<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998.
REGISTRATION NO. 33-36073
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 11 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 12 [X]
PROVIDIAN LIFE & HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV
(Exact Name of Registrant)
Providian Life & Health Insurance Company
(Name of Depositor)
20 Moores Road Frazer, Pennsylvania 19355
(Address of Depositor's Principal Executive Office)
Depositor's Telephone Number: (800) 523-7900
Providian Life & Health Insurance Company
Kimberly A. Scouller, Esquire
Providian Center
P.O. Box 32830
400 West Market Street
Louisville, KY 40232
(Name and Address of Agent for Service)
Copy to:
Michael Berenson, Esquire
Ann B. Furman
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
1025 Thomas Jefferson St. N.W. Suite 400 E
Washington, DC 20007-0805
It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing pursuant to paragraph (b) of Rule 485.
[_] On pursuant to paragraph (b)(1)(v) of Rule 485.
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
[_] On pursuant to paragraph (a)(1) of Rule 485.
[_] 75 days after filing pursuant to paragraph (a)(2) of Rule 485.
[_] On pursuant to paragraph (a)(2) of Rule 485.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PURSUANT TO RULE 481
SHOWING LOCATION IN PART A (PROSPECTUS) AND PART B
(STATEMENT OF ADDITIONAL INFORMATION) OF REGISTRATION
STATEMENT OF INFORMATION REQUIRED BY FORM N-4
PART A
<TABLE>
<CAPTION>
ITEM OF
FORM N-4 PROSPECTUS CAPTION
<C> <S> <C>
1. Cover Page........................ Cover Page
2. Definitions....................... Glossary
3. Synopsis.......................... Highlights; Fee Table
4. Condensed Financial Information... Condensed Financial Information
5. General Description of Registrant,
Depositor, and Portfolio Providian Life & Health Insurance
Companies......................... Company; Providian Life & Health
Insurance Company Separate
Account IV; The Vanguard Variable
Insurance Fund; Voting Rights
6. Deductions and Expenses........... Charges and Deductions; Taxes;
Vanguard Variable Insurance Fund;
Expenses
7. General Description of Variable
Annuity Contracts................. Contract Features; Distribution
at Death Rules; Voting Rights;
Allocation of Purchase Payments;
Exchanges Among the Portfolios;
Additions, Deletions, or
Substitutions of Investments
8. Annuity Period.................... Annuity Payment Options
9. Death Benefit..................... Death of Annuitant Prior to
Annuity Date
10. Purchases and Contract Value...... Contract Application and Purchase
Payments; Accumulated Value
11. Redemptions....................... Full and Partial Withdrawals;
Annuity Payment Options; Free
Look Period
12. Taxes............................. Federal Tax Considerations
13. Legal Proceedings................. Part B: Legal Proceedings
14. Table of Contents for the
Statement of Additional Table of Contents for the
Information....................... Vanguard Variable Annuity Plan
Contract Statement of Additional
Information
PART B
<CAPTION>
ITEM OF STATEMENT OF ADDITIONAL
FORM N-4 INFORMATION CAPTION
<C> <S> <C>
15. Cover Page........................ Cover Page
16. Table of Contents................. Table of Contents
17. General Information and History... The Company
18. Services.......................... Part A: Auditors; Safekeeping of
Account Assets; Distribution of
the Contract
19. Purchase of Securities Being
Offered........................... Distribution of the Contract
20. Underwriters...................... Distribution of the Contract
21. Calculation of Performance Data... Performance Information;
Additional Performance Measures
22. Annuity Payments.................. Computations of Variable Annuity
Income Payments
23. Financial Statements.............. Financial Statements
</TABLE>
<PAGE>
PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
PROSPECTUS
FOR THE
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
OFFERED BY
PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
(A MISSOURI STOCK COMPANY)
APRIL 30, 1998
The Vanguard Variable Annuity Plan Contract (the "Contract"), offered
through Providian Life & Health Insurance Company (the "Company"), provides a
vehicle for investing on a tax-deferred basis in nine Portfolios offered by
The Vanguard Group, Inc. The Contract is intended for retirement savings or
other long-term investment purposes.
The minimum Initial Purchase Payment for the Contract is $5,000; there are
no sales loads. The Contract is a flexible-premium deferred variable annuity
that provides a Free Look Period for a minimum of 10 days (30 days or more in
some instances), during which you may cancel your investment in the Contract.
Your Purchase Payments for the Contract may be allocated among nine
Subaccounts of Providian Life & Health Insurance Company Separate Account IV
(the "Separate Account"). Assets of each Subaccount are invested in corre-
sponding Portfolios of Vanguard Variable Insurance Fund (the "Fund"), an open-
end, diversified investment company offered by The Vanguard Group, Inc. The
Fund currently offers nine Portfolios: the Money Market Portfolio, the High-
Grade Bond Portfolio, the High Yield Bond Portfolio, the Balanced Portfolio,
the Equity Income Portfolio, the Equity Index Portfolio, the Growth Portfolio,
the International Portfolio, and the Small Company Growth Portfolio. Net Pur-
chase Payments are automatically allocated to the Money Market Portfolio until
the end of your Free Look Period, and are subsequently allocated according to
your instructions.
The Contract's Accumulated Value varies with the investment performance of
the Portfolios you select. You bear all investment risk and investment results
for the Portfolios are not guaranteed.
The Contract offers a number of ways of withdrawing monies at a future date,
including a lump-sum payment and several Annuity Payment Options. Full or par-
tial withdrawals from the Contract may be made at any time before the Annuity
Date, although in many instances withdrawals made prior to age 59 1/2 are sub-
ject to a 10% penalty tax (and a portion may be subject to ordinary income
taxes). If you elect an Annuity Payment Option, Annuity Payments may be re-
ceived on a fixed or variable basis. You also have significant flexibility in
choosing the Annuity Date on which Annuity Payments begin.
This Prospectus sets forth the information you should know before investing
in the Contract; it must be accompanied by the current Prospectus for Vanguard
Variable Insurance Fund. Please read both Prospectuses carefully and retain
them for future reference. A Statement of Additional Information for the Con-
tract Prospectus, which has the same date as this Prospectus, has also been
filed with the Securities and Exchange Commission, is incorporated herein by
reference and is available free by writing to Vanguard Variable Annuity Cen-
ter, P.O. Box 1103, Valley Forge, PA 19482-1103. The Table of Contents of the
Statement of Additional Information is included at the end of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
HIGHLIGHTS.......... 3
Fee Table........... 6
Glossary............ 9
Condensed Financial
Information........ 12
Financial State-
ments.............. 12
Yield and Total Re-
turn............... 12
The Company and the
Separate Account... 13
Vanguard Variable
Insurance Fund..... 14
CONTRACT FEATURES... 16
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Free Look Period.... 16
Contract Application
and Purchase
Payments........... 16
Allocation of
Purchase Payments.. 18
Charges and Deduc-
tions.............. 18
Accumulated Value... 20
Dividends and Capi-
tal Gains Treat-
ment............... 21
Annuity Express(TM). 21
Exchanges Among the
Portfolios......... 21
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Full and Partial
Withdrawals........ 22
Minimum Balance
Requirements....... 23
Designation of a
Beneficiary........ 24
Death of Annuitant
Prior to Annuity
Date............... 24
Annuity Date........ 25
Annuity Payment Op-
tions.............. 25
FEDERAL TAX
CONSIDERATIONS..... 28
General Information. 32
</TABLE>
- -------------------------------------------------------------------------------
The Contract is not available in all States.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
2
<PAGE>
HIGHLIGHTS
REFER TO THE GLOSSARY (PAGE 9) FOR A DEFINITION OF ALL CAPITALIZED TERMS.
VANGUARD VARIABLE The Contract provides a vehicle for investing on a tax-
ANNUITY PLAN deferred basis in nine Portfolios offered by The Van-
CONTRACT guard Group, Inc. Monies may be subsequently withdrawn
from the Contract either as a lump sum or as an annuity
income. Because Accumulated Values and, to the extent
Variable Annuity Payments are selected, Annuity Payments
depend on the investment performance of the selected
Portfolios, you bear all investment risk for monies in-
vested under the Contract. The investment performance of
the Portfolios is not guaranteed.
- -------------------------------------------------------------------------------
WHO SHOULD INVEST The Contract is designed for investors seeking long-
term, tax-deferred accumulation of funds, generally for
retirement but also for other long-term investment pur-
poses. The tax-deferred feature of the Contract is most
attractive to investors in high federal and state mar-
ginal tax brackets who have exhausted other avenues of
tax deferral, such as "pre-tax" contributions to employ-
er-sponsored retirement or savings plans. The Contract
is intended for long- term investors.
- -------------------------------------------------------------------------------
INVESTMENT CHOICES Your investment in the Contract may be allocated among
several Subaccounts of the Separate Account. The
Subaccounts in turn invest exclusively in the nine Port-
folios of Vanguard Variable Insurance Fund. The Fund, a
member of The Vanguard Group of Investment Companies,
offers nine Portfolios: the Money Market Portfolio, the
High-Grade Bond Portfolio, the High Yield Bond Portfo-
lio, the Balanced Portfolio, the Equity Income Portfo-
lio, the Equity Index Portfolio, the Growth Portfolio,
the International Portfolio, and the Small Company
Growth Portfolio. The assets of each Portfolio are sepa-
rate, and each Portfolio has distinct investment objec-
tives and policies as described in the accompanying Fund
Prospectus. PAGE 14
- -------------------------------------------------------------------------------
FREE LOOK PERIOD The Contract provides a Free Look Period for a minimum
of 10 days (30 or more days in some instances as speci-
fied in your Contract) during which you may cancel your
investment in the Contract. To cancel your investment,
please return your Contract to us. When we receive the
Contract, you will be reimbursed for all Purchase Pay-
ments and any corresponding appreciation credited to
your account. PAGE 16
- -------------------------------------------------------------------------------
HOW TO INVEST To invest in the Contract, please complete the accompa-
nying application form. The minimum Initial Purchase
Payment is $5,000; the minimum Portfolio balance is
$1,000; and subsequent Purchase Payments must be at
least $250. You may make subsequent Purchase Payments at
any time before the Contract's Annuity Date, as long as
the Annuitant or Joint Annuitant specified in the Con-
tract is living. Please note that when purchasing a Con-
tract, the Annuitant you name, and the Joint Annuitant
if applicable, must be 75 years of age or less. PAGE 16
- -------------------------------------------------------------------------------
3
<PAGE>
ALLOCATION OF Your Net Purchase Payments are initially allocated to
PURCHASE PAYMENTS the Money Market Portfolio when your Contract is issued.
At the end of the Free Look Period, and a 5-day grace
period, the then-current Accumulated Value of your Con-
tract is allocated among the Portfolios of the Fund in
accordance with your application instructions. Requests
to change the allocation of subsequent Net Purchase Pay-
ments may be made in writing, or by telephone if you
have signed the proper section of the Application. PAGE
18
- -------------------------------------------------------------------------------
CHARGES AND The Contract imposes no sales charges. The costs of the
DEDUCTIONS UNDER Contract include mortality and expense risk charges,
THE CONTRACT maintenance and administrative charges which cover the
cost of administering the Contract, and management, ad-
visory and other fees, which reflect the costs of Van-
guard Variable Insurance Fund. There are no charges un-
der the Contract for withdrawals, although withdrawals
made prior to age 59 1/2 may be subject to a 10% penalty
tax. PAGE 18
- -------------------------------------------------------------------------------
EXCHANGES
You may make exchanges among the Fund's Portfolios sub-
ject to certain restrictions on excess exchange activi-
ty. These restrictions do not apply, however, to non-
substantive exchanges or to the Money Market Portfolio.
No fee is imposed for exchanges. Exchanges must be for
at least $250, or, if less, for the entire value of the
Portfolio from which the exchange is made. PAGE 21
- -------------------------------------------------------------------------------
FULL AND PARTIAL You may withdraw all or part of the Accumulated Value of
WITHDRAWALS the Contract before the earlier of the Annuity Date or
the Annuitant's death (or the Joint Annuitant's death,
if later). You may establish systematic withdrawals from
your Contract, and receive distributions at regular in-
tervals. Withdrawals made prior to age 59 1/2 may be
subject to a 10% penalty tax. PAGE 22
- -------------------------------------------------------------------------------
DEATH BENEFIT If the Annuitant specified in your Contract dies prior
to the Annuity Date, the Annuitant's named Beneficiary
will receive the Death Benefit under the Contract. The
Death Benefit is the greater of the then-current Accumu-
lated Value of the Contract or the sum of all Purchase
Payments (less any partial withdrawals and premium tax-
es). Your Beneficiary may elect to receive these pro-
ceeds as a lump sum or as Annuity Payments. PAGE 24
- -------------------------------------------------------------------------------
ANNUITY PAYMENT Beginning on the Annuity Date, you may withdraw monies
OPTIONS from the Contract in the form of an annuity income. As
the Contract Owner you may elect one of several Annuity
Payment Options. The Options provide a wide range of
flexibility in choosing an annuity payment schedule that
meets your particular needs. Annuity Payments may be re-
ceived for a designated period or for life (for either a
single or joint life), with or without a guaranteed num-
ber of payments. Annuity Payments can be fixed, or can
vary with the investment performance of a Portfolio of
the Fund. You may elect a lump-sum payment prior to the
Annuity Date in lieu of Annuity Payments. PAGE 25
- -------------------------------------------------------------------------------
4
<PAGE>
CONTRACT AND If you have questions about your Contract, please tele-
POLICYHOLDER phone the Vanguard Variable Annuity Center (1-800-462-
INFORMATION 2391). Please have ready the Contract number and the
Contract Owner's name when you call. As Contract Owner,
you will receive periodic statements confirming any
transactions that take place, as well as quarterly
statements and an Annual Report.
- -------------------------------------------------------------------------------
5
<PAGE>
FEE TABLE The following table illustrates all expenses that you
would incur as a Contract Owner, except for Premium
Taxes that may be assessed by your state (see "Charges
and Deductions"). The expenses and fees shown are for
the Fund's and the Separate Account's 1997 fiscal years.
The purpose of this table is to assist you in under-
standing the various costs and expenses that you would
bear directly or indirectly as a purchaser of the Con-
tract. The fee table reflects ALL expenses for both the
Separate Account and the Fund. For a complete discussion
of contract costs and expenses, see "Charges and Deduc-
tions."
<TABLE>
<CAPTION>
SEPARATE
OWNER TRANSACTION EXPENSES ACCOUNT
-------------------------------------------------------------------
<S> <C>
Sales Load Imposed on Purchases........................... None
Redemption Fees........................................... None
Exchange Fees............................................. None
-------------------------------------------------------------------
Annual Contract Maintenance Fee*.......................... $25
</TABLE>
* Applies to Contracts valued at less than $25,000 at
the time of initial purchase and on the last Business
Day of each year.
<TABLE>
<CAPTION>
SEPARATE
ANNUAL SEPARATE ACCOUNT EXPENSES ACCOUNT
---------------------------------------------------------------------
<S> <C>
Mortality and Expense Risk Charge**......................... .28%
Administrative Expense Charge............................... .10%
---
TOTAL ANNUAL SEPARATE ACCOUNT EXPENSES.................... .38%
===
</TABLE>
** This charge is currently reduced to 0.28% of all as-
sets when net assets attributable to the Separate Ac-
count (and Separate Account B of First Providian Life &
Health Insurance Company) exceed $2.5 billion. This
charge is further reduced to 0.27% of all assets when
net assets attributable to the Separate Account (and
Separate Account B of First Providian Life & Health In-
surance Company) exceed $5 billion. See "Mortality and
Expense Risk Charge."
<TABLE>
<CAPTION>
HIGH- HIGH SMALL
MONEY GRADE YIELD EQUITY EQUITY COMPANY
ANNUAL FUND OPERATING MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management &
Administrative
Expenses.............. .15% .21% .21% .19% .23% .20% .20% .22% .23%
Investment Advisory
Fees.................. .02 .02 .06 .10 .10 .00 .15 .16 .12
12b-1 Distribution
Fees.................. None None None None None None None None None
Other Expenses
Distribution Costs.... .03 .02 .02 .02 .02 .02 .02 .02 .01
Miscellaneous Expenses. .01 .04 .02 .01 .02 .01 .01 .06 .03
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Other Expenses... .04 .06 .04 .03 .04 .03 .03 .08 .04
---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES............. .21% .29% .31% .32% .37% .23% .38% .46% .39%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
HIGH- HIGH SMALL
MONEY GRADE YIELD EQUITY EQUITY COMPANY
MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH
TOTAL EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Separate Account
Expenses............... .38% .38% .38% .38% .38% .38% .38% .38% .38%
Total Fund Operating
Expenses............... .21 .29 .31 .32 .37 .23 .38 .46 .39
--- --- --- --- --- --- --- --- ---
GRAND TOTAL, SEPARATE
ACCOUNT AND FUND
OPERATING EXPENSES.... .59% .67% .69% .70% .75% .61% .76% .84% .77%
=== === === === === === === === ===
</TABLE>
The following example illustrates the expenses that you
would incur on a $1,000 purchase payment over various
periods, assuming (1) a 5% annual rate of return and (2)
redemption at the end of each period. As noted in the
table above, the Contract imposes no redemption fees of
any kind. Your expenses are identical whether you
continue the Contract or withdraw the entire value of
your Contract at the end of the applicable period as a
lump sum or under one of the Contract's Annuity Payment
Options.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio............. $ 6 $19 $33 $ 75
High-Grade Bond Portfolio.......... 7 22 38 85
High Yield Bond Portfolio.......... 7 22 38 86
Balanced Portfolio................. 7 23 40 89
Equity Income Portfolio............ 8 24 42 94
Equity Index Portfolio............. 6 20 35 78
Growth Portfolio................... 8 25 43 96
International Portfolio............ 9 27 47 105
Small Company Growth Portfolio..... 8 25 43 97
</TABLE>
The Annual Contract Maintenance Fee is reflected in this
example as a percentage equal to the total amount of
fees collected during a year divided by the total
average net assets of the Portfolios during the same
year. The fee is assumed to remain the same in each year
of the above periods. The fee is prorated to reflect
only the remaining portion of the calendar year of
purchase. Thereafter, the fee is deducted on the last
business day of the year for the following year, on a
pro rata basis, from each of the Portfolios you have
chosen. For a complete discussion of Contract costs and
expenses, see "Charges and Deductions."
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EX-
PENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN, SUBJECT
TO THE GUARANTEES IN THE CONTRACT.
---------------------------------------------------------
AUTOMATED QUOTES The Vanguard Tele-Account Service provides access to
Accumulation Unit Values (to two decimal places) and
total returns for all Portfolios, and yield information
for the Money Market, High-Grade Bond, and High Yield
Bond Portfolios of the Vanguard Variable Annuity Plan.
Contract Owners may utilize this service for 24-hour
access to Plan Portfolio information. To access the
service you may call Tele-Account at 1-800-662-6273 (ON-
BOARD) and follow the step-by-step instructions, or
speak with a Vanguard associate at 1-800-522-5555 to
request a brochure that explains how to use the service.
7
<PAGE>
Vanguard's website also has Accumulation Unit Values (to
two decimal places) for all Portfolios. This service can
be utilized from www.vanguard.com by double-clicking on
fund prices.
- -------------------------------------------------------------------------------
8
<PAGE>
GLOSSARY ACCUMULATION UNIT--A measure of your ownership interest
in the Contract prior to the Annuity Date. Analogous,
though not identical, to a share owned in a mutual fund
account.
ACCUMULATION UNIT VALUE--The value of each Accumulation
Unit which is calculated each Valuation Period. Analo-
gous, though not identical, to the share price (net as-
set value) of a mutual fund.
ACCUMULATED VALUE--The value of all amounts accumulated
under the Contract prior to the Annuity Date, equivalent
to the Accumulation Units multiplied by the Accumulation
Unit Value. Analogous to the current market value of a
mutual fund account.
ANNUITANT--The person or persons whose life is used to
determine the duration of any Annuity Payments and, sub-
ject to the provision dealing with Joint Annuitants,
upon whose death, prior to the Annuity Date, benefits
under the Contract are paid.
ANNUITY DATE--The date on which Annuity Payments begin.
The Annuity Date is always the first day of the month
you specify.
ANNUITY PAYMENT--One of a series of payments made under
an Annuity Payment Option.
ANNUITY PAYMENT OPTION--One of several ways in which a
series of payments are made after the Annuity Date. Un-
der a FIXED ANNUITY OPTION, the dollar amount of each
Annuity Payment does not change over time. Annuity Pay-
ments are based on the Contract's Accumulated Value as
of the Annuity Date. Under a VARIABLE ANNUITY OPTION,
the dollar amount of each Annuity Payment may change
over time, depending upon the investment experience of
the Portfolio or Portfolios you choose.
ANNUITY UNIT--Unit of measure used to calculate Variable
Annuity Payments.
BENEFICIARY--The person to whom any benefits are due
upon the Annuitant's death.
BUSINESS DAY--A day when the New York Stock Exchange is
open for trading.
COMPANY ("We", "Us", "Our")--Providian Life & Health In-
surance Company, a Missouri stock company.
CONTRACT ANNIVERSARY--Any anniversary of the Contract
Date.
CONTRACT DATE--The date of issue of this Contract.
CONTRACT OWNER ("You", "Your")--The person or persons
designated as the Contract Owner in the Contract appli-
cation. The term shall also include any person named as
Joint Owner. A Joint Owner shares ownership in all re-
spects with the Owner. The Owner has the right to assign
ownership to a person or party other than himself.
CONTRACT YEAR--A period of 12 months starting with the
Contract Date or any Contract Anniversary.
9
<PAGE>
DEATH BENEFIT--The greater of the then-current Accumu-
lated Value or the sum of all Purchase Payments (less
any partial withdrawals and premium taxes).
FREE LOOK PERIOD--The period during which the Contract
can be cancelled and treated as void from the Contract
Date.
FUND--Vanguard Variable Insurance Fund, Inc., an open-
end, diversified investment company, offered by The Van-
guard Group, Inc., in which the Separate Account in-
vests.
JOINT ANNUITANT--The person other than the Annuitant who
may be designated by the Contract Owner and on whose
life Annuity Payments may also be based.
NET PURCHASE PAYMENT--Any Purchase Payment less the ap-
plicable Premium Tax, if any.
NON-QUALIFIED CONTRACT--A Contract other than a Quali-
fied Contract. Contributions to such a Contract are made
with after-tax dollars.
OWNER'S DESIGNATED BENEFICIARY--The person designated to
receive the Contract Owner's interest in the Contract if
the Contract Owner dies before the entire interest in
the Contract is distributed, as explained in the "IRS-
Required Distribution" section.
PAYEE--The Contract Owner, Annuitant, Beneficiary, or
any other person, estate, or legal entity to whom bene-
fits are to be paid.
PORTFOLIO--The separate investment Portfolios of the
Vanguard Variable Insurance Fund. The Fund currently of-
fers nine Portfolios: the Money Market Portfolio, the
High-Grade Bond Portfolio, the High Yield Bond Portfo-
lio, the Balanced Portfolio, the Equity Income Portfo-
lio, the Equity Index Portfolio, the Growth Portfolio,
the International Portfolio, and the Small Company
Growth Portfolio. In this Prospectus, Portfolio will
also be used to refer to the Subaccount that invests in
the corresponding Portfolio.
PREMIUM TAX--A regulatory tax that may be assessed by
your state on the Purchase Payments made into your Con-
tract. The amount which we must pay as Premium Tax will
be deducted from each Purchase Payment or from your Ac-
cumulated Value as it is incurred by us.
PROOF OF DEATH--(a) A certified death certificate; (b) a
certified decree of a court of competent jurisdiction as
to the finding of death; (c) a written statement by a
medical doctor who attended the deceased; or (d) any
other proof satisfactory to the Company.
PURCHASE PAYMENT--Any premium payment--any amount you
invest in the Contract. The minimum Initial Purchase
Payment is $5,000; each Additional Purchase Payment must
be at least $250. Purchase Payments may be made at any
time prior to the Annuity Date as long as the Annuitant
is living.
QUALIFIED CONTRACT--A Contract that qualifies as an in-
dividual retirement annuity under Section 408(b) of the
Internal Revenue Code of 1986, as amended.
10
<PAGE>
SEPARATE ACCOUNT--Providian Life & Health Insurance Com-
pany Separate Account IV. The Separate Account consists
of assets that are segregated by Providian Life & Health
Insurance Company and invested in the Vanguard Variable
Insurance Fund. The Separate Account is independent of
the general assets of the Company.
SUBACCOUNT--That portion of the Separate Account that
invests in shares of the Fund's Portfolios. Each
Subaccount will only invest in a single Portfolio. The
investment performance of each Subaccount is linked di-
rectly to the in- vestment performance of one of the
nine Portfolios of the Fund.
VALUATION PERIOD--A period between two successive Busi-
ness Days commencing at the close of business of the
first Business Day and ending at the close of business
of the following Business Day.
- -------------------------------------------------------------------------------
11
<PAGE>
CONDENSED FINAN- The Accumulation Unit Values and the number of Accumula-
CIAL INFORMATION tion Units outstanding for each Subaccount in 1991
through 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD APRIL 29, 1991 THROUGH DECEMBER 31, 1997*
----------------------------------------------------------------------------------------
HIGH SMALL
MONEY HIGH-GRADE YIELD EQUITY EQUITY COMPANY
MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value
as of:
Start Date*............ 1.000 10.000 10.000 10.000 10.000 10.000 10.000 10.000 10.000
12/31/91............... 1.032 11.027 . 10.802 . 11.275 . . .
12/31/92............... 1.064 11.656 . 11.514 . 12.039 . . .
12/31/93............... 1.091 12.695 . 12.961 10.488 13.144 10.569 . .
12/31/94............... 1.130 12.290 . 12.815 10.304 13.224 10.964 10.128 .
12/31/95............... 1.191 14.437 . 16.885 14.239 18.073 15.089 11.678 .
12/31/96............... 1.250 14.882 10.871 19.532 16.820 22.098 19.057 13.319 9.725
12/31/97............... 1.314 16.219 12.135 23.946 22.503 29.301 24.034 13.708 10.970
Number of units
outstanding as of:
12/31/91............... 32,495 2,122 . 3,395 . 2,311 . . .
12/31/92............... 75,564 4,417 . 8,682 . 9,645 . . .
12/31/93............... 109,190 6,592 . 16,164 6,411 12,971 4,879 . .
12/31/94............... 154,415 6,589 . 16,429 6,089 13,676 8,004 6,818 .
12/31/95............... 183,867 8,684 . 17,021 7,355 16,292 11,857 8,146 .
12/31/96............... 246,219 9,395 3,042 17,307 9,260 19,360 15,744 12,435 5,362
12/31/97............... 282,813 12,403 7,810 19,528 13,361 24,886 18,975 14,597 11,350
(UNITS ARE SHOWN IN THOUSANDS)
</TABLE>
* Date of commencement of operations for the High-Grade Bond and Equity Index
Subaccounts was 4/29/91, for the Money Market Subaccount was 5/2/91, for the
Balanced Subaccount was 5/23/91, for the Equity Income and Growth
Subaccounts was 6/7/93, for the International Subaccount was 6/3/94, and for
the High Yield Bond and Small Company Growth Subaccounts was 6/3/96.
- -------------------------------------------------------------------------------
FINANCIAL The audited statutory-basis financial statements of the
STATEMENTS Company and the financial statements of the Separate Ac-
count (as well as the Independent Auditors' Reports
thereon) are contained in the Statement of Additional
Information.
- -------------------------------------------------------------------------------
YIELD AND TOTAL From time to time a Portfolio of the Fund may advertise
RETURN its yield and total return investment performance for
various periods, including quarter-to-date, year-to-
date, one year, three year, five year and since incep-
tion. Advertised yields and total returns will be calcu-
lated according to standardized methods prescribed by
the Securities and Exchange Commission ("SEC"), so all
charges and expenses attributable to the Contract will
be included. Including these fees has the effect of de-
creasing the advertised performance of a Portfolio, so
that a Portfolio's investment performance will not be
directly comparable to that of an ordinary mutual fund.
The Company may also advertise total return or other
performance data in non-standard formats which do not
reflect the Annual Contract Maintenance Fee.
12
<PAGE>
Please refer to the Statement of Additional Information
for a description of the method used to calculate a
Portfolio's yield and total return, and a list of the
indexes and other benchmarks used in evaluating a Port-
folio's performance.
The performance measures discussed above are not in-
tended to indicate or predict future performance.
- -------------------------------------------------------------------------------
THE COMPANY AND The Company is a stock life insurance company incorpo-
THE SEPARATE rated under the laws of Missouri on August 6, 1920, with
ACCOUNT administrative offices at 20 Moores Road, Frazer, Penn-
sylvania 19355. The Company is principally engaged in
PROVIDIAN LIFE & offering life insurance, annuity contracts, and accident
HEALTH INSURANCE and health insurance and is admitted to do business in
COMPANY 49 states, the District of Columbia and Puerto Rico.
As of December 31, 1997, the Company had statutory as-
sets of approximately $11 billion. The Company is a
wholly owned indirect subsidiary of AEGON USA, Inc.,
which conducts substantially all of its operations
through subsidiary companies engaged in the insurance
business or in providing non-insurance financial servic-
es. All of the stock of AEGON USA, Inc. is indirectly
owned by AEGON n.v. of the Netherlands. AEGON n.v., a
holding company, conducts its business through subsidi-
ary companies engaged primarily in the insurance busi-
ness.
---------------------------------------------------------
PROVIDIAN LIFE & The Separate Account was established by the Company as a
HEALTH INSURANCE separate account under the laws of the State of Missouri
COMPANY SEPARATE on July 16, 1990, pursuant to a resolution of the
ACCOUNT IV Company's Board of Directors. The Separate Account is a
unit investment trust registered with the SEC under the
Investment Company Act of 1940 (the "1940 Act"). Such
registration does not signify that the SEC supervises
the management or the investment practices or policies
of the Separate Account.
The assets of the Separate Account are owned by the Com-
pany and the obligations under the Contract are obliga-
tions of the Company. These assets are held separately
from the other assets of the Company and are not charge-
able with liabilities incurred in any other business op-
eration of the Company (except to the extent that assets
in the Separate Account exceed the reserves and other
liabilities of the Separate Account). The Company will
always keep assets in the Separate Account with a value
at least equal to the total Accumulated Value under the
Contracts. Income, gains and losses incurred on the as-
sets in the Separate Account, whether or not realized,
are credited to or charged against the Separate Account
without regard to other income, gains or losses of the
Company. Therefore, the investment performance of the
Separate Account is entirely independent of the invest-
ment performance of the Company's general account assets
or any other separate account maintained by the Company.
The Separate Account has nine Subaccounts, each of which
invests solely in a corresponding Portfolio of the Fund.
Additional Subaccounts may be established at the discre-
tion of the Company. The Separate Account meets the def-
inition of a "separate account" under Rule O-1(e)(1) of
the 1940 Act.
- -------------------------------------------------------------------------------
13
<PAGE>
VANGUARD VARIABLE Vanguard Variable Insurance Fund is an open-end diversi-
INSURANCE FUND fied investment company intended exclusively as an in-
vestment vehicle for variable annuity or variable life
insurance contracts offered by insurance companies.
The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 94 distinct portfolios and assets in ex-
cess of $360 billion. Through their jointly-owned sub-
sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund
and the other Funds in the Group obtain at cost virtu-
ally all of their corporate management, administrative,
shareholder accounting and distribution services.
The Fund offers nine Portfolios--a money market portfo-
lio, a high-grade bond portfolio, a high yield bond
portfolio, a balanced portfolio, an equity income port-
folio, an equity index portfolio, a growth portfolio, an
international portfolio, and a small company growth
portfolio--each with distinct investment objectives
and policies.
THE MONEY MARKET PORTFOLIO seeks to provide current in-
come consistent with the preservation of capital and li-
quidity. The Portfolio also seeks to maintain a stable
net asset value of $1.00 per share. The Portfolio in-
vests primarily in high-quality money market instruments
issued by financial institutions, non-financial corpora-
tions, the U.S. Government, state and municipal govern-
ments and their agencies or instrumentalities, as well
as repurchase agreements collateralized by such securi-
ties. The Portfolio also invests in Eurodollar obliga-
tions (dollar-denominated obligations issued outside the
U.S. by foreign banks or foreign branches of domestic
banks) and Yankee obligations (dollar-denominated obli-
gations issued in the U.S. by foreign banks). Vanguard's
Fixed Income Group serves as this Portfolio's investment
adviser.
THE HIGH-GRADE BOND PORTFOLIO seeks to parallel the in-
vestment results of the Lehman Brothers Aggregate Bond
Index. The Portfolio invests primarily in a diversified
portfolio of U.S. Government and corporate bonds, and
mortgage-backed securities. Vanguard's Fixed Income
Group serves as this Portfolio's investment adviser.
THE HIGH YIELD BOND PORTFOLIO seeks to provide a high
level of current income by investing in lower-rated debt
securities, which may be regarded as having speculative
characteristics and are commonly referred to as "junk
bonds." Under normal circumstances, at least 80% of the
Portfolio's assets will be invested in high-yield corpo-
rate debt obligations rated at least B by Moody's In-
vestors Service, Inc. or Standard & Poor's Corporation
or, if unrated, of comparable quality as determined by
the Portfolio's adviser, Wellington Management Company.
THE BALANCED PORTFOLIO seeks the conservation of princi-
pal, a reasonable income return and profits without un-
due risk. The Portfolio invests in a diversified portfo-
lio of common stocks and bonds, with common stocks
expected to represent 60% to 70% of the Portfolio's to-
tal assets and bonds to represent 30% to 40%. Wellington
Management Company serves as this Portfolio's investment
adviser.
14
<PAGE>
THE EQUITY INCOME PORTFOLIO seeks to provide a high
level of current income by investing principally in div-
idend-paying equity securities. Newell Associates serves
as this Portfolio's investment adviser.
THE EQUITY INDEX PORTFOLIO seeks to parallel the invest-
ment results of the Standard & Poor's 500 Composite
Stock Price Index (S&P 500). The Portfolio invests in
common stocks included in the S&P 500. Vanguard's Core
Management Group serves as this Portfolio's investment
adviser.
THE GROWTH PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities
of seasoned U.S. companies with above-average prospects
for growth. Lincoln Capital Management Company serves as
this Portfolio's investment adviser.
THE INTERNATIONAL PORTFOLIO seeks to provide long-term
capital appreciation. The Portfolio invests primarily in
equity securities of companies based outside the United
States. Schroder Capital Management International, Inc.
serves as this Portfolio's investment adviser.
THE SMALL COMPANY GROWTH PORTFOLIO seeks to provide long
term growth in capital by investing primarily in equity
securities of small companies deemed to have favorable
prospects for growth. These securities are primarily
common stocks but may also include securities convert-
ible into common stock. Granahan Investment Management
serves as this Portfolio's investment adviser.
There is no assurance that a Portfolio will achieve its
stated objective.
ADDITIONAL INFORMATION CONCERNING THE INVESTMENT OBJEC-
TIVES AND POLICIES OF THE PORTFOLIOS AND THE INVESTMENT
ADVISORY SERVICES, TOTAL EXPENSES AND CHARGES CAN BE
FOUND IN THE CURRENT PROSPECTUS FOR THE FUND, WHICH AC-
COMPANIES THIS PROSPECTUS. THE FUND PROSPECTUS SHOULD BE
READ CAREFULLY BEFORE ANY DECISION IS MADE CONCERNING
THE ALLOCATION OF PURCHASE PAYMENTS TO A PORTFOLIO.
The Portfolios may be made available to registered sepa-
rate accounts offering variable annuity and variable
life products of the Company as well as other insurance
companies. Although we believe it is unlikely, a mate-
rial conflict could arise between the interests of the
Separate Account and one or more of the other partici-
pating separate accounts. In the event of a material
conflict, the affected insurance companies agree to take
any necessary steps, in- cluding removing their separate
account from the Fund if required by law, to resolve the
matter. See the Fund's Prospectus for more information.
Administrative services are provided by The Vanguard
Group, Inc., The Vanguard Variable Annuity Center, 100
Vanguard Boulevard, Malvern, PA 19355. In California,
The Vanguard Group, Inc. provides administrative serv-
ices under the name Vanguard Administrators. In addi-
tion, The Continuum Company, Inc., 301 West 11th Street,
Kansas City, MO 64105, provides some subadministrative
services.
- -------------------------------------------------------------------------------
15
<PAGE>
CONTRACT FEATURES
The rights and benefits under the Contract are described
below and in the Contract. The Company reserves the
right to make any modification to conform the Contract
to, or give the Contract Owner the benefit of, any fed-
eral or state statute or any rule or regulation of the
United States Treasury Department.
---------------------------------------------------------
FREE LOOK PERIOD A Free Look Period exists for a minimum of 10 days after
the Contract Owner receives the Contract (30 or more
days in some instances as set forth in your Contract)
plus 5 days for mailing. The Contract permits the Con-
tract Owner to cancel the Contract during the Free Look
Period by returning the Contract to Vanguard Variable
Annuity Center, P.O. Box 1103, Valley Forge, PA 19482-
1103. Withdrawals are not permitted during the Free Look
Period. Upon cancellation, the Contract is treated as
void from the Contract Date and the Contract Owner will
receive the greater of the Purchase Payments made under
the Contract or the Accumulated Value of the Contract as
of the day the Contract is received by the Company.
- -------------------------------------------------------------------------------
CONTRACT Individuals wishing to purchase a Non-Qualified Contract
APPLICATION AND should send a completed application and your Initial
PURCHASE PAYMENTS Purchase Payment to the Vanguard Variable Annuity Cen-
ter. Your Initial Purchase Payment must be equal to or
greater than the $5,000 minimum investment requirement.
Furthermore, the named Annuitant and Joint Annuitant
must be 75 years of age or less.
The Contract will be issued and the Initial Net Purchase
Payment will be credited within two Business Days after
acceptance of the application and the Initial Purchase
Payment. Acceptance is subject to the application being
received in good order, and the Company reserves the
right to reject any application or Initial Purchase Pay-
ment.
If the Initial Purchase Payment cannot be credited be-
cause the application is incomplete, the Company will
contact the applicant in writing, explain the reason for
the delay and will refund the Initial Purchase Payment
within five Business Days. As soon as the necessary re-
quirements are fulfilled the Purchase Payment will be
credited.
Additional Purchase Payments may be made at any time
prior to the Annuity Date, as long as the Annuitant or
Joint Annuitant, if applicable, is living. Additional
Purchase Payments must be for at least $250. Additional
Purchase Payments received prior to the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time)
are credited to the Accumulated Value of the Contract as
of the close of business that same day.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, we will only accept a
foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S. correspon-
dent bank.
The Contracts are available on a non-qualified basis and
as individual retirement annuities (IRAs) that qualify
for special federal income tax treatment. Generally,
Qualified Contracts may be purchased only in connection
with a
16
<PAGE>
"rollover" of funds from another qualified plan or IRA
and contain certain other restrictive provisions limit-
ing the timing and amount of payments to and distribu-
tions from the Qualified Contract.
Total Purchase Payments may not exceed $1,000,000 with-
out prior approval of the Company.
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
MONEY SHOULD BE DEPOSIT ACCOUNT NUMBER 1412652173
WIRED TO: PROVIDIAN LIFE & HEALTH INSURANCE COM-
PANY
PLEASE CALL: CONTRACT NUMBER
1-800-462-2391 CONTRACT REGISTRATION
BEFORE WIRING
To assure proper receipt, please be sure your bank in-
cludes the contract number Vanguard has assigned you.
For an Initial Purchase Payment, please complete the
Vanguard Variable Annuity Plan Application and mail it
to the Vanguard Variable Annuity Center, P.O. Box 1103,
Valley Forge, PA 19482-1103 prior to completing wire ar-
rangements. Note: Federal funds wire purchase orders
will be accepted only when the New York Stock Exchange
and Custodian Bank are open for business.
---------------------------------------------------------
SECTION 1035 You may exchange your Accumulated Value under an exist-
EXCHANGES ing annuity contract to the Vanguard Variable Annuity
Plan. Section 1035 of the Internal Revenue Code of 1986,
as amended (the "Code"), provides, in general, that no
gain or loss shall be recognized on the exchange of one
annuity contract for another. To complete a "1035 Ex-
change" simply provide all the requested information on
the 1035 Exchange Form and mail it, along with the ap-
plication and your current contract, to the Variable An-
nuity Center. As an accommodation to owners of Vanguard
Variable Annuity Plan contracts, and in accordance with
the Code, we will accept, under certain conditions, the
consolidation of two or more Vanguard Variable Annuity
Plan contracts into one. Such exchanges will be accepted
on a case by case basis in order to provide contract
owners with consolidated account reporting. In addition,
if applicable, contract owners will be responsible for
only one Annual Contract Maintenance Fee. Under no cir-
cumstances will an exchange of an existing Vanguard
Variable Annuity Plan contract for an identical new Van-
guard Variable Annuity Plan contract be allowed. Special
rules and procedures apply to Code Section 1035 transac-
tions, particularly if the Contract being exchanged was
issued prior to August 14, 1982. Prospective Contract
Owners wishing to take advantage of Code Section 1035
should consult their tax advisers.
Please note, that an outstanding loan on the contract
that you wish to transfer may create a tax consequence.
Therefore, you are encouraged to settle any outstanding
loans with your current insurance company prior to ini-
tiating a 1035 Exchange into the Plan.
- -------------------------------------------------------------------------------
17
<PAGE>
ALLOCATION OF The Contract Owner specifies on the Contract Application
PURCHASE PAYMENTS how Purchase Payments will be allocated. The Contract
Owner may allocate each Purchase Payment to one or more
of the Portfolios as long as such portions are whole
number percentages and any allocation made is at least
10% and at least $1,000.
Allocation instructions for future Purchase Payments may
be changed by the Contract Owner by sending a written
notice to the Vanguard Variable Annuity Center. You may
sign the proper section of the Application to establish
an option that allows you to provide allocation instruc-
tions by telephone. This option includes the ability to
change your investment by eliminating a Contract Portfo-
lio from your allocations or by adding a new Contract
Portfolio to your list. Please note that you must main-
tain a minimum of $1,000 in each Portfolio to which you
have allocated assets.
During the Free Look Period (which is assumed for this
purpose to be 10 to 30 days (or more in some instances
as specified in your contract) after the issuance of the
Contract), the Initial Net Purchase Payment and addi-
tional Purchase Payments received during the Free Look
Period will be allocated to the Money Market Portfolio.
Upon expiration of the Free Look Period, the Accumulated
Value will remain in the Money Market Portfolio for an
additional 5-day grace period to allow for mail deliv-
ery. Upon the expiration of the Free Look Period and the
5-day grace period (15 to 35 days), the Accumulated
Value will then be allocated among the Portfolios in ac-
cordance with the Contract Owner's instructions.
- -------------------------------------------------------------------------------
CHARGES AND The projected expenses for the Contract are substan-
DEDUCTIONS tially below the costs of other variable annuity con-
tracts. For example, based on a $25,000 contract the av-
erage expense ratio of other variable annuity contracts
was 2.09% as of December 31, 1997, compared to 0.71% for
the Vanguard Variable Annuity Plan (source for competi-
tors' data: Morningstar Performance Report January
1998).
No sales load is deducted from the Initial Purchase
Payment or any Additional Purchase Payments. In
addition, there are no sales charges imposed
upon withdrawals.
---------------------------------------------------------
MORTALITY AND The Company imposes a charge as compensation for bearing
EXPENSE RISK certain mortality and expense risks under the Contracts.
CHARGE The annual charge is assessed daily based on the com-
bined net assets of the Separate Account and Separate
Account B of First Providian Life & Health Insurance
Company in the Fund according to the following schedule:
RATE FOR
NET ASSETS ALL ASSETS
--------------------------------- ----------
Up to $2.5 Billion 0.30%
Over $2.5 Billion and Up To $5
Billion 0.28%
Over $5 Billion 0.27%
The Company guarantees that these mortality and expense
risk breakpoints will never increase. If this charge is
insufficient to cover actual costs and assumed risks,
the loss will fall on the Company. Conversely, if the
charge proves more than sufficient, any excess will be
added to the Company surplus.
18
<PAGE>
The mortality risk borne by the Company under the Con-
tracts, where one of the life Annuity Payment Options
was selected, is to make monthly annuity payments (de-
termined in accordance with the annuity tables and other
provisions contained in the Contract) regardless of how
long all Annuitants may live. We also assume mortality
risk as a result of our guarantee of a minimum Death
Benefit in the event the Annuitant dies prior to the An-
nuity Date.
The expense risk borne by the Company under the Con-
tracts is the risk that the charges for administrative
expenses which are guaranteed for the life of the Con-
tract may be insufficient to cover the actual costs of
issuing and ad- ministering the Contract.
---------------------------------------------------------
ADMINISTRATIVE An annual administrative charge of .10% of the net asset
CHARGE & value of the Separate Account is assessed daily along
MAINTENANCE FEE with an annual maintenance fee of $25 for Contracts val-
ued at less than $25,000 at the time of initial purchase
and on the last Business Day of each year. It is impor-
tant to note that fluctuation in Accumulation Unit Val-
ues due to changes in the market values of securities
may cause an investor's Contract's value to fall below
$25,000. The annual maintenance fee is deducted propor-
tionately from each Contract's Accumulated Value; there-
fore, the $25 fee is assessed per Contract, not per
Portfolio chosen. Your Initial Purchase Payment of less
than $25,000 is reduced by an initial maintenance fee
which is pro-rated to reflect only the remaining portion
of the calendar year of purchase. Thereafter, the fee is
deducted on the last Business Day of the year for the
following year, on a pro rata basis from each of the
Portfolios you have chosen. These deductions represent
reimbursement for the costs expected to be incurred over
the life of the Contract for issuing and maintaining
each Contract and the Separate Account. Please note that
Contracts valued at $25,000 or more as of the last Busi-
ness Day of the year will not be assessed the $25 main-
tenance fee for the following year.
---------------------------------------------------------
TAXES The Contract Owner will, where such taxes are imposed by
state law, pay Premium Taxes that currently range up to
3.5%. These taxes will be deducted from the Accumulated
Value or Purchase Payments as incurred by the Company.
As of the date of this Prospectus, the following state
assesses a Premium Tax on all Initial and subsequent
Purchase Payments:
<TABLE>
<CAPTION>
NON-
QUALIFIED QUALIFIED
-------------------------------------------------------------------
<S> <C> <C>
South Dakota................................... 0% 1.25%
</TABLE>
As of the date of this Prospectus, the following states
assess a Premium Tax against the Accumulated Value if
the Owner chooses an Annuity Payment Option instead of
receiving a lump sum distribution:
<TABLE>
<CAPTION>
NON-
QUALIFIED QUALIFIED
-------------------------------------------------------------------
<S> <C> <C>
California..................................... .50% 2.35%
District of Columbia........................... 2.25% 2.25%
Kentucky....................................... 2.00% 2.00%
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
NON-
QUALIFIED QUALIFIED
-------------------------------------------------------------------
<S> <C> <C>
Maine.......................................... 0% 2.00%
Nevada......................................... 0% 3.50%
West Virginia.................................. 1.00% 1.00%
Wyoming........................................ 0% 1.00%
</TABLE>
Under present laws, the Company will incur state or lo-
cal taxes (other than Premium Taxes described above) in
several states. At present, the Company does not charge
the Contract Owner for these other taxes. If there is a
change in state or local tax laws, charges for such
taxes may be made. The Company does not expect to incur
any federal income tax liability attributable to invest-
ment income or capital gains retained as part of the re-
serves under the Contracts. (See "Federal Tax Considera-
tions," page 28.) Based upon these expectations, no
charge is currently being made to the Separate Account
for corporate federal income taxes that may be attribut-
able to the Separate Account.
The Company will periodically review the question of a
charge to the Separate Account for corporate federal in-
come taxes related to the Separate Account. Such a
charge may be made in future years for any federal in-
come taxes incurred by the Company. This might become
necessary if the tax treatment of the Company is ulti-
mately determined to be other than what the Company cur-
rently believes it to be, if there are changes made in
the federal income tax treatment of annuities at the
corporate level, or if there is a change in the
Company's tax status. In the event that the Company
should incur federal income taxes attributable to in-
vestment income or capital gains retained as part of the
reserves under the Contracts, the Accumulated Value of
the Contract would be correspondingly adjusted by any
provision or charge for such taxes.
---------------------------------------------------------
VANGUARD VARIABLE The value of the assets in the Separate Account will re-
INSURANCE FUND flect the fees and expenses paid by the Fund. A complete
EXPENSES description of these expenses is found in the "Fee Ta-
ble" section of this Prospectus and in the "Management
of the Fund" Section of the Fund's Prospectus and in the
Fund's Statement of Additional Information.
- -------------------------------------------------------------------------------
ACCUMULATED VALUE At the commencement of the Contract, the Accumulated
Value equals the Initial Net Purchase Payment. Thereaf-
ter, on any Business Day the Accumulated Value equals
the Accumulated Value from the previous Business Day in-
creased by: i) any Additional Net Purchase Payments re-
ceived by the Company and ii) any increase in the Accu-
mulated Value due to investment results of the selected
Portfolio(s) that occur during the Valuation Period; and
reduced by: i) any decrease in the Accumulated Value due
to investment results of the selected Portfolio(s), ii)
a daily charge to cover the mortality and expense risks
assumed by the Company, iii) any charge to cover the
cost of administering the Contract, iv) any partial
withdrawals, and v) Premium Taxes, if any, that occur
during the Valuation Period.
20
<PAGE>
The Accumulated Value is expected to change from Valua-
tion Period to Valuation Period, reflecting the invest-
ment experience of the selected Portfolios of the Fund
as well as the daily deduction of charges. When your Net
Purchase Payments are allocated to a selected Portfolio,
they result in a particular number of Accumulation Units
being credited to your Contract. The number of Accumula-
tion Units credited is determined by dividing the dollar
amount allocated to each Portfolio by the Accumulation
Unit Value for that Portfolio as of the end of the Valu-
ation Period in which the payment is received. The Accu-
mulation Unit Value varies each Valuation Period (i.e.,
each day that there is trading on the New York Stock Ex-
change) with the net rate of return of the Portfolio.
The net rate of return reflects the investment perfor-
mance of the Portfolio for the Valuation Period and is
net of asset charges to the Portfolio.
- -------------------------------------------------------------------------------
DIVIDENDS AND All dividends and capital gains earned will be
CAPITAL GAINS reinvested and reflected in the Accumulation Unit Value.
TREATMENT Only in this way can these earnings remain tax deferred.
- -------------------------------------------------------------------------------
ANNUITY EXPRESS(TM) The Annuity Express service allows you to transfer funds
automatically from your checking or statement savings
account to one or more Portfolios in your Contract. You
may purchase into existing Portfolios (if the $1,000
minimum balance requirement has been met) monthly, quar-
terly, semiannually, or annually. The minimum automatic
purchase is $50 and the maximum is $100,000.
- -------------------------------------------------------------------------------
EXCHANGES AMONG Should your investment goals change, you may exchange
THE PORTFOLIOS the Accumulated Value among the Portfolios of the Fund.
Requests for exchanges received by mail or by telephone
prior to the close of the New York Stock Exchange (gen-
erally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after
the close of the Exchange are processed the next Busi-
ness Day.
The Contract's exchange privilege is not intended to af-
ford Contract Owners a way to speculate on short-term
movements in the market. Accordingly, in order to pre-
vent excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and in-
crease transaction costs, the Separate Account has es-
tablished a policy of limiting excessive exchange activ-
ity.
Because excessive exchanges can potentially disrupt the
management of the Portfolios and increase transaction
costs, exchange activity is limited to two substantive
exchanges (at least 30 days apart) from each Portfolio
(except the Money Market Portfolio) during any 12-month
period. "Substantive" means either a dollar amount large
enough to have a negative impact on a Portfolio or a se-
ries of movements between Portfolios. This restriction
does not limit non-substantive exchanges and does not
apply to exchanges from the Money Market Portfolio. All
exchanges must be for at least $250, or, if less, the
Accumulated Value in the Portfolio. However, the Company
and the Fund reserve the right to revise or terminate
the exchange privilege, limit the amount of or reject
any exchange, as deemed necessary, at any time.
---------------------------------------------------------
21
<PAGE>
AUTOMATIC The Automatic Exchange Service allows you to move money
EXCHANGES automatically among the Portfolios of the Fund. You may
exchange fixed amounts or percentages of your Portfolio
balance either monthly, quarterly, semiannually or annu-
ally into existing (the $1,000 minimum balance require-
ment has been met) Portfolios. Exchanges at regular in-
tervals or "dollar-cost averaging" can be used, for
example, to move money from a money market portfolio
into a stock or bond portfolio. The minimum exchange
amount is $250. The Automatic Exchange Service may be
established by completing a Vanguard Variable Annuity
Plan Automatic Exchange Service Application Form or
writing a letter of instruction. You may change the
transfer amount or cancel this service in writing or by
telephone, if you have established telephone authoriza-
tion on your Contract. Please note that the Automatic
Exchange Service cannot be used to establish a new Port-
folio, and will not be activated until the Free Look Pe-
riod has expired.
---------------------------------------------------------
TELEPHONE To establish the telephone exchange privilege on your
EXCHANGES Contract, please complete the appropriate section of the
Plan Application. The Company, the Fund, and Vanguard
shall not be responsible for the authenticity of ex-
change instructions received by telephone. Reasonable
procedures will be undertaken to confirm that instruc-
tions communicated by telephone are genuine. Prior to
the acceptance of any request, the caller will be asked
by a customer service representative for his or her con-
tract number and social security number. All calls will
be recorded, and this information will be verified with
the Contract Owner's records prior to processing a
transaction. Furthermore, all transactions performed by
a service representative will be verified with the Con-
tract Owner through a written confirmation statement.
The Company, the Fund, and Vanguard shall not be liable
for any loss, cost or expense for action on telephone
instructions that are believed to be genuine in accor-
dance with these procedures. Every effort will be made
to maintain the exchange privilege. However, the Company
and the Fund reserve the right to revise or terminate
its provisions, limit the amount of or reject any ex-
change, as deemed necessary, at any time.
- -------------------------------------------------------------------------------
FULL AND PARTIAL At any time before the Annuity Date and while the Annui-
WITHDRAWALS tant or Joint Annuitant is living, the Contract Owner
may make a partial or full withdrawal of the Contract to
receive all or part of the Accumulated Value by sending
a written request to the Vanguard Variable Annuity Cen-
ter. Full or partial withdrawals may only be made before
the Annuity Date and all partial withdrawal requests
must be for at least $250. (See "Federal Tax Considera-
tions," page 28.)
You can make a withdrawal by writing to the Vanguard
Variable Annuity Center. Your written request should in-
clude your Contract number, social security number,
withdrawal amount, the signature of all owners, and fed-
eral tax withholding election (IF NO WITHHOLDING ELEC-
TION IS CHOSEN, WE WILL BE REQUIRED TO WITHHOLD 10%).
Your proceeds will normally be distributed within two
Business Days after the receipt of the request but in no
event will it be later than seven calendar days, subject
to postponement in certain circumstances (see "Deferment
of Payment" page 27).
---------------------------------------------------------
22
<PAGE>
SYSTEMATIC You may establish an automatic withdrawal of a specific
WITHDRAWALS amount, a percentage of the balance, or accumulated
earnings from your Contract, and receive distributions
on a monthly, quarterly, semiannual, or annual schedule.
Once established, a check will be sent to your Contract
address, bank account or as
you direct. Please note that each systematic withdrawal,
like any other partial withdrawal, is subject to federal
income taxes on the earnings, and may be subject to a
10% tax imposed by the IRS on withdrawals made prior to
age 59 1/2.
A minimum Contract balance of $10,000, and Portfolio
balance of $1,000 are required to establish a systematic
withdrawal program for your Contract. The minimum auto-
matic withdrawal amount is $250. Changes to the with-
drawal amount, percentage, or the frequency of distribu-
tions may be made by telephone. Any other changes,
including a change in the destination of the check, must
be requested in writing, and should include signatures
of all Contract owners. To cancel the systematic with-
drawal program, the Contract owner(s) needs to submit a
letter of instruction with the appropriate signatures.
To establish a systematic withdrawal program for your
Contract, simply complete the Vanguard Variable Annuity
Plan Systematic Withdrawal Program Application Form.
Please note that the completed form must be signed by
all Contract owners, and must be signature guaranteed if
you are directing the withdrawal checks to an address
other than the Contract address.
Payments under the Contract of any amounts derived from
premiums paid by check may be delayed until such time as
the check has cleared your bank. If, at the time the
Contract Owner requests a full or partial withdrawal, he
or she has not provided the Company with a written elec-
tion not to have federal income taxes withheld, the Com-
pany must by law withhold such taxes from the taxable
portion of any full or partial withdrawal and remit that
amount to the federal government. Moreover, the Internal
Revenue Code provides that a 10% penalty tax will be im-
posed on certain early withdrawals. (See "Federal Tax
Considerations," page 28.)
Since the Contract Owner assumes the investment risk
with respect to amounts allocated to the Separate Ac-
count, the total amount paid upon withdrawal of the Con-
tract (taking into account any prior withdrawals) may be
more or less than the total Purchase Payments made.
- -------------------------------------------------------------------------------
MINIMUM BALANCE Due to the relatively high cost of maintaining smaller
REQUIREMENTS accounts, the Company reserves the right to transfer the
balance in any Portfolio account that falls below
$1,000, due to a partial withdrawal or exchange, to the
remaining Port- folios held under that Contract, on a
pro rata basis. In the event that the entire value of
the Contract falls below $1,000, you may be notified
that the Accumulated Value of your account is below the
Contract's minimum requirement. You would then be al-
lowed 60 days to make an additional investment before
the account is liquidated. Proceeds would be promptly
paid to the Contract Owner. The full proceeds would be
taxable as a withdrawal. A full withdrawal will result
in an automatic termination of the Contract.
- -------------------------------------------------------------------------------
23
<PAGE>
DESIGNATION OF A The Contract Owner may select one or more Beneficiaries,
BENEFICIARY who would receive benefits upon the death of the Annui-
tant, and name them in the application. The
Beneficiary(ies), as named on the application, will
serve as the beneficiary designation. Thereafter, while
the Annuitant or Joint Annuitant is living, the Contract
Owner may change the Beneficiary by written notice. Such
change will take effect on the date the notice is signed
by the Contract Owner but will not affect any payment
made or other action taken before the Company acknowl-
edges the notice. The Contract Owner may also make the
designation of Beneficiary irrevocable by sending writ-
ten notice to, and obtaining approval from, the Company.
Changes in the Beneficiary may then be made only with
the consent of the designated irrevocable Beneficiary.
If the Annuitant dies prior to the Annuity Date, the
following will apply unless the Contract Owner has made
other provisions:
(a) If there is more than one Beneficiary, each will
share in the Death Benefits equally;
(b) If one or two or more Beneficiaries has already
died, that share of the Death Benefit will be paid
equally to the survivor(s);
(c) If no Beneficiary is living, the proceeds will be
paid to the Contract Owner;
(d) If a Beneficiary dies at the same time as the Annui-
tant, the proceeds will be paid as though the Bene-
ficiary had died first. If a Beneficiary dies within
15 days after the Annuitant's death and before the
Company receives due proof of the Annuitant's death,
proceeds will be paid as though the Beneficiary had
died first.
If a Beneficiary who is receiving Annuity Payments dies,
any remaining Payments Certain will be paid to that
Beneficiary's named Beneficiary(ies) when due. If no
Beneficiary survives the Annuitant, the right to any
amount payable will pass to the Contract Owner. If the
Contract Owner is the Annuitant, this right will pass to
his or her estate.
If a Life Annuity with Period Certain Option was elect-
ed, and if the Annuitant dies on or after the Annuity
Date, any unpaid Payments Certain will be paid to the
Beneficiary.
- -------------------------------------------------------------------------------
DEATH OF ANNUITANT Subject to the provisions dealing with Joint Annuitants,
PRIOR TO ANNUITY if the Annuitant dies prior to the Annuity Date, an
DATE amount will be paid as proceeds to the Beneficiary. If
the Annuitant or Joint Annuitant dies prior to the Annu-
ity Date, the survivor shall become the sole Annuitant.
The Death Benefit is calculated and is payable upon re-
ceipt of due Proof of Death of the Annuitant as well as
proof that the Annuitant died prior to the Annuity Date.
Upon receipt of this proof, the Death Benefit will be
paid within seven days, or as soon thereafter as the
Company has sufficient information about the Beneficiary
to make the pay-ment. The Beneficiary may receive the
amount payable in a lump sum cash benefit or under one
of the Annuity Payment Options.
24
<PAGE>
A lump sum cash benefit will equal the greater of: (a)
the Accumulated Value as of the date of due Proof of
Death and proof that the Annuitant died prior to the An-
nuity Date or (b) the sum of Purchase Payments less the
sum of all partial withdrawals and premium taxes. An An-
nuity Payment will be based on the greater of: (a) the
Accumulated Value ten Business Days prior to the Annuity
Date elected by the Beneficiary and approved by the Com-
pany or (b) the sum of Purchase Payments less the sum of
all partial withdrawals and Premium Taxes. The Contract
Owner may elect an Annuity Payment Option for the Bene-
ficiary or, if no such election was made by the Contract
Owner and a cash benefit has not been paid, the Benefi-
ciary may make this election after the Annuitant's
death.
For a discussion of the consequences of the death of the
Contract Owner, if different from the Annuitant, see
"Distribution-at-Death Rules," page 30.
- -------------------------------------------------------------------------------
ANNUITY DATE The Contract Owner may specify an Annuity Date in the
application, which can be no later than the first day of
the month after the Annuitant's 85th birthday, without
the Company's prior approval. If no Annuity Date is
specified in the application, the Annuitant will begin
receiving Annuity Payments on the first day of the month
after ten full years from the date of this Contract, or
the first day of the month which follows the Annuitant's
65th birthday, whichever is later. The Annuity Date is
the date that Annuity Payments are scheduled to commence
under the Contract, unless the Contract has been surren-
dered or an amount has been paid as proceeds to the des-
ignated Beneficiary prior to that date.
The Contract Owner may advance or defer the Annuity
Date. However, the Annuity Date may not be advanced to a
date prior to 30 days after the date of receipt of a
written request or, without the Company's prior approv-
al, deferred to a date beyond the Annuitant's 85th
birthday. An Annuity Date may only be changed by written
request during the Annuitant's or Joint Annuitant's
lifetime and must be made at least 30 days before the
then-scheduled Annuity Date. The Annuity Date and Annu-
ity Payment Options available for Qualified Contracts
may also be controlled by endorsements, the plan or ap-
plicable law.
- -------------------------------------------------------------------------------
ANNUITY PAYMENT All Annuity Payment Options (except the Designated Pe-
OPTIONS riod Annuity Option) are offered as "Variable Annuity
Options." This means that Annuity Payments, after the
initial payment, will reflect the investment experience
of the Portfolio or Portfolios chosen by the Contract
Owner. All Annuity Payment Options are offered as "Fixed
Annuity Options." This means that the amount of each
payment will be set on the Annuity Date and will not
change. If you choose a Fixed Option, your investment
will be moved out of the underlying Vanguard Portfolios
and into the general account of Providian Life & Health
Insurance Company. If you do not wish to receive your
payments on an annuity basis, you may take a lump sum
payment at anytime before the annuity date. The lump sum
value is equal to the Accumulation Value. The following
Annuity Payment Options are available under the Con-
tract:
25
<PAGE>
LIFE ANNUITY--Available as either a Fixed or Variable
Option. Monthly Annuity Payments are paid for the life
of an Annuitant, ceasing with the last Annuity Payment
due prior to the Annuitant's death.
JOINT AND LAST SURVIVOR ANNUITY--Available as either a
Fixed or Variable Option. Monthly Annuity Payments are
paid for the life of two Annuitants and thereafter for
the life of the survivor, ceasing with the last Annuity
Payment due prior to the survivor's death.
LIFE ANNUITY WITH PERIOD CERTAIN--Available as either a
Fixed or Variable Option. Monthly Annuity Payments are
paid for the life of an Annuitant, with a Period Certain
of not less than 120, 180, or 240 months, as elected.
INSTALLMENT OR UNIT REFUND LIFE ANNUITY--Available as
either a Fixed (Installment Refund) or Variable (Unit
Refund) Option. Monthly Annuity Payments are paid for
the life of an Annuitant, with a Period Certain deter-
mined by dividing the Accumulated Value by the First An-
nuity Payment.
DESIGNATED PERIOD ANNUITY--Only available as a Fixed Op-
tion. Monthly Annuity Payments are paid for a Period
Certain as elected, which may be from 10 to 30 years.
In the event that an Annuity Payment Option is not se-
lected, the Company will make monthly Annuity Payments
that will go on for as long as the Annuitant lives (120
payments guaranteed) in accordance with the Life Annuity
with Period Certain Option and the annuity benefit sec-
tions of the Contract. That portion of the Accumulated
Value that has been held in a Portfolio prior to the An-
nuity Date will be applied under a Variable Annuity Op-
tion based on the performance of that Portfolio. Subject
to approval by the Company, the Contract Owner may se-
lect any other Annuity Payment Option then being offered
by the Company. Annuity Payments are guaranteed to be
not less than as provided by the Annuity Tables for the
first payment under a Variable Option and each payment
under a Fixed Option. The minimum payment, however, is
$100 ($20 for Massachusetts Contract Owners). If the Ac-
cumulated Value is less than $5,000, or less than $2,000
for Texas and Massachusetts Contract Owners, the Company
has the right to pay that amount in a lump sum. From
time-to-time, the Company may require proof that the An-
nuitant, Joint Annuitant, or Contract Owner is living.
Annuity Payment Options are not available to: (1) an as-
signee; or (2) any other than a natural person, except
with the consent of the Company.
The Company may, at the time of election of an Annuity
Payment Option, offer more favorable rates in lieu of
the guaranteed rates specified in the Annuity Tables
found in the Contract.
The value of Variable Annuity Payments will reflect the
investment experience of the chosen Portfolio. On or af-
ter the Annuity Date, the Annuity Payment Option is ir-
revocable. Only one Annuity Option may be chosen from
among those made available by the Company per each Port-
folio. The annuity tables, which are contained in the
Contract and are used to calculate the value of Variable
Annuity Payments, are based on an assumed interest rate
of 4%. If the actual net investment experience exactly
equals the assumed interest rate,
26
<PAGE>
then the Variable Annuity Payments will remain the same
(equal to the first Annuity Payment). However, if actual
investment experience exceeds the assumed interest rate,
the Variable Annuity Payments will increase; conversely,
they will decrease if the actual experience is lower.
If an Annuity Payment Option is chosen that depends on
the continuation of the life of the Annuitant or of a
Joint Annuitant, proof of birth date may be required be-
fore Annuity Payments begin. For Annuity Payment Options
involving life income, the actual age of the Annuitant
or of a Joint Annuitant will affect the amount of each
payment. Since payments to older Annuitants are expected
to be fewer in number, the amount of each Annuity Pay-
ment shall be greater.
If at the time of any Annuity Payment the Contract Owner
has not provided the Company with a written election not
to have federal income taxes withheld, the Company must
by law withhold such taxes from the taxable portion of
such Annuity Payment and remit that amount to the fed-
eral government.
The value of all payments, both fixed and variable, will
be greater for shorter guaranteed periods than for
longer guaranteed periods, and greater for life annui-
ties than for joint and survivor annuities, because they
are expected to be made for a shorter period.
After the Annuity Date, the Contract Owner may change
the Portfolio funding the Variable Annuity Payments, ei-
ther by written request or by calling the Vanguard Vari-
able Annuity Center (1-800-462-2391). Because excessive
exchanges can potentially disrupt the management of the
Portfolios and increase transaction costs, exchange ac-
tivity is limited to two substantive exchanges (at least
30 days apart) from the Portfolios (except the Money
Market Portfolio) during any 12-month period. "Substan-
tive" means either a dollar amount large enough to have
a negative impact on a Portfolio or a series of move-
ments between Portfolios. The method of computation of
Variable Annuity Payments is described in more detail in
the Statement of Additional Information.
If you choose an Annuity Payment Option and the postal
or other delivery service is unable to deliver checks to
the Payee's address of record, no interest will accrue
on amounts represented by uncashed Annuity Payment
checks. It is the Payee's responsibility to keep the
Company informed of the Payee's current address of
record.
---------------------------------------------------------
DEFERMENT OF Payment of any cash withdrawal or lump-sum death benefit
PAYMENT due from the Separate Account will occur within seven
days from the date the election becomes effective, ex-
cept that the Company may be permitted to defer such
payment if: (1) the New York Stock Exchange is closed
for other than usual weekends or holidays, or trading on
the Exchange is otherwise restricted; or (2) an emer-
gency exists as defined by the SEC, or the SEC requires
that trading be restricted; or (3) the SEC permits a de-
lay for the protection of Contract Owners.
- -------------------------------------------------------------------------------
27
<PAGE>
FEDERAL TAX CONSIDERATIONS
INTRODUCTION The ultimate effect of federal income taxes on the
amounts paid for the Contract, on the investment returns
on assets held under a Contract, on Annuity Payments,
and on the economic benefits to the Contract Owner, An-
nuitant or Beneficiary, depends on the Company's tax
status and upon the tax status of the individuals con-
cerned. The following discussion is general in nature
and is not intended as tax advice. You should consult a
tax adviser regarding the tax consequences of purchasing
a Contract. No attempt is made to consider any applica-
ble state or other tax laws. Moreover, the discussion is
based upon the Company's understanding of the federal
income tax laws as they are currently interpreted. No
representation is made regarding the likelihood of con-
tinuation of the federal income tax laws, the Treasury
Regulations, or the current interpretations by the In-
ternal Revenue Service. We reserve the right to make
uniform changes on the Contract to the extent necessary
to continue to qualify the Contract as an annuity. For a
discussion of federal income taxes as they relate to the
Fund, please see the accompanying Prospectus for the
Fund.
---------------------------------------------------------
TAXATION OF Section 72 of the Code governs taxation of annuities. In
ANNUITIES IN general, a Contract Owner is not taxed on increases in
GENERAL value under a Contract until some form of withdrawal or
distribution is made under it. However, under certain
cir- cumstances, the increase in value may be subject to
current federal income tax. (See "Contracts Owned by
Non-Natural Persons" and "Diversification Standards",
page 31.)
Section 72 provides that the proceeds of a full or par-
tial withdrawal from a Contract prior to the Annuity
Date will be treated as taxable income to the extent the
amounts held under the Contract exceed the "investment
in the Contract", as that term is defined in the Code.
The "investment in the Contract" can generally be de-
scribed as the cost of the Contract, and generally con-
stitutes all purchase payments paid for the Contract
less any amounts received under the Contract that are
excluded from the individual's gross in- come. The tax-
able portion is taxed at ordinary income tax rates. For
purposes of this rule, a pledge or assignment of a Con-
tract is treated as a payment received on account of a
partial withdrawal of a Contract.
Upon receipt of a full or partial withdrawal or an Annu-
ity Payment under the Contract, you will be taxed if the
value of the Contract exceeds the investment in the Con-
tract. Ordinarily, the taxable portion of such payments
will be taxed at ordinary income tax rates. Partial
withdrawals are generally taken out of earnings first
and then your purchase payments in the Contract.
For Fixed Annuity Payments, in general, the taxable por-
tion of each payment is determined by using a formula
known as the "exclusion ratio", which establishes the
ratio that the investment in the Contract bears to the
total expected amount of Annuity Payments for the term
of the Contract. That ratio is then applied to each pay-
ment to determine the non-taxable portion of the pay-
ment. The remaining portion of each payment is taxed at
ordinary income tax rates. For Variable Annuity Pay-
ments, in general, the taxable portion is determined by
a formula that establishes a specific dollar amount of
each payment
28
<PAGE>
that is not taxed. The dollar amount is determined by
dividing the investment in the Contract by the total
number of expected periodic payments. The remaining por-
tion of each payment is taxed at ordinary income tax
rates. Once the excludible portion of Annuity Payments
to date equals the investment in the Contracts, the bal-
ance of the Annuity Payments will be fully taxable.
Generally, the entire amount distributed from a Quali-
fied Contract is taxable to the Owner. In the case of
Qualified Contracts with after tax contributions, the
Owner is entitled to exclude the portion of each with-
drawal or annuity payment constituting a return of after
tax contributions. Once all of your after tax contribu-
tions have been returned to you on a non-taxable basis,
subsequent withdrawals or annuity payments are fully
taxable as ordinary income. Since the Company has no
knowledge of the amount of after tax contributions you
have made, you will need to make this computation in the
preparation of your federal income tax return.
Withholding of federal income taxes on all distributions
is required unless the recipient elects not to have any
amounts withheld and properly notifies the Company of
that election. In certain situations, taxes will be
withheld on distributions to nonresident aliens at a 30%
flat rate unless an exemption from withholding applies
under the applicable tax treaty.
With respect to amounts withdrawn or distributed before
the taxpayer reaches age 59 1/2, a penalty tax is im-
posed equal to 10% of the taxable portion of amounts
withdrawn or distributed. However, the penalty tax will
not apply to withdrawals: (i) made on or after the death
of the Contract Owner (or where the Contract Owner is
not an individual, the death of the primary Annuitant,
who is defined as the individual the events in whose
life are of primary importance in affecting the timing
and payment under the Contract); (ii) attributable to
the taxpayer's becoming disabled within the meaning of
Code Section 72(m)(7); (iii) that are part of a series
of substantially equal periodic payments made at least
annually for the life (or life expectancy) of the tax-
payer, or joint lives (or joint life expectancies) of
the taxpayer and his Beneficiary; (iv) from a qualified
plan; (v) allocable to investment in the Contract before
August 14, 1982; (vi) under a qualified funding asset
(as defined in Code Section 130(d)); (vii) under an im-
mediate annuity contract as defined in Section 72(u)(4);
or (viii) that are purchased by an employer on termina-
tion of certain types of qualified plans and that are
held by the employer until the employee separates from
service. Other tax penalties may apply to certain dis-
tributions as well as to certain contributions and other
transactions under a qualified contract.
If the penalty tax does not apply to a withdrawal as a
result of the application of item (iii) above, and the
series of payments are subsequently modified (other than
by reason of death or disability), the tax for the year
in which the modification occurs will be increased by an
amount (as determined under Treasury Regulations) equal
to the penalty tax that would have been imposed but for
item (iii) above, plus interest for the deferral period.
The foregoing rule applies if the modification takes
place (a) before the close of the period that is five
years from the date of the first payment and after the
taxpayer attains age 59 1/2, or (b) before the taxpayer
reaches age 59 1/2. The tax penalty may also
29
<PAGE>
not apply to distributions from Qualified Contracts is-
sued under Section 408(b) of the Code used to pay quali-
fied higher education expenses or the acquisition costs
(up to $10,000) involved in the purchase of a principal
residence by a first-time homebuyer.
---------------------------------------------------------
THE COMPANY'S TAX The Company is taxed as a life insurance company under
STATUS Part I of Subchapter L of the Code. Since the Separate
Account is not a separate entity from the Company and
its operations form a part of the Company, it will not
be taxed separately as a "regulated investment company"
under Subchapter M of the Code. Investment income and
realized capital gains on the assets of the Separate Ac-
count are reinvested and taken into account in determin-
ing the Accumulation Value. Under existing federal in-
come tax law, the Separate Account's investment income,
including realized net capital gains, is not taxed to
the Company. The Company reserves the right to make a
deduction for taxes should they be imposed with respect
to such items in the future.
---------------------------------------------------------
DISTRIBUTION-AT- In order to be treated as an annuity contract, a con-
DEATH RULES tract must, generally, provide the following two distri-
bution rules: (a) if any Contract Owner dies on or after
the Annuity Date and before the entire interest in the
Contract has been distributed, the remaining portion of
such interest must be distributed at least as rapidly as
the method in effect on the Contract Owner's death; and
(b) if any Contract Owner dies before the Annuity Date,
the entire interest in the Contract must generally be
distributed within five years after the date of death.
To the extent such interest is payable to a Designated
Beneficiary, however, such interest may be annuitized
over the life of that Designated Beneficiary or over a
period not extending beyond the life expectancy of that
Beneficiary, so long as distributions commence within
one year after the Contract Owner's death. If the Desig-
nated Beneficiary is the spouse of the Contract Owner,
the Contract (together with the deferred tax on the ac-
crued and future income thereunder) may be continued un-
changed in the name of the spouse as Contract Owner. The
term Designated Beneficiary means the natural person
named by the Contract Owner as a beneficiary and to whom
ownership of the Contract passes by reason of the Con-
tract Owner's death.
If the Contract Owner is not an individual, death of the
"primary Annuitant" (as defined under the Code) is
treated as the death of the Contract Owner. The primary
Annuitant is the individual who is of primary importance
in affecting the timing or the amount of payout under a
Contract. In addition, when the Contract Owner is not an
individual, a change in the primary Annuitant is treated
as the death of the Contract Owner.
Finally, in the case of Joint Contract Owners, the dis-
tribution will be required at the death of the first of
the Contract Owners.
---------------------------------------------------------
TRANSFERS OF Any transfer of a Non-Qualified Contract prior to the
ANNUITY CONTRACTS Annuity Date for less than full and adequate considera-
tion will generally trigger tax on the gain in the Con-
tract to the Contract Owner at the time of such trans-
fer. The investment in the Contract of the transferee
will be increased by any amount in -
30
<PAGE>
cluded in the Contract Owner's income. This provision,
however, does not apply to those transfers between
spouses or incident to a divorce which are governed by
Code Section 1041(a).
- -------------------------------------------------------------------------------
CONTRACTS OWNED BY Where the Contract is held by a non-natural person (for
NON-NATURAL example, a corporation), the Contract is generally not
PERSONS treated as an annuity contract for federal income tax
purposes, and the income on that Contract (generally the
increase in the net Accumulated Value less the payments)
is includible in taxable income each year. The rule does
not apply where the non-natural person is only a nominal
owner such as a trust or other entity acting as an agent
for a natural person. The rule also does not apply where
the Contract is acquired by the estate of a decedent,
where the Contract is a qualified funding asset for
structured settlements, where the Contract is purchased
by an employer on behalf of an employee upon termination
of a qualified plan, and in the case of an immediate an-
nuity as defined under the Code.
---------------------------------------------------------
ASSIGNMENTS A transfer of ownership of a Contract or the designation
of an Annuitant or other Beneficiary who is not also the
Contract Owner may result in tax consequences to the
Contract Owner, Annuitant or Beneficiary that are not
discussed herein. A Contract Owner contemplating such a
transfer or assignment of a Contract should contact a
tax adviser with respect to the potential tax effects of
such a transaction.
---------------------------------------------------------
MULTIPLE CONTRACTS All non-qualified annuity contracts issued by the same
RULE company (or affiliate) to the same Contract Owner during
any calendar year are to be aggregated and treated as
one contract for purposes of determining the amount in-
cludible in the taxpayer's gross income. Thus, any
amount received under any Contract prior to the Con-
tract's Annuity Date, such as a partial withdrawal, will
be taxable (and possibly subject to the 10% penalty tax)
to the extent of the combined income in all such con-
tracts. The Treasury Department has specific authority
to issue regulations that prevent the avoidance of Code
Section 72(e) through the serial purchase of annuity
Contracts or otherwise. In addition, there may be other
situations in which the Treasury may conclude that it
would be appropriate to aggregate two or more Contracts
purchased by the same Contract Owner. The aggregation
rules do not apply to immediate annuities as defined un-
der Section 72(u)(4) of the Code. Accordingly, a Con-
tract Owner should consult a tax adviser before purchas-
ing more than one Contract or other annuity contracts.
---------------------------------------------------------
DIVERSIFICATION To comply with certain diversification regulations (the
STANDARDS "Regulations"), which were issued in final form on March
2, 1989, under Code Section 817(h), after a start up pe-
riod, each Subaccount of the Separate Account will be
required to diversify its investments. The Regulations
generally require that on the last day of each quarter
of a calendar year, no more than 55% of the value of
each Subaccount of the Separate Account is represented
by any one investment, no more than 70% is represented
by any two investments, no more than 80% is represented
by any three investments, and no more than 90% is repre-
sented
31
<PAGE>
by any four investments. A "look-through" rule applies
that suggests that each Subaccount of the Separate Ac-
count will be tested for compliance with the percentage
limitations by looking through to the assets of the
Portfolio of the Fund in which each such division in-
vests. All securities of the same issuer are treated as
a single investment. As a result of the 1988 Act, each
government agency or instrumentality will be treated as
a separate issuer for purposes of those limitations.
In connection with the issuance of temporary diversifi-
cation regulations in 1986, the Treasury announced that
such regulations did not provide guidance concerning the
extent to which Contract Owners may direct their invest-
ments to particular divisions of a separate account. It
is possible that regulations or revenue rulings may be
issued in this area at some time in the future. It is
not clear, at this time, what these regulations or rul-
ings would provide. It is possible that when the regula-
tions or rulings are issued, the Contracts may need to
be modified in order to remain in compliance. For these
reasons, the Company reserves the right to modify the
Contracts, as necessary, to prevent the Contract Owner
from being considered the owner of assets of the Sepa-
rate Account.
We intend to comply with the Regulations to assure that
the Contracts continue to be treated as annuity con-
tracts for federal income tax purposes.
---------------------------------------------------------
QUALIFIED Qualified Contracts to provide for retirement may gener-
INDIVIDUAL ally be purchased only in connection with a "rollover"
RETIREMENT of funds from another individual retirement annuity
ANNUITIES (IRA) or qualified plan. IRA Contracts must contain spe-
cial provisions and are subject to limitations on con-
tributions and the timing of when distributions can be
made. Tax penalties may apply to contributions in excess
of specified limits, loans or reassignments, distribu-
tions that do not meet specified requirements, or in
other circumstances. Anyone desiring to purchase a Qual-
ified Contract should consult a personal tax adviser.
- -------------------------------------------------------------------------------
GENERAL The Company retains the right, subject to any applicable
INFORMATION law, to make certain changes. The Company reserves the
right to eliminate the shares of any of the Portfolios
ADDITIONS, and to substitute shares of another Portfolio of the
DELETIONS, OR Fund, or of another registered open-end management in-
SUBSTITUTIONS OF vestment company, if the shares of the Portfolios are no
INVESTMENTS longer available for investment, or, if in the Company's
judgment, investment in any Portfolio would be inappro-
priate in view of the purposes of the Separate Account.
To the extent required by the 1940 Act, substitutions of
shares attributable to a Contract Owner's interest in a
Portfolio will not be made until SEC approval has been
obtained and the Contract Owner has been notified of the
change.
New Portfolios may be established when marketing, tax,
investment, or other conditions so warrant. Any new
Portfolios will be made available to existing Contract
Owners on a basis to be determined by the Company. The
Company may also eliminate one or more Portfolios if
marketing, tax, investment or other conditions so war-
rant.
In the event of any such substitution or change, the
Company may, by appropriate endorsement, make such
changes in the Contracts as may be necessary
32
<PAGE>
or appropriate to reflect such substitution or change.
Furthermore, if deemed to be in the best interests of
persons having voting rights under the Contracts, the
Separate Account may be operated as a management company
under the 1940 Act or any other form permitted by law,
may be deregistered under such Act in the event such
registration is no longer required, or may be combined
with one or more other separate accounts.
---------------------------------------------------------
DISTRIBUTOR OF THE The Vanguard Group, Inc., through its wholly-owned sub-
CONTRACTS sidiary, Vanguard Marketing Corp., is the principal dis-
tributor of the Contract. For these services, the Fund
paid a fee of less than .02% of the Fund's average net
assets for the 1997 fiscal year. This fee is guaranteed
not to exceed .20% of the Fund's average month-end net
assets. A complete description of these services is
found in the "Management of the Fund" section of the
Fund's Prospectus and in the Fund's Statement of Addi-
tional Information. The principal business address for
The Vanguard Group, Inc. is The Vanguard Variable Annu-
ity Center, 100 Vanguard Boulevard, Malvern, PA 19355.
---------------------------------------------------------
VOTING RIGHTS The Fund does not hold regular meetings of shareholders.
The Directors of the Fund may call special meetings of
shareholders as may be required by the 1940 Act or other
applicable law. To the extent required by law, the Port-
folio shares held in the Separate Account will be voted
by the Company at shareholder meetings of the Fund in
accordance with instructions received from persons hav-
ing voting interests in the corresponding Portfolio.
Fund shares as to which no timely instructions are re-
ceived or shares held by the Company as to which Con-
tract Owners have no beneficial interest will be voted
in proportion to the voting instructions that are re-
ceived with respect to all Contracts participating in
that Portfolio. Voting instructions to abstain on any
item to be voted upon will be applied on a pro rata ba-
sis to reduce the votes eligible to be cast.
The number of votes that are available to a Contract
Owner will be calculated separately for each Portfolio
of the Separate Account. That number will be determined
by applying his or her percentage interest, if any, in a
particular Portfolio to the total number of votes at-
tributable to the Portfolio.
Prior to the Annuity Date, the Contract Owner holds a
voting interest in each Portfolio to which the Accumu-
lated Value is allocated. The number of votes which are
available to a Contract Owner will be determined by di-
viding the Accumulated Value attributable to a Portfo-
lio by the net asset value per share of the applicable
Portfolio. After the Annuity Date, the person receiving
Annuity Payments under any variable annuity option has
the voting interest. The number of votes after the Annu-
ity Date will be determined by dividing the reserve for
such Contract allocated to the Portfolio by the net as-
set value per share of the corresponding Portfolio. Af-
ter the Annuity Date, the votes attributable to a Con-
tract decrease as the reserves allocated to the
Portfolio decrease. In determining the number of votes,
fractional shares will be recognized.
The number of votes of the Portfolio that are available
will be determined as of the date coincident with the
date established by that Portfolio for determining
shareholders eligible to vote at the meeting of the
Fund. Voting instruc-
33
<PAGE>
tions will be solicited by written communication prior
to such meeting in accordance with procedures estab-
lished by the Fund.
---------------------------------------------------------
YEAR 2000 MATTERS In March 1997, the Company adopted and currently has in
place a Year 2000 Assessment and Planning Project (the
"Plan") to review and analyze existing hardware and
software systems, as well as voice and data communica-
tions systems, to determine if they are Year 2000 com-
patible. The Plan provides for a management process that
ensures that when a particular system, or software ap-
plication, is determined to be "non-compliant" the
proper steps are in place to either remedy the "non-com-
pliance" or cease using the particular system or soft-
ware. The Plan also provides that the Chief Information
Officer report to the Board of Directors as to the sta-
tus of the efforts under the Plan on a regular and rou-
tine basis. The Company has engaged the services of a
third-party provider that is specialized in Year 2000
issues to work on the project.
The Plan has four specific objectives: (1) to develop an
inventory of all applications; (2) to evaluate all ap-
plications in the inventory to determine the most pru-
dent manner to move them to Year 2000 compliance, if re-
quired; (3) to estimate budgets, resources and schedules
for the migration of the "affected" applications to Year
2000 compliance; and (4) to define testing and deploy-
ment requirements to successfully manage validation and
re-deployment of any changed code. It is anticipated
that all compliance issues will be resolved by December
1998.
As of the date of this Prospectus, the Company has iden-
tified and made available what it believes are the ap-
propriate resources of hardware, people, and dollars,
including the engagement of outside third parties, to
assure that the Plan will be completed.
The Year 2000 computer problem, and its resolution, is
complex and multifaceted, and the success of a response
plan cannot be conclusively known until the Year 2000 is
reached (or an earlier date to the extent that the sys-
tems or equipment addresses Year 2000 data prior to the
Year 2000). Even with appropriate and diligent pursuit
of a well conceived response plan, including testing
procedures, there is no certainty that any company will
achieve complete success. Further, notwithstanding its
efforts or results, the Company's ability to function
unaffected to and through the year 2000 may be adversely
affected by actions (or failures to act) of third par-
ties beyond its knowledge or control.
---------------------------------------------------------
AUDITORS Ernst & Young LLP serves as independent auditors for the
Separate Account and the Company and will audit their
financial statements annually.
---------------------------------------------------------
LEGAL MATTERS Jorden Burt Boros Cicchetti Berenson & Johnson LLP of
Washington, DC, has provided legal advice relating to
the federal securities laws applicable to the issue and
sale of the Contracts. All matters of Missouri law per-
taining to the validity of the Contract and the
Company's right to issue such Contracts have been passed
upon by Kimberly A. Scouller, Esquire, on behalf of the
Company.
- -------------------------------------------------------------------------------
34
<PAGE>
TABLE OF CONTENTS FOR THE VANGUARD VARIABLE ANNUITY PLAN CONTRACT
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE CONTRACT............................................................ B-2
Computation of Variable Annuity Income Payments........................ B-2
Exchanges.............................................................. B-3
Joint Annuitant........................................................ B-3
GENERAL MATTERS......................................................... B-3
Non-Participating...................................................... B-3
Misstatement of Age or Sex............................................. B-3
Assignment............................................................. B-3
Annuity Data........................................................... B-4
Annual Report.......................................................... B-4
Incontestability....................................................... B-4
Ownership.............................................................. B-4
DISTRIBUTION OF THE CONTRACT............................................ B-4
PERFORMANCE INFORMATION................................................. B-4
Money Market Subaccount Yields......................................... B-4
30-Day Yield for Non-Money Market Subaccounts.......................... B-5
Standardized Average Annual Total Return for Non-Money Market
Subaccounts........................................................... B-5
ADDITIONAL PERFORMANCE MEASURES......................................... B-7
Non-Standardized Total Return and Non-Standardized Average Annual Total
Return................................................................ B-7
Non-Standardized Total Return Year-to-Date............................. B-8
Non-Standardized One Year Return....................................... B-8
SAFEKEEPING OF ACCOUNT ASSETS........................................... B-9
THE COMPANY............................................................. B-9
STATE REGULATION........................................................ B-9
RECORDS AND REPORTS..................................................... B-9
LEGAL PROCEEDINGS....................................................... B-10
OTHER INFORMATION....................................................... B-10
FINANCIAL STATEMENTS.................................................... B-10
Audited Financial Statements........................................... B-10
</TABLE>
35
<PAGE>
PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
OFFERED BY
PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
(A MISSOURI STOCK COMPANY)
ADMINISTRATIVE OFFICES
20 MOORES ROAD
FRAZER, PENNSYLVANIA 19355
----------------
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Vanguard Variable Annuity Plan Contract (the
"Contract") offered by Providian Life & Health Insurance Company (the
"Company"). You may obtain a copy of the Prospectus dated April 30, 1998; by
calling 1-800-522-5555, or writing to Vanguard Variable Annuity Center, P.O.
Box 1103, Valley Forge, PA 19482-1103. Terms used in the current Prospectus
for the Contract are incorporated in this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT.
APRIL 30, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- ----
<S> <C>
THE CONTRACT............................................................ B-2
Computation of Variable Annuity Income Payments........................ B-2
Exchanges.............................................................. B-3
Joint Annuitant........................................................ B-3
GENERAL MATTERS......................................................... B-3
Non-Participating...................................................... B-3
Misstatement of Age or Sex............................................. B-3
Assignment............................................................. B-3
Annuity Data........................................................... B-4
Annual Report.......................................................... B-4
Incontestability....................................................... B-4
Ownership.............................................................. B-4
DISTRIBUTION OF THE CONTRACT............................................ B-4
PERFORMANCE INFORMATION................................................. B-4
Money Market Subaccount Yields......................................... B-4
30-Day Yield for Non-Money Market Subaccounts.......................... B-5
Standardized Average Annual Total Return for Non-Money Market
Subaccounts........................................................... B-5
ADDITIONAL PERFORMANCE MEASURES......................................... B-7
Non-Standardized Total Return and Non-Standardized Average Annual Total
Return................................................................ B-7
Non-Standardized Total Return Year-to-Date............................. B-8
Non-Standardized One Year Return....................................... B-8
SAFEKEEPING OF ACCOUNT ASSETS........................................... B-9
THE COMPANY............................................................. B-9
STATE REGULATION........................................................ B-9
RECORDS AND REPORTS..................................................... B-9
LEGAL PROCEEDINGS....................................................... B-10
OTHER INFORMATION....................................................... B-10
FINANCIAL STATEMENTS.................................................... B-10
Audited Financial Statements........................................... B-10
</TABLE>
B-1
<PAGE>
THE CONTRACT
In order to supplement the description in the Prospectus, the following
provides additional information about the Contract which may be of interest to
Contract Owners.
COMPUTATION OF VARIABLE ANNUITY INCOME PAYMENTS
Variable Annuity Income Payments are computed as follows. First, the
Accumulated Value (or the portion of the Accumulated Value used to provide
variable payments) is applied under the Annuity Table contained in the
Contract corresponding to the Annuity Option elected by the Contract Owner and
based on an assumed interest rate of 4%. This will produce a dollar amount
which is the first monthly payment. The Company may, at the time Annuity
Income Payments are computed, offer more favorable rates in lieu of the
guaranteed rates specified in the Annuity Table.
The amount of each Annuity Payment after the first is determined by means of
Annuity Units. The number of Annuity Units is determined by dividing the first
Annuity Payment by the Annuity Unit value for the selected Subaccount ten
Business Days prior to the Annuity Date. The number of Annuity Units for the
Subaccount then remains fixed, unless an exchange of Annuity Units (as set
forth below) is made. After the first Annuity Payment, the dollar amount of
each subsequent Annuity Payment is equal to the number of Annuity Units
multiplied by the Annuity Unit value for the Subaccount ten Business Days
before the due date of the Annuity Payment.
The Annuity Unit value for each Subaccount was initially established at
$10.00 on the day money was first deposited in that Subaccount. The Annuity
Unit value for any subsequent Business Day is equal to (a) times (b) times
(c), where:
(a) the Annuity Unit value for the immediately preceding Business Day;
(b) the Net Investment Factor for the day;
(c) the investment result adjustment factor (.99989255 per day), which rec-
ognizes an assumed interest rate of 4% per year used in determining the
Annuity Payment amounts.
The Net Investment Factor is a factor applied to a Subaccount that reflects
daily changes in the value of the Subaccount due to:
(a) any increase or decrease in the value of the Subaccount due to invest-
ment results;
(b) a daily charge for the mortality and expense risks assumed by the Com-
pany corresponding to an annual rate according to the following sched-
ule:
<TABLE>
<CAPTION>
RATE FOR
NET ASSETS* ALL ASSETS
----------- ----------
<S> <C>
Up to $2.5 Billion............................................... 0.30%
Over $2.5 Billion and Up To $5 Billion........................... 0.28%
Over $5 Billion.................................................. 0.27%
</TABLE>
* Based on the combined net assets of the Separate Account and Separate
Account B of First Providian Life & Health Insurance Company.
(c) a daily charge for the cost of administering the Contract corresponding
to an annual charge of .10%.
(d) an annual charge of $25 for maintenance of Contracts valued at less
than $25,000 at time of initial purchase and on the last business day
of each year.
The Annuity Tables contained in the Contract are based on the 1983 Table "A"
Mortality Table projected for mortality improvement to the year 2000 using
Projection Scale G and an interest rate of 4% a year; except that in
Massachusetts and Montana, the Annuity Tables contained in the Contract are
based on a 60% female/40% male blending of the above, for all annuitants of
either gender.
B-2
<PAGE>
EXCHANGES
After the Annuity Date, if a Variable Annuity Option has been chosen, the
Contract Owner may, by making a written request or by calling the Variable
Annuity Center, exchange the current value of the existing Subaccount to
Annuity Units of any other Subaccount then available. The request for the
exchange must be received, however, at least 10 Business Days prior to the
first payment date on which the exchange is to take effect. This exchange
shall result in the same dollar amount of Annuity Payment on the date of
exchange. The Contract Owner is limited to two substantive exchanges (at least
30 days apart) from a Portfolio (except the Money Market Portfolio) in any
Contract Year, and the value of the Annuity Units exchanged must provide a
monthly Annuity Payment of at least $100 at the time of the exchange.
"Substantive" means either a dollar amount large enough to have a negative
impact on a Portfolio or a series of movements between Portfolios.
Exchanges will be made using the Annuity Unit value for the Subaccounts on
the date the request for exchange is received by the Company. On the exchange
date, the Company will establish a value for the current Subaccount by
multiplying the Annuity Unit value by the number of Annuity Units in the
existing Subaccount, and compute the number of Annuity Units for the new
Subaccount by dividing the Annuity Unit value of the new Subaccount into the
value previously calculated for the existing Subaccount.
JOINT ANNUITANT
The Contract Owner may, in the Contract Application or by written request at
least 30 days prior to the Annuity Date, name a Joint Annuitant. Such Joint
Annuitant must meet the Company's underwriting requirements. If approved by
the Company, the Joint Annuitant shall be named on the Contract Schedule or
added by endorsement. An Annuitant or Joint Annuitant may not be replaced.
The Annuity Date shall be determined based on the date of birth of the
Annuitant. If the Annuitant or Joint Annuitant dies prior to the Annuity Date,
the survivor shall be the sole Annuitant. Another Joint Annuitant may not be
designated. Payment to a Beneficiary shall not be made until the death of the
surviving Annuitant.
GENERAL MATTERS
NON-PARTICIPATING
The Contracts are non-participating. No dividends are payable and the
Contracts will not share in the profits or surplus earnings of the Company.
MISSTATEMENT OF AGE OR SEX
The Company may require proof of age and sex before making Annuity Payments.
If the Annuitant's stated age, sex or both in the Contract are incorrect, the
Company will change the Annuity Benefits payable to those which the Purchase
Payments would have purchased for the correct age and sex. In the case of
correction of the stated age or sex after payments have commenced, the Company
will: (1) in the case of underpayment, pay the full amount due with the next
payment; or (2) in the case of overpayment, deduct the amount due from one or
more future payments.
ASSIGNMENT
Any Nonqualified Contract may be assigned by the Contract Owner prior to the
Annuity Date and during the Annuitant's lifetime. The Company is not
responsible for the validity of any assignment. No assignment will be
recognized until the Company receives written notice thereof. The interest of
any Beneficiary which the assignor has the right to change shall be
subordinate to the interest of an assignee. Any amount paid to the assignee
shall be paid in one sum, notwithstanding any settlement agreement in effect
at the time assignment was executed. The Company shall not be liable as to any
payment or other settlement made by the Company before receipt of written
notice.
B-3
<PAGE>
ANNUITY DATA
The Company will not be liable for obligations which depend on receiving
information from a Payee until such information is received in a form
satisfactory to the Company.
ANNUAL REPORT
Once each Contract Year, the Company will send the Contract Owner an annual
report of the current Accumulated Value allocated to each Subaccount; and any
Purchase Payments, charges, exchanges or withdrawals during the year. This
report will also give the Contract Owner any other information required by law
or regulation. The Contract Owner may ask for a report like this at any time.
INCONTESTABILITY
This Contract is incontestable from the Contract Date, subject to the
"Misstatement of Age or Sex" provision.
OWNERSHIP
The Owner of the Contract on the Contract Date is the Annuitant, unless
otherwise specified in the application. The Owner may specify a new Owner by
written notice at any time thereafter. The term Owner also includes any person
named as a Joint Owner. A Joint Owner shares ownership in all respects with
the Owner. During the Annuitant's lifetime all rights and privileges under
this Contract may be exercised solely by the Owner. Upon the death of the
Owner(s), Ownership is retained by the surviving Joint Owner or passes to the
Owner's Designated Beneficiary, if one has been designated by the Owner. If no
Owner's Designated Beneficiary is designated or if no Owner's Designated
Beneficiary is living, the Owner's Designated Beneficiary is the Owner's
estate. From time to time the Company may require proof that the Owner is
still living.
DISTRIBUTION OF THE CONTRACT
The Vanguard Group, Inc. through its wholly-owned subsidiary, Vanguard
Marketing Corporation, is the principal distributor of the Contracts. For
these services, the Fund paid a fee .02% of the Funds' average net assets for
its 1997 fiscal year. This fee is guaranteed not to exceed .20% of the Fund's
average month-end net assets. A complete description of these services is
found in the "Management of the Fund" section of the Fund's Prospectus and in
the Fund's Statement of Additional Information.
PERFORMANCE INFORMATION
Performance information for the Subaccounts including the yield and
effective yield of the Money Market Subaccount, the yield of the remaining
Subaccounts, and the total return of all Subaccounts, may appear in reports or
promotional literature to current or prospective Contract Owners.
MONEY MARKET SUBACCOUNT YIELDS
Current yield for the Money Market Subaccount will be based on the change in
the value of a hypothetical investment (exclusive of capital changes) over a
particular 7-day period, less a pro-rata share of Subaccount expenses accrued
over that period (the "base-period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The
base period return is then annualized by multiplying by 365/7, with the
resulting yield figure carried to at least the nearest hundredth of one
percent.
Calculation of "effective yield" begins with the same "base period return"
used in the calculation of yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1)/365/7/] - 1
B-4
<PAGE>
The yield of the Money Market Subaccount for the 7-day period ended December
31, 1997, was 5.24%.
30-DAY YIELD FOR NON-MONEY MARKET SUBACCOUNTS
Quotations of yield for the remaining Subaccounts will be based on all
investment income per Unit earned during a particular 30-day period, less
expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the value of a Unit on the last
day of the period, according to the following formula:
YIELD = 2[(a - b + 1)/6/ - 1]
-----
c X d
Where:
[a] equals the net investment income earned during the period by the Series
attributable to shares owned by a Subaccount
[b] equals the expenses accrued for the period (net of reimbursements)
[c] equals the average daily number of Units outstanding during the period
[d] equals the maximum offering price per Accumulation Unit on the last day
of the period
Yield on the Subaccount is earned from the increase in net asset value of
shares of the Series in which the Subaccount invests and from dividends
declared and paid by the Series, which are automatically reinvested in shares
of the Series.
The yield of each Subaccount for the 30-day period ended December 31, 1997,
is set forth below. Yields are calculated daily for each Subaccount. Premiums
and discounts on asset-backed securities are not amortized.
<TABLE>
<S> <C>
High-Grade Bond Subaccount........................................... 5.73%
High Yield Bond Subaccount........................................... 8.14%
Balanced Subaccount.................................................. 3.26%
Equity Income Subaccount............................................. 2.33%
Equity Index Subaccount.............................................. 1.15%
Growth Subaccount.................................................... 0.41%
International Subaccount............................................. --
Small Company Growth Subaccount...................................... 0.15%
</TABLE>
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FOR NON-MONEY MARKET SUBACCOUNTS
When advertising performance of the Subaccounts, the Company will show the
"Standardized Average Annual Total Return," calculated as prescribed by the
rules of the SEC, for each Subaccount. The Standardized Average Annual Total
Return is the effective annual compounded rate of return that would have
produced the cash redemption value over the stated period had the performance
remained constant throughout. The calculation assumes a single $1,000 payment
made at the beginning of the period and full redemption at the end of the
period. It reflects the deduction of all applicable sales loads, the Annual
Contract Maintenance Fee and all other Portfolio, Separate Account and
Contract level charges except Premium Taxes, if any. In calculating
performance information, the Annual Contract Maintenance Fee is reflected as a
percentage equal to the total amount of fees collected during a year divided
by the total average net assets of the Portfolios during the same year. The
fee is assumed to remain the same in each year of the applicable period. The
fee is prorated to reflect only the remaining portion of the calendar year of
purchase. Thereafter, the fee is deducted on the last business day of the year
for the following year, on a pro rata basis, from each of the Portfolios you
have chosen.
B-5
<PAGE>
Quotations of average annual total return for any Subaccount will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Contract over a period of one, three, five and 10
years (or, if less, up to the life of the Subaccount) and year-to-date and
quarter-to-date, calculated pursuant to the formula:
P(1 + T)/n/ = ERV
Where:
(1) [P] equals a hypothetical Initial Purchase Payment of $1,000
(2) [T] equal an average annual total return
(3) [n] equals the number of years
(4) [ERV] equals the ending redeemable value of a hypothetical $1,000 Pur-
chase Payment made at the beginning of the period (or fractional por-
tion thereof)
The following tables show the average annual total return for the
Subaccounts for the period beginning at the inception of each Subaccount and
ending on December 31, 1997.
<TABLE>
<CAPTION>
YEAR YEAR ENDED SINCE
1 YEAR 3 YEARS 5 YEARS TO DATE 12/31/97 INCEPTION*
------ ------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High-Grade Bond
Subaccount............... 8.97% 5.11% 4.26% 8.97% 8.97% 4.13%
High Yield Bond
Subaccount............... 11.62% -- -- 11.62% 11.62% 13.04%
Balanced Subaccount....... 22.58% 23.14% 15.73% 22.58% 22.58% 14.08%
Equity Income Subaccount.. 33.77% 29.71% -- 33.71% 33.71% 19.39%
Equity Index Subaccount... 32.58% 30.34% 19.43% 32.58% 32.58% 17.43%
Growth Subaccount......... 26.10% 29.88% -- 26.10% 26.10% 21.13%
International Subaccount.. 2.91% 10.59% -- 2.91% 2.91% 9.18%
Small Company Growth
Subaccount............... 12.79% -- -- 12.79% 12.79% 6.03%
</TABLE>
- --------
*Since Inception:
Equity Index Subaccount and High-Grade Bond Subaccount--April 29, 1991
Balanced Subaccount--May 23, 1991
Equity Income Subaccount and Growth Subaccount--June 7, 1993
International Subaccount--June 3, 1994
High Yield Bond Subaccount and Small Company Growth Subaccount--June 3,
1996
<TABLE>
<CAPTION>
MONTH- QUARTER 6 MONTHS
TO-DATE TO-DATE TO-DATE
------- ------- --------
<S> <C> <C> <C>
High-Grade Bond Subaccount............................. 1.03% 2.74% 6.05%
High Yield Bond Subaccount............................. 1.29% 2.27% 6.04%
Balanced Subaccount.................................... 1.61% 2.77% 9.06%
Equity Income Subaccount............................... 2.62% 5.93% 14.22%
Equity Index Subaccount................................ 1.07% 2.72% 10.27%
Growth Subaccount...................................... 1.53% 4.05% 7.28%
International Subaccount............................... 0.50% -9.61% -11.42%
Small Company Growth Subaccount........................ -1.00% -8.22% 9.59%
</TABLE>
All total return figures reflect the deduction of the administrative charge,
and the mortality and expense risk charge. The SEC requires that an assumption
be made that the Contract Owner surrenders the entire Contract at the end of
the 1, 5 and 10 year periods (or, if less, up to the life of the Subaccount)
for which performance is required to be calculated.
B-6
<PAGE>
Performance information for a Subaccount may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market
Institutional Averages, or other indices that measure performance of a
pertinent group of securities so that investors may compare a Subaccount's
results with those of a group of securities widely regarded by investors as
representative of the securities markets in general; (ii) other groups of
variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services, a widely-used independent research firm which
ranks mutual funds and other investment companies by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons who rank such investment companies on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the
Contract. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs
and expenses.
Performance information for any Subaccount reflects only the performance of
a hypothetical Contract under which Accumulation Value is allocated to a
Subaccount during a particular time period on which the calculations are
based. Performance information should be considered in light of the investment
objectives and policies, characteristics and quality of the portfolio of the
Fund in which the Subaccount invests, and the market conditions during the
given time period, and should not be considered as a representation of what
may be achieved in the future.
Reports and marketing materials may, from time to time, include information
concerning the rating of Providian Life & Health Insurance Company as
determined by A.M. Best, Moody's, Standard & Poor's or other recognized rating
services. Reports and promotional literature may also contain other
information including (i) the ranking of any Subaccount derived from rankings
of variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services or by other rating services, companies,
publications, or other persons who rank separate accounts or other investment
products on overall performance or other criteria, and (ii) the effect of tax-
deferred compounding on a Subaccount's investment returns, or returns in
general, which may be illustrated by graphs, charts, or otherwise, and which
may include a comparison, at various points in time, of the return from an
investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a taxable basis.
ADDITIONAL PERFORMANCE MEASURES
NON-STANDARDIZED TOTAL RETURN AND NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN
The Company may show Non-Standardized Total Return (i.e., the percentage
change in the value of an Accumulation Unit) for one or more Subaccounts with
respect to one or more periods. The Company may also show Non-Standardized
Average Annual Total Return (i.e., the average annual change in Accumulation
Unit Value) with respect to one or more periods. For one year and periods less
than one year, the Non-Standardized Total Return and the Non-Standardized
Average Annual Total Return are effective annual rates of return and are
equal. For periods greater than one year, the Non-Standardized Average Annual
Total Return is the effective annual compounded rate of return for the periods
stated. Because the value of an Accumulation Unit reflects the Separate
Account and Portfolio expenses (See Fee Table in the Prospectus), the Non-
Standardized Total Return and Non- Standardized Average Annual Total Return
also reflect these expenses. However, these percentages do not reflect the
Annual Contract Maintenance Fee or Premium Taxes (if any), which if included
would reduce the percentages reported by the Company.
B-7
<PAGE>
NON-STANDARDIZED TOTAL RETURN
FOR PERIOD ENDING 12/31/97
<TABLE>
<CAPTION>
MONTH- QUARTER 6 MONTHS
TO-DATE TO-DATE TO-DATE ONE YEAR SINCE INCEPTION
------- ------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
High-Grade Bond Subaccount... 1.03% 2.74% 6.05% 8.98% 7.51%
High Yield Bond Subaccount... 1.29% 2.27% 6.05% 11.63% 13.06%
Balanced Subaccount.......... 1.61% 2.77% 9.07% 22.60% 14.13%
Equity Income Subaccount..... 2.62% 5.94% 14.23% 33.78% 19.43%
Equity Index Subaccount...... 1.67% 2.73% 10.27% 32.59% 17.48%
Growth Subaccount............ 1.53% 4.05% 7.29% 26.12% 21.17%
International Subaccount..... 0.50% -9.60% -11.47% 2.92% 9.22%
Small Company Growth
Subaccount.................. -0.99% -8.22% 9.60% 12.80% 6.05%
</TABLE>
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURNS
FOR PERIOD ENDING 12/31/97
<TABLE>
<CAPTION>
ONE YEAR THREE YEAR FIVE YEAR SINCE INCEPTION
-------- ---------- --------- ---------------
<S> <C> <C> <C> <C>
High-Grade Bond Subaccount........ 8.98% 9.69% 6.83% 7.51%
High Yield Bond Subaccount........ 11.63% -- -- 13.06%
Balanced Subaccount............... 22.60% 23.17% 15.77% 14.13%
Equity Income Subaccount.......... 33.78% 29.74% -- 19.43%
Equity Index Subaccount........... 32.59% 30.37% 19.47% 17.48%
Growth Subaccount................. 26.12% 29.90% -- 21.17%
International Subaccount.......... 2.92% 10.62% -- 9.22%
Small Company Growth Subaccount... 12.80% -- -- 6.05%
</TABLE>
NON-STANDARDIZED TOTAL RETURN YEAR-TO-DATE
The Company may show Non-Standardized Total Return Year-to-Date as of a
particular date, or simply Total Return YTD, for one or more Subaccounts with
respect to one or more non-standardized base periods commencing at the
beginning of a calendar year. Total Return YTD figures reflect the percentage
change in actual Accumulation Unit Values during the relevant period. These
percentages reflect a deduction for the Separate Account and Portfolio
expenses, but do not include the Annual Contract Maintenance Fee or Premium
Taxes (if any), which if included would reduce the percentages reported by the
Company.
<TABLE>
<CAPTION>
TOTAL RETURN YTD
AS OF 12/31/97
----------------
<S> <C>
High-Grade Bond Subaccount..................................... 8.98%
High Yield Bond Subaccount..................................... 11.63%
Balanced Subaccount............................................ 22.60%
Equity Income Subaccount....................................... 33.78%
Equity Index Subaccount........................................ 33.59%
Growth Subaccount.............................................. 26.12%
International Subaccount....................................... 2.92%
Small Company Growth Subaccount................................ 12.80%
</TABLE>
NON-STANDARDIZED ONE YEAR RETURN
The Company may show Non-Standardized One Year Return, for one or more
Subaccounts with respect to one or more non-standardized base periods
commencing at the beginning of a calendar year (or date of inception, if
during the relevant year) and ending at the end of such calendar year. One
Year Return figures reflect the percentage change in actual Accumulation Unit
Values during the relevant period. These percentages reflect a deduction for
the Separate Account and Portfolio expenses, but do not include the Annual
Contract Maintenance Fee or Premium Taxes (if any), which if included would
reduce the percentages reported by the Company.
B-8
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
High-Grade Bond Subaccount............. 8.98% 3.08% 17.47% -3.19% 8.92% 5.70%
High Yield Bond Subaccount............. 11.63% -- -- -- -- --
Balanced Subaccount.................... 22.60% 15.68% 31.76% -1.13% 12.56% 6.59%
Equity Income Subaccount............... 33.78% 18.13% 38.19% -1.76% -- --
Equity Index Subaccount................ 32.59% 22.27% 36.67% 0.61% 9.18% 6.77%
Growth Subaccount...................... 26.12% 26.29% 37.62% 3.74% -- --
International Subaccount............... 2.92% 14.05% 15.31% -- -- --
Small Company Growth Subaccount........ 12.80% -- -- -- -- --
</TABLE>
SAFEKEEPING OF ACCOUNT ASSETS
Title to assets of the Separate Account is held by the Company. The assets
are kept physically segregated and held separate and apart from the Company's
general account assets. Records are maintained of all purchases and
redemptions of eligible Portfolio shares held by each of the Subaccounts.
THE COMPANY
Commonwealth General Corporation owns a 3.7% interest in the Company and
61%, 15.3% and 20% interests, respectively, are held by Commonwealth Life
Insurance Company, Peoples Security Life Insurance Company and Capital
Liberty, L.P. Commonwealth Life Insurance Company and Peoples Security Life
Insurance Company are each wholly owned by Capital General Development
Corporation, which in turn is wholly owned by Commonwealth General
Corporation. A 1% interest in Capital Liberty, L.P. is owned by Commonwealth
General Corporation, which is the general partner, and 79.2% and 19.8%
interests, respectively, are held by two limited partners, Commonwealth Life
Insurance Company and Peoples Security Life Insurance Company.
Commonwealth General Corporation is wholly owned by AEGON USA, Inc., which
in turn is wholly owned by AEGON U.S. Holding Corporation, a wholly owned
subsidiary of AEGON International n.v. AEGON International n.v. is a wholly
owned subsidiary of AEGON n.v. Vereniging AEGON (a Netherlands membership
association) has a 53.63% interest in AEGON n.v.
STATE REGULATION
The Company is a stock life insurance company organized under the laws of
Missouri, and is subject to regulation by the Missouri State Department of
Insurance. An annual statement is filed with the Missouri Commissioner of
Insurance on or before March 1 of each year covering the operations and
reporting on the financial condition of the Company as of December 31 of the
preceding calendar year. Periodically, the Missouri Commissioner of Insurance
examines the financial condition of the Company, including the liabilities and
reserves of the Separate Account.
In addition, the Company is subject to the insurance laws and regulations of
all the states where it is licensed to operate. The availability of certain
contract rights and provisions depends on state approval and/or filing and
review processes. Where required by state law or regulation, the Contracts
will be modified accordingly.
RECORDS AND REPORTS
All records and accounts relating to the Separate Account will be maintained
by the Company or by its administrator, The Vanguard Group, Inc. As presently
required by the Investment Company Act of 1940 and regulations promulgated
thereunder, the Company will mail to all Contract Owners at their last known
address of record, at least semiannually, reports containing such information
as may be required under that Act or by any other applicable law or
regulation.
B-9
<PAGE>
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or
to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of
the information set forth in the Registration Statement, amendments and
exhibits thereto has been included in this Statement of Additional
Information. Statements contained in this Statement of Additional Information
concerning the content of the Contracts and other legal instruments are
intended to be summaries. For a complete statement of the terms of these
documents, reference should be made to the instruments filed with the
Securities and Exchange Commission.
FINANCIAL STATEMENTS
The audited financial statements of the Separate Account for the years ended
December 31, 1997 and December 31, 1996, including the Report of Independent
Auditors thereon, are included in this Statement of Additional Information.
The audited statutory-basis financial statements of the Company for the
years ended December 31, 1997 and December 31, 1996, including the Report of
Independent Auditors thereon, which are also included in this Statement of
Additional Information, should be distinguished from the financial statements
of the Separate Account and should be considered only as bearing on the
ability of the Company to meet its obligations under the Contracts. They
should not be considered as bearing on the investment performance of the
assets held in the Separate Account.
B-10
<PAGE>
STATUTORY- BASIS FINANCIAL STATEMENTS
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
STATUTORY-BASIS FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. 1
Audited Financial Statements
Balance Sheets (Statutory-Basis).......................................... 2
Statements of Operations (Statutory-Basis)................................ 3
Statements of Changes in Capital and Surplus (Statutory-Basis)............ 4
Statements of Cash Flows (Statutory-Basis)................................ 5
Notes to Financial Statements............................................. 6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Providian Life and Health Insurance Company
We have audited the accompanying statutory-basis balance sheets of Providian
Life and Health Insurance Company as of December 31, 1997 and 1996, and the
related statutory-basis statements of operations, changes in capital and sur-
plus, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to ex-
press an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting 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 pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Missouri Department of Insurance, which practices differ from
generally accepted accounting principles. The variances between such practices
and generally accepted accounting principles are also described in Note 1. The
effects on the financial statements of these variances are not reasonably de-
terminable but are presumed to be material.
In our opinion, because of the effects of the matter described in the pre-
ceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the fi-
nancial position of Providian Life and Health Insurance Company at December
31, 1997 and 1996, or the results of its operations or its cash flows for the
years then ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Providian Life and
Health Insurance Company at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with ac-
counting practices prescribed or permitted by the Missouri Department of In-
surance.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 24, 1998
1
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
BALANCE SHEETS (STATUTORY-BASIS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds................................................. $ 4,363,420 $ 4,249,252
Preferred stocks...................................... 31,519 30,658
Common stocks......................................... 487,831 438,067
Mortgage loans........................................ 2,269,507 2,651,611
Real estate........................................... 8,759 6,653
Policy loans.......................................... 155,430 158,186
Cash and short-term investments....................... 45,122 139,705
Other invested assets................................. 216,266 168,430
----------- -----------
Total cash and invested assets......................... 7,577,854 7,842,562
Deferred and uncollected premiums...................... 46,428 49,186
Accrued investment income.............................. 91,639 89,539
Other receivables...................................... 15,150 38,556
Amounts due from affiliates............................ 17,480 7,687
Federal income taxes recoverable from parent........... 230 5,840
Other admitted assets.................................. 32 1,385
Separate account assets................................ 3,573,052 2,427,504
----------- -----------
TOTAL ADMITTED ASSETS.............................. $11,321,865 $10,462,259
=========== ===========
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate policy reserves............................. $ 4,573,048 $ 4,736,127
Policy and contract claims............................ 49,145 43,006
Policyholder contract deposits........................ 1,770,902 1,961,549
Other policy or contract liabilities.................. 460,461 366,441
Amounts due to affiliates............................. 18,429 12,719
Asset valuation reserve............................... 109,465 97,169
Accrued expenses and other liabilities................ 165,840 212,433
Separate account liabilities.......................... 3,544,304 2,427,504
----------- -----------
Total liabilities...................................... 10,691,594 9,856,948
Capital and surplus:
Common stock, $11 par value; 1,145,000 shares
authorized, issued and outstanding................... 12,595 12,595
Preferred stock, $11 par value; 2,290,000 shares
authorized, issued and outstanding................... 25,190 25,190
Paid-in surplus....................................... 2,583 2,583
Unassigned surplus.................................... 589,903 564,943
----------- -----------
Total capital and surplus.............................. 630,271 605,311
----------- -----------
TOTAL LIABILITIES AND CAPITAL AND SURPLUS.......... $11,321,865 $10,462,259
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
STATEMENTS OF OPERATIONS (STATUTORY-BASIS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Premiums earned:
Life and annuity..................................... $ 406,561 $ 343,086
Accident and health.................................. 144,713 154,993
Annuity fund deposits................................. 995,014 1,073,366
Net investment income................................. 559,656 569,860
Commissions and expense allowances on reinsurance
ceded................................................ 2,323 1,123
Amortization of interest maintenance reserve.......... 6,333 3,109
Other income.......................................... 7,770 10,196
---------- ----------
2,122,370 2,155,733
Benefits and expenses:
Accident and health, life and other benefits.......... 1,474,430 1,417,390
Decrease in aggregate policy reserves................. (381,758) (111,769)
Interest on policyholder contract deposits............ 122,478 102,631
Commissions and expense allowances on reinsurance
assumed.............................................. 41,990 39,533
General insurance and other expenses.................. 129,266 122,906
Reinsurance recapture fee............................. 553 2,320
Net transfers to separate accounts.................... 599,633 425,800
---------- ----------
1,986,592 1,998,811
---------- ----------
Net gain from operations before federal income taxes... 135,778 156,922
Federal income tax expense............................. 54,615 50,639
---------- ----------
Net gain from operations............................... 81,163 106,283
Net realized capital gains, net of income taxes (1997--
$9,506; 1996--$1,402) and excluding gains transferred
to the interest maintenance reserve (1997--$10,093;
1996--$2,921)......................................... 24,702 3,394
---------- ----------
Net income............................................. $ 105,865 $ 109,677
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS (STATUTORY-BASIS)
<TABLE>
<CAPTION>
COMMON PREFERRED PAID-IN UNASSIGNED
STOCK STOCK SURPLUS SURPLUS
------- --------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances, January 1, 1996................. $12,595 $25,190 $2,583 $536,126
Net income................................ -- -- -- 109,677
Change in net unrealized gains on
investments.............................. -- -- -- 40,540
Dividends to shareholders................. -- -- -- (125,000)
Prior year federal income tax adjustment.. -- -- -- 6,546
Decrease in nonadmitted assets............ -- -- -- 4,737
Increase in asset valuation reserve....... -- -- -- (7,683)
------- ------- ------ --------
Balances, December 31, 1996............... $12,595 $25,190 $2,583 $564,943
Net income................................ -- -- -- 105,865
Change in net unrealized gains on
investments.............................. -- -- -- 45,907
Dividends to shareholders................. -- -- -- (120,000)
Prior year federal income tax adjustment.. -- -- -- 4,719
Decrease in nonadmitted assets............ -- -- -- 341
Increase in asset valuation reserve....... -- -- -- (12,296)
Change in surplus in separate accounts.... -- -- -- 424
------- ------- ------ --------
Balances, December 31, 1997............... $12,595 $25,190 $2,583 $589,903
======= ======= ====== ========
</TABLE>
See accompanying notes.
4
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (STATUTORY-BASIS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash and short-term investments provided
Operations:
Premiums and annuity fund deposits................... $1,549,498 $1,573,203
Net investment income received....................... 544,108 574,079
Allowances and reserve adjustments received on
reinsurance ceded................................... 2,323 1,125
Other income received.................................. 5,906 10,182
---------- ----------
2,101,835 2,158,589
Benefits paid........................................ 1,468,102 1,412,797
General insurance and other expenses................. 170,488 169,580
Federal income taxes paid............................ 53,792 56,121
Net increase (decrease) in policy loans and premium
notes............................................... (2,745) 3,520
Paid reinsurance reserves and other items............ 18 293
Net transfers to separate accounts................... 602,788 412,252
---------- ----------
2,292,443 2,054,563
---------- ----------
Total cash provided (applied) by operations........... (190,608) 104,026
Investments sold, matured or repaid................... 5,059,887 3,688,955
Other cash provided:
Increase in amounts due to affiliates................ 5,709 7,826
Net increase in broker receivables................... 891 31,112
Other items.......................................... 15,014 40,047
---------- ----------
Total other cash provided............................. 21,614 78,985
---------- ----------
Total cash and short-term investments provided......... 4,890,893 3,871,966
Cash and short-term investments applied:
Investments acquired.................................. 4,783,450 3,717,511
Other cash applied:
Dividends paid to shareholders....................... 120,000 125,000
Decrease in amounts due to affiliates................ 9,770 6,162
Net decrease in broker payables...................... 22,505 --
Net cash and short-term investments transferred on
reinsurance recaptured.............................. 650 78,980
Capital contribution to separate account............. 26,362 --
Other items.......................................... 22,739 9,874
---------- ----------
Total other cash applied.............................. 202,026 220,016
---------- ----------
Total cash and short-term investments applied.......... 4,985,476 3,937,527
---------- ----------
Decrease in cash and short-term investments............ (94,583) (65,561)
Cash and short-term investments:
Beginning of year..................................... 139,705 205,266
---------- ----------
End of year........................................... $ 45,122 $ 139,705
========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION, NATURE OF OPERATIONS AND ACCOUNTING POLICIES
Organization
Providian Life and Health Insurance Company (PLH) is a life and health in-
surance company domiciled in Missouri. Prior to June 10, 1997, PLH was an in-
direct, wholly owned subsidiary of Providian Corporation (Providian). On June
10, 1997, Providian's insurance operations, including the operations of PLH,
were merged with an indirect, wholly owned subsidiary of AEGON N.V., an inter-
national insurance organization headquartered in The Hague, The Netherlands.
Providian was the surviving corporation in the merger. Effective October 15,
1997, Providian's name was changed to Commonwealth General Corporation (Com-
monwealth). Effective December 31, 1997, ownership of Commonwealth was trans-
ferred to AEGON USA, Inc., an indirect, wholly owned subsidiary of AEGON N.V.
PLH is directly owned by Commonwealth Life Insurance Company (CLICO) 61%,
Capital Liberty, L.P. (CLLP) 20%, Peoples Security Life Insurance Company
(PSI) 15%, and Commonwealth 4%. Commonwealth is the ultimate parent of CLICO,
CLLP, and PSI. PLH wholly owns an insurance subsidiary, Veterans Life Insur-
ance Company (VLIC), which wholly owns an insurance subsidiary, First
Providian Life and Health Insurance Company (FPLH), and a non-insurance sub-
sidiary.
Nature of Operations
PLH sells and services life and accident and health insurance products, pri-
marily utilizing direct response methods, such as television, telephone, mail
and third-party programs to reach low to middle-income households nationwide.
PLH also sells and services group and individual accumulation products, pri-
marily utilizing brokers, fund managers, financial planners, stock brokerage
firms and a mutual fund.
Management's Estimates
The preparation of financial statements of insurance companies requires man-
agement to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Such estimates and assump-
tions could change in the future as more information becomes known, which
could impact the amounts reported and disclosed herein.
Basis of Presentation
The accompanying financial statements of PLH have been prepared in accor-
dance with the accounting practices prescribed or permitted by the Missouri
Department of Insurance. Such practices vary from generally accepted account-
ing principles (GAAP). The more significant variances from GAAP are as fol-
lows:
Investments
Investments in bonds and mandatorily redeemable preferred stocks are re-
ported at amortized cost or fair value based on their National Association
of Insurance Commissioners (NAIC) rating; for GAAP, such fixed maturity in-
vestments are designated at purchase as held-to-maturity, trading or avail-
able-for-sale. Held-to-maturity fixed investments are reported at amortized
cost, and the remaining fixed maturity investments are reported at fair
value with unrealized holding gains and losses reported in operations for
those designated as trading and as a separate component of shareholders'
equity for those designated as available-for-sale.
6
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Fair values of investments in bonds and stocks are generally based on
values specified by the Securities Valuation Office (SVO) of the NAIC,
rather than on values provided by outside broker confirmations or inter-
nally calculated estimates. However, for certain investments, the NAIC does
not provide a value and PLH uses either admitted asset investment amounts
(i.e., statement values) as allowed by the NAIC, quoted fair values pro-
vided by outside broker confirmations or internally calculated estimates.
Investments in real estate are reported net of related obligations rather
than on a gross basis. Real estate owned and occupied by PLH is included in
investments rather than reported as an operating asset, and investment in-
come and operating expenses include amounts representing rent for PLH's oc-
cupancy of such real estate. Changes between cost and admitted asset in-
vestment amounts are credited or charged directly to unassigned surplus
rather than to a separate surplus account.
Valuation allowances are established for mortgage loans based on the dif-
ference between the unpaid loan balance and the estimated fair value of the
underlying real estate when such loans are determined to be in default as
to scheduled payments. Under GAAP, valuation allowances would be estab-
lished when PLH determines it is probable that it will be unable to collect
all amounts due (both principal and interest) according to the contractual
terms of the loan agreement. Such allowances are generally based on the es-
timated fair value of the underlying real estate (collateral). The initial
valuation allowance and subsequent changes in the allowance for mortgage
loans are charged or credited directly to unassigned surplus, rather than
being included as a component of earnings as would be required under GAAP.
Under a formula prescribed by the NAIC, PLH defers the portion of real-
ized capital gains and losses attributable to changes in the general level
of interest rates on sales of certain liabilities and fixed income invest-
ments, principally bonds and mortgage loans, and amortizes such deferrals
into income on a straight-line basis over the remaining period to maturity
based on groupings of individual liabilities or investments sold. The net
accumulated unamortized balance of such deferrals is reported as an "inter-
est maintenance reserve" (IMR). Realized capital gains and losses are re-
ported in income net of federal income tax and transfers to the IMR. At De-
cember 31, 1997 and 1996, the IMR balance was in an asset position of
$7,002,000 and $10,762,000, respectively, and was non-admitted for statu-
tory accounting purposes. The "asset valuation reserve" (AVR) is also de-
termined by a NAIC prescribed formula and is reported as a liability rather
than a valuation allowance. The AVR represents a provision for possible
fluctuations in the value of bonds, equity securities, mortgage loans, real
estate and other invested assets. Changes to the AVR are charged or cred-
ited directly to unassigned surplus. Under GAAP, realized capital gains and
losses are reported in the income statement on a pretax basis in the period
that the asset giving rise to the gain or loss is sold and direct write-
downs are recorded (or valuation allowances are provided, where appropriate
under GAAP) when there has been a decline in value deemed to be other than
temporary, in which case, write-downs (or provisions) for such declines are
charged to income.
Subsidiaries
The accounts and operations of PLH's subsidiaries are not consolidated
with the accounts and operations of PLH as would be required under GAAP.
Policy Acquisition Costs
Costs of acquiring and renewing business are expensed when incurred. Un-
der GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For uni-
versal life insurance and investmenttype contracts, to the extent recover-
able from future gross profits, deferred policy acquisition costs are amor-
tized generally in
7
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
proportion to the present value of expected gross profits from surrender
charges and investment, mortality and expense margins.
Nonadmitted Assets
Certain assets designated as "nonadmitted," principally agents' debit
balances and furniture and equipment, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
Premiums
Revenues for universal life policies and investment-type contracts con-
sist of the entire premium received and benefits incurred represent the to-
tal of death benefits paid, surrenders and the change in policy reserves.
Under GAAP, premiums received in excess of policy charges are not recog-
nized as premium revenue and benefits represent the excess of benefits paid
over the policy account value and interest credited to the account values.
Benefit Reserves
Certain policy reserves are calculated using prescribed interest and mor-
tality assumptions rather than on expected experience and actual account
balances as would be required under GAAP.
Reinsurance
Policy and contract liabilities ceded to reinsurers have been reported as
reductions of the related reserves rather than as assets as would be re-
quired under GAAP.
Commissions allowed by reinsurers on business ceded are reported as in-
come when received rather than being deferred and amortized with deferred
policy acquisition costs.
Federal Income Taxes
Deferred federal income taxes are not provided for differences between
the financial statement amounts and the tax bases of assets and liabili-
ties.
Statements of Cash Flows
Cash and short term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
The effects of the foregoing variances from GAAP on the accompanying statu-
tory-basis financial statements have not been determined, but are presumed to
be material.
Other significant accounting policies followed in preparing the accompanying
statutory-basis financial statements are as follows:
Investments
Bonds, preferred stocks, common stocks, mortgage loans, real estate, pol-
icy loans, short-term investments, other invested assets and derivative fi-
nancial instruments are stated at values prescribed by the NAIC, as fol-
lows:
Bonds not backed by other loans are stated at amortized cost using
the constant effective yield method.
8
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Loan-backed bonds and structured securities are valued at amortized
cost using the constant effective yield method. Anticipated prepayments
are considered when determining the amortization of related discounts
or premiums. Prepayment assumptions are obtained from dealer survey
values or internal estimates and are consistent with the current inter-
est rate and economic environment. The retrospective adjustment method
is used to value such securities.
Preferred stocks are carried at cost. In addition, certain bonds and
preferred stocks are carried at the lower of cost (or amortized cost)
or the NAIC designated fair value.
Common stocks are carried at the NAIC designated fair value, except
that investments in unconsolidated subsidiaries and affiliates in which
PLH has an interest of 20 percent or more are carried on the equity ba-
sis.
Mortgage loans in good standing are carried at unpaid principal bal-
ances while statutorily delinquent mortgages are carried at their un-
paid principal balance less the related valuation allowance.
Real estate is carried at the lower of cost (less depreciation for
occupied and investment real estate, generally calculated using the
straight-line method) or net realizable value, and is net of related
obligations, if any.
Policy loans are carried at the aggregate unpaid principal balance.
Short-term investments include investments with maturities of less
than one year at the date of acquisition. Short-term investments are
carried at amortized cost.
Other invested assets are comprised of limited partnership invest-
ments and are valued using the equity method of accounting.
Derivative financial instruments, consisting primarily of interest
rate swap agreements, including basis swaps, and futures, are valued
consistently with the hedged item. Hedges of fixed income assets and/or
liabilities are valued at amortized cost. Hedges of items carried at
fair value are valued at fair value. Derivatives which cease to be ef-
fective hedges are valued at fair value.
Bond and other loan interest is credited to income as it accrues. Divi-
dends on preferred and common stocks are credited to income on exdividend
dates. For securities, PLH follows the guidelines of the NAIC for each se-
curity on an individual basis in determining the admitted or nonadmitted
status of accrued income amounts. There was no interest on securities ex-
cluded from investment income at December 31, 1997 and 1996. For mortgage
loans, PLH's policy is to exclude from investment income interest in excess
of three months past due. At December 31, 1997 and 1996, the total amount
excluded from accrued investment income for delinquent mortgage loans was
approximately $308,000 and $504,000, respectively. The amounts to be paid
or received as a result of derivative instruments are recognized in the
statements of operations as an adjustment to investment income. Realized
capital gains and losses on derivative instruments are recognized currently
in earnings. If the item being hedged is subject to the IMR, the gain or
loss on the hedging derivative instrument is subject to the IMR upon termi-
nation.
Net income includes realized capital gains and losses on investments
sold, net of federal income tax and transfers to the IMR. The cost of in-
vestments sold is determined on a first-in, first-out basis.
Separate Accounts
Separate account assets and liabilities reported in the accompanying
statutory-basis financial statements represent funds that are separately
administered, principally for annuity contracts, and for which the contract
holder, rather than PLH, bears the investment risk. Separate account con-
tract holders have no claim against the assets of the general account of
PLH. Separate account assets are reported at estimated fair value. Separate
account liabilities are also reported at estimated fair value and are ex-
clusive of capital contributions
9
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
made by PLH. The operations of the separate accounts are not included in
the accompanying statutory-basis financial statements. Fees charged on sep-
arate account policyholder deposits are included in net transfers to sepa-
rate accounts in the accompanying statements of operations.
Policy Reserves
Unearned premiums represent the portion of premiums written which are ap-
plicable to the unexpired terms of accident and health policies in force,
calculated principally by the application of monthly pro rata fractions.
Liabilities for unearned premiums are included in aggregate policy re-
serves.
PLH waives deduction of deferred fractional premiums upon death of
insureds. PLH's policy is to return any portion of the final premium beyond
the date of death. Surrender values on direct business are not promised in
excess of the legally computed reserves. Additional premiums are charged
for policies issued on substandard lives according to underwriting classi-
fication. Mean reserves are determined by computing the regular mean re-
serve for the plan at the issued age and holding, in addition, onehalf of
the extra premium charged for the year.
The tabular interest has been determined from the basic data for the cal-
culation of policy reserves. The tabular less actual reserve released and
the tabular cost have been determined by formula as described in the NAIC
instructions.
Policy reserves also include single premium and flexible premium annuity
contracts and structured settlement contracts. The single premium and flex-
ible premium contracts contain surrender charges for the first six to seven
years of the contract. These contract reserves are held at the contract
value that accrues to the policyholder. Structured settlement contracts
contain no surrender charge as the contracts are not surrenderable. Policy
reserves on these contracts are determined based on the expected future
cash flows discounted at the applicable statutorily defined mortality and
interest rates. Annual effective rates credited to these annuity contracts
ranged from 4.0 percent to 8.0 percent during 1997 and 1996.
Liabilities for Policy and Contract Claims
Liabilities for policy and contract claims, principally related to acci-
dent and health policies, include amounts determined in accordance with
standard actuarial practice and statutory regulation. These estimates are
subject to the effects of trends in claim severity and frequency. Although
considerable variability is inherent in such estimates, management believes
that the liabilities for policy and contract claims are adequate. The meth-
ods of making such estimates and establishing the resulting liabilities are
continually reviewed and updated, and any adjustments resulting therefrom
are reflected in current earnings.
Policyholder Contract Deposits
Policyholder contract deposits are comprised primarily of guaranteed in-
vestment contracts (GICs). The GICs consist of three types. One type is
guaranteed as to principal along with interest guarantees based upon prede-
termined indices. The second type guarantees principal and interest, but
also includes a penalty if the contract is surrendered early. The third
type guarantees principal and interest and is non-surrenderable before the
fixed maturity date. Policy reserves on the GICs are determined following
the retrospective deposit method and consist of contract values that accrue
to the benefit of the policyholder. Annual effective rates credited to
these GICs ranged from 5.5 percent to 6.6 percent and from 5.2 percent to
6.6 percent during 1997 and 1996, respectively.
Premiums, Benefits and Expenses
For individual and most group life policies, premiums are reported as
earned on the policy/certificate anniversary. For individual and group an-
nuities, premiums and annuity fund deposits are recorded as earned when
collected. For individual and group accident and health policies, premiums
are recorded as earned on
10
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
a pro rata basis over the coverage period for which the premiums were col-
lected or due. Benefit claims (including an estimated provision for claims
incurred but not reported), policy reserve changes and expenses are charged
to income as incurred.
Reinsurance
Reinsurance premiums, benefits and expenses are accounted for in a manner
consistent with that used in accounting for original policies issued and
the terms of the reinsurance contracts. Premiums, benefits, expenses and
the reserves for policy and contract liabilities and unearned premiums are
recorded net of reinsured amounts.
Guaranty Fund Assessments
Periodically, PLH is assessed by various state guaranty funds as part of
those funds' activities to collect funds from solvent insurance companies
to cover certain losses to policyholders that resulted from the insolvency
or rehabilitation of other insurance companies. Each state guaranty fund
operates independently of any other state guaranty fund; as such, the meth-
ods by which assessments are levied against PLH vary from state to state.
Also, some states permit guaranty fund assessments to be partially recov-
ered through reductions in future premium taxes. At December 31, 1997 and
1996, PLH has established an estimated liability for guaranty fund assess-
ments for those insolvencies or rehabilitations that have actually occurred
prior to that date. The estimated liability is determined using preliminary
information received from the various state guaranty funds and the National
Organization of Life and Health Insurance Guaranty Associations. Because
there are many uncertainties regarding the ultimate assessments that will
be assessed against PLH, the ultimate assessments for those insolvencies or
rehabilitations that occurred prior to December 31, 1997 may vary from the
estimated liability included in the accompanying financial statements. The
estimated liability for guaranty fund assessments recorded at December 31,
1997 and 1996 was $12,354,000 and $11,525,000, respectively.
Permitted Statutory Accounting Practices
PLH's statutory-basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the Missouri Depart-
ment of Insurance. Currently, "prescribed" statutory accounting practices
include state insurance laws, regulations, and general administrative
rules, as well as a variety of publications of the NAIC, including the
NAIC's Accounting Practices and Procedures Manual. "Permitted" statutory
accounting practices encompass all accounting practices that are not pre-
scribed; such practices may differ from state to state, may differ from
company to company within a state, and may change in the future.
The NAIC is in the process of codifying statutory accounting practices
(Codification). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that PLH uses to prepare its statutory-basis financial state-
ments. Codification, which is expected to be approved by the NAIC in 1998,
will require adoption by the various states before it becomes the pre-
scribed statutory basis of accounting for insurance companies domesticated
within those states. Accordingly, before Codification becomes effective for
PLH, Missouri must adopt Codification as the prescribed basis of accounting
on which domestic insurers must report their statutory-basis results to the
Department of Insurance. At this time it is unclear whether Missouri will
adopt Codification. However, based on current draft guidance, management
believes that the impact of codification will not be material to PLH's
statutory-basis financial statements.
11
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain reclassifications have been made to the prior year financial state-
ments to conform with the current year presentation.
2. INVESTMENTS
The tables below contain amortized cost (carrying value or statement value)
and fair value information on bonds.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. government obligations......... $ 133,391 $ 931 $ 229 $ 134,093
States and political subdivisions... 19,464 1,217 -- 20,681
Foreign government obligations*..... 29,293 227 67 29,453
Corporate and other................. 2,595,091 95,032 4,976 2,685,147
Foreign corporate*.................. 384,898 14,292 10,739 388,451
Asset-backed........................ 541,542 434 -- 541,976
Mortgage-backed..................... 659,741 -- -- 659,741
---------- -------- ------- ----------
$4,363,420 $112,133 $16,011 $4,459,542
========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. government obligations......... $ 170,990 $ 576 $ 3,340 $ 168,226
States and political subdivisions... 33,765 526 994 33,297
Foreign government obligations*..... 39,483 301 432 39,352
Corporate and other................. 2,730,863 43,960 23,430 2,751,393
Foreign corporate*.................. 218,306 5,868 679 223,495
Asset-backed........................ 519,149 -- -- 519,149
Mortgage-backed..................... 536,696 -- -- 536,696
---------- ------- ------- ----------
$4,249,252 $51,231 $28,875 $4,271,608
========== ======= ======= ==========
</TABLE>
- --------
* Substantially all are U.S. dollar denominated.
12
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and fair value of bonds at December 31, 1997, by contrac-
tual maturity, are shown below. Actual maturities may differ from contractual
maturities because certain borrowers may have the right to call or prepay ob-
ligations, sometimes without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less............................ $ 123,776 $ 123,553
Due after one year through five years.............. 524,363 525,913
Due after five years through ten years............. 886,610 895,178
Due after ten years................................ 1,627,388 1,713,181
---------- ----------
3,162,137 3,257,825
Asset-backed securities............................ 541,542 541,976
Mortgage-backed securities......................... 659,741 659,741
---------- ----------
$4,363,420 $4,459,542
========== ==========
</TABLE>
Proceeds during 1997 and 1996 from sales, maturities and calls of bonds were
$4,006,319,000 and $2,992,250,000, respectively. Gross gains of $43,227,000
and $36,104,000 and gross losses of $29,488,000 and $28,403,000 in 1997 and
1996, respectively, were realized on those sales.
The cost of preferred stocks of unaffiliated companies was $31,519,000 and
$30,886,000 at December 31, 1997 and 1996, respectively, and the related fair
value was $31,640,000 and $30,681,000 at December 31, 1997 and 1996, respec-
tively. There was no difference between cost and statement value of preferred
stocks at December 31, 1997. The difference between cost and statement value
of $228,000 at December 31, 1996 was credited directly to unassigned surplus
as of that date and did not affect net income.
The change in unrealized gains and losses on investments in common stocks
and on investments in subsidiaries is credited or charged directly to unas-
signed surplus and does not affect net income. The cost and fair value of
those investments at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Common stocks........................... $ 34,723 $ 1,527 $3,455 $ 32,795
Subsidiaries............................ 202,606 252,430 -- 455,036
-------- -------- ------ --------
$237,329 $253,957 $3,455 $487,831
======== ======== ====== ========
DECEMBER 31, 1996
Common stocks........................... $ 28,991 $ 655 $1,083 $ 28,563
Subsidiaries............................ 202,606 206,898 -- 409,504
-------- -------- ------ --------
$231,597 $207,553 $1,083 $438,067
======== ======== ====== ========
</TABLE>
The fair value of investments in subsidiaries presented above represents
PLH's equity interest in the net assets of the subsidiary.
Included in investments are securities having statement values of $3,966,000
at December 31, 1997 which were on deposit with various state insurance de-
partments to satisfy regulatory requirements.
13
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The carrying value of mortgage loans is net of an allowance for loan losses
of $868,000 and $2,526,000 at December 31, 1997 and 1996, respectively. The
maximum and minimum lending rates for commercial mortgage loans made during
1997 were 8.8 percent and 6.9 percent, respectively; the maximum and minimum
lending rates for residential mortgage loans made during 1997 were 9.0 percent
and 4.3 percent, respectively; and the maximum and minimum lending rates for
farm mortgage loans made during 1997 were 8.5 percent and 7.8 percent, respec-
tively. The maximum percentage of any one loan to the value of collateral at
the time of the loan, exclusive of insured, guaranteed or purchase money mort-
gages, was 80 percent. Hazard insurance is required on all properties covered
by mortgage loans at least equal to the excess of the loan over the maximum
loan which would be permitted by law on the land without buildings. As of De-
cember 31, 1997, PLH held $1,059,000 of mortgages with interest more than one
year overdue amounting to $137,000. As of December 31, 1997, there were no
taxes, assessments, or other amounts advanced by PLH on account of mortgage
loans which were not included in mortgage loan totals. During 1997, $440,000
of taxes and maintenance expenses were paid by PLH on property acquired
through foreclosure. During 1997, PLH did not reduce interest rates on any
outstanding mortgages.
3. FINANCIAL INSTRUMENTS
PLH utilizes a variety of financial instruments in its asset/liability man-
agement process and to meet its customers' financing needs. The
asset/liability management process focuses on the management of a variety of
risks, including interest rate, market and credit risks. Effective management
of these risks is an important determinant of profitability. Instruments used
in this process and to meet the customers' financing and investing needs in-
clude derivative financial instruments, primarily interest rate swap agree-
ments and futures contracts, and commitments to extend credit. Other deriva-
tives, such as forwards, are used to a much lesser extent in the
asset/liability management process. All of these instruments involve (to vary-
ing degrees) elements of market and credit risks in excess of the amounts rec-
ognized in the accompanying financial statements at a given point in time. The
contract or notional values of all of these instruments reflect the extent of
involvement in the various types of financial instruments.
PLH's exposure to market risk (including interest rate risk) is the risk of
market volatility and potential disruptions in the market which may result in
certain instruments being less valuable. PLH monitors and controls its expo-
sure to this risk primarily through the use of cash flow stress testing, total
portfolio analysis of net duration levels, a monthly mark-to-market process
and ongoing monitoring of interest rate movements.
PLH's exposure to credit risk (including interest rate risk) is the risk of
loss from a counterparty failing to perform according to the terms of the con-
tract. This exposure includes settlement risk (risk that the counterparty de-
faults after PLH has delivered funds or securities under the terms of the con-
tract) which results in an accounting loss and replacement cost risk (cost to
replace the contract at current market rates should the counterparty default
prior to the settlement date). There is no off-balance sheet exposure to
credit risk that would result in an immediate accounting loss (settlement
risk) associated with counterparty non-performance on interest rate swap
agreements and futures. Interest rate swap agreements are subject to replace-
ment cost risk, which equals the cost to replace those contracts in a net gain
position should a counterparty default. Default by a counterparty would not
result in an immediate accounting loss. These instruments, as well as futures
and forwards, are subject to market risk, which is the possibility that future
changes in market prices may make the instruments less valuable. Credit loss
exposure resulting from non-performance by a counterparty for commitments to
extend credit is represented by the contractual amounts of the instruments.
The credit risk on all financial instruments, whether on- or off-balance
sheet, is controlled through an ongoing credit review, approval and monitoring
process. PLH determines, on an individual counterparty basis, the need for
collateral or other security to support financial instruments with credit
risk, and establishes individual
14
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and aggregate counterparty exposure limits. In order to limit exposure associ-
ated with counterparty nonperformance on interest rate swap agreements, PLH
enters into master netting agreements with its counterparties. These master
netting agreements provide that, upon default of either party, contracts in
gain positions will be offset with contracts in loss positions and the net
gain or loss will be received or paid, respectively. Assuming every
counterparty defaulted, the cost of replacing those interest rate contracts in
a net gain position, after consideration of the aforementioned master netting
agreements, was $20,344,000 and $22,188,000 at December 31, 1997 and 1996, re-
spectively.
PLH manages interest rate risk through the use of duration analysis. Dura-
tion is a key portfolio management tool and is measured for both assets and
liabilities. For the simplest forms of assets or liabilities, duration is pro-
portional to their weighted average life, with weights equal to the discounted
present value of estimated cash flows. This methodology causes near-term cash
flows to have a greater proportional weight than cash flows further in the fu-
ture. For more complex assets and liabilities with optional cash flows, for
example, callable bonds, mortgage-backed securities, or traditional insurance
liabilities, additional adjustments are made in estimating an effective dura-
tion number. PLH uses derivatives as a less costly and less burdensome alter-
native to restructuring the underlying cash instruments to manage interest
rate risk based upon the aggregate net duration level of its aggregate portfo-
lio. Information is provided below for each significant derivative product
type.
Interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments, without an exchange of the underlying princi-
pal amount. PLH also enters into basis swap agreements where amounts received
are based primarily upon three month LIBOR or less and pays amounts based on
either a short-term Treasury or Prime Rate. The amounts to be paid or received
as a result of these agreements are accrued and recognized in the accompanying
statements of operations through net investment income. Gains or losses real-
ized on closed or terminated agreements are deferred and amortized as a compo-
nent of the IMR.
Futures are contracts which call for the delayed delivery of securities in
which the seller agrees to deliver on a specified future date, a specified in-
strument at a specified price. The daily change in fair value for futures used
as accounting hedges both for products that provide a return based on the mar-
ket performance of a designated index and for investments in common stocks are
recognized in the accompanying statement of operations through net realized
investment gains and losses. Margin requirements on futures contracts, equal
to the change in fair value, are usually settled on a daily basis.
The following table summarizes the activity by notional or contract value in
derivative products for 1997 and 1996:
<TABLE>
<CAPTION>
RECEIVE PAY FIXED/
FIXED/PAY RECEIVE
FLOATING FLOATING BASIS FUTURES FORWARDS
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995.... $1,320,962 $ -- $ 65,198 $ 50,106 $250,000
Additions.................... 107,473 10,000 100,000 314,271 --
Maturities................... 109,268 -- 4,558 -- --
Terminations................. 396,400 -- -- 293,594 --
---------- ------- -------- -------- --------
Balances, December 31, 1996.... 922,767 10,000 160,640 70,783 250,000
Additions.................... 266,290 25,958 -- 319,168 --
Maturities................... 194,567 -- 22,002 314,449 --
Terminations................. 5,000 -- -- -- --
---------- ------- -------- -------- --------
Balances, December 31, 1997.... $ 989,490 $35,958 $138,638 $ 75,502 $250,000
========== ======= ======== ======== ========
</TABLE>
15
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1997 and 1996, PLH terminated or closed certain interest rate swap
agreements which were
accounted for as hedges. The net deferred gains on these agreements during
1997 and 1996 were $71,000 and $1,279,000, respectively, and are being amor-
tized to investment income over a period of one to six years, the expected re-
maining life of the related investments, as a component of the IMR.
Commitments
Commitments to extend credit consist of agreements to lend to a customer at
some future time, subject to established contractual conditions. Since it is
likely some commitments may expire or be withdrawn without being fully drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. PLH evaluates individually each customer's creditworthiness.
Collateral may be obtained, if deemed necessary, based on a credit evaluation
of the counterparty. The collateral may include commercial, residential and/or
farm real estate. At December 31, 1997 and 1996, commitments to extend credit
were $155,185,000 and $136,317,000, respectively. Additionally, at December
31, 1997, PLH has agreed to fund additional investments through the year 2002
in an amount not to exceed $75,313,000.
Concentrations of Credit Risk
PLH limits credit risk by diversifying its investment portfolio among common
and preferred stocks, public bonds, private placement securities, and commer-
cial and residential mortgage loans. It further diversifies these portfolios
between and within industry sectors, by geography and by property type. Credit
risk is also limited by maintaining stringent underwriting standards and pur-
chasing insurance protection in certain cases. In addition, PLH establishes
credit approval processes, credit limits and monitoring procedures on an indi-
vidual counterparty basis. As a result, management believes that significant
concentrations of credit risk do not exist.
4. FEDERAL INCOME TAXES
PLH and its subsidiaries file a life-nonlife consolidated federal income tax
return. Under a written agreement, PLH and its affiliates allocate the federal
income tax liability among the members of the consolidated return group in the
ratio that each member's separate return tax liability, or benefit from a net
operating loss, for the year bears to the consolidated tax liability. The fi-
nal settlement under this agreement is made after the annual filing of the
consolidated U.S. Corporate Income Tax Return.
Reported income tax expense differs from income tax expense that would re-
sult from applying statutory rates to pretax income primarily due to differ-
ences in the statutory and tax treatment of certain statutory investments, de-
ferred policy acquisition costs, bad debts, and differences in policy and con-
tract liabilities.
Included in the statements of changes in capital and surplus are certain ad-
justments increasing surplus by $4,719,000 and $6,546,000 at December 31, 1997
and 1996, respectively, relating to tax accrual adjustments applicable to
prior tax years.
At December 31, 1997, accumulated earnings of PLH for federal income tax
purposes included a "Policyholders' Surplus" account balance of $17,425,000, a
special memorandum tax account. This is a special memorandum account balance
which has not been currently taxed, but income taxes computed at current rates
will become payable if this surplus is distributed. Provisions of the Deficit
Reduction Act of 1984 (the Act) do not permit further additions to the Policy-
holders' Surplus account. The "Shareholders' Surplus" account is also a spe-
cial memorandum tax account, and generally represents an accumulation of tax-
able income (net of tax thereon) plus the dividends received deduction, tax-
exempt interest, and certain other special deductions as provided by the Act.
At December 31, 1997, the balance in the Shareholders' Surplus account
amounted to approximately $611,347,000. There is no present intention to make
distributions in excess of the Shareholders' Surplus account.
16
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. RELATED PARTY TRANSACTIONS
Reinsurance Assumed from Affiliates
PLH entered into two indemnity reinsurance agreements with CLICO in 1987
whereby PLH assumes 100 percent of the risks reinsured on all structured set-
tlement policies issued during 1987 by CLICO. The agreements were amended in
1988 whereby PLH also assumes 100 percent of the risks reinsured on all struc-
tured settlement, pension buyout, and single premium immediate annuities is-
sued subsequent to 1987 by CLICO. The agreements were also amended in 1988 to
change the agreements from indemnity reinsurance to coinsurance. The agree-
ments were further amended in 1992 whereby CLICO recaptured structured settle-
ments issued in 1991 and in the first five months of 1992.
PLH entered into a reinsurance agreement with CLICO in 1990 on a coinsurance
basis whereby PLH assumes 100 percent of the risk on certain guaranteed in-
vestment contracts issued by CLICO. The agreement was amended in 1996 to pro-
vide CLICO with profit sharing on the assumed business of up to 20 basis
points per year of the account value. The amount of profit sharing paid to
CLICO in 1997 and 1996 was $1,986,000 and $1,733,000, respectively. In addi-
tion, the agreement was amended to provide CLICO with reimbursement of ex-
traordinary expenses related to the assumed policies, including guaranty fund
assessment payments. There were no expense reimbursements made to CLICO in
1997 or 1996.
PLH entered into indemnity reinsurance agreements with PSI in 1987 whereby
PLH assumes 100 percent of the risks reinsured on all structured settlement
contracts issued during 1987. The agreements were amended in 1988 whereby PLH
also assumed 100 percent of the risks reinsured on all structured settlement,
pension buyout and single premium immediate annuities issued subsequent to
1987. The agreements were also amended in 1988 to change the agreements from
indemnity reinsurance to coinsurance.
PLH entered into a reinsurance agreement with PSI in 1996 on a coinsurance
basis whereby PLH assumes 100 percent of the risk on certain guaranteed in-
vestment contracts issued by PSI. The agreement provides PSI with profit shar-
ing on the assumed business of up to 20 basis points of account value. The
amount of profit sharing paid to PSI in 1997 and 1996 was $984,000 and
$164,000, respectively.
Effective June 30, 1995, PLH entered into a coinsurance agreement with PSI
whereby PLH assumed 100 percent of the risk of business reinsured by PSI from
Manufacturers Life Insurance Company of North America (MLIC), formerly North
American Security Life. This agreement coinsured existing deposits of MLIC's
fixed account portion of their variable annuity product business. In addition,
this agreement included prospective coinsurance of future sales of MLIC's
fixed account portion of their variable annuity product. This agreement also
contained a provision which provided PSI with profit sharing on the assumed
business of up to 10 basis points of account value. The profit sharing amount
paid by PLH to PSI in 1996 was $574,000. Under the initial agreement, PLH re-
ceived cash and invested assets in exchange for its coinsurance of
$724,700,000 of fixed annuity deposits. As of November 1, 1996, the coinsur-
ance agreement was amended whereby PSI recaptured the fixed annuity deposits
from PLH. The recapture resulted in PLH transferring to PSI liabilities previ-
ously reinsured related to the business of $575,450,000 and assets of
$577,000,000 as of December 31, 1996. The $1,550,000 difference represented
the net expense incurred by PLH as of December 31, 1996.
17
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the amounts reflected in the statements of
operations from reinsurance assumed by PLH from CLICO and PSI:
<TABLE>
<CAPTION>
EXPENSE (REVENUE) FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------
ASSUMED FROM
------------------------------------------------------------------
CLICO CLICO PSI PSI PSI TOTAL
ITEM ASSUMED (ANNUITIES) (GIC'S) (ANNUITIES) (GIC'S) (MLIC) ASSUMED
- ------------ ----------- --------- ----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Premium income.......... $(173,892) $ (2,555) $(1,982) $(100,941) $ -- $(279,370)
Life, annuity and other
benefits............... 79,100 353,690 10,116 84,908 -- 527,814
Commissions and
expenses............... 6,995 -- 19 -- -- 7,014
Change in reserves or
policyholder contract
deposits............... 178,450 (269,172) 56 45,651 -- (45,015)
<CAPTION>
EXPENSE (REVENUE) FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------
ASSUMED FROM
------------------------------------------------------------------
CLICO CLICO PSI PSI PSI TOTAL
ITEM ASSUMED (ANNUITIES) (GIC'S) (ANNUITIES) (GIC'S) (MLIC) ASSUMED
- ------------ ----------- --------- ----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Premium income.......... $(105,397) $(105,319) $ (307) $(244,197) $(126,736) $(581,956)
Life, annuity and other
benefits............... 62,884 152,409 9,871 5,120 306,302 536,586
Commissions and
expenses............... 4,304 -- 3 -- (2,338) 1,969
Change in reserves or
policyholder contract
deposits............... 112,743 38,934 (789) 243,558 (149,236) 245,210
</TABLE>
PLH entered into two separate reinsurance agreements with two affiliates,
Academy Life Insurance Company (ALIC) and Pension Life Insurance Company of
America (PLIC), in 1992, both on a coinsurance funds withheld basis. On April
1, 1993, the reinsurance agreements were amended from a coinsurance funds
withheld basis to a coinsurance nonfunds withheld basis. The following table
summarizes the amounts reflected in the statements of operations from these
reinsurance agreements:
<TABLE>
<CAPTION>
EXPENSE (REVENUE)
FOR THE YEAR
ENDED DECEMBER 31
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Premium income assumed............................... $(46,442) $(49,974)
Life, accident and health and other benefit assumed.. 32,957 32,048
Commissions and expense allowances on reinsurance
assumed............................................. 9,143 11,547
Change in policy reserves assumed.................... 2,788 3,983
Other income assumed................................. (167) (165)
</TABLE>
18
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Other Agreements and Transactions with Related Parties
PLH has entered into agreements with its affiliates whereby PLH performs ad-
ministrative services, management support services, and marketing services for
its affiliates. PLH, as compensation, receives an amount equal to the actual
cost of providing such services. This cost is allocated on a pro rata basis to
each affiliate receiving these services. Amounts received were $63,000,000 and
$70,000,000 in 1997 and 1996, respectively. Such amounts are classified as re-
ductions of general insurance and other expenses in the accompanying state-
ments of operations.
PLH entered into a revolving credit note with Commonwealth on April 8, 1996,
whereby PLH can borrow from Commonwealth up to $35,000,000. Interest is com-
puted monthly at a rate designated in the note. At December 31, 1997 and 1996,
there was no outstanding balance. During 1997, PLH paid $24,000 in interest
expense related to this note. No such interest expense was incurred or paid
during 1996.
PLH participates in various benefit plans sponsored by Commonwealth and the
related costs allocated to PLH are not significant.
PLH has 2,290,000 shares of redeemable preferred stock outstanding, all of
which are owned by CLLP. The preferred stock has a par value of $11 per share
and a liquidation value of $240 per share. CLLP is entitled to receive a cumu-
lative dividend equal to 8 1/2 percent per annum of the liquidation value of
the preferred stock. PLH may redeem all or any portion of the preferred stock
at the liquidation value commencing December 18, 2008.
During 1997, PLH paid ordinary cash dividends of $35,154,000 and paid an ex-
traordinary cash dividend of $84,846,000 ($46,716,000 to CLLP and $73,284,000
to its common stock shareholders). During 1996, PLH paid ordinary cash divi-
dends of $53,871,000 ($46,716,000 to CLLP and $7,155,000 to its common stock
shareholders). Also during 1996, PLH paid an extraordinary cash dividend of
$71,129,000 to its common stock shareholders.
On December 23, 1996, PLH made a capital contribution of its home office
data center with a book value of $4,657,000 to VLIC.
Commonwealth provides general management, advisory, legal and other general
services to PLH. Diversified Financial Products, Inc., (DFP), formerly
Providian Capital Management, Inc., an affiliate, provides investment manage-
ment services to PLH along with marketing and administrative services for
PLH's accumulation business.
6. REINSURANCE
Certain premiums and benefits are assumed from and ceded to nonaffiliated
insurance companies under various reinsurance agreements. The ceded reinsur-
ance agreements provide PLH with increased capacity to write larger risks and
maintain its exposure to loss within its capital resources.
19
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PLH's assumed and ceded reinsurance agreements with affiliated and
nonaffiliated insurance companies reduced (increased) certain items in the ac-
companying financial statements by the following amounts:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSUMED:
Policy and contract liabilities*...................... $3,006,401 $3,040,667
Claim reserves*....................................... 14,169 13,796
Advance premiums*..................................... 908 928
Unearned premium reserves*............................ 6,697 7,273
CEDED:
Benefits paid or provided............................. 743 1,512
Commissions and expense allowances on reinsurance
ceded................................................ (2,323) (1,123)
Other income-reserves on ceded business............... 17 39
Policy and contract liabilities*...................... 1,408 1,412
Claim reserves*....................................... 682 392
Advance premiums*..................................... 9 10
Unearned premium reserves*............................ 43 35
</TABLE>
- --------
* At year end.
For all long-duration contracts, the effect of reinsurance on life and annu-
ity premiums earned in 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
PREMIUMS PREMIUMS
EARNED EARNED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Direct................................................. $168,988 $162,087
Assumed................................................ 238,181 180,812
Ceded.................................................. (608) 187
-------- --------
Net.................................................... $406,561 $343,086
======== ========
</TABLE>
For all short-duration contracts, the effect of all reinsurance agreements
on accident and health premiums written and earned in 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
1997 PREMIUMS 1996 PREMIUMS
------------------ ------------------
WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Direct.................................. $ 84,959 $ 84,959 $ 92,721 $ 92,721
Assumed................................. 61,427 61,427 63,960 63,960
Ceded................................... (1,673) (1,673) (1,688) (1,688)
-------- -------- -------- --------
Net..................................... $144,713 $144,713 $154,993 $154,993
======== ======== ======== ========
</TABLE>
Amounts payable or recoverable for reinsurance on paid or unpaid life and
health claims are not subject to periodic or maximum limits. At December 31,
1997, PLH reinsurance recoverables are not material and no individual rein-
surer owed PLH an amount equal to or greater than 3% of PLH's surplus.
PLH remains obligated for amounts ceded in the event that the reinsurers do
not meet their obligations.
20
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. LIFE AND ANNUITY RESERVES AND DEPOSIT FUND LIABILITIES
The withdrawal provisions of PLH's annuity reserves and deposit fund liabil-
ities at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
---------- -------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary
withdrawal (with
adjustment):
With market value
adjustment............. $1,360,368 15.0%
At book value less
surrender charge....... 385,683 4.2%
At market value......... 3,519,863 38.7%
---------- -----
5,265,914 57.9%
Subject to discretionary
withdrawal (without
adjustment)
at book value with
minimal or no charge or
adjustment............... 1,691,979 18.6%
Not subject to
discretionary withdrawal. 2,134,391 23.5%
---------- -----
Total annuity reserves and
deposit fund liabilities
before reinsurance....... 9,092,284 100.0%
=====
Less reinsurance.......... --
----------
Net annuity reserves and
deposit fund
liabilities*............. $9,092,284
==========
</TABLE>
- --------
* Includes $3,521,516,000 of annuities reported in PLH's separate account li-
abilities. The remaining balance, $5,570,768,000 is included in aggregate
policy reserves and policyholder contract deposits in the accompanying bal-
ance sheet.
The above amount subject to discretionary withdrawal with market value ad-
justment includes approximately $862,931,000 at December 31, 1997 of floating
rate GIC liabilities with credited rates that vary in response to changes in
stipulated indexes and which self-adjust in response to market changes making
their market value and book value essentially equal.
As of December 31, 1997, PLH had $114,171,000 of insurance in force, and re-
lated policy reserves of $559,000, for which the gross premiums were less than
the net premiums according to the standard of valuation set by the state of
Missouri.
8. SEPARATE ACCOUNTS
Separate accounts held by PLH represent funds held for individual policy-
holders. The separate accounts do not have any minimum guarantees and the in-
vestment risks associated with market value changes are borne entirely by the
policyholder. The assets in the separate accounts, carried at estimated fair
value, consist of common stocks, mortgage loans, long-term bonds and cash.
During 1997, PLH made a capital contribution of $26,362,000 to the separate
accounts. At December 31, 1997, the fair value of this capital contribution
was $28,748,000 which is included in the separate account assets but is ex-
cluded from the corresponding liabilities. No such capital contributions were
made during 1996.
21
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Information regarding the separate accounts of PLH as of and for the year
ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
NONINDEXED
GUARANTEED NON-
MORE THAN 4% GUARANTEED TOTAL
------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums, deposits and other
considerations......................... $ 3,481 $ 781,075 $ 784,556
======== ========== ==========
Separate account liabilities*........... $166,241 $3,376,067 $3,542,308
======== ========== ==========
Reserves for separate accounts by
withdrawal characteristics:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment........ $166,241 $ -- $ 166,241
At market value..................... -- 3,376,067 3,376,067
-------- ---------- ----------
Total separate account liabilities...... $166,241 $3,376,067 $3,542,308
======== ========== ==========
</TABLE>
- --------
* Separate account liabilities are exclusive of $1,996,000 which represents
amounts due to the general account net of other amounts payable as of De-
cember 31, 1997.
A reconciliation of the amounts transferred to and from PLH's separate ac-
counts for the year ended December 31, 1997 is presented below (in thousands):
<TABLE>
<S> <C>
Transfers as reported in the Summary of Operations of
PLH's Separate Accounts Annual Statement:
Transfers to separate accounts................................ $784,931
Transfers from separate accounts.............................. (189,627)
--------
Net transfers to separate accounts.............................. 595,304
--------
Reconciling adjustments:
Fees paid to external fund manager............................ 2,311
Transfers to modified separate account........................ 2,018
--------
4,329
--------
Transfers as reported in the Summary of Operations
of PLH's Life, Accident & Health Annual Statement.............. $599,633
========
</TABLE>
9. DEFERRED AND UNCOLLECTED PREMIUMS
Deferred and uncollected accident and health and life insurance premiums and
annuity considerations as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
NET OF
TYPE GROSS LOADING LOADING
---- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Ordinary new...................................... $ 2,975 $ 2,161 $ 814
Ordinary renewal.................................. 18,330 5,589 12,741
------- ------- -------
Total ordinary.................................... 21,305 7,750 13,555
------- ------- -------
Group new business................................ 2,399 1,440 959
Group renewal..................................... 39,231 10,013 29,218
------- ------- -------
Total group....................................... 41,630 11,453 30,177
------- ------- -------
Total Life and annuity............................ 62,935 19,203 43,732
Accident and health............................... 2,696 -- 2,696
------- ------- -------
Total............................................. $65,631 $19,203 $46,428
======= ======= =======
</TABLE>
22
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. CAPITAL AND SURPLUS AND STATUTORY RESTRICTIONS ON DIVIDENDS
Life/Health insurance companies are subject to certain Risk-Based Capital
(RBC) requirements as specified by the NAIC. Under those requirements, the
amount of capital and surplus maintained by a life/health insurance company is
to be determined based on the various risk factors related to it. At December
31, 1997, PLH meets the RBC requirements.
PLH is subject to limitations, imposed by the state of Missouri, on the pay-
ment of dividends to its parent company. Generally, dividends during any year
may not be paid, without prior regulatory approval, in excess of the greater
of (1) 10 percent of PLH's statutory capital and surplus as of the preceding
December 31, or (2) PLH's statutory net income for the preceding year. Subject
to availability of unassigned surplus at the time of such dividend, the maxi-
mum payment which may be made in 1998, without prior regulatory approval, is
$105,866,000.
11. CONTINGENCIES
In the ordinary course of business, PLH is a defendant in litigation princi-
pally involving insurance policy claims for damages, including compensatory
and punitive damages. In the opinion of management, the outcome of such liti-
gation will not result in a loss which would be material to PLH's financial
position or results of operations.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by PLH in estimating fair
value disclosures for financial instruments in the accompanying financial
statements and notes thereto:
Bonds, Preferred Stocks and Common Stocks
The fair values of bonds, preferred stocks and common stocks are gener-
ally based on published quotations of the SVO of the NAIC. However, for
certain investments, the SVO does not provide a value and PLH uses either
admitted asset investment amounts (i.e., statement values) as allowed by
the NAIC, values provided by outside broker confirmations or internally
calculated estimates. The fair values of PLH's investments in bonds, pre-
ferred stocks and common stocks are disclosed in Note 2.
Mortgage Loans
The fair values of commercial, residential and farm mortgage loans are
estimated utilizing discounted cash flow calculations, using current market
interest rates for loans with similar terms to borrowers of similar credit
quality.
Policy Loans
The carrying values of policy loans reported in the accompanying balance
sheets approximate their fair values.
Cash, Short-Term Investments, Other Invested Assets and Deferred and
Uncollected Premiums
The carrying values of cash, short-term investments, other invested as-
sets and deferred and uncollected premiums reported in the accompanying
balance sheets approximate their fair values.
Investment Contracts
The fair values of floating rate guaranteed investment contracts approxi-
mate their carrying values. The fair values of fixed rate guaranteed in-
vestment contracts and investmenttype fixed annuity contracts are
23
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
estimated using discounted cash flow calculations, based on current inter-
est rates for similar contracts. The fair values of variable annuity con-
tracts are equal to their carrying values.
Derivative Financial Instruments
The fair values for derivative financial instruments are based on pricing
models or formulas using current assumptions.
The carrying values and fair values of PLH's investments in commercial, res-
idential and farm mortgage loans are summarized as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
DECEMBER 31, 1997
Commercial mortgages................................ $1,376,289 $1,423,046
Residential mortgages............................... 797,525 806,891
Farm mortgages...................................... 95,693 99,515
---------- ----------
$2,269,507 $2,329,452
========== ==========
DECEMBER 31, 1996
Commercial mortgages................................ $1,565,534 $1,584,662
Residential mortgages............................... 1,035,648 1,043,983
Farm mortgages...................................... 50,429 49,055
---------- ----------
$2,651,611 $2,677,700
========== ==========
</TABLE>
The carrying values and fair values of PLH's interest rate swap and forward-
rate agreements are summarized as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- -------
(IN THOUSANDS)
<S> <C> <C>
DECEMBER 31, 1997
Interest rate swaps...................................... $ -- $18,417
Forwards................................................. 1,927 1,927
------ -------
$1,927 $20,344
====== =======
DECEMBER 31, 1996
Interest rate swaps...................................... $ -- $21,178
Forwards................................................. 210 210
------ -------
$ 210 $21,388
====== =======
</TABLE>
24
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The carrying values and fair values of PLH's liabilities for investment-type
contracts are summarized as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
DECEMBER 31, 1997
Fixed annuity contracts........................... $2,922,910 $2,968,539
Guaranteed investment contracts................... 1,770,902 1,781,897
Variable annuity contracts *...................... 3,542,308 3,542,308
---------- ----------
$8,236,120 $8,292,744
========== ==========
DECEMBER 31, 1996
Fixed annuity contracts........................... $3,050,018 $3,097,631
Guaranteed investment contracts................... 1,961,549 2,034,047
Variable annuity contracts *...................... 2,430,508 2,430,508
---------- ----------
$7,442,075 $7,562,186
========== ==========
</TABLE>
- --------
*Included in PLH's separate account liabilities.
The fair values for PLH's insurance contracts other than investment con-
tracts are not required to be disclosed. However, the fair values of liabili-
ties under all insurance contracts are taken into consideration in PLH's over-
all management of interest rate risk, such that PLH's exposure to changing in-
terest rates is minimized through the matching of investment maturities with
amounts due under insurance contracts.
13. YEAR 2000 (UNAUDITED)
Commonwealth's parent has adopted and has in place a Year 2000 Assessment
and Planning Project (the Project) to review and analyze its information tech-
nology and systems to determine if they are Year 2000 compatible. Commonwealth
and PLH have begun to convert or modify, where necessary, critical data
processing systems. It is contemplated that the Project will be substantially
completed by early 1999. Commonwealth and PLH do not expect this Project to
have a significant effect on operations. However, to mitigate the effect of
outside influences upon the success of the Project, Commonwealth and PLH have
undertaken communications with their significant customers, suppliers and
other third parties to determine their Year 2000 compatibility and readiness.
Management believes that the issues associated with the Year 2000 will be re-
solved with no material financial impact on Commonwealth and PLH.
Since the Year 2000 computer problem, and its resolution, is complex and
multifaceted, the success of a response plan cannot be conclusively known un-
til the Year 2000 is reached (or an earlier date to the extent that systems or
equipment addresses Year 2000 date data prior to the Year 2000). Even with ap-
propriate and diligent pursuit of a well-conceived project, including testing
procedures, there is no certainty that any company will achieve complete suc-
cess. Notwithstanding the efforts or results of Commonwealth and PLH, their
ability to function unaffected to and through the Year 2000 may be adversely
affected by actions (or failure to act) of third parties beyond their knowl-
edge or control.
25
<PAGE>
FINANCIAL STATEMENTS
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
Years ended December 31, 1997 and 1996
with Report of Independent Auditors
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-3
Audited Financial Statements
Statements of Assets and Liabilities....................................... F-4
Statements of Operations................................................... F-5
Statements of Changes in Net Assets........................................ F-9
Notes to Financial Statements.............................................. F-13
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Contract Owners
Providian Life and Health Insurance Company Separate Account IV
We have audited the accompanying statements of assets and liabilities of
Providian Life and Health Insurance Company Separate Account IV (comprising
the Money Market, High-Grade Bond, Balanced, Equity Index, Growth, Equity In-
come, International, High Yield Bond, and Small Company Growth Subaccounts) as
of December 31, 1997 and 1996, and the related statements of operations and
changes in net assets for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to ex-
press an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. Our proce-
dures included confirmation of securities owned as of December 31, 1997 and
1996, by correspondence with the custodian. 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 referred to above present fairly,
in all material respects, the financial position of each of the respective
subaccounts constituting the Providian Life and Health Insurance Company Sepa-
rate Account IV at December 31, 1997 and 1996, and the results of their opera-
tions and changes in their net assets for the years then ended in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 24, 1998
F-3
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1997 1996
-------------- --------------
<S> <C> <C> <C>
ASSETS
Investments:
Money Market Portfolio (cost: $371,552,301
and $307,822,346 in 1997 and 1996, respec-
tively).................................... $ 371,552,301 $ 307,822,346
High-Grade Bond Portfolio (cost:
$195,869,365 and $138,952,194 in 1997 and
1996, respectively)........................ 201,054,285 139,742,432
Balanced Portfolio (cost: $370,193,553 and
$273,862,778 in 1997 and 1996, respective-
ly)........................................ 467,928,845 338,446,730
Equity Index Portfolio (cost: $505,818,804
and $315,174,642 in 1997 and 1996, respec-
tively).................................... 729,598,787 428,230,285
Growth Portfolio (cost: $341,690,303 and
$234,271,695 in 1997 and 1996, respective-
ly)........................................ 456,227,268 300,148,377
Equity Income Portfolio (cost: $227,326,165
and $125,927,119 in 1997 and 1996, respec-
tively).................................... 300,498,943 155,702,167
International Portfolio (cost: $189,515,133
and $148,121,109 in 1997 and 1996, respec-
tively).................................... 200,158,929 165,699,331
High Yield Bond Portfolio (cost: $92,864,429
and $32,343,453 in 1997 and 1996, respec-
tively).................................... 94,777,204 33,101,942
Small Company Growth Portfolio (cost:
$118,708,456 and $52,498,244 in 1997 and
1996, respectively)........................ 124,555,024 52,169,364
-------------- --------------
TOTAL ASSETS................................. 2,946,351,586 1,921,062,974
LIABILITIES
Amounts due to Providian Life and Health In-
surance Company............................ 732,313 592,319
Amounts due to Vanguard Group, Inc.......... 33,362 399,137
-------------- --------------
NET ASSETS................................... $2,945,585,911 $1,920,071,518
============== ==============
NET ASSETS ATTRIBUTABLE TO VARIABLE ANNUITY
CONTRACT OWNERS
Money Market Subaccount..................... $ 371,527,944 $ 307,756,483
High-Grade Bond Subaccount.................. 201,167,039 139,806,986
Balanced Subaccount......................... 467,618,812 338,038,396
Equity Index Subaccount..................... 729,189,185 427,833,751
Growth Subaccount........................... 456,049,952 300,037,248
Equity Income Subaccount.................... 300,655,472 155,751,785
International Subaccount.................... 200,097,118 165,630,157
High Yield Bond Subaccount.................. 94,773,754 33,067,945
Small Company Growth Subaccount............. 124,506,635 52,148,767
-------------- --------------
NET ASSETS ATTRIBUTABLE TO VARIABLE ANNUITY
CONTRACT OWNERS............................. $2,945,585,911 $1,920,071,518
============== ============== ===
</TABLE>
See accompanying notes.
F-4
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HIGH-GRADE
MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends.............. $ 19,306,003 $10,484,855 $35,601,558 $ 15,813,836 $ 15,526,501
Expenses:
Mortality and expense
risk and
administrative
charges............... 1,497,775 546,504 1,930,924 2,720,224 1,736,328
------------ ----------- ----------- ------------ ------------
Net investment income... 17,808,228 9,938,351 33,670,634 13,093,612 13,790,173
Realized and unrealized
gain on investments:
Net realized gain from
investment transac-
tions:
Proceeds from sales... 368,352,557 35,016,314 62,110,595 109,624,928 97,738,113
Cost of investments
sold................. 368,352,557 34,729,485 48,169,540 76,384,289 72,814,174
------------ ----------- ----------- ------------ ------------
-- 286,829 13,941,055 33,240,639 24,923,939
Net unrealized
appreciation
(depreciation) of
investments:
At end of year........ -- 5,184,920 97,735,292 223,779,983 114,536,965
At beginning of year.. -- 790,238 64,583,952 113,055,643 65,876,682
------------ ----------- ----------- ------------ ------------
-- 4,394,682 33,151,340 110,724,340 48,660,283
------------ ----------- ----------- ------------ ------------
Net gain (loss) on in-
vestments.............. -- 4,681,511 47,092,395 143,964,979 73,584,222
------------ ----------- ----------- ------------ ------------
Net increase in net as-
sets resulting from op-
erations............... $ 17,808,228 $14,619,862 $80,763,029 $157,058,591 $ 87,374,395
============ =========== =========== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
STATEMENT OF OPERATIONS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
EQUITY HIGH YIELD SMALL COMPANY
INCOME INTERNATIONAL BOND GROWTH TOTAL
----------- ------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends.............. $10,992,886 $ 5,022,249 $ 5,623,214 $ 451,706 $118,822,808
Expenses:
Mortality and expense
risk and
administrative
charges............... 707,575 893,949 244,438 367,526 10,645,243
----------- ----------- ----------- ----------- ------------
Net investment income... 10,285,311 4,128,300 5,378,776 84,180 108,177,565
Realized and unrealized
gain on investments:
Net realized gain from
investment transac-
tions:
Proceeds from sales... 41,039,734 62,512,538 26,595,851 41,279,050 844,269,680
Cost of investments
sold................. 31,551,150 56,758,783 26,145,087 39,290,754 754,195,819
----------- ----------- ----------- ----------- ------------
9,488,584 5,753,755 450,764 1,988,296 90,073,861
Net unrealized
appreciation
(depreciation) of
investments:
At end of year........ 73,172,778 10,643,796 1,912,775 5,846,568 532,813,077
At beginning of year.. 29,775,048 17,578,222 758,488 (328,880) 292,089,393
----------- ----------- ----------- ----------- ------------
43,397,730 (6,934,426) 1,154,287 6,175,448 240,723,684
----------- ----------- ----------- ----------- ------------
Net gain (loss) on in-
vestments.............. 52,886,314 (1,180,671) 1,605,051 8,163,744 330,797,545
----------- ----------- ----------- ----------- ------------
Net increase in net as-
sets resulting from op-
erations............... $63,171,625 $ 2,947,629 $ 6,983,827 $ 8,247,924 $438,975,110
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONEY MARKET HIGH-GRADE BOND BALANCED EQUITY INDEX GROWTH
------------ --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends.............. $13,160,444 $8,463,430 $23,855,951 $ 8,868,690 $13,349,352
Expenses:
Mortality and expense
risk and
administrative
charges............... 1,260,312 622,547 1,641,529 1,830,793 1,153,277
----------- ---------- ----------- ----------- -----------
Net investment income... 11,900,132 7,840,883 22,214,422 7,037,897 12,196,075
Realized and unrealized
gain (loss) on
investments:
Net realized gain
(loss) from investment
transactions:
Proceeds from sales... 211,205,591 47,435,492 61,055,889 73,303,777 58,237,988
Cost of investments
sold................. 211,205,591 47,452,352 49,086,533 55,129,134 45,698,016
----------- ---------- ----------- ----------- -----------
-- (16,860) 11,969,356 18,174,643 12,539,972
Net unrealized
appreciation
(depreciation) of
investments:
At end of year........ -- 790,238 64,583,952 113,055,643 65,876,682
At beginning of year.. -- 4,663,027 53,529,152 65,347,825 36,959,812
----------- ---------- ----------- ----------- -----------
-- (3,872,789) 11,054,800 47,707,818 28,916,870
----------- ---------- ----------- ----------- -----------
Net gain (loss) on
investments............ -- (3,889,649) 23,024,156 65,882,461 41,456,842
----------- ---------- ----------- ----------- -----------
Net increase (decrease)
in net assets resulting
from operations........ $11,900,132 $3,951,234 $45,238,578 $72,920,358 $53,652,917
=========== ========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
STATEMENT OF OPERATIONS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SMALL COMPANY
EQUITY INCOME INTERNATIONAL HIGH YIELD BOND GROWTH TOTAL
------------- ------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends.............. $ 6,157,784 $ 5,582,345 $1,034,662 $ 185,451 $ 80,658,109
Expenses:
Mortality and expense
risk and
administrative
charges............... 691,291 681,652 69,954 147,387 8,098,742
----------- ----------- ---------- ---------- ------------
Net investment income... 5,466,493 4,900,693 964,708 38,064 72,559,367
Realized and unrealized
gain (loss) on
investments:
Net realized gain
(loss) from investment
transactions:
Proceeds from sales... 33,524,966 31,825,076 3,286,820 11,251,067 531,126,666
Cost of investments
sold................. 27,736,656 28,197,949 3,247,554 11,600,231 479,354,016
----------- ----------- ---------- ---------- ------------
5,788,310 3,627,127 39,266 (349,164) 51,772,650
Net unrealized
appreciation
(depreciation) of
investments:
At end of year........ 29,775,048 17,578,222 758,488 (328,880) 292,089,393
At beginning of year.. 19,124,057 8,728,001 -- -- 188,351,874
----------- ----------- ---------- ---------- ------------
10,650,991 8,850,221 758,488 (328,880) 103,737,519
----------- ----------- ---------- ---------- ------------
Net gain (loss) on
investments............ 16,439,301 12,477,348 797,754 (678,044) 155,510,169
----------- ----------- ---------- ---------- ------------
Net increase (decrease)
in net assets resulting
from operations........ $21,905,794 $17,378,041 $1,762,462 $ (639,980) $228,069,536
=========== =========== ========== ========== ============
</TABLE>
See accompanying notes.
F-8
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HIGH-GRADE
MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at January 1,
1997................... $307,756,483 $139,806,986 $338,038,396 $427,833,751 $300,037,248
Increase in net assets
resulting from
operations:
Net investment income.. 17,808,228 9,938,351 33,670,634 13,093,612 13,790,173
Net realized gain on
investments........... -- 286,829 13,941,055 33,240,639 24,923,939
Net unrealized
appreciation
(depreciation) of
investments........... -- 4,394,682 33,151,340 110,724,340 48,660,283
------------ ------------ ------------ ------------ ------------
Net increase in net
assets resulting from
operations............. 17,808,228 14,619,862 80,763,029 157,058,591 87,374,395
Changes from variable
annuity contract
transactions:
Transfers of net
premiums.............. 217,903,756 32,631,602 59,455,811 120,636,984 91,041,141
Transfers for
terminations.......... (28,374,231) (4,491,074) (13,126,567) (12,795,430) (9,494,565)
Transfers for annuity
benefits.............. (779,602) (49,233) (523,938) (390,044) (198,384)
Net transfers within
Separate Account IV... (142,786,690) 18,648,896 3,012,081 36,845,333 (12,709,883)
------------ ------------ ------------ ------------ ------------
Net increase in net
assets derived from
variable annuity
contract transactions.. 45,963,233 46,740,191 48,817,387 144,296,843 68,638,309
------------ ------------ ------------ ------------ ------------
Net increase in net
assets................. 63,771,461 61,360,053 129,580,416 301,355,434 156,012,704
------------ ------------ ------------ ------------ ------------
Balances at December 31,
1997................... $371,527,944 $201,167,039 $467,618,812 $729,189,185 $456,049,952
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-9
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
STATEMENT OF CHANGES IN NET ASSETS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HIGH YIELD SMALL COMPANY
EQUITY INCOME INTERNATIONAL BOND GROWTH TOTAL
------------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balances at January 1,
1997................... $155,751,785 $165,630,157 $33,067,945 $ 52,148,767 $1,920,071,518
Increase in net assets
resulting from
operations:
Net investment income.. 10,285,311 4,128,300 5,378,776 84,180 108,177,565
Net realized gain on
investments........... 9,488,584 5,753,755 450,764 1,988,296 90,073,861
Net unrealized
appreciation
(depreciation) of
investments........... 43,397,730 (6,934,426) 1,154,287 6,175,448 240,723,684
------------ ------------ ----------- ------------ --------------
Net increase in net
assets resulting from
operations............. 63,171,625 2,947,629 6,983,827 8,247,924 438,975,110
Changes from variable
annuity contract
transactions:
Transfers of net
premiums.............. 50,527,970 40,854,983 28,392,471 31,540,432 672,985,150
Transfers for
terminations.......... (5,838,000) (6,329,735) (2,299,685) (2,012,223) (84,761,510)
Transfers for annuity
benefits.............. (140,462) 455,782 (41,137) (17,339) (1,684,357)
Net transfers within
Separate Account IV... 37,182,554 (3,461,698) 28,670,333 34,599,074 --
------------ ------------ ----------- ------------ --------------
Net increase in net
assets derived from
variable annuity
contract transactions.. 81,732,062 31,519,332 54,721,982 64,109,944 586,539,283
------------ ------------ ----------- ------------ --------------
Net increase in net
assets................. 144,903,687 34,466,961 61,705,809 72,357,868 1,025,514,393
------------ ------------ ----------- ------------ --------------
Balances at December 31,
1997................... $300,655,472 $200,097,118 $94,773,754 $124,506,635 $2,945,585,911
============ ============ =========== ============ ==============
</TABLE>
See accompanying notes.
F-10
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONEY MARKET HIGH-GRADE BOND BALANCED EQUITY INDEX GROWTH
------------ --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at January 1,
1996................... $218,943,545 $125,374,146 $287,392,121 $294,449,996 $178,912,627
Increase (decrease) in
net assets resulting
from operations:
Net investment income.. 11,900,132 7,840,883 22,214,422 7,037,897 12,196,075
Net realized gain
(loss) on investments. -- (16,860) 11,969,356 18,174,643 12,539,972
Net unrealized
appreciation
(depreciation) of
investments........... -- (3,872,789) 11,054,800 47,707,818 28,916,870
------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in net assets resulting
from operations........ 11,900,132 3,951,234 45,238,578 72,920,358 53,652,917
Changes from variable
annuity contract
transactions:
Transfers of net
premiums.............. 157,597,760 28,246,069 41,426,503 73,583,170 60,643,110
Transfers for
terminations.......... (20,633,241) (3,734,039) (9,607,547) (10,057,111) (5,701,392)
Transfers for annuity
benefits.............. (248,748) (2,021) (138,974) 61,650 23,382
Net transfers within
Separate Account IV... (59,802,965) (14,028,403) (26,272,285) (3,124,312) 12,506,604
------------ ------------ ------------ ------------ ------------
Net increase in net
assets derived from
variable annuity
contract transactions.. 76,912,806 10,481,606 5,407,697 60,463,397 67,471,704
------------ ------------ ------------ ------------ ------------
Net increase in net
assets................. 88,812,938 14,432,840 50,646,275 133,383,755 121,124,621
------------ ------------ ------------ ------------ ------------
Balances at December 31,
1996................... $307,756,483 $139,806,986 $338,038,396 $427,833,751 $300,037,248
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-11
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
STATEMENT OF CHANGES IN NET ASSETS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SMALL COMPANY
EQUITY INCOME INTERNATIONAL HIGH YIELD BOND GROWTH TOTAL
------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balances at January 1,
1996................... $104,724,939 $ 95,133,312 $ -- $ -- $1,304,930,686
Increase (decrease) in
net assets resulting
from operations:
Net investment income.. 5,466,493 4,900,693 964,708 38,064 72,559,367
Net realized gain
(loss) on investments. 5,788,310 3,627,127 39,266 (349,164) 51,772,650
Net unrealized
appreciation
(depreciation) of
investments........... 10,650,991 8,850,221 758,488 (328,880) 103,737,519
------------ ------------ ----------- ----------- --------------
Net increase (decrease)
in net assets resulting
from operations........ 21,905,794 17,378,041 1,762,462 (639,980) 228,069,536
Changes from variable
annuity contract
transactions:
Transfers of net
premiums.............. 31,387,672 34,938,284 6,901,502 10,562,475 445,286,545
Transfers for
terminations.......... (3,446,687) (4,009,584) (156,080) (386,129) (57,731,810)
Transfers for annuity
benefits.............. (286,506) 79,822 27,956 -- (483,439)
Net transfers within
Separate Account IV... 1,466,573 22,110,282 24,532,105 42,612,401 --
------------ ------------ ----------- ----------- --------------
Net increase in net
assets derived from
variable annuity
contract transactions.. 29,121,052 53,118,804 31,305,483 52,788,747 387,071,296
------------ ------------ ----------- ----------- --------------
Net increase in net
assets................. 51,026,846 70,496,845 33,067,945 52,148,767 615,140,832
------------ ------------ ----------- ----------- --------------
Balances at December 31,
1996................... $155,751,785 $165,630,157 $33,067,945 $52,148,767 $1,920,071,518
============ ============ =========== =========== ==============
</TABLE>
See accompanying notes.
F-12
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ACCOUNTING POLICIES
ORGANIZATION OF THE ACCOUNT
Providian Life and Health Insurance Company Separate Account IV (the "Sepa-
rate Account") is a separate account of Providian Life and Health Insurance
Company ("PLH"), and is registered as a unit investment trust under the In-
vestment Company Act of 1940, as amended. The Separate Account was established
for the purpose of funding variable annuity contracts issued by PLH.
Prior to June 10, 1997, PLH was an indirect, wholly owned subsidiary of
Providian Corporation ("Providian"). On June 10, 1997, Providian's insurance
operations, including the operations of PLH, were merged with an indirect,
wholly owned subsidiary of AEGON N.V., an international insurance organization
headquartered in The Hague, The Netherlands. Providian was the surviving cor-
poration in the merger. Effective October 15, 1997, Providian's name was
changed to Commonwealth General Corporation ("CGC"). Effective December 31,
1997, ownership of CGC was transferred to AEGON USA, Inc., an indirect, wholly
owned subsidiary of AEGON N.V.
As of December 31, 1997, the Separate Account has nine subaccounts which in-
vest exclusively in shares of a corresponding portfolio of the Vanguard Vari-
able Insurance Fund (the "Fund"), an open-end diversified investment company
offered by The Vanguard Group, Inc. ("Vanguard").
The portfolios available in the Fund as of December 31, 1997 are as follows:
VANGUARD VARIABLE INSURANCE FUND
Money Market Portfolio
High-Grade Bond Portfolio
Balanced Portfolio
Equity Index Portfolio
Growth Portfolio
Equity Income Portfolio
International Portfolio
High Yield Bond Portfolio
Small Company Growth Portfolio
Each portfolio has different investment objectives and policies as outlined
in the prospectus of the Separate Account. There is no assurance that a port-
folio will achieve its stated investment objective.
The contract owner's initial premium is automatically allocated to the Money
Market Subaccount until the end of the free look period (typically ten days
or, in certain instances, 30 days or more). Subsequent to the free look period
and a five day grace period, a contract owner may allocate all or a portion of
the initial premium and additional premiums, if any, to one or more
subaccounts of the Separate Account.
INVESTMENTS
The Separate Account purchases shares of the portfolios at net asset value
in connection with premium payments allocated to the subaccounts in accordance
with contract owners' directions and redeems shares of the portfolios to proc-
ess transfers and to meet policy contract obligations. Gains and losses re-
sulting from the redemption of shares are computed on the basis of average
cost. Investment transactions are recorded on the trade dates.
All dividends and capital gains earned on the portfolios are reinvested in
the portfolios and are reflected in the unit values of the subaccounts of the
Separate Account.
F-13
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Investments in the portfolios are valued at market which is calculated daily
on each day the New York Stock Exchange is open for trading. Income and both
realized and unrealized gains or losses from assets of each subaccount will be
credited to, or charged against, that subaccount without regard to income,
gains or losses from any other subaccount of the Separate Account or arising
out of any other business PLH may conduct.
The contract's accumulated value varies with the investment performance of
the corresponding portfolios. Investment results are not guaranteed by the Sep-
arate Account or PLH.
Although the assets in the Separate Account are the property of PLH, the as-
sets in the Separate Account attributable to the contracts cannot be used to
discharge the liabilities arising out of any other business which PLH may con-
duct. The assets of the Separate Account are available to cover the general li-
abilities of PLH only to the extent that the Separate Account's assets exceed
its liabilities under the contracts.
2. INVESTMENTS
The following is a summary of shares and amounts outstanding for each of the
respective portfolios as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
PORTFOLIO SHARES NET ASSET VALUE FAIR VALUE
- --------- --------------- --------------- --------------
<S> <C> <C> <C>
Money Market..................... 371,552,301.070 $ 1.00 $ 371,552,301
High-Grade Bond.................. 18,790,120.093 10.70 201,054,285
Balanced......................... 27,525,226.176 17.00 467,928,845
Equity Index..................... 28,701,761.880 25.42 729,598,787
Growth........................... 21,121,632.778 21.60 456,227,268
Equity Income.................... 16,001,008.679 18.78 300,498,943
International.................... 15,576,570.350 12.85 200,158,929
High Yield Bond.................. 8,949,688.763 10.59 94,777,204
Small Company Growth............. 11,364,509.489 10.96 124,555,024
--------------
$2,946,351,586
==============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
PORTFOLIO SHARES NET ASSET VALUE FAIR VALUE
- --------- --------------- --------------- --------------
<S> <C> <C> <C>
Money Market..................... 307,822,345.890 $ 1.00 $ 307,822,346
High-Grade Bond.................. 13,398,123.884 10.43 139,742,432
Balanced......................... 22,548,083.271 15.01 338,446,730
Equity Index..................... 21,904,362.398 19.55 428,230,285
Growth........................... 16,967,121.386 17.69 300,148,377
Equity Income.................... 10,664,532.007 14.60 155,702,167
International.................... 13,006,226.890 12.74 165,699,331
High Yield Bond.................. 3,204,447.399 10.33 33,101,942
Small Company Growth............. 5,372,746.072 9.71 52,169,364
--------------
$1,921,062,974
==============
</TABLE>
F-14
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate cost of shares purchased during the years ended December 31,
1997 and 1996 for each of the respective portfolios is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
Money Market........................................ $ 432,082,512 $301,289,330
High-Grade Bond..................................... 91,646,656 65,756,574
Balanced............................................ 144,500,315 88,846,647
Equity Index........................................ 267,028,451 140,971,704
Growth.............................................. 180,232,782 137,965,542
Equity Income....................................... 132,950,196 68,234,485
International....................................... 98,152,807 89,893,236
High Yield Bond..................................... 86,666,063 35,591,007
Small Company Growth................................ 105,500,966 64,098,475
-------------- ------------
$1,538,760,748 $992,647,000
============== ============
</TABLE>
3. FEDERAL INCOME TAXES
Operations of the Separate Account are included in the federal income tax re-
turn of PLH, which is taxed as a life insurance company under the Internal Rev-
enue Code. The Separate Account will not be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code. Under current federal
income tax law, no federal income taxes are payable with respect to the Sepa-
rate Account.
4. ADVISORY AND SERVICE FEES
Vanguard furnishes corporate management, administrative, marketing and dis-
tribution services. Additionally, Vanguard furnishes investment advisory serv-
ices to certain Funds' portfolios. The net asset value of the portfolios is net
of the advisory and service fees.
5. EXPENSES
An annual charge is deducted from the unit values of the subaccounts of the
Separate Account for PLH's assumption of certain mortality and expense risks
incurred in connection with the contract and for the cost of administering the
contract. It is assessed daily based on the Fund's combined net assets attrib-
utable to the Separate Account and Separate Account B of First Providian Life
and Health Insurance Company ("FPLH"), an affiliate of PLH. For the year ended
December 31, 1995 and through April 29, 1996, the annual rate on the first $500
million of combined net assets in the Fund was .45% and was .40% on the next
$250 million of combined net assets in the Fund. This charge was reduced in
various increments to .30% on combined net assets in the Fund in excess of $1.5
billion. Effective April 30, 1996 and through November 30, 1997, the annual
rate changed to .375% on the first $1.5 billion of combined net assets in the
Fund and is reduced to .30% of combined net assets in the Fund in excess of
$1.5 billion. Effective December 1, 1997, the annual rate changed to .30% on
the first $2.5 billion of combined net assets in the Fund, is reduced to .28%
of combined net assets in the Fund over $2.5 billion and up to $5 billion, and
is further reduced to .27% of combined net assets in the Fund in excess of $5
billion.
For the years ended December 31, 1997 and 1996, the effective annual rate for
this mortality and expense charge was .33% and .37%, respectively, and the to-
tal charge was $8,334,397 and $5,928,086, respectively.
In addition, an annual administrative charge of .10% is deducted from the
unit values of the subaccounts of the Separate Account. This charge is assessed
daily by Vanguard, based on the net assets attributable to the Separate Account
and Separate Account B of FPLH. Additionally, an annual maintenance fee of $25
per contract
F-15
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
is charged for contracts valued at less than $25,000 at the time of initial
purchase and on the last business day of each year. The maintenance fee is de-
ducted proportionately from the contract's accumulated value. These deductions
represent reimbursement to Vanguard for the costs expected to be incurred for
issuing and maintaining each contract and the Separate Account. The total of
these costs for the years ended December 31, 1997 and 1996 was $2,310,846 and
$2,170,656, respectively.
6. CONTRACT OWNER TRANSACTIONS
Transactions with contract owners during 1997 and 1996 and end of period val-
ues for each of the respective subaccounts were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
MONEY MARKET
Outstanding units at be-
ginning of period....... 246,219,368.636 183,867,044.733
Issuance of units........ 322,738,113.296 234,989,691.634
Redemption of units...... (286,144,342.815) (172,637,367.731)
----------------- -----------------
Outstanding units at end
of period............... 282,813,139.117 246,219,368.636
================= =================
End of period:
Unit value.............. $ 1.313687 $ 1.249928
================= =================
Subaccount value........ $ 371,527,944 $ 307,756,483
================= =================
HIGH-GRADE BOND
Outstanding units at be-
ginning of period....... 9,394,532.242 8,684,285.622
Issuance of units........ 5,251,505.755 3,980,774.263
Redemption of units...... (2,242,639.315) (3,270,527.643)
----------------- -----------------
Outstanding units at end
of period............... 12,403,398.682 9,394,532.242
================= =================
End of period:
Unit value.............. $ 16.218703 $ 14.881740
================= =================
Subaccount value........ $ 201,167,039 $ 139,806,986
================= =================
BALANCED
Outstanding units at be-
ginning of period....... 17,306,951.811 17,020,904.719
Issuance of units........ 4,994,533.368 3,631,390.249
Redemption of units...... (2,773,302.669) (3,345,343.157)
----------------- -----------------
Outstanding units at end
of period............... 19,528,182.510 17,306,951.811
================= =================
End of period:
Unit value.............. $ 23.945844 $ 19.531943
================= =================
Subaccount value........ $ 467,618,812 $ 338,038,396
================= =================
EQUITY INDEX
Outstanding units at be-
ginning of period....... 19,360,323.938 16,292,023.678
Issuance of units........ 9,635,037.119 6,659,468.353
Redemption of units...... (4,109,141.256) (3,591,168.093)
----------------- -----------------
Outstanding units at end
of period............... 24,886,219.801 19,360,323.938
================= =================
End of period:
Unit value.............. $ 29.300922 $ 22.098481
================= =================
Subaccount value........ $ 729,189,185 $ 427,833,751
================= =================
</TABLE>
F-16
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
GROWTH
Outstanding units at beginning of period...... 15,744,328.753 11,856,793.774
Issuance of units............................. 7,615,399.753 7,257,192.909
Redemption of units........................... (4,384,827.134) (3,369,657.930)
--------------- ---------------
Outstanding units at end of period............ 18,974,901.372 15,744,328.753
=============== ===============
End of period:
Unit value................................... $ 24.034378 $ 19.056846
=============== ===============
Subaccount value............................. $ 456,049,952 $ 300,037,248
=============== ===============
EQUITY INCOME
Outstanding units at beginning of period...... 9,259,727.052 7,354,576.945
Issuance of units............................. 6,180,595.097 4,071,632.986
Redemption of units........................... (2,079,556.812) (2,166,482.879)
--------------- ---------------
Outstanding units at end of period............ 13,360,765.337 9,259,727.052
=============== ===============
End of period:
Unit value................................... $ 22.502863 $ 16.820343
=============== ===============
Subaccount value............................. $ 300,655,472 $ 155,751,785
=============== ===============
INTERNATIONAL
Outstanding units at beginning of period...... 12,435,392.012 8,146,285.194
Issuance of units............................. 6,519,817.190 6,779,070.277
Redemption of units........................... (4,358,523.547) (2,489,963.459)
--------------- ---------------
Outstanding units at end of period............ 14,596,685.655 12,435,392.012
=============== ===============
End of period:
Unit value................................... $ 13.708394 $ 13.319255
=============== ===============
Subaccount value............................. $ 200,097,118 $ 165,630,157
=============== ===============
HIGH YIELD BOND
Outstanding units at beginning of period...... 3,041,910.125 --
Issuance of units............................. 7,081,022.117 3,355,401.631
Redemption of units........................... (2,312,982.643) (313,491.506)
--------------- ---------------
Outstanding units at end of period............ 7,809,949.599 3,041,910.125
=============== ===============
End of period:
Unit value................................... $ 12.135002 $ 10.870783
=============== ===============
Subaccount value............................. $ 94,773,754 $ 33,067,945
=============== ===============
SMALL COMPANY GROWTH
Outstanding units at beginning of period...... 5,362,364.247 --
Issuance of units............................. 9,916,890.076 6,547,047.130
Redemption of units........................... (3,929,423.425) (1,184,682.883)
--------------- ---------------
Outstanding units at end of period............ 11,349,830.898 5,362,364.247
=============== ===============
End of period:
Unit value................................... $ 10.969911 $ 9.724958
=============== ===============
Subaccount value............................. $ 124,506,635 $ 52,148,767
=============== ===============
</TABLE>
F-17
<PAGE>
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. NET ASSETS
Net assets at December 31, 1997 for each of the respective subaccounts are
summarized in the following tables:
<TABLE>
<CAPTION>
HIGH-GRADE
MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Contract owner transac-
tions.................. $321,352,750 $159,543,079 $252,642,396 $404,486,174 $269,992,819
Accumulated net
investment income...... 50,175,194 36,400,799 85,156,223 36,267,154 29,813,011
Accumulated net realized
gain on investments.... -- 38,241 32,084,902 64,655,874 41,707,157
Net unrealized apprecia-
tion on investments.... -- 5,184,920 97,735,291 223,779,983 114,536,965
------------ ------------ ------------ ------------ ------------
$371,527,944 $201,167,039 $467,618,812 $729,189,185 $456,049,952
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD SMALL COMPANY
EQUITY INCOME INTERNATIONAL BOND GROWTH TOTAL
------------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Contract owner transac-
tions.................. $189,615,522 $169,067,081 $86,027,465 $116,898,691 $1,969,625,977
Accumulated net invest-
ment income............ 22,588,172 10,037,572 6,343,484 122,244 276,903,853
Accumulated net realized
gain on investments.... 15,279,000 10,348,669 490,030 1,639,132 166,243,005
Net unrealized apprecia-
tion on investments.... 73,172,778 10,643,796 1,912,775 5,846,568 532,813,076
------------ ------------ ----------- ------------ --------------
$300,655,472 $200,097,118 $94,773,754 $124,506,635 $2,945,585,911
============ ============ =========== ============ ==============
</TABLE>
8. YEAR 2000 (UNAUDITED)
CGC's parent has adopted and has in place a Year 2000 Assessment and Planning
Project (the "Project") to review and analyze its information technology and
systems to determine if they are Year 2000 compatible. CGC and PLH have begun
to convert or modify, where necessary, critical data processing systems. It is
contemplated that the Project will be substantially completed by early 1999.
CGC and PLH do not expect this Project to have a significant effect on opera-
tions. However, to mitigate the effect of outside influences upon the success
of the Project, CGC and PLH have undertaken communications with their signifi-
cant customers, suppliers and other third parties to determine their Year 2000
compatibility and readiness. Management believes that the issues associated
with the Year 2000 will be resolved with no material financial impact on CGC
and PLH.
Since the Year 2000 computer problem, and its resolution, is complex and
multifaceted, the success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that systems or
equipment addresses Year 2000 date data prior to the Year 2000). Even with ap-
propriate and diligent pursuit of a well-conceived project, including testing
procedures, there is no certainty that any company will achieve complete suc-
cess. Notwithstanding the efforts or results of CGC and PLH, their ability to
function unaffected to and through the Year 2000 may be adversely affected by
actions (or failure to act) of third parties beyond their knowledge or control.
F-18
<PAGE>
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Part A None
Part B Audited Financial Statement
Providian Life & Health Insurance Company Separate Account IV
Years ended December 31, 1997 and 1996 with Report of Independent Au-
ditors/8/
Audited Financial Statements--Statutory-Basis
Providian Life & Health Insurance Company
Years ended December 31, 1997 and 1996 with Report of Independent Au-
ditors/8/
Part C None
(B) EXHIBITS
(1) Resolution of the Board of Directors of National Home Life Assurance
Company ("National Home") authorizing establishment of the Separate Ac-
count./4/
(2) Not Applicable.
(3) Not Applicable.
(4) Form of variable annuity contract/5/
(5) Form of application/5/
(6) (a) Articles of Incorporation of National Home/1/
(b) Amendment to Articles of Incorporation of National Home/2/
(c) Amended and Restated Articles of Incorporation of National Home/3/
(7) Not applicable.
(8) (a) Participation Agreement for the Vanguard Variable Insurance Fund/6/
(b) First Amendment to Participation, Market Consulting and Administra-
tion Agreement/7/
(c) Administration Service Agent/8/
(9) (a) Opinion and Consent of Counsel/8/
(b) Consent of Counsel/8/
(10) Consent of Independent Auditors/8/
(11) No financial statements are omitted from item 23.
(12) Not applicable.
(13) Performance computation/7/
(14) Not applicable.
- --------
/1/ Incorporated by reference from the initial Registration Statement of the
Providian Life & Health Insurance Company Separate Account II, File No. 33-
7033.
/2/ Incorporated by reference from Post-Effective Amendment No. 3 to the Regis-
tration Statement of Providian Life & Health Insurance Company Separate Ac-
count II, File No. 33-7033.
/3/ Incorporated by reference from Post-Effective Amendment No. 5 to the Regis-
tration Statement of the Providian Life & Health Insurance Company Separate
Account II, File No. 33-7033.
/4/ Incorporated by reference from the initial Registration Statement of the
Providian Life & Health Insurance Company Separate Account IV, File No. 33-
36073.
/5/ Incorporated by reference from Pre-Effective Amendment No. 1 to the Regis-
tration Statement of the Providian Life & Health Insurance Company Separate
Account IV, File No. 33-36073.
/6/ Incorporated by reference from Post-Effective Amendment No. 1 to the Regis-
tration Statement of Providian Life & Health Insurance Company Separate Ac-
count IV, File No. 33-36073.
/7/ Incorporated by reference from Post-Effective Amendment No. 6 to Registra-
tion Statement of Providian Life & Health Insurance Company Separate Account
IV, File No. 33-36073.
/8/ Filed herewith.
C-1
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS* WITH DEPOSITOR
------------------ ---------------------
<S> <C>
Bart Herbert, Jr. ............. President
Edward A. Biemer............... Senior Vice President
Thomas P. Bowie................ Senior Vice President
G. Douglas Mangum, Jr. ........ Senior Vice President
William L. Busler.............. Executive Vice President
Martha A. McConnell............ Treasurer
Brian Alford................... Vice President
Nathan C. Anguiano............. Vice President & Assistant Treasurer
Frank A. Camp.................. Vice President & Division General Counsel
Brenda K. Clancy............... Vice President
Michele M. Coan................ Vice President
Jane A. Coyne.................. Vice President
Karen H. Fleming............... Vice President
Carolyn M. Johnson............. Vice President
Michael F. Lane................ Vice President
Vice President, Secretary and Associate General
Susan E. Martin................ Counsel
John A. Mazzuca................ Vice President
Daniel C. Mohwinkel............ Vice President
Thomas B. Nesspor.............. Vice President
Maureen E. Nielsen............. Vice President
Larry N. Norman................ Vice President
G. Eric O'Brien................ Vice President
Daniel H. Odum................. Vice President
John C. Prestwood, Jr. ........ Vice President and Actuary
Frank J. Rosa.................. Vice President
Douglas A. Sarcia.............. Vice President
Gary H. Scott.................. Vice President
Brian A. Smith................. Vice President
Colleen M. Tobiason............ Vice President
William A. Waldie, Jr. ........ Vice President
Michael A. Wapp................ Vice President
Ronald L. Ziegler.............. Vice President & Actuary
Janice Boehmler................ Assistant Vice President
Michael A. Cioffi.............. Assistant Vice President & Qualified Actuary
Kimberly A. Cushing............ Assistant Vice President
Mary Ellen Fahringer........... Assistant Vice President
JoAnn Herndon.................. Assistant Vice President
Patricia A. Lukacs............. Assistant Vice President
William R. Maurer.............. Assistant Vice President
Robert E. Payne................ Assistant Vice President
Teresa L. Stolba............... Assistant Vice President
Harvey Waite................... Assistant Vice President
Cliford W. Flenniken........... Assistant Treasurer
William C. White, IV........... Assistant Treasurer
Paul J. Lukacs................. Assistant Controller
Joseph C. Noone................ Assistant Controller
Amy E. Anders.................. Second Vice President
George E. Claiborne, Jr. ...... Second Vice President
Cindy L. Chanley............... Second Vice President
Marvin A. Johnson.............. Second Vice President
Anne M. Spaes.................. Second Vice President
David L. Blankenship........... Second Vice President/Investments
C. Ray Brewer.................. Second Vice President/Investments
Kirk W. Buese.................. Second Vice President/Investments
William S. Cook................ Second Vice President/Investments
Deborah A. Dias................ Second Vice President/Investments
Lee W. Eastland................ Second Vice President/Investments
Donald E. Flynn................ Second Vice President/Investments
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS* WITH DEPOSITOR
------------------ ---------------------
<S> <C>
Donald E. Flynn.................... Second Vice President/Investments
Eric B. Goodman.................... Second Vice President/Investments
M. Josette Goulet.................. Second Vice President/Investments
James Grant........................ Second Vice President/Investments
David R. Halfpap................... Second Vice President/Investments
Robert L. Hansen................... Second Vice President/Investments
Donna L. Heitzman.................. Second Vice President/Investments
David W. Hopewell.................. Second Vice President/Investments
Frederick B. Howard................ Second Vice President/Investments
Claudia Jackson.................... Second Vice President/Investments
Jon D. Kettering................... Second Vice President/Investments
Tim Kuussalo....................... Second Vice President/Investments
James D. MacKinnon................. Second Vice President/Investments
Jeffrey T. McGlaun................. Second Vice President/Investments
Paul D. Mier....................... Second Vice President/Investments
Thomas L. Nordstrom................ Second Vice President/Investments
Ralph M. O'Brien................... Second Vice President/Investments
Douglas H. Owen, Jr. .............. Second Vice President/Investments
Dennis Roland...................... Second Vice President/Investments
James D. Ross...................... Second Vice President/Investments
J. Alan Schork..................... Second Vice President/Investments
Lindsay Schumacher................. Second Vice President/Investments
Michael B. Shaffer................. Second Vice President/Investments
Clifford Sheets.................... Second Vice President/Investments
Michael B. Simpson................. Second Vice President/Investments
Jon L. Skaggs...................... Second Vice President/Investments
Elizabeth A. Smedley............... Second Vice President/Investments
Michael S. Smith................... Second Vice President/Investments
Donna J. Spalding.................. Second Vice President/Investments
Robert T. Stanley.................. Second Vice President/Investments
Bradley L. Stofferahn.............. Second Vice President/Investments
Randall K. Waddell................. Second Vice President/Investments
Marcia Weiland..................... Second Vice President/Investments
Tammy C. Wetterer.................. Second Vice President/Investments
Kim A. Bivins...................... Second Vice President/Special Markets
Gregory Lee Chapman................ Second Vice President/Special Markets
Lisa L. Patterson.................. Second Vice President/Special Markets
Rhonda L. Pritchett................ Second Vice President/Special Markets
Thomas E. Walsh.................... Second Vice President/Special Markets
Harvey Willis...................... Second Vice President/Special Markets
Edward P. Reiter................... Second Vice President & Assistant Secretary
L. Jude Clark...................... Assistant Secretary
Colleen S. Lyons................... Assistant Secretary
Mary Ann Malinyak.................. Assistant Secretary
John F. Reesor..................... Assistant Secretary
Mary L. Schaefer................... Assistant Secretary
Kimberly A. Scouller............... Assistant Secretary
R. Michael Slaven.................. Assistant Secretary
Craig D. Vermie.................... Assistant Secretary
Carolyn Wetterer................... Assistant Secretary
Nancy E. Partington................ Advertising Compliance Officer
James T. Bradley................... Product Compliance Officer
</TABLE>
C-3
<PAGE>
DIRECTORS:
<TABLE>
<S> <C>
Susan E. Martin Douglas A. Sarcia
John C. Prestwood, Jr. Brian A. Smith
Bart Herbert, Jr. Thomas B. Nesspor
Jay H. Berman Craig D. Vermie
G. Douglas Mangum, Jr.
</TABLE>
- -------
* The business address of each director and officer of Providian Life & Health
Insurance Company is 20 Moores Road, Frazer, Pennsylvania 19355, 400 West
Market Street, Louisville, Kentucky 40202 or 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52499.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT.
The Depositor, Providian Life & Health Insurance Company, is indirectly wholly
owned by AEGON USA, Inc. The Registrant is a segregated asset account of
Providian Life & Health Insurance Company.
The following chart indicates the persons controlled by or under common con-
trol with Providian Life & Health Insurance Company.
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
AEGON N.V. Netherlands 53.63% of Vereniging Holding company
Corporation AEGON Netherlands
Membership
Association
Groninger Financieringen Netherlands 100% of AEGON N.V. Holding company
B.V. Corporation Netherlands
Corporation
AEGON Netherland N.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands
Corporation
AEGON Nevak Holding B.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands
Corporation
AEGON International N.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands
Corporation
Voting Trust Trustees: Delaware Voting Trust
K.J. Storm
Donald J. Shepard
H.B. Van Wijk
Dennis Hersch
AEGON U.S. Holding Delaware 100% of Voting Trust Holding company
Corporation
Short Hills Management New Jersey 100% of AEGON U.S. Holding company
Company Holding Corporation
CORPA Reinsurance New York 100% of AEGON U.S. Holding company
Company Holding Corporation
AEGON Management Company Indiana 100% of AEGON U.S. Holding company
Holding Corporation
RCC North America Inc. Delaware 100% of AEGON U.S. Holding company
Holding Corporation
AEGON USA, Inc. Iowa 100% of AEGON U.S. Holding company
Holding Corporation
AUSA Holding Company Maryland 100% AEGON USA, Inc. Holding company
Monumental General Maryland 100% AUSA Holding Co. Holding company
Insurance Group, Inc.
Trip Mate Insurance Kansas 100% Monumental Sale/admin. of travel
Agency, Inc. General Insurance insurance
Group, Inc.
Monumental General Maryland 100% Monumental Provides management
Administrators, Inc. General Insurance srvcs. to unaffiliated
Group, Inc. third party
administrator
Executive Management and Maryland 100% Monumental Provides actuarial
Consultant General consulting services
Services, Inc. Administrators, Inc.
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Monumental General Mass Maryland 100% Monumental Marketing arm for sale of
Marketing, Inc. General Insurance mass marketed insurance
Group, Inc. coverages
Diversified Investment Delaware 100% AUSA Holding Co. Registered investment
Advisors, Inc. advisor
Diversified Investors Delaware 100% Diversified Broker-Dealer
Securities Corp. Investment Advisors,
Inc.
AEGON USA Securities, Iowa 100% AUSA Holding Co. Broker-Dealer
Inc.
Supplemental Ins. Tennessee 100% AUSA Holding Co. Insurance
Division, Inc.
Creditor Resources, Inc. Michigan 100% AUSA Holding Co. Credit insurance
CRC Creditor Resources Canada 100% Creditor Insurance agency
Canadian Dealer Network Resources, Inc.
Inc.
AEGON USA Investment Iowa 100% AUSA Holding Co. Investment advisor
Management, Inc.
AEGON USA Realty Iowa 100% AUSA Holding Co. Provides real estate
Advisors, Inc. administrative and real
estate investment
services
Quantra Corporation Delaware 100% AEGON USA Realty Real estate and financial
Advisors, Inc. software production and
sales
Quantra Software Delaware 100% Quantra Manufacture and sell
Corporation Corporation mortgage loan and
security management
software
Landauer Realty Iowa 100% AEGON USA Realty Real estate counseling
Advisors, Inc. Advisors, Inc.
Landauer Associates, Delaware 100% AEGON USA Realty Real estate counseling
Inc. Advisors, Inc.
Realty Information Iowa 100% AEGON USA Realty Information Systems for
Systems, Inc. Advisors, Inc. real estate investment
management
AEGON USA Realty Iowa 100% AEGON USA Realty Real estate management
Management, Inc Advisors, Inc.
USP Real Estate Iowa 21.89% First AUSA Real estate investment
Investment Trust Life Ins. Co. trust
13.11% PFL Life Ins.
Co.
4.86% Bankers United
Life Assurance Co.
Cedar Income Fund, Ltd. Iowa 16.73% PFL Life Ins. Real estate investment
Co. trust
3.77% Bankers United
Life Assurance
Company
3.38% Life Investors
Co. of America
1.97% AEGON USA Realty
Advisors, Inc.
.18% First AUSA Life
Ins. Co.
RCC Properties Limited Iowa AEGON USA Realty Limited Partnership
Partnership Advisors, Inc. is
General Partner and
5% owner.
AUSA Financial Markets, Iowa 100% AUSA Holding Co. Marketing
Inc.
Endeavor Investment California 49.9% AUSA Financial General Partnership
Advisors Markets, Inc.
Universal Benefits Iowa 100% AUSA Holding Co. Third party administrator
Corporation
Investors Warranty of Iowa 100% AUSA Holding Co. Provider of automobile
America, Inc. extended maintenance
contracts
Massachusetts Fidelity Iowa 100% AUSA Holding Co. Trust company
Trust Co.
Money Services, Inc. Delaware 100% AUSA Holding Co. Provides financial
counseling for employees
and agents of affiliated
companies
Zahorik Company, Inc. California 100% AUSA Holding Co. Broker-Dealer
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
ZCI, Inc. Alabama 100% Zahorik Company, Insurance agency
Inc.
AEGON Asset Management Delaware 100% AUSA Holding Co. Registered investment
Services, Inc. advisor
Intersecurities, Inc. Delaware 100% AUSA Holding Co. Broker-Dealer
ISI Insurance Agency, California 100% Intersecurities, Insurance agency
Inc. Inc.
ISI Insurance Agency of Ohio 100% ISI Insurance Insurance agency
Ohio, Inc. Agency, Inc.
ISI Insurance Agency of Texas 100% ISI Insurance Insurance agency
Texas, Inc. Agency, Inc.
ISI Insurance Agency of Massachusetts 100% ISI Insurance Insurance Agency
Massachusetts, Inc. Agency Inc.
Associated Mariner Michigan 100% Intersecurities, Holding co./management
Financial Group, Inc. Inc. services
Mariner Financial Michigan 100% Associated Broker/Dealer
Services, Inc. Mariner Financial
Group, Inc.
Mariner Planning Michigan 100% Mariner Financial Financial planning
Corporation Services, Inc.
Associated Mariner Michigan 100% Associated Insurance agency
Agency, Inc. Mariner Financial
Group, Inc.
Associated Mariner Hawaii 100% Associated Insurance agency
Agency of Hawaii, Inc. Mariner Agency, Inc.
Associated Mariner Ins. Massachusetts 100% Associated Insurance agency
Agency of Mariner Agency, Inc.
Massachusetts, Inc.
Associated Mariner Ohio 100% Associated Insurance agency
Agency Ohio, Inc. Mariner Agency, Inc.
Associated Mariner Texas 100% Associated Insurance agency
Agency Texas, Inc. Mariner Agency, Inc.
Associated Mariner New Mexico 100% Associated Insurance agency
Agency New Mexico, Inc. Mariner Agency, Inc.
Mariner Mortgage Corp. Michigan 100% Associated Mortgage origination
Mariner Financial
Group, Inc.
Idex Investor Services, Florida 100% AUSA Holding Co. Shareholder services
Inc.
Idex Management, Inc. Delaware 50% AUSA Holding Co. Investment advisor
50% Janus Capital
Corp.
IDEX II Series Fund Massachusetts Various Mutual fund
IDEX Fund Massachusetts Various Mutual fund
IDEX Fund 3 Massachusetts Various Mutual fund
First AUSA Life Maryland 100% AEGON USA, Inc. Insurance holding company
Insurance Company
AUSA Life Insurance New York 100% First AUSA Life Insurance
Company, Inc. Insurance Company
Life Investors Insurance Iowa 100% First AUSA Life Insurance
Company of America Ins. Co.
Bankers United Life Iowa 100% Life Investors Insurance
Assurance Company Ins. Company of
America
Life Investors Agency Iowa 100% Life Investors Marketing
Group, Inc. Ins. Company of
America
PFL Life Insurance Iowa 100% First AUSA Life Insurance
Company Ins. Co.
AEGON Financial Services Minnesota 100% PFL Life Marketing
Group, Inc. Insurance Co.
AEGON Assignment Kentucky 100% AEGON Financial Administrator of
Corporation Services Group, Inc. structured settlements
Southwest Equity Life Arizona 100% of Common Voting Insurance
Ins. Co. Stock First AUSA Life
Ins. Co.
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Iowa Fidelity Life Arizona 100% of Common Voting Insurance
Insurance Co. Stock First AUSA Life
Ins. Co.
Western Reserve Life Ohio 100% First AUSA Life Insurance
Assurance Co. of Ohio Ins. Co.
WRL Series Fund, Inc. Maryland Various Mutual fund
WRL Investment Services, Florida 100% Western Reserve Provides administration
Inc. Life Assurance Co. of for affiliated mutual
Ohio fund
WRL Investment Florida 100% Western Reserve Registered investment
Management, Inc. Life Assurance Co. of advisor
Ohio
Monumental Life Maryland 100% First AUSA Life Insurance
Insurance Co. Ins. Co.
AEGON Special Markets Maryland 100% Monumental Life Marketing
Group, Inc. Ins. Co.
Monumental General Maryland 100% First AUSA Life Insurance
Casualty Co. Ins. Co.
United Financial Maryland 100% First AUSA Life General agency
Services, Inc. Ins. Co.
Bankers Financial Life Arizona 100% First AUSA Life Insurance
Ins. Co. Ins. Co.
The Whitestone Maryland 100% First AUSA Life Insurance agency
Corporation Ins. Co.
Cadet Holding Corp. Iowa 100% First AUSA Life Holding company
Insurance Company
Commonwealth General Delaware 100% AEGON USA, Inc. Holding company
Corporation ("CGC")
PB Series Trust Massachusetts N/A Mutual fund
Monumental Agency Group, Kentucky 100% CGC Provider of srvcs. to
Inc. ins. cos.
Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security
Life Insurance Company
Durco Agency, Inc. Virginia 100% Benefit Plans, General agent
Inc.
Commonwealth General. Kentucky 100% CGC Administrator of
Assignment Corporation structured settlements
Providian Financial Pennsylvania 100% CGC Financial services
Services, Inc.
AFSG Securities Pennsylvania 100% CGC Broker-Dealer
Corporation
PB Investment Advisors, Delaware 100% CGC Registered investment
Inc. advisor
Diversified Financial Delaware 100% CGC Provider of investment,
Products Inc. marketing and admin.
services to ins. cos.
AEGON USA Real Estate Delaware 100% Diversified Real estate and mortgage
Services, Inc. Financial Products holding company
Inc.
Capital Real Estate Delaware 100% CGC Furniture and equiment
Development Corporation lessor
Capital General Delaware 100% CGC Holding company
Development Corporation
Commonwealth Life Kentucky 100% Capital General Insurance company
Insurance Company Development
Corporation
Agency Holding I, Inc. Delaware 100% Commonwealth Life Investment subsidiary
Insurance Company
Agency Investments I, Delaware 100% Agency Holding I, Investment subsidiary
Inc. Inc.
Peoples Security Life North 100% Capital General Insurance company
Insurance Company Carolina Development
Corporation
Ammest Realty Texas 100% Peoples Security Special purpose
Corporation Life Insurance subsidiary
Company
Agency Holding II, Inc. Delaware 100% Peoples Security Investment subsidiary
Life Insurance
Company
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Agency Investments II, Delaware 100% Agency Holding Investment subsidiary
Inc. II, Inc.
Agency Holding III, Inc. Delaware 100% Peoples Security Investment subsidiary
Life Insurance
Company
Agency Investments III, Delaware 100% Agency Holding Investment subsidiary
Inc. III, Inc.
JMH Operating Company, Mississippi 100% Peoples Security Real estate holdings
Inc. Life Insurance
Company
Capital Security Life North 100% Capital General Insurance company
Ins. Co. Carolina Development
Corporation
Independence Automobile Florida 100% Capital Security Automobile Club
Association, Inc. Life Insurance
Company
Independence Automobile Georgia 100% Capital Security Automobile Club
Club, Inc. Life Insurance
Company
Capital 200 Block Delaware 100% CGC Real estate holdings
Corporation
Capital Broadway Kentucky 100% CGC Real estate holdings
Corporation
Southlife, Inc. Tennessee 100% CGC Investment subsidiary
Ampac Insurance Agency, Pennsylvania 100% CGC Provider of management
Inc. support services
(EIN 23-1720755)
National Home Life Pennsylvania 100% Ampac Insurance Special-purpose
Corporation Agency, Inc. subsidiary
Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose
Corporation Agency, Inc. subsidiary
Association Consultants, Illinois 100% Ampac Insurance TPA license-holder
Inc. Agency, Inc.
Valley Forge Associates, Pennsylvania 100% Ampac Insurance Furniture & equipment
Inc. Agency, Inc. lessor
Veterans Benefits Plans, Pennsylvania 100% Ampac Insurance Administator of group
Inc. Agency, Inc. insurance programs
Veterans Insurance Delaware 100% Ampac Insurance Special-purpose
Services, Inc. Agency, Inc. subsidiary
Financial Planning Dist. 100% Ampac Insurance Special-purpose
Services, Inc. Columbia Agency, Inc. subsidiary
Providian Auto and Home Missouri 100% CGC Insurance company
Insurance Company
Academy Insurance Group, Delaware 100% CGC Holding company
Inc.
Academy Life Insurance Missouri 100% Academy Insurance Insurance company
Co. Group, Inc.
Pension Life Insurance New Jersey 100% Academy Insurance Insurance company
Company of America Group, Inc.
Academy Services, Inc. Delaware 100% Academy Insurance Special-purpose
Group, Inc. subsidiary
Ammest Development Corp. Kansas 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
Ammest Insurance Agency, California 100% Academy Insurance General agent
Inc. Group, Inc.
Ammest Massachusetts Massachusetts 100% Academy Insurance Special-purpose
Insurance Agency, Inc. Group, Inc. subsidiary
Ammest Realty, Inc. Pennsylvania 100% Academy Insurance Special-purpose
Group, Inc. subsidiary
Ampac, Inc. Texas 100% Academy Insurance Managing general agent
Group, Inc.
Ampac Insurance Agency, Pennsylvania 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
(EIN 23-2364438)
Data/Mark Services, Inc. Delaware 100% Academy Insurance Provider of mgmt.
Group, Inc. services
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Force Financial Group, Delaware 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
Force Financial Massachusetts 100% Force Fin. Group, Special-purpose
Services, Inc. Inc. subsidiary
Military Associates, Pennsylvania 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
NCOA Motor Club, Inc. Georgia 100% Academy Insurance Automobile club
Group, Inc.
NCOAA Management Company Texas 100% Academy Insurance Special-purpose
Group, Inc. subsidiary
Unicom Administrative Pennsylvania 100% Academy Insurance Provider of admin.
Services, Inc. Group, Inc. services
Unicom Administrative Germany 100% Unicom Provider of admin.
Services, GmbH Administrative servcies
Services, Inc.
Providian Property and Kentucky 100% Providian Auto Insurance company
Casualty Insurance and Home Insurance
Company Company
Providian Fire Insurance Kentucky 100% Providian Insurance company
Co. Property and Casualty
Insurance Co.
Capital Liberty, L.P. Delaware 79.2% Commonwealth Holding Company
Life Insurance
Company
19.8% Peoples Security
Life Insurance
Company
1% CGC
Commonwealth General LLC Turks & 100% CGC Special-purpose
Caicos subsidiary
Islands
Providian Life and Missouri 3.7% CGC Insurance company
Health Insurance
Company
15.3% Peoples Security
Life Insurance
Company
20% Capital Liberty,
L.P.
61% Commonwealth Life
Insurance Company
Veterans Life Insurance Illinois 100% Providian Life Insurance company
Co. and Health Insurance
Company
Peoples Benefit Pennsylvania 100% Veterans Life Special-purpose
Services, Inc. Ins. Co. subsidiary
First Providian Life and New York 100% Veterans Life Insurance Company
Health Insurance Ins. Co.
Company
</TABLE>
C-9
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 28, 1998 there were 40,875 owners of Contracts.
ITEM 28. INDEMNIFICATION
Item 28 is incorporated by reference from the Post-Effective Amendment No. 6
to the Registration Statement of the National Home Life Assurance Company Sep-
arate Account II, File No. 33-7037.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of The Continuum Company, Inc., Kansas City, Mis-
souri and The Vanguard Group, Inc., Valley Forge, Pennsylvania.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B.
ITEM 32. UNDERTAKINGS
(a) Providian Life & Health Insurance Company represents that the fees and
charges deducted under the contracts in this registration statement, in the
aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred and the risks assumed by Providian Life & Health In-
surance Company.
C-10
<PAGE>
SIGNATURES
AS REQUIRED BY THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF
1940, THE REGISTRANT, PROVIDIAN LIFE & HEALTH INSURANCE COMPANY SEPARATE
ACCOUNT IV, CERTIFIES THAT IT MEETS THE REQUIREMENTS OF SECURITIES ACT RULE
485 FOR EFFECTIVENESS HEREOF AND HAS DULY CAUSED THIS AMENDED REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF IN THE COUNTY OF JEFFERSON AND
COMMONWEALTH OF KENTUCKY ON THE 30TH DAY OF APRIL, 1998.
Providian Life & Health Insurance
Company Separate Account IV
(Registrant)
By: Providian Life & Health
Insurance Company
By: /s/ Bart Herbert, Jr.*
---------------------------------
BART HERBERT, JR., PRESIDENT
Providian Life & Health Insurance
Company (Depositor)
By: /s/ Bart Herbert, Jr.*
---------------------------------
BART HERBERT, JR., PRESIDENT
*By: /s/ R. Michael Slaven
--------------------------------
R. MICHAEL SLAVEN
ATTORNEY-IN-FACT
C-11
<PAGE>
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS AMENDED REGISTRATION STATEMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Martha A. McConnell* Treasurer (Chief April 30, 1998
- ------------------------------------ Accounting Officer)
MARTHA A. MCCONNELL
/s/ Jay H. Berman* Director April 30, 1998
- ------------------------------------
JAY H. BERMAN
/s/ Susan E. Martin* Director, Vice April 30, 1998
- ------------------------------------ President,
SUSAN E. MARTIN Secretary and
Associate General
Counsel
/s/ G. Douglas Mangum, Jr.* Director, and Senior April 30, 1998
- ------------------------------------ Vice President
G. DOUGLAS MANGUM, JR.
/s/ John C. Prestwood, Jr.* Director, Vice April 30, 1998
- ------------------------------------ President and
JOHN C. PRESTWOOD, JR. Actuary
/s/ Douglas A. Sarcia* Director and Vice April 30, 1998
- ------------------------------------ President
DOUGLAS A. SARCIA
/s/ Brian A. Smith* Director and Senior April 30, 1998
- ------------------------------------ Vice President
BRIAN A. SMITH
/s/ Thomas B. Nesspor* Director and Vice April 30, 1998
- ------------------------------------ President
THOMAS B. NESSPOR
/s/ Bart Herbert, Jr.* Director and April 30, 1998
- ------------------------------------ President
BART HERBERT, JR.
/s/ Craig D. Vermie* Director April 30, 1998
- ------------------------------------
CRAIG D. VERMIE
/s/ R. Michael Slaven
*By: _______________________________
R. MICHAEL SLAVEN
ATTORNEY-IN-FACT
</TABLE>
C-12
<PAGE>
SEPARATE ACCOUNT IV
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
INDEX TO EXHIBITS
EXHIBIT 8(c) ADMINISTRATIVE SERVICES AGREEMENT DATED SEPTEMBER, 1997 BETWEEN
THE VANGUARD GROUP, INC., PROVIDIAN LIFE AND HEALTH INSURANCE
COMPANY AND FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
EXHIBIT 9(a) OPINION AND CONSENT OF COUNSEL
EXHIBIT 9(b) CONSENT OF COUNSEL
EXHIBIT 10 CONSENT OF INDEPENDENT AUDITORS
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
THIS ADMINISTRATIVE SERVICES AGREEMENT (this "Agreement"), dated as of
September 30, 1997, is between The Vanguard Group, Inc. ("Vanguard"), and
Providian Life and Health Insurance Company and First Providian Life and Health
Insurance Company (referred to herein as the "Company").
WHEREAS, the Company or its authorized representatives desire to ensure
that the administration of the Vanguard Variable Annuity Plan Contract, offered
by the Company which uses the Vanguard Variable Insurance Fund as its underlying
investment vehicle (the "Contracts"), is implemented in accordance with all
applicable laws and regulations; and
WHEREAS, Vanguard, a licensed third party administrator desires to
perform certain administrative functions with respect to the Contracts.
NOW, THEREFORE, in consideration of the promises herein contained and
other good and valuable consideration, the parties hereto agree as follows with
respect to the administration of the Contracts.
AGREEMENT
1.1 Administration of Contracts. The Company retains Vanguard to
---------------------------
perform the administrative services set forth in Exhibit A hereto with respect
to the Contracts.
1.2 Termination. Either party may terminate this Agreement upon
-----------
written notice to the other party in the manner described below (a) for Cause
(defined below); (b) upon the termination, for whatever reason, of that certain
Participation, Market Consulting and Administration Agreement dated April 23,
1991 among Vanguard, the Company and Vanguard Variable Insurance Fund, Inc., as
amended (the "Participation Agreement"): and/or (c) upon mutual agreement of the
parties hereto. The Company must fulfill all lawful obligations with respect to
the Contracts, regardless of any dispute between the Company and Vanguard. In
order to fulfill this obligation, Vanguard shall maintain and make available to
the Company complete Books and Records (defined below) which shall be (i)
readily accessible to the Company at Vanguard's offices during the transition
from Vanguard to the Company or another third party administrator selected by
the Company and (ii) promptly delivered to the Company at its offices or such
other location designated by the Company. Upon termination, Vanguard, subject to
any fiduciary obligations it may have, shall release its authority with respect
to the bank accounts, and funds deposited therein, described in Section 1.4
below. "Cause" shall mean the material breach of this Agreement by either party
or the material default by either party in any of its duties and obligations
hereunder, which breach or default remains uncured for thirty (30) days after
the receipt of written notice thereof by the breaching or defaulting party. The
Company shall provide thirty (30) days written notice to Vanguard of termination
or cancellation of this Agreement if the termination is required by applicable
law.
<PAGE>
1.3 Receipt of Payments. The payment to Vanguard of any premiums or
-------------------
charges for the Contracts by or on behalf of a Contract owner shall be deemed to
have been received by the Company, and the payment of return premiums or claims
by the Company to Vanguard shall not be deemed payment to a Contract owner or
claimant until such payments are received by such Contract owner or claimant.
Vanguard shall comply with all federal securities laws, regulations and rules
and NASD rules regarding the deadlines for investing premiums, redeeming
Contracts and paying claims. Nothing in this Section 1.3 limits any right of the
Company against Vanguard resulting from the failure of Vanguard to make payments
to the Company, Contract owners or claimants.
1.4 Fiduciary Account. Vanguard will hold in a fiduciary capacity all
-----------------
charges or premiums collected by it on behalf of or for the Company with respect
to Contract owners, and return premiums received from the Company. Vanguard
shall comply with all applicable fiduciary account statutes and regulations. In
accordance with applicable laws, regulations and rules, Vanguard will
immediately remit such funds to the person or persons entitled thereto, or shall
promptly deposit them in a fiduciary account established and maintained by
Vanguard in a federally or state-insured financial institution reasonably
acceptable to the Company, in the name of the Company, which fiduciary account,
with respect to funds relating to Nevada policyholders, shall be deposited in an
account located at a financial institution located in Nevada, unless the Nevada
Insurance Department grants an exemption. Vanguard shall require the bank in
which such fiduciary account is maintained to keep records clearly recording the
deposits in and withdrawals from such account on behalf of or for the Company.
Vanguard shall promptly obtain and keep copies of all such records and, upon
request of the Company, furnish the Company with copies of such records
pertaining to deposits and withdrawals on behalf of or for the Company. Vanguard
may make withdrawals from such account for:
a. remittance to the Company when entitled thereto;
b. transfer to and deposit in accounts for the underlying
portfolios described in the Contracts in accordance with
Contract owner instructions;
c. transfer to and deposit in a claims paying account, with
claims to be paid as provided in this Agreement;
d. payment to Vanguard of the amounts described in Section 1.10
below; or
e. remittance of return premiums to the person or persons
entitled thereto.
1.5 Form of Payments of Claims. All claims paid by Vanguard from funds
--------------------------
collected on behalf of the Company, including withdrawals, cancellations and
death claims, shall be paid only on checks or drafts of and as authorized by the
Company.
1.6 Notices to Policyholders. To the extent required by applicable law,
------------------------
Vanguard shall provide a written notice to the Contract owners advising them of
the identity of and relationship among Vanguard, the Contract owners and the
Company. If Vanguard collects funds from the Contract owners, Vanguard will
provide the Contract owner with a written statement specifying the amount of the
premium charged by the Company for such Contract. Any policies,
2
<PAGE>
certificates, booklets, termination notices or other written communications
delivered by the Company to Vanguard for delivery to its Contract owners shall
be delivered by Vanguard promptly after receipt of instructions from the Company
to do so.
1.7 Books and Records. Vanguard shall establish and maintain facilities and
-----------------
procedures for the safekeeping of policy forms, check forms and facsimile
signature imprinting devices, if any, and all other documents, reports, records,
books, files, and other materials (whether on paper, microfiche, computer or
other forms) relative to this Agreement and all transactions between Vanguard,
the Company, and Contract owners, which shall include the identity and addresses
of contract owners and certificate holders (collectively, "Books and Records"),
which facilities and procedures shall be reasonably acceptable to the Company.
The Company may request additional facilities and procedures if necessary to
comply with applicable laws or industry standards. Vanguard shall maintain the
Books and Records at its principal administrative office, for the duration of
this Agreement and seven years thereafter; provided, however, that in the event
this agreement is terminated, Vanguard may, pursuant to applicable law, deliver
the Books and Records to the Company and/or a successor administrator rather
than maintain such Books and Records for seven years. The Books and Records
shall also be maintained in accordance with prudent standards of insurance
recordkeeping and as required by applicable law. The Company and Vanguard shall
both own the Books and Records and shall each retain the right of access to the
Books and Records to fulfill its contractual obligations to Contract owners,
claimants and the Company.
1.8 Access to Books and Records. The Company and any applicable regulatory
---------------------------
agency (including state insurance departments, the SEC and the NASD) shall have
full and free access, during ordinary business hours, to the Books and Records,
which shall be in a form usable by them. Each party shall cooperate with the
other party and all appropriate governmental authorities in connection with any
investigation or inquiry relating to this Agreement.
The Company or its duly authorized independent auditors have the right
under this Agreement to perform on-site reviews of Vanguard's operations and
audits of the Books and Records directly pertaining to the Contracts serviced by
Vanguard's facilities hereunder at Vanguard's facilities in accordance with
reasonable procedures and at reasonable frequencies, including a reasonable
period of time in advance of an announced SEC examination. Each party shall pay
for its own costs and expenses (including personnel time and materials) incurred
in connection with such audits.
1.9 Description of Books and Records.
--------------------------------
a. Vanguard shall maintain detailed books and records that reflect all
administered transactions specifically in regard to premiums,
withdrawals, cancellations, transfers, death claims, state and
federal tax withholding, premium taxes, administrator's fees,
contributions received and deposited and claims and authorized
expenses paid.
b. The detailed preparation, journalizing, and posting of such books and
records shall be made in accordance with the terms and conditions of
this Agreement and state insurance, SEC and NASD requirements, and,
if applicable, in accordance with ERISA, as amended and to enable the
insurer to complete the National Association of Insurance
Commissioners' annual financial statement.
3
<PAGE>
c. Vanguard shall maintain a cash receipt register of all premiums or
contributions received. The minimum detail required in the register
shall be: date received and deposited, the mode of payment, the
policy number, name of individual or group Contract owner.
d. The description of a disbursement shall be in sufficient detail to
identify the source document substantiating the purpose of the
disbursement, and shall include all of the following: (i) the check
number; (ii) the date of disbursement; (iii) the person to whom the
disbursement was made; (iv) the amount disbursed; and (v) ledger
account number. If the amount disbursed does not agree with the
amount billed or authorized, Vanguard shall prepare a written record
as to the application for the disbursement. All disbursements shall
be supported by evidential matter. The evidential matters must be
referenced in the journal entry so that they may be traced for
verification.
e. Vanguard shall prepare and maintain monthly financial institution
account reconciliations and provide these reconciliations to the
Company by the date noted in Exhibit A.
f. Vanguard shall render accounts to the Company detailing all
transactions and remit all money due to the Company under this
Agreement, the Contracts and the Participation Agreement (including
the mortality and expense risk charge) to the Company by the dates
set forth in Exhibit A. Vanguard will render an accounting to the
Company detailing all transactions performed by Vanguard pertaining
to the business underwritten by the Company by the dates set forth in
Exhibit A.
g. Vanguard shall maintain a customer complaint log in accordance with
state insurance, SEC and NASD requirements and shall file the
customer complaint log with the applicable regulatory agency if and
when required. Vanguard shall provide the Company with a copy of the
customer complaint log on a quarterly basis or more frequently if
reasonably requested by the Company. Vanguard shall promptly notify
the Company of all customer complaints involving a regulatory agency.
1.10 Contingent Fees. Vanguard shall not receive commissions, fees, or charges
---------------
contingent upon savings obtained in the adjustment, settlement and payment of
losses covered by the Company obligations, but Vanguard may receive compensation
based on premiums or charges collected or the number of claims paid or processed
as may be provided for in any later amendments to this Agreement.
For services to be rendered by Vanguard, as provided in Section 1.1 of
this Agreement, Vanguard shall receive no compensation. But in any event
Vanguard shall receive the administration charge set forth in the Participation
Agreement.
Vanguard shall not receive from the Company or any covered individual any
compensation or other payments except as expressly set forth in this Agreement.
4
<PAGE>
1.11 Advertising. Vanguard may use only such advertising pertaining to the
-----------
business underwritten by the Company as has been approved in writing by the
Company in advance of its use. The Company shall have the prior approval of the
Director of the Department of Insurance, State of Idaho, before approving
advertising for use by Vanguard.
Vanguard shall maintain at its principal administrative office a complete
file of all advertisements, regardless of by whom written, created or designed,
which are used with respect to Contract owners or potential Contract owners of
the Contracts located in Georgia, with a notation indicating the manner and
extent of distribution and the form number of any policy advertised. Such file
shall be subject to inspection by the Office of Commissioner of Insurance of the
State of Georgia. All such advertisements shall be maintained in said file for a
period of not less than five years. Vanguard shall file with the Commissioner of
Insurance of the State of Georgia on or before March 1 of each year, a
certification executed by an authorized officer of the administrator wherein it
is stated that to the best of his knowledge, information and belief, the
advertisements disseminated by Vanguard with regard to the Contracts during the
preceding calendar year complied, or were made to comply in all respects, with
the advertising regulations of Georgia. The Company shall be solely responsible
for ensuring that all such advertisements provided to and approved in writing by
the Company comply in all respects with the advertising regulations of Georgia.
1.12 Underwriting. The underwriting of the insurance policies is the
------------
responsibility of the Company and Vanguard shall not provide any underwriting
services. The Company shall be responsible for determining the benefits, premium
rates, adjudication of claims, underwriting criteria and claims payment
procedures applicable to such coverage and for securing reinsurance, if any; the
rules pertaining to these matters must be provided, in writing, by the Company
to Vanguard.
1.13 Copy of Written Agreement. This Agreement shall be retained as part of
-------------------------
the official records of both the Company and Vanguard for the duration of this
Agreement plus seven years.
1.14 Compliance. Vanguard is licensed as a third party administrator in the
----------
Commonwealth of Pennsylvania and will seek and maintain a third party
administrator license in those states where it is required and will be in
material compliance with all laws, rules and regulations applicable to third
party administration of the Contracts.
1.15 Confidentiality of Personal Information. Information that identifies an
---------------------------------------
individual covered by a Contract is confidential and shall be kept confidential
in accordance with applicable law. In addition, all information provided by the
Company to Vanguard shall be kept confidential. During the time such information
is in Vanguard's custody or control, Vanguard shall take all reasonable
precautions to prevent disclosure or use of the information for a purpose
unrelated to administration of the Contract. Vanguard shall disclose such
information only: in response to a court order; for an examination conducted by
the applicable regulatory agency; to or at the request of the Company; or with
the written consent of the identified individual or his or her legal
representative. This Section 1.15 shall survive the termination of this
Agreement.
1.16 Liability. Each party shall only be responsible or liable to the other
---------
party for losses caused by the negligence, bad faith, malfeasance or misconduct
of such party or its employees or agents.
5
<PAGE>
1.17 Bond. Vanguard shall comply with the bond and insurance requirements of
----
each state in which it administers Contracts, and to the bonding requirements of
the SEC and NASD.
1.18 Agent, Broker, or Adjuster Licensing. With respect to Wyoming residents,
------------------------------------
Vanguard will not:
a. solicit applications for insurance or annuities for the Company,
negotiate insurance or annuities on behalf of the Company, or carry
out and countersign insurance policies unless licensed in Wyoming as
an agent;
b. on behalf of the Company, for compensation or fee, solicit, negotiate
or procure insurance or the renewal or continuance thereof for
Wyoming insured or prospective insureds unless licensed in Wyoming as
a broker;
c. adjust claims in Wyoming for the Company by investigating and
negotiating settlements unless licensed in Wyoming as an adjuster, or
an agent or broker who adjusts or assists in the adjustment of losses
arising under policies issued by the Company represented by that
agent or through that broker. Nothing herein shall be interpreted as
to prohibit Vanguard from engaging in ministerial or clerical
activities relating to the payment of claims.
SECTION 2 - MISCELLANEOUS
-------------
2.1 Ratifications. Except for the Participation Agreement, this Agreement,
-------------
including Exhibit A, constitutes the entire Agreement between the parties hereto
and supersedes any prior agreement with respect to the subject matter hereof,
whether written or oral.
2.2 Amendments and Modifications. No provision of this Agreement may be
----------------------------
amended, modified or waived except in a writing signed by the parties hereto.
2.3 Successors and Assigns. This Agreement is binding upon and shall inure to
----------------------
the benefit of the Company and Vanguard and their respective successors and
permitted assigns. This Agreement may not be assigned by either part without the
prior written consent of the other party.
2.4 Corporate Authority. Each party hereto represents and warrants to each
-------------------
other party that it is empowered under the applicable laws and regulations and
by its charter and by-laws to enter into and perform this Agreement and that all
requisite corporate proceedings have been taken to authorize it to enter into
and perform this Amendment.
2.5 Governing Law. This Agreement shall be governed by the laws of the
-------------
Commonwealth of Pennsylvania.
2.6 Severability. If any portion of this Agreement shall be held or made
------------
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
6
<PAGE>
2.7 Remedies Cumulative; No Waiver. No right, power or remedy granted or
------------------------------
reserved herein is intended to be exclusive of any other right, power or remedy,
but each and every such right, power and remedy shall be cumulative and
concurrent and in addition to any other right, remedy or power hereunder or
under law. No delay or omission by either party to exercise any right, power or
remedy in connection with a default shall exhaust or impair any such right,
power or remedy or shall be construed to be a waiver of such default or
acquiescence therein.
2.8 Arbitration. Any dispute arising out of or related to this Agreement,
-----------
which cannot be resolved by negotiation, shall be settled by binding arbitration
in accordance with and subject to the Commercial Arbitration Rules of the
American Arbitration Association then applicable (the "Rules"). Unless otherwise
mutually agreed upon by the parties, the arbitration hearings will be held in
the City of Philadelphia, PA. A panel of three arbitrators will be selected in
accordance with the Rules and the arbitrators will allow such discovery as is
appropriate and consistent with the purposes of arbitration in accomplishing
fair, speedy and cost effective resolution of disputes. The arbitrators will
reference the rules of evidence and the Federal Rules of Civil Procedure then in
effect in setting the scope of discovery. Judgment upon the award rendered in
any such arbitration may be entered in any court having jurisdiction thereof, or
application may be made to such court for a judicial acceptance of the award and
an enforcement, as the law of such jurisdiction may require or allow.
2.9 Errors and Omissions. Any inadvertent error or omission made by either
--------------------
party in connection with this Agreement which has been corrected within 30 days,
shall not constitute a material breach of the Agreement or render the Agreement
null and void.
2.10 Notice Addresses. Any notice to be given by one party to the other shall
----------------
be (i) personally delivered or (ii) mailed certified mail postage prepaid, if to
Vanguard, at Vanguard Financial Center, 100 Vanguard Boulevard, Malvern PA
19355, Attn: Pauline C. Scalvino, and if to the Company, at 400 West Market
Street, Louisville, Kentucky 40202, Attn: Sarah Strange.
7
<PAGE>
EXECUTED as of the date first written above.
VANGUARD:
--------
THE VANGUARD GROUP, INC.
By /s/ Raymond J. Klapinsky
------------------------------
Name Raymond J. Klapinsky
----------------------------
Title Managing Director
---------------------------
PROVIDIAN:
---------
PROVIDIAN LIFE AND HEALTH
INSURANCE COMPANY
By /s/ William L. Busler
------------------------------
Name William L. Busler
----------------------------
Title Executive Vice President
---------------------------
FIRST PROVIDIAN LIFE AND HEALTH
INSURANCE COMPANY
By /s/ William L. Busler
------------------------------
Name William L. Busler
----------------------------
Title Exec. V.P.
---------------------------
8
<PAGE>
EXHIBIT A
- ---------
ADMINISTRATIVE SERVICES
(Responsibility for each item is indicated by V for Vanguard, C for Company and
V/C for a joint responsibility of both Vanguard and Company.)
A. CONTRACT ISSUANCE/SUBSEQUENT PAYMENTS
1. Review new applications, apply issuance criteria to application for
Contract. (V)
2. Notify Contract owner or annuitant of any error or missing data
needed to establish Contract within SEC guidelines of accepting the
funds within two days or return funds within five days. (V)
3. If issuance criteria met, prepare contract schedule page, prepare
issued Contract, and mail Contract to Contract Owners. (V)
4. Establish and maintain participant, annuitant, and Contract Owner
records, as applicable, on authorized storage/retrieval systems. (V)
5. Print and maintain supply of confirmation statements. Prepare and
mail confirmation statements of purchases to Contract Owners. (V)
6. Deposit monies received with application into the designated
account (see "Accounting/Auditing", below). (V)
7. Print and maintain inventory of issue-related forms, Contracts and
endorsements. (V)
8. During the free-look period, premiums will be invested in accordance
with the terms of the contract and prospectus.
9. Update the Contract Owner master records and other records to reflect
payments received, and the allocation of each payment received. (V)
B. ACCOUNTING/AUDITING
1. Deposit cash received under the Contracts into a designated bank
account. (V)
2. Photocopy and microfilm all checks. Balance, edit, endorse and
prepare daily deposits. (V)
9
<PAGE>
3. Transfer funds from the depository account to the custodian bank. (V)
4. On returned items, reverse transactions, prepare reports, and
communicate with Contract Owner. (V)
5. Receive funds from custodian accounts for transfer into disbursement
account. (V)
6. Prepare disbursement checks (see "Disbursement" below). (V)
7. Generate accounting information necessary to post entries to transfer
agency bank account reconciliation. (V)
8. Cooperate on annual audit of Separate Accounts and other audits, as
required, which are conducted for purposes of financial statement
certification and publication. The Company will give at least 30 days
notice. (V)
Additionally, accommodate other client and/or regulatory audits, as
required. The Company will notify Vanguard of client and /or
regulatory time frames as soon as possible.
9. Retain systems generated reports in accordance with a retention
schedule mutually established within the Participation, Market
Consulting and Administration Agreement in Schedule 1.6(b)(iv).
Provide access to such reports for internal and external auditing.
(V)
10. Perform daily balancing of Vantage-One and RPS cycle reports (system
check from nightly cycle), Vantage-One and RPS accounting extract and
Vantage-One and RPS disbursement extract. (C)
During the daily balancing described above, forced balances and/or
invalid Journal entries may occur. When these errors occur, the
Company and Vanguard will work together to determine the cause of the
error, perform the proper corrections, and develop and implement
procedures if deemed necessary to ensure the error does not reoccur.
(C/V)
11. Company will perform daily balancing for the Separate Account
including the following reconciliations: Separate Account shares to
Fund Shares, Separate Account units to customer units on Vantage-One,
RPS and the spreadsheets for annuitized customers tracked manually,
and Separate Account assets to liabilities.
10
<PAGE>
Separate Account Shares to Fund Shares
--------------------------------------
Company will communicate the difference to Vanguard, work with
Vanguard to determine the cause of the difference and agree upon the
appropriate resolution.
Separate Account Units to Customer Units on Vantage-One or RPS
--------------------------------------------------------------
Company will communicate the difference to Vanguard, work with
Vanguard to determine the cause of the difference and agree upon the
appropriate resolution.
Separate Account Units to RPS Manual Spreadsheets
-------------------------------------------------
Company will communicate the difference to Vanguard, work with
Vanguard to determine the cause of the difference and agree upon the
appropriate resolution.
Separate Account Assets to Liabilities
--------------------------------------
Company will communicate the difference (i.e. breakage) to Vanguard,
work with Vanguard to determine the cause of the difference (that is
in excess of the normal level of breakage) and agree upon the
appropriate resolution. Vanguard and Company will mutually agree upon
what is considered a normal level of breakage. (C)
C. PRICING/VALUATION
1. Company will perform daily the calculation for the accumulation and
annuity (payout) unit values for the Separate Account in accordance
with the prospectus and the Statement of Additional Information.
Company will also perform daily the calculation of the M&E factor
included in the unit value calculation. Vanguard will use its best
efforts to provide, in a mutually agreed upon format, the NAV and
dividend and capital gain rate and share balance by 6:00 p.m. EST on
each day the NYSE is open. (C/V)
2. Vanguard will communicate to Company any corrections to the NAV,
dividend rate, or capital gain rate as soon as the error is detected.
Company will maintain a record of corrections of the accumulation and
annuity (payout) unit values for the Separate Account in accordance
with applicable federal securities laws, rules and regulations. For
errors not caused by corrections to the NAV, dividend rate, or
capital gain rate,
11
<PAGE>
Company will communicate the unit value corrections to Vanguard as
soon as the error is detected. Company will also communicate to
Vanguard when the unit value has been corrected on the administrative
system so that Vanguard can reverse and reapply the affected
transactions. Company will work with the recordkeeper to correct unit
values in the administrative system. All corrections will be verified
by Company. (C/V)
3. Vanguard will determine daily the purchases and redemptions (trade
sheets) activity by fund and notify the fund manager. Vanguard will
provide daily to Company the purchases and redemptions transacted on
the Vantage-One and RPS systems by fund, as well as purchases and
redemptions of the annuitized customers tracked manually. Company
will determine daily the purchases and redemptions activity by fund.
Company will use the activity by fund in processing the share
balances by fund and will confirm these share balances as indicated
per item B11 above. (C/V)
D. CONTRACT OWNER SERVICE/RECORD MAINTENANCE
1. Process Contract owner service requests, including informational
requests, endorsement/acknowledgment, beneficiary changes, transfer
of assets between investment vehicles, and changes of any other
information maintained on the system. (V)
2. Respond directly to questions or inquiries relating to transaction
records or current account value. (V)
3. Review daily system reports confirming changes made to participant,
annuitant or Contract owner accounts. (V)
4. Process Contract owner service requests within the following
standards (V):
- New Policy Issue 2 business days
- Subsequent Premium same business day
- Surrenders/Partial Withdrawals 1 business day
- Correspondence -
- Financial 2 business days
- Non-Financial 5 business days
5. Provide client service within agreed upon guidelines. Provide results
monthly to the Company. (V)
- 90% of all calls answered within 20 seconds.
- Average "Speed of Answer" 20 seconds or less
12
<PAGE>
- Abandonment Rate of 3% or less
6. Provide quarterly customer statements. (V)
E. DISBURSEMENTS (SURRENDERS; CLAIMS)
1. Receive requests for partial or full surrenders, and death claims
from Contract owners and beneficiaries. (V)
2. Process surrender requests and death claims against the Contract
owner master files. (V)
3. Prepare checks for surrenders, partial withdrawals, death claims and
forward to Contract owner, beneficiary or designated payee, after
withholding appropriate Federal and State taxes. (V)
4. Prepare and mail confirmation statements of disbursement transactions
to Contract owners. (V)
5. Print and maintain check supply. (V)
6. Follow up on outstanding checks on a periodic basis and escheat
unclaimed funds to states based on individual state requirements. (V)
F. ANNUITY BENEFIT PROCESSING -- FOR FIXED PAYOUTS AND VARIABLE PAYOUTS
Fixed
-----
1. Receive information with respect to annuitants going into the annuity
(payout) phase. Fixed annuity election reports are forwarded to the
Company. Funds are wired from Vanguard, 10 business days before first
payment is due. (V/C)
Vanguard is to provide the following information in order for the
Company to process a fixed annuitization. The information is needed
for a fixed annuitization on the 10th business day prior to the due
date of the first payment on the annuitized contract.
a) Contract amount
b) Annuitization form (including W4P and W9 tax information)
c) Tax Cost Basis of Original Premium
d) Birth Date Verification (copy of birth certificate or driver's
license)
13
<PAGE>
e) Copy of Quote or date annuitization paperwork received at
Vanguard
f) If joint annuitant, need their date of birth
g) Address of where to mail the check
h) Account number for direct deposits
i) Beneficiary information
Variable
2. Variable annuity election requests are handled by Vanguard with the
exclusion ratio calculated by the Company and verified by Vanguard. The
Company calculates the amount of the initial annuity payment for variable
payout based on tables attached to the Contract and the current annuity
unit value calculated 10 business days prior to the annuitization date.
(C/V)
Both parties will coordinate the transfer of the appropriate information
necessary to complete calculations and communicate results.
G. TAXES
1. Vanguard is to collect and account for premium taxes as appropriate,
instruct Company to remit the taxes and wire premium dollars to the
Company. The Company shall inform Vanguard of any changes in state
regulations regarding the imposition of premium taxes. The Company
will remit all premium taxes due. (V/C)
2. Vanguard is to collect and account for all federal and state
withholding as appropriate, and wire the dollar amount of such taxes
collected to the Company. The Company shall inform Vanguard of any
changes in federal and state regulations regarding the imposition of
federal and state taxes. The Company will remit all federal and state
taxes due. (V)
3. Vanguard is to prepare and maintain premium tax and other federal and
state tax records by Contract owner and by state. (V)
H. FINANCIAL AND MANAGEMENT REPORTS
1. REPORTS TO BE PREPARED MONTHLY BY THE DATES OUTLINED BELOW FOR
SEPARATE ACCOUNT IV & B
DATE RECEIVED
BY OTHER PARTY
--------------
a) M&E and admin report (C) Last business day of month
14
<PAGE>
b) Separate Account General Ledger (C) 1st business day
c) Federal & State Withholding and Premium 1st business day
Tax Information (V)
d) Bank Statements/Reconciliation-- 5th business day
the Insurance Company (V)
e) Reconciliation of Premiums in 5th business day
Suspense to balance in Receipt
Bank Account (V)
2. MONTHLY REPORTS FROM THE VANTAGE ONE AND RPS SYSTEMS TO BE PROVIDED
BY VANGUARD TO THE COMPANY
DATE RECEIVED
BY THE COMPANY
--------------
a) Suspense File List (V) 4th business day
b) Investment Vehicle Report (V) 4th business day
c) Reserve Listing Calculation Results (V) 4th business day
d) Mortality Gain/Loss Detail (V) 4th business day
e) Detail Account Reporting (V) daily with a day lag
f) Variable Fund Value (V) 1st business day
g) RPS feed to PCATS system (V) 4th business day
h) Minimum Death Benefit Report (V) 4th business day
i) Annuity Statutory Reserve (V) 1st business day
following year end
j) CO5 (Vantage One Report) (V) Daily (by 8:00 a.m.)
k) Others as requested by the Company's internal or external auditors
l) Others as requested by the Company's accounting areas as needed to prepare
financial statements or perform analysis.
m) Payment Account Control Report(AD-134)(V) 8:00 a.m. after cycle runs
n) VVAP Extract File (V) Daily
I. AGENT LICENSE RECORDKEEPING
1. Report the following agent license status information to the Company
(V):
a) Address changes
b) Name changes should be reported to each State with a copy
to the Company.
c) New Agents to be licensed/appointed as it relates to the Vanguard
Variable Annuity Plan
2. The Company will track and monitor individual agent license status
and compliance with individual continuing education requirements. (C)
15
<PAGE>
J. ADDITIONAL SERVICES
1. The Company will calculate daily the Mortality and Expense Risk Charge (M&E)
and Administrative charges. The Company will provide a statement and
supporting documentation to Vanguard the evening of the last business day of
the month detailing the M&E and Administrative charges owed by fund for
Separate Account IV and B. Vanguard will wire the Company an amount equal to
the M&E charge on the statement on the second business day except when the
difference between the Company's statement and Vanguard's records is greater
than 20%. Should this occur, Vanguard will provide to the Company a list of
the discrepancies by fund and both Vanguard and Company will cooperate to
reconcile the difference within five business days. Vanguard is not
responsible for wiring the M&E to the Company until it has received the
statement from the Company.
Vanguard will perform a review of the M&E and Administrative charges per the
Company's statements to its records. If the discrepancies between the
Company's and Vanguard's calculation is less than 20%, Vanguard will provide
to the Company a list of the discrepancies by fund. Both Vanguard and the
Company will cooperate to resolve the discrepancies prior to the 10th
business day following the end of the month in question. Any funds owed
between Vanguard and the Company will be wired on the 10th business day.
The above procedures will begin on a date mutually agreed to by Vanguard and
the Company. (V/C)
2. Vanguard will ensure that the administrative system controls are in place to
ensure the accuracy of the annual maintenance fee due Vanguard. Separate
Accounts IV and B will remit to Vanguard no later than the fourth business
day of the month the total for the previous month. (V)
3. Maintain an appropriate Disaster Recovery Contingency Plan for the annuity
business. (V/C)
K. PROXY PROCESSING
1. The Company is to receive record date information and proxy
solicitation from Vanguard's Legal Department. (V)
2. Vanguard will perform proxy solicitation using Vanguard proxy tape
information. (V)
16
<PAGE>
L. PERIODIC REPORTS TO CONTRACT OWNERS
1. Based on necessary information provided by Vanguard in a timely
manner, tax reporting will be performed by the Company in accordance
with procedures mutually agreed upon by the Company and Vanguard. (C)
2. Respond to requests from plan administrators or trustees for
information affecting the plan or participants for qualified plans.
(V)
3. Prepare semi-annual and annual reports for the funds in compliance
with the Investment Company Act of 1940 for the benefit of the
Separate Account shareholders. (V)
M. TRANSACTION AND BREAKAGE GAIN/LOSS
1. Transaction gain/loss should be funded by Vanguard to the Separate
Account on a daily basis. (V)
2. The Company will provide a report of breakage amounts to Vanguard as
of the end of the previous month with supporting documentation no
later than the 1st business day following the end of the previous
month. Vanguard will fund breakage to the Separate Account within
three (3) business days of notification. (V/C)
These time frames may be modified through mutual agreement by Vanguard and the
Company.
N. MORTALITY GAIN/LOSS
1. Mortality gain/loss should be funded by the Company to the Separate
Account when deemed necessary by Company. Company will provide a
statement annually to Vanguard for the necessary withdrawals and
fundings for mortality gain/loss at that time. (C)
O. BANK ACCOUNTS
1. Company shall be deemed the co-owner with Vanguard of the bank
accounts established for deposits into and withdrawals from the
Separate Account.
17
<PAGE>
EXHIBIT 9(A)
April 30, 1998
PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
ADMINISTRATIVE OFFICES
20 MOORES ROAD
FRAZER, PENNSYLVANIA 19355
RE: PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT IV--OPINION AND CONSENT
To Whom It May Concern:
This opinion and consent is furnished in connection with the filing of Post-
Effective Amendment No. 11 (the "Amendment") to the Registration Statement on
Form N-4, File No. 33-36073 (the "Registration Statement") under the Securities
Act of 1933, as amended (the "Act"), of Providian Life & Health Insurance
Company Separate Account IV ("Separate Account IV"). Separate Account IV
receives and invests premiums allocated to it under a flexible premium
multi-funded annuity contract (the "Annuity Contract"). The Annuity Contract is
offered in the manner described in the prospectus contained in the Registration
Statement (the "Prospectus").
In my capacity as legal adviser to Providian Life & Health Insurance Company,
I hereby confirm the establishment of Separate Account IV pursuant to a resolu-
tion adopted by the Board of Directors of Providian Life & Health Insurance
Company for a separate account for assets applicable to the Annuity Contract,
pursuant to the provisions of Section 376.309 of the Missouri Insurance Stat-
utes. In addition, I have made such examination of the law in addition to con-
sultation with outside counsel and have examined such corporate records and
such other documents as I consider appropriate as a basis for the opinion here-
inafter expressed. On the basis of such examination, it is my professional
opinion that:
1. Providian Life & Health Insurance Company is a corporation duly orga-
nized and validly existing under the laws of the State of Missouri.
2. Separate Account IV is an account established and maintained by
Providian Life & Health Insurance Company pursuant to the laws of the State
of Missouri, under which income, capital gains and capital losses incurred
on the assets of Separate Account IV are credited to or charged against the
assets of Separate Account IV, without regard to the income, capital gains
or capital losses arising out of any other business which Providian Life &
Health Insurance Company may conduct.
3. Assets allocated to Separate Account IV will be owned by Providian Life
& Health Insurance Company. The assets in Separate Account IV attributable
to the Annuity Contract generally are not chargeable with liabilities aris-
ing out of any other business which Providian Life & Health Insurance Com-
pany may conduct. The assets of Separate Account IV are available to cover
the general liabilities of Providian Life & Health Insurance Company only to
the extent that the assets of Separate Account IV exceed the liabilities
arising under the Annuity Contracts.
4. The Annuity Contracts have been duly authorized by Providian Life &
Health Insurance Company and, when sold in jurisdictions authorizing such
sales, in accordance with the Registration Statement, will constitute val-
idly issued and binding obligations of Providian Life & Health Insurance
Company in accordance with their terms.
<PAGE>
Providian Life and Health Insurance Company
Separate Account IV
April 30, 1998
5. Owners of the Annuity Contracts as such, will not be subject to any de-
ductions, charges or assessments imposed by Providian Life and Health Insur-
ance Company other than those provided in the Annuity Contract.
I hereby consent to the use of this opinion as an exhibit to the Amendment and
to the reference to my name under the heading "Legal Matters" in the Prospec-
tus.
Very truly yours,
/s/ Kimberly A. Scouller
Kimberly A. Scouller
Assistant General Counsel
<PAGE>
EXHIBIT 9(b)
JORDEN BURT BOROS CICCKETTI BERENSON & JOHNSON LLP
1025 THOMAS JEFFERSON STREET, N.W.
SUITE 400-EAST
WASHINGTON, D.C. 20007-0805
(202) 965-8100
TELECOPIER (202) 965-8104
April 30, 1998
PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
20 MOORES ROAD
FRAZER, PENNSYLVANIA 19355
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Prospectus contained in Post-Effective Amendment No. 11 to the
Registration Statement on Form N-4 (file No. 33-36073) filed by Providian Life &
Health Insurance Company and Providian Life & Health Insurance Company Separate
Account IV with the Securities and Exchange Commission under the Securities Act
of 1933 and the Investment Company Act of 1940.
Very truly yours,
/s/ Jorden Burt Boros Ciccketti Berenson & Johnson LLP
Jorden Burt Boros Ciccketti Berenson & Johnson LLP
<PAGE>
Exhibit No. (10)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Auditors" and to the
use of our reports dated April 24, 1998, with respect to the financial
statements of Providian Life and Health Insurance Company Separate Account IV
and the statutory-basis financial statements of Providian Life and Health
Insurance Company in Post-Effective Amendment No. 11 to the Registration
Statement (Form N-4 No. 33-36073) and related Prospectus of Providian Life
and Health Insurance Company Separate Account IV.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 24, 1998
