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 May 1, 1998 FOR THE INDIVIDUAL
FIXED AND VARIABLE DEFERRED ANNUITY CONTRACT WHICH IS DESCRIBED HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE
THE COMPANY AT: One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois
60181-4644, (800) 831-5433.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 1998.
TABLE OF CONTENTS
Page
COMPANY 3
EXPERTS 3
LEGAL OPINIONS 3
DISTRIBUTION 3
Reduction or Elimination of the Withdrawal Charge 4
PERFORMANCE INFORMATION 4
Total Return 4
Historical Unit Values 6
Reporting Agencies 6
FEDERAL TAX STATUS 7
General 7
Diversification 8
Multiple Contracts 10
Contracts Owned by Other than Natural Persons 10
Tax Treatment of Assignments 10
Income Tax Withholding 10
Tax Treatment of Withdrawals - Non-Qualified Contracts 11
Qualified Plans 11
Tax Treatment of Withdrawals - Qualified Contracts 14
Tax-Sheltered Annuities - Withdrawal Limitations 15
ANNUITY PROVISIONS 16
Variable Annuity 16
Fixed Annuity 16
Annuity Unit 16
Net Investment Factor 17
Mortality and Expense Guarantee 17
FINANCIAL STATEMENTS 17
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 $300
billion of life insurance in force and approximately $24 billion in assets.
It provides life and health insurance, retirement plans, and related financial
services to individuals and groups.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and 1996,
and the related consolidated statements of income, shareholder's equity, and
cash flows for the years ended December 31, 1997 and 1996, and the periods from
June 1, 1995 to December 31, 1995 and January 1, 1995 to May 31, 1995, and the
statement of assets and liabilities of the Separate Account as of December 31,
1997, and the related statement of operations for the year or period then ended,
the statements of changes in contract owners' equity for each of the years or
periods presented, and the financial highlights for each of the years or periods
presented, 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. The report of KPMG Peat Marwick LLP covering the Company's financial
statements referred to above contains an explanatory paragraph stating that as a
result of its 1995 acquisition, the consolidated financial information for the
periods subsequent to the acquisition is presented on a different cost basis
than for the period prior to the acquisition and, therefore, is not comparable.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the federal securities and income tax laws in
connection with the Contracts.
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 relatively new and therefore have no performance history.
However, the Separate Account and certain 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.
FEDERAL TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE
FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT
SPECIAL RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS.
MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER
TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner is
not taxed on increases in the value of a Contract until distribution occurs,
either in the form of a lump sum payment or as annuity payments under the
Annuity Option selected. For a lump sum payment received as a total withdrawal
(total surrender), the recipient is taxed on the portion of the payment that
exceeds the cost basis of the Contract. For Non-Qualified Contracts, this cost
basis is generally the purchase payments, while for Qualified Contracts there
may be no cost basis. The taxable portion of the lump sum payment is taxed at
ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments
based on a fixed annuity option is determined by multiplying the payment by
the ratio that the cost basis of the Contract (adjusted for any period or
refund feature) bears to the expected return under the Contract. The exclusion
amount for payments based on a variable annuity option is determined by
dividing the cost basis of the Contract (adjusted for any period certain or
refund guarantee) by the number of years over which the annuity is expected to
be paid. Payments received after the investment in the Contract has been
recovered (i.e. when the total of the excludable amount equals the
investment in the Contract) are fully taxable. The taxable portion is taxed
at ordinary income tax rates. For certain types of Qualified Plans there
may be no cost basis in the Contract within the meaning of Section 72 of
the Code. Owners, Annuitants and Beneficiaries under the Contracts should seek
competent financial advice about the tax consequences of any distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification
of the Contract as an annuity contract would result in the imposition of
federal income tax to the Owner with respect to earnings allocable to the
Contract prior to the receipt of payments under the Contract. The Code
contains a safe harbor provision which provides that annuity contracts such as
the Contract meet the diversification requirements if, as of the end of each
quarter, the underlying assets meet the diversification standards for a
regulated investment company and no more than fifty-five percent (55%) of the
total assets consist of cash, cash items, U.S. Government securities and
securities of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the Contract. The
Regulations amplify the diversification requirements for variable contracts
set forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (1) no more than 55% of the value of the total
assets of the portfolio is represented by any one investment; (2) no more than
70% of the value of the total assets of the portfolio is represented by any
two investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer."
The Company intends that all investment portfolios underlying the Contracts
will be managed in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be
contained in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available,
would cause the Owner to be considered as the owner of the assets of the
Separate Account resulting in the imposition of federal income tax to the
Owner with respect to earnings allocable to the Contract prior to receipt of
payments under the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a
new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the Owners
being retroactively determined to be the owners of the assets of the Separate
Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from
such combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the Owner is a non-natural
person, e.g., a corporation or certain other entities. Such Contracts
generally will not be treated as annuities for federal income tax purposes.
However, this treatment is not applied to a Contract held by a trust or other
entity as an agent for a natural person nor to Contracts held by Qualified
Plans. Purchasers should consult their own tax counsel or other tax adviser
before purchasing a Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Owner are subject to federal income tax withholding. Generally,
amounts are withheld from periodic payments at the same rate as wages and at
the rate of 10% from non-periodic payments. However, the Owner, in most cases,
may elect not to have taxes withheld or to have withholding done at a
different rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a
mandatory 20% withholding for federal income tax. The 20% withholding
requirement generally does not apply to: a) a series of substantially equal
payments made at least annually for the life or life expectancy of the
participant or joint and last survivor expectancy of the participant and a
designated beneficiary or for a specified period of 10 years or more; or
b) distributions which are required minimum distributions; or c) the portion
of the distributions not includible in gross income (i.e. returns of after-tax
contributions). Participants should consult their own tax counsel or other
tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate
purchase payments made, any amount withdrawn will be treated as coming first
from the earnings and then, only after the income portion is exhausted, as
coming from the principal. Withdrawn earnings are includible in gross income.
It further provides that a ten percent (10%) penalty will apply to the income
portion of any premature distribution. However, the penalty is not imposed on
amounts received: (a) after the taxpayer reaches age 59 1/2; (b) after
the death of the Owner; (c) if the taxpayer is totally disabled (for this
purpose disability is as defined in Section 72(m)(7) of the Code); (d) in a
series of substantially equal periodic payments made not less frequently
than annually for the life (or life expectancy) of the taxpayer or for the
joint lives (or joint life expectancies) of the taxpayer and his or her
Beneficiary; (e) under an immediate annuity; or (f) which are allocable to
purchase payments made prior to August 14, 1982.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS
The Contracts offered herein are designed to be suitable for use under
various types of Qualified Plans. Taxation of participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Owners, Annuitants and Beneficiaries are cautioned that
benefits under a Qualified Plan may be subject to the terms and conditions of
the plan regardless of the terms and conditions of the Contracts issued
pursuant to the plan. Some retirement plans are subject to distribution and
other requirements that are not incorporated into the Company's administrative
procedures. Owners, participants and Beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Contracts comply with applicable law. Following are general
descriptions of the types of Qualified Plans with which the Contracts may be
used. Such descriptions are not exhaustive and are for general informational
purposes only. The tax rules regarding Qualified Plans are very complex and
will have differing applications depending on individual facts and
circumstances. Each purchaser should obtain competent tax advice prior to
purchasing a Contract issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and
excise taxes may apply to contributions or distributions made in violation
of applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided in ARIZONA GOVERNING COMMITTEE V.
NORRIS that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection
with Qualified Plans will utilize annuity tables which do not differentiate on
the basis of sex. Such annuity tables will also be available for use in
connection with certain non-qualified deferred compensation plans.
a. H.R. 10 Plans
Section 401 of the Code permits self-employed individuals to establish
Qualified Plans for themselves and their employees, commonly referred to as
"H.R. 10" or "Keogh" plans. Contributions made to the Plan for the benefit of
the employees will not be included in the gross income of the employees until
distributed from the Plan. The tax consequences to participants may vary
depending upon the particular plan design. However, the Code places
limitations and restrictions on all Plans including on such items as: amount
of allowable contributions; form, manner and timing of distributions;
transferability of benefits; vesting and nonforfeitability of interests;
nondiscrimination in eligibility and participation; and the tax treatment of
distributions, withdrawals and surrenders. (See "Tax Treatment of Withdrawals
- - Qualified Contracts" below.) Purchasers of Contracts for use with an H.R. 10
Plan should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
b. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employees until the employees receive distributions from the Contracts. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. (See "Tax Treatment of Withdrawals -
Qualified Contracts" and "Tax-Sheltered Annuities - Withdrawal Limitations"
below.) Employee loans are not allowable under the Contracts. Any employee
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
c. Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to
an IRA which will be deductible from the individual's gross income. These IRAs
are subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Contracts"
below.) Under certain conditions, distributions from other IRAs and other
Qualified Plans may be rolled over or transferred on a tax-deferred basis into
an IRA. Sales of Contracts for use with IRAs are subject to special
requirements imposed by the Code, including the requirement that certain
informational disclosure be given to persons desiring to establish an IRA.
Purchasers of Contracts to be qualified as Individual Retirement Annuities
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
Roth IRAs
Beginning in 1998, individuals may purchase a new type of non-deductible IRA,
known as a Roth IRA. Purchase payments for a Roth IRA are limited to a
maximum of $2,000 per year. Lower maximum limitations apply to individuals
with adjusted gross incomes between $95,000 and $110,000 in the case of
single taxpayers, between $150,000 and $160,000 in the case of married
taxpayers filing joint returns, and between $0 and $10,000 in the case of
married taxpayers filing separately. An overall $2,000 annual limitation
continues to apply to all of a taxpayer's IRA contributions, including Roth
IRA and non-Roth IRAs.
Qualified distributions from Roth IRAs are free from federal income tax. A
qualified distribution requires that an individual has held the Roth IRA
for at least five years and, in addition, that the distribution is made
either after the individual reaches age 59 1/2, on the individual's death or
disability, or as a qualified first-time home purchase, subject to a $10,000
lifetime maximum, for the individual, a spouse, child, grandchild, or
ancestor. Any distribution which is not a qualified distribution is taxable
to the extent of earnings in the distribution. Distributions are treated as
made from contributions first and therefore no distributions are taxable
until distributions exceed the amount of contributions to the Roth IRA. The
10% penalty tax and the regular IRA exceptions to the 10% penalty tax apply
to taxable distributions from a Roth IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA. Furthermore,
an individual may make a rollover contribution from a non-Roth IRA to a Roth
IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual
must pay tax on any portion of the IRA being rolled over that represents
income or a previously deductible IRA contribution. However, for rollovers
in 1998, the individual may pay that tax ratably over the four taxable year
period beginning with tax year 1998.
Purchasers of Contracts to be qualified as a Roth IRA 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 and 408A (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 70 1/2 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:
<TABLE>
<CAPTION>
<S> <C>
(1) the dollar amount of the first Annuity Payment is divided by the
value of an Annuity Unit as of the Annuity Date. This
establishes the number of Annuity Units for each monthly
payment. The number of Annuity Units remains fixed during the
Annuity Payment period.
(2) the fixed number of Annuity Units is multiplied by the Annuity
Unit value for the last Valuation Period of the month preceding
the month for which the payment is due. This result is the
dollar amount of the payment.
</TABLE>
The total dollar amount of each Variable Annuity Payment is the sum of all
investment portfolios' Variable Annuity Payments reduced by the applicable
Contract Maintenance Charge.
FIXED ANNUITY
A fixed annuity is a series of payments made during the Annuity Period which
are guaranteed as to dollar amount by the Company and do not vary with the
investment experience of the Separate Account. The General Account Value on
the day immediately preceding the Annuity Date will be used to determine the
Fixed Annuity monthly payment. The first monthly Annuity Payment will be
based upon the Annuity Option elected and the appropriate Annuity Option
Table.
ANNUITY UNIT
The value of an Annuity Unit for each investment portfolio was arbitrarily
set initially at $10. This was done when the first investment portfolio shares
were purchased. The investment portfolio Annuity Unit value at the end of any
subsequent Valuation Period is determined by multiplying the investment
portfolio Annuity Unit value for the immediately preceding Valuation Period by
the product of (a) the Net Investment Factor for the day for which the Annuity
Unit value is being calculated, and (b) 0.999919.
NET INVESTMENT FACTOR
The Net Investment Factor for any investment portfolio for any Valuation
Period is determined by dividing:
<TABLE>
<CAPTION>
<S> <C>
(a) the Accumulation Unit value as of the close of the current
Valuation Period, by
(b) the Accumulation Unit value as of the close of the immediately
preceding Valuation Period.
</TABLE>
The Net Investment Factor may be greater or less than one, as the Annuity Unit
value may increase or decrease.
MORTALITY AND EXPENSE GUARANTEE
The Company guarantees that the dollar amount of each Annuity Payment after
the first Annuity Payment will not be affected by variations in mortality or
expense experience.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts.
COVA VARIABLE ANNUITY
ACCOUNT ONE
Financial Statements
December 31, 1997
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Contract Owners of Cova Variable
Annuity Account One, Board of Directors
and Shareholder of
Cova Financial Services Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of the
Quality Income, Money Market, High Yield, Stock Index, Growth and Income, Bond
Debenture, Developing Growth, Large Cap Research, Mid-Cap Value, Quality Bond,
Small Cap Stock, Large Cap Stock, Select Equity, International Equity, Balanced
Portfolio, Small Cap Equity, Equity Income, and Growth and Income Equity
sub-accounts (investment options within the Cova Series Trust) and the Growth
and Income sub-account (investment option within the Lord Abbett Series Fund,
Inc.) and the Money Market sub-account (investment option within the General
American Capital Company) of Cova Variable Annuity Account One of Cova Financial
Services Life Insurance Company (the Separate Account), as of December 31, 1997,
and the related statement of operations for the year or period then ended, the
statements of changes in contract owners' equity for each of the years or
periods presented, and the financial highlights for each of the years or periods
presented. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with transfer agents. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
sub-accounts of Cova Variable Annuity Account One of Cova Financial Services
Life Insurance Company as of December 31, 1997, the results of its operations
for the year or period then ended, the changes in its contract owners' equity
for each of the years or periods presented, and the financial highlights for
each of the years or periods presented, in conformity with generally accepted
accounting principles.
Chicago, Illinois
February 20, 1998
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1997
(In thousands of dollars)
- ----------------------------------------------------------------------------------------------------------------------------
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments:
Cova Series Trust:
Quality Income Portfolio - 4,505,192 shares at a net asset value of $10.90 per share
<S> <C> <C>
(cost $47,803) $ 49,105
Money Market Portfolio - 21,610,549 shares at a net asset value of $1.00 per share
(cost $21,611) 21,611
High Yield Portfolio - 3,051,753 shares at a net asset value of $10.90 per share
(cost $32,420) 33,262
Stock Index Portfolio - 4,206,886 shares at a net asset value of $21.07 per share
(cost $63,640) 88,640
Growth and Income Portfolio - 2,706,448 shares at a net asset value of $17.05 per share
(cost $35,262) 46,149
Bond Debenture Portfolio - 4,195,836 shares at a net asset value of $12.11 per share
(cost $48,864) 50,822
Developing Growth Portfolio -148,362 shares at a net asset value of $10.55 per share
(cost $1,558) 1,565
Large Cap Research Portfolio -124,489 shares at a net asset value of $9.91 per share
(cost $1,227) 1,233
Mid-Cap Value Portfolio - 194,149 shares at a net asset value of $10.48 per share
(cost $1,995) 2,035
Quality Bond Portfolio - 1,536,461 shares at a net asset value of $10.40 per share
(cost $15,801) 15,987
Small Cap Stock Portfolio - 4,057,416 shares at a net asset value of $13.10 per share
(cost $46,648) 53,171
Large Cap Stock Portfolio - 1,588,261 shares at a net asset value of $13.85 per share
(cost $19,135) 21,990
Select Equity Portfolio - 6,950,455 shares at a net asset value of $13.97 per share
(cost $83,547) 97,067
International Equity Portfolio - 5,437,189 shares at a net asset value of $11.47 per share
(cost $61,064) 62,373
Balanced Portfolio - 38,606 shares at a net asset value of $10.39 per share
(cost $401) 401
Small Cap Equity Portfolio - 26,146 shares at a net asset value of $10.42 per share
(cost $277) 272
Equity Income Portfolio - 50,388 shares at a net asset value of $11.05 per share
(cost $536) 557
Growth and Income Equity Portfolio - 122,207 shares at a net asset value of $10.71 per share
(cost $1,291) 1,309
Lord Abbett Series Fund, Inc. Growth and Income Portfolio - 24,988,059 shares
at a net asset value of $19.51 per share (cost $399,658) 487,519
General American Capital Company Money Market Portfolio - 182,049 shares
at a net asset value of $18.23 per share (cost $3,272) 3,318
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,038,386
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1997
(In thousands of dollars)
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities:
<S> <C>
Trust Quality Income $ 2
Trust Money Market 1
Trust High Yield 1
Trust Stock Index 3
Trust Growth and Income 2
Trust Bond Debenture 2
Trust Quality Bond 1
Trust Small Cap Stock 2
Trust Large Cap Stock 1
Trust Select Equity 4
Trust International Equity 2
Fund Growth and Income 19
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 40
- ----------------------------------------------------------------------------------------------------------------------------
Contract owners' equity:
Accumulation phase:
Trust Quality Income - 2,931,053 accumulation units at $16.716329 per unit 48,997
Trust Money Market - 1,742,444 accumulation units at $12.375226 per unit 21,563
Trust High Yield - 1,409,290 accumulation units at $23.571992 per unit 33,220
Trust Stock Index - 3,547,220 accumulation units at $24.963514 per unit 88,552
Trust Growth and Income - 2,198,250 accumulation units at $20.978325 per unit 46,115
Trust Bond Debenture - 3,945,097 accumulation units at $12.881792 per unit 50,820
Trust Developing Growth - 148,658 accumulation units at $10.527554 per unit 1,565
Trust Large Cap Research - 124,559 accumulation units at $9.899560 per unit 1,233
Trust Mid-Cap Value - 194,386 accumulation units at $10.467957 per unit 2,035
Trust Quality Bond - 1,433,081 accumulation units at $11.155126 per unit 15,986
Trust Small Cap Stock - 3,940,243 accumulation units at $13.491466 per unit 53,159
Trust Large Cap Stock - 1,473,929 accumulation units at $14.889462 per unit 21,946
Trust Select Equity - 6,903,606 accumulation units at $14.053502 per unit 97,020
Trust International Equity - 5,440,592 accumulation units at $11.462435 per unit 62,362
Trust Balanced - 38,079 accumulation units at $10.531920 per unit 401
Trust Small Cap Equity - 26,148 accumulation units at $10.418047 per unit 272
Trust Equity Income - 49,725 accumulation units at $11.194166 per unit 557
Trust Growth and Income Equity - 121,673 accumulation units at $10.756082 per unit 1,309
Fund Growth and Income - 15,788,404 accumulation units at $30.837057 per unit 486,867
GACC Money Market - 311,051 accumulation units at $10.667011 per unit 3,318
Annuitization phase:
Trust Quality Income - 8,069 annuity units at $13.173884 per unit 106
Trust Money Market - 4,562 annuity units at $10.211104 per unit 47
Trust High Yield - 2,229 annuity units at $18.576727 per unit 41
Trust Stock Index - 4,097 annuity units at $20.804263 per unit 85
Trust Growth and Income - 1,803 annuity units at $17.739841 per unit 32
Trust Small Cap Stock - 773 annuity units at $12.807785 per unit 10
Trust Large Cap Stock - 3,028 annuity units at $14.134938 per unit 43
Trust Select Equity - 3,237 annuity units at $13.341341 per unit 43
Trust International Equity - 790 annuity units at $10.881576 per unit 9
Fund Growth and Income - 26,046 annuity units at $24.302215 per unit 633
- ----------------------------------------------------------------------------------------------------------------------------
Total contract owners' equity 1,038,346
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and contract owners' equity $ 1,038,386
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Statement of Operations
Year or period ended December 31, 1997
(In thousands of dollars)
- -----------------------------------------------------------------------------------------------------------------
Cova Series
-------------------------------------------------------------------------------------
Growth
Quality Money High Stock and Bond Developing Large Cap Mid-Cap
Income Market Yield Index Income Debenture Growth Research Value
- -----------------------------------------------------------------------------------------------------------------
Investment income -
dividends and capital
<S> <C> <C> <C> <C> <C> <C> <C> <C>
gains distributions 3,311 2,483 3,144 1,321 1,044 1,611 - 2 2
- -----------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense
risk fee 647 564 483 992 507 301 2 1 2
Administrative fee 78 68 58 119 61 36 - - -
- -----------------------------------------------------------------------------------------------------------------
Total expenses 725 632 541 1,111 568 337 2 1 2
- -----------------------------------------------------------------------------------------------------------------
Net investment income 2,586 1,851 2,603 210 476 1,274 (2) 1 -
- -----------------------------------------------------------------------------------------------------------------
Net realized gain (loss)
on investments 503 - 835 15,709 906 27 - - -
Net change in unrealized
gain (loss) on investments 367 - 351 4,729 6,685 1,687 7 6 40
- -----------------------------------------------------------------------------------------------------------------
Net realized and change in
unrealized gain (loss) on
investments 870 - 1,186 20,438 7,591 1,714 7 6 40
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
contract owners' equity
resulting from operations 3,456 1,851 3,789 20,648 8,067 2,988 5 7 40
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Lord Abbett
- ----------------------------------------------------------------------------------------------------------------
Growth Series Fund, Inc.
Small Large Interna- Small and Growth GACC
Quality Cap Cap Select tional Cap Equity Income and Global Money
Bond Stock Stock Equity Equity Balanced Equity Income Equity Income Equity Market Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
626 262 1,346 747 547 8 2 11 14 38,031 - - 54,512
- ----------------------------------------------------------------------------------------------------------------
109 386 186 704 472 1 1 2 4 4,843 8 21 10,236
13 47 22 84 57 - - - 1 581 1 3 1,229
- ----------------------------------------------------------------------------------------------------------------
122 433 208 788 529 1 1 2 5 5,424 9 24 11,465
- ----------------------------------------------------------------------------------------------------------------
504 (171) 1,138 (41) 18 7 1 9 9 32,607 (9) (24) 43,047
- ----------------------------------------------------------------------------------------------------------------
51 46 1,668 30 15 1 - - 1 842 (36) 55 20,653
156 5,990 1,324 12,310 513 - (5) 21 18 41,372 (1) 40 75,610
- ----------------------------------------------------------------------------------------------------------------
207 6,036 2,992 12,340 528 1 (5) 21 19 42,214 (37) 95 96,263
- ----------------------------------------------------------------------------------------------------------------
711 5,865 4,130 12,299 546 8 (4) 30 28 74,821 (46) 71 139,310
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Statement of Changes in Contract Owners' Equity
Year or period ended December 31, 1997
(In thousands of dollars)
- -----------------------------------------------------------------------------------------------------------------------------------
Cova SeTrust
-----------------------------------------------------------------------------------------------------
Growth Small
Quality Money High Stock and Bond Developing Large Cap Mid-Cap Quality Cap
Income Market Yield Index Income Debenture Growth Research Value Bond Stock
- -----------------------------------------------------------------------------------------------------------------------------------
From operations:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net investment income (loss)2,586 1,851 2,603 210 476 1,274 (2) 1 - 504 (171)
Net realized gain (loss)
on investments 503 - 835 15,709 906 27 - - - 51 46
Net change in unrealized
gain (loss) on investments 367 - 351 4,729 6,685 1,687 7 6 40 156 5,990
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
contract owners' equity
resulting from operations 3,456 1,851 3,789 20,648 8,067 2,988 5 7 40 711 5,865
- -----------------------------------------------------------------------------------------------------------------------------------
From account unit
transactions:
Contributions by Cova - - - - - - 100 100 100 - -
Redemptions by Cova - - - - - - - - - (2,144) -
Proceeds from units
of the account sold 504 45,236 795 2,638 2,541 8,751 503 359 463 2,671 9,550
Payments for units of
the account redeemed (9,775) (8,119) (2,972) (14,588) (1,993) (978) (2) (2) (28) (731) (1,221)
Account transfers, net 3,092 (48,066) (11,222) (9,170) 5,116 32,608 959 769 1,460 10,203 24,982
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
contract owners' equity
from account unit
transactions (6,179) (10,949) (13,399) (21,120) 5,664 40,381 1,560 1,226 1,995 9,999 33,311
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
contract owners' equity (2,723) (9,098) (9,610) (472) 13,731 43,369 1,565 1,233 2,035 10,710 39,176
Contract owners' equity:
Beginning of period 51,826 30,708 42,871 89,109 32,416 7,451 - - - 5,276 13,993
- -----------------------------------------------------------------------------------------------------------------------------------
End of period $ 49,103 21,610 33,261 88,637 46,147 50,820 1,565 1,233 2,035 15,986 53,169
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Lord Abbett
- ----------------------------------------------------------------------------------------------
Growth Series Fund, Inc.
Large Interna- Small and Growth GACC
Cap Select tional Cap Equity Income and Global Money
Stock Equity Equity BalancedEquity Income Equity Income Equity Market Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1,138 (41) 18 7 1 9 9 32,607 (9) (24) 43,047
1,668 30 15 1 - - 1 842 (36) 55 20,653
1,324 12,310 513 - (5) 21 18 41,372 (1) 40 75,610
- ----------------------------------------------------------------------------------------------
4,130 12,299 546 8 (4) 30 28 74,821 (46) 71 139,310
- ----------------------------------------------------------------------------------------------
- - - 1 1 1 1 - - - 304
(15,455) - - (1) (1) (1) (1) - - - (17,603)
7,691 19,507 11,213 184 116 219 679 47,264 5 5,197 166,086
(421) (1,556) (1,224) (26) - (1) (44) (23,254) (114) (312) (67,361)
10,293 44,654 37,503 235 160 309 646 94,311 (2,228) (1,996) 194,618
- ----------------------------------------------------------------------------------------------
2,108 62,605 47,492 393 276 527 1,281 118,321 (2,337) 2,889 276,044
- ----------------------------------------------------------------------------------------------
6,238 74,904 48,038 401 272 557 1,309 193,142 (2,383) 2,960 415,354
15,751 22,159 14,333 - - - - 294,358 2,383 358 622,992
- ----------------------------------------------------------------------------------------------
21,989 97,063 62,371 401 272 557 1,309 487,500 - 3,318 1,038,346
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Statement of Changes in Contract Owners' Equity
Year or period ended December 31, 1996
(In thousands of dollars)
- ------------------------------------------------------------------------------------------------------------------
Cova Series
--------------------------------------------------------------------------
Growth
Quality Money High Stock and Bond
Income Market Yield Index Income Debenture
- ------------------------------------------------------------------------------------------------------------------
From operations:
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $ 1,465 1,284 2,924 3,048 1,322 200
Net realized gain (loss)
on investments 44 - (169) 3,892 164 13
Net change in unrealized
gain (loss) on investments (534) - 952 9,295 2,566 271
- ------------------------------------------------------------------------------------------------------------------
Net increase in contract
owners' equity resulting
from operations 975 1,284 3,707 16,235 4,052 484
- ------------------------------------------------------------------------------------------------------------------
From account unit
transactions:
Contributions by Cova - - - - - 500
Redemptions by Cova - - - - - (508)
Proceeds from units of
the account sold 1,603 43,943 1,989 3,731 2,777 3,795
Payments for units of
the account redeemed (4,251) (3,044) (2,299) (4,891) (866) (164)
Account transfers 12,246 (45,603) 2,962 (11,728) 6,836 3,344
- ------------------------------------------------------------------------------------------------------------------
Net decrease (decrease) in
contract owners' equity
from account unit
transactions 9,598 (4,704) 2,652 (12,888) 8,747 6,967
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
contract owners' equity 10,573 (3,420) 6,359 3,347 12,799 7,451
Contract owners' equity:
Beginning of period 41,253 34,128 36,512 85,762 19,617 -
- ------------------------------------------------------------------------------------------------------------------
End of period $ 51,826 30,708 42,871 89,109 32,416 7,451
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Lord Abbett
Trust Series Fund, Inc.
- --------------------------------------------------------------- ---------------------
Small Large Interna- Growth GACC
Quality Cap Cap Select tional and Global Money
Bond Stock Stock Equity Equity Income Equity Market Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
143 509 310 228 25 15,839 262 (1) 27,558
44 47 85 (17) 72 532 43 - 4,750
30 533 1,531 1,210 796 24,020 (151) 6 40,525
- ------------------------------------------------------------------------------------------------------------------
217 1,089 1,926 1,421 893 40,391 154 5 72,833
- ------------------------------------------------------------------------------------------------------------------
5,000 5,000 15,000 5,000 5,000 - - - 35,500
(3,000) (5,135) (3,846) (4,922) (5,128) - - - (22,539)
995 6,112 800 10,306 5,710 31,434 231 88 113,514
(19) (71) - (115) (60) (13,615) (328) - (29,723)
2,083 6,998 1,871 10,469 7,918 45,518 (174) 265 43,005
- ------------------------------------------------------------------------------------------------------------------
5,059 12,904 13,825 20,738 13,440 63,337 (271) 353 139,757
- ------------------------------------------------------------------------------------------------------------------
5,276 13,993 15,751 22,159 14,333 103,728 (117) 358 212,590
- - - - - 190,630 2,500 - 410,402
- ------------------------------------------------------------------------------------------------------------------
5,276 13,993 15,751 22,159 14,333 294,358 2,383 358 622,992
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Five years ended December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Quality Income Portfolio
(Managed by Van Kampen American Capital Investment Advisory Corp.)
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C> <C> <C> <C>
beginning of period $ 15.54 15.33 13.17 13.97 12.75
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .84 .45 .72 .60 1.00
Net realized and unrealized
gain (loss) from security
transactions .34 (.24) 1.44 (1.40) .22
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.18 .21 2.16 (.80) 1.22
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 16.72 15.54 15.33 13.17 13.97
- --------------------------------------------------------------------------------------------------------------------------
Total return* 7.57% 1.36% 16.41% (5.70%) 9.50%
Contract owners' equity,
end of period (in thousands) $ 49,103 51,826 41,253 33,933 5,111
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 5.00% 2.94% 4.99% 4.48% 8.30%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect mortality
and expense fees, administration expense fees as well as all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Five years ended December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Money Market Portfolio
(Managed by Van Kampen American Capital Investment Advisory Corp.)
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C> <C> <C> <C>
beginning of period $ 11.88 11.43 10.90 10.61 10.46
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .50 .45 .50 .30 .19
Net realized and unrealized
gain (loss) from security
transactions - - .03 (.01) (.04)
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .50 .45 .53 .29 .15
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 12.38 11.88 11.43 10.90 10.61
- --------------------------------------------------------------------------------------------------------------------------
Total return* 4.17% 3.98% 4.85% 2.70% 1.45%
Contract owners' equity,
end of period (in thousands) $ 21,610 30,708 34,128 75,878 6,552
Ratio of expenses to average
contract owners' equity 1.40% 1.40% 1.40% 1.40% 1.40%
Ratio of net investment
income to average
contract owners' equity 4.10% 3.90% 4.48% 2.90% 1.78%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect mortality
and expense fees, administration expense fees as well as all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Five years ended December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - High Yield Portfolio
(Managed by Van Kampen American Capital Investment Advisory Corp.)
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C> <C> <C> <C>
beginning of period $ 21.42 19.52 16.98 18.02 14.99
- --------------------------------------------------------------------------------------------------------------------------
Net investment income 1.58 1.55 1.44 1.38 1.80
Net realized and unrealized
gain (loss) from security
transactions .57 .35 1.10 (2.42) 1.23
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 2.15 1.90 2.54 (1.04) 3.03
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 23.57 21.42 19.52 16.98 18.02
- --------------------------------------------------------------------------------------------------------------------------
Total return* 10.03% 9.73% 14.99% (5.79%) 20.21%
Contract owners' equity,
end of period (in thousands) $ 33,261 42,871 36,512 19,653 18,846
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 6.74% 7.52% 7.98% 7.92% 13.05%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect mortality
and expense fees, administration expense fees as well as all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Five years ended December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Stock Index Portfolio
(Managed by Van Kampen American Capital Investment Advisory Corp.)
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C> <C> <C> <C>
beginning of period $ 19.04 15.77 11.68 11.87 11.05
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .09 .67 .51 .37 .22
Net realized and unrealized
gain (loss) from security
transactions 5.83 2.60 3.58 (.56) .60
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 5.92 3.27 4.09 (.19) .82
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 24.96 19.04 15.77 11.68 11.87
- --------------------------------------------------------------------------------------------------------------------------
Total return* 31.13% 20.69% 35.06% (1.58%) 7.35%
Contract owners' equity,
end of period (in thousands) $ 88,637 89,109 85,762 36,807 91,269
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 .27% 3.53% 4.85% 2.10% 2.99%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect mortality
and expense fees, administration expense fees as well as all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Five years ended December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Growth and Income Portfolio (Managed by Van Kampen American
Capital Investment Advisory Corp.)
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C> <C> <C> <C>
beginning of period $ 17.01 14.61 11.20 11.92 10.47
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .23 .68 1.02 .19 .54
Net realized and unrealized
gain (loss) from security
transactions 3.74 1.72 2.39 (.91) .91
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 3.97 2.40 3.41 (.72) 1.45
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 20.98 17.01 14.61 11.20 11.92
- --------------------------------------------------------------------------------------------------------------------------
Total return* 23.34% 16.42% 30.49% (6.07%) 13.84%
Contract owners' equity,
end of period (in thousands) $ 46,147 32,416 19,617 10,941 6,528
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 1.18% 5.16% 9.92% 2.05% 7.54%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect mortality
and expense fees, administration expense fees as well as all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Year ended December 31, 1997 and the period from commencement of operations
through December 31, 1996
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Bond Debenture Portfolio
(Managed by Lord, Abbett & Co.)
- ---------------------------------------------------------------------------------------------------------------------
Period from
May 1, 1996
through
December 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C>
beginning of period $ 11.29 10.10
- ---------------------------------------------------------------------------------------------------------------------
Net investment income .40 .32
Net realized and unrealized
gain from security
transactions 1.19 .87
- ---------------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.59 1.19
- ---------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 12.88 11.29
- ---------------------------------------------------------------------------------------------------------------------
Total return* 14.05% 11.86%
Contract owners' equity,
end of period (in thousands) $ 50,820 7,451
Ratio of expenses to average
contract owners' equity 1.40% 1.40%**
Ratio of net investment
income to average
contract owners' equity 5.26% 7.76%**
- ---------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Period from commencement of operations through December 31, 1997
See accompanying notes to consolidated financial statements.
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Developing Growth Portfolio
(Managed by Lord, Abbett & Co.)
- ---------------------------------------------------------------------------------------------------------------------------
Period from
August 20, 1997
through
December 31,
1997
- ---------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C>
beginning of period $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------
Net investment loss (.02)
Net realized and unrealized
gain from security
transactions .55
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .53
- ---------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 10.53
- ---------------------------------------------------------------------------------------------------------------------------
Total return* 5.28%
Contract owners' equity,
end of period (in thousands) $ 1,565
Ratio of expenses to average
contract owners' equity 1.40%**
Ratio of net investment
income to average
contract owners' equity (0.98)%**
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment return does not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but does reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Period from commencement of operations through December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Large Cap Research Portfolio
(Managed by Lord, Abbett & Co.)
- ---------------------------------------------------------------------------------------------------------------------------
Period from
August 20, 1997
through
December 31,
1997
- ---------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C>
beginning of period $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------
Net investment loss (.01)
Net realized and unrealized
loss from security
transactions (.09)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment
operations (.10)
- ---------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 9.90
- ---------------------------------------------------------------------------------------------------------------------------
Total return* (1.00%)
Contract owners' equity,
end of period (in thousands) $ 1,233
Ratio of expenses to average
contract owners' equity 1.40%**
Ratio of net investment
income to average
contract owners' equity 0.55%**
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment return does not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but does reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Period from commencement of operations through December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Mid-Cap Value Portfolio
(Managed by Lord, Abbett & Co.)
- ---------------------------------------------------------------------------------------------------------------------------
Period from
August 20, 1997
through
December 31,
1997
- ---------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C>
beginning of period $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------
Net investment loss (.01)
Net realized and unrealized
gain from security
transactions .48
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .47
- ---------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 10.47
- ---------------------------------------------------------------------------------------------------------------------------
Total return* 4.68%
Contract owners' equity,
end of period (in thousands) $ 2,035
Ratio of expenses to average
contract owners' equity 1.40%**
Ratio of net investment
income to average
contract owners' equity (.16%)**
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment return does not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but does reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Year ended December 31, 1997 and the period from commencement of operations
through December 31, 1996
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Quality Bond Portfolio
(Managed by J.P. Morgan Investment Management, Inc.)
- --------------------------------------------------------------------------------------------------------------------------
Period from
May 1, 1996
through
December 31,
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C>
beginning of period $ 10.37 9.90
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .44 .28
Net realized and unrealized
gain from security
transactions .35 .19
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .79 .47
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 11.16 10.37
- --------------------------------------------------------------------------------------------------------------------------
Total return* 7.58% 4.76%
Contract owners' equity,
end of period (in thousands) $ 15,986 5,276
Ratio of expenses to average
contract owners' equity 1.40% 1.40%**
Ratio of net investment
income to average
contract owners' equity 5.76% 3.75%**
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Year ended December 31, 1997 and the period from commencement of operations
through December 31, 1996
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Small Cap Stock Portfolio
(Managed by J. P. Morgan Investment Management, Inc.)
- --------------------------------------------------------------------------------------------------------------------------
Period from
May 1, 1996
through
December 31,
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C>
beginning of period $ 11.31 10.51
- --------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.08) .39
Net realized and unrealized
gain from security
transactions 2.26 .41
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 2.18 .80
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 13.49 11.31
- --------------------------------------------------------------------------------------------------------------------------
Total return* 19.31% 7.57%
Contract owners' equity,
end of period (in thousands) $ 53,169 13,993
Ratio of expenses to average
contract owners' equity 1.40% 1.40%**
Ratio of net investment
income to average
contract owners' equity (.55%) 9.65%**
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Year ended December 31, 1997 and the period from commencement of operations
through December 31, 1996
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Large Cap Stock Portfolio
(Managed by J. P. Morgan Investment Management, Inc.)
- --------------------------------------------------------------------------------------------------------------------------
Period from
May 1, 1996
through
December 31,
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C>
beginning of period $ 11.33 10.00
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .77 .22
Net realized and unrealized
gain from security
transactions 2.79 1.11
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 3.56 1.33
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 14.89 11.33
- --------------------------------------------------------------------------------------------------------------------------
Total return* 31.36% 13.32%
Contract owners' equity,
end of period (in thousands) $ 21,989 15,751
Ratio of expenses to average
contract owners' equity 1.40% 1.40%**
Ratio of net investment
income to average
contract owners' equity 7.64% 3.02%**
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Year ended December 31, 1997 and the period from commencement of operations
through December 31, 1996
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Select Equity Portfolio
(Managed by J. P. Morgan Investment Management, Inc.)
- --------------------------------------------------------------------------------------------------------------------------
Period from
May 1, 1996
through
December 31,
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C>
beginning of period $ 10.84 10.08
- --------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.03) .10
Net realized and unrealized
gain from security
transactions 3.24 .66
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 3.21 .76
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 14.05 10.84
- --------------------------------------------------------------------------------------------------------------------------
Total return* 29.67% 7.48%
Contract owners' equity,
end of period (in thousands) $ 97,063 22,159
Ratio of expenses to average
contract owners' equity 1.40% 1.40%**
Ratio of net investment
income to average
contract owners' equity (.07%) 3.12%**
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Year ended December 31, 1997 and the period from commencement of operations
through December 31, 1996
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - International Equity Portfolio
(Managed by J. P. Morgan Investment Management, Inc.)
- --------------------------------------------------------------------------------------------------------------------------
Period from
May 1, 1996
through
December 31,
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C>
beginning of period $ 10.97 10.21
- --------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.01) .02
Net realized and unrealized
gain from security
transactions .50 .74
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .49 .76
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 11.46 10.97
- --------------------------------------------------------------------------------------------------------------------------
Total return* 4.52% 7.36%
Contract owners' equity,
end of period (in thousands) $ 62,371 14,333
Ratio of expenses to average
contract owners' equity 1.40% 1.40%**
Ratio of net investment
income to average
contract owners' equity .05% .46%**
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Period from commencement of operations through December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Balanced Portfolio
(Managed by Mississippi Advisors, Inc.)
- --------------------------------------------------------------------------------------------------------------------------
Period from
July 1, 1997
through
December 31,
1997
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C>
beginning of period $ 10.00
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .14
Net realized and unrealized
gain from security
transactions .39
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .53
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 10.53
- --------------------------------------------------------------------------------------------------------------------------
Total return* 5.32%
Contract owners' equity,
end of period (in thousands) $ 401
Ratio of expenses to average
contract owners' equity 1.40%**
Ratio of net investment
income to average
contract owners' equity 6.75%**
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment return does not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but does reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Period from commencement of operations through December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Small Cap Equity Portfolio
(Managed by Mississippi Advisors, Inc.)
- --------------------------------------------------------------------------------------------------------------------------
Period from
July 1, 1997
through
December 31,
1997
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C>
beginning of period $ 10.00
- --------------------------------------------------------------------------------------------------------------------------
Net investment income -
Net realized and unrealized
gain from security
transactions .42
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .42
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 10.42
- --------------------------------------------------------------------------------------------------------------------------
Total return* 4.18%
Contract owners' equity,
end of period (in thousands) $ 272
Ratio of expenses to average
contract owners' equity 1.40%**
Ratio of net investment
income to average
contract owners' equity 1.01%**
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment return does not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but does reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Period from commencement of operations through December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Equity Income Portfolio
(Managed by Mississippi Advisors, Inc.)
- --------------------------------------------------------------------------------------------------------------------------
Period from
July 1, 1997
through
December 31,
1997
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C>
beginning of period $ 10.00
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .15
Net realized and unrealized
gain from security
transactions 1.04
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.19
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 11.19
- --------------------------------------------------------------------------------------------------------------------------
Total return* 11.94%
Contract owners' equity,
end of period (in thousands) $ 557
Ratio of expenses to average
contract owners' equity 1.40%**
Ratio of net investment
income to average
contract owners' equity 6.79%**
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment return does not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but does reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Period from commencement of operations through December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Cova Series Trust - Growth and Income Equity Portfolio
(Managed by Mississippi Advisors, Inc.)
- --------------------------------------------------------------------------------------------------------------------------
Period from
July 1, 1997
through
December 31,
1997
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C>
beginning of period $ 10.00
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .05
Net realized and unrealized
gain from security
transactions .71
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .76
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 10.76
- --------------------------------------------------------------------------------------------------------------------------
Total return* 7.56%
Contract owners' equity,
end of period (in thousands) $ 1,309
Ratio of expenses to average
contract owners' equity 1.40%**
Ratio of net investment
income to average
contract owners' equity 3.25%**
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment return does not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but does reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Five years ended December 31, 1997
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Lord Abbett Series Fund, Inc. Growth and Income Portfolio
(Managed by Lord, Abbett & Co.)
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C> <C> <C> <C>
beginning of period $ 25.09 21.31 16.64 16.42 14.50
- --------------------------------------------------------------------------------------------------------------------------
Net investment income 2.01 1.32 1.37 .76 .88
Net realized and unrealized
gain (loss) from security
transactions 3.74 2.46 3.30 (.54) 1.04
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 5.75 3.78 4.67 .22 1.92
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 30.84 25.09 21.31 16.64 16.42
- --------------------------------------------------------------------------------------------------------------------------
Total return* 22.91% 17.76% 28.03% 1.32% 13.24%
Contract owners' equity,
end of period (in thousands) $ 487,500 294,358 190,630 114,416 82,033
Ratio of expenses to average
contract owners' equity 1.40% 1.40% 1.40% 1.40% 1.40%
Ratio of net investment
income to average
contract owners' equity 8.40% 6.59% 8.57% 5.40% 8.12%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect mortality
and expense fees, administration expense fees as well as all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Period from January 1, 1997 through April 18, 1997 and the four years ended
December 31, 1996
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
Lord Abbett Series Fund, Inc. Global Equity Portfolio
(Managed by Lord, Abbett & Co.)
- --------------------------------------------------------------------------------------------------------------------------
Period from
January 1,
1997 through
April 18, 1997
1997 *** 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C> <C> <C> <C>
beginning of period $ 15.41 14.52 13.33 13.29 10.64
- --------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.06) 1.70 .91 1.45 .24
Net realized and unrealized
gain (loss) from security
transactions (.29) (.81) .28 (1.41) 2.41
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations (.35) .89 1.19 .04 2.65
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 15.06 15.41 14.52 13.33 13.29
- --------------------------------------------------------------------------------------------------------------------------
Total return* (2.28%) 6.18% 8.91% .27% 24.91%
Contract owners' equity,
end of period (in thousands) $ - 2,383 2,500 3,108 3,635
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 (1.40)%** 10.33% 5.36% 9.78% 1.88%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and
portfolio operating expenses).
**Annualized
***Sub-account ceased operations on April 18, 1997.
</FN>
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Financial Highlights
Year ended December 31, 1997 and the period from commencement of operations
through December 31, 1996
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below:
General American Capital Company Money Market Portfolio
(Managed by Conning Asset Management Company)
- --------------------------------------------------------------------------------------------------------------------------
Period from
June 3, 1996
through
December 31,
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
<S> <C> <C>
beginning of period $ 10.23 10.00
- --------------------------------------------------------------------------------------------------------------------------
Net investment loss (.14) (.08)
Net realized and unrealized
gain from security
transactions .58 .31
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .44 .23
- --------------------------------------------------------------------------------------------------------------------------
Accumulation unit value,
end of period $ 10.67 10.23
- --------------------------------------------------------------------------------------------------------------------------
Total return* 4.24% 2.34%
Contract owners' equity,
end of period (in thousands) $ 3,318 358
Ratio of expenses to average
contract owners' equity 1.40% 1.40%**
Ratio of net investment
income to average
contract owners' equity (1.40%) (1.40%)**
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Investment returns do not reflect any contract based fees (withdrawal fees,
contract maintenance fees, or account transfer fees), but do reflect
mortality and expense fees, administration expense fees as well as all
expenses of the underlying portfolio (investment advisory fees and portfolio
operating expenses).
**Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT ONE
Notes to Financial Statements
- --------------------------------------------------------------------------------
COVA VARIABLE ANNUITY ACCOUNT ONE
Notes to Financial Statements
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
(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., four are managed
by Lord, Abbett & Co., five are managed by J.P. Morgan Investment
Management, Inc., and four are managed by Mississippi Advisors, Inc. The
Trust portfolios available for investment are the Quality Income, Money
Market, High Yield, Stock Index, Growth and Income, Bond Debenture,
Developing Growth, Large Cap Research, Mid-Cap Value, Quality Bond, Small
Cap Stock, Large Cap Stock, Select Equity, International Equity, Balanced,
Small Cap Equity, Equity Income, and Growth and Income Equity portfolios.
The Fund has one portfolio available for investment, the Growth and Income
portfolio. GACC has one portfolio available for investment, the Money
Market portfolio. 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 Developing Growth, Trust Large Cap Research, and Trust Mid-Cap
Value sub-accounts commenced operations on August 20, 1997. The Trust
Balanced, Trust Small Cap Equity, Trust Equity Income, and Trust Growth and
Income Equity sub-accounts commenced operations on July 1, 1997.
The assets and liabilities of the Fund Global Equity Portfolio and Fund
Global Equity sub-account were transferred to the Trust International
Portfolio and Trust International Equity sub-accounts in accordance with a
substitution order. The Fund Global Equity sub-account ceased operations on
April 18, 1997.
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 $0.3
million and $35.5 million in 1997 and 1996, respectively, to the Separate
Account of which, after subsequent redemptions, net of realized and
unrealized gains and losses on investments, approximately $0.3 million
remains as of December 31, 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. Dividends 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 funds 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
owner's gross income until amounts are withdrawn or received pursuant to an
Optional Payment Plan.
(d) Annuity Reserves
Annuity reserves are computed for currently payable contracts according to
the 1983 Mortality Table. The assumed interest rate is 3%. Charges to
annuity reserves for mortality and expense risks experience are reimbursed
to Cova if the reserves required are less than originally estimated. If
additional reserves are required, Cova reimburses the variable annuity
account. The 1997 charges were not material.
(3) Contract Fees
There are no deductions made from purchase payments for sales fees at the
time of purchase. However, if all or a portion of the contract value is
withdrawn, a withdrawal fee is calculated and deducted from the contract
value. The withdrawal fee 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 fees.
An annual contract maintenance fee of $30 is imposed on all contracts with
contract values less than $50,000 on their policy anniversary. The fee
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, 1997, withdrawal and account transfer
charges of approximately $113 thousand and contract maintenance fees of
approximately $317 thousand were deducted from the contract values in the
Separate Account.
Mortality and expense risks assumed by Cova are compensated by a fee
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 fee in the event of the death of the contract
owner.
In addition, the Separate Account bears certain administration expenses,
which are equivalent to an annual rate of .15% of net assets. These fees
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 the realized and change in unrealized gains and
losses on investments.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Realized gain (loss) on investments:
Trust Quality Income Portfolio:
<S> <C> <C>
Aggregate proceeds from sales $ 33,851 13,850
Aggregate cost of redemptions 33,348 13,806
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 503 44
- ---------------------------------------------------------------------------------------------------------------------------
Trust Money Market Portfolio:
Aggregate proceeds from sales 63,852 36,177
Aggregate cost of redemptions 63,852 36,177
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ - -
- ---------------------------------------------------------------------------------------------------------------------------
Trust High Yield Portfolio:
Aggregate proceeds from sales 27,472 22,909
Aggregate cost of redemptions 26,637 23,078
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments $ 835 (169)
- ---------------------------------------------------------------------------------------------------------------------------
Trust Stock Index Portfolio:
Aggregate proceeds from sales 55,951 21,062
Aggregate cost of redemptions 40,242 17,170
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 15,709 3,892
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Realized gain (loss) on investments:
Trust Growth and Income Portfolio:
Aggregate proceeds from sales $ 4,135 1,508
Aggregate cost of redemptions 3,229 1,344
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 906 164
- ---------------------------------------------------------------------------------------------------------------------------
Trust Bond Debenture Portfolio:
Aggregate proceeds from sales 646 635
Aggregate cost of redemptions 619 622
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 27 13
- ---------------------------------------------------------------------------------------------------------------------------
Trust Developing Growth Portfolio:
Aggregate proceeds from sales -
Aggregate cost of redemptions - N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ -
- ---------------------------------------------------------------------------------------------------------------------------
Trust Large Cap Research Portfolio:
Aggregate proceeds from sales 1
Aggregate cost of redemptions 1 N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ -
- ---------------------------------------------------------------------------------------------------------------------------
Trust Mid-Cap Value Portfolio:
Aggregate proceeds from sales -
Aggregate cost of redemptions - N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ -
- ---------------------------------------------------------------------------------------------------------------------------
Trust Quality Bond Portfolio:
Aggregate proceeds from sales 3,837 2,991
Aggregate cost of redemptions 3,786 2,947
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 51 44
- ---------------------------------------------------------------------------------------------------------------------------
Trust Small Cap Stock Portfolio:
Aggregate proceeds from sales 513 1,882
Aggregate cost of redemptions 467 1,835
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 46 47
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Realized gain (loss) on investments:
Trust Large Cap Stock Portfolio:
Aggregate proceeds from sales $ 7,686 1,423
Aggregate cost of redemptions 6,018 1,338
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 1,668 85
- ---------------------------------------------------------------------------------------------------------------------------
Trust Select Equity Portfolio:
Aggregate proceeds from sales 305 1,680
Aggregate cost of redemptions 275 1,697
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments $ 30 (17)
- ---------------------------------------------------------------------------------------------------------------------------
Trust International Equity Portfolio:
Aggregate proceeds from sales 616 4,568
Aggregate cost of redemptions 601 4,496
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 15 72
- ---------------------------------------------------------------------------------------------------------------------------
Trust Balanced Portfolio:
Aggregate proceeds from sales 38
Aggregate cost of redemptions 37 N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 1
- ---------------------------------------------------------------------------------------------------------------------------
Trust Small Cap Equity Portfolio:
Aggregate proceeds from sales 2
Aggregate cost of redemptions 2 N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ -
- ---------------------------------------------------------------------------------------------------------------------------
Trust Equity Income Portfolio:
Aggregate proceeds from sales 3
Aggregate cost of redemptions 3 N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ -
- ---------------------------------------------------------------------------------------------------------------------------
Trust Growth and Income Equity Portfolio:
Aggregate proceeds from sales 34
Aggregate cost of redemptions 33 N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 1
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Realized gain (loss) on investments:
Fund Growth and Income Portfolio:
Aggregate proceeds from sales $ 3,701 2,696
Aggregate cost of redemptions 2,859 2,164
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 842 532
- ---------------------------------------------------------------------------------------------------------------------------
Fund Global Equity Portfolio:
Aggregate proceeds from sales 2,353 372
Aggregate cost of redemptions 2,389 329
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments $ (36) 43
- ---------------------------------------------------------------------------------------------------------------------------
GACC Money Market Portfolio:
Aggregate proceeds from sales 2,883 6
Aggregate cost of redemptions 2,828 6
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments $ 55 -
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain (loss) on investments:
Trust Quality Income Portfolio:
End of period 1,302 935
Beginning of period 935 1,469
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain (loss) on investments $ 367 (534)
- ---------------------------------------------------------------------------------------------------------------------------
Trust Money Market Portfolio:
End of period - -
Beginning of period - -
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ - -
- ---------------------------------------------------------------------------------------------------------------------------
Trust High Yield Portfolio:
End of period 842 491
Beginning of period 491 (461)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 351 952
- ---------------------------------------------------------------------------------------------------------------------------
Trust Stock Index Portfolio:
End of period 25,000 20,271
Beginning of period 20,271 10,976
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 4,729 9,295
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Net change in unrealized gain (loss) on investments:
Trust Growth and Income Portfolio:
End of period $ 10,887 4,202
Beginning of period 4,202 1,636
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 6,685 2,566
- ---------------------------------------------------------------------------------------------------------------------------
Trust Bond Debenture Portfolio:
End of period 1,958 271
Beginning of period 271 -
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 1,687 271
- ---------------------------------------------------------------------------------------------------------------------------
Trust Developing Growth Portfolio:
End of period 7
Beginning of period - N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 7
- ---------------------------------------------------------------------------------------------------------------------------
Trust Large Cap Research Portfolio:
End of period 6
Beginning of period - N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 6
- ---------------------------------------------------------------------------------------------------------------------------
Trust Mid-Cap Value Portfolio:
End of period 40
Beginning of period - N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 40
- ---------------------------------------------------------------------------------------------------------------------------
Trust Quality Bond Portfolio:
End of period 186 30
Beginning of period 30 -
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 156 30
- ---------------------------------------------------------------------------------------------------------------------------
Trust Small Cap Stock Portfolio:
End of period 6,523 533
Beginning of period 533 -
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 5,990 533
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Net change in unrealized gain (loss) on investments:
Trust Large Cap Stock Portfolio:
End of period $ 2,855 1,531
Beginning of period 1,531 -
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 1,324 1,531
- ---------------------------------------------------------------------------------------------------------------------------
Trust Select Equity Portfolio:
End of period 13,520 1,210
Beginning of period 1,210 -
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 12,310 1,210
- ---------------------------------------------------------------------------------------------------------------------------
Trust International Equity Portfolio:
End of period 1,309 796
Beginning of period 796 -
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 513 796
- ---------------------------------------------------------------------------------------------------------------------------
Trust Balanced Portfolio:
End of period -
Beginning of period - N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ -
- ---------------------------------------------------------------------------------------------------------------------------
Trust Small Cap Equity Portfolio:
End of period (5)
Beginning of period - N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized loss on investments $ (5)
- ---------------------------------------------------------------------------------------------------------------------------
Trust Equity Income Portfolio:
End of period 21
Beginning of period - N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 21
- ---------------------------------------------------------------------------------------------------------------------------
Trust Growth and Income Equity Portfolio:
End of period 18
Beginning of period - N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 18
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Net change in unrealized gain (loss) on investments:
Fund Growth and Income Portfolio:
End of period $ 87,861 46,489
Beginning of period 46,489 22,469
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 41,372 24,020
- ---------------------------------------------------------------------------------------------------------------------------
Fund Global Equity Portfolio:
End of period - 1
Beginning of period 1 152
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized loss on investments $ (1) (151)
- ---------------------------------------------------------------------------------------------------------------------------
GACC Money Market Portfolio:
End of period 46 6
Beginning of period 6 -
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain on investments $ 40 6
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT ONE
Notes to Financial Statements
- --------------------------------------------------------------------------------------------------------------------------
(5) UNIT TRANSACTIONS
The change in the number of units resulting from account transactions is as
follows:
- --------------------------------------------------------------------------------------------------------------------------
Cova SeTrust
-----------------------------------------------------------------------------------------------
Quality Money High Stock Growth and Bond DevelopinLarge CapMid-Cap Quality
Income Market Yield Index Income Debenture Growth Research Value Bond
- --------------------------------------------------------------------------------------------------------------------------
Accumulation phase:
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,690,633 2,987,132 1,870,2325,436,980 1,342,833 N/A N/A N/A N/A N/A
Contributions by Cova - - - - - 50,000 500,000
Redemptions by Cova - - - - - (50,000) (294,154)
Units sold 106,671 3,772,567 98,690 216,989 180,267 360,638 98,567
Units redeemed (280,149) (259,281) (113,437)(283,639) (59,321) (10,552) (2,065)
Units transferred 817,805 (3,915,492)145,699 (689,475) 442,117 309,577 206,482
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 334,960 2,584,926 2,001,1844,680,855 1,905,896 659,663 N/A N/A N/A 508,830
Contributions by Cova - - - - - - 10,000 10,000 10,000 -
Redemptions by Cova - - - - - - - - - (205,846)
Units sold 33,059 3,712,455 36,057 125,947 130,796 715,126 47,968 36,718 45,300 256,670
Units redeemed (623,489) (683,810) (135,503)(654,828) (101,374) (79,865) (322) (274) (2,730) (67,027)
Units transferred 186,523 (3,871,127(492,448)(604,754) 262,932 2,650,173 91,012 78,115 141,816 940,454
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992,931,053 1,742,444 1,409,2903,547,220 2,198,250 3,945,097 148,658 124,559 194,386 1,433,081
- --------------------------------------------------------------------------------------------------------------------------
Annuity phase:
Balance at December 31, 1996 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Units sold 8,913 4,793 2,641 4,293 1,875 - - - - -
Units redeemed (844) (231) (412) (196) (72) - - - - -
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 8,069 4,562 2,229 4,097 1,803 N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Lord Abbett
- ---------------------------------------------------------------------------
Interna- Small Growth anSeries Fund, Inc. GACC
Small Cap Large Cap Select tional Cap Equity Income Growth andGlobal Money
Stock Stock Equity Equity BalancedEquity Income Equity Income Equity Market
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
N/A N/A N/A N/A N/A N/A N/A N/A 8,947,108 172,206 N/A
500,000 1,500,000 500,000 500,000 - - -
(500,000) (367,586) (500,000) (500,000) - - -
580,659 76,199 1,024,461 550,620 1,374,562 15,160 8,787
(6,730) (522) (11,729) (5,835) (587,874) (21,479) (96)
663,476 181,515 1,031,791 762,107 1,998,505 (11,278) 26,273
- -------------------------------------------------------------------------------------------------------
1,237,405 1,389,606 2,044,523 1,306,892 N/A N/A N/A N/A 11,732,301154,609 34,964
- - - - 100 100 100 100 - - -
- (1,132,414) - - (100) (100) (100) (100) - - -
786,201 538,054 1,538,506 974,793 17,711 10,694 17,814 46,324 1,642,859 350 509,800
(90,427) (36,558) (116,499) (107,953) (2,450) - (56) (4,084) (816,777) (7,330) (29,528)
2,007,064 715,241 3,437,076 3,266,860 22,818 15,454 31,967 79,433 3,230,021 (147,629)(204,185)
- -------------------------------------------------------------------------------------------------------
3,940,243 1,473,929 6,903,606 5,440,592 38,079 26,148 49,725 121,673 15,788,404 - 311,051
- -------------------------------------------------------------------------------------------------------
N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
804 3,384 3,617 822 - - - - 28,068 - -
(31) (356) (380) (32) - - - - (2,022) - -
- -------------------------------------------------------------------------------------------------------
773 3,028 3,237 790 N/A N/A N/A N/A 26,046 N/A N/A
- -------------------------------------------------------------------------------------------------------
</TABLE>
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(With Independent Auditors' Report Thereon)
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) (the Company) as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholder's
equity, and cash flows for the years ended December 31, 1997 and 1996, and
the period from June 1, 1995 to December 31, 1995 (Successor periods), and
the period from January 1, 1995 to May 31, 1995 (Predecessor period). 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, 1997 and 1996, 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 Predecessor consolidated financial
statements present fairly, in all material respects, the results of their
operations and their cash flows for the Predecessor period in conformity
with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, effective
June 1, 1995, the predecessor to Cova Corporation, a subsidiary of General
American Life Insurance Company, acquired all of the outstanding stock of
Cova Financial Services Life Insurance Company in a business combination
accounted for as a purchase. As a result of the acquisition, the
consolidated financial information for the periods subsequent to the
acquisition is presented on a different cost basis than that for the period
prior to the acquisition and, therefore, is not comparable.
Chicago, Illinois
March 5, 1998
<TABLE>
<CAPTION>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets
December 31, 1997 and 1996
- -------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
Investments:
Debt securities available for sale, at fair value (cost of
<S> <C> <C>
$1,269,362 in 1997 and $952,824 in 1996) $ 1,280,247 949,611
Mortgage loans, net of allowance for potential loan loss
of $237 in 1997 and $88 in 1996 348,206 244,103
Policy loans 24,228 22,336
Short-term investments, at fair value - 4,404
- -------------------------------------------------------------------------------------------------------------------
Total investments 1,652,681 1,220,454
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - interest-bearing 12,910 38,322
Cash - noninterest-bearing 3,666 5,501
Receivable from sale of securities 1,870 1,064
Accrued investment income 20,602 15,011
Deferred policy acquisition costs 84,326 49,833
Present value of future profits 41,486 46,389
Goodwill 19,717 20,849
Federal and state income taxes recoverable - 1,461
Deferred tax benefits, net 7,933 13,537
Receivable from OakRe 1,544,567 1,973,813
Reinsurance receivables 9,293 3,504
Other assets 2,184 2,205
Separate account assets 1,108,125 641,871
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 4,509,360 4,033,814
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets
December 31, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY 1997 1996
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
Liabilities:
<S> <C> <C>
Policyholder deposits $ 3,098,287 3,135,325
Future policy benefits 38,361 32,342
Payable on purchase of securities 7,261 15,978
Federal and state income taxes payable 1,312 -
Accounts payable and other liabilities 21,912 19,764
Future purchase price payable to OakRe 12,173 16,051
Guaranty fund assessments 9,700 12,409
Separate account liabilities 1,107,816 626,901
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 4,296,822 3,858,770
- ------------------------------------------------------------------------------------------------------------------
Shareholder's equity:
Common stock, $2 par value. Authorized
5,000,000 shares; issued and outstanding
2,899,446 shares in 1997 and 1996 5,799 5,799
Additional paid-in capital 191,491 166,491
Retained earnings 12,516 3,538
Net unrealized appreciation (depreciation)
on securities, net of tax 2,732 (784)
- ------------------------------------------------------------------------------------------------------------------
Total shareholder's equity 212,538 175,044
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 4,509,360 4,033,814
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Income
Years ended December 31, 1997, 1996, and 1995
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
----------------------------------------------------------
Seven months Five months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Revenues:
<S> <C> <C> <C> <C>
Premiums $ 9,368 3,154 921 1,097
Net investment income 111,661 70,629 24,188 92,486
Net realized gains (losses) on sales of
investments 563 472 1,324 (12,414)
Separate account fees 12,455 7,205 2,957 1,818
Other income 2,400 1,320 725 1,037
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 136,447 82,780 30,115 84,024
- ---------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest on policyholder deposits 81,129 50,100 17,706 97,867
Current and future policy benefits 11,496 5,130 1,785 1,830
Operating and other expenses 19,208 14,573 7,126 12,777
Amortization of purchased
intangible assets 3,668 2,332 3,030 -
Amortization of deferred acquisition
costs 6,307 4,389 100 11,157
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 121,808 76,524 29,747 123,631
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 14,639 6,256 368 (39,607)
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit):
Current 1,951 1,740 1,011 (16,404)
Deferred 3,710 915 (580) 6,340
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) 5,661 2,655 431 (10,064)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8,978 3,601 (63) (29,543)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholder's Equity
Years ended December 31, 1997, 1996, and 1995
- ----------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
------------------------------------------------------
Seven months Five months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Common stock, balance at beginning
<S> <C> <C> <C> <C>
and end of period $ 5,799 5,799 5,799 5,799
- ----------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 166,491 129,586 137,749 136,534
Adjustment to reflect purchase acquisition
indicated in note 2 - - (52,163) -
Capital contribution 25,000 36,905 44,000 1,215
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of period 191,491 166,491 129,586 137,749
- ----------------------------------------------------------------------------------------------------------------------------
Retained earnings (deficit):
Balance at beginning of period 3,538 (63) (36,441) 1,506
Adjustment to reflect purchase acquisition
indicated in note 2 - - 36,441 -
Net income (loss) 8,978 3,601 (63) (29,543)
Dividends to shareholder - - - (8,404)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of period 12,516 3,538 (63) (36,441)
- ----------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of securities:
Balance at beginning of period (784) 2,764 (28,837) (65,228)
Adjustment to reflect purchase acquisition
indicated in note 2 - - 28,837 -
Change in unrealized appreciation (depreciation)
of debt and equity securities 14,077 (13,915) 10,724 178,010
Change in deferred Federal income taxes (1,893) 1,910 (1,489) (18,458)
Change in deferred acquisition costs (5,342) 1,561 - (123,161)
Change in present value of future profits
attributable to unrealized losses (gains) (3,326) 6,896 (6,471) -
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of period 2,732 (784) 2,764 (28,837)
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholder's equity $ 212,538 175,044 138,086 78,270
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
- ----------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
-----------------------------------------------------------
Seven months Five months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Interest and dividend receipts $ 109,731 68,622 18,744 131,439
Premiums received 9,579 3,154 921 1,097
Insurance and annuity benefit payments (5,219) (3,729) (2,799) (1,809)
Operating disbursements (21,839) (17,158) (10,480) (9,689)
Taxes on income refunded (paid) 970 (3,016) 60 48,987
Commissions and acquisition costs paid (55,067) (36,735) (17,456) (23,872)
Separate account charges 12,455 7,205 2,957 1,818
Other (1,429) 937 529 1,120
------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 49,181 19,280 (7,524) 149,091
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash used for the purchase of investment securities (809,814) (715,274) (875,996) (575,891)
Proceeds from investment securities sold and matured 382,783 262,083 253,814 2,885,053
Other 15,400 (14,166) 179 (8,557)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (411,631) (467,357) (622,003) 2,300,605
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Policyholder deposits 841,174 446,784 132,752 130,660
Transfers from (to) OakRe 637,168 574,010 628,481 (3,048,531)
Transfer to separate accounts (450,303) (126,797) (40,903) (6,653)
Return of policyholder deposits (597,425) (491,025) (436,271) (290,586)
Transfers to RGA (120,411) - - -
Dividends to shareholder - - - (8,404)
Capital contributions received 25,000 20,000 44,000 1,215
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 335,203 422,972 328,059 (3,222,299)
- ----------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (27,247) (25,105) (301,468) (772,603)
Cash and cash equivalents at beginning of period 43,823 62,256 363,724 1,136,327
CFLIC contributed cash (note 9) - 6,672 - -
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 16,576 43,823 62,256 363,724
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<TABLE>
<CAPTION>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
-----------------------------------------------------------
Seven months Five months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Reconciliation of net income (loss) to net cash provided by (used in) operating
activities:
<S> <C> <C> <C> <C>
Net income (loss) $ 8,978 3,601 (63) (29,543)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Increase (decrease) in future policy benefits 6,019 680 (1,013) 11
Increase (decrease) in payables and accrued
liabilities (1,194) 2,900 (392) (10,645)
Decrease (increase) in accrued investment
income (5,591) (4,778) (7,904) 32,010
Amortization of intangible assets 9,975 6,721 3,831 11,309
Amortization and accretion of securities
premiums and discounts 1,664 2,751 307 2,410
Recapture commissions paid to OakRe (4,837) (4,483) (4,777) -
Net realized loss (gain) on sale of investments (563) (472) (1,324) 12,414
Interest accumulated on policyholder deposits 81,129 50,100 17,706 97,867
Investment expenses paid 1,936 1,151 642 2,373
Decrease (increase) in guaranty fund assessments - - (104) 5,070
Increase (decrease) in current and deferred
Federal income taxes 5,917 (351) 491 38,923
Separate account net loss (income) (2,637) (2,008) 1 1
Commissions and expenses deferred (46,142) (34,803) (14,568) (13,354)
Other (5,473) (1,729) (357) 245
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 49,181 19,280 (7,524) 149,091
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
(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 73%, 66%, and 59% of the company's sales have been through
two specific brokerage firms, A. G. Edwards & Sons, Incorporated and
Edward Jones & Company in 1997, 1996, and 1995, 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 with
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 million. In exchange, the Predecessor transferred specifically
identified assets to OakRe with a market value at June 1, 1995 of $2,986
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 three 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.
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, 1997 and
1996.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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) PURCHASE 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>
- ---------------------------------------------------------------------------------------------------------------------------
June 1, 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in millions)
Assets acquired:
<S> <C>
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>
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 shareholder's equity of $13.1 million in 1995 reflecting
the application of push down purchase accounting. The Company's
consolidated financial statements subsequent to June 1, 1995 reflect
this new basis of accounting.
All amounts for the period 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
DEBT SECURITIES
Investments in all debt 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 securities at December 31, 1997
and 1996 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 stockholder's equity, net of
deferred effects of income tax and related effects on deferred
acquisition costs and present value of future profits.
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. Other invested assets are carried at lower of cost or market.
Reserves for loans are established when the Company determines that
collection of all amounts due under the contractual terms is doubtful
and are calculated in conformity with Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in banks,
U.S. 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
carried at fair 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, 1997,
approximately $309,000 of capital investments remained within the
separate accounts.
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 amortization period is
the remaining life of the policies, which is estimated to be 20 years
from the date of original policy issue.
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
- ---------------------------------------------------------------------------------------------------------------------------
Seven Five
months months
ended ended
December 31, May 31,
1997 1996 1995 1995
(in thousands)
Deferred policy acquisition costs,
<S> <C> <C> <C> <C>
beginning of period $ 49,833 14,468 92,398 213,362
Effects of push down purchase accounting - - (92,398) -
Commissions and expenses deferred 46,142 34,803 14,568 13,354
Amortization (6,307) (4,389) (100) (11,157)
Deferred policy acquisition costs attributable
to unrealized (gains) losses (5,342) 1,561 - (123,161)
Effects on deferred policy acquisition costs
of CFLIC consolidation - 3,390 - -
- ---------------------------------------------------------------------------------------------------------------------------
Deferred policy acquisition costs, end of period $ 84,326 49,833 14,468 92,398
- ---------------------------------------------------------------------------------------------------------------------------
</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 pretax rate of 18% (12% net after tax).
In addition, as the Company has the option of retaining its SPDA
policies after they reach their next interest rate reset date and are
"recaptured" from OakRe, a component of this asset represents estimates
of future profits on recaptured business. This asset will be amortized
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 inception. The amortization and
adjustments resulting from unrealized gains and losses are 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, is
projected to be 5.3%, 4.3%, 4.4%, 4.7%, and 4.7% for the years ended
December 31, 1998 through 2002, 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 reallocation 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 shown 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>
- ---------------------------------------------------------------------------------------------------------------------------
Seven
months
ended
December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Present value of future profits - beginning of period $ 46,389 38,155 46,709
Net amortization (1,577) (473) (2,083)
Present value of future profits attributable to
unrealized (gains) losses (3,326) 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 $ 41,486 46,389 38,155
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 shown below. The effects on goodwill of the consolidation of CFLIC
(see note 9) with the Company are presented separately.
<TABLE>
<CAPTION>
Seven
months
ended
December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Goodwill - beginning of period $ 20,849 23,358 24,060
Amortization (1,132) (916) (702)
Adjustment due to revised push down purchase accounting - (3,626) -
Effects on goodwill of CFLIC consolidation - 2,033 -
- ---------------------------------------------------------------------------------------------------------------------------
Goodwill - end of period $ 19,717 20,849 23,358
- ---------------------------------------------------------------------------------------------------------------------------
</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 3.50% thereafter. On policies that are
recaptured and subsequently exchanged to a variable annuity policy, the
Company will pay a commission to OakRe of 0.50%.
The Company has recorded a future payable that represents the present
value of the anticipated future commission payments payable to OakRe
over the remaining life of the financial reinsurance agreement
discounted at an estimated borrowing rate of 6.50%. 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 shown below. The effects on
the future payable on the consolidation of CFLIC (see note 9) with the
Company are presented separately.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Seven
months
ended
December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Future payable - beginning of period $ 16,051 23,967 27,797
Interest added 959 943 947
Payments to OakRe (4,837) (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 $ 12,173 16,051 23,967
- ---------------------------------------------------------------------------------------------------------------------------
</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 Company's 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 $37.9 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 Company's policyholder deposits as of December 31, 1997 was
5.95%.
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.
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 files a consolidated income tax
return with its subsidiaries. Allocations of Federal income taxes are
based upon separate return calculations.
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 in 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.
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 SFAS No. 121, Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to the Disposed of, 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 at December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments
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 No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Because
of this, and further because the value of a business is also based upon
its anticipated earning power, the aggregate fair value amounts
represented do not present the underlying value of the Company.
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 value amounts reported in the balance sheets for these
instruments approximate their fair values. Short-term debt securities
are considered available for sale.
Investment Securities and Mortgage Loans (Including Mortgage-backed
Securities)
Fair values of 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, certain mortgage-backed securities, and mortgage
loans, 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).
Policy Loans
Fair values of policy loans approximate carrying value as the interest
rates on the majority of policy loans are reset periodically and,
therefore, approximate current interest rates.
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, 1997 and 1996, the cash
surrender value of policyholder funds on deposit was approximately $41.2
million and $29.1 million less than their stated carrying value. Of the
contracts permitting surrender, substantially all 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 financing reinsurance agreement entered into with OakRe as a
condition to the purchase of the Company 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.
During 1997, the Company entered into a financing reinsurance agreement
with RGA Reinsurance Company (RGA), an affiliate, related to certain of
the Company's single premium deferred annuity products. The agreement
contains recapture provisions, at the option of the Company, beginning
in 1999 at a rate of 20% per year. Deposits recorded under the contract
during 1997 were approximately $120 million, and are reflected as
policyholder deposits in the consolidated balance sheet at December 31,
1997.
OTHER
Certain 1996 and 1995 amounts have been reclassified to conform to the
1997 presentation.
(4) INVESTMENTS
The Company's investments in debt and equity securities are considered
available for sale and carried at estimated fair value, with the
aggregate unrealized appreciation or depreciation being recorded as a
separate component of shareholder's equity. The amortized cost,
estimated fair value, and carrying value of investments at December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government treasuries $ 8,067 121 - 8,188 8,188
Collateralized mortgage
obligations 370,802 4,504 (524) 374,782 374,782
Corporate, state, municipalities,
and political subdivisions 890,493 14,867 (8,083) 897,277 897,277
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 1,269,362 19,492 (8,607) 1,280,247 1,280,247
Mortgage loans 348,206 24,346 - 372,552 348,206
Policy loans 24,228 - - 24,228 24,228
Short-term investments - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Total investments $ 1,641,796 43,838 (8,607) 1,677,027 1,652,681
- ---------------------------------------------------------------------------------------------------------------------------
Company's beneficial interest
in separate accounts $ - - - 309 309
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Debt securities:
<S> <C> <C> <C> <C> <C>
U.S. Government treasuries $ 7,196 29 (50) 7,175 7,175
Collateralized mortgage
obligations 384,071 985 (2,721) 382,335 382,335
Corporate, state, municipalities,
and political subdivisions 561,557 3,971 (5,427) 560,101 560,101
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 952,824 4,985 (8,198) 949,611 949,611
Mortgage loans 244,103 - - 244,103 244,103
Policy loans 22,336 - - 22,336 22,336
Short-term investments 4,383 21 - 4,404 4,404
- ---------------------------------------------------------------------------------------------------------------------------
Total investments $ 1,223,646 5,006 (8,198) 1,220,454 1,220,454
- ---------------------------------------------------------------------------------------------------------------------------
Company's beneficial interest
in separate accounts $ - - - 14,970 14,970
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1997, 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>
- ---------------------------------------------------------------------------------------------------------------------------
1997
Estimated
Amortized fair
cost value
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C>
Less than one year $ 7,218 7,223
Due after one year through five years 390,374 391,433
Due after five years through ten years 381,229 385,719
Due after ten years 119,739 121,090
Mortgage-backed securities 370,802 374,782
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 1,269,362 1,280,247
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, approximately 94.0% of the Company's debt
securities are investment grade or are nonrated but considered to be of
investment grade. Of the 6.0% noninvestment grade debt securities, 4.6%
are rated as BB, 1.3% are rated as B and .1% are rated C and treated as
impaired.
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 counterparties to these agreements.
Securities loaned at December 31, 1997 had market values totaling
$14,594,982. Cash, letters of credit, and government securities of
$14,851,854 were held by the custodian bank as collateral to secure this
agreement. Income on the Company's security lending program in 1997 was
immaterial.
No debt securities were non income-producing during the years ended
December 31, 1997 and 1996.
The components of net investment income, realized capital gains
(losses), and unrealized gains (losses) were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
Seven Five
months months
ended ended
December 31, May 31,
1997 1996 1995 1995
(in thousands of dollars)
<S> <C> <C> <C> <C>
Income on debt securities $ 84,203 53,632 19,629 63,581
Income on equity securities - - - 302
Income on short-term investments 2,265 2,156 2,778 28,060
Income on interest rate swaps 43 - - 377
Income on policy loans 1,852 1,454 868 624
Interest on mortgage loans 24,890 13,633 1,444 248
Income on foreign exchange - - - 184
Income on real estate - - - 1,508
Income on separate account investments 2,637 772 - (1)
Loss on derivatives (2,035) (1,640) - -
Miscellaneous interest (258) 1,773 109 (24)
- ---------------------------------------------------------------------------------------------------------------------------
Total investment income 113,597 71,780 24,828 94,859
Investment expenses (1,936) (1,151) (640) (2,373)
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income $ 111,661 70,629 24,188 92,486
- ---------------------------------------------------------------------------------------------------------------------------
Net realized capital gains (losses) were as follows:
Debt securities 537 469 1,344 (16,749)
Mortgage loans 27 4 - 1,431
Equity securities - - - (423)
Real estate - - - (124)
Short-term investments (1) (1) (20) (1,933)
Other assets - - - (76)
Interest rate swaps - - - 5,460
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains (losses) on investments $ 563 472 1,324 (12,414)
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) were as follows:
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The Company Predecessor
Seven Five
months months
ended ended
December 31, May 31,
1997 1996 1995 1995
(in thousands of dollars)
<S> <C> <C> <C> <C>
Debt securities $ 10,885 (3,213) 10,688 (85,410)
Short-term investments - 21 36 879
Effects on deferred acquisition costs
amortization (3,781) 1,561 - 39,030
Effects on present value of future
profits amortization (2,901) 425 (6,471) -
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) before income tax 4,203 (1,206) 4,253 (45,501)
Unrealized income tax benefit (expense) (1,471) 422 (1,489) 16,664
- ---------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on investments $ 2,732 (784) 2,764 (28,837)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of investments in debt securities during 1997 were
$358,658,091. Gross gains of $1,765,242 and gross losses of $254,493
were realized on those sales. Included in these amounts were $681,159 of
gross gains and $122,480 of gross losses realized on the sale of
noninvestment grade securities. Net realized gains include a 1997
impairment adjustment totaling approximately $974,000 related to one
debt security held by the Company.
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 noninvestment 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 $1,553,501 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
noninvestment 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 on the sale of noninvestment grade securities.
Securities with a carrying value of approximately $7,083,163 at
December 31, 1997 were deposited with government authorities as
required by law.
(5) SECURITIES GREATER THAN 10% OF SHAREHOLDER'S EQUITY
As of December 31, 1997 the Company held no individual securities which
exceeded 10% of shareholder's equity.
<TABLE>
<CAPTION>
As of December 31, 1996 the Company held the following individual securities which exceeded 10% of shareholder's
equity:
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt Carrying
securities value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Countrywide Mtg. 1993-12 A4 $ 19,347,536
FNMA Remic Tr 1996-50 A1 19,104,500
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
FINANCIAL FUTURES CONTRACTS
A derivative financial instrument, in very general terms, refers to a
security whose value is "derived" from the value of an underlying asset,
reference rate, or index.
The Company has a variety of reasons to use derivative instruments, such
as to attempt to protect the Company against possible changes in the
market value of its portfolio and to manage the portfolio's effective
yield, maturity, and duration. All of the Company's holdings are marked
to market monthly with the change in value reflected in unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when exercising an option contract or
taking delivery of a security underlying a futures contract. In these
instances, the recognition of gain or loss is postponed until the
disposal of the security underlying the option or futures contract.
Summarized below are the specific types of derivative instruments used
by the Company.
INTEREST RATE SWAPS
The Company is sensitive to interest rate changes and changes in
exchange rates, as its liabilities may reprice, mature before
interest-earning assets or exchange rates may fluctuate on bonds that
pay in foreign dollars. The Company manages interest rate risk on
certain contracts, primarily through the utilization of interest rate
swaps. Under interest rate swaps, the Company agrees with counterparties
to exchange, at specified intervals, the payments between floating and
fixed rate interest amounts calculated by reference to notional amounts.
Net interest payments are recognized within net investment income in the
consolidated statements of operations.
At December 31, 1997, the Company has one outstanding interest rate swap
agreement which expires in 2002. Under the agreement, the Company
receives a fixed rate of 6.63% on $7.0 million and pays a floating rate
based on London Interbank Offered Rate (LIBOR). At December 31, 1997,
the estimated fair value of the agreement was immaterial.
FUTURES
A futures contract is an agreement involving the delivery of a
particular asset on a specified future date at an agreed upon price. The
Company generally invests in futures on S&P 500 securities and typically
closes the contract prior to the delivery date. These contracts are
generally used to manage the portfolio's effective duration and reduce
market risk.
Upon entering into futures contracts, the Company maintains, in a
segregated account with its custodian, securities with a value equal to
its obligation under the futures contracts. During the period the
futures contract is open, payments are received from or made to the
broker daily based upon changes in the value of the contract (the
variation margin) with the related income or loss reflected in the
statement of income as a contra to changes in fair value of 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 as described in
note 1. Gains and losses from these anticipatory hedges are applied to
the cost basis of the assets acquired with recaptured funds. Net losses
recorded as basis adjustments to hedged debt securities were $-0- and
$381,105 in 1997 and 1996, respectively.
In order to limit exposure to market fluctuations related to temporary
seed money invested within the separate account, the Company entered
into financial futures contracts during 1997 and 1996. No financial
futures were held at December 31, 1997. Financial futures with a total
notional face amount of $14,528,750 and a fair value of $14,652,969 were
held at December 31, 1996. The Company recorded $2,035,309 and
$1,639,717 of losses from terminated contracts as a component of net
investment income during 1997 and 1996, respectively. The Company also
recorded gains of $2,636,999 and $2,007,720 as a component of net
investment income from market appreciation on the underlying hedged
securities within the separate account during 1997 and 1996,
respectively.
The Company is exposed to credit related risk in the event of
nonperformance by counterparties to financial instruments but does not
expect any counterparties to fail to meet their obligations. Where
appropriate, master netting agreements are arranged and collateral is
obtained in the form of rights to securities to lower the Company's
exposure to credit risk. It is the Company's policy to deal only with
highly rated companies.
(7) POSTRETIREMENT 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 1997 and 1996, the Company was allocated a portion
of benefit costs including severance pay, accumulated vacations, and
disability benefits. At December 31, 1997, 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 subsidiaries, CFLIC and 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 shareholder's equity accounts. Income tax expense for the years
ended December 31 was allocated as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
Seven Five
months months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Statements of income:
Operating income (excluding realized
<S> <C> <C> <C> <C>
investment gains and losses) $ 5,464 2,493 (85) (5,038)
Realized investment gains (losses) 197 162 516 (5,026)
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) included
in the statements of income 5,661 2,655 431 (10,064)
- ---------------------------------------------------------------------------------------------------------------------------
Shareholder's equity:
Change in deferred Federal income
- ---------------------------------------------------------------------------------------------------------------------------
taxes related to unrealized appreciation
- ---------------------------------------------------------------------------------------------------------------------------
(depreciation) on securities 1,893 (1,910) 1,489 18,458
Total income tax expense $ 7,554 745 1,920 8,394
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The actual Federal income tax expense differed from the expected tax
expense computed by applying the U.S. Federal statutory rate to income
before taxes on income as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
Seven Five
months months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Computed expected tax expense $ 5,12435.0% $ 2,19035.0% $ 12935.0% $ (13,862)35.0%
State income taxes, net (33)(0.2) 77 1.2 11 3.0 (306)0.8
Tax-exempt bond interest - - - - (22)(6.0) (332)0.8
Amortization of intangible assets 396 2.7 320 5.1 254 69.0 - -
Permanent difference due to
derivative transfer - - - - - - 4,399(11.1)
Other 174 1.2 68 1.1 59 16.1 37 (.1)
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 5,66138.7% $ 2,65542.4% $ 431117.1% $ (10,064)25.4%
- ---------------------------------------------------------------------------------------------------------------------------
</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, 1997 and 1996 follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Deferred tax assets:
<S> <C> <C>
PVFP $ 2,043 1,639
Policy reserves 25,312 19,237
Liability for commissions on recapture 4,715 6,073
Tax basis of intangible assets purchased 5,791 6,230
DAC "Proxy Tax" 14,594 9,032
Unrealized losses on investments - 422
Other deferred tax assets 31 827
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 52,486 43,460
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
PVFP 11,777 19,169
Unrealized gains on investments 1,472 -
Deferred acquisition costs 29,514 10,694
Other deferred tax liabilities 1,790 60
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 44,553 29,923
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 7,933 13,537
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 Company's
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 1997, 1996, and the seven months of
1995 for the Company were $9,400,517, $6,618,303, and $7,139,525,
respectively, and for the five months of 1995 for the Predecessor were
$6,364,609.
During 1997, the Company received approximately $1.1 million in advisory
fees from GALIC related to advisory services for certain GALIC annuity
products.
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
shareholder's equity on the Company's 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 CFLIC's balance sheet is fully consolidated
with the Company's December 31, 1996 balance sheet, CFLIC's 1996 income
and cash flow statements have not been consolidated with the Company's
1996 income or cash flows statements. However, CFLIC's December 31, 1996
cash balance of $6.7 million is included in the Company's cash flows
statement.
(10) STATUTORY SURPLUS AND DIVIDEND RESTRICTION
GAAP differs 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 tax under GAAP
reporting, the nonrecognition 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, adjustments to record the carrying values of debt
securities and certain equity securities at fair value 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.
As of December 31, the differences between statutory capital and surplus
and shareholder's equity determined in conformity with GAAP were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C>
Statutory capital and surplus $ 90,439 75,354
Reconciling items:
GAAP investment valuation reserves (237) (88)
Statutory asset valuation reserves 18,301 17,599
Interest maintenance reserve 3,080 2,301
GAAP investment adjustments to fair value 10,886 (3,191)
Deferred policy acquisition costs 84,326 49,833
GAAP basis policy reserves (37,292) (30,202)
Deferred Federal income taxes (net) 7,933 13,537
GAAP guarantee assessment adjustment (12,329) -
Goodwill 19,457 20,849
Present value of future profits 41,486 46,389
Future purchase price payable (12,173) (16,051)
Other (1,339) (1,286)
- ---------------------------------------------------------------------------------------------------------------------------
GAAP shareholder's equity $ 212,538 175,044
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Statutory net losses for CFSLIC for the years ended December 31, 1997,
1996, and 1995 were $9,816,357, $13,575,788, and $74,012,650,
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. Due to the
1997 statutory net loss and the Company's negative earned surplus at
December 31, 1997, no dividends are permissible in 1998 without prior
approval of the insurance commissioner.
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,
1997 the Company's total adjusted capital and authorized control level -
RBC were $108,741,069 and $25,433,964, respectively. This level of
adjusted capital qualifies under all tests.
(11) GUARANTY FUND ASSESSMENTS
The Company participates with 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 Company's authority to
issue new business, the Company is contingently liable for its share of
claims covered by the guaranty associations for insolvencies incurred
through 1997, 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 assets as a credit against premium of other state taxes over, most
commonly, five years.
At December 31, 1997, 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 $9.7 million in future assessments on insolvencies that
occurred before December 31, 1997. 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 $9.7
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 remaining 20%. The credits retained for 1997 were not
material.
