STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACT
issued by
COVA VARIABLE ANNUITY ACCOUNT ONE
AND
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED DECEMBER 2, 1997, 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 DECEMBER 2, 1997.
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
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. 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 $275 billion
of life insurance in force and approximately $19 billion in assets. It provides
life and health insurance, retirement plans, and related financial services to
individuals and groups.
On April 1, 1996, the Company contributed initial capital to the Large Cap Stock
and Quality Bond Sub-Accounts of the Separate Account. As of December 31, 1996,
the capital contributed to the Large Cap Stock Sub-Account represented
approximately 75% of the total assets of such Sub-Account and the capital
contributed to the Quality Bond Sub-Account represented approximately 36% of the
total assets of 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 balance sheets of the Company as of December 31, 1996 and 1995
and the related consolidated statements of income, shareholder's equity and cash
flows for the year ended December 31, 1996 and the periods from June 1, 1995
through December 31, 1995 and January 1, 1995 through May 31, 1995 and for the
year ended December 31, 1994 and the combined statement of assets and
liabilities and contract owners' equity of the Separate Account as of December
31, 1996 and the related combined statement of operations for the year then
ended and the statement of change in contract owners' equity for the years ended
December 31, 1996 and 1995, 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 expenses 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 Charges 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
Where:
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.
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
Contract Maintenance Charge and Withdrawal Charge. The deduction of any Contract
Maintenance Charge and 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.
The Contracts are new and therefore have no performance history. However, the
Separate Account and certain corresponding Portfolios have been in existence for
sometime and consequently have an investment performance history. In order to
show how the historical investment performance of the Separate Account and the
Portfolios affect Accumulation Unit values, performance information was
developed. The information is based upon the historical experience of the
Separate Account and the Portfolios and is for the periods shown. The prospectus
contains a chart of performance information.
Future performance of the Portfolios will vary and the 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 for a Portfolio is calculated for a specified period of time by
assuming an initial Purchase Payment of $1,000 allocated to the Portfolio. There
are performance figures for the Accumulation Units which reflect the insurance
charges as well as the Portfolio expenses. There are also 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 performance may also show figures when no withdrawal is
assumed.
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.
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 Internal Revenue Code of 1986, as amended (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 by the Prospectus 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; (f) distributions
made to an alternate payee pursuant to a qualified domestic relations order;(g)
distributions from an Individual Retirement Annuity for the purchase of medical
insurance (as described in Section 213(d)(1)(D) of the Code) for the Owner or
Annuitant (as applicable) and his or her spouse and dependents if the Owner or
Annuitant (as applicable) has received unemployment compensation for at least 12
weeks (this exception will no longer apply after the Owner or Annuitant (as
applicable) has been re-employed for at least 60 days); (h) distributions from
an Individual Retirement Annuity made to the Owner or Annuitant (as applicable)
to the extent such distributions do not exceed the qualified higher education
expenses (as defined in Section 72(t)(7) of the Code) of the Owner or Annuitant
(as applicable) for the taxable year; and (i) distributions from an Individual
Retirement Annuity made to the Owner or Annuitant (as applicable) which are
qualified first-time home buyer distributions (as defined in Section 72(t)(8) of
the Code). The exceptions stated in (d) 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 begin no later than April
1st of the calendar year following the later of (a) the year in which the
employee attains age 701/2 or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. 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.
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 rollovers and transfers between certain Qualified 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:
(1) the dollar amount of the first Annuity Payment is divided by the value of
an Annuity Unit as of the annuity date. This establishes the number of
Annuity Units for each monthly payment. The number of Annuity Units remains
fixed during the Annuity Payment period.
(2) the fixed number of Annuity Units is multiplied by the Annuity Unit value
for the last valuation period of the month preceding the month for which
the payment is due. This result is the dollar amount of the payment.
The total dollar amount of each Variable Annuity Payment is the sum of all
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:
(a) the Accumulation Unit value as of the close of the current valuation
period, by
(b) the Accumulation Unit value as of the close of the immediately preceding
valuation period.
The Net Investment Factor may be greater or less than one, as the Annuity Unit
value may increase or decrease.
MORTALITY AND EXPENSE GUARANTEE
The Company guarantees that the dollar amount of each Annuity Payment after the
first Annuity Payment will not be affected by variations in mortality or expense
experience.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts.
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Statements
(UNAUDITED)
September 30, 1997
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997 (Unaudited)
(In thousands of dollars)
ASSETS
INVESTMENTS:
<TABLE>
<CAPTION>
<S> <C>
COVA SERIES TRUST:
Quality Income Portfolio - 3,933,677 shares at a net asset value of $10.73 per share (cost $41,496) $ 42,207
High Yield Portfolio - 3,028,141 shares at a net asset value of $11.13 per share (cost $32,096 ) 33,697
Growth and Income Portfolio - 2,686,458 shares at a net asset value of $17.24 per share (cost $34,476) 46,325
Money Market Portfolio - 52,103,875 shares at a net asset value of $1.00 per share (cost $52,104) 52,104
Stock Index Portfolio - 4,172,727 shares at a net asset value of $20.60 per share (cost $58,709 ) 85,942
Bond Debenture Portfolio - 3,185,066 shares at a net asset value of $12.15 per share (cost $36,502) 38,707
Quality Bond Portfolio - 1,067,007 shares at a net asset value of $10.38 per share (cost $10,843) 11,071
Small Cap Stock Portfolio - 3,278,475 shares at a net asset value of $13.36 per share (cost $36,370) 43,794
Large Cap Stock Portfolio - 884,997 shares at a net asset value of $14.34 per share (cost $8,934) 12,694
Select Equity Portfolio - 5,534,428 shares at a net asset value of $14.11 per share (cost $63,844) 78,075
International Equity Portfolio - 4,388,348 shares at a net asset value of $12.11 per share (cost $48,963) 53,130
Balanced Portfolio - 20,767 shares at a net asset value of $10.51 per share (cost $213) 218
Growth & Income Equity Portfolio - 55,385 shares at a net asset value of $10.77 per share (cost $580) 597
Small Cap Equity Portfolio - 15,097 shares at a net asset value of $11.19 per share (cost $161) 169
Equity Income Portfolio - 24,159 shares at a net asset value of $10.90 per share (cost $254) 263
Mid-Cap Value Portfolio - 10,000 shares at a net asset value of $10.44 per share (cost $100 ) 104
Large Cap Research Portfolio - 10,000 shares at a net asset value of $10.04 per share (cost $100) 100
Developing Growth Portfolio - 10,000 shares at a net asset value of $11.19 per share (cost $100) 112
LORD ABBETT SERIES FUND, INC:
Growth and Income Portfolio - 21,136,644 shares at a net asset value of $21.22 per share (cost $322,534) 448,429
GENERAL AMERICAN CAPITAL COMPANY:
Money Market Portfolio - 90,467 shares at a net asset value of $17.97 per share (cost $1,590 ) 1,626
Total Assets $949,364
</TABLE>
See accompanying notes to unaudited financial statements
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF ASSETS AND LIABILITIES (Continued)
September 30, 1997 (Unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND CONTRACT OWNERS EQUITY
Contract Owners' Equity:
Accumulation Phase:
Trust Quality Income - 2,586,950 accumulation units at $16.290615 per unit $ 42,143
Trust High Yield - 1,458,818 accumulation units at $23.069578 per unit 33,654
Trust Growth and Income - 2,187,652 accumulation units at $21.166476 per unit 46,304
Trust Money Market - 4,255,070 accumulation units at $12.244078 per unit 52,100
Trust Stock Index 3,529,378 accumulation units at $24.342237 per unit 85,913
Trust Bond Debenture - 3,058,369 accumulation units at $12.656085 per unit 38,707
Trust Quality Bond - 1,017,806 accumulation units at $10.877551 per unit 11,071
Trust Small Cap Stock - 3,179,176 accumulation units at $13.775226 per unit 43,794
Trust Large Cap Stock - 865,130 accumulation units at $14.621557 per unit 12,649
Trust Select Equity - 5,494,928 accumulation units at $14.200213 per unit 78,029
Trust International Equity - 4,390,462 accumulation units at $12.101316 per unit 53,130
Trust Balanced - 20,827 accumulation units at $10.478753 per unit 218
Trust Growth and Income Equity - 55,548 accumulation units at $10.741146 per unit 597
Trust Small Cap Equity - 15,141 accumulation units at $11.156281 per unit 169
Trust Equity Income - 24,231 accumulation units at $10.870351 per unit 263
Trust Mid Cap - 10,000 accumulation units at $10.436222 per unit 104
Trust Large Cap Research - 100,000 accumulation units at $10.041286 per unit 100
Trust Developing Growth - 10,000 accumulation units at $11.192242 per unit 112
Fund Growth and Income - 14,473,804 accumulation units at $30.940092 per unit 447,820
GACC Money Market - 154,036 accumulation units at $10.553104 per unit 1,626
ANNUITIZATION PHASE:
Trust Quality Income - 4,955 annuity units at 12.934418 per unit 64
Trust High Yield - 2,351 annuity units at 18.316777 per unit 43
Trust Growth and Income - 1,142 annuity units at 18.032832 per unit 21
Trust Money Market - 440 annuity units at 10.178462 per unit 4
Trust Stock Index - 1,429 annuity units at 20.438245 per unit 29
Trust Large Cap Stock - 3,182 annuity units at 13.984438 per unit 45
Trust Select Equity - 3,402 annuity units at 13.581454 per unit 46
Fund Growth and Income - 24,773 annuity units at 24.565806 per unit 609
Total Contract Owners' Equity 949,364
Total Liabilities and Contract Owners' Equity $949,364
</TABLE>
See accompanying notes to unaudited financial statements
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1997 (Unaudited)
(In thousands of dollars)
COVA
SERIES TRUST
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QUALITY HIGH GROWTH & MONEY STOCK BOND QUALITY SMALL CAP LARGE CAP
INCOME YIELD INCOME MARKET INDEX DEBENTURE BOND STOCK EQUITY
--------- ------ --------- ------- -------- ---------- -------- ----------- -----------
STOCK
-----------
INVESTMENT INCOME:
- -------------------------------
INCOME:
- -------------------------------
Dividends and Capital Gains $ 2,647 $1,652 $ 778 $ 1,994 $ 793 $ 385 $ 221 $ 165 $ 139
- ------------------------------- --------- ------ --------- ------- -------- ---------- -------- ----------- -----------
Total Income 2,647 1,652 778 1,994 793 385 221 165 139
- ------------------------------- --------- ------ --------- ------- -------- ---------- -------- ----------- -----------
EXPENSES:
- -------------------------------
Mortality and Expense
- -------------------------------
Risk Fee 497 378 361 456 710 162 67 235 135
- ------------------------------- --------- ------ --------- ------- -------- ---------- -------- ----------- -----------
Administrative Fee 60 45 43 55 85 19 8 28 16
- ------------------------------- --------- ------ --------- ------- -------- ---------- -------- ----------- -----------
Total Expenses 557 423 404 511 795 181 75 263 151
- ------------------------------- --------- ------ --------- ------- -------- ---------- -------- ----------- -----------
Net Investment Income 2,090 1,229 374 1,483 (2) 204 146 (98) (12)
- ------------------------------- --------- ------ --------- ------- -------- ---------- -------- ----------- -----------
NET REALIZED GAIN
- -------------------------------
ON INVESTMENTS 300 726 475 -- 11,332 25 32 14 1,517
- ------------------------------- --------- ------ --------- ------- -------- ---------- -------- ----------- -----------
NET CHANGE IN UNREALIZED
- -------------------------------
GAIN/(LOSS) ON INVESTMENTS (224) 1,111 7,648 -- 6,962 1,934 198 6,890 2,229
- ------------------------------- --------- ------ --------- ------- -------- ---------- -------- ----------- -----------
NET REALIZED AND UNREALIZED
- -------------------------------
GAIN/(LOSS) ON INVESTMENTS 76 1,837 8,123 -- 18,294 1,959 230 6,904 3,746
- ------------------------------- --------- ------ --------- ------- -------- ---------- -------- ----------- -----------
NET INCREASE INCONTRACT
- -------------------------------
OWNERS' EQUITYRESULTING
- -------------------------------
FROM OPERATIONS $ 2,166 $3,066 $ 8,497 $ 1,483 $18,292 $ 2,163 $ 376 $ 6,806 $ 3,734
- ------------------------------- --------- ------ --------- ------- -------- ---------- -------- ----------- -----------
<S> <C> <C>
SELECT INTL
EQUITY EQUITY
-------- -------
INVESTMENT INCOME:
- -------------------------------
INCOME:
- -------------------------------
Dividends and Capital Gains $ 436 $ 346
- ------------------------------- -------- -------
Total Income 436 346
- ------------------------------- -------- -------
EXPENSES:
- -------------------------------
Mortality and Expense
- -------------------------------
Risk Fee 433 293
- ------------------------------- -------- -------
Administrative Fee 51,917 35
- ------------------------------- -------- -------
Total Expenses 485 328
- ------------------------------- -------- -------
Net Investment Income (49) 18
- ------------------------------- -------- -------
NET REALIZED GAIN
- -------------------------------
ON INVESTMENTS 23 11
- ------------------------------- -------- -------
NET CHANGE IN UNREALIZED
- -------------------------------
GAIN/(LOSS) ON INVESTMENTS 13,021 3,371
- ------------------------------- -------- -------
NET REALIZED AND UNREALIZED
- -------------------------------
GAIN/(LOSS) ON INVESTMENTS 13,044 3,382
- ------------------------------- -------- -------
NET INCREASE INCONTRACT
- -------------------------------
OWNERS' EQUITYRESULTING
- -------------------------------
FROM OPERATIONS $12,995 $ 3,400
- ------------------------------- -------- -------
</TABLE>
See accompanying notes to unaudited financial statements
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1997 (Unaudited) (Continued)
(In thousands of dollars)
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC. GACC
__________________________________________________ _____________ ______
<TABLE>
<CAPTION>
Growth & Income Growth &
----------------- ----------
Small Cap Equity Mid-Cap Large Cap Developing
---------- ------- -------- --------- -----------
Balanced Equity Equity Income Value Research Growth INCOME
--------- ----------------- ---------- ------- -------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends and Capital Gains -- -- -- -- -- -- --
Distributions $ 0
Total Income -- -- -- -- -- -- -- 0
EXPENSES:
Mortality and Expense
Risk Fee -- 1 -- -- -- -- -- 3,387
Administrative Fee -- -- -- -- -- -- -- 406
Total Expenses -- 1 -- -- -- -- -- 3,793
Net Investment Income -- (1) -- -- -- -- -- (3,793)
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS -- -- -- -- -- -- -- 572
NET CHANGE IN UNREALIZED
GAIN/(LOSS) ON INVESTMENTS 5 17 8 10 4 -- 12 79,407
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS 5 17 8 10 4 -- 12 79,979
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS $ 5 $ 16 $ 8 $ 10 $ 4 -- $ 12 $ 76,186
Global Money
-------- --------
EQUITY MARKET TOTAL
-------- -------- --------
<S> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends and Capital Gains
Distributions $ 0 $ 0 $ 9,556
Total Income 0 0 9,556
EXPENSES:
Mortality and Expense
Risk Fee 8 14 7,137
Administrative Fee 1 2 855
Total Expenses 9 16 7,992
Net Investment Income (9) (16) 1,564
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS (36) 32 15,023
NET CHANGE IN UNREALIZED
GAIN/(LOSS) ON INVESTMENTS (1) 30 122,632
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS (37) 62 137,655
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS ($46) $ 46 $139,219
</TABLE>
See accompanying notes to unaudited financial statements
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF CHANGES IN CONTRACT OWNERS EQUITY
For the Nine Months Ended September 30, 1997 (Unaudited)
(In thousands of dollars)
COVA
SERIES TRUST
_____________________________________________________________________________
_________________________________
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quality High Growth & Money Stock Bond Quality Small Cap
INCOME YIELD INCOME MARKET INDEX DEBENTURE BOND STOCK
--------- --------- ---------- --------- --------- ----------- --------- -----------
FROM OPERATIONS:
- ----------------------------
Net Investment Income $ 2,090 $ 1,229 $ 374 $ 1,483 ($2) $ 204 $ 146 ($98)
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
Net Realized Gain
- ----------------------------
on Investments 300 726 475 -- 11,332 25 32 14
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
Net Unrealized Gain/(Loss)
- ----------------------------
on Investments (224) 1,111 7,648 -- 6,962 1,934 198 6,890
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
Net Increase in Contract
- ----------------------------
Owners' Equity Resulting
- ----------------------------
from Operations
- ----------------------------
2,166 3,066 8,497 1,483 18,292 2,163 376 6,806
--------- --------- ---------- --------- --------- ----------- --------- -----------
From Account Unit
- ----------------------------
Transactions:
- ----------------------------
Contributions by Cova -- -- -- -- -- -- -- --
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
Redemptions by Cova -- -- -- -- -- -- (2,144) --
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
Proceeds from Units of
- ----------------------------
the Account Sold 398 647 1,955 40,202 2,075 5,814 1,742 6,435
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
Payments for Units of the
- ----------------------------
Account Redeemed (5,916) (1,874) (1,379) (5,412) (8,323) (491) (257) (584)
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
Account Transfers (6,267) (11,013) 4,836 (14,877) (15,211) 23,770 6,078 17,144
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
Net Increase/(Decrease) in
- ----------------------------
Contract Owners' Equity
- ----------------------------
From Account Unit
- ----------------------------
Transactions (11,785) (12,240) 5,412 19,913 (21,459) 29,093 5,419 22,995
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
Net Increase/(Decrease) in
- ----------------------------
Contract Owners' Equity (9,619) (9,174) 13,909 21,396 (3,167) 31,256 5,795 29,801
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
Contract Owners' Equity:
- ----------------------------
Beginning of Period 51,826 42,871 32,416 30,708 89,109 7,451 5,276 13,993
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
End of Period $ 42,207 $ 33,697 $ 46,325 $ 52,104 $ 85,942 $ 38,707 $ 11,071 $ 43,794
- ---------------------------- --------- --------- ---------- --------- --------- ----------- --------- -----------
<S> <C> <C> <C>
Large Cap Select Intl
STOCK EQUITY EQUITY
----------- -------- --------
FROM OPERATIONS:
- ----------------------------
Net Investment Income ($12) ($49) $ 18
- ---------------------------- ----------- -------- --------
Net Realized Gain
- ----------------------------
on Investments 1,517 23 11
- ---------------------------- ----------- -------- --------
Net Unrealized Gain/(Loss)
- ----------------------------
on Investments 2,229 13,021 3,371
- ---------------------------- ----------- -------- --------
Net Increase in Contract
- ----------------------------
Owners' Equity Resulting
- ----------------------------
from Operations
- ----------------------------
3,734 12,995 3,400
----------- -------- --------
From Account Unit
- ----------------------------
Transactions:
- ----------------------------
Contributions by Cova -- -- --
- ---------------------------- ----------- -------- --------
Redemptions by Cova (14,430) -- --
- ---------------------------- ----------- -------- --------
Proceeds from Units of
- ----------------------------
the Account Sold 3,444 14,115 8,828
- ---------------------------- ----------- -------- --------
Payments for Units of the
- ----------------------------
Account Redeemed (293) (847) (734)
- ---------------------------- ----------- -------- --------
Account Transfers 4,488 29,653 27,303
- ---------------------------- ----------- -------- --------
Net Increase/(Decrease) in
- ----------------------------
Contract Owners' Equity
- ----------------------------
From Account Unit
- ----------------------------
Transactions (6,791) 42,921 35,397
- ---------------------------- ----------- -------- --------
Net Increase/(Decrease) in
- ----------------------------
Contract Owners' Equity (3,057) 55,916 38,797
- ---------------------------- ----------- -------- --------
Contract Owners' Equity:
- ----------------------------
Beginning of Period 15,751 22,159 14,333
- ---------------------------- ----------- -------- --------
End of Period $ 12,694 $78,075 $53,130
- ---------------------------- ----------- -------- --------
</TABLE>
See accompanying notes to unaudited financial statements
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF CHANGES IN CONTRACT OWNERS EQUITY
For the Nine Months Ended September 30, 1997 (Unaudited) (Continued)
(In thousands of dollars)
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC. GACC
____________________________________________________________________
________________ ________
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth & Income Small Cap Large Cap Growth &
----------------- ----------- ---------- ----------
Equity Mid-Cap Developing
-------- -------- -----------
Balanced Equity Equity Income Value Research Growth Income
---------- ----------------- ----------- -------- -------- ---------- ----------- ----------
FROM OPERATIONS:
Net Investment Income -- ($1) -- -- -- -- -- (3,793)
Net Realized Gain/(Loss)
on Investments -- -- -- -- -- -- -- 572
Net Unrealized Gain/(Loss)
on Investments 5 17 8 10 4 -- 12 79,407
Net Increase in Contract
Owners' Equity Resulting
from Operations 5 16 8 10 4 -- 12 76,186
From Account Unit
Transactions:
Contributions by Cova 1 1 1 1 100 100 100 --
Redemptions by Cova (1) (1) (1) (1) -- -- -- --
Proceeds from Units of
the Account Sold 78 291 52 91 -- -- -- 32,390
Payments for Units of the
Account Redeemed (1) (1) -- (2) -- -- -- (15,417)
Account Transfers 136 291 109 164 -- -- -- 60,912
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit
Transactions 212 580 160 252 100 100 100 77,885
Net Increase/(Decrease) in
Contract Owners' Equity 218 597 169 263 104 100 112 154,071
Contract Owners' Equity:
Beginning of Period 0 0 0 0 0 0 0 294,358
End of Period $ 218 $ 597 $ 169 $ 263 $ 104 $ 100 $ 112 $ 448,429
<S> <C> <C> <C>
Global Money
-------- --------
Equity Market Total
-------- -------- ---------
FROM OPERATIONS:
Net Investment Income (9) (16) 1,564
Net Realized Gain/(Loss)
on Investments (36) 32 15,023
Net Unrealized Gain/(Loss)
on Investments (1) 30 122,632
Net Increase in Contract
Owners' Equity Resulting
from Operations (46) 46 139,219
From Account Unit
Transactions:
Contributions by Cova -- -- 304
Redemptions by Cova -- -- (16,578)
Proceeds from Units of
the Account Sold 5 1,531 120,093
Payments for Units of the
Account Redeemed (114) (51) (41,696)
Account Transfers (2,228) (258) 125,030
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit
Transactions (2,337) 1,222 187,153
Net Increase/(Decrease) in
Contract Owners' Equity (2,383) 1,268 326,372
Contract Owners' Equity:
Beginning of Period 2,383 358 622,992
End of Period $ 0 $ 1,626 $949,364
</TABLE>
See accompanying notes to unaudited financial statements
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF CHANGES IN CONTRACT OWNERS EQUITY
For the Year Ended December 31, 1996
(In thousands of dollars)
COVA LORD ABBETT SERIES TRUST
SERIES FUND, INC. GACC
<TABLE>
<CAPTION>
QUALITY HIGH GROWTH & MONEY STOCK BOND QUALITY SMALL LARGE
Income Yield Income Market Index Debenture Bond Cap Stock
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 1,465 $ 2,924 $ 1,322 $ 1,284 $ 3,048 $ 200 $ 143 $ 509 $ 310
Net Realized Gain/(Loss)
on Investments 44 (169) 164 -- 3,892 13 44 47 85
Net Unrealized Gain/(Loss)
on Investments (534) 952 2,566 -- 9,295 271 30 533 1,531
Net Increase in Contract
Owners' Equity Resulting
from Operations 975 3,707 4,052 1,284 16,235 484 217 1,089 1,926
From Account Unit
Transactions:
Contributions by Cova -- -- -- -- -- 500 5,000 5,000 15,000
Redemptions by Cova -- -- -- -- -- (508) (3,000) (5,135) (3,846)
Proceeds from Units of
the Account Sold 1,603 1,989 2,777 43,943 3,731 3,795 995 6,112 800
Payments for Units of the
Account Redeemed (4,251) (2,299) (866) (3,044) (4,891) (164) (19) (71) --
Account Transfers 12,246 2,962 6,836 45,603 (11,728) 3,344 2,083 6,998 1,871
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit
Transactions 9,598 2,652 8,747 (4,704) (12,888) 6,967 5,059 12,904 13,825
Net Increase/(Decrease) in
Contract Owners' Equity 10,573 6,359 12,799 (3,420) 3,347 7,451 5,276 13,993 15,751
Contract Owners' Equity:
Beginning of Period 41,253 36,512 19,617 34,128 85,762 -- -- -- --
End of Period $ 51,826 $42,871 $ 32,416 $30,708 $ 89,109 $ 7,451 $ 5,276 $ 13,993 $15,751
SELECT INTL GROWTH & GLOBAL Money
Cap Stock Equity Equity INCOME EQUITY Market TOTAL
--------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 228 $ 25 $ 15,839 $ 262 ($1) $ 27,558
Net Realized Gain/(Loss)
on Investments (17) 72 532 43 -- 4,750
Net Unrealized Gain/(Loss)
on Investments 1,210 796 24,020 (151) 6 40,525
Net Increase in Contract
Owners' Equity Resulting
from Operations 1,421 893 40,391 154 5 72,833
From Account Unit
Transactions:
Contributions by Cova 5,000 5,000 -- -- -- 35,500
Redemptions by Cova (4,922) (5,128) -- -- -- (22,539)
Proceeds from Units of
the Account Sold 10,306 5,710 31,434 231 88 113,514
Payments for Units of the
Account Redeemed (115) (60) (13,615) (328) -- (29,723)
Account Transfers 10,469 7,918 45,518 (174) 265 43,005
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit
Transactions 20,738 13,440 63,337 (271) 353 139,757
Net Increase/(Decrease) in
Contract Owners' Equity 22,159 14,333 103,728 (117) 358 212,590
Contract Owners' Equity:
Beginning of Period -- -- 190,630 2,500 -- 410,402
End of Period $ 22,159 $14,333 $ 294,358 $ 2,383 $ 358 $622,992
</TABLE>
See accompanying notes to unaudited financial statements
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO UNAUDITED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1997
1. ORGANIZATION:
Cova Variable Annuity Account One, (the "Separate Account") is a separate
investment account established by a resolution of the Board of Directors of
Cova Financial Services Life Insurance Company ("Cova"). The Separate Account
operates as a Unit Investment Trust under the Investment Company Act of 1940.
The Separate Account is divided into sub-accounts, with the assets of each
sub-account invested in the Cova Series Trust ("Trust"), the Lord Abbett
Series Fund, Inc. ("Fund") or General American Capital Company (GACC). The
Trust consists of eighteen portfolios of which five portfolios are managed by
Van Kampen American Capital Investment Advisory Corp., five are managed by
J.P. Morgan Investment Management, Inc., four are managed by Mississippi
Valley Advisors, Inc. and four portfolios are managed by Lord, Abbett & Co.
The Trust portfolios available for investment are the Quality Income, High
Yield, Growth and Income, Money Market, Stock Index, Select Equity, Large Cap
Stock, Small Cap Stock, International Equity, Quality Bond, Bond Debenture,
Balanced, Small Cap Equity, Equity Income, Growth & Income Equity, Mid-Cap
Value, Large Cap Research and Developing Growth Portfolios. The Fund has one
portfolio available for investment: the Growth and Income Portfolio. GACC
has the Money Market Portfolio available for investment. Not all portfolios of
the Trust, Fund and GACC are available for investment depending upon the
nature and specific terms of the different contracts currently being offered
for sale. The Trust, Fund and GACC are all diversified, open-end, management
investment companies which are intended to meet differing investment
objectives.
In order to satisfy diversification requirements and provide for optimum
policyholder returns, Cova has made periodic contributions to the Trust and
Fund to provide for the initial purchases of investments. In return, Cova has
been credited with accumulation units of the Separate Account. As additional
funds are received through policyholder deposits, Cova has, at its discretion
and without adversely impacting the investment operations of the Trust and
Fund, removed its capital investment in the Separate Account by liquidating
accumulation units. Cova contributed approximately $35.5 million and $0.3
million in 1996 and 1997, respectively, to the separate account of which,
after subsequent redemptions, net of realized and unrealized gains and losses
on investments, approximately $1.3 million remains as of September 30, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES:
A. INVESTMENT VALUATION
Investments in shares of the Trust, Fund and GACC are carried in the statement
of assets and liabilities at the underlying net asset value of the Trust, Fund
and GACC. The net asset value of the Trust, Fund and GACC has been determined
on the market value basis and is valued daily by the Trust, Fund and GACC
investment managers. Realized gains and losses are calculated by the average
cost method.
B. REINVESTMENT OF DIVIDENDS
With the exception of GACC, 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.
GACC follows the Federal income tax practice known as consent dividending,
whereby substantially all of its net investment income and net realized
capital gains are deemed to be passed through to the Separate Account. As a
result, GACC does not distribute any dividends or capital gains. During
December of each year, accumulated investment income and capital gains of the
underlying GACC fund are allocated to the Separate Account by increasing the
cost basis and recognizing a capital gain in the Separate Account.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO UNAUDITED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1997
C. FEDERAL INCOME TAXES
Operations of the Separate Account form a part of Cova, 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
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 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. GENERAL:
The accompanying unaudited financial statements include all adjustments,
consisting of normal recurring accruals, that management considers necessary
for fair presentation of the Separate Accounts financial position and results
of operations as of and for the interim periods presented. Certain footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission, although the Separate Account believes the disclosures in
these financial statements are adequate to present fairly the information
contained herein. The results of operations for the nine months ended
September 30, 1997, are not necessarily indicative of the results to be
expected for the full year.
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Statements
December 31, 1996
(With Independent Auditors' Report Thereon)
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
(In thousands of dollars)
ASSETS
INVESTMENTS:
<TABLE>
<CAPTION>
<S> <C>
COVA SERIES TRUST:
Quality Income Portfolio - 4,773,562 shares at a net asset value of $10.69 per share (cost $50,095) $ 51,030
High Yield Portfolio - 3,864,501 shares at a net asset value of $10.63 per share (cost $40,574) 41,065
Growth and Income Portfolio - 2,212,069 shares at a net asset value of $13.99 per share (cost $26,737) 30,939
Money Market Portfolio - 30,708,197 shares at a net asset value of $1.00 per share (cost $30,708) 30,708
Stock Index Portfolio - 5,310,381 shares at a net asset value of $16.13 per share (cost $65,367) 85,638
Bond Debenture Portfolio - 659,052 shares at a net asset value of $10.97 per share (cost $6,959) 7,230
Quality Bond Portfolio - 510,720 shares at a net asset value of $10.08 per share (cost $5,119) 5,149
Small Cap Stock Portfolio - 1,229,042 shares at a net asset value of $10.92 per share (cost 12,890) 13,424
Large Cap Stock Portfolio - 1,383,680 shares at a net asset value of $11.11 per share (cost $13,844) 15,375
Select Equity Portfolio - 2,034,176 shares at a net asset value of $10.74 per share (cost $20,641) 21,851
International Equity Portfolio - 1,301,665 shares at a net asset value of $10.96 per share (cost $13,470) 14,265
LORD ABBETT SERIES FUND, INC:
Growth and Income Portfolio - 17,288,936 shares at a net asset value of $17.03 per share (cost $247,869) 294,358
Global Equity Portfolio - 220,660 shares at a net asset value of $10.80 per share (cost $2,382) 2,383
GENERAL AMERICAN CAPITAL COMPANY:
Money Market Portfolio - 20,751 shares at a net asset value of $17.24 per share (cost $352) 358
DIVIDENDS RECEIVABLE:
COVA SERIES TRUST
Quality Income Portfolio 796
High Yield Portfolio 1,806
Growth and Income Portfolio 1,477
Stock Index Portfolio 3,471
Bond Debenture Portfolio 221
Quality Bond Portfolio 127
Small Cap Portfolio 569
Large Cap Portfolio 376
Select Equity Portfolio 308
International Equity Portfolio 68
--------
TOTAL DIVIDENDS RECEIVABLE 9,219
TOTAL ASSETS $622,992
========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
(In thousands of dollars)
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND CONTRACT OWNERS' EQUITY
CONTRACT OWNERS' EQUITY:
Trust Quality Income - 3,334,960 accumulation units at $15.540273 per unit $ 51,826
Trust High Yield - 2,001,184 accumulation units at $21.422784 per unit 42,871
Trust Growth and Income - 1,905,896 accumulation units at $17.008151 per unit 32,416
Trust Money Market - 2,584,926 accumulation units at $11.879722 per unit 30,708
Trust Stock Index - 4,680,855 accumulation units at $19.036956 per unit 89,109
Trust Bond Debenture Portfolio - 659,663 accumulation units at $11.294930 per unit 7,451
Trust Quality Bond Portfolio - 508,830 accumulation units at $10.368764 per unit 5,276
Trust Small Cap Stock Portfolio - 1,237,405 accumulation units at $11.308419 per unit 13,993
Trust Large Cap Stock Portfolio - 1,389,606 accumulation units at $11.334979 per unit 15,751
Trust Select Equity Portfolio - 2,044,523 accumulation units at $10.838053 per unit 22,159
Trust International Equity Portfolio - 1,306,892 accumulation units at $10.967004 per unit 14,333
Fund Growth and Income - 11,732,301 accumulation units at $25.089525 per unit 294,358
Fund Global Equity - 154,609 accumulation units at $15.414356 per unit 2,383
GACC Money Market Portfolio - 34,964 accumulation units at $10.233546 per unit 358
TOTAL CONTRACT OWNERS' EQUITY $622,992
--------
TOTAL LIABILITIES AND CONTRACT OWNERS' EQUITY $622,992
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(In thousands of dollars)
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC. GACC
<TABLE>
<CAPTION>
QUALITY HIGH GROWTH & MONEY STOCK BOND QUALITY SMALL
INCOME YIELD INCOME MARKET INDEX DEBENTURE BOND CAP STOCK STOCK
--------- ------- --------- ------- ------- ---------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends and Capital Gains
Distributions $ 2,167 $3,473 $ 1,684 $ 1,749 $ 4,267 $ 236 $ 195 $ 583
Total Income 2,167 3,473 1,684 1,749 4,267 236 195 583
EXPENSES:
Mortality and Expense
Risk Fee 627 490 323 415 1,088 32 46 66
Administrative Fee 75 59 39 50 131 4 6 8
Total Expenses 702 549 362 465 1,219 36 52 74
Net Investment Income 1,465 2,924 1,322 1,284 3,048 200 143 509
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS 44 (169) 164 -- 3,892 13 44 47
NET CHANGE IN UNREALIZED
GAIN/(LOSS) ON INVESTMENTS (534) 952 2,566 -- 9,295 271 30 533
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS (490) 783 2,730 -- 13,187 284 74 580
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS $ 975 $3,707 $ 4,052 $ 1,284 $16,235 $ 484 $ 217 $ 1,089
LARGE SELECT INTL GROWTH & GLOBAL Money
CAP STOCK STOCK EQUITY EQUITY INCOME EQUITY Market Total
---------------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends and Capital Gains
Distributions $ 445 $ 330 $ 103 $ 19,230 $ 298 -- $34,760
Total Income 445 330 103 19,230 298 -- 34,760
EXPENSES:
Mortality and Expense
Risk Fee 120 91 69 3,028 32 1 6,428
Administrative Fee 15 11 9 363 4 -- 774
Total Expenses 135 102 78 3,391 36 1 7,202
Net Investment Income 310 228 25 15,839 262 (1) 27,558
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS 85 (17) 72 532 43 -- 4,750
NET CHANGE IN UNREALIZED
GAIN/(LOSS) ON INVESTMENTS 1,531 1,210 796 24,020 (151) 6 40,525
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS 1,616 1,193 868 24,552 (108) 6 45,275
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS $ 1,926 $ 1,421 $ 893 $ 40,391 $ 154 $ 5 $72,833
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT ONE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
For the Year Ended December 31, 1996
(In thousands of dollars)
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC. GACC
_________
<TABLE>
<CAPTION>
QUALITY HIGH GROWTH & MONEY STOCK BOND QUALITY SMALL LARGE
INCOME YIELD INCOME MARKET INDEX DEBENTURE BOND CAP STOCK
--------- -------- ---------- --------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 1,465 $ 2,924 $ 1,322 $ 1,284 $ 3,048 $ 200 $ 143 $ 509 $ 310
Net Realized Gain/(Loss)
on Investments 44 (169) 164 -- 3,892 13 44 47 85
Net Unrealized Gain/(Loss)
on Investments (534) 952 2,566 -- 9,295 271 30 533 1,531
Net Increase in Contract
Owners' Equity Resulting
from Operations 975 3,707 4,052 1,284 16,235 484 217 1,089 1,926
From Account Unit
Transactions:
Contributions by Cova -- -- -- -- -- 500 5,000 5,000 15,000
Redemptions by Cova -- -- -- -- -- (508) (3,000) (5,135) (3,846)
Proceeds from Units of
the Account Sold 1,603 1,989 2,777 43,943 3,731 3,795 995 6,112 800
Payments for Units of the
Account Redeemed (4,251) (2,299) (866) (3,044) (4,891) (164) (19) (71) --
Account Transfers 12,246 2,962 6,836 (45,603) (11,728) 3,344 2,083 6,998 1,871
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit 9,598 2,652 8,747 (4,704) (12,888) 6,967 5,059 12,904 13,825
Transactions
Net Increase/(Decrease) in
Contract Owners' Equity 10,573 6,359 12,799 (3,420) 3,347 7,451 5,276 13,993 15,751
Contract Owners' Equity:
Beginning of Period 41,253 36,512 19,617 34,128 85,762 -- -- -- --
End of Period $ 51,826 $42,871 $ 32,416 $ 30,708 $ 89,109 $ 7,451 $ 5,276 $13,993 $ 15,751
SELECT INTL GROWTH & GLOBAL Money
CAP STOCK EQUITY EQUITY INCOME EQUITY MARKET TOTAL
----------- -------- ---------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 228 $ 25 $ 15,839 $ 262 ($1) $ 27,558
Net Realized Gain/(Loss)
on Investments (17) 72 532 43 -- 4,750
Net Unrealized Gain/(Loss)
on Investments 1,210 796 24,020 (151) 6 40,525
Net Increase in Contract
Owners' Equity Resulting
from Operations 1,421 893 40,391 154 5 72,833
From Account Unit
Transactions:
Contributions by Cova 5,000 5,000 -- -- -- 35,500
Redemptions by Cova (4,922) (5,128) -- -- -- (22,539)
Proceeds from Units of
the Account Sold 10,306 5,710 31,434 231 88 113,514
Payments for Units of the
Account Redeemed (115) (60) (13,615) (328) -- (29,723)
Account Transfers 10,469 7,918 45,518 (174) 265 43,005
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit 20,738 13,440 63,337 (271) 353 139,757
Transactions
Net Increase/(Decrease) in
Contract Owners' Equity 22,159 14,333 103,728 (117) 358 212,590
Contract Owners' Equity:
Beginning of Period -- -- 190,630 2,500 -- 410,402
End of Period $ 22,159 $14,333 $ 294,358 $ 2,383 $ 358 $622,992
</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
(In thousands of dollars)
VAN KAMPEN MERRITT
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
<TABLE>
<CAPTION>
QUALITY HIGH GROWTH & MONEY STOCK GROWTH & GLOBAL
INCOME YIELD INCOME MARKET INDEX INCOME EQUITY TOTAL
--------- -------- ---------- --------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
From Operations:
Net Investment Income $ 1,948 $ 2,332 $ 1,371 $ 2,318 $ 2,875 $ 12,502 $ 149 $ 23,495
Net Realized Gain/(Loss)
on Investments 16 (117) 46 _ _ 2,589 383 63 2,980
Net Unrealized Gain
on Investments 3,600 1,786 2,248 110 11,838 22,184 5 41,771
Net Increase in Contract
Owners' Equity
Resulting from
Operations 5,564 4,001 3,665 2,428 17,302 35,069 217 68,246
From Account Unit Transactions:
Redemptions by Cova _ _ _ _ _ _ _ _ _ _ _ _ (132) (132)
Proceeds from Units of
the Account Sold 2,609 3,648 2,179 27,608 2,384 29,458 686 68,572
Payments for Units of the
Account Redeemed (5,174) (2,111) (718) (4,508) (4,200) (18,059) (1,244) (36,014)
Account Transfers 4,321 11,321 3,550 (67,278) 33,469 29,746 (135) 14,994
Net Increase/(Decrease) in
Contract Owners' Equity
From Account Unit
Transactions 1,756 12,858 5,011 (44,178) 31,653 41,145 (825) 47,420
Net Increase/(Decrease) in
Contract Owners' Equity 7,320 16,859 8,676 (41,750) 48,955 76,214 (608) 115,666
Contract Owners' Equity:
Beginning of Period 33,933 19,653 10,941 75,878 36,807 114,416 3,108 294,736
End of Period $ 41,253 $36,512 $ 19,617 $ 34,128 $85,762 $ 190,630 $ 2,500 $410,402
========= ======== ========== ========= ======== ========== ======== =========
</TABLE>
See accompanying notes to financial statements.
<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>
COVA SERIES TRUST - QUALITY INCOME PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
12/31/96 12/31/95 12/31/94
-------------- -------------- --------------
<S> <C> <C> <C>
ACCUMULATION UNIT VALUE,
BEGINNING OF PERIOD $ 15.33 $ 13.17 $ 13.97
NET INVESTMENT INCOME .45 .72 .60
NET REALIZED AND UNREALIZED
GAIN/(LOSS) FROM SECURITY
TRANSACTIONS (.24) 1.44 (1.40)
TOTAL FROM INVESTMENT OPERATIONS OPERATIONS1.38(.80)1.22.73.140 O .21 2.16 (.80)
- -------------------------------------------------------------------
ACCUMULATION UNIT VALUE,
END OF PERIOD $ 15.54 $ 15.33 $ 13.17
============== ============== ==============
TOTAL RETURN* 1.36% 16.41% (5.70)%
CONTRACT OWNERS EQUITY,
END OF PERIOD (IN THOUSANDS) $ 51,826 $ 41,253 $ 33,933
RATIO OF EXPENSES TO AVERAGE
CONTRACT OWNERS' EQUITY 1.40% 1.40% 1.40%
RATIO OF NET INVESTMENT INCOME
TO AVERAGE CONTRACT
OWNERS' EQUITY 2.94% 4.99% 4.48%
NUMBER OF UNITS OUTSTANDING
AT END OF PERIOD 3,334,960 2,690,633 2,576,412
FOR THE YEAR FOR THE YEAR
ENDED ENDED
12/31/93 12/31/92
-------------- --------------
<S> <C> <C>
ACCUMULATION UNIT VALUE,
BEGINNING OF PERIOD $ 12.75 $ 12.02
NET INVESTMENT INCOME 1.00 .64
NET REALIZED AND UNREALIZED
GAIN/(LOSS) FROM SECURITY
TRANSACTIONS .22 .09
TOTAL FROM INVESTMENT OPERATIONS OPERATIONS1.38(.80)1.22.73.140 O 1.22 .73
- -------------------------------------------------------------------
ACCUMULATION UNIT VALUE,
END OF PERIOD $ 13.97 $ 12.75
============== ==============
TOTAL RETURN* 9.50% 6.10%
CONTRACT OWNERS EQUITY,
END OF PERIOD (IN THOUSANDS) $ 51,111 $ 24,124
RATIO OF EXPENSES TO AVERAGE
CONTRACT OWNERS' EQUITY 1.40% 1.40%
RATIO OF NET INVESTMENT INCOME
TO AVERAGE CONTRACT
OWNERS' EQUITY 8.30% 5.45%
NUMBER OF UNITS OUTSTANDING
AT END OF PERIOD 3,659,656 1,891,499
<FN>
* INVESTMENT RETURNS DO NOT REFLECT ANY CONTRACT BASED CHARGES (WITHDRAWAL CHARGES, CONTRACT MAINTENANCE FEES OR
ACCOUNT TRANSFER CHARGES),
BUT DO REFLECT MORTALITY AND EXPENSE CHARGES, ADMINISTRATION EXPENSE CHARGES AS WELL AS ALL EXPENSES OF THE
UNDERLYING PORTFOLIOS
(INVESTMENT ADVISORY FEES AND PORTFOLIO OPERATING EXPENSES).
</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>
COVA SERIES TRUST - HIGH YIELD PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 19.52 $ 16.98 $ 18.02 $ 14.99 $ 12.75
-------------- -------------- -------------- -------------- --------------
Net Investment Income 1.55 1.44 1.38 1.80 2.26
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions .35 1.10 (2.42) 1.23 (.02)
Total from Investment Operations 1.90 2.54 (1.04) 3.03 2.24
Accumulation Unit Value,
End of Period $ 21.42 $ 19.52 $ 16.98 $ 18.02 $ 14.99
============== ============== ============== ============== ==============
Total Return* 9.73% 14.99% (5.79)% 20.21% 17.53%
Contract Owners Equity,
End of Period (in thousands) $ 42,871 $ 36,512 $ 19,653 $ 18,846 $ 5,416
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 7.52% 7.98% 7.92% 13.05% 16.04%
Number of Units Outstanding
at End of Period 2,001,184 1,870,232 1,157,642 1,045,815 361,296
<FN>
* Investment returns do not reflect any contract based charges (withdrawal charges, contract maintenance fees or
account transfer charges),
but do reflect mortality and expense charges, administration expense charges as well as all expenses of the
underlying portfolios
(investment advisory fees and portfolio operating expenses).
</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>
COVA SERIES TRUST - GROWTH & INCOME PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
FOR THE PERIOD FROM
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR 5/1/92 (COMMENCEMENT
ENDED ENDED ENDED ENDED OF OPERATIONS)
12/31/96 12/31/95 12/31/94 12/31/93 THROUGH 12/31/92
--------------
<S> <C> <C> <C> <C> <C>
ACCUMULATION UNIT VALUE,
BEGINNING OF PERIOD $ 14.61 $ 11.20 $ 11.92 $ 10.47 $ 10.00
-------------- -------------- -------------- -------------- ----------------------
NET INVESTMENT INCOME .68 1.02 .19 .54 .19
NET REALIZED AND UNREALIZED
GAIN/(LOSS) FROM SECURITY
TRANSACTIONS 1.72 2.39 (.91) .91 .28
TOTAL FROM INVESTMENT OPERATIONS 2.40 3.41 (.72) 1.45 .47
ACCUMULATION UNIT VALUE,
END OF PERIOD $ 17.01 $ 14.61 $ 11.20 $ 11.92 $ 10.47
============== ============== ============== ============== ======================
TOTAL RETURN** 16.42% 30.49% (6.07)% 13.84% 7.09%*
CONTRACT OWNERS EQUITY,
END OF PERIOD (IN THOUSANDS) $ 32,416 $ 19,617 $ 10,941 $ 6,528 $ 2,627
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 5.16% 9.92% 2.05% 7.54% 3.82%*
NUMBER OF UNITS OUTSTANDING
AT END OF PERIOD 1,905,896 1,342,833 977,209 574,643 250,919
<FN>
* ANNUALIZED
** INVESTMENT RETURNS DO NOT REFLECT ANY CONTRACT BASED CHARGES (WITHDRAWAL CHARGES, CONTRACT MAINTENANCE FEES OR
ACCOUNT TRANSFER CHARGES),
BUT DO REFLECT MORTALITY AND EXPENSE CHARGES, ADMINISTRATION EXPENSE CHARGES AS WELL AS ALL EXPENSES OF THE
UNDERLYING PORTFOLIOS
(INVESTMENT ADVISORY FEES AND PORTFOLIO OPERATING EXPENSES).
</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>
COVA SERIES TRUST - MONEY MARKET PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 11.43 $ 10.90 $ 10.61 $ 10.46 $ 10.21
-------------- -------------- -------------- -------------- --------------
Net Investment Income .45 .50 .30 .19 .25
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions -- .03 (.01) (.04) --
Total from Investment Operations .45 .53 .29 .15 .25
Accumulation Unit Value,
End of Period $ 11.88 $ 11.43 $ 10.90 $ 10.61 $ 10.46
============== ============== ============== ============== ==============
Total Return* 3.98% 4.85% 2.70% 1.45% 2.44%
Contract Owners Equity,
End of Period (in thousands) $ 30,708 $ 34,128 $ 75,878 $ 6,552 $ 4,031
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 3.90% 4.48% 2.90% 1.78% 2.46%
Number of Units Outstanding
at End of Period 2,584,926 2,987,132 6,963,421 617,575 385,448
<FN>
* Investment returns do not reflect any contract based charges (withdrawal charges, contract maintenance fees or
account transfer charges),
but do reflect mortality and expense charges, administration expense charges as well as all expenses of the
underlying portfolios
(investment advisory fees and portfolio operating expenses).
</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>
COVA SERIES TRUST - STOCK INDEX PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 15.77 $ 11.68 $ 11.87 $ 11.05 $ 10.55
-------------- -------------- -------------- -------------- --------------
Net Investment Income .67 .51 .37 .22 .52
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions 2.60 3.58 (.56) .60 (.02)
Total from Investment Operations 3.27 4.09 (.19) .82 .50
Accumulation Unit Value,
End of Period $ 19.04 $ 15.77 $ 11.68 $ 11.87 $ 11.05
============== ============== ============== ============== ==============
Total Return* 20.69% 35.06% (1.58)% 7.35% 4.75%
Contract Owners Equity,
End of Period (in thousands) $ 89,109 $ 85,762 $ 36,807 $ 91,269 $ 34,979
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 3.53% 4.85% 2.10% 2.99% 10.02%
Number of Units Outstanding
at End of Period 4,680,855 5,436,980 3,151,443 7,691,151 3,164,251
<FN>
* Investment returns do not reflect any contract based charges (withdrawal charges, contract maintenance fees or
account transfer charges),
but do reflect mortality and expense charges, administration expense charges as well as all expenses of the
underlying portfolios
(investment advisory fees and portfolio operating expenses).
</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>
COVA SERIES TRUST - BOND DEBENTURE PORTFOLIO (MANAGED BY LORD, ABBETT & CO.)
For the Period From 5/01/96
Through 12/31/96
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.10
----------------------------
Net Investment Income .32
Net Realized and Unrealized
Gain from Security
Transactions .87
Total from Investment Operations 1.19
Accumulation Unit Value,
End of Period $ 11.29
============================
Total Return** 18.17%*
Contract Owners Equity,
End of Period (in thousands) $ 7,451
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 7.76%*
Number of Units Outstanding
at End of Period 659,663
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees or account transfer charges),
but do reflect mortality and expense charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio operating expenses).
</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>
COVA SERIES TRUST - QUALITY BOND PORTFOLIO (MANAGED BY J.P. MORGAN INVESTMENT
MANAGEMENT, INC.)
For the Period From 5/01/96
Through 12/31/96
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 9.90
----------------------------
Net Investment Income .28
Net Realized and Unrealized
Gain from Security
Transactions .19
Total from Investment Operations .47
Accumulation Unit Value,
End of Period $ 10.37
============================
Total Return** 7.18%*
Contract Owners Equity,
End of Period (in thousands) $ 5,276
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 3.75%*
Number of Units Outstanding
at End of Period 508,830
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees or account transfer charges),
but do reflect mortality and expense charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio operating expenses).
</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>
COVA SERIES TRUST - SMALL CAP STOCK PORTFOLIO (MANAGED BY J.P. MORGAN
INVESTMENT MANAGEMENT, INC.)
For the Period From 5/01/96
Through 12/31/96
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.51
----------------------------
Net Investment Income .39
Net Realized and Unrealized
Gain from Security
Transactions .41
Total from Investment Operations .80
Accumulation Unit Value,
End of Period $ 11.31
============================
Total Return** 11.49%*
Contract Owners Equity,
End of Period (in thousands) $ 13,993
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 9.65%*
Number of Units Outstanding
at End of Period 1,237,405
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees or account transfer charges),
but do reflect mortality and expense charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio operating expenses)..
</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>
COVA SERIES TRUST - LARGE CAP STOCK PORFOLIO (MANAGED BY J.P. MORGAN
INVESTMENT MANAGEMENT, INC.)
For the Period From 5/01/96
Through 12/31/96
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.00
----------------------------
Net Investment Income .22
Net Realized and Unrealized
Gain from Security
Transactions 1.11
Total from Investment Operations 1.33
Accumulation Unit Value,
End of Period $ 11.33
============================
Total Return** 20.47%*
Contract Owners Equity,
End of Period (in thousands) $ 15,751
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 3.02%*
Number of Units Outstanding
at End of Period 1,389,606
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees or account transfer charges),
but do reflect mortality and expense charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio operating expenses).
</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>
COVA SERIES TRUST - SELECT EQUITY PORTFOLIO (MANAGED BY J.P. MORGAN INVESTMENT
MANAGEMENT, INC.)
FOR THE PERIOD FROM 5/01/96
THROUGH 12/31/96
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.08
----------------------------
Net Investment Income .10
Net Realized and Unrealized
Gain from Security
Transactions .66
Total from Investment Operations .76
Accumulation Unit Value,
End of Period $ 10.84
Total Return** 11.34%*
Contract Owners Equity,
End of Period (in thousands) $ 22,159
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 3.12%*
Number of Units Outstanding
at End of Period 2,044,523
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees or account transfer charges),
but do reflect mortality and expense charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio operating expenses).
</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>
COVA SERIES TRUST - INTERNATIONAL EQUITY PORTFOLIO (MANAGED BY J.P. MORGAN
INVESTMENT MANAGEMENT, INC.)
For the Period From 5/01/96
Through 12/31/96
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.21
----------------------------
Net Investment Income .02
Net Realized and Unrealized
Gain from Security
Transactions .74
Total from Investment Operations .76
Accumulation Unit Value,
End of Period $ 10.97
============================
Total Return** 11.16%*
Contract Owners Equity,
End of Period (in thousands) $ 14,333
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 0.46%*
Number of Units Outstanding
at End of Period 1,306,892
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees or account transfer charges),
but do reflect mortality and expense charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio operating expenses).
</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
<S> <C> <C> <C> <C> <C>
For the Year For theYear For the Year For the Year For the Year
Ended Ended Ended Ended Ended
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
Accumulation Unit Value,
Beginning of Period $ 21.31 $ 16.64 $ 16.42 $ 14.50 $ 12.73
-------------- ------------- -------------- -------------- --------------
Net Investment Income 1.32 1.37 .76 .88 1.06
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions 2.46 3.30 (.54) 1.04 .71
Total from Investment Operations 3.78 4.67 .22 1.92 1.77
-------------- ------------- -------------- -------------- --------------
Accumulation Unit Value,
- ---------------------------------
End of Period $ 25.09 $ 21.31 $ 16.64 $ 16.42 $ 14.50
- --------------------------------- ============== ============= ============== ============== ==============
Total Return* 17.76% 28.03% 1.32% 13.24% 13.98%
- --------------------------------- -------------- ------------- -------------- -------------- --------------
Contract Owners Equity,
- ---------------------------------
End of Period (in thousands) $ 294,358 $ 190,630 $ 114,416 $ 82,033 $ 37,146
- --------------------------------- -------------- ------------- -------------- -------------- --------------
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 6.59% 8.57% 5.40% 8.12% 10.59%
- --------------------------------- -------------- ------------- -------------- -------------- --------------
Number of Units Outstanding
- ---------------------------------
at End of Period 11,732,301 8,947,108 6,875,139 4,994,582 2,560,999
- --------------------------------- -------------- ------------- -------------- -------------- --------------
<FN>
* Investment returns do not reflect any contract based charges (withdrawal charges, contract maintenance fees
or account transfer charges), but do reflect mortality and expense charges, administration expense charges as well as
all expenses of the underlying portfolio (investment advisory fees and portfolio operating expenses)
</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 For the Year For the Year For the Year For the Year
-------------- -------------- -------------- -------------- --------------
Ended Ended Ended Ended Ended
-------------- -------------- -------------- -------------- --------------
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
- ---------------------------------
Beginning of Period $ 14.52 $ 13.33 $ 13.29 $ 10.64 $ 10.97
- --------------------------------- -------------- -------------- -------------- -------------- --------------
Net Investment Income 1.70 .91 1.45 .24 .18
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions (.81) .28 (1.41) 2.41 (.51)
Total from Investment Operations .89 1.19 .04 2.65 (.33)
-------------- -------------- -------------- -------------- --------------
Accumulation Unit Value,
- ---------------------------------
End of Period $ 15.41 $ 14.52 $ 13.33 $ 13.29 $ 10.64
- --------------------------------- ============== ============== ============== ============== ==============
Total Return* 6.18% 8.91% .27% 24.91% (2.98)%
- --------------------------------- -------------- -------------- -------------- -------------- --------------
Contract Owners Equity,
- ---------------------------------
End of Period (in thousands) $ 2,383 $ 2,500 $ 3,108 $ 3,635 $ 3,249
- --------------------------------- -------------- -------------- -------------- -------------- --------------
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 10.33% 5.36% 9.78% 1.88% 1.38%
- --------------------------------- -------------- -------------- -------------- -------------- --------------
Number of Units Outstanding
- ---------------------------------
at End of Period 154,609 172,206 233,186 273,399 305,314
- --------------------------------- -------------- -------------- -------------- -------------- --------------
<FN>
* Investment returns do not reflect any contract based charges (withdrawal charges, contract maintenance fees
or account transfer charges), but do reflect mortality and expense charges, administration expense charges as well
as all expenses of the underlying portfolios (investment advisory fees and portfolio operating expenses).
</TABLE>
See accompanying notes to financial statements.
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>
GENERAL AMERICAN CAPITAL COMPANY - MONEY MARKET PORTFOLIO
For the Period From 6/03/96
-----------------------------
Through 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
- ---------------------------------
Beginning of Period $ 10.00
- --------------------------------- -----------------------------
Net Investment Income (.08)
Net Realized and Unrealized
Gain from Security
Transactions .31
Total from Investment Operations .23
Accumulation Unit Value,
End of Period $ 10.23
=============================
Total Return** 4.05%*
Contract Owners Equity,
End of Period (in thousands) $ 358
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity (1.40)%*
Number of Units Outstanding
at End of Period 34,964
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees or account transfer charges), but do reflect mortality and expense charges, administration
expense charges as well as all expenses of the underlying portfolios (investment advisory fees and portfolio operating expenses).
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1996
and for the year ended December 31, 1995
1. Organization:
Cova Variable Annuity Account One, (the "Separate Account") is a separate
investment account established by a resolution of the Board of Directors of
Cova Financial Services Life Insurance Company ("Cova"). The Separate Account
operates as a Unit Investment Trust under the Investment Company Act of 1940.
The Separate Account is divided into sub-accounts, with the assets of each
sub-account invested in the Cova Series Trust ("Trust"), the Lord Abbett
Series Fund, Inc. ("Fund") or General American Capital Company (GACC). The
Trust consists of eleven portfolios of which five portfolios are managed by
Van Kampen American Capital Investment Advisory Corp., five are managed by
J.P. Morgan Investment Management, Inc. and one portfolio is managed by Lord,
Abbett & Co. The Trust portfolios available for investment are the Quality
Income, High Yield, Growth and Income, Money Market, Stock Index, Select
Equity, Large Cap Stock, Small Cap Stock, International Equity, Quality Bond,
and Bond Debenture Portfolios. The Fund has two portfolios available for
investment: the Growth and Income, and Global Equity Portfolios. GACC has
the Money Market Portfolio available for investment. Not all portfolios of the
Trust, Fund and GACC are available for investment depending upon the nature
and specific terms of the different contracts currently being offered for
sale. The Trust, Fund and GACC are all diversified, open-end, management
investment companies which are intended to meet differing investment
objectives.
The Trust Quality Income Portfolio invests in U.S. Government issued debt
obligations and in various investment-grade debt instruments, including
mortgage pass-through certificates and collateralized mortgage obligations.
The Trust High Yield Portfolio invests primarily in medium and lower-grade
debt securities and futures and options contracts. The Trust Growth and
Income Portfolio invests primarily in common stocks and futures and options
contracts. The Trust Money Market and GACC Money Market Portfolios invest in
short-term money market instruments. The Trust Stock Index Portfolio invests
in common stocks, stock index futures and options, and short-term securities.
The Trust Select Equity and Large Cap Stock Portfolios invest in stocks of
large and medium-sized companies. The Trust Small Cap Stock Portfolio invests
primarily in the common stock of small U.S. companies. The Trust
International Equity Portfolio invests primarily in stocks of established
companies based in developed countries. The Trust Quality Bond Portfolio
invests primarily in higher grade debt securities. The Trust Bond Debenture
Portfolio invests primarily in convertible and discount debt securities. The
Fund Growth and Income Portfolio invests in common stocks. The Fund Global
Equity Portfolio invests primarily in both domestic and foreign common stocks
and forward currency contracts.
In order to satisfy diversification requirements and provide for optimum
policyholder returns, Cova has made periodic contributions to the Trust and
Fund to provide for the initial purchases of investments. In return, Cova has
been credited with accumulation units of the Separate Account. As additional
funds are received through policyholder deposits, Cova has, at its discretion
and without adversely impacting the investment operations of the Trust and
Fund, removed its capital investment in the Separate Account by liquidating
accumulation units. In 1996, Cova contributed approximately $35.5 million to
the Separate Account of which, after subsequent redemptions, net of realized
and unrealized gains and losses on investments, approximately $15.0 million
remains as of December 31, 1996.
2. SIGNIFICANT ACCOUNTING POLICIES:
A. INVESTMENT VALUATION
Investments in shares of the Trust, Fund and GACC are carried in the statement
of assets and liabilities at the underlying net asset value of the Trust, Fund
and GACC. The net asset value of the Trust, Fund and GACC has been determined
on the market value basis and is valued daily by the Trust, Fund and GACC
investment managers. Realized gains and losses are calculated by the average
cost method.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1996
and for the year ended December 31, 1995
B. REINVESTMENT OF DIVIDENDS
With the exception of GACC, 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.
GACC follows the Federal income tax practice known as consent dividending,
whereby substantially all of its net investment income and net realized
capital gains are deemed to be passed through to the Separate Account. As a
result, GACC does not distribute any dividends or capital gains. During
December of each year, accumulated investment income and capital gains of the
underlying GACC fund are allocated to the Separate Account by increasing the
cost basis and recognizing a capital gain in the Separate Account.
C. FEDERAL INCOME TAXES
Operations of the Separate Account form a part of Cova, 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
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 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.
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. 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.
For the year ended December 31, 1996, withdrawal and account transfer charges
of approximately $280 thousand and contract maintenance charges of
approximately $240 thousand were deducted from the contract values in the
Separate Account.
Mortality and expense risks assumed by Cova 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 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.
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1996
and for the year ended December 31, 1995
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 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 is unable to obtain a
refund. Cova, however, reserves the right to deduct premium taxes when
incurred.
4. GAIN/(LOSS) ON INVESTMENTS:
The table below summarizes realized and unrealized gains and losses on
investments:
<TABLE>
<CAPTION>
REALIZED GAIN/(LOSS) ON INVESTMENTS (IN THOUSANDS OF DOLLARS):
For the Year For the Year
-------------- --------------
Ended Ended
-------------- --------------
12/31/96 12/31/95
-------------- --------------
<S> <C> <C>
Trust Quality Income Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 13,850 $ 21,223
- ------------------------------------------ -------------- --------------
Aggregate Cost 13,806 21,207
- ------------------------------------------ -------------- --------------
Net Realized Gain on Investments $ 44 $ 16
- ------------------------------------------ -------------- ==============
Trust High Yield Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 22,909 $ 1,957
- ------------------------------------------ -------------- --------------
Aggregate Cost 23,078 2,074
- ------------------------------------------ -------------- --------------
Net Realized Loss on Investments $ (169) $ (117)
- ------------------------------------------ ============== ==============
Trust Growth and Income Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 1,508 $ 1,127
- ------------------------------------------ -------------- --------------
Aggregate Cost 1,344 1,082
- ------------------------------------------ -------------- --------------
Net Realized Gain on Investments $ 164 $ 46
- ------------------------------------------ ============== ==============
Trust Money Market Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 36,177 $ 71,027
- ------------------------------------------ -------------- --------------
Aggregate Cost 36,177 71,027
- ------------------------------------------ -------------- --------------
Net Realized Gain/(Loss) on Investments -- --
- ------------------------------------------ ============== ==============
Trust Stock Index Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 21,062 $ 19,097
- ------------------------------------------ -------------- --------------
Aggregate Cost 17,170 16,508
- ------------------------------------------ -------------- --------------
Net Realized Gain on Investments $ 3,892 $ 2,589
- ------------------------------------------ ============== ==============
Trust Bond Debenture Portfolio
- ------------------------------------------
Aggregate Proceeds From Sales $ 635
- ------------------------------------------ --------------
Aggregate Cost 622 N/A
- ------------------------------------------ -------------- --------------
Net Realized Gain on Investments $ 13
- ------------------------------------------ ==============
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1996
and for the year ended December 31, 1995
4. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
REALIZED GAIN/(LOSS) ON INVESTMENTS (IN THOUSANDS OF DOLLARS):
For the Year For the Year
-------------- -------------
Ended Ended
-------------- -------------
12/31/96 12/31/95
-------------- -------------
<S> <C> <C>
Trust Quality Bond Portfolio
- ------------------------------------
Aggregate Proceeds From Sales $ 2,991
- ------------------------------------ --------------
Aggregate Cost 2,947 N/A
- ------------------------------------ --------------
Net Realized Gain on Investments $ 44
==============
Trust Small Cap Stock Portfolio $ 1,882
Aggregate Proceeds From Sales 1,835 N/A
--------------
Aggregate Cost $ 47
==============
Net Realized Gain on Investments
Trust Large Cap Stock Portfolio
Aggregate Proceeds From Sale $ 1,423
Aggregate Cost 1,338 N/A
--------------
Net Realized Gain on Investments $ 85
==============
Trust Select Equity Portfolio
Aggregate Proceeds From Sales $ 1,680
Aggregate Cost 1,697 N/A
--------------
Net Realized Loss on Investments $ (17)
==============
Trust International Equity Portfolio
Aggregate Proceeds From Sales $ 4,568
Aggregate Cost 4,496 N/A
--------------
Net Realized Gain on Investments $ 72
==============
Fund Growth and Income Portfolio:
Aggregate Proceeds From Sales $ 2,696 $ 4,043
Aggregate Cost 2,164 3,660
Net Realized Gain on Investments $ 532 $ 383
============== =============
Fund Global Equity Portfolio:
Aggregate Proceeds From Sales $ 372 $ 946
Aggregate Cost 329 883
Net Realized Gain on Investments $ 43 $ 63
============== =============
</TABLE>
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1996
and for the year ended December 31, 1995
4. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
REALIZED GAIN/(LOSS) ON INVESTMENTS (IN THOUSANDS OF DOLLARS):
For the Year For the Year
-------------- --------------
Ended Ended
-------------- --------------
12/31/96 12/31/95
-------------- --------------
<S> <C> <C>
GACC Money Market Portfolio
- ----------------------------------------------------------------
Aggregate Proceeds From Sales $ 6
- ---------------------------------------------------------------- --------------
Aggregate Cost 6 N/A
- ---------------------------------------------------------------- --------------
Net Realized Gainon Investments --
==============
UNREALIZED GAIN/(LOSS) ON INVESTMENTS (IN THOUSANDS OF DOLLARS):
- ----------------------------------------------------------------
Trust Quality Income Portfolio:
End of Period $ 935 $ 1,469
Beginning of Period 1,469 (2,131)
Net Change in Unrealized Gain/(Loss) on Investments $ (534) $ 3,600
==============
Trust High Yield Portfolio:
End of Period $ 491 $ (461)
Beginning of Period (461) (2,247)
Net Change in Unrealized Gain on Investments $ 952 $ 1,786
==============
Trust Growth and Income Portfolio:
End of Period $ 4,202 $ 1,636
Beginning of Period 1,636 (612)
Net Change in Unrealized Gain on Investments $ 2,566 $ 2,248
============== ==============
Trust Money Market Portfolio:
End of Period -- --
Beginning of Period -- (110)
Net Change in Unrealized Gain on Investments -- $ 110
============== ==============
Trust Stock Index Portfolio:
End of Period $ 20,271 $ 10,976
Beginning of Period 10,976 (862)
Net Change in Unrealized Gain on Investments $ 9,295 $ 11,838
============== ==============
Trust Bond Debenture Portfolio:
End of Period $ 271
Beginning of Period -- N/A
Net Change in Unrealized Gain on Investments $ 271
==============
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1996
and for the year ended December 31, 1995
4. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
UNREALIZED GAIN/(LOSS) ON INVESTMENT (IN THOUSANDS OF DOLLARS):
For the Year For the Year
Ended Ended
12/31/96 12/31/95
<S> <C> <C>
Trust Quality Bond Portfolio:
End of Period $ 30
Beginning of Period -- N/A
Net Change in Unrealized Gain on Investments $ 30
==============
Trust Small Cap Portfolio:
End of Period $ 533
Beginning of Period -- N/A
Net Change in Unrealized Gain on Investments $ 533
==============
Trust Large Cap Portfolio:
End of Period $ 1,531
Beginning of Period -- N/A
Net Change in Unrealized Gain on Investments $ 1,531
==============
Trust Select Equity Portfolio:
End of Period $ 1,210
Beginning of Period -- N/A
Net Change in Unrealized Gain on Investments $ 1,210
==============
Trust International Equity Portfolio:
End of Period $ 796
Beginning of Period -- N/A
Net Change in Unrealized Gain on Investments $ 796
==============
Fund Growth and Income Portfolio:
End of Period $ 46,489 $ 22,469
Beginning of Period 22,469 285
Net Change in Unrealized Gain on Investments $ 24,020 $ 22,184
============== =============
Fund Global Equity Portfolio:
End of Period $ 1 $ 152
Beginning of Period 152 147
Net Change in Unrealized Gain/(Loss) on Investments ($151) $ 5
============== =============
GACC Money Market Portfolio
End of Period $ 6 N/A
Beginning of Period --
Net Change in Unrealized Gain on Investments $ 6
==============
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1996
and for the year ended December 31, 1995
5. ACCOUNT UNIT TRANSACTIONS:
The change in the number of accumulation units resulting from account unit
transactions is as follows:
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC. GACC
_____________________________________________________________________________
_______________ ______________ _______
<TABLE>
__
<CAPTION>
QUALITY HIGH GROWTH & MONEY STOCK BOND QUALITY SMALL
INCOME YIELD INCOME MARKET INDEX DEBENTURE BOND CAP STOCK
---------- ---------- ---------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1994 2,576,412 1,157,642 977,209 6,963,421 3,151,443 N/A N/A N/A
Redemptions by Cova -- -- -- -- -- -- -- --
Units Sold 181,275 195,356 162,687 2,450,650 163,890 -- -- --
Units Redeemed (362,175) (114,778) (55,487) (405,521) (300,704) -- -- --
Units Transferred 295,120 632,013 258,424 (6,021,418) 2,422,351 -- -- --
Balance at
December 31, 1995 2,690,633 1,870,232 1,342,833 2,987,132 5,436,980 N/A N/A N/A
Contributions by Cova Life -- -- -- -- -- 50,000 500,000 500,000
Redemptions by Cova -- -- -- -- -- (50,000) (294,154) (500,000)
Units Sold 106,671 98,690 180,267 3,772,567 216,989 360,638 98,567 580,659
Units Redeemed (280,149) (113,437) (59,321) (259,281) (283,639) (10,552) (2,065) (6,730)
Units Transferred 817,805 145,699 442,117 (3,915,492) (689,475) 309,577 206,482 663,476
Balance at
December 31, 1996 3,334,960 2,001,184 1,905,896 2,584,926 4,680,855 659,663 508,830 1,237,405
LARGE SELECT INTL GROWTH & GLOBAL MONEY
CAP STOCK EQUITY EQUITY INCOME EQUITY MARKET TOTAL
---------- ---------- ---------- ----------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1994 N/A N/A N/A 6,875,139 233,186 N/A 21,934,453
Redemptions by Cova -- -- -- -- (10,000) (10,000)
Units Sold -- -- -- 1,505,688 50,282 4,709,829
Units Redeemed -- -- -- (940,462) (91,135) (2,270,262)
Units Transferred -- -- -- 1,506,743 (10,127) (916,893)
Balance at
December 31, 1995 N/A N/A N/A 8,947,108 172,206 N/A 23,447,125
Contributions by Cova Life 1,500,000 500,000 500,000 -- -- -- 3,550,000
Redemptions by Cova (367,586) (500,000) (500,000) -- -- -- (2,211,740)
Units Sold 76,199 1,024,461 550,620 1,374,562 15,160 8,787 8,464,837
Units Redeemed (522) (11,729) (5,835) (587,874) (21,479) (96) (1,642,709)
Units Transferred 181,515 1,031,791 762,107 1,998,505 (11,278) 26,273 1,969,102
Balance at
December 31, 1996 1,389,606 2,044,523 1,306,892 11,732,301 154,609 34,964 33,576,614
</TABLE>
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(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 sheets of Cova Financial
Services Life Insurance Company and subsidiaries (a wholly owned subsidiary of
Cova Corporation) as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders equity and cash flows for the
year ended December 31, 1996 and the period from June 1, 1995 to December 31,
1995 (Successor periods), and from January 1, 1995 to May 31, 1995, and for
the year ended December 31, 1994 (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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cova
Financial Services Life Insurance Company and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
the Successor periods, in conformity with generally accepted accounting
principles. Also, in our opinion, the aforementioned Predecessor consolidated
financial statements present fairly, in all material respects, the results of
their operations and their cash flows for the Predecessor periods presented,
in conformity with generally accepted accounting principles.
St. Louis, Missouri
March 7, 1997
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
ASSETS 1996
1995
<S> <C> <C>
Investments:
Debt securities available for sale at market
(cost of $952,817 in 1996 and $583,868 in 1995) $ 949,611 $ 594,556
Mortgage loans (net) 244,103 77,472
Policy loans 22,336 19,125
Short-term investments at cost which approximates
market 4,404 7,859
---------- ----------
Total investments 1,220,454 699,012
---------- ----------
Cash and cash equivalents - interest bearing 38,322 59,312
Cash - non-interest bearing 5,501 2,944
Receivable from sale of securities 1,064 --
Accrued investment income 15,011 9,116
Deferred policy acquisition costs 49,833 14,468
Present value of future profits 46,389 38,155
Goodwill 20,849 23,358
Federal and state income taxes recoverable 1,461 397
Deferred tax benefits (net) 13,537 13,556
Receivable from OakRe 1,973,813 2,391,982
Reinsurance receivables 3,504 8,891
Other assets 2,205 2,425
Separate account assets 641,871 410,449
---------- ----------
Total Assets $4,033,814 $3,674,065
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets (Continued)
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS EQUITY 1996 1995
<S> <C> <C>
Policyholder deposits $3,135,325 $3,033,763
Future policy benefits 32,342 28,071
Payable on purchase of securities 15,978 5,327
Accounts payable and other liabilities 19,764 20,143
Future purchase price payable to OakRe 16,051 23,967
Guaranty fund assessments 12,409 14,259
Separate account liabilities 626,901 410,449
----------- -----------
Total Liabilities 3,858,770 3,535,979
----------- -----------
Shareholders equity:
Common stock, $2 par value. (Authorized
5,000,000 shares; issued and outstanding
2,899,446 shares in 1996 and 1995) 5,799 5,799
Additional paid-in capital 166,491 129,586
Retained earnings 3,538 (63)
Net unrealized appreciation/(depreciation)
on securities, net of tax (784) 2,764
----------- -----------
Total Shareholders Equity 175,044 138,086
----------- -----------
Total Liabilities and Shareholders Equity $4,033,814 $3,674,065
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Income
Years ended December 31, 1996, 1995, and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 3,154 $ 921 $ 1,097 $ 2,787
Net investment income 70,629 24,188 92,486 277,616
Net realized gain (loss) on sale of investments 472 1,324 (12,414) (101,361)
Separate Account charges 7,205 2,957 1,818 3,992
Other income 1,320 725 1,037 2,713
------- -------- ---------- -----------
Total revenues 82,780 30,115 84,024 185,747
------- -------- ---------- -----------
Benefits and expenses:
Interest on policyholder deposits 50,100 17,706 97,867 249,905
Current and future policy benefits 5,130 1,785 1,830 5,259
Operating and other expenses 14,573 7,126 12,777 24,479
Amortization of purchased intangible assets 2,332 3,030 -- --
Amortization of deferred acquisition costs 4,389 100 11,157 125,357
------- -------- ---------- -----------
Total Benefits and Expenses 76,524 29,747 123,631 405,000
------- -------- ---------- -----------
Income/(loss) before income taxes 6,256 368 (39,607) (219,253)
------- -------- ---------- -----------
Income Taxes:
Current 1,740 1,011 (16,404) (46,882)
Deferred 915 (580) 6,340 (30,118)
------- -------- ---------- -----------
Total income tax expense/(benefit) 2,655 431 (10,064) (77,000)
------- -------- ---------- -----------
Net Income/(Loss) $ 3,601 $ (63) $ (29,543) $(142,253))
======= ======== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholders Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Common stock ($2 par value common stock;
Authorized 5,000,000 shares; issued and
outstanding 2,899,446 in 1996, 1995 and 1994
Balance at beg. of period) $ 5,799 $ 5,799 $ 5,799 $ 5,632
Par value of additional shares issued -- -- -- 167
--------- --------- ----------
Balance at end of period 5,799 5,799 5,799 5,799
--------- --------- --------- ----------
Additional paid-in capital:
Balance at beginning of period 129,586 137,749 136,534 120,763
Adjustment to reflect purchase acquisition
indicated in note 2 -- (52,163) -- --
Capital contribution 36,905 44,000 1,215 15,771
--------- --------- --------- ----------
Balance at end of period 166,491 129,586 137,749 136,534
--------- --------- --------- ----------
Retained earnings/(deficit):
Balance at beginning of period (63) (36,441) 1,506 143,759
Adjustment to reflect purchase acquisition -- 36,441 -- --
indicated in note 2
Net income/(loss) 3,601 (63) (29,543) (142,253)
Dividends to shareholder -- -- (8,404) --
--------- --------- --------- ----------
Balance at end of period $ 3,538 $ (63) $(36,441) $ 1,506
--------- --------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholders Equity (Continued)
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Net unrealized appreciation/(depreciation)of securities:
Balance at beginning of period 2,764 $(28,837) $ (65,228) $ (321)
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 (13,915) 10,724 178,010 (357,502)
Change in deferred Federal income taxes 1,910 (1,489) (18,458) 53,324
Change in deferred acquisition costs attributable
to unrealized losses/(gains) 1,561 -- (123,161) 205,146
Change in present value of future profits
attributable to unrealized losses/(gains) 6,896 (6,471) -- --
--------- --------- ----------
Balance at end of period (784) 2,764 (28,837) (65,228)
--------- --------- ---------- ----------
Total Shareholders Equity $175,044 $138,086 $ 78,270 $ 78,611
========= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Interest and dividend receipts $ 68,622 $ 18,744 $ 131,439 $ 309,856
Premiums received 3,154 921 1,097 2,787
Insurance and annuity benefit payments (3,729) (2,799) (1,809) (3,755)
Operating disbursements (17,158) (10,480) (9,689) (26,023)
Taxes on income refunded (paid) (3,016) 60 48,987 17,032
Commissions and acquisition costs paid (36,735) (17,456) (23,872) (26,454)
Other 937 529 1,120 836
---------- ---------- ----------- ------------
Net cash provided by/(used in) operating
activities 12,075 (10,481) 147,273 274,279
---------- ---------- ----------- ------------
Cash flows from investing activities:
Cash used for the purchase of investment
securities (715,274) (875,994) (575,891) (1,935,353)
Proceeds from investment securities sold and
matured 262,083 253,814 2,885,053 3,040,474
Other (14,166) 179 (8,557) (8,185)
---------- ---------- ----------- ------------
Net cash provided by/(used in) investing
activities $(467,357) $(622,003) $2,300,605 $ 1,096,936
---------- ---------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 446,784 $ 132,752 $ 130,660 $ 274,960
Transfers from/(to) OakRe 574,010 628,481 (3,048,531) --
Transfer to Separate Accounts (119,592) (37,946) (4,835) (33,548)
Return of policyholder deposits (491,025) (436,271) (290,586) (608,868)
Dividends to Shareholder -- -- (8,404) --
Capital contributions received 20,000 44,000 1,215 15,938
---------- ---------- ------------- -----------
Net cash provided by/(used in) financing
activities 430,177 331,016 (3,220,481) (351,518)
---------- ---------- ------------- -----------
Increase/(decrease) in cash and cash
equivalents (25,105) (301,468) (772,603) 1,019,697
Cash and cash equivalents at beginning of
period 62,256 363,724 1,136,327 116,630
CFLIC contributed cash (Note 9) 6,672 -- -- --
Cash and cash equivalents at end of period $ 43,823 $ 62,256 $ 363,724 $1,136,327
========== ========== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(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
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Reconciliation of net income/(loss)to net cash
provided by operating activities:
Net income/(loss) $ 3,601 $ (63) $(29,543) $(142,253)
Adjustments to reconcile net income/(loss)
to net cash provided by operating activities:
Increase/(decrease) in future policy
benefits (net of reinsurance) 680 (1,013) 11 1,494
Increase/(decrease) in payables and accrued
liabilities 2,900 (392) (10,645) 3,830
Decrease/(increase) in accrued investment
income (4,778) (7,904) 32,010 21,393
Amortization of intangible assets 6,721 3,831 11,309 125,722
Amortization and accretion of securities
premiums and discounts 2,751 307 2,410 3,635
Recapture commissions paid to OakRe (4,483) (4,777) -- --
Net realized losson sale of
investments (472) (1,324) 12,414 101,361
Interest accumulated on policyholder
deposits 50,100 17,706 97,867 249,905
Investment expenses paid 1,151 642 2,373 7,296
Decrease/(Increase)in guaranty assessments -- (104) 5,070 (935)
Increase/(decrease) in current and deferred
Federal income taxes (351) 491 38,923 (59,263)
Separate account net loss (2,008) 1 1 2
Deferral of acquisition costs (34,803) (14,568) (13,354) (30,024)
Other (8,934) (3,314) (1,573) (7,884)
--------- ----------
Net cash provided by operating activities $ 12,075 $(10,481) $147,273 $ 274,279
========= ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Services Life Insurance Company (CFSLIC) and subsidiaries (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 47 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 66%, 59% and 57% of the companies sales have been through two
specific brokerage firms, A.G. Edwards & Sons, Incorporated. and Edward Jones
& Company in 1996, 1995 and 1994, 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 $22.7 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 economic
benefits and risks of 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 was
retained by XFSI subsequent to the sale of the Predecessor and other
affiliates. 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 expired in four 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 thereafter assume the benefits and risks of
those deposits.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
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 periods ending December 31, 1996 and 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.
The Company owns 100% of the outstanding shares of First Cova Life Insurance
Company (a New York domiciled insurance company) (FCLIC) and Cova Financial
Life Insurance Company (a California domiciled insurance company) (CFLIC).
Ownership of Cova Financial Life Insurance Company was obtained on December
31, 1996 as the result of a capital contribution by Cova Corporation. The
Company has presented the consolidated financial position and results of
operations for its subsidiaries from the dates of actual ownership (see note
9).
(2) CHANGE IN ACCOUNTING
Upon closing 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 then sole subsidiary FCLIC 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, however, these allocations were not finalized until 1996. The
table below summarizes the final allocation of purchase price:
<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 47.4
Goodwill 20.5
Deferred tax benefit 24.9
Receivable from OakRe 2,969.0
Other assets 5.9
Separate account assets 332.7
--------------
3,814.8
--------------
Liabilities assumed:
Policyholder deposits 3,299.2
Future policy benefits 27.2
Future purchase price payable 22.7
Deferred Federal income taxes 12.6
Other liabilities 29.0
Separate account liabilities 332.7
--------------
3,723.4
--------------
Adjusted purchase price $ 91.4
==============
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
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 predecessor historical costs. The periods ending on or after
such date are labeled The Company, and are based on the new cost basis of the
Company or fair values at June 1, 1995 and subsequent results of operations.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITIES
Investments in all debt securities and those equity securities with readily
determinable market values are 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, 1996 and 1995 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").
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.
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
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.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
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 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.
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, but did establish
a valuation allowance for potential losses on mortgage loans of $88 thousand
at December 31, 1996.
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 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.
SEPARATE ACCOUNT ASSETS
The separate account investments are 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 market value.
In order to provide for optimum policyholder returns, and to allow for the
replication of the investment performance of existing cloned mutual funds, the
Company has periodically transferred capital to the separate account to
provide for the initial purchase of investments in new portfolios. As
additional funds have been received through policyholder deposits, the Company
has periodically reduced its capital investment in the separate accounts. As
of December 31, 1996, approximately $15.0 million of capital investments
remained within the separate accounts.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
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, 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 acquisition costs are shown below. The
effects on deferred policy acquisition costs of the consolidation of CFLIC
(see note 9) with the Company are presented separately.
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
(In Thousands) 1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Deferred policy acquisition costs,
beginning of period $14,468 $ 92,398 $ 213,362 $ 146,504
Effects of push down purchase
accounting -- (92,398) -- --
Commissions and expenses deferred 34,803 14,568 13,354 30,025
Amortization (4,389) (100) (11,157) (125,357)
Deferred policy acquisition costs
attributable to unrealized gains/(losses) 1,561 -- (123,161) 162,190
Effects on deferred policy acquisition
costs of CFLIC consolidation 3,390 -- -- --
--------
Deferred policy acquistion costs,
end of period $49,833 $ 14,468 $ 92,398 $ 213,362
======== ========= ========== ==========
</TABLE>
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 at a pre-tax
rate of 18% (12% net after tax).
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
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 in proportion to estimated
future gross profits derived from investment income, realized gains and losses
on sales of securities, unrealized securities gains and losses, 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 present value of future profits will be adjusted to
the amount that would have existed had the actual experience and revised
estimates been known and applied from the inception. 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 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 6.8%, 5.8%, 4.6%, 4.5% and 4.7% for the years ended December 31, 1997
through 2001, respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate actual results.
During 1996, the Company adjusted its original purchase accounting to include
a revised estimate of the ultimate renewal (recapture) rate. This adjustment
resulted in a re-allocation of the net purchased intangible asset between
present value of future profits, goodwill and the future payable. This final
allocation and the resulting impact on inception to date amortization was
recorded, in its entirety, in 1996. No restatement of the June 1, 1995
opening Balance Sheet was made.
The components of present value of future profits are below. The effects on
present value of future profits of the consolidation of CFLIC (see note 9)
with the Company are presented separately.
<TABLE>
<CAPTION>
The Company
7 Months
Ended
(In Thousands) 1996
12/31/95
<S> <C> <C>
Present value of future profits - beginning of period 38,155 46,709
Interest added 3,274 1,941
Net amortization (3,747) (4,024)
Present value of future profits attributable to unrealized gains 6,896 (6,471)
Adjustment due to revised push down purchase accounting 698 --
Effects on present value of future profits of CFLIC consolidation 1,113 --
Present value of future profits - end of period $46,389 $38,155
</TABLE>
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%.
(continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The Company has recorded a future payable that represents the present value
ofthe 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 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 by the year 2000.
The components of this future payable are below. The effects on the future
payable of the consolidation of CFLIC (see note 9) with the Company are
presented separately.
<TABLE>
<CAPTION>
The Company
7 Months
Ended
(In Thousands) 1996 12/31/95
<S> <C> <C>
Future payable - beginning of period $23,967 $27,797
Interest added 943 947
Payments to OakRe (4,483) (4,777)
Adjustment due to revised push down purchase accounting (5,059) --
Effects on future payable of CFLIC consolidation 683 --
--------
Future payable - end of period $16,051 $23,967
======== ========
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
Goodwill
Under the push down method of purchase accounting, the excess of purchase
price over the fair value of tangible and intangible assets and liabilities
acquired is established as an asset and referred to as Goodwill. The Company
has elected to amortize goodwill on the straight line basis over a 20 year
period. The components of goodwill are below. The effects on goodwill of the
consolidation of CFLIC (see note 9) with the Company are presented separately.
<TABLE>
<CAPTION>
<S> <C> <C>
(In Thousands) The Company
--------------------
7 Months Ended
1996 12/31/95
----------------
Goodwill - beginning of period $ 23,358 $ 24,060
Amortization (916) (702)
Adjustment due to revised push down purchase accounting
(3,626) --
Effects on goodwill of CFLIC consolidation 2,033 --
--------------------
Goodwill - end of period $ 20,849 $ 23,358
</TABLE>
Deferred Tax Assets and Liabilities
XFSI and GALIC 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 over ten
to fifteen years.
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. The average weighted interest crediting rate on the Companys
policyholder deposits as of December 31, 1996 was 5.77%.
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 5.50% 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.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
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 as the amounts are not
material to the financial statements.
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.
Subsequent to June 1, 1995, the Company filed its own separate income tax
return, independent from its ultimate parent, GALIC.
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 those temporary differences are expected
to be recovered or settled. 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
- Amortization of present value of future profits
- Recoverability of Goodwill
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.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
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.
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, 1996.
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.
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
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."
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
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, 1996, fair value of the Companys mortgage loans
are equivalent to their 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, 1996 and 1995 the cash surrender value of
policyholder funds on deposit were approximately $29.1 million and $2.2
million less than their stated carrying value, respectively. 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.
REINSURANCE:
The impact of reinsurance on the December 31, 1996 financial statements is not
considered material.
The financing reinsurance agreement entered into with OakRe does not meet the
conditions for reinsurance accounting under Generally Accepted Accounting
Principles (GAAP). 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 1994 and 1995 amounts have been reclassified to conform to the 1996
presentation.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(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, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996
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 $ 7,175 $ 29 ($50) $ 7,175 $ 7,196
Collateralized mortgage obligations 382,335 985 (2,721) 382,335 384,071
Corporate, state, municipalities, and
political subdivisions 560,101 3,971 (5,427) 560,101 561,557
Total debt securities 949,611 4,985 (8,198) 949,611 952,824
Mortgage loans 244,103 -- -- 244,103 244,103
Policy loans 22,336 -- -- 22,336 22,336
Short term investments 4,404 21 -- 4,404 4,383
Total investments $1,220,454 $5,006 ($8,198) $1,220,454 $1,223,646
Companys beneficial interest in
separate accounts $ 14,970 -- -- $ 14,970 --
</TABLE>
<TABLE>
<CAPTION>
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
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, 1996, the Company had no impaired investments. The Company did
establish a valuation allowance for potential losses on mortgage loans of $88 thousand as
of December 31, 1996.
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(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, 1996, 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>
1996
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
(in thousands of dollars)
Due after one year through five years $233,232 $234,493
Due after five years through ten years 283,884 281,155
Due after ten years 51,630 51,628
Mortgage-backed securities 384,078 382,335
Total $952,824 $949,611
<FN>
At December 31, 1996, approximately 98.7% of the Company's debt securities are
investment grade or are non-rated but considered to be of investment grade.
Of the 1.3% 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 EITF 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 $3,341,163 were recorded in 1994. No IOs
or IOettes were held by the Company at December 31, 1996 or 1995. The
weighted average of the effective yield that was used to accrue interest
income in 1994 was 11.88%.
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, 1996
had market values totaling $16,612,411. Cash, letters of credit, and
government securities of $17,251,070 was held by the custodian bank as
collateral to secure this agreement. Income on the Companys security lending
program in 1996 was immaterial.
No debt securities were non-income producing during the years ended December
31, 1996 and 1995.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
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>
The components of net investment income, realized capital gains/(losses) and
unrealized gains/(losses) were as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
(in thousands of dollars)
<S> <C> <C> <C> <C>
Income on debt securities $53,632 $19,629 $ 63,581 $ 267,958
Income on equity securities -- -- 302 645
Income on short-term investments 2,156 2,778 28,060 11,705
Income on cash on deposit -- -- -- 316
Income on interest rate swaps -- -- 377 (244)
Income on policy loans 1,454 868 624 1,376
Interest on mortgage loans 13,633 1,444 248 1,162
Income on foreign exchange -- -- 184 (433)
Income of real estate -- -- 1,508 3,278
Income on separate account investments 772 -- (1) 2
Miscellaneous interest 133 109 (24) (853)
-------- --------- -----------------
Total investment income 71,780 24,828 94,859 284,912
---------
Investment expenses (1,151) (640) (2,373) (7,296)
-------- -------- ---------
Net investment income $70,629 $24,188 $ 92,486 $ 277,616
======== ======== ========= =================
Realized capital gains/(losses) were as follows:
Debt securities 469 $ 1,344 $(16,749) $ (79,300)
Mortgage loans 4 -- 1,431 (3,452)
Equity securities -- -- (423) (76)
Real estate -- -- (124) --
Short-term investments (1) (20) (1,933) (282)
Other assets -- -- (76) 147
Interest rate swaps -- -- 5,460 -- (18,398)
--------- -----------------
Net realized gains/(losses) on investments $ 472 $ 1,324 $(12,414) $ (101,361)
======== ======== ========= =================
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
(In thousands
of dollars)
<S> <C> <C> <C> <C>
Unrealized gains/(losses) were as follows:
Debt securities ($3,213) $10,688 $(85,410) $(261,947)
Short-term investments 21 36 879 (594)
Effects on deferred acquisition costs amortization 1,561 -- 39,030 162,190
Effects on present value of future profits 425 (6,471) -- --
Unrealized gains/(losses) before income tax (1,206) 4,253 (45,501) (100,351)
Unrealized income tax benefit/(expense) 422 (1,489) 16,664 35,123
Net unrealized gains (losses) on investments ($784) $ 2,764 $(28,837) ($65,228)
======== ========= ==========
</TABLE>
Proceeds from sales of investments in debt securities during 1996 were
$223,430,495. Gross gains of $1,158,518 and gross losses of $687,126 were
realized on those sales. Included in these amounts were $28,969 of gross
gains realized on the sale of non-investment grade securities.
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.
Unrealized appreciation/(depreciation) of debt securities for the Company in
1996 and 1995, and the Predecessor in 1995 and 1994 were $(13,900,000),
$10,688,000, $176,537,000, and $(357,401,000), 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 $7,032,267 at December 31, 1996
were deposited with government authorities as required by law.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(5) SECURITIES GREATER THAN 10% OF SHAREHOLDERS EQUITY
As of December 31, 1996 the Company held the following individual securities
which exceeded 10% of shareholders equity:
<TABLE>
<CAPTION>
LONG-TERM DEBT CARRYING
SECURITIES VALUE
<S> <C>
Countrywide Mtg. 1993-12 A4 $19,347,536
FNMA Remic Tr 1996-50 A1 19,104,500
</TABLE>
As of December 31, 1995 the Company held the following individual securities
which exceeded 10% of shareholders equity:
<TABLE>
<CAPTION>
LONG-TERM DEBT CARRYING
SECURITIES VALUE
<S> <C>
Countrywide Mtg. 1993-12 A4 $18,726,875
American Airlines 15,080,392
</TABLE>
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
FINANCIAL FUTURES CONTRACTS
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. Gains or losses are realized in daily cash settlements. 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
future 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.
The Company periodically enters into financial futures contracts in order to
hedge its short term investment spread risks encountered during occasional
periods of unusually large recapture activity. Gains and losses from these
anticipatory hedges are applied to the cost basis of the assets acquired with
recaptured funds. In 1996, $381,105 in net losses were recorded as basis
adjustments to hedged debt securities.
In order to limit its exposure to market fluctuations while it holds temporary
seed money investments within the separate account (see note 3), the Company
has adopted a hedging policy that involves holdings of futures contracts. As
of December 31, 1996, the Company held 35 S&P 500 index futures contracts, 5
5-year T-Note futures contracts and 10 10-year T-Note futures contracts with a
total notional face amount of $14,528,750 and a total fair market value of
$14,652,969. Collateral requirements set by the Chicago Board of Trade
averaged $9,800 per contract at December 31, 1996. At December 31, 1996, the
Company recorded as a component of net investment income, $1,639,717 of gross
losses from terminated contracts and $406,141 of gross gains from open
contracts. In 1996, the Company also recorded, as an offsetting component of
net investment income, a net gain of $2,007,720 from market appreciation on
the underlying hedged securities within the separate account.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(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. In 1996 and 1995, the Company
was allocated a portion of benefit costs including severance pay, accumulated
vacations, and disability benefits. At December 31, 1996 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 with its
wholly-owned subsidiary, FCLIC. 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 tax recoveries.
Income taxes are recorded in the statements of earnings and directly in
certain shareholders equity accounts. Income tax expense (benefit) for the
years ended December 31 was allocated as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
(In thousands of dollars)
<S> <C> <C> <C> <C>
Statements of income:
Operating income (excluded realized
investment gains and losses) $ 2,493 $ (85) $ (5,038) $ (39,511)
Realized investment gains/(losses) 162 516 (5,026) (37,489)
-------- -------
Income tax expense/(benefit) included
in the statements of income 2,655 431 (10,064) (77,000)
Shareholders equity:
Unrealized gains/(losses) on securities
available for sale and intangible assets (1,910) 1,489 18,458 (53,324)
Total income tax expense/(benefit) $ 745 $1,920 $ 8,394 $(130,324)
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of COVA Corporation)
Notes to Consolidated Financial Statements
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:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
1996 1995 1995 1994
7 MONTHS 5 MONTHS
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $2,190 35.0% $129 35.0% $(13,862) 35.0% $(76,739) 35.0%
State income taxes, net 77 1.23 11 3.0 (306) 0.8 (1,552) 0.7
Tax-exempt bond interest -- -- (22) (6.0) (332) 0.8 (1,208) 0.6
Amortization of intangible assets 320 5.12 254 69.0 -- -- 111 (0.1)
Permanent difference due to derivative transfer
-- -- -- -- 4,399 (11.1) -- --
Other 68 1.09 59 16.1 37 (.1) 2,388 (1.1)
Total $2,655 42.44% $431 117.1% $(10,064) 25.4% $(77,000) 35.1%
====== ====== ===== ====== ========= ====== ========= =====
</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, 1996 &
1995 follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands of dollars)
<S> <C> <C>
Deferred tax assets:
PVFP $ 1,639 --
Policy Reserves 19,237 $ 7,601
Liability for commissions on recapture 6,073 8,868
Tax basis of intangible assets purchased 6,230 13,141
DAC Proxy Tax 9,032 4,749
Unrealized losses on investments 422 --
Other deferred tax assets 827 2,860
Total assets $43,460 $37,219
------- -------
Deferred tax liabilities:
PVFP $19,169 $16,774
Unrealized gains on investments -- 1,489
Deferred Acquisition Costs 10,694 5,316
Other deferred tax liabilities 60 84
Total liabilities 29,923 23,663
-------
Net Deferred Tax Asset $13,537 $13,556
======= =======
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(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 Conning Asset Management, 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 1996 and the 7 months of 1995 for the Company were
$6,618,303, and $7,139,525, respectively, and the five months of 1995 and the
year 1994 for the Predecessor were 6,364,609, and $8,553,028, respectively.
On December 31, 1996 Cova Corporation transferred its ownership of Cova
Financial Life Insurance Company (CFLIC), an affiliated life insurer domiciled
in the state of California, to the Company. The transfer of ownership was
recorded as additional paid in capital and increased Shareholders Equity on
the Companys December 31, 1996 Balance Sheet by approximately $16.9 million.
This change in direct ownership had no effect on the operations of either the
Company or CFLIC as both entities had existed under common management and
control prior to the December 31, 1996 transfer. Although CFLICs Balance
Sheet is fully consolidated with the Companys December 31, 1996 Balance Sheet,
CFLICs 1996 Income Statement and Cash Flow have not been consolidated with the
Companys 1996 Income Statement or Cash Flow Statement. However, CFLICs
year-end cash balance of $6.7 million is included in the Cash Flow Statement.
(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 recognition of deferred taxes under GAAP reporting, 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 SUBSIDIARIES
(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>
1996 1995
(in thousands of dollars)
<S> <C> <C>
Statutory Capital and Surplus $ 75,354 $ 59,682
Reconciling items:
GAAP investment valuation reserves (88) --
Statutory Asset Valuation Reserves 17,599 13,378
Interest Maintenance Reserve 2,301 1,892
GAAP investment adjustments to fair value (3,191) 10,724
Deferred policy acquisition costs 49,833 14,468
GAAP basis policy reserves (30,202) (11,233)
Deferred federal income taxes (net) 13,537 13,556
Modified coinsurance -- --
Goodwill 20,849 23,358
Present value of future profits 46,389 38,155
Future purchase price payable (16,051) (23,967)
Other (1,286) (1,927)
GAAP Shareholders' Equity $175,044 $138,086
========= =========
</TABLE>
Statutory net losses for CFSLIC for the years ended December 31, 1996, 1995
and 1994 were $(13,575,788), $(74,012,650), and $(92,952,989), 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 during 1997 will be $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, 1996 the Company's Total Adjusted
Capital and Authorized Control Level - RBC were, $92,953,237, and $21,058,220
respectively. This level of adjusted capital qualifies under all tests.
(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 1996, 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.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
At December 31, 1996, 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 $12.4 million in
future assessments on insolvencies that occurred before December 31, 1996.
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 a receivable from Oakre for approximately $12.3
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
