STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACT
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 MAY 1, 1996, FOR THE INDIVIDUAL
FIXED AND VARIABLE DEFERRED ANNUITY CONTRACT WHICH IS DESCRIBED 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) 831-5433.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 1996.
TABLE OF CONTENTS
Page
COMPANY
EXPERTS
LEGAL OPINIONS
DISTRIBUTION
Reduction or Elimination of the Withdrawal Charge
PERFORMANCE INFORMATION
Total Return
Historical Unit Values
Reporting Agencies
Hypothetical Information - General American Capital Company
Money Market Fund
Hypothetical Information - Public Fund Performance
Hypothetical Information - Private Accounts
TAX STATUS
General
Diversification
Multiple Contracts
Contracts Owned by Other than Natural Persons
Tax Treatment of Assignments
Income Tax Withholding
Tax Treatment of Withdrawals - Non-Qualified Contracts
Qualified Plans
Tax Treatment of Withdrawals - Qualified Contracts
Tax-Sheltered Annuities - Withdrawal Limitations
ANNUITY PROVISIONS
Variable Annuity
Fixed Annuity
Annuity Unit
Net Investment Factor
Mortality and Expense Guarantee
FINANCIAL STATEMENTS
COMPANY
Cova Financial Services Life Insurance Company (the "Company") was originally
incorporated on August 17, 1981 as Assurance Life Company, a Missouri
corporation and changed its name to Xerox Financial Services Life Insurance
Company in 1985. On June 1, 1995 a wholly-owned subsidiary of General
American Life Insurance Company ("General American") purchased the Company
from Xerox Financial Services, Inc. ("XFS"). The acquisition of the Company
included related companies ("Acquisition"). On June 1, 1995, the Company
changed its name to Cova Financial Services Life Insurance Company. The
Company presently is licensed to do business in the District of Columbia and
all states except California, Maine, New Hampshire, New York and Vermont.
General American is a St. Louis-based mutual company with more than $250
billion of life insurance in force and approximately $15 billion in assets.
It provides life and health insurance, retirement plans, and related financial
services to individuals and groups.
In conjunction with the Acquisition, the Company entered into a financing
reinsurance transaction that caused OakRe Life Insurance Company ("OakRe"), a
Missouri licensed insurer and a wholly-owned XFS subsidiary, to assume the
benefits and risks of existing single premium deferred annuity deposits
(SPDAs) which aggregated to $3,059 million at December 31, 1994. In exchange,
the Company transferred specifically identified assets to OakRe which had a
carrying value of $3,150.4 million at December 31, 1994. Ownership of OakRe
was retained by XFS subsequent to the Acquisition. The receivable from OakRe
to the Company that was created by this transaction will be liquidated over
the remaining crediting rate guaranty periods (which will be substantially all
expired in five years) by the transfer of cash in the amount of the then
current account value, less a recapture fee to OakRe on policies retained
beyond their 30-day no-fee surrender window by the Company, upon the next
crediting reset date of each annuity policy. The Company may then retain
and assume the benefits and risks of those deposits thereafter.
All of the Company's deposit obligations are fully guaranteed by General
American and the receivable from OakRe equal to the SPDA obligations is
guaranteed by OakRe's parent, XFS. In the event that both OakRe and XFS
default on the receivable, the Company may draw funds from a standby bank
irrevocable letter of credit established by XFS in the amount of $500 million.
In substance, the structure of the Acquisition allowed the seller, XFS, to
retain substantially all of the existing financial benefits and risks of the
existing business, while General American obtained the corporate 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.
On April 1, 1996, the Company contributed initial capital to the Select
Equity, Large Cap Stock, Small Cap Stock, International Equity, Quality Bond,
and Bond Debenture Sub-Accounts of the Separate Account. As of May 1, 1996,
the capital contributed to these Sub-Accounts represented approximately 100%
of the total assets of each such Sub-Account. The Company currently intends to
remove these assets from the Sub-Accounts on a pro rata 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.
DISTRIBUTION
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.
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE
The amount of the Withdrawal Charge on the Contracts may be reduced or
eliminated when sales of the Contracts are made to individuals or to a group
of individuals in a manner that results in savings of sales expenses. The
entitlement to reduction of the Withdrawal Charge will be determined by the
Company after examination of all the relevant factors such as:
1. The size and type of group to which sales are to be made will be
considered. Generally, the sales expenses for a larger group are less than
for a smaller group because of the ability to implement large numbers of
Contracts with fewer sales contacts.
2. The total amount of purchase payments to be received will be
considered. Per Contract sales expenses are likely to be less on larger
purchase payments than on smaller ones.
3. Any prior or existing relationship with the Company will be
considered. Per Contract sales expenses are likely to be less when there is a
prior existing relationship because of the likelihood of implementing the
Contract with fewer sales contacts.
4. There may be other circumstances, of which the Company is not
presently aware, which could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines that
there will be a reduction in sales expenses, the Company may provide for a
reduction or elimination of the Withdrawal Charge.
The Withdrawal Charge may be eliminated when the Contracts are issued to an
officer, director or employee of the Company or any of its affiliates. In no
event will any reduction or elimination of the Withdrawal Charge be permitted
where the reduction or elimination will be unfairly discriminatory to any
person.
PERFORMANCE INFORMATION
Total Return
From time to time, the Company may advertise performance data. Such data will
show the percentage change in the value of an Accumulation Unit based on the
performance of an investment portfolio over a period of time, usually a
calendar year, determined by dividing the increase (decrease) in value for
that unit by the Accumulation Unit value at the beginning of the period.
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 for the underlying investment
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 Charges 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
<TABLE>
<CAPTION>
<S> <C> <C>
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.
</TABLE>
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. The deduction of any Withdrawal Charge would reduce
any percentage increase or make greater any percentage decrease.
Owners should note that the investment results of each investment portfolio
will fluctuate over time, and any presentation of the investment portfolio's
total return for any period should not be considered as a representation of
what an investment may earn or what an Owner's total return may be in any
future period.
Historical Unit Values
The Company may also show historical Accumulation Unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual Accumulation Unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in Accumulation Unit values for any of the investment
portfolios against established market indices such as the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average or other
management investment companies which have investment objectives similar to
the investment portfolio being compared. The Standard & Poor's 500
Composite Stock Price Index is an unmanaged, unweighted average of 500 stocks,
the majority of which are listed on the New York Stock Exchange. The Dow
Jones Industrial Average is an unmanaged, weighted average of thirty blue chip
industrial corporations listed on the New York Stock Exchange. Both the
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones
Industrial Average assume quarterly reinvestment of dividends.
Reporting Agencies
The Company may also distribute sales literature which compares the
performance of the Accumulation Unit values of the Contracts with the
unit values of variable annuities issued by other insurance companies. Such
information will be derived from the Lipper Variable Insurance Products
Performance Analysis Service, the VARDS Report or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is
published by Lipper Analytical Services, Inc., a publisher of statistical data
which currently tracks the performance of almost 4,000 investment
companies.The rankings compiled by Lipper may or may not reflect the deduction
of asset-based insurance charges. The Company's sales literature utilizing
these rankings will indicate whether or not such charges have been deducted.
Where the charges have not been deducted, the sales literature will indicate
that if the charges had been deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Roswell, Georgia and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect
the deduction of asset-based insurance charges. In addition, VARDS prepares
risk adjusted rankings, which consider the effects of market risk on total
return performance. This type of ranking may address the question as to which
funds provide the highest total return with the least amount of risk. Other
ranking services may be used as sources of performance comparison, such as
CDA/Weisenberger.
Morningstar rates a variable annuity against its peers with similar investment
objectives. Morningstar does not rate any variable annuity that has less than
three years of performance data.
Hypothetical Information - General American Capital Company Money Market Fund
Although the Accumulation Units which invest in the General American Capital
Company Money Market Fund have no investment performance history as yet,
the General American Capital Company Money Market Fund has been in existence
for some time and consequently has an investment performance history. In
order to demonstrate how actual investment experience of the General
American Capital Company Money Market Fund affects Accumulation Unit values,
hypothetical performance information was developed. The information is based
upon the historical experience of the General American Capital Company Money
Market Fund and is for the periods shown. The prospectus contains a chart
of hypothetical information.
Future performance of the General American Capital Company Money Market
Fund will vary and the hypothetical results shown are not necessarily
representative of future results. Performance for periods ending after
those shown may vary substantially from the examples shown. The hypothetical
performance of the General American Capital Company Money Market Fund is
calculated for a specified period of time by assuming an initial Purchase
Payment of $1,000 allocated to the Portfolio. There are hypothetical
performance figures for the Accumulation Units which reflect the insurance
charges as well as the portfolio expenses. There are also hypothetical
performance figures for the Accumulation Units which reflect the insurance
charges, the contract maintenance charge, the portfolio expenses, and assume
that you make a withdrawal at the end of the period and therefore the
withdrawal charge is reflected. The percentage increases (decreases) are
determined by subtracting the initial Purchase Payment from the ending value
and dividing the remainder by the beginning value. The hypothetical
performance may also show figures when no withdrawal is assumed.
Hypothetical Information - Public Fund Performance
Lord, Abbett & Co. is the sub-adviser for the Bond Debenture investment
portfolio. This portfolio is newly-organized and does not yet have its own
performance record. However, it has the same investment objective and follows
substantially the same investment strategies as a mutual fund advised by the
same sub-adviser whose shares are sold to the public (Public Fund).
Set forth in the prospectus is the historical performance of this Public Fund.
Investors should not consider this performance data as an indication of the
future performance of this portfolio. The performance figures reflect the
deduction of the historical fees and expenses paid by the Public Fund and not
those to be paid by the investment portfolio. The figures do not reflect the
deduction of the insurance charges and the contract maintenance charge.
Investors should refer to the prospectus for the Contracts for information
pertaining to those charges. The results shown reflect the reinvestment of
dividends and distributions, and were calculated in the same manner that will
be used by the investment portfolio to calculate its own performance.
The performance of the Public Fund is commonly measured as total return. An
average annual compounded rate of return ("T") may be computed by using the
redeemable value at the end of a specified period ("ERV") of a hypothetical
initial investment of $1,000 ("P") over a period of time ("n") according to
the formula:
n
P (1 + T) = ERV
The table contained in the prospectus shows the average annualized total
returns for the fiscal year ended December 31, 1995, of a 1-year, 5-year and
10-year investment in the Public Fund.
In order to demonstrate how the performance of the Public Fund would
affect Accumulation Unit values, the prospectus contains hypothetical
performance information. In determining the hypothetical performance of the
Accumulation Units, the actual performance of the Public Fund was used.
The performance of the Accumulation Units will vary and the hypothetical
results shown are not necessarily representative of future results.
Performance for periods ending after those shown may vary substantially
from the examples shown. The performance of the Accumulation Units is
calculated for the specified period of time by assuming an initial Purchase
Payment of $1,000 allocated to the investment portfolio and a deduction
of all charges and deductions. The hypothetical performance figures for the
Accumulation Units assume the deduction of the fees and expenses anticipated
to actually be paid by the investment portfolio. There are hypothetical
performance figures for the Accumulation Units which reflect the insurance
charges as well as the fees and expenses of the investment portfolio. There
are also hypothetical performance figures for the Accumulation Units which
reflect the insurance charges, the contract maintenance charge, the
withdrawal charge and the fees and expenses of the investment portfolio. The
percentage increases (decreases) are determined by subtracting the initial
Purchase Payment from the ending value and dividing the remainder by the
beginning value.
Hypothetical Information - Private Accounts
J.P. Morgan Investment Management Inc. is the sub-adviser for the Select
Equity, Large Cap Stock, Small Cap Stock, and Quality Bond investment
portfolios. These portfolios are newly formed and have no performance history.
They have investment objectives, policies and strategies substantially
similar to those employed by the sub-adviser with respect to certain private
accounts (Private Accounts) represented in the Active Equity Composite, the
Structured Stock Selection Composite, the Small Cap Directly Invested
Composite and the Public Bond Composite, respectively. Thus the performance
information derived from these Private Accounts is deemed relevant to the
investor.
Set forth in the prospectus is the hypothetical performance information
derived from the historical composite performance of these Private Accounts
included in the Active Equity Composite, the Structured Stock Selection
Composite, the Small Cap Directly Invested Composite and the Public Bond
Composite. Investors should not consider this performance data as an
indication of the future performance of the comparable investment portfolios.
The actual composite performance figures of the Private Accounts are time-
weighted rates of return which include all income and accrued income and
realized and unrealized gains or losses, but do not reflect the deduction of
investment advisory fees actually charged to the Private Accounts. The
figures do not reflect the deduction of the insurance charges and the
contract maintenance charge. Investors should refer to the prospectus for
the Contracts for information pertaining to those charges.
The table contained in the prospectus shows the average annualized total
returns for the fiscal year ended December 31, 1995, of a 1-year, 5-year and
10 year (where available) or since inception investment in the composite of
comparable Private Accounts adjusted to reflect the deduction of the
investment advisory fees and expenses which are anticipated to be paid by the
respective investment portfolios.
In order to demonstrate how the actual investment experience of these Private
Accounts would affect Accumulation Unit values, the hypothetical composite
performance information was developed. The composite information is based
upon the performance of the composites of comparable Private Accounts with
substantially similar investment objectives, policies and strategies as the
respective portfolios reduced by the investment advisory fees and expenses
which are anticipated to be paid by the respective investment portfolios. The
hypothetical performance of these Accumulation Units is calculated for a
specified period of time by assuming an initial Purchase Payment of $1,000
allocated to the investment portfolios. There are hypothetical performance
figures for the Accumulation Units which reflect the actual performance
results of the composites of comparable Private Accounts, adjusted to reflect
the deduction of the fees and expenses anticipated to be paid by the
investment portfolio and the insurance charges. There are also hypothetical
performance figures for the Accumulation Units which reflect the insurance
charges, the contract maintenance charge, the withdrawal charge and the actual
performance results of the composites of comparable Private Accounts, adjusted
to reflect the deduction of the fees and expenses anticipated to be paid by
the investment portfolio. The percentage increases (decreases) are determined
by subtracting the initial Purchase Payment from the ending value and dividing
the remainder by the beginning value.
The performance of the comparable investment portfolios may be at variance
from the composite performance of the Private Accounts because such accounts
are not mutual funds and are not subject to the various requirements and
limitations applicable to mutual funds under the Investment Company Act of
1940 and the Internal Revenue Code.
There is no performance information for the International Equity Portfolio,
which is also managed by J.P. Morgan Investment Management Inc., in the
Prospectus.
The future performance of the investment portfolios will vary and the
hypothetical results shown are not necessarily representative of future
results.
TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE
FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT
SPECIAL RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS.
MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER
TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner is
not taxed on increases in the value of a Contract until distribution occurs,
either in the form of a lump sum payment or as annuity payments under the
Annuity Option selected. For a lump sum payment received as a total withdrawal
(total surrender), the recipient is taxed on the portion of the payment that
exceeds the cost basis of the Contract. For Non-Qualified Contracts, this cost
basis is generally the purchase payments, while for Qualified Contracts there
may be no cost basis. The taxable portion of the lump sum payment is taxed at
ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments
based on a fixed annuity option is determined by multiplying the payment by
the ratio that the cost basis of the Contract (adjusted for any period or
refund feature) bears to the expected return under the Contract. The exclusion
amount for payments based on a variable annuity option is determined by
dividing the cost basis of the Contract (adjusted for any period certain or
refund guarantee) by the number of years over which the annuity is expected to
be paid. Payments received after the investment in the Contract has been
recovered (i.e. when the total of the excludable amount equals the
investment in the Contract) are fully taxable. The taxable portion is taxed
at ordinary income tax rates. For certain types of Qualified Plans there
may be no cost basis in the Contract within the meaning of Section 72 of
the Code. Owners, Annuitants and Beneficiaries under the Contracts should seek
competent financial advice about the tax consequences of any distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification
of the Contract as an annuity contract would result in the imposition of
federal income tax to the Owner with respect to earnings allocable to the
Contract prior to the receipt of payments under the Contract. The Code
contains a safe harbor provision which provides that annuity contracts such as
the Contract meet the diversification requirements if, as of the end of each
quarter, the underlying assets meet the diversification standards for a
regulated investment company and no more than fifty-five percent (55%) of the
total assets consist of cash, cash items, U.S. Government securities and
securities of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the Contract. The
Regulations amplify the diversification requirements for variable contracts
set forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (1) no more than 55% of the value of the total
assets of the portfolio is represented by any one investment; (2) no more than
70% of the value of the total assets of the portfolio is represented by any
two investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer."
The Company intends that all investment portfolios underlying the Contracts
will be managed in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be
contained in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available,
would cause the Owner to be considered as the owner of the assets of the
Separate Account resulting in the imposition of federal income tax to the
Owner with respect to earnings allocable to the Contract prior to receipt of
payments under the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a
new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the Owners
being retroactively determined to be the owners of the assets of the Separate
Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from
such combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the Owner is a non-natural
person, e.g., a corporation or certain other entities. Such Contracts
generally will not be treated as annuities for federal income tax purposes.
However, this treatment is not applied to a Contract held by a trust or other
entity as an agent for a natural person nor to Contracts held by Qualified
Plans. Purchasers should consult their own tax counsel or other tax adviser
before purchasing a Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Owner are subject to federal income tax withholding. Generally,
amounts are withheld from periodic payments at the same rate as wages and at
the rate of 10% from non-periodic payments. However, the Owner, in most cases,
may elect not to have taxes withheld or to have withholding done at a
different rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a
mandatory 20% withholding for federal income tax. The 20% withholding
requirement generally does not apply to: a) a series of substantially equal
payments made at least annually for the life or life expectancy of the
participant or joint and last survivor expectancy of the participant and a
designated beneficiary or for a specified period of 10 years or more; or
b) distributions which are required minimum distributions; or c) the portion
of the distributions not includible in gross income (i.e. returns of after-tax
contributions). Participants should consult their own tax counsel or other
tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate
purchase payments made, any amount withdrawn will be treated as coming first
from the earnings and then, only after the income portion is exhausted, as
coming from the principal. Withdrawn earnings are includible in gross income.
It further provides that a ten percent (10%) penalty will apply to the income
portion of any premature distribution. However, the penalty is not imposed on
amounts received: (a) after the taxpayer reaches age 59 1/2; (b) after
the death of the Owner; (c) if the taxpayer is totally disabled (for this
purpose disability is as defined in Section 72(m)(7) of the Code); (d) in a
series of substantially equal periodic payments made not less frequently
than annually for the life (or life expectancy) of the taxpayer or for the
joint lives (or joint life expectancies) of the taxpayer and his or her
Beneficiary; (e) under an immediate annuity; or (f) which are allocable to
purchase payments made prior to August 14, 1982.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS
The Contracts offered herein are designed to be suitable for use under
various types of Qualified Plans. Taxation of participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Owners, Annuitants and Beneficiaries are cautioned that
benefits under a Qualified Plan may be subject to the terms and conditions of
the plan regardless of the terms and conditions of the Contracts issued
pursuant to the plan. Some retirement plans are subject to distribution and
other requirements that are not incorporated into the Company's administrative
procedures. Owners, participants and Beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Contracts comply with applicable law. Following are general
descriptions of the types of Qualified Plans with which the Contracts may be
used. Such descriptions are not exhaustive and are for general informational
purposes only. The tax rules regarding Qualified Plans are very complex and
will have differing applications depending on individual facts and
circumstances. Each purchaser should obtain competent tax advice prior to
purchasing a Contract issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and
excise taxes may apply to contributions or distributions made in violation
of applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee v.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection
with Qualified Plans will utilize annuity tables which do not differentiate on
the basis of sex. Such annuity tables will also be available for use in
connection with certain non-qualified deferred compensation plans.
a. H.R. 10 Plans
Section 401 of the Code permits self-employed individuals to establish
Qualified Plans for themselves and their employees, commonly referred to as
"H.R. 10" or "Keogh" plans. Contributions made to the Plan for the benefit of
the employees will not be included in the gross income of the employees until
distributed from the Plan. The tax consequences to participants may vary
depending upon the particular plan design. However, the Code places
limitations and restrictions on all Plans including on such items as: amount
of allowable contributions; form, manner and timing of distributions;
transferability of benefits; vesting and nonforfeitability of interests;
nondiscrimination in eligibility and participation; and the tax treatment of
distributions, withdrawals and surrenders. (See "Tax Treatment of Withdrawals
- - Qualified Contracts" below.) Purchasers of Contracts for use with an H.R. 10
Plan should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
b. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employees until the employees receive distributions from the Contracts. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. (See "Tax Treatment of Withdrawals -
Qualified Contracts" and "Tax-Sheltered Annuities - Withdrawal Limitations"
below.) Employee loans are not allowable under the Contracts. Any employee
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
c. Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to
an IRA which will be deductible from the individual's gross income. These IRAs
are subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Contracts"
below.) Under certain conditions, distributions from other IRAs and other
Qualified Plans may be rolled over or transferred on a tax-deferred basis into
an IRA. Sales of Contracts for use with IRAs are subject to special
requirements imposed by the Code, including the requirement that certain
informational disclosure be given to persons desiring to establish an IRA.
Purchasers of Contracts to be qualified as Individual Retirement Annuities
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
d. Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit corporate employers to establish
various types of retirement plans for employees. These retirement plans may
permit the purchase of the Contracts to provide benefits under the Plan.
Contributions to the Plan for the benefit of employees will not be includible
in the gross income of the employees until distributed from the Plan. The tax
consequences to participants may vary depending upon the particular plan
design. However, the Code places limitations and restrictions on all
Plans including on such items as: amount of allowable contributions; form,
manner and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Purchasers of Contracts for use with Corporate Pension or Profit Sharing Plans
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract, a ratable portion of
the amount received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued benefit under
the retirement plan. Special tax rules may be available for certain
distributions from a Qualified Contract. Section 72(t) of the Code imposes a
10% penalty tax on the taxable portion of any distribution from qualified
retirement plans, including Contracts issued and qualified under Code
Sections 401 (H.R. 10 and Corporate Pension and Profit-Sharing Plans), 403(b)
(Tax-Sheltered Annuities) and 408(b) (Individual Retirement Annuities). To
the extent amounts are not includible in gross income because they have been
rolled over to an IRA or to another eligible Qualified Plan, no tax penalty
will be imposed. The tax penalty will not apply to the following
distributions: (a) if distribution is made on or after the date on which the
Owner or Annuitant (as applicable) reaches age 59 1/2; (b)
distributions following the death or disability of the Owner or Annuitant
(as applicable) (for this purpose disability is as defined in Section 72(m)
(7) of the Code); (c) after separation from service, distributions that
are part of substantially equal periodic payments made not less frequently
than annually for the life (or life expectancy) of the Owner or Annuitant
(as applicable) or the joint lives (or joint life expectancies) of such Owner
or Annuitant (as applicable) and his or her designated Beneficiary; (d)
distributions to an Owner or Annuitant (as applicable) who has separated
from service after he has attained age 55; (e) distributions made to
the Owner or Annuitant (as applicable) to the extent such distributions
do not exceed the amount allowable as a deduction under Code Section 213
to the Owner or Annuitant (as applicable) for amounts paid during the
taxable year for medical care; and (f) distributions made to an alternate payee
pursuant to a qualified domestic relations order. The exceptions stated in (d),
(e) and (f) above do not apply in the case of an Individual Retirement
Annuity. The exception stated in (c) above applies to an Individual Retirement
Annuity without the requirement that there be a separation from service.
Generally, distributions from a qualified plan must commence no later than
April 1 of the calendar year following the year in which the employee attains
age 70 1/2. Required distributions must be over a period not exceeding the
life expectancy of the individual or the joint lives or life expectancies of
the individual and his or her designated beneficiary. If the required
minimum distributions are not made, a 50% penalty tax is imposed as to the
amount not distributed. In addition, distributions in excess of $150,000 per
year may be subject to an additional 15% excise tax unless an exemption applies.
TAX-SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only when the Owner: (1) attains age 59 1/2; (2)
separates from service; (3) dies; (4) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
Value which represents contributions made by the Owner and does not include
any investment results. The limitations on withdrawals became effective on
January 1, 1989 and apply only to salary reduction contributions made after
December 31, 1988, to income attributable to such contributions and to income
attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect transfers between Tax-Sheltered Annuity Plans.
Owners should consult their own tax counsel or other tax adviser regarding any
distributions.
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 investment portfolio(s) of the Separate
Account. At the Annuity Date, the Contract Value in each investment portfolio
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:
<TABLE>
<CAPTION>
<S> <C>
(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.
</TABLE>
The total dollar amount of each Variable Annuity Payment is the sum of all
investment portfolios' Variable Annuity Payments reduced by the applicable
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 investment portfolio was arbitrarily
set initially at $10. This was done when the first investment portfolio shares
were purchased. The investment portfolio Annuity Unit value at the end of any
subsequent Valuation Period is determined by multiplying the investment
portfolio 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 investment portfolio for any Valuation
Period is determined by dividing:
<TABLE>
<CAPTION>
<S> <C>
(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.
</TABLE>
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.
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.
<PAGE>
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