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 854 $ 1,267 ($45) $ 961 ($112) $ 0 $ 37 ($2)
Net Realized Gain/(Loss)
on Investments (27) (204) 105 __ 3,308 6 (6) 71
Net Unrealized Gain/(Loss)
on Investments (1,265) 1,255 1,808 __ 6,580 224 40 184
NET INCREASE/(DECREASE) IN
Contract Owners' Equity
Resulting from Operations (438) 2,318 1,868 961 9,776 230 71 253
From Account Unit Transactions:
Contributions by Cova Life -- -- -- -- -- 500 5,000 5,000
Redemptions by Cova Life -- -- -- -- -- (508) (1,000) (5,128)
Proceeds from Units of
the Account Sold 1,460 1,624 2,360 36,144 2,661 2,793 641 3,774
Payments for Units of the
Account Redeemed (3,037) (1,767) (677) (1,984) (3,248) (17) (5) (6)
Account Transfers 13,504 3,090 5,286 (36,297) (11,327) 1,982 1,367 4,792
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit
Transactions 11,927 2,947 6,969 (2,137) (11,914) 4,750 6,003 8,432
Net Increase/(Decrease) in
Contract Owners' Equity 11,489 5,265 8,837 (1,176) (2,138) 4,980 6,074 8,685
Contract Owners' Equity:
Beginning of Period 41,253 36,512 19,617 34,128 85,762 -- -- --
End of Period $ 52,742 $41,777 $ 28,454 $ 32,952 $ 83,624 $ 4,980 $ 6,074 $ 8,685
SMALL LARGE SELECT GROWTH & GLOBAL Money
CAP STOCK CAP STOCK EQUITY INCOME EQUITY MARKETTOTAL
----------- ----------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income ($23) ($10) ($18) ($2,391) ($27) ($1) $ 490
Net Realized Gain/(Loss)
on Investments 46 5 (17) 92 14 __ 3,393
Net Unrealized Gain/(Loss)
on Investments 278 639 263 23,676 159 2 33,843
NET INCREASE/(DECREASE) IN
Contract Owners' Equity
Resulting from Operations 301 634 228 21,377 146 1 37,726
From Account Unit Transactions:
Contributions by Cova Life 5,000 15,000 5,000 -- -- -- 35,500
Redemptions by Cova Life (5,135) (2,206) (4,922) -- -- -- (18,899)
Proceeds from Units of
the Account Sold 3,703 477 6,338 24,061 142 61 86,239
Payments for Units of the
Account Redeemed (11) (1) (28) (8,717) (201) -- (19,699)
Account Transfers 4,194 1,255 5,499 36,095 (18) 178 29,600
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit
Transactions 7,751 14,525 11,887 51,439 (77) 239 112,741
Net Increase/(Decrease) in
Contract Owners' Equity 8,052 15,159 12,115 72,816 69 240 150,467
Contract Owners' Equity:
Beginning of Period -- -- -- 190,630 2,500 -- 410,402
End of Period $ 8,052 $ 15,159 $ 12,115 $ 263,446 $ 2,569 $ 240 $ 560,869
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
For the Year Ended December 31, 1995
(In thousands of dollars)
VAN KAMPEN MERRITT
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
<TABLE>
<CAPTION>
QUALITY HIGH GROWTH & MONEY STOCK GROWTH & GLOBAL
INCOME YIELD INCOME MARKET INDEX INCOME EQUITY TOTAL
-------- -------- ---------- --------- ------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
From Operations:
Net Investment Income $ 1,948 $ 2,332 $ 1,371 $ 2,318 $ 2,875 $ 12,501 $ 149 $ 23,495
Net Realized Gain/(Loss)
on Investments 16 (117) 46 __ 2,589 383 63 2,980
Net Unrealized Gain
on Investments 3,600 1,786 2,248 110 11,838 22,184 5 41,771
Net Increase in Contract
Owners' Equity
Resulting from
Operations 5,564 4,001 3,665 2,428 17,302 35,069 217 68,246
From Account Unit Transactions:
Redemptions by Cova
Financial Services Life
Insurance Company __ __ __ __ __ __ (132) (132)
Proceeds from Units of
the Account Sold 2,609 3,648 2,179 27,608 2,384 29,458 686 68,572
Payments for Units of the
Account Redeemed 5,174 (2,111) (718) (4,508) 4,200 (18,059) (1,244) (36,014)
Account Transfers 4,321 11,321 3,550 67,278 33,469 29,746 (135) 14,994
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit
Transactions 1,756 12,858 5,011 (44,178) 31,653 41,145 (825) 47,420
Net Increase/(Decrease) in
Contract Owners' Equity 7,320 16,859 8,676 (41,750) 48,955 76,214 (608) 115,666
Contract Owners' Equity:
Beginning of Period 33,933 19,653 10,941 75,878 36,807 114,416 3,108 294,736
End of Period $ 41,253 $36,512 $ 19,617 $ 34,128 $85,762 $ 190,630 $ 2,500 $410,402
======== ========== ========= ======= ========== ======== =========
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996 (Unaudited)
1. Organization:
Cova Variable Annuity Account One, (the "Separate Account") is a separate
investment account established by a resolution of the Board of Directors of
Cova Financial Services Life Insurance Company ("Cova Life"). The Separate
Account operates as a Unit Investment Trust under the Investment Company Act
of 1940.
The Separate Account is divided into sub-accounts, with the assets of each
sub-account invested in the Cova Series Trust (formerly Van Kampen Merritt
Series Trust) ("Trust"), the Lord Abbett Series Fund, Inc. ("Fund") or General
American Capital Company (GACC). All portfolios of the Trust are managed by
Cova Investment Advisory Corporation (the Adviser). The Trust has entered
into an investment advisory agreement with the Adviser, pursuant to which the
Adviser manages the investment operations of the Trusts affairs. The Trust
pays the Adviser a monthly fee based on the average daily net assets. The
Adviser has entered into a sub-advisory agreement with Van Kampen American
Capital Investment Advisory Corp., J.P. Morgan Investment Management, Inc. and
Lord, Abbett & Co. for investment advisory services in connection with the
management of the Trust. During 1996 and prior, the Trust portfolios
available for investment were the Quality Income, High Yield, Growth and
Income, Money Market, Stock Index, Select Equity, Large Cap Stock, Small Cap
Stock, International Equity, Quality Bond, and Bond Debenture Portfolios. The
Fund had two portfolios available for investment during and prior to 1996;
the Growth and Income Global Equity Portfolios. GACC had the Money Market
Portfolio available for investment in 1996. Not all portfolios of the Trust,
Fund and GACC are available for investment depending upon the nature and
specific terms of the different contracts currently being offered for sale.
The Trust, Fund and GACC are all diversified, open-end, management investment
companies which are intended to meet differing investment objectives.
The Trust Quality Income Portfolio invests in U.S. Government issued debt
obligations and in various investment-grade debt instruments, including
mortgage pass-through certificates and collateralized mortgage obligations.
The Trust High Yield Portfolio invests primarily in medium and lower-grade
debt securities and futures and options contracts. The Trust Growth and
Income Portfolio invests primarily in common stocks and futures and options
contracts. The Trust Money Market and GACC Money Market Portfolios invest in
short-term money market instruments. The Trust Stock Index Portfolio invests
in common stocks, stock index futures and options, and short-term securities.
The Trust Select Equity and Large Cap Stock Portfolios invest in stocks of
large and medium-sized companies holding from 60 to 90 and from 225 to 250
stocks, respectively. The Trust Small Cap Stock Portfolio invests primarily
in the common stock of small U.S. companies. The Trust International Equity
Portfolio invests primarily in stocks of established companies based in
developed countries. The Trust Quality Bond Portfolio investment objective is
to provide a high total return consistent with moderate risk of capital and
maintenance of liquidity. The Trust Bond Debenture Portfolio invests
primarily in convertible and discount debt securities. The Fund Growth and
Income Portfolio invests in common stocks. The Fund Global Equity Portfolio
invests primarily in both domestic and foreign common stocks and forward
currency contracts.
In order to satisfy diversification requirements and provide for optimum
policyholder returns, Cova Life has made periodic contributions to the Trust
and Fund to provide for the initial purchases of investments. In return, Cova
Life has been credited with accumulation units of the Separate Account. As
additional funds are received through policyholder deposits, Cova Life has, at
its discretion and without adversely impacting the investment operations of
the Trust and Fund, removed its capital investment in the Separate Account by
liquidating accumulation units. Since inception, $48,700,000 has been
contributed to the Separate Account by Cova Life of which, after subsequent
redemptions and net of realized and unrealized gains and losses on
investments, $17,403,720 remains as of September 30, 1996.
KPMG Peat Marwick LLP
1010 Market Street
St. Louis, MO 63101-2085
INDEPENDENT AUDITOR'S REPORT
The Contract Owners of Cova Variable
Annuity Account One
Cova Financial Services Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of the
Quality Income, High Yield, Growth and Income, Money Market, and Stock Index
sub-accounts (investment options within the Van Kampen Merritt Series Trust)
and the Growth and Income and Global Equity sub-accounts (investment options
within the Lord Abbett Series Fund, Inc.) of Cova Variable Annuity Account One
of Cova Financial Services Life Insurance Company (the Separate Account) as of
December 31, 1995, and the related statement of operations for the year then
ended, and the statement of changes in contract owners' equity for each of the
two years in the period then ended, and the financial highlights for each of
the periods presented. These financial statements and financial highlights
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
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
financial highlights 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 investments
owned at December 31, 1995 by correspondence with the Van Kampen Merritt
Series Trust and the Lord Abbett Series Fund, Inc. 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 financial highlights referred to
above present fairly, in all material respects, the financial position of the
sub-accounts of Cova Variable Annuity Account One of Cova Financial Services
Life Insurance Company as of December 31, 1995, and the results of their
operations for the year then ended, the changes in their contract owners'
equity for each of the two years in the period then ended, and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles.
By: /s/ KPMG PEAT MARWICK LLP
___________________________
KPMG Peat Marwick LLP
February 9, 1996
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
ASSETS
INVESTMENTS:
<TABLE>
<CAPTION>
<S> <C>
VAN KAMPEN MERRITT SERIES TRUST:
Quality Income Portfolio - 3,795,029 shares at a net asset value of $10.87 per share (cost $39,788,169) $ 41,257,437
High Yield Portfolio - 3,495,538 shares at a net asset value of $10.45 per share (cost $36,977,062) 36,515,856
Growth and Income Portfolio - 1,568,033 shares at a net asset value of $12.51 per share (cost $17,983,818) 19,619,568
Money Market Portfolio - 34,132,295 shares at a net asset value of $1.00 per share (cost $34,132,295) 34,132,295
Stock Index Portfolio - 6,195,688 shares at a net asset value of $13.84 per share (cost $74,796,201) 85,772,259
LORD ABBETT SERIES FUND, INC:
Growth and Income Portfolio - 12,510,916 shares at a net asset value of $15.24 per share (cost $168,182,678) 190,651,303
Global Equity Portfolio - 218,212 shares at a net asset value of $11.46 per share (cost $2,347,939) 2,500,282
--------------
TOTAL ASSETS $ 410,449,000
LIABILITIES AND CONTRACT OWNERS' EQUITY
FEES PAYABLE TO COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY $ 46,951
CONTRACT OWNERS' EQUITY:
Trust Quality Income - 2,690,633 accumulation units at $15.331971 per unit 41,252,707
Trust High Yield - 1,870,232 accumulation units at $19.522535 per unit 36,511,673
Trust Growth and Income - 1,342,833 accumulation units at $14.608904 per unit 19,617,323
Trust Money Market - 2,987,132 accumulation units at $11.425133 per unit 34,128,376
Trust Stock Index - 5,436,980 accumulation units at $15.773906 per unit 85,762,417
Fund Growth and Income - 8,947,108 accumulation units at $21.306277 per unit 190,629,558
Fund Global Equity - 172,206 accumulation units at $14.517502 per unit 2,499,995
--------------
TOTAL CONTRACT OWNERS' EQUITY 410,402,049
--------------
TOTAL LIABILITIES AND CONTRACT OWNERS' EQUITY $ 410,449,000
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
VAN KAMPEN MERRITT
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
<TABLE>
<CAPTION>
QUALITY HIGH GROWTH & MONEY STOCK GROWTH & GLOBAL
INCOME YIELD INCOME MARKET INDEX INCOME EQUITY
----------- ------------ ---------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends $ 2,492,472 $ 2,739,550 $1,564,298 $ 3,041,467 $ 3,700,759 $ 14,542,511 $187,705
----------- ------------ ---------- ----------- ----------- ------------ --------
Total Income 2,492,472 2,739,550 1,564,298 3,041,467 3,700,759 14,542,511 187,705
EXPENSES:
Mortality and Expense
Risk Fee 486,430 363,864 172,191 646,185 737,442 1,822,160 34,676
Administrative Fee 58,371 43,664 20,663 77,542 88,493 218,659 4,161
Total Expenses 544,801 407,528 192,854 723,727 825,935 2,040,819 38,837
Net Investment Income 1,947,671 2,332,022 1,371,444 2,317,740 2,874,824 12,501,692 148,868
Net Realized Gain/(Loss)
on Investments 16,010 (117,175) 45,687 _ _ 2,588,787 382,600 62,728
Net Change in Unrealized
Gain on Investments 3,599,953 1,785,959 2,247,668 109,903 11,838,391 22,183,647 5,346
Net Realized and Unrealized
Gain on Investments 3,615,963 1,668,784 2,293,355 109,903 14,427,178 22,566,247 68,074
Net Increase in Contract
Owners' Equity Resulting
From Operations $5,563,6343 $4,000,8066 $3,664,799 $2,427,6433 $17,302,002 $35,067,9399 $216,942
=========== ============ ========== =========== =========== ============ ========
TOTAL
------------
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends $ 28,268,762
------------
Total Income 28,268,762
EXPENSES:
Mortality and Expense
Risk Fee 4,262,948
Administrative Fee 511,553
Total Expenses 4,774,501
Net Investment Income 23,494,261
Net Realized Gain/(Loss)
on Investments 2,978,637
Net Change in Unrealized
Gain on Investments 41,770,867
Net Realized and Unrealized
Gain on Investments 44,749,504
Net Increase in Contract
Owners' Equity Resulting
From Operations $68,243,7655
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
For the Year Ended December 31, 1995
VAN KAMPEN MERRITT
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
________________________________________________________
___________________
<TABLE>
<CAPTION>
QUALITY HIGH GROWTH & MONEY STOCK GROWTH &
INCOME YIELD INCOME MARKET INDEX INCOME
------------- ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 1,947,671 $ 2,332,022 $ 1,371,444 $ 2,317,740 $ 2,874,824 $ 12,501,692
Net Realized Gain/(Loss)
on Investments 16,010 (117,175) 45,687 _ _ 2,588,787 382,600
Net Unrealized Gain
on Investments 3,599,953 1,785,959 2,247,668 109,903 11,838,391 22,183,647
NET INCREASE IN CONTRACT
Owners' Equity
Resulting from
Operations 5,563,634 4,000,806 3,664,799 2,427,643 17,302,002 35,067,939
From Account Unit Transactions:
Redemptions by Cova
Financial Services Life
Insurance Company _ _ _ _ _ _ _ _ _ _ _ _
Proceeds from Units of
the Account Sold 2,609,198 3,648,081 2,179,253 27,608,801 2,384,152 29,457,859
Payments for Units of the
Account Redeemed (5,173,896) (2,111,627) (717,441) (4,508,332) (4,199,482) (18,058,651)
Account Transfers 4,321,271 11,321,086 3,550,031 (67,277,501) 33,469,082 29,746,158
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit
Transactions 1,756,573 12,857,540 5,011,843 (44,177,032) 31,653,752 41,145,366
Net Increase/(Decrease) in
Contract Owners' Equity 7,320,207 16,858,346 8,676,642 (41,749,389) 48,955,754 76,213,305
Contract Owners' Equity:
Beginning of Period 33,932,500 19,653,327 10,940,681 75,877,765 36,806,663 114,416,253
End of Period $41,252,7077 $36,511,673 $19,617,323 $ 34,128,376 $85,762,417 $190,629,558
============= ============ ============ ============= ============ =============
GLOBAL
EQUITY TOTAL
------------ -------------
<S> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 148,868 $ 23,494,261
Net Realized Gain/(Loss)
on Investments 62,728 2,978,637
Net Unrealized Gain
on Investments 5,346 41,770,867
NET INCREASE IN CONTRACT
Owners' Equity
Resulting from
Operations 216,942 68,243,765
From Account Unit Transactions:
Redemptions by Cova
Financial Services Life
Insurance Company (131,875) (131,875)
Proceeds from Units of
the Account Sold 686,017 68,573,361
Payments for Units of the
Account Redeemed (1,244,057) (36,013,486)
Account Transfers (135,353) 14,994,774
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit
Transactions (825,268) 47,422,774
Net Increase/(Decrease) in
Contract Owners' Equity (608,326) 115,666,539
Contract Owners' Equity:
Beginning of Period 3,108,321 294,735,510
End of Period $ 2,499,995 $410,402,049
============ =============
</TABLE>
See accompanying notes to financial statements.
VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
For the Year Ended December 31, 1994
VAN KAMPEN MERRITT
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
TOTAL
$12,184,894
(2,376,747)
(12,420,870)
(2,612,723)
(165,388)
51,347,975
(17,333,821)
3,525,880
37,374,646
34,761,923
259,973,587
$294,735,510
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
VAN KAMPEN MERRITT SERIES TRUST - QUALITY INCOME PORTFOLIO
For the Year For the Year For the Year
Ended Ended Ended
12/31/95 12/31/94 12/31/93
-------------- -------------- --------------
<S> <C> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 13.17 $ 13.97 $ 12.75
Net Investment Income .72 .60 1.00
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions 1.44 (1.40) .22
Total from Investment Operations Operations1.38(.80)1.22.73.140 O 2.16 (.80) 1.22
- -------------------------------------------------------------------
Accumulation Unit Value,
End of Period $ 15.33 $ 13.17 $ 13.97
============== ============== ==============
Total Return* 16.41% 5.70% 9.50%
Contract Owners Equity ,
End of Period (in thousands) $ 41,253 $ 33,933 $ 51,111
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40% 1.40%
Ratio of Net Investment Income
to Average Contract
Owners' Equity 4.99% 4.48% 8.30%
Number of Units Outstanding
at End of Period 2,690,633 2,576,412 3,659,656
For the Year For the Year
Ended Ended
12/31/92 12/31/91
-------------- --------------
<S> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 12.02 $ 10.62
Net Investment Income .64 .67
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions .09 .73
Total from Investment Operations Operations1.38(.80)1.22.73.140 O .73 1.40
- -------------------------------------------------------------------
Accumulation Unit Value,
End of Period $ 12.75 $ 12.02
============== ==============
Total Return* 6.10% 13.20%
Contract Owners Equity ,
End of Period (in thousands) $ 24,124 $ 6,779
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%
Ratio of Net Investment Income
to Average Contract
Owners' Equity 5.45% 6.09%
Number of Units Outstanding
at End of Period 1,891,499 563,960
<FN>
* Investment returns do not reflect any annual contract maintenance fees
or withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
VAN KAMPEN MERRITT SERIES TRUST - HIGH YIELD PORTFOLIO
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 16.98 $ 18.02 $ 14.99 $ 12.75 $ 10.06
-------------- -------------- -------------- -------------- --------------
Net Investment Income 1.44 1.38 1.80 2.26 1.14
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions 1.10 (2.42) 1.23 (.02) 1.55
Total from Investment Operations 2.54 (1.04) 3.03 2.24 2.69
Accumulation Unit Value,
End of Period $ 19.52 $ 16.98 $ 18.02 $ 14.99 $ 12.75
============== ============== ============== ============== ==============
Total Return* 14.99% (5.79)% 20.21% 17.53% 26.73%
Contract Owners Equity ,
End of Period (in thousands) $ 36,512 $ 19,653 $ 18,846 $ 5,416 $ 3,803
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40% 1.40% 1.40% 1.40%
Ratio of Net Investment Income
to Average Contract
Owners' Equity 7.98% 7.92% 13.05% 16.04% 9.83%
Number of Units Outstanding
at End of Period 1,870,232 1,157,642 1,045,815 361,296 298,202
<FN>
* Investment returns do not reflect any annual contract maintenance fees or
withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
VAN KAMPEN MERRITT SERIES TRUST - GROWTH & INCOME PORTFOLIO
For the Period From
For the Year For the Year For the Year 5/1/92
Ended Ended Ended (Commencement of Operations)
12/31/95 12/31/94 12/31/93 Through 12/31/92
<S> <C> <C> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 11.20 $ 11.92 $ 10.47 $ 10.00
-------------- -------------- -------------- -----------------------------
Net Investment Income 1.02 .19 .54 .19
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions 2.39 (.91) .91 .28
Total from Investment Operations 3.41 (.72) 1.45 .47
Accumulation Unit Value,
End of Period $ 14.61 $ 11.20 $ 11.92 $ 10.47
============== ============== ============== =============================
Total Return** 30.49% (6.07)% 13.84% 7.09%*
Contract Owners Equity ,
End of Period (in thousands) $ 19,617 $ 10,941 $ 6,528 $ 2,627
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40% 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 9.92% 2.05% 7.54% 3.82%*
Number of Units Outstanding
at End of Period 1,342,833 977,209 574,643 250,919
<FN>
* Annualized
** Investment returns do not reflect any annual contract maintenance fees or
withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
VAN KAMPEN MERRITT SERIES TRUST - MONEY MARKET PORTFOLIO
For the Year Months For the Year For the Year For the Year
Ended Ended Ended Ended
12/31/95 12/31/94 12/31/93 12/31/92
<S> <C> <C> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 10.90 $ 10.61 $ 10.46 $ 10.21
--------------------- -------------- -------------- --------------
Net Investment Income .50 .30 .19 .25
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions .03 (.01) (.04) --
Total from Investment Operations .53 .29 .15 .25
Accumulation Unit Value,
End of Period $ 11.43 $ 10.90 $ 10.61 $ 10.46
===================== ============== ============== ==============
Total Return** 4.85% 2.70% 1.45% 2.44%
Contract Owners Equity ,
End of Period (in thousands) $ 34,128 $ 75,878 $ 6,552 $ 4,031
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40% 1.40% 1.40%
Ratio of Net Investment Income
to Average Contract
Owners' Equity 4.48% 2.90% 1.78% 2.46%
Number of Units Outstanding
at End of Period 2,987,132 6,963,421 617,575 385,448
For the Period
From 11/1/91
Through 12/31/91 12/31/91
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.00
--------------------------
Net Investment Income .21
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions --
Total from Investment Operations .21
Accumulation Unit Value,
End of Period $ 10.21
==========================
Total Return** 4.19%*
Contract Owners Equity ,
End of Period (in thousands) $ 5,386
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 4.04%*
Number of Units Outstanding
at End of Period 527,571
<FN>
* Annualized
** Investment returns do not reflect any annual contract maintenance
fees or withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
VAN KAMPEN MERRITT SERIES TRUST - STOCK INDEX PORTFOLIO
For the Year Months For the Year For the Year For the Year For the Period
Ended Ended Ended Ended From 11/1/91
12/31/95 12/31/94 12/31/93 12/31/92 Through 12/31/91
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 11.68 $ 11.87 $ 11.05 $ 10.55 $ 10.00
--------------------- -------------- -------------- -------------- ------------------
Net Investment Income .51 .37 .22 .52 (.02)
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions 3.58 (.56) .60 (.02) .57
Total from Investment Operations 4.09 (.19) .82 .50 .55
Accumulation Unit Value,
End of Period $ 15.77 $ 11.68 $ 11.87 $ 11.05 $ 10.55
===================== ============== ============== ============== ==================
Total Return** 35.06% (1.58)% 7.35% 4.75% 38.03%*
Contract Owners Equity ,
End of Period (in thousands) $ 85,762 $ 36,807 $ 91,269 $ 34,979 $ 6,753
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40% 1.40% 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 4.85% 2.10% 2.99% 10.02% (1.40)%*
Number of Units Outstanding
at End of Period 5,436,980 3,151,443 7,691,151 3,164,251 639,923
<FN>
* Annualized
** Investment returns do not reflect any annual contract maintenance
fees or withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
LORD ABBETT SERIES FUND, INC. - GROWTH AND INCOME PORTFOLIO
For theYear For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 16.64 $ 16.42 $ 14.50 $ 12.73 $ 10.15
------------- -------------- -------------- -------------- --------------
Net Investment Income 1.37 .76 .88 1.06 .85
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions 3.30 (.54) 1.04 .71 1.73
Total from Investment Operations 4.67 .22 1.92 1.77 2.58
------------- -------------- -------------- -------------- --------------
Accumulation Unit Value,
- ---------------------------------
End of Period $ 21.31 $ 16.64 $ 16.42 $ 14.50 $ 12.73
- --------------------------------- ============= ============== ============== ============== ==============
Total Return* 28.03% 1.32% 13.24% 13.98% 25.42%
- --------------------------------- ------------- -------------- -------------- -------------- --------------
Contract Owners Equity ,
- ---------------------------------
End of Period (in thousands) $ 190,630 $ 114,416 $ 82,033 $ 37,146 $ 18,154
- --------------------------------- ------------- -------------- -------------- -------------- --------------
Ratio of Expenses to Average
- ---------------------------------
Contract Owners' Equity 1.40% 1.40% 1.40% 1.40% 1.40%
- --------------------------------- ------------- -------------- -------------- -------------- --------------
Ratio of Net Investment Income
- ---------------------------------
to Average Contract
- ---------------------------------
Owners' Equity 8.57% 5.40% 8.12% 10.59% 9.05%
- --------------------------------- ------------- -------------- -------------- -------------- --------------
Number of Units Outstanding
- ---------------------------------
at End of Period 8,947,108 6,875,139 4,994,582 2,560,999 1,426,577
- --------------------------------- ------------- -------------- -------------- -------------- --------------
<FN>
* Investment returns do not reflect any annual contract maintenance
fees or withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
LORD ABBETT SERIES FUND, INC. - GLOBAL EQUITY PORTFOLIO
For the Year Months For the Year For the Year For the Year For the Year
--------------------- -------------- -------------- -------------- --------------
Ended Ended Ended Ended Ended
--------------------- -------------- -------------- -------------- --------------
12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
--------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
- ---------------------------------
Beginning of Period $ 13.33 $ 13.29 $ 10.64 $ 10.97 $ 9.79
- --------------------------------- --------------------- -------------- -------------- -------------- --------------
Net Investment Income .91 1.45 .24 .18 .14
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions .28 (1.41) 2.41 (.51) 1.04
Total from Investment Operations 1.19 .04 2.65 (.33) 1.18
--------------------- -------------- -------------- -------------- --------------
Accumulation Unit Value,
- ---------------------------------
End of Period $ 14.52 $ 13.33 $ 13.29 $ 10.64 $ 10.97
- --------------------------------- ===================== ============== ============== ============== ==============
Total Return* 8.91% .27% 24.91% (2.98)% 12.02%
- --------------------------------- --------------------- -------------- -------------- -------------- --------------
Contract Owners Equity ,
- ---------------------------------
End of Period (in thousands) $ 2,500 $ 3,108 $ 3,635 $ 3,249 $ 4,292
- --------------------------------- --------------------- -------------- -------------- -------------- --------------
Ratio of Expenses to Average
- ---------------------------------
Contract Owners' Equity 1.40% 1.40% 1.40% 1.40% 1.40%
- --------------------------------- --------------------- -------------- -------------- -------------- --------------
Ratio of Net Investment Income
- ---------------------------------
to Average Contract
- ---------------------------------
Owners' Equity 5.36% 9.78% 1.88% 1.38% 2.19%
- --------------------------------- --------------------- -------------- -------------- -------------- --------------
Number of Units Outstanding
- ---------------------------------
at End of Period 172,206 233,186 273,399 305,314 391,234
- --------------------------------- --------------------- -------------- -------------- -------------- --------------
<FN>
* Investment returns do not reflect any annual contract maintenance
fees or withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1995 and 1994
1. ORGANIZATION:
Cova Variable Annuity Account One, (formerly Xerox Variable Annuity Account
One) (the "Separate Account") is a separate investment account established by
a resolution of the Board of Directors of Cova Financial Services Life
Insurance Company ("Cova Life") formerly known as Xerox Financial Services
Life Insurance Company (Xerox Life). On June 1, 1995, a subsidiary of General
American Life Insurance Company (GALIC) purchased Xerox Life under the terms
of a stock purchase agreement. After closing of the sale transaction, Xerox
Life and the Separate Account were renamed. Operations of the separate
account were not affected by this transaction. The Separate Account operates
as a Unit Investment Trust under the Investment Company Act of 1940.
The Separate Account is divided into sub-accounts, with the assets of each
sub-account invested in either the Van Kampen Merritt Series Trust ("Trust")
or the Lord Abbett Series Fund, Inc. ("Fund"). The Trust is managed by Van
Kampen American Capital Investment Advisory Corp. During 1995 and prior, the
Trust consisted of five portfolios available for investment; the Quality
Income, High Yield, Growth & Income, Money Market, and Stock Index Portfolios.
The Fund had two portfolios available for investment during and prior to
1995; the Growth and Income Global Equity Portfolios. Not all portfolios of
the Trust and Fund are available for investment depending upon the nature and
specific terms of the different contracts currently being offered for sale.
Both the Trust and Fund are diversified, open-end, management investment
companies which are intended to meet differing investment objectives.
The Trust Quality Income Portfolio invests in U.S. Government issued debt
obligations and in various investment-grade debt instruments, including
mortgage pass-through obligations and collateralized mortgage obligations.
The Trust High Yield Portfolio invests in medium and lower-grade debt
securities and futures and options contracts. The Trust Growth and Income
Portfolio invests in common stocks and futures and options contracts. The
Trust Money Market Portfolio invests in short-term money market instruments.
The Trust Stock Index Portfolio invests in common stocks, stock index futures
and options, and short-term securities. The Fund Growth and Income Portfolio
invests in common stocks. The Fund Global Equity Portfolio invests in both
domestic and foreign common stocks and forward currency contracts.
In order to satisfy diversification requirements and provide for optimum
policyholder returns, Cova Life has made periodic contributions to the Trust
and Fund to provide for the initial purchases of investments. In return, Cova
Life has been credited with accumulation units of the Separate Account. As
additional funds were received through policyholder deposits, Cova Life has,
at its discretion and without adversely impacting the investment operations of
the Trust and Fund, removed its capital investment in the Separate Account by
liquidating all of its remaining accumulation units at December 31, 1995.
2. SIGNIFICANT ACCOUNTING POLICIES:
A. INVESTMENT VALUATION
Investments in shares of the Trust and Fund are carried in the statement of
assets and liabilities at the underlying net asset value of the Trust and
Fund. The net asset value of the Trust and Fund has been determined on the
market value basis and is valued daily by the Trust and Fund investment
managers. Realized gains and losses are calculated by the average cost
method.
B. REINVESTMENT OF DIVIDENDS
Dividends received from net investment income and net realized capital gains
are reinvested in additional shares of the portfolio of the Trust or Fund
making the distribution or, at the election of the Separate Account, received
in cash. Dividend income and capital gain distributions are recorded as
income on the ex-dividend date.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1995 and 1994
C. FEDERAL INCOME TAXES
Operations of the Separate Account form a part of Cova Life, which is taxed as
a "Life Insurance Company" under the Internal Revenue Code ("Code"). Under
current provisions of the Code, no Federal income taxes are payable by Cova
Life with respect to earnings of the Separate Account.
Under the principles set forth in Internal Revenue Ruling 81-225 and Section
817(h) of the Code and regulations thereunder, Cova Life believes that it will
be treated as the owner of the assets invested in the Separate Account for
Federal income tax purposes, with the result that earnings and gains, if any,
derived from those assets will not be included in a contract owners' gross
income until amounts are withdrawn or received pursuant to an Optional Payment
Plan.
3. CONTRACT CHARGES:
There are no deductions made from purchase payments for sales charges at the
time of purchase. However, if all or a portion of the contract value is
withdrawn, a withdrawal charge is calculated and deducted from the contract
value. The withdrawal charge is imposed on withdrawals of contract values
attributable to purchase payments within five years after receipt and is equal
to 5% of the purchase payment withdrawn. After the first contract
anniversary, provided that the contract value prior to withdrawal exceeds
$5,000, an owner may make a withdrawal each contract year of up to 10% of the
aggregate purchase payments free from withdrawal charges. An annual contract
maintenance charge of $30 is imposed on all contracts with contract values
less than $50,000 on their policy anniversary. The charge covers the cost of
contract administration for the previous year and is prorated between the
sub-accounts to which the contract value is allocated.
Mortality and expense risks assumed by Cova Life are compensated by a charge
equivalent to an annual rate of 1.25% of the value of net assets. The
mortality risks assumed by Cova Life arise from its contractual obligation to
make annuity payments after the annuity date for the life of the annuitant,
and to waive the withdrawal charge in the event of the death of the contract
owner.
In addition, the Separate Account bears certain administration expenses, which
are equivalent to an annual rate of .15% of net assets. These charges cover
the cost of establishing and maintaining the contracts and Separate Account.
Cova Life currently advances any premium taxes due at the time purchase
payments are made and then deducts premium taxes from the contract value at
the time annuity payments begin or upon withdrawal if Cova Life is unable to
obtain a refund. Cova Life, however, reserves the right to deduct premium
taxes when incurred.
4. ACCOUNT TRANSFERS:
Subject to certain restrictions, the contract owner may transfer all or a part
of the accumulated value of the contract among other offered and available
account options of the Separate Account and fixed rate annuities of Cova Life.
If more than 12 transfers have been made in the contract year, a transfer fee
of $25 per transfer or, if less, 2% of the amount transferred will be deducted
from the account value. If the owner is participating in the Dollar Cost
Averaging program, such related transfers are not taken into account in
determining any transfer fee.
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1995 and 1994
5. GAIN/(LOSS) ON INVESTMENTS:
The table below summarizes realized and unrealized gains and losses on
investments:
<TABLE>
<CAPTION>
REALIZED GAIN/(LOSS) ON INVESTMENTS:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
12/31/95 12/31/94
<S> <C> <C>
Trust Quality Income Portfolio:
Aggregate Proceeds From Sales $ 21,222,667 $ 55,910,839
Aggregate Cost 21,206,657 58,510,084
Net Realized Gain/(Loss) on Investments $ 16,010 $ (2,599,245)
============== ==============
Trust High Yield Portfolio:
Aggregate Proceeds From Sales $ 1,956,676 $ 9,145,332
Aggregate Cost 2,073,851 9,508,299
Net Realized Loss on Investments $ (117,175) $ (362,967)
============== ==============
Trust Growth and Income Portfolio:
Aggregate Proceeds From Sales $ 1,127,323 $ 1,423,903
Aggregate Cost 1,081,636 1,445,563
-------------- --------------
Net Realized Gain/(Loss) on Investments $ 45,687 $ (21,660)
- ------------------------------------------ ============== ==============
Trust Money Market Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 71,027,222 $ 60,198,925
- ------------------------------------------ -------------- --------------
Aggregate Cost 71,027,222 60,198,925
- ------------------------------------------ -------------- --------------
Net Realized Gain/(Loss) on Investments _ _ --
- ------------------------------------------ ============== ==============
Trust Stock Index Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 19,096,794 $ 67,994,793
- ------------------------------------------ -------------- --------------
Aggregate Cost 16,508,007 67,715,975
- ------------------------------------------ -------------- --------------
Net Realized Gain on Investments $ 2,588,787 $ 278,818
- ------------------------------------------ ============== ==============
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1995 and 1994
5. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
REALIZED GAIN/(LOSS) ON INVESTMENTS:
FOR THE YEAR FOR THE YEAR
Ended Ended
12/31/95 12/31/94
<S> <C> <C>
Fund Growth and Income Portfolio:
Aggregate Proceeds From Sales $ 4,042,598 $ 3,887,963
Aggregate Cost 3,659,998 3,701,950
Net Realized Gain on Investments $ 382,600 $ 186,013
============== ==============
Fund Global Equity Portfolio:
Aggregate Proceeds From Sales $ 945,473 $ 738,271
Aggregate Cost 882,745 595,977
Net Realized Gain on Investments $ 62,728 $ 142,294
============== ==============
UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
- ------------------------------------------------------
Trust Quality Income Portfolio:
End of Period $ 1,469,268 $ (2,130,685)
Beginning of Period (2,130,685) (687,104)
Net Change in Unrealized Gain/(Loss) on Investments $ 3,599,953 $ (1,443,581)
============== ==============
Trust High Yield Portfolio:
End of Period $ (461,206) $ (2,247,165)
Beginning of Period (2,247,165) 278,327
Net Change in Unrealized Gain/(Loss) on Investments $ 1,785,959 $ (2,525,492)
============== ==============
Trust Growth and Income Portfolio:
End of Period $ 1,635,750 $ (611,918)
Beginning of Period (611,918) 168,575
Net Change in Unrealized Gain/(Loss) on Investments $ 2,247,668 $ (780,493)
============== ==============
Trust Money Market Portfolio:
End of Period _ _ $ (109,903)
Beginning of Period (109,903) (32,286)
Net Change in Unrealized Gain/(Loss) on Investments $ 109,903 $ (77,617)
============== ==============
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1995 and 1994
5. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
12/31/94
<S> <C> <C> 12/31/95 12/31/94
Trust Stock Index Portfolio:
End of Period $ 10,976,058 $ (862,333)
Beginning of Period (862,333) 2,144,041
Net Change in Unrealized Gain/(Loss) on Investments $ 11,838,391 $ (3,006,374)
============== ==============
Fund Growth and Income Portfolio:
End of Period $ 22,468,625 $ 284,978
Beginning of Period 284,978 4,422,497
Net Change in Unrealized Gain/(Loss) on Investments $ 22,183,647 $ (4,137,519)
============== ==============
Fund Global Equity Portfolio:
End of Period $ 152,343 $ 146,997
Beginning of Period 146,997 596,791
Net Change in Unrealized Gain/(Loss) on Investments $ 5,346 $ (449,794)
============== ==============
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1995 and 1994
6. ACCOUNT UNIT TRANSACTIONS:
The change in the number of accumulation units resulting from account unit
transactions is as follows:
VAN KAMPEN
MERRITT LORD ABBETT
SERIES TRUST SERIES FUND,
INC.
_______________________________________
___________ __________________
<TABLE>
__
<CAPTION>
QUALITY HIGH GROWTH & MONEY STOCK GROWTH & GLOBAL
INCOME YIELD INCOME MARKET INDEX INCOME EQUITY TOTAL
----------- ---------- ---------- ----------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1993 3,659,656 1,045,815 547,643 617,575 7,691,151 4,994,582 273,399 18,829,821
Redemptions by
Cova Life -- -- -- -- -- (10,000) -- (10,000)
Units Sold 254,048 200,146 151,404 2,494,509 272,775 783,757 -- 4,156,639
Units Redeemed (226,584) (78,180) (25,238) (367,835) (345,996) (264,803) (36,859) (1,345,495)
Units Transferred (1,110,708) (10,139) 303,400 4,219,172 (4,466.487) 1,371,603 (3,354) 303,487
Balances at
December 31, 1994 2,576,412 1,157,642 977,209 6,963,421 3,151,443 6,875,139 233,186 21,934,452
Redemptions by Cova Life -- -- -- -- -- -- (10,000) (10,000)
Units Sold 181,275 195,356 162,687 2,450,650 163,890 1,505,688 50,282 4,709,828
Units Redeemed (362,174) (114,779) (55,487) (405,521) (300,704) (940,462) (91,135) (2,270,262)
Units Transferred 295,120 632,013 258,424 (6,021,418) 2,422,351 1,506,743 (10,127) (916,894)
Balance at
December 31, 1995 2,690,633 1,870,232 1,342,833 2,987,132 5,436,980 8,947,108 172,206 23,447,124
</TABLE>
7. SUBSEQUENT EVENTS:
On February 9, 1996, the Board of Trustees of Van Kampen Merritt Series Trust
voted to change the name of the Trust to Cova Series Trust, replace Van Kampen
American Capital Investment Advisory Corp. with Cova Investment Advisory Corp.
as Trust manager, and engage Van Kampen American Capital Investment Advisory
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Cova Financial Services Life Insurance Company:
We have audited the accompanying consolidated balance sheet of Cova Financial
Services Life Insurance Company and subsidiary (a wholly owned subsidiary of
Cova Corporation) as of December 31, 1995 (Successor or the Company) and the
consolidated balance sheet of Xerox Financial Services Life Insurance Company
and subsidiary as of December 31, 1994 (Predecessor), and the related
consolidated statements of income, shareholders' equity and cash flows for the
periods from June 1, 1995 to December 31, 1995 (Successor period), and from
January 1, 1995 to May 31, 1995, and for the years ended December 31, 1994 and
1993 (Predecessor periods). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the Successor consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Cova
Financial Services Life Insurance Company and subsidiary as of December 31,
1995, and the results of their operations and their cash flows for the
Successor period, in conformity with generally accepted accounting principles.
Also, in our opinion, the aforementioned Predecessor consolidated financial
statements present fairly, in all material respects, the financial position of
Xerox Financial Services Life Insurance Company and subsidiary as of December
31, 1994, and the results of their operations and their cash flows for the
Predecessor periods, in conformity with generally accepted accounting
principles.
As discussed in note 3 to the consolidated financial statements, the Company
changed its method of accounting for investments to adopt the provisions of
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," at January 1, 1994.
St. Louis, Missouri
April 15, 1996
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets
December 31, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
ASSETS 1995 1994
<S> <C> <C>
Investments:
Debt securities available for sale at market
(cost of $583,868 in 1995 and $2,163,588 in 1994) $ 594,556 $ 1,901,642
Equity securities at market (cost: $10,650 in 1994) -- 8,754
Mortgage loans 77,472 6,825
Real Estate -- 26,735
Policy loans 19,125 17,691
Other invested assets -- 7,597
Short-term investments at cost which approximates market 7,859 93,118
Total investments 699,012 2,062,362 3,566,750
Cash and cash equivalents - interest bearing 59,312 1,133,999
Cash - non-interest bearing 2,944 2,328
Receivable from sale of securities -- 25,829
Accrued investment income 9,116 33,222
Due from affiliates -- 12,938
Deferred policy acquisition costs 8,708 213,362
Present value of future profits 43,914 --
Goodwill 23,358 --
Guaranty assessments recoverable -- 12,192
Federal and state income taxes recoverable 1,397 33,851
Deferred tax benefits (net) 13,556 56,135
Receivable from OakRe 2,391,982 --
Reinsurance receivables 8,891 1,457
Other assets 2,426 2,080
Separate account assets 410,449 294,803
Total Assets $3,675,065 $ 3,884,558
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets (continued)
December 31, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
<S> <C> <C>
Policyholder deposits $3,033,763 $3,401,053
Future policy benefits 28,071 25,544
Payable on purchase of securities 5,327 46,285
Current Federal income tax payable 1,000 --
Accounts payable and other liabilities 20,143 17,985
Future purchase price payable to OakRe 23,967 --
Accrued liability for unrealized losses on off-balance-sheet
derivative instruments -- 18,398
Guaranty assessments 14,259 2,046
Separate account liabilities 410,449 294,636
Total Liabilities 3,536,979 $3,805,947
Shareholders' equity:
Common stock, $2 par value. (Authorized 5,000,000 shares;
issued and outstanding 2,899,446 shares in 1995 and 1994) 5,799 5,799
Additional paid-in capital 129,586 136,534
Retained earnings (63) 1,506
Net unrealized appreciation/(depreciation) on securities,
net of tax 2,764 (65,228)
Total Shareholders' Equity 138,086 78,611
Total Liabilities and Shareholders' Equity $3,675,065 $3,884,558
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Income
Years ended December 31, 1995, 1994, and 1993
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Revenues:
Premiums (net of $106 premium ceded for the
Company in 1995, and $57,$231,$207 for the $ 921 $ 1,097 $ 2,787 $ 4,002
Predecessor in 1995, 1994 and 1993)
Net investment income 24,188 92,486 277,616 335,583
Net realized gain (loss) on sale of investments 1,324 (12,414) (101,361) 17,699
Other income 3,682 2,855 6,705 3,604
Total revenues 30,115 84,024 185,747 360,888
Benefits and expenses:
Interest on policyholder deposits 17,706 97,867 249,905 265,674
Current and future policy benefits (net of
reinsurance recoveries for the Company of $8
and Predecessor of $4,$888 & $7,480 in
1995, 1994 and 1993) 1,785 1,830 5,259 6,054
Operating and other expenses 7,126 12,777 24,479 29,414
Amortization of purchased intangible assets 3,030 -- -- --
Amortization of deferred acquisition costs 100 11,157 125,357 38,308
Total Benefits and Expenses 29,747 123,631 405,000 339,450
Income/(loss) before income taxes 368 (39,607) (219,253) 21,438
Income Taxes:
Current 1,011 (16,404) (46,882) 15,639
Deferred (580) 6,340 (30,118) (6,137)
Total income tax expense/(benefit) 431 (10,064) (77,000) 9,502
Net Income/(Loss) ($63) ($29,543) $(142,253)) $ 11,936
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholders Equity
Years ended December 31, 1995, 1994 and 1993
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994
1993
<S> <C> <C> <C> <C>
Common stock ($2 par value common stock;
Authorized 5,000,000 shares; issued and
outstanding 2,899,446 in 1995 and 1994 and
2,816,090 in 1993, Balance at beg. of period) $ 5,799 $ 5,799 $ 5,632 $ 5,392
Par value of additional shares issued -- -- 167 240
Balance at end of period 5,799 5,799 5,799 5,632
Additional paid-in capital:
Balance at beginning of period 137,749 136,534 120,763 116,003
Adjustment to reflect purchase acquisition
indicated in note 2 (52,163) -- -- --
Capital contribution 44,000 1,215 15,771 4,760
Balance at end of period 129,586 137,749 136,534 120,763
Retained earnings/(deficit):
Balance at beginning of period (36,441) 1,506 143,759 131,823
Adjustment to reflect purchase acquisition
indicated in note 2 36,441 -- -- --
Net income/(loss) (63) (29,543) (142,253) 11,936
Dividends to shareholder -- (8,404) -- --
Balance at end of period $ (63) $(36,441) $ 1,506 $143,759
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994 and 1993
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Net unrealized appreciation/(depreciation)of securities:
Balance at beginning of period $(28,837) $ (65,228) $ (321) $ (277)
Adjustment to reflect purchase acquisition
indicated in note 2 28,837 -- -- --
Implementation of change in accounting for
marketable debt and equity securities, net of
effects of deferred taxes of $18,375 and
deferred acquisition costs of $42,955 -- -- 34,125 --
Change in unrealized appreciation/(depreciation)
of debt and equity securities 10,724 178,010 (357,502) (74)
Change in deferred Federal income taxes (1,489) (18,458) 53,324 30
Change in deferred acquisition costs attributable
to unrealized losses/(gains) -- (123,161) 205,146 --
Change in present value of future profits
attributable to unrealized (gains) (6,471) -- -- --
Balance at end of period 2,764 (28,837) (65,228) (321)
Total Shareholders' Equity $138,086 $ 78,270 $ 78,611 $269,833
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Interest and dividend receipts $ 18,744 $ 131,439 $ 309,856 $ 343,122
Premiums received 921 1,097 2,787 4,002
Insurance and annuity benefit payments (2,799) (1,809) (3,755) (3,465)
Operating disbursements (10,480) (9,689) (26,023) (33,103)
Taxes on income refunded (paid) 60 48,987 17,032 (15,414)
Commissions and acquisition costs paid (17,456) (23,872) (26,454) (30,982)
Other 529 1,120 836 (1,585)
Net cash provided/(used in) by operating activities (10,481) 147,273 274,279 262,575
Cash flows from investing activities:
Cash used for the purch. of investment secur. (875,994) (575,891) (1,935,353) (3,685,448)
Proceeds from invest. secur. sold and matured 253,814 2,885,053 3,040,474 3,675,470
Other 179 (8,557) (8,185) 25,687
Net cash provided by/(used in) in investing activities $(622,003) $2,300,605 $ 1,096,936 $ 15,709
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 132,752 $ 130,660 $ 274,960 $ 348,392
Transfers (to)/from OakRe 628,481 (3,048,531) -- --
Transfer to Separate Accounts (37,946) (4,835) (33,548) (132,340)
Return of policyholder deposits (436,271) (290,586) (608,868) (446,396)
Dividends to Shareholder -- (8,404) -- --
Capital contributions received 44,000 1,215 15,938 5,000
Net cash provided by/(used in) financing activities 331,016 (3,220,481) (351,518) (225,344)
Increase in cash and cash equivalents (301,468) (772,603) 1,019,697 52,940
Cash and cash equivalents at beginning of period 363,724 1,136,327 116,630 63,690
Cash and cash equivalents at end of period $ 62,256 $ 363,724 $1,136,327 $ 116,630
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows, Continued
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Reconciliation of net income/(loss)to net cash
provided by operating activities:
Net income/(loss) ($63) ($29,543) $(142,253) $ 11,936
Adjustments to reconcile net income/(loss)to net
cash provided by operating activities:
Increase/(decrease) in future policy benefits
(net of reinsurance) (1,013) 11 1,494 4,106
Increase/(decrease) in payables and accrued
liabilities (392) (10,645) 3,830 (7,940)
Decrease/(increase) in accrued investment
income (7,904) 32,010 21,393 1,443
Amortization of intangible assets and costs 3,831 11,309 125,722 38,652
Amortization and accretion of securities
premiums and discounts 307 2,410 3,635 (97)
Recapture commissions paid to OakRe (4,777) -- -- --
Net realized (gain)/loss on sale of investments (1,324) 12,414 101,361 (17,699)
(17,699)
Interest accumulated on policyholder
deposits 17,706 97,867 249,905 265,674
Investment expenses paid 642 2,373 7,296 6,924
Decrease/(Increase)in guaranty assessments (104) 5,070 (935) (4,076)
Increase/(decrease) in current and deferred
Federal income taxes 491 38,923 (59,263) (5,942)
Separate account net income/(loss) 1 1 2 (2,256)
Deferral of costs (14,568) (13,354) (30,024) (29,342)
Other (3,314) (1,573) (7,884) 1,192
Net cash provided by operating activities $(10,481) $ 147,273 $ 274,279 $262,575
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Services Life Insurance Company and subsidiary (the Company),
formerly Xerox Financial Services Life Insurance Company (the Predecessor),
market and service single premium deferred annuities, immediate annuities,
variable annuities, and single premium whole-life insurance policies. The
Company is licensed to do business in 45 states and the District of Columbia.
Most of the policies issued present no significant mortality nor longevity
risk to the Company, but rather represent investment deposits by the
policyholders. Life insurance policies provide policy beneficiaries with
mortality benefits amounting to a multiple, which declines with age, of the
original premium.
Under the deferred annuity contracts, interest rates credited to policyholder
deposits are guaranteed by the Company for periods from one to ten years, but
in no case may renewal rates be less than 3%. The Company may assess
surrender fees against amounts withdrawn prior to scheduled rate reset and
adjust account values based on current crediting rates. Policyholders also
may incur certain Federal income tax penalties on withdrawals.
Although the Company markets its products through numerous distributors,
including regional brokerage firms, national brokerage firms and banks,
approximately 59%, 57% and 58% of the companies sales have been through two
specific brokerage firms, A.G. Edwards & Sons, Incorporated. and Edward D.
Jones & Company in 1995, 1994 and 1993, respectively.
ORGANIZATION
Prior to June 1, 1995 Xerox Financial Services, Inc. (XFSI) owned 100% or
2,899,446 shares of the Predecessor. XFSI is a wholly owned subsidiary of
Xerox Corporation.
On June 1, 1995 XFSI sold 100% of the issued and outstanding shares of the
Predecessor to Cova Corporation, a subsidiary of General American Life
Insurance Company (GALIC), a Missouri domiciled life insurance company, in
exchange for approximately $91.4 million in cash and $27.8 million in future
payables. In conjunction with this Agreement, the Predecessor also entered
into a financing reinsurance transaction that caused OakRe Life Insurance
Company(OakRe),a subsidiary of the Predecessor, to assume the existing single
premium deferred annuity deposits (SPDAs) of Cova Financial Services Life
Insurance Company, which had an aggregate carrying value at June 1, 1995 of
$2,982.0 million. In exchange, the Predecessor transferred specifically
identified assets to OakRe with a market value at June 1, 1995 of $2,986.0
million. Ownership of OakRe is retained by XFSI subsequent to the sale of the
Predecessor and other affiliates. The Receivable from OakRe to the Company
(Continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
that was created by this transaction will be liquidated over the remaining
crediting rate guaranty periods (which will be substantially expired in five
years) by the transfer of cash in the amount of the then current account
value, less a recapture commission fee to OakRe on policies retained beyond
their 30-day no-fee surrender window by the Company, upon the next crediting
rate reset date of each annuity policy. The Company may then reinvest that
cash for those policies that are retained and assume the benefits and risks of
those deposits thereafter.
In the event that both OakRe and XFSI default on the receivable, the Company
may draw funds from a standby bank irrevocable letter of credit established by
XFSI in the amount of $500 million. No funds were drawn on this letter of
credit during the period ending December 31, 1995.
In substance, terms of the agreement have allowed the seller, XFSI, to retain
substantially all of the existing financial benefits and risks of the existing
business, while the purchaser, GALIC, obtained the corporate operating and
product licenses, marketing and administrative capabilities of the Company,
and access to the retention of the policyholder deposit base that persists
beyond the next crediting rate reset date. Accordingly, the future gross
profits, as defined in note 3, of the Company on existing business will
consist of the gross profits on separate accounts, single premium deferred
annuities not reinsured to OakRe, single premium whole life policies, and
single premium immediate annuities, commencing at the date of closing; plus
the gross profits from SPDA deposits retained, commencing upon the expiration
of their current guaranteed crediting rate.
(2) CHANGE IN ACCOUNTING
Upon closing of the sale, the Company restated its financial statements in
accordance with "push down purchase accounting", which allocates the net
purchase price for the Company and its subsidiary of $91.4 million according
to the fair values of the acquired assets and liabilities, including the
estimated present value of future profits. These allocated values were
dependent upon policies in force and market conditions at the time of closing.
These allocations are summarized below:
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
(In Millions)
<S> <C> June 1, 1995
Assets acquired:
Debt securities $ 32.4
Policy loans 18.3
Cash and cash equivalents 363.7
Present value of future profits 46.7
Goodwill 24.1
Deferred tax benefit 26.8
Receivable from OakRe 2,969.0
Other assets 5.9
Separate account assets 332.7
-------------
3,819.6
Liabilities assumed:
Policyholder deposits 3,299.2
Future policy benefits 27.2
Future purchase price payable 27.8
Deferred Federal income taxes 12.3
Other liabilities 29.0
Separate account liabilities 332.7
3,728.2
-------------
Adjusted purchase price $ 91.4
=============
</TABLE>
In addition to revaluing all material tangible assets and liabilities to their
respective estimated market values as of the closing date of the sale, the
Company also recorded in its financial statements the excess of cost over fair
value of net assets acquired (goodwill) as well as the present value of future
profits to be derived from the purchased and reinsured business. These amounts
were determined in accordance with the purchase method of accounting. This new
basis of accounting resulted in an increase in shareholders equity of $13.1
million in 1995 reflecting the application of push down purchase accounting.
The Companys consolidated financial statements subsequent to June 1, 1995
reflect this new basis of accounting.
All amounts for periods ended before June 1, 1995 are labeled Predecessor and
are based on historical costs. The periods ending on or after such date are
labeled The Company, and are based on fair values at June 1, 1995 and
subsequent costs.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITIES
Effective January 1, 1994 the Predecessor adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS #115). SFAS #115 requires that investments in all
debt securities and those equity securities with readily determinable market
values be classified into one of three categories: held-to-maturity, trading,
or available-for-sale. Classification of investments is based on management's
current intent. All debt and equity securities at December 31, 1995 and 1994
were classified as available-for-sale. Securities available-for-sale are
carried at market value, with unrealized holding gains and losses reported as
a separate component of stockholders equity, net of deferred effects of income
tax and related effects on deferred acquisition costs.
Amortization of the discount or premium from the purchase of mortgage-backed
bonds is recognized using a level-yield method which considers the estimated
timing and amount of prepayments of the underlying mortgage loans. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between the prepayments previously
anticipated and the actual prepayments received and currently anticipated.
When such a difference occurs, the net investment in the mortgage-backed bond
is adjusted to the amount that would have existed had the new effective yield
been applied since the acquisition of the bond, with a corresponding charge or
credit to interest income (the "retrospective method").
For investments in "high risk" (interest-only strips) collateralized mortgage
obligations (CMOs), the Company's accounting in 1993 followed the provisions
of the Financial Accounting Standards Board's Emerging Issues Task Force
Consensus No. 89-4. A new effective yield was calculated for each individual
high-risk CMO based on the amortized cost of the investment and the current
estimate of future cash flows (the "prospective method"). The recalculated
yield was then used to accrue interest income in the subsequent period.
In 1994, the Predecessor adopted Financial Accounting Standards Board's
Emerging Issues Task Force Consensus No. 93-18 which amends EITF 89-4 and
requires impairment tests to be performed using discounted cash flows at a
risk free discount rate. If the amortized cost of the security exceeds future
cash flows discounted at the risk free rate, then amortized cost is written
down to fair value. The adoption of this Consensus resulted in no adjustments
at January 1, 1994.
A realized loss is recognized and charged against income if the Company's
carrying value in a particular investment in the available-for-sale category
has experienced a significant decline in market value that is deemed to be
other than temporary.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Investment income is recorded when earned. Realized capital gains and losses
on the sale of investments are determined on the basis of specific costs of
investments and are credited or charged to income. Gains or losses on
financial future or option contracts which qualify as hedges of investments
are treated as basis adjustments and are recognized in income over the life of
the hedged investments.
MORTGAGE LOANS AND OTHER INVESTED ASSETS
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan (SFAS 114), indicate a likelihood of loss.
Prior to year-end 1995, the Company evaluated its real estate-related assets
(including accrued interest) by estimating the probabilities of loss utilizing
various projections that included several factors relating to the borrower,
property, term of the loan, tenant composition, rental rates, other supply and
demand factors and overall economic conditions. Generally, at that time, the
reserve was based upon the excess of the loan amount over the estimated future
cash flows from the loan.
SFAS 114 defines impaired loans as loans in which it is probable that a
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. In 1995, the Company adopted
Statement of Financial Accounting Standards No. 118, Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures (SFAS 118).
SFAS 118 amends SFAS 114, providing clarification of income recognition issues
and requiring additional disclosures relating to impaired loans. The adoption
of SFAS 114 and 118 had no effect on the Companys financial position or
results of operations at or for the period ended December 31, 1995. The
Company had no impaired loans and no valuation allowances established for
potential losses on mortgage loans at December 31, 1995.
Mortgage loans and policy loans are carried at their unpaid principal
balances. Real estate is carried at cost less accumulated depreciation.
Other invested assets are carried at lower of cost or market.
Prior to 1995, when an investment supported by real estate collateral was
deemed "in-substance" foreclosed, the investment was reclassified as real
estate and recorded at its fair value, with any reduction in carrying value
recorded as a realized loss. The change in this valuation allowance was
recorded as a realized capital gain or loss in the statements of income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in banks, US
Treasury bills, money market accounts, and commercial paper with maturities
under 90 days, which are not otherwise restricted.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
SEPARATE ACCOUNT ASSETS
Separate accounts contain segregated assets of the Company that are
specifically assigned to variable annuity policyholders in the separate
accounts and are not available to other creditors of the Company. The
earnings of separate account investments are also assigned to the
policyholders in the separate accounts, and are not guaranteed or supported by
the other general investments of the Company. The Company earns mortality and
expense risk fees from the separate accounts and assesses withdrawal charges
in the event of early withdrawals. Separate accounts assets are valued at
fair value.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business which vary with and are directly related
to the production of new business, principally commissions, premium taxes,
sales costs, and certain policy issuance and underwriting costs, are deferred.
These deferred costs are amortized in proportion to estimated future gross
profits derived from investment income, realized gains and losses on sales of
securities, unrealized securities gains and losses recognized under SFAS #115,
interest credited to accounts, surrender fees, mortality costs, and policy
maintenance expenses. The estimated gross profit streams are periodically
reevaluated and the unamortized balance of deferred acquisition costs is
adjusted to the amount that would have existed had the actual experience and
revised estimates been known and applied from the inception of the policies
and contracts. The amortization and adjustments resulting from unrealized
gains and losses is not recognized currently in income but as an offset to the
unrealized gains and losses reflected as a separate component of equity.
The components of deferred policy acquistion costs were as follows:
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
(IN THOUSANDS OF DOLLARS) 12/31/95 5/31/95
1994 1993
<S> <C> <C> <C> <C>
Deferred policy acquisition costs,
beginning of period $ 92,398 $ 213,362 $ 146,504 $155,470
Effects of push down purchase
accounting (92,398) -- -- --
Commissions and expenses deferred 8,809 13,354 30,025 29,342
Amortization (100) (11,157) (125,357) (38,308)
Deferred policy acquisition costs
attributable to unrealized
gains/(losses) -- (123,161) 162,190 --
Deferred policy acquistion costs,
end of period $ 8,709 $ 92,398 $ 213,362 $146,504
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
PURCHASE RELATED INTANGIBLE ASSETS AND LIABILITIES
In accordance with the purchase method of accounting for business
combinations, two intangible assets and a future payable related to accrued
purchase price consideration were established as of the purchase date:
Present value of future profits
As of June 1, 1995 the Company established an intangible asset which
represents the present value of future profits to be derived from both the
purchased and transferred blocks of business. Certain estimates were utilized
in the computation of this asset including estimates of future policy
retention, investment income, interest credited to policyholders, surrender
fees, mortality costs, and policy maintenance costs discounted a pre-tax rate
of 18% (12% net after tax). In addition, as the Company has the option of
retaining its SPDA policies after they reach their next interest rate reset
date and are recaptured from OakRe, a component of this asset represents
estimates of future profits on recaptured business. This asset will be
amortized according to the estimated profit stream and will periodically be
adjusted as actual profits materialize and are different from the estimates.
The asset will also be adjusted for amounts attributable to realized and
unrealized securities gains and losses. Any adjustments to the unamortized
balance will be applied as if the revised estimates had been known and applied
since inception. The amortization period is the remaining life of the
policies, which is estimated to be 20 years from the date of original policy
issue. Based on current assumptions, amortization of the original in-force
PVFP asset, expressed as a percentage of the original in-force asset, are
projected to be 7.6%, 7.6%, 6.6%, 5.4% and 5.3% for the years ended December
31, 1996 through 2000, respectively. Actual amortization incurred during
these years may be more or less as assumptions are modified to incorporate
actual results.
The components of present value of future profits are as follows:
<TABLE>
<CAPTION>
The Company
7 Months Ended
(In Thousands) 12/31/95
<S> <C>
Present value of future profits - beginning of period $ 46,709
Interest added 1,941
Commissions capitalized 5,759
Gross amortization, excluding interest (4,024)
Present value of future profits attributable to
unrealized gains (6,471)
---------
Present value of future profits - end of period $ 43,914
=========
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
Future payable
Pursuant to the financial reinsurance agreement with OakRe, the receivable
from OakRe becomes due in installments when the SPDA policies reach their next
crediting rate reset date. For any recaptured policies that continue in force
into the next guarantee period, the Company will pay a commission to OakRe of
1.75% up to 40% of policy account values originally reinsured and 3.5%
thereafter. On policies that are recaptured and subsequently exchanged to a
variable annuity policy, the Company will pay a commission to OakRe of 0.50%.
The Company has recorded a future payable that represents the present value of
the anticipated future commission payments payable to OakRe over the remaining
life of the financial reinsurance agreement discounted at an estimated
borrowing rate of 6.5%. This liability will be periodically adjusted as actual
results differ from the estimates used in establishing the total purchase
price. This liability, which can be anticipated with a high degree of
certainty, represents a contingent purchase price payable for the policies
transferred to OakRe on the purchase date and has been pushed down to the
Company through the financial reinsurance agreement. The Company expects that
this payable will be substantially extinguished over the next five years.
The components of this future payable are as follows:
<TABLE>
<CAPTION>
The Company
7 Months Ended
(In Thousands) 12/31/95
<S> <C>
Future payable - beginning of period $ 27,797
Interest added 947
Payments to OakRe (4,777)
---------
Future payable - end of period $ 23,967
=========
</TABLE>
Goodwill
Under the push down method of purchase accounting, the excess of purchase
price over the fair value of assets and liabilities acquired and present value
of future profits less future payable is established as an asset and referred
to as Goodwill. Goodwill will also be periodically adjusted to account for any
retroactive changes to present value of future profits and future payables as
actual results differ from original assumptions and are applied retroactively
as of the original purchase date. The Company has elected to amortize goodwill
on the straight line basis over a 20 year period.
Deferred Tax Assets and Liabilities
Xerox Financial Services, Inc. (XFSI) and General American agreed to file an
election to treat the acquisition of the Company as an asset acquisition under
the provisions of Internal Revenue Code Section 338(h)(10). As a result of
that election, the tax basis of the Companys assets as of the date of
acquisition were revalued based upon fair market values. The principal effect
of the election was to establish a tax asset on the tax-basis balance sheet of
approximately $35.3 million for the value of the business acquired that is
amortizable for tax purposes.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
POLICYHOLDER DEPOSITS
The Company recognizes its liability for policy amounts that are not subject
to policyholder mortality nor longevity risk at the stated contract value,
which is the sum of the original deposit and accumulated interest, less any
withdrawals.
FUTURE POLICY BENEFITS
Reserves are held for future annuity benefits that subject the Company to
risks to make payments contingent upon the continued survival of an individual
or couple (longevity risk). These reserves are valued at the present value of
estimated future benefits discounted for interest, expenses, and mortality.
The assumed mortality is the 1983 Individual Annuity Mortality Tables
discounted at 5.75% to 8.50%, depending upon year of issue.
Current mortality benefits payable are recorded for reported claims and
estimates of amounts incurred but not reported.
PREMIUM REVENUE
The Company recognizes premium revenue at the time of issue on annuity
policies that subject it to longevity risks.
The Company currently assesses no explicit life insurance premium for its
commitment to make payments in excess of its recorded liability that are
contingent upon policyholder mortality. Benefits paid in excess of the
recorded liability are recognized when incurred.
Amounts collected on policies not subject to any mortality or longevity risk
are recorded as increases in the policyholder deposits liability.
FEDERAL INCOME TAXES
Prior to June 1,1995 the revenues and expenses of the Predecessor were
included in a consolidated Federal income tax return with its parent company
and other affiliates. Allocations of Federal income taxes were based upon
separate return calculations.
After June 1, 1995 the Company will be filing its own separate income tax
return, independent from its ultimate parent, GALIC.
The Company accounts for deferred income taxes according to Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS
#109).
Under the asset and liability method of SFAS #109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
(continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
those temporary differences are expected to be recovered or settled. Under
SFAS #109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income to the period that includes the enactment
date.
RISKS AND UNCERTAINTIES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
The following elements of the consolidated financial statements are most
affected by the use of estimates and assumptions:
- Investment market valuation
- Amortization of deferred policy acquisition costs
- Calculation and amortization of present value of future profits
- Recoverability of Goodwill
- Recoverability of guaranty fund assessments
The market value of the Company's investments is subject to the risk that
interest rates will change and cause a temporary increase or decrease in the
liquidation value of debt securities. To the extent that fluctuations in
interest rates cause the cash flows of assets and liabilities to change, the
Company might have to liquidate assets prior to their maturity and recognize a
gain or loss. Interest rate exposure for the investment portfolio is managed
through asset/liability management techniques which attempt to control the
risks presented by differences in the probable cash flows and reinvestment of
assets with the timing of crediting rate changes in the Company's policies and
contracts. Changes in the estimated prepayments of mortgage-backed securities
also may cause retrospective changes in the amortization period of securities
and the related recognition of income.
The amortization of deferred acquisition costs is based on estimates of
long-term future gross profits from existing policies. These gross profits
are dependent upon policy retention and lapses, the spread between investment
earnings and crediting rates, and the level of maintenance expenses. Changes
in circumstances or estimates may cause retrospective adjustment to the
periodic amortization expense and the carrying value of the deferred expense.
In a similar manner, the amortization of present value of future profits is
based on estimates of long-term future profits from existing and recaptured
policies.
These gross profits are dependent upon policy retention and lapses, the spread
between investment earnings and crediting rates, and the level of maintenance
expenses. Changes in circumstances or estimates may cause retrospective
adjustment to the periodic amortization expense and the carrying value of the
asset.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets
to be Disposed of (SFAS 121), which was adopted by the Company in the fourth
quarter of 1995, the Company has considered the recoverability of Goodwill and
has concluded that no circumstances have occurred which would give rise to
impairment of Goodwill for the period ending December 31, 1995.
The Company is subject to assessments in substantially all jurisdictions where
it is licensed to fund guaranteed benefits to policyholders of non-affiliated
insolvent insurers licensed in those jurisdictions. Such assessments
generally are limited to a percentage of the premiums written by the Company
and are fully or partially recoverable as credits against future premium tax
payments in the majority of jurisdictions. The Company is at risk to extent
that the Company may not incur sufficient premium taxes to permit full
recovery of available credits. The Company has been indemnified by OakRe
against any guaranty assessments incurred that relate to insolvencies
occurring prior to June 1, 1995. See note 11 - Guaranty Fund Assessments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS #107) applies fair value disclosure
practices with regard to financial instruments, both assets and liabilities,
for which it is practical to estimate fair value. In cases where quoted
market prices are not readily available, fair values are based on estimates
that use present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Although fair value
estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, might
not be realized in the immediate settlement of the instruments. SFAS #107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Because of this, and further because a value of
a business is also based upon its anticipated earning power, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
SFAS #115 takes SFAS #107 another step and requires balance sheet adjustments
of debt investments available for sale and equity investments to fair value
with a corresponding adjustment to shareholders' equity. The Predecessor
adopted SFAS #115 in 1994 and classified all of its investments as "available
for sale". The effects of implementing SFAS #115 as of January 1, 1994 was a
net increase in Shareholders' Equity of approximately $29.2 million.
The Predecessor adopted Statement of Financial Accounting Standard No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments" (SFAS #119), as of December 31, 1994. SFAS #119 requires
increased disclosures about derivative financial instruments including the
amount, nature, and terms of all derivative financial instruments as well as
(continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
disclosure of the purposes for which derivative financial instruments are
held, end-of-period fair values and any net gains or losses arising from
trading of derivative financial instruments.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS
AND ACCRUED INVESTMENT INCOME:
The carrying values amounts reported in the balance sheets for these
instruments approximate their fair values. Short-term debt securities are
considered "available for sale."
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES):
Fair values for debt securities are based on quoted market prices, where
available. For debt securities not actively traded, fair value estimates are
obtained from independent pricing services. In some cases, such as private
placements and certain mortgage-backed securities, fair values are estimated
by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments. (See
note 4 for fair value disclosures). Fair values for mortgages are based on
management estimates and incorporate independent appraisals of underlying real
property. As of December 31, 1995, fair value of the Companys mortgage loans
are equivalent to the carrying value.
INTEREST RATE SWAPS AND FINANCIAL FUTURES CONTRACTS:
The fair value of interest rate swaps and financial futures contracts are the
amounts the Company would receive or pay to terminate the contracts at the
reporting date, thereby taking into account the current unrealized gains or
losses of open contracts. Amounts are based on quoted market prices, or
pricing models or formulas using current assumptions. (See note 6 for fair
value disclosures).
INVESTMENT CONTRACTS:
The Company's policy contracts require the beneficiaries to commence receipt
of payments by the later of age 85 or 10 years after purchase, and
substantially all permit earlier surrenders, generally subject to fees and
adjustments. Fair values for the Company's liabilities for investment type
contracts (Policyholder Deposits) are estimated as the amount payable on
demand. As of December 31, 1995 and 1994 the cash surrender value of
policyholder funds on deposit were $2,228,009 and $129,404,638 respectively,
less than their stated carrying value. Of the contracts permitting surrender,
90% provide the option to surrender without fee or adjustment during the 30
days following reset of guaranteed crediting rates. The Company has not
determined a practical method to determine the present value of this option.
All of the Company's deposit obligations are fully guaranteed by the acquirer,
GALIC, and the receivable from OakRe equal to the SPDA obligations is
guaranteed by OakRe's parent, XFSI.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
REINSURANCE:
Reinsurance is not material to the Companys operation or its financial
statements. The Company, however, has adopted the provisions of Statement of
Financial Accounting Standard No. 113, Accounting and Reporting for
Reinsurance of Short Duration and Long Duration Contracts (SFAS 113). The
adoption of this accounting standard had no effect on the financial statements
other than gross reporting of balance sheet amounts and disclosure of
reinsurance amounts netted against revenues and expenses.
The financing reinsurance agreement entered into with OakRe does not meet the
conditions for reinsurance accounting under SFAS No. 113. The net assets
initially transferred to OakRe were established as a receivable and are
subsequently increased as interest is accrued on the underlying liabilities
and decreased as funds are transferred back to the Company when policies reach
their crediting rate reset date or benefits are claimed.
OTHER
Certain 1993 and 1994 amounts have been reclassified to conform to the 1995
presentation.
(4) INVESTMENTS
The Company's investments in debt and equity securities are considered
available for sale and carried at estimated fair value, with the aggregate
unrealized appreciation or depreciation being recorded as a separate component
of shareholder equity. The carrying value and amortized cost of investments at
December 31, 1995 and 1994 are as follows:
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
THE COMPANY
1995
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
AMORTIZED
VALUE GAINS LOSSES VALUE
COST
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 4,307 $ 156 -- $ 4,307 $ 4,151
Mortgage-backed and derivative
securities:
Collateralized mortgage obligations 252,148 4,344 $ (237) 252,148 248,041
Corporate, state, municipalities, and
political subdivisions 338,101 7,261 (836) 338,101 331,676
Total debt securities 594,556 11,761 (1,073) 594,556 583,868
Mortgage loans 77,472 -- -- 77,472 77,472
Policy loans 19,125 -- -- 19,125 19,125
Short term investments 7,859 36 -- 7,859 7,823
Total investments $699,012 $11,797 $(1,073) $699,012 $688,288
<FN>
As of December 31, 1995, the Company has no impaired investments and no valuation
allowances established for potential losses on its investments.
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
PREDECESSOR
1994
GROSS GROSS ESTIMATED COST
OR
CARRYING UNREALIZED UNREALIZED FAIR
AMORTIZED
VALUE GAINS LOSSES VALUE
COST
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 10,834 $ 80 $ (1,787) $ 10,834 $ 12,541
Mortgage-backed and
derivative securities:
GNMA 6,447 186 -- 6,447 6,261
FNMA & FHLMC 272 6 -- 272 266
Collateralized mortgage obligations 1,188,257 490 (185,964) 1,188,257 1,373,731
Foreign governments 27,947 -- (4,355) 27,947 32,302
Corporate, state, municipalities, and
political subdivisions 654,848 9,884 (80,583) 654,848 725,547
Redeemable preferred stocks 13,037 194 (97) 13,037 12,940
Total debt securities 1,901,642 10,840 (272,786) 1,901,642 2,163,588
Other invested assets (1) 7,597 466 (1,335) 6,728 7,597
Equity securities 8,754 -- -- 8,754 8,754
Real estate (1) 26,735 2,034 (153) 28,616 26,735
Mortgage loans 6,825 -- (1,245) 5,580 6,825
Policy loans 17,691 -- -- 17,691 17,691
Short term investments 93,118 4,060 (4,654) 93,118 93,712
Total investments(1) $2,062,362 $17,400 $(280,173) $2,062,129 $2,324,902
Company's beneficial interest in separate
account assets $ 167 N/A N/A $ 167 N/A
<FN>
(1) The Company has established valuation allowances of approximately $200,000 and $400,000 as
of December 31, 1994 for estimated potential losses on real estate and other invested assets,
respectively.
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The amortized cost and estimated market value of debt securities at December
31, 1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Maturities of mortgage-backed securities will be substantially shorter than
their contractual maturity because they require monthly principal installments
and mortgagees may prepay principal.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
(in thousands of dollars)
Due after one year through five years $135,221 $137,828
Due after five years through ten years 176,906 180,132
Due after ten years 23,700 24,448
Mortgage-backed securities 248,041 252,148
Total $583,868 $594,556
<FN>
At December 31, 1995, approximately 99.25% of the Company's debt securities
are investment grade or are non-rated but considered to be of investment
grade. Of the 0.75% non-investment grade debt securities, all are rated as
BB+.
</TABLE>
Included in debt securities in 1994 and the first five months of 1995 are
investments in interest-only mortgage-backed stripped securities (IOs) and
similar IOettes. Accounting for investments in "high risk" (interest only)
collateralized mortgage obligations (CMOs), is in accordance with the
provisions of the Financial Standards Board's Emerging Issues Task Force
Consensus Nos. 89-4 and 93-18. An effective yield is calculated for each high
risk CMO based on the current amortized cost of the investment and the current
estimate of future cash flow. The recalculated effective yield is used to
record interest income in subsequent periods (the "prospective method"). If
the anticipated cash flow for any "high risk" CMO discounted at the comparable
risk-free rate is less than the unamortized cost, an impairment loss is
recorded and the unamortized cost adjusted. The write-down is treated as a
realized loss. Write-downs of approximately $3,341,163 and $51,120,276 were
recorded in 1994 and 1993, respectively. At December 31, 1994 the Predecessor
held such securities with a carrying value of $36,441,742. The weighted
average of the effective yield that was used to accrue interest income in 1994
was 11.88%.
FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The Company participates in a securities lending program whereby certain
securities are loaned to third parties, primarily major brokerage firms. The
agreement with a custodian bank facilitating such lending requires a minimum
of 102% of the initial market value of the domestic loaned securities to be
maintained in a collateral pool. To further minimize the credit risk related
to this lending program, the Company monitors the financial condition of the
counter parties to these agreements. Securities loaned at December 31, 1995
had market values totaling $16,034,037. Cash, letters of credit, and
government securities of $16,353,995 was held by the custodian bank as
collateral to secure this agreement. Income on the Companys security lending
program in 1995 was immaterial.
Debt securities with a recorded investment of $0 and $2,827,500, were
non-income producing during the years ended December 31,1995 and 1994.
Information related to troubled debt restructurings during 1994 is as follows:
<TABLE>
<CAPTION>
THE
PREDECESSOR
DEBT MORTGAGE
SECURITIES LOANS
TOTAL
(in thousands of
dollars)
<S> <C> <C> <C>
Aggregate carrying value at December 31, 1994 $3,306 -- $3,306
Gross interest income included in net income
during 1994 205 -- 205
Gross interest income that would have been
earned during 1994 if there had been no
restructuring 538 -- 538
</TABLE>
Information related to troubled debt restructuring during 1993 is as follows:
<TABLE>
<CAPTION>
THE
PREDECESSOR
DEBT
MORTGAGE
SECURITIES LOANS
TOTAL
(in thousands of
dollars)
<S> <C> <C> <C>
Aggregate carrying value at December 31, 1993 $5,275 $6,405 $11,680
Gross interest income included in net income
during 1993 589 568 1,157
Gross interest income that would have been
earned during 1993 if there had been no
restructuring 904 712 1,616
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The components of net investment income were as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994
1993
(in thousands of dollars)
<S> <C> <C> <C> <C>
Income on debt securities $19,629 $ 63,581 $ 267,958 $327,489
Income on equity securities -- 302 645 725
Income on short-term investments 2,778 28,060 11,705 4,624
Income on cash on deposit -- -- 316 1,711
Income on interest rate swaps -- 377 (244) 3,365
Income on policy loans 868 624 1,376 1,147
Interest on mortgage loans 1,444 248 1,162 1,053
Income on foreign exchange -- 184 (433) (281)
Income of real estate -- 1,508 3,278 586
Income on separate account investments -- (1) 2 2,256
Miscellaneous interest 109 (24) (853) (168)
--
Total investment income 24,828 94,859 284,912 342,507
Investment expenses (640) (2,373) (7,296) (6,924)
Net investment income $24,188 $ 92,486 $ 277,616 $335,583
Realized capital gains/(losses) were as follows:
Debt securities $ 1,344 $(16,749) $ (79,300) $ 12,716
Mortgage loans -- 1,431 (3,452) (453)
Equity securities -- (423) (76) 2,489
Real estate -- (124) -- 2,335
Short-term investments (20) (1,933) (282) 612
Other assets -- (76) 147 --
Interest rate swaps -- 5,460 (18,398) --
Net realized gains/(losses) on investments $ 1,324 $(12,414) $(101,361) $ 17,699
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
- -----------------------------------------------------
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Unrealized gains/(losses) were as follows:
Debt securities $10,688 $(85,410) $(261,947) $ --
Equity securities -- -- -- (494)
Short-term investments 36 879 (594) --
Effects on deferred acquisition costs amortization -- 39,030 162,190 --
Effects on present value of future profits (6,471) -- -- --
Unrealized gains/(losses) before income tax 4,253 (45,501) (100,351) (494)
Unrealized income tax benefit/(expense) (1,489) 16,664 35,123 173
Net unrealized gains (losses) on investments $ 2,764 $(28,837) $ (65,228) $(321)
</TABLE>
Proceeds from sales of investments in debt securities for the Company during
1995 were $214,811,186, and for the Predecessor were $2,786,998,780. Gross
gains of $1,533,501 and gross losses of $190,899 were realized by the Company
on its sales. Included in these amounts for the Company are $373,768 of
gross gains realized on the sale of non-investment grade securities. The
Predecessor realized gross gains of $9,499,191 and gross losses of $26,249,279
on its sales. Included in these amounts are $6,367,297 of gross gains and
$7,607,167 of gross losses realized on the sale of non-investment grade
securities.
Proceeds from sales of investments in debt securities during 1994 were
$3,081,863,341. Gross gains of $59,472,808 and gross losses of $136,394,109
were realized on those sales. Included in these amounts are $6,455,887 of
gross gains and $6,692,683 of gross losses realized on the sale of
non-investment grade securities.
Proceeds from sales of investments in debt securities during 1993 were
$3,635,309,534. Gross gains of $229,942,137 and gross losses of $198,648,778
were realized on those sales. Included in these amounts are $47,042,511 of
gross gains and $9,163,938 of gross losses realized on the sale of
non-investment grade securities.
Unrealized appreciation/(depreciation) of debt securities for the Company in
1995, and the Predecessor in 1995, 1994 and 1993 were $10,688,000,
$176,537,000, $(357,401,000), and $15,171,000, respectively. Unrealized
appreciation/(depreciation)of debt securities is calculated as the change
between the cost and market values of debt securities for the years then
ended.
Securities with a book value of approximately $6,933,755 at December 31, 1995
were deposited with government authorities as required by law.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(5) SECURITIES GREATER THAN 10% OF SHAREHOLDERS' EQUITY
As of December 31, 1995 the Company held the following individual securities
which exceeded 10% of shareholders' equity:
<TABLE>
<CAPTION>
Long-term Debt Amortized
Securities Cost
- -----------------------------------
<S> <C>
Countrywide Mtg. 1933-12 A4 $18,681,636
American Airlines 14,940,484
</TABLE>
As of December 31, 1994 the Company held the following individual securities
which exceeded 10% of shareholders' equity:
<TABLE>
<CAPTION>
Long-term Debt Amortized Long-term Debt Amortized
Securities Cost Securities Cost
<S> <C> <C> <C>
PRU HOME MTG SEC 1994 SER 26-A $43,947,846 VIRGINIA STATE HOUSING DEV AUTH 1994-A $14,300,000
PRU HOME MTG SEC 1993 SER 19-A9 41,024,780 PRU HOME MTG SEC 1994 SER 8-A2 14,228,882
HOUSING SEC INC 1994 SER 1-A8 34,293,893 FHLMC MC MTG PRT CRT SER 1628-G 13,841,422
FNMA REMIC TR 1994-51 PE 34,079,290 FNMA REMIC TR 1993 SER 33-ZA 13,613,754
FHLMC MC MTG PRT CRT SER 1162-Z 34,029,681 FNMA REMIC TR 1994 SER 58-B 13,502,865
RES FUNDING CORP 1994 SER S7-A3 33,929,196 FNMA REMIC TR 1994 SER 58-A 13,402,600
RES FUNDING CORP 1993 SER S18-A6 30,771,180 TELEPHONE & DATA SYSTEMS 13,382,782
FHLMC MC MTG PRT CRT SER 1652-E 29,880,047 ARGENTINA FRB 13,051,979
G E CAPITAL 1994 SER 4-A6 29,587,419 FHA PROJECT LOAN 223-F(MANASSAS VA) 12,985,981
RES FUNDING CORP 1994 SER S10-A3 28,743,601 PARAMOUNT COMMUNICATIONS 12,985,579
FNMA REMIC TR 1993 SER 131-Z 26,821,993 FNMA REMIC TR 1993 SER G22-ZA 12,962,715
CITICORP MTG 1994 SER 11-A1 26,271,938 FNMA REMIC TR 1992 SER 184-X 12,815,453
COUNTRYWIDE MTG 1993 SER 13-A2 24,027,743 TELARG 12,458,038
G E CAPITAL KRONE LINKED (CI) 23,500,000 UNITED AIRLINES 1991 ETC SER A2 12,420,542
G E CAPITAL MTG 1994 SER 12-A4 23,480,685 PRU HOME MTG SEC 1994 SER 6-A5 12,400,623
GRUMA SA DE CV 23,335,945 SIGNET MASTER TR 1994-4A 11,986,616
FHLMC MC MTG PRT CRT SER 1108-K 23,146,222 GENERAL MOTORS CORP DEBENTURE 11,856,797
FHLMC MC MTG PRT CRT SER 1468-ZA 22,546,223 PRU HOME MTG SEC 1993 SER 43-10 11,791,582
G E CAPITAL MTG 1994 SER 10-A12 21,288,675 CENTRAL BANK OF ARGENTINA 11,695,148
RES FUNDING CORP 1993 SER S26-A8 21,225,227 FHLMC MC MTG PRT CRT SER 1697-PG 11,544,588
LOUISIANA POWER & LIGHT(WATERFORD 3) 20,909,267 FNMA REMIC TR 1993 SER 29-SK 11,316,353
SEARS MTG ACC CORP 1993 SER 11-A5 20,861,498 PRU HOME MTG SEC 1993 SER 41-A4 11,272,637
FEDERAL HOME LOAN BANK 20,716,221 FHLMC MC MTG PRT CRT SER 1513-AF 11,266,102
FHLMC MC MTG PRT CRT SER 1244-G 20,697,580 FNMA REMIC TRUST 1993 SER 4-HB 11,181,840
PRU HOME MTG SEC 1993 SER 30-A9 20,570,432 PHILLIPS PETROLEUM 11,120,220
G E CAPITAL MTG 1992 SER 7 20,423,860 INTERAMERICAN DEV BANK 10,751,421
CSR AMERICA INC 19,916,660 COUNRTYWIDE MTG 1994 SER L-AB 10,603,498
FHLMC MC MTG PRT CRT SER 1364-I 19,892,880 CHASE MTG SEC 1994SER F-A7 10,516,592
FHLMC MC MTG PRT CRT SER 1574-F 19,825,320 FNMA REMIC TR 1994 SER 3-SC 10,434,265
SEARS MTG SEC CORP 1993-7 T7 19,709,253 NEWS AMERICAN HOLDINGS 10,310,547
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
FINANCIAL FUTURES CONTRACTS
The Predecessor was a party to financial futures contracts under a program of
hedging with off-balance sheet risk in the normal course of business to meet
the needs of its policyholders and to reduce its own exposure to fluctuations
in interest rates. The contracts involved, to varying degrees, elements of
interest rate risk in excess of the amount recognized in the consolidated
balance sheet.
Futures contracts are contracts for delayed delivery of securities in which
the seller agrees to make delivery at a specified future date for a specific
price. Risks arise from the possible inability of counter parties to meet the
terms of their contracts and from movements in securities values and interest
rates. When futures contracts are designated as hedges additional risks arise
due to the possibility that the futures contract will provide an imperfect
correlation to the hedged security.
As of December 31, 1994, the Predecessor held 65 5Yr T-note futures, 190 10Yr
T-note futures, and 50 T-bond futures contracts with a total notional face
amount of $30,500,000. The contracts matured in March, 1995, and resulted in
a net amount of $468,520 being applied as an increase in book value of the
underlying hedged securities. Collateral requirements were set by the Chicago
Board of Trade and averaged $1,121 per contract as of December 31, 1994.
INTEREST RATE SWAPS
During 1994 and the first five months of 1995, the Predecessor was party to
derivative financial instruments in the normal course of business for the
purposes of earning investment income and modifying the interest rate-related
risks of the portfolio.
The notional amounts of derivatives do not represent amounts exchanged by the
parties and, thus, are not a measure of the Company's exposure through the use
of derivatives. The amounts exchanged are determined by reference to the
notional amounts and the other terms of the instruments.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The following table summarizes various information regarding derivative
financial instruments as of December 31, 1994:
<TABLE>
<CAPTION>
FAIR MARKET LOSSES
NOTIONAL PURPOSE VALUE AT FROM
Amount Nature/Terms For Holding 12/31/94 Investment
- ----------- ----------------------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Open
- -----------
5,000,000 LIBOR/Mexican Par Bond Swap
2/17/1995 receive 10% fixed,
pay 6 Month LIBOR Investment $ (5,460,000) $ 0
35,000,000 Zero Coupon Swap Spread/Yield
Curve 8/19/1996 6 Month LIBOR Investment (12,937,750) 0
Closed
- -----------
25,000,000 Lehman Corporate Index Swap
1/1/1994 Investment 0 (77,305)
25,000,000 Lehman Corporate Index Swap
1/1/1994 Investment 0 (77,305)
</TABLE>
The Libor/Mexican Par Bond swap caused the Predecessor to receive or pay the
net of a fixed-rate of 10%, in exchange for paying 6 month LIBOR, times a
multiplier of six times the notional amount. The substance is as if the
Predecessor owned $30 million par of the bonds using funds borrowed at six
month LIBOR. At maturity, the Predecessor committed to acquire the $30
million par of the bonds if their market price was less than 72, for a payment
of $21.6 million. The Predecessor thereby assumed the market risk below that
price.
The Predecessor received or paid at maturity of the Zero Coupon Swap
Spread/Yield Curve swap an amount derived from both the relationship between
the 6 month LIBOR and the 10 year constant maturity treasury rates, and a
function (swap spread) that usually correlates to corporate bond quality
spreads. The Predecessor could lose money if the yield curve is flat or
inverted and the swap spread is small. The purpose of the instrument was to
offset the effects of holding very large amounts of cash equivalents in
conjunction with XFSIs plan to discontinue its ownership of the Predecessor.
Effective December 31, 1994, XFSI formally assumed the net obligation for this
instrument, resulting in a capital contribution to the Predecessor.
The unrealized depreciation was recorded as a realized loss as of December 31,
1994 based on the current evolving accounting practices for derivative
instruments where as at December 31, 1993 the unrealized loss was treated as
an off-balance-sheet item.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The following table summarizes various information regarding these derivative
financial instruments as of December 31, 1995:
<TABLE>
<CAPTION>
FAIR MARKET LOSSES
NOTIONAL PURPOSE VALUE AT FROM
Amount Nature/Terms For Holding 12/31/95 Investment in 1995
- ---------- ---------------------------- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
Closed
- ----------
5,000,000 LIBOR/Mexican Par Bond Swap
2/17/1995 receive 10% fixed,
pay 6 Month LIBOR Investment $ 0 $ 0
</TABLE>
(7) POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company has no direct employees and no retired employees. All personnel
used to support the operations of the Company are supplied by contract by Cova
Life Management Company (CLMC), a wholly owned subsidiary of Cova Corporation.
The Company is allocated a portion of certain health care and life insurance
benefits for future retired employees of CLMC as determined in accordance with
Financial Accounting Standards Board Statement No. 106, "Employers' Accounting
For Postretirement Benefits Other Than Pensions" (SFAS #106). In 1995, the
Company was allocated a portion of benefit costs including severance pay,
accumulated vacations, and disability benefits as determined in accordance
with Financial Accounting Standards Board Statement No. 112, "Employers'
Accounting for Postemployment Benefits" (SFAS #112). At December 31, 1995
CLMC had no retired employees nor any employees fully eligible for retirement
and had no disbursements for such benefit commitments. The expense arising
from these obligations is not material.
(8) INCOME TAXES
The Company will file a consolidated Federal Income Tax return for the first
five months of 1995 with the Companys former ultimate parent, Xerox
Corporation, a New York corporation, along with Xerox Corporationss other
eligible subsidiaries. For the last seven months, the Company will file a
consolidated Federal Income Tax return with its wholly-owned subsidiary, First
Cova Life Insurance Company, a New York insurance company. Amounts payable or
recoverable related to periods before June 1, 1995 are subject to an
indemnification agreement with XFSI, which has the effect that the Company is
not at risk for any income taxes nor entitled to recoveries related to those
periods, except for approximately $1.4 million of state income taxes.
The actual Federal income tax expense differed from the expected tax expense
computed by applying the US. Federal statutory rate to income before taxes on
income as follows:
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of COVA Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
1995 1995 1994 1993
7 MONTHS 5 MONTHS
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $129 35.0% $(13,862) 35.0% $(76,739) 35.0% $7,503 35.0%
State income taxes, net 11 3.0 (306) 0.8 (1,552) 0.7 1,631 7.6
Rate change effect on prior deferrals -- -- -- -- -- -- 456 2.1
Tax-exempt bond interest (22) (6.0) (332) 0.8 (1,208) 0.6 (123) (0.6)
Amortization of intangible assets 254 69.0 -- -- 111 (0.1) 111 0.5
Permanent difference due to derivative
transfer -- -- 4,399 (11.1) -- -- -- --
Other 59 16.1 37 (.1) 2,388 (1.1) (76) (0.3)
Total $431 117.1% $(10,064) 25.4% $(77,000) 35.1% $9,502 44.3%
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995 &
1994 follows:
<TABLE>
<CAPTION>
The Company Predecessor
1995 1994
<S> <C> <C>
Deferred tax assets:
Policy Reserves $ 7,601 $ 26,602
Liability for commissions on recapture 8,868 --
Tax basis of intangible assets purchased 13,141 --
DAC Proxy Tax 4,749 4,797
Permanent Impairments -- 4,934
Unrealized losses on investments -- 91,889
Book to tax differences on Investments 1,287
Other deferred tax assets 2,860 4,809
Total assets $37,219 $134,318
Deferred tax liabilities:
PVFP $16,774 --
Unrealized gains on investments 1,489 --
Deferred Acquisition Costs 5,316 74,676
Other deferred tax liabilities 84 3,507
Total liabilities $23,663 $ 78,183
Net Deferred Tax Asset/(Liability) $13,556 $ 56,135
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
the deferred tax assets will be fully realized in the future based upon
expectation of the reversal of existing temporary differences, anticipated
future earnings, and consideration of all other available evidence.
Accordingly no valuation allowance is established.
(9) RELATED-PARTY TRANSACTIONS
The Company has entered into management, operations and services agreements
with both affiliated and unaffiliated companies. The affiliated companies are
Cova Life Management Company (CLMC), a Delaware corporation, which provides
management services and the employees necessary to conduct the activities of
the Company, and General American Investment Management Company, which
provides investment advice. Additionally, a portion of overhead and other
corporate expenses are allocated by the Companys ultimate parent, GALIC. The
unaffiliated companies are Johnson & Higgins, a New Jersey corporation, and
Johnson & Higgins/Kirke Van Orsdel, a Delaware corporation, which provide
various services for the Company including underwriting, claims and
administrative functions. The affiliated and unaffiliated service providers
are reimbursed for the cost of their services and are paid a service fee.
Expenses and fees paid to affiliated companies during the 7 months of 1995 for
the Company were $7,139,525, and the five months of 1995 and the years of 1994
and 1993 for the Predecessor were 6,364,609, $8,553,028, and $7,986,999,
respectively.
(10) STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Generally accepted accounting principles (GAAP) differ in certain respects
from the accounting practices prescribed or permitted by insurance regulatory
authorities (statutory accounting principles).
The major differences arise principally from the immediate expense recognition
of policy acquisition costs and intangible assets for statutory reporting,
determination of policy reserves based on different discount rates and
methods, the non-recognition of financial reinsurance for GAAP reporting, the
establishment of an Asset Valuation Reserve as a contingent liability based on
the credit quality of the Company's investment securities, and an Interest
Maintenance Reserve as an unearned liability to defer the realized gains and
losses of fixed income investments presumably resulting from changes to
interest rates and amortize them into income over the remaining life of the
investment sold. In addition, SFAS #115 adjustments to record the carrying
values of debt securities and certain equity securities at market are applied
only under GAAP reporting and capital contributions in the form of notes
receivable from an affiliated company are not recognized under GAAP reporting.
Purchase accounting creates another difference as it requires the restatement
of GAAP assets and liabilities to their estimated fair values and shareholders
equity to the net purchase price. Statutory accounting does not recognize the
purchase method of accounting.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
As of December 31, the differences between statutory capital and surplus and
shareholder's equity determined in conformity with generally accepted
accounting principles (GAAP) were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
(in thousands of dollars)
<S> <C> <C> <C>
Statutory Capital and Surplus $ 59,682 $ 100,071 $108,617
Reconciling items:
GAAP investment valuation reserves -- (600) (14,076)
Statutory Asset Valuation Reserves 13,378 45,470 43,060
Interest Maintenance Reserve 1,892 15,123 50,074
GAAP investment adjustments to fair value 10,724 (274,222) --
Deferred policy acquisition costs 8,708 213,362 146,504
GAAP basis policy reserves (11,233) 7,944 (45,784)
Deferred federal income taxes (net) 13,556 56,135 (8,933)
Modified coinsurance -- (10,534) (13,994)
Goodwill 23,001 -- --
Present value of future profits 43,914 -- --
Future purchase price payable (23,967) -- --
Elimination of notes contributed
to statutory surplus -- (72,000) --
Other (1,569) (2,138) 4,365
GAAP Shareholders' Equity $138,086 $ 78,611 $269,833
</TABLE>
Statutory net losses for the years ended December 31, 1995, 1994 and 1993 were
$(74,012,650), $(92,952,989),and $(13,299,824), respectively.
The maximum amount of dividends which can be paid by State of Missouri
insurance companies to shareholders without prior approval of the insurance
commissioner is the greater of 10% of statutory earned surplus or statutory
net gain from operations for the preceding year. Accordingly, the maximum
dividend permissible at December 31, 1995 was $ 0.
The National Association of Insurance Commissioners has developed certain Risk
Based Capital (RBC) requirements for life insurers. If prescribed levels of
RBC are not maintained, certain actions may be required on the part of the
Company or its regulators. At December 31, 1995 the Company's Total Adjusted
Capital and Authorized Control Level - RBC were, $73,060,575 and $18,224,056
respectively. This level of adjusted capital qualifies under all tests.
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COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(11) GUARANTY FUND ASSESSMENTS
The Company participates with all life insurance companies licensed throughout
the United States, in associations formed to guarantee benefits to
policyholders of insolvent life insurance companies. Under state laws, as a
condition for maintaining the Companys authority to issue new business, the
Company is contingently liable for its share of claims covered by the guaranty
associations for insolvencies incurred through 1995, but for which assessments
have not yet been determined nor assessed, to a maximum in each state
generally of 2% of statutory premiums per annum in the given state. Most
states then permit recovery of assessments as a credit against premium or
other state taxes over, most commonly, five years.
At December 31, 1995, the National Organization of Life and Health Guaranty
Associations (NOLHGA) distributed a study of the major outstanding industry
insolvencies, with estimates of future assessments by state. Based on this
study, the Company has accrued a liability for approximately $14.3 million in
future assessments on insolvencies that occurred before December 31, 1995.
Under the coinsurance agreement between the Company and OakRe (see note 1),
OakRe is required to reimburse the Company for any future assessments that it
pays which relate to insolvencies occurring prior to June 1, 1995. As such,
the Company has recorded an additional receivable from OakRe for $14.3
million.
At the same time, the Company is liable to OakRe for 80% of any future premium
tax recoveries that are realized from any such assessments, and may retain the
