File Nos. 33-45223
811-6543
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 5 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [ ]
Amendment No. 7 [X]
(Check appropriate box or boxes.)
COVA VARIABLE ANNUITY ACCOUNT FOUR
___________________________________
(Exact Name of Registrant)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
_______________________________________________
(Name of Depositor)
One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644
______________________________________________________ __________
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (800) 831-5433
Name and Address of Agent for Service:
Lorry J. Stensrud, President
Cova Financial Services Life Insurance Company
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
(800) 523-1661
Copies to:
Judith A. Hasenauer, Esq. and Jeffery K. Hoelzel
Blazzard, Grodd & Hasenauer, P.C. Senior Vice President, General
P.O. Box 5108 Counsel and Secretary
Westport, CT 06881 Cova Financial Services
(203) 226-7866 Life Insurance Company
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois
60181-4644
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b) of Rule 485
_X_ on May 1, 1996 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
___ on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following:
____ This Post-Effective Amendment designates a new date for a previously
filed Post-Effective Amendment.
Registrant has declared that it has registered an indefinite number or amount
of securities in accordance with Rule 24f-2 under the Investment Company Act
of 1940. Registrant filed its Rule 24f-2 Notice for the most recent fiscal
year on or about February 26, 1996.
<TABLE>
<CAPTION>
<S> <C> <C>
CROSS REFERENCE SHEET
(required by Rule 495)
ITEM NO. LOCATION
PART A
Item 1. Cover Page........................... Cover Page
Item 2. Definitions.......................... Definitions
Item 3. Synopsis............................. Highlights
Item 4. Condensed Financial Information...... Condensed Financial Information
Item 5. General Description of Registrant,
Depositor, and Portfolio Companies... The Company; The Variable
Account; Cova Series Trust;
Neuberger & Berman Advisers
Management Trust
Item 6. Deductions and Expenses.............. Charges and Deductions
Item 7. General Description of Variable
Annuity Contracts.................... The Contracts
Item 8. Annuity Period....................... Annuity Provisions
Item 9. Death Benefit........................ The Contracts; Annuity
Provisions
Item 10. Purchases and Contract Value......... Purchase Payments and Contract
Value
Item 11. Redemptions.......................... Withdrawals
Item 12. Taxes................................ Tax Status
Item 13. Legal Proceedings.................... Legal Proceedings
Item 14. Table of Contents of the Statement
of Additional Information............ Table of Contents of the
Statement of Additional
Information
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
CROSS REFERENCE SHEET (CONT'D)
(required by Rule 495)
ITEM NO. LOCATION
PART B
Item 15. Cover Page........................... Cover Page
Item 16. Table of Contents.................... Table of Contents
Item 17. General Information and History...... The Company
Item 18. Services............................. Not Applicable
Item 19. Purchase of Securities Being Offered. Not Applicable
Item 20. Underwriters......................... Distributor
Item 21. Calculation of Performance Data...... Performance Information
Item 22. Annuity Payments..................... Annuity Provisions
Item 23. Financial Statements................. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item so numbered in Part C to this Registration Statement.
PART A
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
<S> <C>
Annuity Service Office:
Home Office: P.O. Box 295
One Tower Lane, Suite 3000 400 Locust Street
Oakbrook Terrace, IL 60181-4644 Des Moines, Iowa 50309-0295
(800) 831-LIFE (800) 255-9448
(515) 243-5834
</TABLE>
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACTS
issued by
COVA VARIABLE ANNUITY ACCOUNT FOUR
and
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
The Individual Flexible Purchase Payment Deferred Variable Annuity Contracts
(the "Contracts") described in this Prospectus provide for accumulation of
Contract Values on a variable basis and payment of monthly annuity payments on
a fixed or variable basis. The Contracts described in this Prospectus are for
use by individuals in connection with fringe benefit plans, including welfare
and pension plans under the Employee Retirement Income Security Act of 1974
("ERISA") and bonus and compensation plans exempt from ERISA. Fringe benefit
plans may or may not qualify for any tax-favored treatment other than the
benefits provided for by annuities depending on the plan. (See "Qualified
Contracts" and "Non-Qualified Contracts" under "Definitions" on Page __.) The
amounts of the Mortality and Expense Risk Premium, Administrative Expense
Charge and Contract Maintenance Charge under the Contracts will vary depending
upon the total projected purchase payments anticipated from all Contracts sold
under the particular plan during the first five years of plan participation in
the Contracts. (See "Charges and Deductions" on Page __.)
Purchase payments for the Contracts will be allocated to a segregated
investment account of Cova Financial Services Life Insurance Company (the
"Company") which account has been designated Cova Variable Annuity Account
Four (the "Variable Account"). Prior to June 1, 1995, the Company was known as
Xerox Financial Services Life Insurance Company and the Variable Account was
known as Xerox Variable Annuity Account Four. The Variable Account invests in
shares of Cova Series Trust (see "Cova Series Trust" on Page __) or in shares
of Neuberger & Berman Advisers Management Trust (see "Neuberger & Berman
Advisers Management Trust" on Page __). Cova Series Trust is a series fund
with eleven Portfolios, five of which are currently available in connection
with the Contracts offered under this Prospectus: Money Market Portfolio,
Quality Income Portfolio, High Yield Portfolio, Stock Index Portfolio and
Growth and Income Portfolio. Neuberger & Berman Advisers Management Trust is a
series fund with seven Portfolios, four of which are currently available in
connection with the Contracts offered herein: Liquid Asset Portfolio, Limited
Maturity Bond Portfolio, Growth Portfolio and Balanced Portfolio. See "Tax
Status - Diversification" for a discussion of Owner control of the underlying
investments in a variable annuity contract.
This Prospectus concisely sets forth the information a prospective investor
should know before investing. Additional information about the Contracts is
contained in the Statement of Additional Information which is available at no
charge. The Statement of Additional Information has been filed with the
Securities and Exchange Commission and is incorporated herein by reference.
The Table of Contents of the Statement of Additional Information can be found
on Page __ of this Prospectus. For the Statement of Additional Information,
call (800) 831-LIFE or write the Home Office address listed above.
INQUIRIES:
Any inquiries regarding purchasing a Contract can be made by telephone or in
writing to Cova Life Sales Company at (800) 831-LIFE or One Tower Lane, Suite
3000, Oakbrook Terrace, Illinois 60181-4644. All other questions should be
directed to the Annuity Service Office listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Prospectus and the Statement of Additional Information are dated May 1,
1996.
This Prospectus should be kept for future reference.
TABLE OF CONTENTS
PAGE
DEFINITIONS
HIGHLIGHTS
FEE TABLE
THE COMPANY
THE VARIABLE ACCOUNT
Cova Series Trust
Neuberger & Berman Advisers Management Trust
AMT Liquid Asset Investments
AMT Growth Investments
AMT Limited Maturity Bond Investments
AMT Balanced Investments
Voting Rights
Substitution of Securities
CHARGES AND DEDUCTIONS
Deduction for Withdrawal Charge (Sales Load)
Waiver of Withdrawal Charge
Deduction for Mortality and Expense Risk Premium
Deduction for Administrative Expense Charge
Deduction for Contract Maintenance Charge
Reduction of Charges
Deduction for Premium Taxes
Deduction for Trust and AMT Expenses
Deduction for Transfer Fee
THE CONTRACTS
Ownership
Assignment
Beneficiary
Change of Beneficiary
Transfers of Contract Values During the Accumulation Period
Death of the Annuitant
Death of the Owner
ANNUITY PROVISIONS
Annuity Date and Annuity Option
Change in Annuity Date and Annuity Option
Allocation of Annuity Payments
Transfers During the Annuity Period
Annuity Options
assumed
PURCHASE PAYMENTS AND CONTRACT VALUE
Purchase Payments
Allocation of Purchase Payments
Dollar Cost Averaging
Distributor
Contract Value
Accumulation Unit
WITHDRAWALS
Suspension of Payments or Transfers
PERFORMANCE INFORMATION
Money Market and Liquid Asset Portfolios
Other Portfolios
TAX STATUS
General
Diversification
Multiple Contracts
Contracts Owned by Other Than Natural Persons
Tax Treatment of Assignments
Income Tax Withholding
Tax Treatment of Withdrawals - Non-Qualified Contracts
Qualified Plans
Tax Treatment of Withdrawals - Qualified Contracts
Tax-Sheltered Annuities - Withdrawal Limitations
FINANCIAL STATEMENTS
LEGAL PROCEEDINGS
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
DEFINITIONS
ACCUMULATION UNIT - An accounting unit of measure used to calculate the
Contract Value in a Sub-Account of the Variable Account.
ANNUITANT - The natural person on whose life Annuity Payments are based.
ANNUITY DATE - The date on which Annuity Payments begin.
ANNUITY PAYMENTS - The series of payments made to the Annuitant after the
Annuity Date under the Annuity Option elected.
ANNUITY PERIOD - The period starting on the Annuity Date.
ANNUITY UNIT - An accounting unit of measure used to calculate Variable
Annuity Payments after the Annuity Date.
BENEFICIARY - The person(s) who will receive the Death Benefit.
COMPANY - Cova Financial Services Life Insurance Company at its Annuity
Service Office shown on the cover page of this Prospectus.
CONTRACT ANNIVERSARY - An anniversary of the Issue Date.
CONTRACT VALUE - The sum of the Owner's interest in the Sub-Accounts of the
Variable Account.
CONTRACT YEAR - One year from the Issue Date and from each Contract
Anniversary.
DISTRIBUTOR - Cova Life Sales Company, One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644.
ELIGIBLE INVESTMENT(S) - An investment entity which can be selected by the
Owner to be an underlying investment of the Contract.
FIXED ANNUITY - A series of payments made during the Annuity Period which are
guaranteed as to dollar amount by the Company and do not vary with the
investment experience of the Variable Account.
ISSUE DATE - The date on which the first Contract Year begins.
NON-QUALIFIED CONTRACTS - Contracts issued under Non-Qualified Plans which do
not receive favorable tax treatment under Sections 401 or 403(b) of the
Internal Revenue Code.
OWNER - The person or entity named in the Application who/which has all the
rights under the Contract.
PORTFOLIO - A segment of an Eligible Investment which constitutes a separate
and distinct class of shares.
QUALIFIED CONTRACTS - Contracts issued under Qualified Plans which receive
favorable tax treatment under Sections 401 or 403(b) of the Internal Revenue
Code.
SUB-ACCOUNT - A segment of the Variable Account.
SUB-ACCOUNT VALUE - The Owner's interest in a Sub-Account.
VALUATION DATE - The Variable Account will be valued each day that the New
York Stock Exchange is open for trading which is Monday through Friday, except
for normal business holidays.
VALUATION PERIOD - The period beginning at the close of business of the New
York Stock Exchange on each Valuation Date and ending at the close of business
for the next succeeding Valuation Date.
VARIABLE ACCOUNT - A separate investment account of the Company, designated as
Cova Variable Annuity Account Four, into which purchase payments or Contract
Values may be allocated.
VARIABLE ACCOUNT VALUE - The sum of the Owner's interest in each of the
Sub-Accounts of the Variable Account.
VARIABLE ANNUITY - A series of payments made during the Annuity Period which
vary in amount with the investment experience of each applicable Sub-Account.
WITHDRAWAL VALUE - The Withdrawal Value is:
1) the Contract Value for the Valuation Period next following the
Valuation Period during which a written request for withdrawal is received at
the Company; less
2) any applicable taxes not previously deducted; less
3) the Withdrawal Charge, if any; less
4) the Contract Maintenance Charge, if any.
HIGHLIGHTS
Purchase payments for the Contracts will be allocated to a segregated
investment account of Cova Financial Services Life Insurance Company (the
"Company") which account has been designated Cova Variable Annuity Account
Four (the "Variable Account"). Under certain circumstances, however, purchase
payments may initially be allocated to the Cova Series Trust Money Market
Sub-Account or the Neuberger & Berman Advisers Management Trust Liquid Asset
Sub-Account of the Variable Account (see below). The Variable Account invests
in shares of Cova Series Trust (see "Cova Series Trust" on Page __) and
Neuberger & Berman Advisers Management Trust (see "Neuberger & Berman Advisers
Management Trust" on Page __). Owners bear the investment risk for all amounts
allocated to the Variable Account.
Within ten days (twenty days with respect to Contracts issued in North Dakota)
of the date of receipt of the Contract by the Owner, it may be returned by
delivering or mailing it to the Company at its Annuity Service Office or to
the agent through whom it was purchased. When the Contract is received by the
Company, it will be voided as if it had never been in force. The Company will
refund the Contract Value (which may be more or less than the purchase
payments) computed at the end of the Valuation Period during which the
Contract is received by the Company except in the following circumstances: (a)
in states which require the Company to refund purchase payments, less any
withdrawals; or (b) in the case of Contracts which are deemed by certain
states to be replacing an existing annuity or insurance contract and which
states require that contract owners be given a twenty day right to return the
policy after delivery. With respect to the circumstances described in (a) and
(b) above, the Company will refund the greater of purchase payments, less any
withdrawals, or the Contract Value, and will allocate initial purchase
payments to the Cova Series Trust Money Market Sub-Account or the
Neuberger & Berman Advisers Management Trust Liquid Asset Sub-Account, as
elected by the Owner, until the expiration of fifteen days from the Issue
Date (or twenty-five days in the case of Contracts described under (b) above).
Upon the expiration of the fifteen day period (or twenty-five day period with
respect to Contracts described under (b)), the Sub-Account Value of the
Cova Series Trust Money Market Sub-Account or the Neuberger & Berman
Advisers Management Trust Liquid Asset Sub-Account will be allocated to the
Variable Account in accordance with the election made by the Owner in the
Application.
A Withdrawal Charge (sales load) may be deducted in the event of a withdrawal
of all or a portion of the Contract Value. The Withdrawal Charge is imposed on
withdrawals of Contract Values attributable to purchase payments within five
(5) years after receipt. The Withdrawal Charge, if any, is equal to five
percent (5%) of the purchase payment withdrawn. The Withdrawal Charge does not
apply to a withdrawal equal to: (a) purchase payments held for at least five
(5) years not previously withdrawn; (b) gain; and (c) amounts for which the
waiver of Withdrawal Charge applies. (See "Withdrawals" on Page __.) A
withdrawal of up to ten percent (10%) of aggregate purchase payments made
within the five years preceding the request for withdrawal may be made free
from the Withdrawal Charge on a noncumulative basis once each Contract Year if
the Contract Value prior to the withdrawal exceeds $5,000. (See "Charges and
Deductions - Deduction for Withdrawal Charge (Sales Load)" and "Charges and
Deductions - Waiver of Withdrawal Charge" on Page __.)
The Company deducts on each Valuation Date, both prior to the Annuity Date and
during the Annuity Period, a Mortality and Expense Risk Premium, the amount of
which will vary depending upon the total projected purchase payments to be
made over the first five years of plan participation in the Contracts. The
maximum Mortality and Expense Risk Premium is equal, on an annual basis, to
1.25% of the daily net asset value of the Variable Account. This Charge
compensates the Company for assuming the mortality and expense risks under the
Contracts. (See "Charges and Deductions - Deduction for Mortality and Expense
Risk Premium" on Page __.)
The Company deducts on each Valuation Date, both prior to the Annuity Date and
during the Annuity Period, an Administrative Expense Charge, the amount of
which will vary depending upon the total projected purchase payments to be
made over the first five years of plan participation in the Contracts. The
maximum Administrative Expense Charge is equal, on an annual basis, to .15% of
the daily net asset value of the Variable Account. This Charge compensates the
Company for costs associated with the administration of the Contract and the
Variable Account. (See "Charges and Deductions - Deduction for Administrative
Expense Charge" on Page __.)
The Company deducts an annual Contract Maintenance Charge from the Contract
Value on each Contract Anniversary. The amount of this charge will vary
depending upon the total projected purchase payments to be made over the first
five years of plan participation in the Contracts. The maximum Contract
Maintenance Charge is $30 each Contract Year. (See "Charges and Deductions -
Deduction for Contract Maintenance Charge" on Page __.)
Premium taxes or other taxes payable to a state or other governmental entity
will be charged against the Contract Values. (See "Charges and Deductions -
Deduction for Premium Taxes" on Page __.)
Under certain circumstances, a Transfer Fee may be assessed when an Owner
transfers Contract Values from one Sub-Account to another Sub-Account. (See
"Charges and Deductions - Deduction for Transfer Fee" on Page __.)
There is a ten percent (10%) federal income tax penalty that may be applied to
the income portion of any distribution from the Contracts.(See "Tax Status -
Tax Treatment of Withdrawals - Non-Qualified Contracts" on Page __ and "Tax
Status - Tax Treatment of Withdrawals - Qualified Contracts" on Page __.) For
a further discussion of the taxation of the Contracts, see "Tax Status" on
Page __.
Withdrawals of amounts attributable to contributions made pursuant to a salary
reduction agreement (as defined in Section 403(b)(11) of the Code) are limited
to circumstances only when the Owner attains age 59 1/2, separates from
service, dies, becomes disabled (within the meaning of Section 72(m)(7) of the
Code) or in the case of hardship. Withdrawals for hardship are restricted to
the portion of the Owner's Contract Value which represents contributions made
by the Owner and does not include any investment results. The limitations on
withdrawals became effective on January 1, 1989, and apply only to: (1) salary
reduction contributions made after December 31, 1988; (2) income attributable
to such contributions; and (3) income attributable to amounts held as of
December 31, 1988. The limitations on withdrawals do not affect rollovers or
transfers between certain Qualified Plans. Tax penalties may also apply. (See
"Tax Status - Tax Treatment of Withdrawals - Qualified Contracts" on Page __.)
Owners should consult their own tax counsel or other tax adviser regarding any
distributions. (See "Tax Status - Tax-Sheltered Annuities - Withdrawal
Limitations" on Page __.)
The Treasury Department has indicated that guidelines may be forthcoming under
which a variable annuity contract will not be treated as an annuity contract
for tax purposes if the owner of the contract has excessive control over the
investment underlying the contract. The issuance of such guidelines may
require the Company to impose limitations on a Contract Owner's right to
control the investment. It is not known whether any such guidelines would have
a retroactive effect. (See "Tax Status - Diversification" on Page __.)
COVA VARIABLE ANNUITY ACCOUNT FOUR
FEE TABLE
OWNER TRANSACTION EXPENSES
Withdrawal Charge (see Note 2 below) 5% of purchase payment withdrawn
Transfer Fee (see Note 4 below) No charge for first 12 transfers
in a contract year; thereafter,
the fee is $25 per transfer or,
if less, 2% of the amount
transferred.
<TABLE>
<CAPTION>
<S> <C>
ANNUAL CONTRACT FEE (see Note 3 below )
Contract Maintenance Charge (if the total purchase payments during the first five years $ 30
of plan participation are projected to be from $50,000 to $999,999.)
Contract Maintenance Charge (if the total purchase payments during the first five years $ 20
of plan participation are projected to be from $1,000,000 to $2,499,999.)
Contract Maintenance Charge (if the total purchase payments during the first five years $ 15
of plan participation are projected to be from $2,500,000 to $4,999,999.)
Contract Maintenance Charge (if the total purchase payments during the first five years $ 10
of plan participation are projected to equal or exceed $5,000,000.)
VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
MORTALITY AND EXPENSE RISK PREMIUM (see Note 3 below)
Mortality and Expense Risk Premium (if the total purchase payments during the first 1.25%
five years of plan participation are projected to be from $50,000 to $999,999.)
Mortality and Expense Risk Premium (if the total purchase payments during the first 1.05%
five years of plan participation are projected to be from $1,000,000 to $2,499,999.)
Mortality and Expense Risk Premium (if the total purchase payments during the first .95%
five years of plan participation are projected to be from $2,500,000 to $4,999,999.)
Mortality and Expense Risk Premium (if the total purchase payments during the first .80%
five years of plan participation are projected to equal or exceed $5,000,000.)
ADMINISTRATIVE EXPENSE CHARGE (see Note 3 below)
Administrative Expense Charge (if the total purchase payments during the first five .15%
years of plan participation are projected to be from $50,000 to $2,499,999.)
Administrative Expense Charge (if the total purchase payments during the first five .10%
years of plan participation are projected to be from $2,500,000 to $4,999,999.)
Administrative Expense Charge (if the total purchase payments during the first five .05%
years of plan participation are projected to equal or exceed $5,000,000.)
</TABLE>
COVA SERIES TRUST'S ANNUAL EXPENSES
(as a percentage of the first $500 million of the average daily net assets of
a Portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other Expenses
(after expense
reimbursement for
Management certain Portfolios Total Portfolio
Fees (see Note 5 below) Annual Expenses
----------- ------------------- ----------------
Money Market# .00% .11% .11%
Stock Index .50% .11% .61%
High Yield .75% .11% .86%
Quality Income .50% .10% .60%
Growth and Income .60% .09% .69%
<FN>
# Cova Investment Advisory Corporation ("Adviser"), the investment adviser for
Cova Series Trust, currently waives its fees for the Money Market Portfolio.
Although not obligated to, the Adviser expects to continue to waive its fees
for the Money Market Portfolio. In the future, the Adviser may charge its fees
on a partial or complete basis. Absent the management fee waiver, the total
management fee on an annual basis for the Money Market Portfolio is .50%. The
examples shown below for the Money Market Portfolio are calculated based upon
a waiver of the management fee.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST'S ANNUAL EXPENSES(1)
(as a percentage of the average daily net assets of a Portfolio)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investment
Management and Other Total Annual
Portfolio Administration Fees Expenses Expenses
- ---------------------- --------------------- --------- -------------
Liquid Asset(2) 0.30% 0.71% 1.01%
Limited Maturity Bond 0.65% 0.10% 0.75%
Growth 0.84% 0.10% 0.94%
Balanced 0.85% 0.19% 1.04%
</TABLE>
(1) Neuberger & Berman Advisers Management Trust ("Trust") is divided
into seven portfolios ("Portfolios"), four of which are available through the
Variable Account. Each Portfolio invests all of its net investable assets in a
corresponding series ("Series") of Advisers Managers Trust. Expenses in the
table reflect expenses of the Portfolios and include each Portfolio's pro rata
portion of the operating expenses of each Portfolio's corresponding Series.
The Portfolios pay Neuberger & Berman Management Inc., the Trust's investment
manager and Administrator ("N&B Management"), an administration fee based on
the Portfolios' net asset value. Each Portfolio's corresponding Series pays
N&B Management a management fee based on the Series' average daily net assets.
Accordingly, this table combines management fees at the Series level and
administration fees at the Portfolio level in a unified fee rate. See
"Expenses" in the Trust's Prospectus.
(2) N&B Management has undertaken to reimburse the Liquid Asset Portfolio
for certain operating expenses, including the compensation of N&B Management
and excluding certain other expenses that exceed 1% of the Portfolio's average
daily net asset value. Absent such reimbursement, the "Total Annual Expenses"
for the year ended December 31, 1995 would have been 1.36% for the Liquid
Asset Portfolio. N&B Management may cease to reimburse the Liquid Asset
Portfolio for its operating expenses upon 60 days written notice.
EXAMPLES (see Note 3 below)
An Owner would pay the following expenses on a $1,000 investment, assuming a
5% annual return on assets:
a) upon surrender at the end of each time period;
b) if the Contract is not surrendered or is annuitized.
<TABLE>
<CAPTION>
<S> <C> <C>
1 year 3 years
COVA SERIES TRUST MONEY MARKET PORTFOLIO
(if the total purchase payments during the first a)66.36 95.62
five years of plan participation are b)16.36 50.62
projected to be from $50,000 to $999,999.)
(if the total purchase payments during the first a)64.00 88.45
five years of plan participation are b)14.00 43.45
projected to be from $1,000,000 to $2,499,999.)
(if the total purchase payments during the first a)62.32 83.30
five years of plan participation are b)12.32 38.30
projected to be from $2,500,000 to $4,999,999.)
(if the total purchase payments during the first a)60.12 76.55
five years of plan participation are b)10.12 31.55
projected to equal or exceed $5,000,000.)
COVA SERIES TRUST QUALITY INCOME PORTFOLIO
(if the total purchase payments during the first a)71.29 110.60
five years of plan participation are b)21.29 65.60
projected to be from $50,000 to $999,999.)
(if the total purchase payments during the first a)68.95 103.53
five years of plan participation are b)18.95 58.53
projected to be from $1,000,000 to $2,499,999.)
(if the total purchase payments during the first a)67.27 98.45
five years of plan participation are b)17.27 53.45
projected to be from $2,500,000 to $4,999,999.)
(if the total purchase payments during the first a)65.08 91.80
five years of plan participation are b)15.08 46.80
projected to equal or exceed $5,000,000.)
COVA SERIES TRUST STOCK INDEX PORTFOLIO
(if the total purchase payments during the first a)71.39 110.91
five years of plan participation are b)21.39 65.91
projected to be from $50,000 to $999,999.)
(if the total purchase payments during the first a)69.05 103.84
five years of plan participation are b)19.05 58.84
projected to be from $1,000,000 to $2,499,999.)
(if the total purchase payments during the first a)67.37 98.76
five years of plan participation are b)17.37 53.76
projected to be from $2,500,000 to $4,999,999.)
(if the total purchase payments during the first a)65.19 92.11
five years of plan participation are b)15.19 47.11
projected to equal or exceed $5,000,000.)
COVA SERIES TRUST HIGH YIELD PORTFOLIO
(if the total purchase payments during the first a)73.90 118.46
five years of plan participation are b)23.90 73.46
projected to be from $50,000 to $999,999.)
(if the total purchase payments during the first a)71.56 111.44
five years of plan participation are b)21.56 66.44
projected to be from $1,000,000 to $2,499,999.)
(if the total purchase payments during the first a)69.89 106.40
five years of plan participation are b)19.89 61.40
projected to be from $2,500,000 to $4,999,999.)
(if the total purchase payments during the first a)67.71 99.80
five years of plan participation are b)17.71 54.80
projected to equal or exceed $5,000,000.)
COVA SERIES TRUST GROWTH AND INCOME PORTFOLIO
(if the total purchase payments during the first a)72.19 113.33
five years of plan participation are b)22.19 68.33
projected to be from $50,000 to $999,999.)
(if the total purchase payments during the first a)69.85 106.28
five years of plan participation are b)19.85 61.28
projected to be from $1,000,000 to $2,499,999.)
(if the total purchase payments during the first a)68.18 101.21
five years of plan participation are b)18.18 56.21
projected to be from $2,500,000 to $4,999,999.)
(if the total purchase payments during the first a)65.99 94.58
five years of plan participation are b)15.99 49.58
projected to equal or exceed $5,000,000.)
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST GROWTH PORTFOLIO
(if the total purchase payments during the first a)74.70 120.87
five years of plan participation are b)24.70 75.87
projected to be from $50,000 to $999,999.)
(if the total purchase payments during the first a)72.36 113.87
five years of plan participation are b)22.36 68.87
projected to be from $1,000,000 to $2,499,999.)
(if the total purchase payments during the first a)70.69 108.83
five years of plan participation are b)20.69 63.83
projected to be from $2,500,000 to $4,999,999.)
(if the total purchase payments during the first a)68.51 102.25
five years of plan participation are b)18.51 57.25
projected to equal or exceed $5,000,000.)
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST LIQUID
ASSET PORTFOLIO
(if the total purchase payments during the first a)75.40 122.97
five years of plan participation are b)25.40 77.97
projected to be from $50,000 to $999,999.)
(if the total purchase payments during the first a)73.06 115.98
five years of plan participation are b)23.06 70.98
projected to be from $1,000,000 to $2,499,999.)
(if the total purchase payments during the first a)71.39 110.95
five years of plan participation are b)21.39 65.95
projected to be from $2,500,000 to $4,999,999.)
(if the total purchase payments during the first a)69.22 104.38
five years of plan participation are b)19.22 59.38
projected to equal or exceed $5,000,000.)
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
LIMITED MATURITY BOND PORTFOLIO
(if the total purchase payments during the first a)72.80 115.15
five years of plan participation are b)22.80 70.15
projected to be from $50,000 to $999,999.)
(if the total purchase payments during the first a)70.45 108.10
five years of plan participation are b)20.45 63.10
projected to be from $1,000,000 to $2,499,999.)
(if the total purchase payments during the first a)68.78 103.04
five years of plan participation are b)18.78 58.04
projected to be from $2,500,000 to $4,999,999.)
(if the total purchase payments during the first a)66.60 96.42
five years of plan participation are b)16.60 51.42
projected to equal or exceed $5,000,000.)
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST BALANCED PORTFOLIO
(if the total purchase payments during the first a)75.70 123.87
five years of plan participation are b)25.70 78.87
projected to be from $50,000 to $999,999.)
(if the total purchase payments during the first a)73.36 116.88
five years of plan participation are b)23.36 71.88
projected to be from $1,000,000 to $2,499,999.)
(if the total purchase payments during the first a)71.69 111.86
five years of plan participation are b)21.69 66.86
projected to be from $2,500,000 to $4,999,999.)
(if the total purchase payments during the first a)69.52 105.30
five years of plan participation are b)19.52 60.30
projected to equal or exceed $5,000,000.)
</TABLE>
EXPLANATION OF FEE TABLE AND EXAMPLES
1. The purpose of the above Table is to assist the Owner in
understanding the various costs and expenses that an Owner will incur,
directly or indirectly. The Table reflects expenses of the Variable Account as
well as of the Eligible Investments. For additional information, see "Charges
and Deductions" in this Prospectus and see the Prospectuses for Cova
Series Trust and Neuberger & Berman Advisers Management Trust.
2. The Withdrawal Charge is imposed on withdrawals of Contract Values
attributable to purchase payments within five (5) years after receipt and
is equal to 5% of the purchase payment withdrawn. After the five year
period, withdrawals attributable to such purchase payments are not
subject to the Withdrawal Charge.
After the first Contract Year, a withdrawal of up to ten percent (10%) of
aggregate purchase payments made within the five years preceding the request
for withdrawal may be made free from the Withdrawal Charge on a noncumulative
basis once each Contract Year if the Contract Value prior to the withdrawal
exceeds $5,000. The 10% free withdrawal has been factored into the Examples
above.
3. As indicated elsewhere herein, the Contracts described in this
Prospectus are for use by individuals in connection with fringe benefit plans.
The amounts of the Contract Maintenance Charge, Mortality and Expense Risk
Premium and Administrative Expense Charge vary depending upon the total
projected purchase payments anticipated during the first five years of plan
participation in the Contracts. Where the total purchase payments during the
first five years of plan participation are initially projected to be from
$50,000 to $999,999, the amounts of the Mortality and Expense Risk Premium and
Contract Maintenance Charge may be reduced where purchase payments
subsequently exceed, or are projected to exceed, these amounts. (See "Charges
and Deductions" on Page __.)
4. No Transfer Fee will be assessed for a transfer made in connection
with the Dollar Cost Averaging program providing for the automatic transfer of
funds from the Cova Series Trust Money Market Sub-Account or the
Neuberger & Berman Advisers Management Trust Liquid Asset Sub-Account to
any other Sub-Account(s). (See "Charges and Deductions - Deduction for
Transfer Fee" on Page __ and "Purchase Payments and Contract Value - Dollar
Cost Averaging" on Page __.)
5. Since August 20, 1990, the Company has been reimbursing Cova Series
Trust for all operating expenses (exclusive of the management fees) in excess
of approximately .10%. The actual expense percentages for all operating
expenses (exclusive of the management fees) for the Trust for the year ended
December 31, 1995 were: .25% for the Quality Income Portfolio, .34% for the
High Yield Portfolio, .14% for the Money Market Portfolio, .28% for the Stock
Index Portfolio and .59% for the Growth and Income Portfolio. Absent the
expense reimbursement and management fee waiver, the percentages shown for
total expenses for the Trust (on an annualized basis) for the year or period
ended December 31, 1995, would have been .75% for the Quality Income
Portfolio, 1.09% for the High Yield Portfolio, .64% for the Money Market
Portfolio, .78% for the Stock Index Portfolio and 1.19% for the Growth and
Income Portfolio.
6. The assumed average contract size is $30,000.
7. Premium taxes are not reflected. Premium taxes may apply. See
"Charges and Deductions - Deduction for Premium Taxes" on Page __.
8. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE COMPANY
Cova Financial Services Life Insurance Company (the "Company") was originally
incorporated on August 17, 1981 as Assurance Life Company, a Missouri
corporation and changed its name to Xerox Financial Services Life Insurance
Company in 1985. The Company presently is licensed to do business in the
District of Columbia and all states except California, Maine, New Hampshire,
New York and Vermont.
On June 1, 1995, a wholly-owned subsidiary of General American Life Insurance
Company ("General American") purchased the Company from Xerox Financial
Services, Inc. ("XFS"). The acquisition of the Company included related
Companies ("Acquisition").
On June 1, 1995, the Company changed its name to Cova Financial Services Life
Insurance Company.
General American is a St. Louis-based mutual company with more than $250
billion of life insurance inforce and approximately $15 billion in assets.
It provides life and health insurance, retirement plans, and related financial
services to indivuals and groups.
In conjunction with this Acquisition, the Company entered into a financing
reinsurance transaction that would cause OakRe Life Insurance Company
("OakRe"), a Missouri licensed insurer and a wholly-owned XFS
subsidiary, to assume the benefits and risks of existing single premium
deferred annuity deposits (SPDAs) which aggregated $3,059 million at December
31, 1994. In exchange, the Company transfered specifically identified assets
to OakRe which had a carrying value of $3,150.4 million at December 31, 1994.
Ownership of OakRe was retained by XFS subsequent to the Acquisition. The
receivable from OakRe to the Company that was created by this transaction
will be liquidated over the remaining crediting rate guaranty periods (which
will be substantially all expired in five years) by the transfer of cash in
the amount of the then current account value, less a recapture fee to OakRe
on policies retained beyond their 30-day no-fee surrender window by the
Company, upon the next crediting reset date of each annuity policy. The
Company may then retain and assume the benefits and risks of those deposits
thereafter.
All of the Company's deposit obligations are fully guaranteed by General
American and the receivable from OakRe equal to the SPDA obligations is
guaranteed by OakRe's parent, XFS. In the event that both OakRe and XFS
default on the receivable, the Company may draw funds from a standby bank
irrevocable letter of credit established by XFS in the amount of $500 million.
In substance, the structure of the Acquisition allowed the seller, XFS, to
retain substantially all of the existing financial benefits and risks of the
existing business, while General American obtained the corporate licenses,
marketing and administrative capabilities of the Company, and access to the
retention of the policyholder deposit base that persists beyond the next
crediting rate reset date.
THE VARIABLE ACCOUNT
Cova Variable Annuity Account Four (the "Variable Account") is a
segregated asset account established under Missouri law pursuant to a
resolution of the Board of Directors of the Company adopted on February 24,
1987. The Company has caused the Variable Account to be registered
with the Securities and Exchange Commission as a unit investment trust
pursuant to the provisions of the Investment Company Act of 1940.
The assets of the Variable Account are the property of the Company. However,
the assets of the Variable Account, equal to the reserves and other contract
liabilities with respect to the Variable Account, are not chargeable with
liabilities arising out of any other business the Company may conduct. Income,
gains and losses, whether or not realized, are, in accordance with the
Contracts, credited to or charged against the Variable Account without regard
to other income, gains or losses of the Company. The Company's obligations
arising under the Contracts are general obligations.
The Variable Account meets the definition of a "separate account" under the
federal securities laws.
The Variable Account is divided into Sub-Accounts, with the assets of each
Sub-Account invested in one Portfolio of Cova Series Trust or
Neuberger & Berman Advisers Management Trust.
There is no assurance that the investment objective of any of the Portfolios
will be met. Owners bear the complete investment risk for purchase payments
allocated to a Sub-Account. Contract Values will fluctuate in accordance with
the investment performance of the Sub-Account(s) to which purchase payments
are allocated, and in accordance with the imposition of the fees and charges
assessed under the Contracts.
COVA SERIES TRUST
Cova Series Trust ("Trust") has been established to act as one of the funding
vehicles for the Contracts offered. Prior to May 1, 1996, the Trust was known
as Van Kampen Merritt Series Trust. The Trust is managed by Cova Investment
Advisory Corporation (the "Adviser"). Prior to May 1, 1996, Van Kampen
American Capital Investment Advisory Corp. was the investment adviser of the
Trust. The Adviser is an Illinois corporation which was incorporated on August
31, 1993 under the name Oakbrook Investment Advisory Corporation and which is
registered with the Securities and Exchange Commission as an investment
adviser under the Investment Advisers Act of 1940. The Adviser is affiliated
with the Company. The Adviser has retained Van Kampen American Capital
Investment Advisory Corp. as Sub-Adviser to make investment decisions and
place orders for the Money Market, Quality Income, High Yield, Stock Index and
Growth and Income Portfolios. The Trust is an open-end management investment
company. While a brief summary of the investment objectives of the available
Portfolios is set forth below, more comprehensive information, including a
discussion of potential risks, is found in the current prospectus for the
Trust which is included with this Prospectus. A PROSPECTIVE INVESTOR SHOULD
READ THE PROSPECTUS FOR THE TRUST CAREFULLY BEFORE INVESTING. Additional
Prospectuses and the Statement of Additional Information can be obtained by
calling or writing the Company's Home Office.
The Trust is intended to meet differing investment objectives with its
currently available separate Portfolios: Money Market Portfolio, Quality
Income Portfolio, Stock Index Portfolio, High Yield Portfolio and Growth and
Income Portfolio. The investment objectives of the Portfolios are as follows:
MONEY MARKET PORTFOLIO. The investment objective of this Portfolio is to
provide high current income consistent with the preservation of capital and
liquidity through investment in a broad range of money market instruments that
will mature within 12 months of the date of purchase. An investment in the
Money Market Portfolio is neither insured nor guaranteed by the U.S.
government.
QUALITY INCOME PORTFOLIO. The investment objective of this Portfolio is to
seek a high level of current income, consistent with safety of principal, by
investing in obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities or in various investment grade debt obligations
including mortgage pass-through certificates and collateralized mortgage
obligations.
STOCK INDEX PORTFOLIO. The investment objective of this Portfolio is to
achieve investment results that approximate the aggregate price and yield
performance of the Standard & Poor's 500 Composite Stock Price Index by
investing in common stocks, stock index futures contracts and options on stock
indexes and stock index futures contracts, and certain short-term fixed income
securities such as cash reserves.
"Standard & Poor's", "S&P", "S&P 500", "Standard & Poor's 500" and "500" are
trademarks of McGraw-Hill Inc. and have been licensed for use by the Company.
The Stock Index Portfolio is not sponsored, endorsed, sold or promoted by
Standard & Poor's Corporation ("S&P") and S&P makes no representation
regarding the advisability of investing in the Stock Index Portfolio. (See the
Cova Series Trust Prospectus for more information concerning the Stock
Index Portfolio.)
HIGH YIELD PORTFOLIO. The investment objective of this Portfolio is the
maximization of total investment return through income and capital
appreciation. The Portfolio will pursue its investment objective by investing
in a portfolio substantially consisting of medium and lower grade domestic
corporate debt securities. The Portfolio may also invest up to 35% of its
assets in foreign government and foreign corporate debt securities of similar
quality. The Portfolio may also, from time to time, invest in cash or cash
equivalents due to market conditions or for other defensive purposes. Lower
grade corporate debt securities are commonly known as "junk bonds" and involve
a significant degree of risk. (See "Investment Objectives - High Yield
Portfolio" in the Trust Prospectus.) Prior to investing in this Portfolio,
purchasers are cautioned to read the section entitled "Special Risks of High
Yield Investing" in the Trust Prospectus. As disclosed in the Fee Table, the
management fee for the High Yield Portfolio is .75% of 1% of the average daily
net assets of the Portfolio. This fee is higher than fees paid by many other
investment companies with similar investment objectives. (See "Management of
the Trust - The Investment Adviser" in the Trust Prospectus.)
GROWTH AND INCOME PORTFOLIO. The investment objective of the Growth and Income
Portfolio is to seek long-term growth of both capital and income by investing
in a portfolio of common stocks which are considered by the Investment Advisor
to have potential for capital appreciation and dividend growth. The Portfolio
may also invest up to 35% of its assets in common stocks which are considered
by the Investment Adviser to have potential for capital appreciation but which
are issued by foreign corporations.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Each Portfolio of Neuberger & Berman Advisers Management Trust ("AMT")
invests all of its net investable assets in its corresponding series (each a
"Series") of Advisers Managers Trust ("Managers Trust"), an open-end
management investment company. All Series of Managers Trust are managed by
Neuberger & Berman Management Incorporated ("N&B Management"). Each Series
invests in securities in accordance with an investment objective, policies,
and limitations identical to those of its corresponding Portfolio. This
"master/feeder fund" structure is different from that of many other investment
companies which directly acquire and manage their own portfolios of
securities. For more information regarding this structure, see the prospectus
for AMT. There are seven Portfolios, four of which are available in connection
with the Contracts. In that the investment objective of each Portfolio matches
that of its corresponding Series, the following information is presented in
terms of the applicable Series of Managers Trust. The investment objectives of
each Series are as follows:
AMT LIQUID ASSET INVESTMENTS - The investment objective of AMT Liquid
Asset Investments is to provide the highest current income consistent with
safety and liquidity. The Series invests in high quality U.S.
dollar-denominated money market instruments of U.S. and foreign issuers,
including governments and their agencies and instrumentalities, banks and
other financial institutions, and corporations, and may invest in repurchase
agreements with respect to these instruments. An investment in the Liquid
Asset Portfolio is neither insured nor guaranteed by the U.S. Government.
AMT GROWTH INVESTMENTS - AMT Growth Investments seeks capital
appreciation without regard to income by investing in securities believed to
have the maximum potential for long-term capital appreciation. It does not
seek to invest in securities that pay dividends or interest, and any such
income is incidental. The Series expects to be almost fully invested in common
stocks, often of companies that may be temporarily out of favor in the market.
AMT LIMITED MATURITY BOND INVESTMENTS - The investment objective of AMT
Limited Maturity Bond Investments is to provide the highest current income
consistent with low risk to principal and liquidity; and secondarily, total
return. The Series invests in a diversified portfolio of fixed and variable
rate debt securities and seeks to increase income and preserve or enhance
total return by actively managing average portfolio maturity in light of
market conditions and trends. These are short-to-intermediate term debt
securities. The Series' dollar-weighted average portfolio maturity may range
up to five years.
AMT BALANCED INVESTMENTS - The investment objective of AMT Balanced
Investments is long-term capital growth and reasonable current income without
undue risk to principal. The investment adviser anticipates that the Series'
investments will normally be managed so that approximately 60% of the Series'
total assets will be invested in common stocks and the remaining assets will
be invested in debt securities. However, depending on the investment
adviser's view regarding current market trends, the common stock portion of
the Series' investments may be adjusted downward to as low as 50% or upward to
as high as 70%. At least 25% of the Series' assets will be invested in
fixed-income senior securities.
Additional Portfolios and/or Eligible Investments may be made available to
Owners at the request of the trustee(s) of a participating fringe benefit plan
or plans.
VOTING RIGHTS
In accordance with its view of present applicable law, the Company will vote
the shares of the Trust and AMT held in the Variable Account at special
meetings of the shareholders in accordance with instructions received from
persons having the voting interest in the Variable Account. The Company will
vote shares for which it has not received instructions, as well as shares
attributable to it, in the same proportion as it votes shares for which it has
received instructions. Neither the Trust nor AMT holds regular meetings of
shareholders.
The number of shares which a person has a right to vote will be determined as
of a date to be chosen by the Company not more than sixty (60) days prior to a
shareholder meeting of the Trust or AMT. Voting instructions will be solicited
by written communication at least ten (10) days prior to the meeting with
respect to the Trust and at least fourteen (14) days prior to the meeting with
respect to AMT.
Shares of AMT are issued and redeemed in connection with investment in and
payments under variable contracts issued through separate accounts of life
companies which may or may not be affiliated with AMT. Shares of the Balanced
Portfolio are also offered directly to qualified pension and retirement plans
("Qualified Plans"). Shares of AMT are purchased and redeemed at net asset
value. The Board of Trustees of AMT and Managers Trust have undertaken to
monitor AMT and Managers Trust, respectively, for the existence of any
material irreconcilable conflict between the interests of the variable
contract owners of the life companies and to determine what action, if any,
should be taken in the event of a conflict. The life companies and N&B
Management are responsible for reporting any potential or existing conflicts
to the Boards. Due to differences of tax treatment and other considerations,
the interests of various variable contract owners participating in AMT and
Managers Trust and the interests of Qualified Plans investing in AMT and
Managers Trust may conflict. If such a conflict were to occur, one or more
life company separate accounts or Qualified Plans might withdraw their
investment in the Trust. This might force Managers Trust to sell portfolios
securities at disadvantageous prices.
SUBSTITUTION OF SECURITIES
If the shares of the Trust or AMT (or any Portfolio within the Trust or AMT or
any other Eligible Investment), are no longer available for investment by the
Variable Account or, if in the judgment of the Company, further investment in
the shares should become inappropriate in view of the purpose of the
Contracts, the Company, with the approval of the trustee(s) of the
participating fringe benefit plan(s), may substitute shares of another
Eligible Investment (or Portfolio) for shares already purchased or to be
purchased in the future by purchase payments under the Contracts. No
substitution of securities may take place without prior approval of the
Securities and Exchange Commission and under the requirements it may impose.
CHARGES AND DEDUCTIONS
Various charges and deductions are made from Contract Values and the Variable
Account. These charges and deductions are:
DEDUCTION FOR WITHDRAWAL CHARGE (SALES LOAD)
If all or a portion of the Contract Value (see "Withdrawals" on Page __)
is withdrawn, a Withdrawal Charge (sales load) will be calculated at the time
of each withdrawal and will be deducted from the Contract Value. This
Charge reimburses the Company for expenses incurred in connection with the
promotion, sale and distribution of the Contracts. The Withdrawal Charge
is imposed on withdrawals of Contract Values attributable to purchase
payments within five (5) years after receipt and is equal to 5% of the
purchase payment withdrawn. The Withdrawal Charge does not apply to
a withdrawal equal to: (a) purchase payments held for at least five (5)
years not previously withdrawn; (b) gain; and (c) amounts for which
the waiver of Withdrawal Charge applies. (See "Withdrawals" on Page
__.) After the five year period, withdrawals attributable to such
purchase payments are not subject to the Withdrawal Charge.
In the event of the death of the Owner, the Company will waive the Withdrawal
Charge with respect to any death benefits paid.
For a partial withdrawal, the Withdrawal Charge will be deducted from the
remaining Withdrawal Value, if sufficient; otherwise it will be deducted from
the amount withdrawn. For example, based on the 5% Withdrawal Charge, if the
Owner requests $100 and the Withdrawal Charge is $5, the total withdrawal is
in the amount of $105 (i.e., the Withdrawal Charge is 5% of the amount
requested and is deducted from the Withdrawal Value remaining after the Owner
is paid the amount requested). The amount deducted from the Contract Value
will be determined by canceling Accumulation Units from each applicable
Sub-Account in the ratio that the value of each Sub-Account bears to the total
Contract Value. The Owner must specify in writing in advance which Units are
to be canceled from each Sub-Account if other than the above method of
cancellation is desired.
Commissions will be paid out of the Company's general investment account to
broker-dealers who sell the Contracts. Broker-dealers will be paid commissions
and other compensation up to an amount equal to 5.75% of purchase payments. In
addition, under certain circumstances, the Company may pay certain
broker-dealers a persistency bonus which will take into account, among other
factors, the length of time purchase payments have been held under the
Contract and Contract Values. To the extent that the Withdrawal Charge is
insufficient to cover the actual cost of distribution, the Company may use any
of its corporate assets, including potential profit which may arise from the
Mortality and Expense Risk Premium (see below), to provide for any difference.
WAIVER OF WITHDRAWAL CHARGE
After the first Contract Year, a withdrawal of up to ten percent (10%) of
aggregate purchase payments made within the five years preceding the
request for withdrawal may be made free from the Withdrawal Charge on a
noncumulative basis once each Contract Year if the Contract Value prior to
the withdrawal exceeds $5,000.
DEDUCTION FOR MORTALITY AND EXPENSE RISK PREMIUM
The Company deducts on each Valuation Date, both prior to the Annuity Date and
during the Annuity Period, a Mortality and Expense Risk Premium, the amount of
which will vary depending upon the total projected purchase payments to be
made over the first five years of plan participation in the Contracts as shown
in the schedule below. The Mortality and Expense Risk Premium is equal, on an
annual basis, to the following percentages of the daily net asset value of the
Variable Account:
Mortality and Expense Risk Premium Breakpoints:
<TABLE>
<CAPTION>
<S> <C>
Purchase Payment Charge
- --------------------------------- -------
$50,000 - $999,999 1.25%
$1,000,000 - $2,499,999 1.05%
$2,500,000 - $4,999,999 .95%
$5,000,000 - and over .80%
</TABLE>
The amount of the Mortality and Expense Risk Premium to be assessed by the
Company may be established at a rate below .80% in certain circumstances where
total purchase payments above $5,000,000 are projected.
The amount of the Mortality and Expense Risk Premium that is attributable to
each type of risk is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Total Mortality Expense
Charge Component Component
- ----------------- --------- ----------
1.25% 0.80% 0.45%
1.05% 0.75% 0.30%
0.95% 0.70% 0.25%
0.80% 0.65% 0.15%
</TABLE>
The amount of the Mortality and Expense Risk Premium is based on projected
purchase payments over the first five years of plan participation in the
Contracts and is determined at the time the employer establishes the program
making the Contracts available to its employees in connection with the fringe
benefit plan(s). In the event that actual purchase payments do not meet the
projected amount over the first five years of plan participation in the
Contracts, the amount of the Mortality and Expense Risk Premium will not be
increased. It will remain at the same level at which it was initially
established. Where projected purchase payments are from $50,000 - $999,999,
the amount of the Mortality and Expense Risk Premium may be subsequently
reduced under certain circumstances. (See "Reduction of Charges" on Page __.)
The mortality risks assumed by the Company arise from its contractual
obligation to make annuity payments after the Annuity Date for the life of the
Annuitant and to waive the Withdrawal Charge in the event of the death of the
Owner. The expense risk assumed by the Company is that all actual expenses
involved in administering the Contracts, including Contract maintenance costs,
administrative costs, mailing costs, data processing costs, legal fees,
accounting fees, filing fees and the costs of other services may exceed the
amount recovered from the Contract Maintenance Charge and the Administrative
Expense Charge.
If the Mortality and Expense Risk Premium is insufficient to cover the actual
costs, the loss will be borne by the Company. Conversely, if the amount
deducted proves more than sufficient, the excess will be a profit to the
Company. The Company expects a profit from this charge.
The Mortality and Expense Risk Premium is guaranteed by the Company and cannot
be increased.
DEDUCTION FOR ADMINISTRATIVE EXPENSE CHARGE
The Company deducts on each Valuation Date, both prior to the Annuity Date and
during the Annuity Period, an Administrative Expense Charge, the amount of
which will vary depending upon the total projected purchase payments to be
made over the first five years of plan participation in the Contracts as shown
in the schedule below. The Administrative Expense Charge is equal, on an
annual basis, to the following percentages of the daily net asset value of the
Variable Account:
Administrative Expense Charge Breakpoints:
<TABLE>
<CAPTION>
<S> <C>
Purchase Payment Charge
- -------------------------------------- -------
$50,000 - $2,499,999 .15%
$2,500,000 - $4,999,999 .10%
$5,000,000 - and over .05%
</TABLE>
The amount of the Administrative Expense Charge to be assessed by the Company
may be established at a rate below .05% in certain circumstances where total
purchase payments above $5,000,000 are projected.
The amount of the Administrative Expense Charge is based on projected purchase
payments over the first five years of plan participation in the Contracts and
is determined at the time the employer establishes the program making the
Contracts available to its employees in connection with the fringe benefit
plan(s).
This charge, together with the Contract Maintenance Charge (see below), is to
reimburse the Company for the expenses it incurs in the establishment and
maintenance of the Contracts and the Variable Account. These expenses include
but are not limited to: preparation of the Contracts, confirmations, annual
reports and statements, maintenance of Owner records, maintenance of Variable
Account records, administrative personnel costs, mailing costs, data
processing costs, legal fees, accounting fees, filing fees, the costs of other
services necessary for Owner servicing and all accounting, valuation,
regulatory and reporting requirements. Since this charge is an asset-based
charge, the amount of the charge attributable to a particular Contract may
have no relationship to the administrative costs actually incurred by that
Contract. The Company does not intend to profit from this charge. This charge
will be reduced to the extent that the amount of this charge is in excess of
that necessary to reimburse the Company for its administrative expenses.
Should this charge prove to be insufficient, the Company will not increase
this charge and will incur the loss.
DEDUCTION FOR CONTRACT MAINTENANCE CHARGE
The Company deducts an annual Contract Maintenance Charge from the Contract
Value on each Contract Anniversary. The amount of this charge will vary
depending upon the total projected purchase payments to be made over the first
five years of plan participation in the Contracts as shown in the schedule
below. (In South Carolina, the Contract Maintenance Charge is the lesser of
the applicable charge each year as set forth below or 2% of the Contract Value
on the Contract Anniversary.)
Contract Maintenance Charge Breakpoints:
<TABLE>
<CAPTION>
<S> <C>
Purchase Payment Charge
- -------------------------------------- -------
$50,000 - $999,999 $ 30
$1,000,000 - $2,499,999 $ 20
$2,500,000 - $4,999,999 $ 15
$5,000,000 - and over $ 10
</TABLE>
The amount of the Contract Maintenance Charge is based on projected purchase
payments over the first five years of plan participation in the Contracts and
is determined at the time the employer establishes the program making the
Contracts available to its employees in connection with the fringe benefit
plan(s). Where projected purchase payments are from $50,000 - $999,999, the
amount of the Contract Maintenance Charge may be subsequently reduced under
certain circumstances. (See "Reduction of Charges" on Page __.)
This charge is to reimburse the Company for its administrative expenses (see
above). This charge is deducted by canceling Accumulation Units from each
applicable Sub-Account in the ratio that the value of each Sub-Account bears
to the total Contract Value. When the Contract is withdrawn for its full
Withdrawal Value, on other than the Contract Anniversary, the Contract
Maintenance Charge will be deducted at the time of withdrawal. If the Annuity
Date is not a Contract Anniversary, a pro rata portion of the annual Contract
Maintenance Charge will be deducted. After the Annuity Date, the Contract
Maintenance Charge will be collected on a monthly basis and will result in a
reduction of each Annuity Payment. The Company has set this charge at a level
so that, when considered in conjunction with the Administrative Expense Charge
(see above), it will not make a profit from the charges assessed for
administration.
REDUCTION OF CHARGES
Where purchase payments during the first five years of plan participation in
the Contracts are initially projected to be less than $1,000,000, the Company
will reduce the amount of the Mortality and Expense Risk Premium and Contract
Maintenance Charge where purchase payments subsequently exceed or are
projected to exceed $1,000,000 as described below. The Mortality and Expense
Risk Premium will be reduced from 1.25% to 1.05% and the Contract Maintenance
Charge will be reduced from $30 to $20 if, within two years from the date
purchase payments are initially received in connection with the fringe benefit
plan, the purchase payments received or the combination of purchase payments
received and purchase payments projected for the balance of the original five
year period equal or exceed $1,000,000. The reductions in charges will take
effect on the earlier of the following dates (a) within seven days following
the date on which purchase payments are received such as to cause the
aggregate purchase payments received in connection with the fringe benefit
plan to equal or exceed $1,000,000 or (b) within seven days following the date
on which the Company receives a request from the employer to review projected
purchase payments based on additional projected employees and/or purchase
payments being added which will cause the aggregate purchase payments made in
connection with the fringe benefit plan to become equal to or exceed
$1,000,000 during the first five years of plan participation in the Contracts.
DEDUCTION FOR PREMIUM TAXES
Premium taxes or other taxes payable to a state or other governmental entity
will be charged against the Contract Values. Some states assess premium taxes
at the time purchase payments are made; others assess premium taxes at the
time annuity payments begin. The Company currently intends to advance any
premium taxes due at the time purchase payments are made and then deduct
premium taxes from an Owner's Contract Value at the time annuity payments
begin or upon withdrawal if the Company is unable to obtain a refund. The
Company, however, reserves the right to deduct premium taxes when incurred.
Premium taxes generally range from 0% to 4%.
DEDUCTION FOR INCOME TAXES
While the Company is not currently maintaining a provision for federal income
taxes with respect to the Variable Account, the Company has reserved the right
to establish a provision for income taxes if it determines, in its sole
discretion, that it will incur a tax as a result of the operation of the
Variable Account. The Company will deduct for any income taxes incurred by it
as a result of the operation of the Variable Account whether or not there was
a provision for taxes and whether or not it was sufficient. The Company will
deduct any withholding taxes required by applicable law.
DEDUCTION FOR TRUST AND AMT EXPENSES
There are other deductions from and expenses paid out of the assets of the
Trust and AMT which are described in the accompanying Trust and AMT
Prospectuses.
DEDUCTION FOR TRANSFER FEE
Prior to the Annuity Date, an Owner may transfer all or part of a Sub-Account
without the imposition of any fee or charge if there have been no more than 12
transfers made in the Contract Year. If more than 12 transfers have been made
in the Contract Year, the Company will deduct a transfer fee which will be
equal to $25 per transfer or, if less, 2% of the amount transferred. If the
Owner is participating in the Dollar Cost Averaging program providing for the
automatic transfer of funds from the Van Kampen Merritt Series Trust Money
Market Sub-Account or the Neuberger & Berman Advisers Management Trust Liquid
Asset Sub-Account to any other Sub-Account(s), such transfers are not
currently taken into account in determining any transfer fee. (See "Purchase
Payments and Contract Value - Dollar Cost Averaging" on Page __.)
THE CONTRACTS
OWNERSHIP
The Owner has all rights and may receive all benefits under the Contract.
Prior to the Annuity Date, the Owner is the person designated in the
Application, unless changed. On and after the Annuity Date, the Annuitant is
the Owner. Upon the death of the Annuitant, the Beneficiary is the Owner.
The Owner may change the Owner at any time. A change of Owner will
automatically revoke any prior designation of Owner. A request for change must
be: (1) made in writing; and (2) received at the Company. The change will
become effective as of the date the written request is signed. A new
designation of Owner will not apply to any payment made or action taken by the
Company prior to the time it was received.
ANNUITANT
The Annuitant is the person on whose life Annuity Payments are based. The
Annuitant is the person designated in the Application, unless changed.
ASSIGNMENT
The Owner may, at any time during his or her lifetime, assign his or her
rights under the Contract. The Company will not be bound by any assignment
until written notice is received by the Company. The Company is not
responsible for the validity of any assignment. The Company will not be liable
as to any payment or other settlement made by the Company before receipt of
the assignment.
If the Contract is issued pursuant to a Qualified Plan, it may not be
assigned, pledged or otherwise transferred except as may be allowed under
applicable law.
BENEFICIARY
The Beneficiary is named in the Application, unless changed, and is entitled
to receive the benefits to be paid at the death of the Owner.
Unless the Owner provides otherwise, the Death Benefit will be paid in equal
shares or all to the survivor as follows:
(1) to the primary Beneficiaries who survive the Owner's death; or if
there are none,
(2) to the contingent Beneficiaries who survive the Owner's death; or
if there are none,
(3) to the estate of the Owner.
CHANGE OF BENEFICIARY
Subject to the rights of any irrevocable Beneficiary, the Owner may change the
primary Beneficiary or contingent Beneficiary. A change may be made by filing
a written request with the Company. The change will take effect as of the date
the notice is signed. The Company will not be liable for any payment made or
action taken before it records the change.
TRANSFERS OF CONTRACT VALUES DURING THE ACCUMULATION PERIOD
Prior to the Annuity Date, an Owner may transfer all or part of a Sub-Account
without the imposition of any fee or charge if there have been no more than 12
transfers made in the Contract Year. If more than 12 transfers have been made
in the Contract Year, the Company will deduct a transfer fee. If the Owner is
participating in the Dollar Cost Averaging program providing for the automatic
transfer of funds from the Van Kampen Merritt Series Trust Money Market
Sub-Account or the Neuberger & Berman Advisers Management Trust Liquid Asset
Sub-Account to any other Sub-Account(s), such transfers are not taken into
account in determining any transfer fee. (See "Charges and Deductions -
Deduction for Transfer Fee" on Page __ and "Purchase Payments and Contract
Value - Dollar Cost Averaging" on Page __.) After the Annuity Date, the Owner
may make a transfer once in each Contract Year. (See "Transfers During the
Annuity Period" on Page __.) All transfers are subject to the following:
(1) the deduction of any transfer fee that may be imposed ($25 per
transfer or, if less, 2% of the amount transferred, for transfers if there
have been more than 12 transfers in the Contract Year). The transfer fee will
be deducted from the Sub-Account from which the transfer is made. However, if
the entire interest in the Sub-Account is being transferred, the transfer fee
will be deducted from the amount which is transferred.
(2) The minimum amount which may be transferred is the lesser of (i)
$1000; or (ii) the Owner's entire interest in the Sub-Account.
(3) Transfers will be effected during the Valuation Period next
following receipt by the Company of a written transfer request (or by
telephone, if authorized) containing all required information. However, no
transfer may be made effective within seven (7) calendar days of the Annuity
Date.
(4) Any transfer direction must clearly specify the amount which is to
be transferred and the Sub-Accounts which are to be affected.
(5) The Company reserves the right at any time and without prior notice
to any party including, but not limited to, the circumstances described in the
"Suspension of Payments or Transfers" provision below, to terminate, suspend
or modify the transfer privileges described above.
An Owner may elect to make transfers by telephone. If there are joint owners,
unless the Company is informed to the contrary, instructions will be accepted
from either one of the joint owners. The Company will use reasonable
procedures to confirm that instructions communicated by telephone are genuine.
If it does not, the Company may be liable for any losses due to unauthorized
or fraudulent instructions. The Company tape records all telephone
instructions.
DEATH OF THE ANNUITANT
Upon death of the Annuitant prior to the Annuity Date, the Owner must
designate a new Annuitant. If no designation is made within 30 days of the
death of the Annuitant, the Owner will become the Annuitant. An Owner which is
a non-natural person may not change the Annuitant. If the Owner is a
non-natural person, then the death of the Annuitant will be treated as the
death of the Owner. (See "Death of the Owner" below.) Upon death of the
Annuitant after the Annuity Date, the Death Benefit, if any, will be as
specified in the Annuity Option elected.
DEATH OF THE OWNER
Upon death of the Owner prior to the Annuity Date, the Death Benefit will be
paid to the Beneficiary designated by the Owner. The Death Benefit will be the
greater of:
1. the purchase payments, less any withdrawals and any applicable
Withdrawal Charge; or
2. the Contract Value.
The Death Benefit will be determined and paid as of the Valuation Period next
following the date of receipt by the Company of both due proof of death and an
election for a single sum payment or election under an Annuity Option as of
the date of death.
If a single sum payment is requested, the proceeds will be paid within seven
(7) days of receipt of proof of death and the election. Payment under an
Annuity Option may only be elected during the sixty-day period beginning with
the date of receipt of proof of death or a single sum payment will be made to
the Beneficiary at the end of the sixty-day period.
The entire Death Benefit must be paid within five (5) years of the date of
death unless:
(i) the Beneficiary is the spouse of the Owner, in which event the
Beneficiary will become the Owner and may elect that the Contract remain in
effect; or
(ii) the Beneficiary is not the spouse of the Owner, in which event the
Beneficiary may elect to have the Death Benefit payable under an Annuity
Option over the lifetime of the Beneficiary beginning within one year of the
date of death.
The Contract can be held by joint owners. Any joint owner must be the spouse
of the other owner. Upon the death of either joint owner, the surviving spouse
will be the designated Beneficiary. Any other Beneficiary designated in the
Application or as subsequently changed will be treated as a contingent
Beneficiary unless otherwise indicated.
ANNUITY PROVISIONS
ANNUITY DATE AND ANNUITY OPTION
The Owner selects an Annuity Date and Annuity Option at the time of
application. The Annuity Date must always be the first day of a calendar month
and must be at least one month after the Issue Date. The Annuity Date may not
be later than the first day of the first calendar month following the
Annuitant's 85th birthday. If no Annuity Option is elected, Option 2 with 10
years guaranteed payments will automatically be applied.
CHANGE IN ANNUITY DATE AND ANNUITY OPTION
Prior to the Annuity Date, the Owner may, upon at least thirty (30) days prior
written notice to the Company, change the Annuity Date. The Annuity Date must
always be the first day of a calendar month and must be at least one month
after the Issue Date. The Annuity Date may not be later than the first day of
the calendar month following the Annuitant's 85th birthday.
The Owner may, upon at least thirty (30) days prior written notice to the
Company, at any time prior to the Annuity Date, change the Annuity Option.
ALLOCATION OF ANNUITY PAYMENTS
At least seven (7) days, but not more than thirty (30) days, prior to the
Annuity Date the Owner may elect that:
(1) all of the Contract Value be used so that the Annuity will be paid
as a Fixed Annuity; or
(2) that a portion of the Contract Value be used to pay the Annuity as a
Fixed Annuity and a portion of the Contract Value be used to pay the Annuity
as a Variable Annuity.
However, if an election has not been made at least seven (7) days prior to the
Annuity Date, the Annuity will be paid as a Variable Annuity in accordance
with the allocation of the Contract Value on the Annuity Date.
TRANSFERS DURING THE ANNUITY PERIOD
During the Annuity Period, the Owner may transfer, by written request,
Contract Values among the Sub-Accounts subject to the following:
1. the Owner may make a transfer once each Contract Year between
Sub-Accounts of the Variable Account.
2. the Owner may, at any time, make a transfer from one or more
Sub-Accounts so that all or a portion of the Annuity Payments are paid as a
Fixed Annuity. The Owner may not make a transfer of amounts to be paid as
Fixed Annuity Payments to the Variable Account.
ANNUITY OPTIONS
The actual dollar amount of Variable Annuity Payments is dependent upon (i)
the Contract Value on the Annuity Date, (ii) the annuity table specified in
the Contract, (iii) the Annuity Option selected, and (iv) the investment
performance of the Sub-Account selected. The annuity tables contained in the
Contract are based on a three percent (3%) assumed investment rate. If the
actual net investment rate exceeds three percent (3%), payments will increase.
Conversely, if the actual rate is less than three percent (3%), Annuity
Payments will decrease. If a higher assumed investment rate was used, the
initial payment would be higher, but the actual net investment rate would have
to be higher in order for Annuity Payments to increase.
Variable Annuity Payments will reflect the investment performance of the
Variable Account in accordance with the allocation of the Contract Value to
the Sub-Account on the Annuity Date. Thereafter, allocations may not be
changed except as provided in "Transfers During the Annuity Period", above.
The total dollar amount of each Annuity Payment is the sum of the Variable
Annuity Payment and the Fixed Annuity Payment reduced by the Contract
Maintenance Charge (except in Oregon where the Fixed Annuity Payment is not
reduced by the Contract Maintenance Charge).
The amount payable under the Contract may be made under one of the following
options or any other option acceptable to the Company (except that if the
Contract is purchased pursuant to a pension plan, Option 3 must be selected):
OPTION 1. LIFE ANNUITY.
An annuity payable monthly during the lifetime of the Annuitant. Payments
cease at the death of the Annuitant.
OPTION 2. LIFE ANNUITY WITH 5, 10 OR 20 YEARS GUARANTEED.
An annuity payable monthly during the lifetime of the Annuitant with the
guarantee that, if at the death of the Annuitant, payments have been made for
less than the selected guaranteed period, payments will be continued to the
Beneficiary for the remainder of the guaranteed period. If the Beneficiary
does not desire payments to continue for the remainder of the guaranteed
period, he or she may elect to have the present value of the guaranteed
Annuity Payments remaining, as of the date notice of death is received by the
Company, commuted at the assumed investment rate.
OPTION 3. JOINT AND LAST SURVIVOR ANNUITY.
An annuity payable monthly during the joint lifetime of the Annuitant and
another person. At the death of either Payee, Annuity Payments will continue
to be made to the survivor Payee. The survivor's Annuity Payments will be
equal to 100%, 66 2/3% or 50% of the amount payable during the joint lifetime,
as chosen.
If no Annuity Option is elected, Option 2 with a 10 year guaranteed period
will automatically be applied (except that with respect to Contracts purchased
pursuant to pension plans, Option 3 is the only available option).
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
Annuity Payments will be paid as monthly installments. However, if the net
amount available to apply under any Annuity Option is less than $5,000
($2,000, if the Contract is issued in Massachusetts or Texas), the Company has
the right to pay the amount in one single lump sum. In addition, if the
payments provided for would be or become less than $100 ($20, if the Contract
is issued in Texas), the Company has the right to change the frequency of
payments to provide payments of at least $100 ($20, if the Contract is issued
in Texas).
PURCHASE PAYMENTS AND CONTRACT VALUE
PURCHASE PAYMENTS
The Contracts are purchased under a flexible purchase payment plan. The
initial purchase payment is due on the Issue Date. Prior Company approval must
be obtained for purchase payment(s) in excess of $1,000,000. The Company
reserves the right to decline any Application or purchase payment. As
indicated elsewhere, the Contracts described herein will be sold to fringe
benefit plans. The minimum size for a plan is $50,000 of aggregate purchase
payments anticipated over the first five Contract Years (including any
rollovers). In the event that a plan participant chooses to make purchase
payments through payroll deduction, such participant must make payments of at
least $1,200 per year. Additional purchase payments by participants (other
than participants utilizing payroll deduction) must be at least $2,000.
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments are allocated to the appropriate Sub-Account(s) within the
Variable Account as elected by the Owner. Unless elected otherwise by the
Owner, subsequent purchase payments are allocated in the same manner as the
initial purchase payment. Under certain circumstances, however, purchase
payments which have been designated by prospective purchasers to be allocated
to Sub-Accounts other than the Van Kampen Merritt Series Trust Money Market
Sub-Account or the Neuberger & Berman Advisers Management Trust Liquid Asset
Sub-Account, may initially be allocated to the Van Kampen Merritt Series Trust
Money Market Sub-Account or the Neuberger & Berman Advisers Management Trust
Liquid Asset Sub-Account, as elected by the Owner. (See "Highlights" on Page
4.) For each Sub-Account, purchase payments are converted into Accumulation
Units. The number of Accumulation Units credited to the Contract is determined
by dividing the purchase payment allocated to the Sub-Account by the value of
the Accumulation Unit for the Sub-Account.
If the Application for a Contract is in good order, the Company will apply the
purchase payment to the Variable Account and credit the Contract with
Accumulation Units within two business days of receipt. If the Application for
a Contract is not in good order, the Company will attempt to get it in good
order or the Company will return the Application and the purchase payment
within five (5) business days. The Company will not retain a purchase payment
for more than five (5) business days while processing an incomplete
Application unless it has been so authorized by the purchaser.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected, permits an Owner to
systematically transfer each month amounts from the Van Kampen Merritt Series
Trust Money Market Sub-Account or the Neuberger & Berman Advisers Management
Trust Liquid Asset Sub-Account to any other Sub-Account(s). By allocating
amounts on a regularly scheduled basis as opposed to allocating the total
amount at one particular time, an Owner may be less susceptible to the impact
of market fluctuations. The minimum amount which may be transferred is $500.
An Owner must have a minimum of $6,000 of Contract Value in the Van Kampen
Merritt Series Trust Money Market Sub-Account or the Neuberger & Berman
Advisers Management Trust Liquid Asset Sub-Account, or the amount required to
complete the Owner's designated program, in order to participate in the Dollar
Cost Averaging program.
All Dollar Cost Averaging transfers will be made on the 15th of each month (or
the next Valuation Date if the 15th of the month is not a Valuation Date). If
the Owner is participating in the Dollar Cost Averaging program, such
transfers are not taken into account in determining any transfer fee. Under
certain circumstances, there may be restrictions with respect to an Owner's
ability to participate in the Dollar Cost Averaging program.
DISTRIBUTOR
Cova Life Sales Company ("Life Sales"), One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644, acts as the distributor of the Contracts. Life
Sales is an affiliate of the Company. The Contracts are offered on a
continuous basis.
CONTRACT VALUE
The value of the Contract is the sum of the Owner's interest in the
Sub-Accounts of the Variable Account. The value of each Sub-Account is
determined by multiplying the number of Accumulation Units attributable to the
Sub-Account by the value of an Accumulation Unit for the Sub-Account.
ACCUMULATION UNIT
Purchase payments allocated to the Variable Account and amounts transferred to
or within the Variable Account are converted into Accumulation Units. This is
done by dividing each purchase payment by the value of an Accumulation Unit
for the Valuation Period during which the purchase payment is allocated to the
Variable Account or the transfer is made. The Accumulation Unit value for each
Sub-Account was arbitrarily set initially at $10. The Accumulation Unit value
for any later Valuation Period is determined by subtracting (b) from (a) and
dividing the result by (c) where:
(a) is the net result of
(1) the assets of the Sub-Account; i.e., the aggregate value of the
underlying Eligible Investment shares held at the end of such
Valuation Period, plus or minus
(2) the cumulative charge or credit for taxes reserved which is
determined by the Company to have resulted from the operation
of the Sub-Account;
(b) is the cumulative unpaid charge for the Mortality and Expense Risk
Premium and for the Administrative Expense Charge (see "Charges and
Deductions" above); and
(c) is the number of Accumulation Units outstanding at the end of such
Valuation Period.
The Accumulation Unit value may increase or decrease from Valuation Period to
Valuation Period. In that the Mortality and Expense Risk Premium and the
Administrative Expense Charge vary in amount depending on the size of the
projected purchase payments, Sub-Accounts may have more than one Accumulation
Unit Value at any one time.
WITHDRAWALS
While the Contract is in force and before the Annuity Date, the Company will,
upon written request to the Company by the Owner, allow the withdrawal of all
or a portion of the Contract for its Withdrawal Value. Withdrawals will result
in the cancellation of Accumulation Units from each applicable Sub-Account of
the Variable Account in the ratio that the Sub-Account Value bears to the
total Contract Value. The Owner must specify in writing in advance which units
are to be canceled if other than the above-mentioned method of cancellation is
desired. The Company will pay the amount of any withdrawal within seven (7)
days of receipt of a request, unless the "Suspension of Payments or Transfers"
provision is in effect (see "Suspension of Payments or Transfers" below).
The Withdrawal Value is the Contract Value for the Valuation Period next
following the Valuation Period during which a written request for withdrawal
is received at the Company reduced by the sum of:
(a) any applicable taxes not previously deducted;
(b) any applicable Contract Maintenance Charge; and
(c) any applicable Withdrawal Charge.
Each partial withdrawal must be for an amount which is not less than $1,000
or, if smaller, the remaining value in the Sub-Account. The remaining value in
each Sub-Account from which a partial withdrawal is requested must be at least
$1,000 after the partial withdrawal is completed.
A partial withdrawal will be made as follows:
(1) from the portion of the Contract Value equal to the amount of
purchase payments held under the Contract for at least 5 years less prior
withdrawals of these purchase payments; then
(2) from the Contract Value attributable to an amount, if any, in excess
of purchase payments made less prior withdrawals of purchase payments; then
(3) from the Contract Value for which the Waiver of Withdrawal Charge,
if any, applies (see "Waiver of Withdrawal Charge" on Page 13); then
(4) from the portion of the Contract Value equal to the amount of
purchase payments held under the Contract for less than 5 years less prior
withdrawals of these purchase payments.
Certain tax withdrawal penalties and restrictions may apply to withdrawals
from Contracts. (See "Tax Status" on Page __.) For Contracts purchased in
connection with 403(b) plans, the Code limits the withdrawal of amounts
attributable to contributions made pursuant to a salary reduction agreement
(as defined in Section 403(b)(11) of the Code) to circumstances only when the
Owner: (1) attains age 591/2; (2) separates from service; (3) dies; (4)
becomes disabled (within the meaning of Section 72(m)(7) of the Code); or (5)
in the case of hardship.
However, withdrawals for hardship are restricted to the portion of the Owner's
Contract Value which represents contributions made by the Owner and does not
include any investment results. The limitations on withdrawals became
effective on January 1, 1989 and apply only to salary reduction contributions
made after December 31, 1988, to income attributable to such contributions and
to income attributable to amounts held as of December 31, 1988. The
limitations on withdrawals do not affect rollovers or transfers between
certain Qualified Plans. Owners should consult their own tax counsel or other
tax adviser regarding any distributions.
SUSPENSION OF PAYMENTS OR TRANSFERS
The Company reserves the right to suspend or postpone payments for withdrawals
or transfers for any period when:
(1) the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
(2) trading on the New York Stock Exchange is restricted;
(3) an emergency exists as a result of which disposal of securities held
in the Variable Account is not reasonably practicable or it is not reasonably
practicable to determine the value of the Variable Account's net assets; or
(4) during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of Owners; provided that applicable
rules and regulations of the Securities and Exchange Commission will govern as
to whether the conditions described in (2) and (3) exist.
PERFORMANCE INFORMATION
MONEY MARKET AND LIQUID ASSET PORTFOLIOS
From time to time, the Company may advertise the "yield" and "effective yield"
of the Money Market and Liquid Asset Sub-Accounts of the Variable Account.
Both yield figures are based on historical earnings and are not intended to
indicate future performance. The "yield" of the Money Market and Liquid Asset
Sub-Accounts refers to the income generated by Contract Values in the Money
Market and Liquid Asset Sub-Accounts over a seven-day period (which period
will be stated in the advertisement). This income is "annualized." That is,
the amount of income generated by the investment during that week is assumed
to be generated each week over a 52-week period and is shown as a percentage
of the Contract Values in the Money Market and Liquid Asset Sub-Accounts. The
"effective yield" is calculated similarly. However, when annualized, the
income earned by Contract Values is assumed to be reinvested. This results in
the "effective yield" being slightly higher than the "yield" because of the
compounding effect of the assumed reinvestment. The yield figure will reflect
the deduction of any asset-based charges and any applicable Contract
Maintenance Charge, but will not reflect the deduction of any Withdrawal
Charge. The deduction of any Withdrawal Charge would reduce any percentage
increase or make greater any percentage decrease.
OTHER PORTFOLIOS
From time to time, the Company may advertise performance data for the various
other Portfolios under the Contract. Such data will show the percentage change
in the value of an Accumulation Unit based on the performance of an investment
medium over a period of time, usually a calendar year, determined by dividing
the increase (decrease) in value for that Unit by the Accumulation Unit value
at the beginning of the period. This percentage figure will reflect the
deduction of any asset-based charges and any applicable Contract Maintenance
Charges under the Contracts, but will not reflect the deduction of any
Withdrawal Charge. The deduction of any Withdrawal Charge would reduce any
percentage increase or make greater any percentage decrease. In that the
Mortality and Expense Risk Premium and the Administrative Expense Charge vary
in amount depending on the size of the projected purchase payments, there may
be different Accumulation Unit Values within the same Sub-Account. (See
"Purchase Payments and Contract Value - Accumulation Unit" on Page __.)
Any advertisement will also include total return figures calculated as
described in the Statement of Additional Information. The total return figures
reflect the deduction of any applicable Contract Maintenance Charges and
Withdrawal Charges, as well as any asset-based charges.
The Company may make available yield information with respect to some of the
Portfolios. Such yield information will be calculated as described in the
Statement of Additional Information. The yield information will reflect the
deduction of any applicable Contract Maintenance Charge as well as any
asset-based charges.
The Company may also show historical Accumulation Unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual Accumulation Unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in Accumulation Unit values for any of the Portfolios
against established market indices such as the Standard & Poor's 500 Stock
Index, the Dow Jones Industrial Average or other management investment
companies which have investment objectives similar to the Portfolio being
compared. The Standard & Poor's 500 Stock Index is an unmanaged, unweighted
average of 500 stocks, the majority of which are listed on the New York Stock
Exchange. The Dow Jones Industrial Average is an unmanaged, weighted average
of thirty blue chip industrial corporations listed on the New York Stock
Exchange. Both the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average assume quarterly reinvestment of dividends.
The Company may also distribute sales literature which compares the
performance of the Accumulation Unit values of the Contracts issued through
the Variable Account with the unit values of variable annuities issued through
the separate accounts of other insurance companies. Such information will be
derived from the Lipper Variable Insurance Products Performance Analysis
Service, the VARDS Report or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is
published by Lipper Analytical Services, Inc., a publisher of statistical data
which currently tracks the performance of almost 4,000 investment companies.
The rankings compiled by Lipper may or may not reflect the deduction of
asset-based insurance charges. The Company's sales literature utilizing these
rankings will indicate whether or not such charges have been deducted. Where
the charges have not been deducted, the sales literature will indicate that if
the charges had been deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Miami and published by Financial
Planning Resources, Inc. The VARDS rankings may or may not reflect the
deduction of asset-based insurance charges.
Morningstar rates a variable annuity subaccount against its peers with similar
investment objectives. Morningstar does not rate any subaccount that has less
than three years of performance data.
TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE
FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT
SPECIAL RULES NOT DESCRIBED IN THIS PROSPECTUS MAY BE APPLICABLE IN CERTAIN
SITUATIONS. MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE
STATE OR OTHER TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner is
not taxed on increases in the value of a Contract until distribution occurs,
either in the form of a lump sum payment or as annuity payments under the
Annuity Option selected. For a lump sum payment received as a total withdrawal
(total surrender), the recipient is taxed on the portion of the payment that
exceeds the cost basis of the Contract. For Non-Qualified Contracts, this cost
basis is generally the purchase payments, while for Qualified Contracts there
may be no cost basis. The taxable portion of the lump sum payment is taxed at
ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments
based on a fixed annuity option is determined by multiplying the payment
by the ratio that the cost basis of the Contract (adjusted for any
period or refund feature) bears to the expected return under the Contract.
The exclusion amount for payments based on a variable annuity option is
determined by dividing the cost basis of the Contract (adjusted for any
period certain or refund guarantee) by the number of years over which the
annuity is expected to be paid. Payments received after the investment
in the Contract has been recovered (i.e., when the total of the excludable
amount equal the investment in the Contract) are fully taxable. The taxable
portion is taxed at ordinary income tax rates. For certain types of Qualified
Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Owners, Annuitants and Beneficiaries under the
Contracts should seek competent financial advice about the tax consequences
of any distributions.
The Contracts described in this Prospectus are for use by individuals in
connection with fringe benefit plans including Qualified Plans. (See
"Qualified Plans" on Page __.) Owners, Annuitants and Beneficiaries are
cautioned that benefits under such plans may be subject to the terms and
conditions of the related plan and trust documents regardless of the terms and
conditions of the Contracts issued pursuant to such plan and trust documents.
In addition, there may be certain tax consequences under Section 72 of the
Code in connection with the purchase of a Contract by an Owner in connection
with such plans. Purchasers should obtain competent tax advice prior to
purchasing a Contract issued under a plan.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Variable Account is not a separate entity from the
Company and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification
of the Contract as an annuity contract would result in imposition of federal
income tax to the Owner with respect to earnings allocable to the Contract
prior to the receipt of payments under the Contract. The Code contains a safe
harbor provision which provides that annuity contracts such as the Contracts
meet the diversification requirements if, as of the end of each quarter, the
underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five percent (55%) of the total
assets consist of cash, cash items, U.S. Government securities and securities
of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contracts. The
Regulations amplify the diversification requirements for variable contracts
set forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (1) no more than 55% of the value of the total
assets of the portfolio is represented by any one investment; (2) no more than
70% of the value of the total assets of the portfolio is represented by any
two investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer".
The Company intends that all Portfolios of the Trust and AMT underlying the
Contracts will be managed by the investment advisers in such a manner as to
comply with these diversification requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Variable Account will cause the Owner to be treated as the
owner of the assets of the Variable Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be
contained in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available,
would cause the Owner to be considered as the owner of the assets of the
Variable Account resulting in the imposition of federal income tax to the
Owner with respect to earnings allocable to the Contract prior to receipt of
payments under the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a
new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the Owner
being retroactively determined to be the owner of the assets of the Variable
Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from
such combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, investment earnings on premiums for the
Contracts will be taxed currently to the Contract Owner if the Owner is a
non-natural person, e.g., a corporation, or certain other entities. Such
Contracts generally will not be treated as annuities for federal income tax
purposes. However, this treatment is not applied to Contracts held by a trust
or other entity as an agent for a natural person, nor to Contracts held by
Qualified Plans. Purchasers should consult their own tax counsel or other tax
adviser before purchasing a Contract to be held by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Owner are subject to federal income tax withholding. Generally,
amounts are withheld from periodic payments at the same rate as wages and at
the rate of 10% from non-periodic payments. However, the Owner, in most cases,
may elect not to have taxes withheld or to have withholding done at a
different rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a
mandatory 20% withholding for federal income tax. The 20% withholding
requirement generally does not apply to: a) a series of substantially equal
payments made at least annually for the life or life expectancy of the
participant or joint and last survivor expectancy of the participant and a
designated beneficiary, or distributions for a specified period of 10 years or
more; or (b) distributions which are required minimum distributions; or (c)
the portion of the distribution that is not includible in gross income (i.e.,
the return of after-tax contributions). Participants should consult their own
tax counsel or other tax advisor regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate
purchase payments made, any amount withdrawn will be treated as coming first
from the earnings and then, only after the income portion is exhausted, as
coming from the principal. Withdrawn earnings are includible in gross income.
It further provides that a ten percent (10%) penalty will apply to the income
portion of any distribution. However, the penalty is not imposed on amounts
received: (a) after the taxpayer reaches age 59 1/2; (b) after the death of
the Owner; (c) if the taxpayer is totally disabled (for this purpose
disability is as defined in Section 72(m)(7) of the Code); (d) in a series of
substantially equal periodic payments made not less frequently than annually
for the life (or life expectancy) of the taxpayer or for the joint lives (or
joint life expectancies) of the taxpayer and his or her Beneficiary; (e) under
an immediate annuity; or (f) which are allocable to purchase payments made
prior to August 14, 1982.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals - Qualified Contracts", on Page
23.)
QUALIFIED PLANS
The Contracts offered by this Prospectus are designed to be suitable for use
under various types of Qualified Plans. Taxation of participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Owners, Annuitants and Beneficiaries are cautioned that
benefits under a Qualified Plan may be subject to the terms and conditions of
the plan regardless of the terms and conditions of the Contracts issued
pursuant to the plan. Some retirement plans are subject to distribution and
other requirements that are not incorporated into the Company's administrative
procedures. Contract Owners, participants and beneficiaries are responsible
for determining that contributions, distributions and other transactions with
respect to the Contracts comply with applicable law. Following are general
descriptions of the types of Qualified Plans with which the Contracts may be
used. Such descriptions are not exhaustive and are for general informational
purposes only. The tax rules regarding Qualified Plans are very complex and
will have differing applications depending on individual facts and
circumstances. Each purchaser should obtain competent tax advice prior to
purchasing a Contract issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
in this Prospectus. Generally, Contracts issued pursuant to Qualified Plans
are not transferable except upon surrender or annuitization. Various penalty
and excise taxes may apply to contributions or distributions made in violation
of applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts", on Page 23.)
On July 6, 1983, the Supreme Court decided in ARIZONA GOVERNING COMMITTEE V.
NORRIS that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection
with Qualified Plans will utilize annuity tables which do not differentiate on
the basis of sex. Such annuity tables will also be available for use in
connection with certain non-qualified deferred compensation plans.
A. TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employees until the employees receive distributions from the Contracts. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. (See "Tax Treatment of Withdrawals -
Qualified Contracts" and "Tax-Sheltered Annuities - Withdrawal Limitations"
below.) Any employee should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
B. CORPORATE PENSION AND PROFIT-SHARING PLANS
Sections 401(a) and 401(k) of the Code permit corporate employers to establish
various types of retirement plans for employees. These retirement plans may
permit the purchase of the Contracts to provide benefits under the Plan.
Contributions to the Plan for the benefit of employees will not be includible
in the gross income of the employees until distributed from the Plan. The tax
consequences to participants may vary depending upon the particular plan
design. However, the Code places limitations and restrictions on all plans
including on such items as: amount of allowable contributions; form, manner
and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Purchasers of Contracts for use with Corporate Pension or Profit-Sharing Plans
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract, a ratable portion of
the amount received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued benefit under the
retirement plan. Special tax rules may be available for certain distributions
from a Qualified Contract. Section 72(t) of the Code imposes a 10% penalty tax
on the taxable portion of any distribution from qualified retirement plans,
including Contracts issued and qualified under Code Sections 401 (Corporate
Pension and Profit-Sharing Plans) and 403(b) (Tax-Sheltered Annuities). To the
extent amounts are not includible in gross income because they have been
rolled over to an Individual Retirement Annuity or to an eligible Qualified
Plan, no tax penalty will be imposed. The tax penalty will not apply to the
following distributions: (a) if distribution is made on or after the date on
which the Owner or Annuitant (as applicable) reaches age 59 1/2; (b)
distributions following the death or disability of the Owner or Annuitant (as
applicable) (for this purpose disability is as defined in Section 72(m)(7) of
the Code); (c) after separation from service, distributions that are part of
substantially equal periodic payments made not less frequently than annually
for the life (or life expectancy) of the Owner or Annuitant (as applicable) or
the joint lives (or joint life expectancies) of such Owner or Annuitant (as
applicable) and his or her designated Beneficiary; (d) distributions to an
Owner or Annuitant (as applicable) who has separated from service after he has
attained age 55; (e) distributions made to the Owner or Annuitant (as
applicable) to the extent such distributions do not exceed the amount
allowable as a deduction under Code Section 213 to the Owner or Annuitant (as
applicable) for amounts paid during the taxable year for medical care; and (f)
distributions made to an alternate payee pursuant to a qualified domestic
relations order.
Generally, distributions from a qualified plan must commence no later than
April 1 of the calendar year, following the year in which the employee attains
age 70 1/2. Required distributions must be over a period not exceeding the
life expectancy of the individual or the joint lives or life expectancies of
the individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed. In addition, distributions in excess of $150,000 per year may be
subject to an additional 15% excise tax unless an exemption applies.
TAX-SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only when the Owner: (1) attains age 59 1/2; (2)
separates from service; (3) dies; (4) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
Value which represents contributions made by the Owner and does not include
any investment results. The limitations on withdrawals became effective on
January 1, 1989 and apply only to salary reduction contributions made after
December 31, 1988, to income attributable to such contributions and to income
attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect rollovers or transfers between certain Qualified
Plans. Owners should consult their own tax counsel or other tax adviser
regarding any distributions.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company have been included in the
Statement of Additional Information. No financial statements for the Variable
Account have been included herein because, as of the date of this Prospectus,
the Variable Account had no assets.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Variable Account,
the Distributor or the Company is a party.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
ITEM PAGE
Company............................................................. 3
Experts............................................................. 3
Legal Opinions...................................................... 3
Distributor......................................................... 3
Yield Calculation for Money Market and Liquid Asset Sub-Accounts.... 3
Performance Information............................................. 4
Annuity Provisions.................................................. 5
Variable Annuity............................................... 5
Fixed Annuity.................................................. 6
Annuity Unit................................................... 6
Net Investment Factor.......................................... 6
Mortality and Expense Guarantee................................ 6
Financial Statements................................................ 6
PART B
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACTS
issued by
COVA VARIABLE ANNUITY ACCOUNT FOUR
AND
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 1996, FOR THE INDIVIDUAL
FLEXIBLE PURCHASE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS WHICH ARE
REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE
THE COMPANY AT: One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois
60181-4644, (800) 831-LIFE.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 1996.
TABLE OF CONTENTS
PAGE
Company................................................................ 3
Experts................................................................ 3
Legal Opinions......................................................... 3
Distributor............................................................ 3
Yield Calculation for Money Market and Liquid Asset Sub-Accounts....... 3
Performance Information................................................ 4
Annuity Provisions..................................................... 5
Variable Annuity..................................................... 5
Fixed Annuity........................................................ 6
Annuity Unit......................................................... 6
Net Investment Factor................................................ 6
Mortality and Expense Guarantee...................................... 6
Financial Statements................................................... 6
COMPANY
Information regarding the Company and its ownership is contained in the
Prospectus.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1994 and for each of the years in the three-year period ended December 31,
1995 included herein and elsewhere in the registration statement have been
included herein and in the registration statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon authority of said firm as experts in accounting and
auditing.
LEGAL OPINIONS
Legal matters in connection with the Contracts described herein are being
passed upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
DISTRIBUTOR
Cova Life Sales Company acts as the distributor. Cova Life Sales Company is an
affiliate of the Company. The offering is on a continuous basis.
YIELD CALCULATION FOR MONEY MARKET
AND LIQUID ASSET SUB-ACCOUNTS
The Money Market and Liquid Asset Sub-Accounts of the Variable Account will
calculate their current yields based upon the seven days ended on the date of
calculation. As of December 31, 1995, the Liquid Asset Sub-Account and the
Money Market Sub-Account had not yet commenced operations.
The current yields of the Money Market and Liquid Asset Sub-Accounts are
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing Contract Owner account having a balance
of one Accumulation Unit of the Sub-Account at the beginning of the period,
subtracting the Mortality and Expense Risk Premium, the Administrative Expense
Charge and the Contract Maintenance Charge, dividing the difference by the
value of the account at the beginning of the same period to obtain the base
period return and multiplying the result by (365/7).
The Money Market and Liquid Asset Sub-Accounts compute their effective
compound yields according to the method prescribed by the Securities and
Exchange Commission. The effective yields reflect the reinvestment of net
income earned daily on Money Market or Liquid Asset Sub-Account assets.
Net investment income for yield quotation purposes will not include either
realized capital gains and losses or unrealized appreciation and depreciation,
whether reinvested or not.
The yields quoted should not be considered a representation of the yield of
the Money Market or Liquid Asset Sub-Accounts in the future since the yield is
not fixed. Actual yields will depend not only on the type, quality and
maturities of the investments held by the Money Market or Liquid Asset
Sub-Accounts and changes in the interest rates on such investments, but also
on changes in the Money Market or Liquid Asset Sub-Accounts' expenses during
the period.information may be useful in reviewing the performance of the Money
Market and Liquid Asset Sub-Accounts and for providing a basis for comparison
with other investment alternatives. However, the Money Market and Liquid
Asset Sub-Accounts' yields fluctuate, unlike bank deposits or other
investments which typically pay a fixed yield for a stated period of time.
The yield information does not reflect the deduction of any applicable
Withdrawal Charge at the time of the surrender. (See "Charges and Deductions
- - Deduction for Withdrawal Charge (Sales Load)" in the Prospectus.)
PERFORMANCE INFORMATION
From time to time, the Company may advertise performance data as described in
the Prospectus. Any such advertisement will include total return figures for
the time periods indicated in the advertisement. Such total return figures
will reflect the deduction of a Mortality and Expense Risk Premium, an
Administrative Expense Charge, the investment advisory fee for the underlying
Portfolio being advertised and any applicable Contract Maintenance Charges and
Withdrawal Charges.
The hypothetical value of a Contract purchased for the time periods described
in the advertisement will be determined by using the actual Accumulation Unit
values for an initial $1,000 purchase payment, and deducting any applicable
Contract Maintenance Charges and any applicable Withdrawal Charge to arrive at
the ending hypothetical value. The average annual total return is then
determined by computing the fixed interest rate that a $1,000 purchase payment
would have to earn annually, compounded annually, to grow to the hypothetical
value at the end of the time periods described. The formula used in these
calculations is:
n
P(1 + T) = ERV
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used (or
fractional portion thereof) of a hypothetical $1,000 payment made
at the beginning of the time periods used.
In addition to total return data, the Company may include yield information in
its advertisements. For each Sub-Account (other than the Money Market and
Liquid Asset Sub-Accounts) for which the Company will advertise yield, it will
show a yield quotation based on a 30 day (or one month) period ended on the
date of the most recent balance sheet of the Variable Account included in the
registration statement, computed by dividing the net investment income per
Accumulation Unit earned during the period by the maximum offering price per
Unit on the last day of the period, according to the following formula:
6
Yield = 2 [ ( a-b + 1 ) - 1]
---
cd
<TABLE>
<CAPTION>
<S> <C> <C>
Where:
a = Net investment income earned during the period by the
Trust or AMT attributable to shares owned by the
Sub-Account.
b = Expenses accrued for the period (net of
reimbursements).
c = The average daily number of Accumulation Units
outstanding during the period.
d = The maximum offering price per Accumulation Unit on the
last day of the period.
</TABLE>
The Company may also advertise performance data which will be calculated in
the same manner as described above but which will not reflect the deduction of
any Withdrawal Charge.
Owners should note that the investment results of each Sub-Account will
fluctuate over time, and any presentation of the Sub-Account's total return or
yield for any period should not be considered as a representation of what an
investment may earn or what an Owner's total return or yield may be in any
future period.
ANNUITY PROVISIONS
VARIABLE ANNUITY
A variable annuity is an annuity with payments which: (1) are not
predetermined as to dollar amount; and (2) will vary in amount with the net
investment results of the applicable Sub-Account(s) of the Variable Account.
At the Annuity Date, the Contract Value in each Sub-Account will be applied to
the applicable Annuity Tables. The Annuity Table used will depend upon the
Annuity Option chosen. If, as of the Annuity Date, the then current Annuity
Option rates applicable to this class of Contracts provide a first Annuity
Payment greater than guaranteed under the same Annuity Option under this
Contract, the greater payment will be made. The dollar amount of Annuity
Payments after the first is determined as follows:
(1) the dollar amount of the first Annuity Payment is divided by the
value of an Annuity Unit as of the Annuity Date. This establishes the number
of Annuity Units for each monthly payment. The number of Annuity Units
remains fixed during the Annuity Payment period.
(2) the fixed number of Annuity Units is multiplied by the Annuity Unit
value for the last Valuation Period of the month preceding the month for which
the payment is due. This result is the dollar amount of the payment.
The total dollar amount of each Variable Annuity Payment is the sum of all
Sub-Account Variable Annuity Payments reduced by the applicable Contract
Maintenance Charge.
FIXED ANNUITY
A fixed annuity is a series of payments made during the Annuity Period which
are guaranteed as to dollar amount by the Company and do not vary with the
investment experience of the Variable Account. If elected by the Owner at
least 7 days, but not more than 30 days, prior to the Annuity Date, a portion
of the Contract Value will be used to determine the Fixed Annuity monthly
payment. The first monthly Annuity Payment will be based upon the Annuity
Option elected and the appropriate Annuity Option Table.
ANNUITY UNIT
The value of an Annuity Unit for each Sub-Account was arbitrarily set
initially at $10. This was done when the first Eligible Investment shares
were purchased. The Sub-Account Annuity Unit value at the end of any
subsequent Valuation Period is determined by multiplying the Sub-Account
Annuity Unit value for the immediately preceding Valuation Period by the
product of (a) the Net Investment Factor for the day for which the
Annuity Unit Value is being calculated, and (b) 0.999919.
NET INVESTMENT FACTOR
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing:
(a) the Accumulation Unit value as of the close of the current
Valuation Period, by
(b) the Accumulation Unit value as of the close of the immediately
preceding Valuation Period.
The Net Investment Factor may be greater or less than one, as the Annuity Unit
value may increase or decrease.
MORTALITY AND EXPENSE GUARANTEE
The Company guarantees that the dollar amount of each Annuity Payment after
the first Annuity Payment will not be affected by variations in mortality or
expense experience.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts.
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Cova Financial Services Life Insurance Company:
We have audited the accompanying consolidated balance sheet of Cova Financial
Services Life Insurance Company and subsidiary (a wholly owned subsidiary of
Cova Corporation) as of December 31, 1995 (Successor or the Company) and the
consolidated balance sheet of Xerox Financial Services Life Insurance Company
and subsidiary as of December 31, 1994 (Predecessor), and the related
consolidated statements of income, shareholders' equity and cash flows for the
periods from June 1, 1995 to December 31, 1995 (Successor period), and from
January 1, 1995 to May 31, 1995, and for the years ended December 31, 1994 and
1993 (Predecessor periods). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the Successor consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Cova
Financial Services Life Insurance Company and subsidiary as of December 31,
1995, and the results of their operations and their cash flows for the
Successor period, in conformity with generally accepted accounting principles.
Also, in our opinion, the aforementioned Predecessor consolidated financial
statements present fairly, in all material respects, the financial position of
Xerox Financial Services Life Insurance Company and subsidiary as of December
31, 1994, and the results of their operations and their cash flows for the
Predecessor periods, in conformity with generally accepted accounting
principles.
As discussed in note 3 to the consolidated financial statements, the Company
changed its method of accounting for investments to adopt the provisions of
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," at January 1, 1994.
St. Louis, Missouri
April 15, 1996
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets
December 31, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
ASSETS 1995 1994
<S> <C> <C>
Investments:
Debt securities available for sale at market
(cost of $583,868 in 1995 and $2,163,588 in 1994) $ 594,556 $ 1,901,642
Equity securities at market (cost: $10,650 in 1994) -- 8,754
Mortgage loans 77,472 6,825
Real Estate -- 26,735
Policy loans 19,125 17,691
Other invested assets -- 7,597
Short-term investments at cost which approximates market 7,859 93,118
Total investments 699,012 2,062,362 3,566,750
Cash and cash equivalents - interest bearing 59,312 1,133,999
Cash - non-interest bearing 2,944 2,328
Receivable from sale of securities -- 25,829
Accrued investment income 9,116 33,222
Due from affiliates -- 12,938
Deferred policy acquisition costs 8,708 213,362
Present value of future profits 43,914 --
Goodwill 23,358 --
Guaranty assessments recoverable -- 12,192
Federal and state income taxes recoverable 1,397 33,851
Deferred tax benefits (net) 13,556 56,135
Receivable from OakRe 2,391,982 --
Reinsurance receivables 8,891 1,457
Other assets 2,426 2,080
Separate account assets 410,449 294,803
Total Assets $3,675,065 $ 3,884,558
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets (continued)
December 31, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
<S> <C> <C>
Policyholder deposits $3,033,763 $3,401,053
Future policy benefits 28,071 25,544
Payable on purchase of securities 5,327 46,285
Current Federal income tax payable 1,000 --
Accounts payable and other liabilities 20,143 17,985
Future purchase price payable to OakRe 23,967 --
Accrued liability for unrealized losses on off-balance-sheet
derivative instruments -- 18,398
Guaranty assessments 14,259 2,046
Separate account liabilities 410,449 294,636
Total Liabilities 3,536,979 $3,805,947
Shareholders' equity:
Common stock, $2 par value. (Authorized 5,000,000 shares;
issued and outstanding 2,899,446 shares in 1995 and 1994) 5,799 5,799
Additional paid-in capital 129,586 136,534
Retained earnings (63) 1,506
Net unrealized appreciation/(depreciation) on securities,
net of tax 2,764 (65,228)
Total Shareholders' Equity 138,086 78,611
Total Liabilities and Shareholders' Equity $3,675,065 $3,884,558
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Income
Years ended December 31, 1995, 1994, and 1993
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Revenues:
Premiums (net of $106 premium ceded for the
Company in 1995, and $57,$231,$207 for the $ 921 $ 1,097 $ 2,787 $ 4,002
Predecessor in 1995, 1994 and 1993)
Net investment income 24,188 92,486 277,616 335,583
Net realized gain (loss) on sale of investments 1,324 (12,414) (101,361) 17,699
Other income 3,682 2,855 6,705 3,604
Total revenues 30,115 84,024 185,747 360,888
Benefits and expenses:
Interest on policyholder deposits 17,706 97,867 249,905 265,674
Current and future policy benefits (net of
reinsurance recoveries for the Company of $8
and Predecessor of $4,$888 & $7,480 in
1995, 1994 and 1993) 1,785 1,830 5,259 6,054
Operating and other expenses 7,126 12,777 24,479 29,414
Amortization of purchased intangible assets 3,030 -- -- --
Amortization of deferred acquisition costs 100 11,157 125,357 38,308
Total Benefits and Expenses 29,747 123,631 405,000 339,450
Income/(loss) before income taxes 368 (39,607) (219,253) 21,438
Income Taxes:
Current 1,011 (16,404) (46,882) 15,639
Deferred (580) 6,340 (30,118) (6,137)
Total income tax expense/(benefit) 431 (10,064) (77,000) 9,502
Net Income/(Loss) ($63) ($29,543) $(142,253)) $ 11,936
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholders Equity
Years ended December 31, 1995, 1994 and 1993
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994
1993
<S> <C> <C> <C> <C>
Common stock ($2 par value common stock;
Authorized 5,000,000 shares; issued and
outstanding 2,899,446 in 1995 and 1994 and
2,816,090 in 1993, Balance at beg. of period) $ 5,799 $ 5,799 $ 5,632 $ 5,392
Par value of additional shares issued -- -- 167 240
Balance at end of period 5,799 5,799 5,799 5,632
Additional paid-in capital:
Balance at beginning of period 137,749 136,534 120,763 116,003
Adjustment to reflect purchase acquisition
indicated in note 2 (52,163) -- -- --
Capital contribution 44,000 1,215 15,771 4,760
Balance at end of period 129,586 137,749 136,534 120,763
Retained earnings/(deficit):
Balance at beginning of period (36,441) 1,506 143,759 131,823
Adjustment to reflect purchase acquisition
indicated in note 2 36,441 -- -- --
Net income/(loss) (63) (29,543) (142,253) 11,936
Dividends to shareholder -- (8,404) -- --
Balance at end of period $ (63) $(36,441) $ 1,506 $143,759
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994 and 1993
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Net unrealized appreciation/(depreciation)of securities:
Balance at beginning of period $(28,837) $ (65,228) $ (321) $ (277)
Adjustment to reflect purchase acquisition
indicated in note 2 28,837 -- -- --
Implementation of change in accounting for
marketable debt and equity securities, net of
effects of deferred taxes of $18,375 and
deferred acquisition costs of $42,955 -- -- 34,125 --
Change in unrealized appreciation/(depreciation)
of debt and equity securities 10,724 178,010 (357,502) (74)
Change in deferred Federal income taxes (1,489) (18,458) 53,324 30
Change in deferred acquisition costs attributable
to unrealized losses/(gains) -- (123,161) 205,146 --
Change in present value of future profits
attributable to unrealized (gains) (6,471) -- -- --
Balance at end of period 2,764 (28,837) (65,228) (321)
Total Shareholders' Equity $138,086 $ 78,270 $ 78,611 $269,833
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Interest and dividend receipts $ 18,744 $ 131,439 $ 309,856 $ 343,122
Premiums received 921 1,097 2,787 4,002
Insurance and annuity benefit payments (2,799) (1,809) (3,755) (3,465)
Operating disbursements (10,480) (9,689) (26,023) (33,103)
Taxes on income refunded (paid) 60 48,987 17,032 (15,414)
Commissions and acquisition costs paid (17,456) (23,872) (26,454) (30,982)
Other 529 1,120 836 (1,585)
Net cash provided/(used in) by operating activities (10,481) 147,273 274,279 262,575
Cash flows from investing activities:
Cash used for the purch. of investment secur. (875,994) (575,891) (1,935,353) (3,685,448)
Proceeds from invest. secur. sold and matured 253,814 2,885,053 3,040,474 3,675,470
Other 179 (8,557) (8,185) 25,687
Net cash provided by/(used in) in investing activities $(622,003) $2,300,605 $ 1,096,936 $ 15,709
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 132,752 $ 130,660 $ 274,960 $ 348,392
Transfers (to)/from OakRe 628,481 (3,048,531) -- --
Transfer to Separate Accounts (37,946) (4,835) (33,548) (132,340)
Return of policyholder deposits (436,271) (290,586) (608,868) (446,396)
Dividends to Shareholder -- (8,404) -- --
Capital contributions received 44,000 1,215 15,938 5,000
Net cash provided by/(used in) financing activities 331,016 (3,220,481) (351,518) (225,344)
Increase in cash and cash equivalents (301,468) (772,603) 1,019,697 52,940
Cash and cash equivalents at beginning of period 363,724 1,136,327 116,630 63,690
Cash and cash equivalents at end of period $ 62,256 $ 363,724 $1,136,327 $ 116,630
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows, Continued
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Reconciliation of net income/(loss)to net cash
provided by operating activities:
Net income/(loss) ($63) ($29,543) $(142,253) $ 11,936
Adjustments to reconcile net income/(loss)to net
cash provided by operating activities:
Increase/(decrease) in future policy benefits
(net of reinsurance) (1,013) 11 1,494 4,106
Increase/(decrease) in payables and accrued
liabilities (392) (10,645) 3,830 (7,940)
Decrease/(increase) in accrued investment
income (7,904) 32,010 21,393 1,443
Amortization of intangible assets and costs 3,831 11,309 125,722 38,652
Amortization and accretion of securities
premiums and discounts 307 2,410 3,635 (97)
Recapture commissions paid to OakRe (4,777) -- -- --
Net realized (gain)/loss on sale of investments (1,324) 12,414 101,361 (17,699)
(17,699)
Interest accumulated on policyholder
deposits 17,706 97,867 249,905 265,674
Investment expenses paid 642 2,373 7,296 6,924
Decrease/(Increase)in guaranty assessments (104) 5,070 (935) (4,076)
Increase/(decrease) in current and deferred
Federal income taxes 491 38,923 (59,263) (5,942)
Separate account net income/(loss) 1 1 2 (2,256)
Deferral of costs (14,568) (13,354) (30,024) (29,342)
Other (3,314) (1,573) (7,884) 1,192
Net cash provided by operating activities $(10,481) $ 147,273 $ 274,279 $262,575
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Services Life Insurance Company and subsidiary (the Company),
formerly Xerox Financial Services Life Insurance Company (the Predecessor),
market and service single premium deferred annuities, immediate annuities,
variable annuities, and single premium whole-life insurance policies. The
Company is licensed to do business in 45 states and the District of Columbia.
Most of the policies issued present no significant mortality nor longevity
risk to the Company, but rather represent investment deposits by the
policyholders. Life insurance policies provide policy beneficiaries with
mortality benefits amounting to a multiple, which declines with age, of the
original premium.
Under the deferred annuity contracts, interest rates credited to policyholder
deposits are guaranteed by the Company for periods from one to ten years, but
in no case may renewal rates be less than 3%. The Company may assess
surrender fees against amounts withdrawn prior to scheduled rate reset and
adjust account values based on current crediting rates. Policyholders also
may incur certain Federal income tax penalties on withdrawals.
Although the Company markets its products through numerous distributors,
including regional brokerage firms, national brokerage firms and banks,
approximately 59%, 57% and 58% of the companies sales have been through two
specific brokerage firms, A.G. Edwards & Sons, Incorporated. and Edward D.
Jones & Company in 1995, 1994 and 1993, respectively.
ORGANIZATION
Prior to June 1, 1995 Xerox Financial Services, Inc. (XFSI) owned 100% or
2,899,446 shares of the Predecessor. XFSI is a wholly owned subsidiary of
Xerox Corporation.
On June 1, 1995 XFSI sold 100% of the issued and outstanding shares of the
Predecessor to Cova Corporation, a subsidiary of General American Life
Insurance Company (GALIC), a Missouri domiciled life insurance company, in
exchange for approximately $91.4 million in cash and $27.8 million in future
payables. In conjunction with this Agreement, the Predecessor also entered
into a financing reinsurance transaction that caused OakRe Life Insurance
Company(OakRe),a subsidiary of the Predecessor, to assume the existing single
premium deferred annuity deposits (SPDAs) of Cova Financial Services Life
Insurance Company, which had an aggregate carrying value at June 1, 1995 of
$2,982.0 million. In exchange, the Predecessor transferred specifically
identified assets to OakRe with a market value at June 1, 1995 of $2,986.0
million. Ownership of OakRe is retained by XFSI subsequent to the sale of the
Predecessor and other affiliates. The Receivable from OakRe to the Company
(Continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
that was created by this transaction will be liquidated over the remaining
crediting rate guaranty periods (which will be substantially expired in five
years) by the transfer of cash in the amount of the then current account
value, less a recapture commission fee to OakRe on policies retained beyond
their 30-day no-fee surrender window by the Company, upon the next crediting
rate reset date of each annuity policy. The Company may then reinvest that
cash for those policies that are retained and assume the benefits and risks of
those deposits thereafter.
In the event that both OakRe and XFSI default on the receivable, the Company
may draw funds from a standby bank irrevocable letter of credit established by
XFSI in the amount of $500 million. No funds were drawn on this letter of
credit during the period ending December 31, 1995.
In substance, terms of the agreement have allowed the seller, XFSI, to retain
substantially all of the existing financial benefits and risks of the existing
business, while the purchaser, GALIC, obtained the corporate operating and
product licenses, marketing and administrative capabilities of the Company,
and access to the retention of the policyholder deposit base that persists
beyond the next crediting rate reset date. Accordingly, the future gross
profits, as defined in note 3, of the Company on existing business will
consist of the gross profits on separate accounts, single premium deferred
annuities not reinsured to OakRe, single premium whole life policies, and
single premium immediate annuities, commencing at the date of closing; plus
the gross profits from SPDA deposits retained, commencing upon the expiration
of their current guaranteed crediting rate.
(2) CHANGE IN ACCOUNTING
Upon closing of the sale, the Company restated its financial statements in
accordance with "push down purchase accounting", which allocates the net
purchase price for the Company and its subsidiary of $91.4 million according
to the fair values of the acquired assets and liabilities, including the
estimated present value of future profits. These allocated values were
dependent upon policies in force and market conditions at the time of closing.
These allocations are summarized below:
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
(In Millions)
<S> <C> June 1, 1995
Assets acquired:
Debt securities $ 32.4
Policy loans 18.3
Cash and cash equivalents 363.7
Present value of future profits 46.7
Goodwill 24.1
Deferred tax benefit 26.8
Receivable from OakRe 2,969.0
Other assets 5.9
Separate account assets 332.7
-------------
3,819.6
Liabilities assumed:
Policyholder deposits 3,299.2
Future policy benefits 27.2
Future purchase price payable 27.8
Deferred Federal income taxes 12.3
Other liabilities 29.0
Separate account liabilities 332.7
3,728.2
-------------
Adjusted purchase price $ 91.4
=============
</TABLE>
In addition to revaluing all material tangible assets and liabilities to their
respective estimated market values as of the closing date of the sale, the
Company also recorded in its financial statements the excess of cost over fair
value of net assets acquired (goodwill) as well as the present value of future
profits to be derived from the purchased and reinsured business. These amounts
were determined in accordance with the purchase method of accounting. This new
basis of accounting resulted in an increase in shareholders equity of $13.1
million in 1995 reflecting the application of push down purchase accounting.
The Companys consolidated financial statements subsequent to June 1, 1995
reflect this new basis of accounting.
All amounts for periods ended before June 1, 1995 are labeled Predecessor and
are based on historical costs. The periods ending on or after such date are
labeled The Company, and are based on fair values at June 1, 1995 and
subsequent costs.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITIES
Effective January 1, 1994 the Predecessor adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS #115). SFAS #115 requires that investments in all
debt securities and those equity securities with readily determinable market
values be classified into one of three categories: held-to-maturity, trading,
or available-for-sale. Classification of investments is based on management's
current intent. All debt and equity securities at December 31, 1995 and 1994
were classified as available-for-sale. Securities available-for-sale are
carried at market value, with unrealized holding gains and losses reported as
a separate component of stockholders equity, net of deferred effects of income
tax and related effects on deferred acquisition costs.
Amortization of the discount or premium from the purchase of mortgage-backed
bonds is recognized using a level-yield method which considers the estimated
timing and amount of prepayments of the underlying mortgage loans. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between the prepayments previously
anticipated and the actual prepayments received and currently anticipated.
When such a difference occurs, the net investment in the mortgage-backed bond
is adjusted to the amount that would have existed had the new effective yield
been applied since the acquisition of the bond, with a corresponding charge or
credit to interest income (the "retrospective method").
For investments in "high risk" (interest-only strips) collateralized mortgage
obligations (CMOs), the Company's accounting in 1993 followed the provisions
of the Financial Accounting Standards Board's Emerging Issues Task Force
Consensus No. 89-4. A new effective yield was calculated for each individual
high-risk CMO based on the amortized cost of the investment and the current
estimate of future cash flows (the "prospective method"). The recalculated
yield was then used to accrue interest income in the subsequent period.
In 1994, the Predecessor adopted Financial Accounting Standards Board's
Emerging Issues Task Force Consensus No. 93-18 which amends EITF 89-4 and
requires impairment tests to be performed using discounted cash flows at a
risk free discount rate. If the amortized cost of the security exceeds future
cash flows discounted at the risk free rate, then amortized cost is written
down to fair value. The adoption of this Consensus resulted in no adjustments
at January 1, 1994.
A realized loss is recognized and charged against income if the Company's
carrying value in a particular investment in the available-for-sale category
has experienced a significant decline in market value that is deemed to be
other than temporary.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Investment income is recorded when earned. Realized capital gains and losses
on the sale of investments are determined on the basis of specific costs of
investments and are credited or charged to income. Gains or losses on
financial future or option contracts which qualify as hedges of investments
are treated as basis adjustments and are recognized in income over the life of
the hedged investments.
MORTGAGE LOANS AND OTHER INVESTED ASSETS
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan (SFAS 114), indicate a likelihood of loss.
Prior to year-end 1995, the Company evaluated its real estate-related assets
(including accrued interest) by estimating the probabilities of loss utilizing
various projections that included several factors relating to the borrower,
property, term of the loan, tenant composition, rental rates, other supply and
demand factors and overall economic conditions. Generally, at that time, the
reserve was based upon the excess of the loan amount over the estimated future
cash flows from the loan.
SFAS 114 defines impaired loans as loans in which it is probable that a
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. In 1995, the Company adopted
Statement of Financial Accounting Standards No. 118, Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures (SFAS 118).
SFAS 118 amends SFAS 114, providing clarification of income recognition issues
and requiring additional disclosures relating to impaired loans. The adoption
of SFAS 114 and 118 had no effect on the Companys financial position or
results of operations at or for the period ended December 31, 1995. The
Company had no impaired loans and no valuation allowances established for
potential losses on mortgage loans at December 31, 1995.
Mortgage loans and policy loans are carried at their unpaid principal
balances. Real estate is carried at cost less accumulated depreciation.
Other invested assets are carried at lower of cost or market.
Prior to 1995, when an investment supported by real estate collateral was
deemed "in-substance" foreclosed, the investment was reclassified as real
estate and recorded at its fair value, with any reduction in carrying value
recorded as a realized loss. The change in this valuation allowance was
recorded as a realized capital gain or loss in the statements of income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in banks, US
Treasury bills, money market accounts, and commercial paper with maturities
under 90 days, which are not otherwise restricted.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
SEPARATE ACCOUNT ASSETS
Separate accounts contain segregated assets of the Company that are
specifically assigned to variable annuity policyholders in the separate
accounts and are not available to other creditors of the Company. The
earnings of separate account investments are also assigned to the
policyholders in the separate accounts, and are not guaranteed or supported by
the other general investments of the Company. The Company earns mortality and
expense risk fees from the separate accounts and assesses withdrawal charges
in the event of early withdrawals. Separate accounts assets are valued at
fair value.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business which vary with and are directly related
to the production of new business, principally commissions, premium taxes,
sales costs, and certain policy issuance and underwriting costs, are deferred.
These deferred costs are amortized in proportion to estimated future gross
profits derived from investment income, realized gains and losses on sales of
securities, unrealized securities gains and losses recognized under SFAS #115,
interest credited to accounts, surrender fees, mortality costs, and policy
maintenance expenses. The estimated gross profit streams are periodically
reevaluated and the unamortized balance of deferred acquisition costs is
adjusted to the amount that would have existed had the actual experience and
revised estimates been known and applied from the inception of the policies
and contracts. The amortization and adjustments resulting from unrealized
gains and losses is not recognized currently in income but as an offset to the
unrealized gains and losses reflected as a separate component of equity.
The components of deferred policy acquistion costs were as follows:
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
(IN THOUSANDS OF DOLLARS) 12/31/95 5/31/95
1994 1993
<S> <C> <C> <C> <C>
Deferred policy acquisition costs,
beginning of period $ 92,398 $ 213,362 $ 146,504 $155,470
Effects of push down purchase
accounting (92,398) -- -- --
Commissions and expenses deferred 8,809 13,354 30,025 29,342
Amortization (100) (11,157) (125,357) (38,308)
Deferred policy acquisition costs
attributable to unrealized
gains/(losses) -- (123,161) 162,190 --
Deferred policy acquistion costs,
end of period $ 8,709 $ 92,398 $ 213,362 $146,504
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
PURCHASE RELATED INTANGIBLE ASSETS AND LIABILITIES
In accordance with the purchase method of accounting for business
combinations, two intangible assets and a future payable related to accrued
purchase price consideration were established as of the purchase date:
Present value of future profits
As of June 1, 1995 the Company established an intangible asset which
represents the present value of future profits to be derived from both the
purchased and transferred blocks of business. Certain estimates were utilized
in the computation of this asset including estimates of future policy
retention, investment income, interest credited to policyholders, surrender
fees, mortality costs, and policy maintenance costs discounted a pre-tax rate
of 18% (12% net after tax). In addition, as the Company has the option of
retaining its SPDA policies after they reach their next interest rate reset
date and are recaptured from OakRe, a component of this asset represents
estimates of future profits on recaptured business. This asset will be
amortized according to the estimated profit stream and will periodically be
adjusted as actual profits materialize and are different from the estimates.
The asset will also be adjusted for amounts attributable to realized and
unrealized securities gains and losses. Any adjustments to the unamortized
balance will be applied as if the revised estimates had been known and applied
since inception. The amortization period is the remaining life of the
policies, which is estimated to be 20 years from the date of original policy
issue. Based on current assumptions, amortization of the original in-force
PVFP asset, expressed as a percentage of the original in-force asset, are
projected to be 7.6%, 7.6%, 6.6%, 5.4% and 5.3% for the years ended December
31, 1996 through 2000, respectively. Actual amortization incurred during
these years may be more or less as assumptions are modified to incorporate
actual results.
The components of present value of future profits are as follows:
<TABLE>
<CAPTION>
The Company
7 Months Ended
(In Thousands) 12/31/95
<S> <C>
Present value of future profits - beginning of period $ 46,709
Interest added 1,941
Commissions capitalized 5,759
Gross amortization, excluding interest (4,024)
Present value of future profits attributable to
unrealized gains (6,471)
---------
Present value of future profits - end of period $ 43,914
=========
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
Future payable
Pursuant to the financial reinsurance agreement with OakRe, the receivable
from OakRe becomes due in installments when the SPDA policies reach their next
crediting rate reset date. For any recaptured policies that continue in force
into the next guarantee period, the Company will pay a commission to OakRe of
1.75% up to 40% of policy account values originally reinsured and 3.5%
thereafter. On policies that are recaptured and subsequently exchanged to a
variable annuity policy, the Company will pay a commission to OakRe of 0.50%.
The Company has recorded a future payable that represents the present value of
the anticipated future commission payments payable to OakRe over the remaining
life of the financial reinsurance agreement discounted at an estimated
borrowing rate of 6.5%. This liability will be periodically adjusted as actual
results differ from the estimates used in establishing the total purchase
price. This liability, which can be anticipated with a high degree of
certainty, represents a contingent purchase price payable for the policies
transferred to OakRe on the purchase date and has been pushed down to the
Company through the financial reinsurance agreement. The Company expects that
this payable will be substantially extinguished over the next five years.
The components of this future payable are as follows:
<TABLE>
<CAPTION>
The Company
7 Months Ended
(In Thousands) 12/31/95
<S> <C>
Future payable - beginning of period $ 27,797
Interest added 947
Payments to OakRe (4,777)
---------
Future payable - end of period $ 23,967
=========
</TABLE>
Goodwill
Under the push down method of purchase accounting, the excess of purchase
price over the fair value of assets and liabilities acquired and present value
of future profits less future payable is established as an asset and referred
to as Goodwill. Goodwill will also be periodically adjusted to account for any
retroactive changes to present value of future profits and future payables as
actual results differ from original assumptions and are applied retroactively
as of the original purchase date. The Company has elected to amortize goodwill
on the straight line basis over a 20 year period.
Deferred Tax Assets and Liabilities
Xerox Financial Services, Inc. (XFSI) and General American agreed to file an
election to treat the acquisition of the Company as an asset acquisition under
the provisions of Internal Revenue Code Section 338(h)(10). As a result of
that election, the tax basis of the Companys assets as of the date of
acquisition were revalued based upon fair market values. The principal effect
of the election was to establish a tax asset on the tax-basis balance sheet of
approximately $35.3 million for the value of the business acquired that is
amortizable for tax purposes.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
POLICYHOLDER DEPOSITS
The Company recognizes its liability for policy amounts that are not subject
to policyholder mortality nor longevity risk at the stated contract value,
which is the sum of the original deposit and accumulated interest, less any
withdrawals.
FUTURE POLICY BENEFITS
Reserves are held for future annuity benefits that subject the Company to
risks to make payments contingent upon the continued survival of an individual
or couple (longevity risk). These reserves are valued at the present value of
estimated future benefits discounted for interest, expenses, and mortality.
The assumed mortality is the 1983 Individual Annuity Mortality Tables
discounted at 5.75% to 8.50%, depending upon year of issue.
Current mortality benefits payable are recorded for reported claims and
estimates of amounts incurred but not reported.
PREMIUM REVENUE
The Company recognizes premium revenue at the time of issue on annuity
policies that subject it to longevity risks.
The Company currently assesses no explicit life insurance premium for its
commitment to make payments in excess of its recorded liability that are
contingent upon policyholder mortality. Benefits paid in excess of the
recorded liability are recognized when incurred.
Amounts collected on policies not subject to any mortality or longevity risk
are recorded as increases in the policyholder deposits liability.
FEDERAL INCOME TAXES
Prior to June 1,1995 the revenues and expenses of the Predecessor were
included in a consolidated Federal income tax return with its parent company
and other affiliates. Allocations of Federal income taxes were based upon
separate return calculations.
After June 1, 1995 the Company will be filing its own separate income tax
return, independent from its ultimate parent, GALIC.
The Company accounts for deferred income taxes according to Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS
#109).
Under the asset and liability method of SFAS #109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
(continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
those temporary differences are expected to be recovered or settled. Under
SFAS #109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income to the period that includes the enactment
date.
RISKS AND UNCERTAINTIES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
The following elements of the consolidated financial statements are most
affected by the use of estimates and assumptions:
- Investment market valuation
- Amortization of deferred policy acquisition costs
- Calculation and amortization of present value of future profits
- Recoverability of Goodwill
- Recoverability of guaranty fund assessments
The market value of the Company's investments is subject to the risk that
interest rates will change and cause a temporary increase or decrease in the
liquidation value of debt securities. To the extent that fluctuations in
interest rates cause the cash flows of assets and liabilities to change, the
Company might have to liquidate assets prior to their maturity and recognize a
gain or loss. Interest rate exposure for the investment portfolio is managed
through asset/liability management techniques which attempt to control the
risks presented by differences in the probable cash flows and reinvestment of
assets with the timing of crediting rate changes in the Company's policies and
contracts. Changes in the estimated prepayments of mortgage-backed securities
also may cause retrospective changes in the amortization period of securities
and the related recognition of income.
The amortization of deferred acquisition costs is based on estimates of
long-term future gross profits from existing policies. These gross profits
are dependent upon policy retention and lapses, the spread between investment
earnings and crediting rates, and the level of maintenance expenses. Changes
in circumstances or estimates may cause retrospective adjustment to the
periodic amortization expense and the carrying value of the deferred expense.
In a similar manner, the amortization of present value of future profits is
based on estimates of long-term future profits from existing and recaptured
policies.
These gross profits are dependent upon policy retention and lapses, the spread
between investment earnings and crediting rates, and the level of maintenance
expenses. Changes in circumstances or estimates may cause retrospective
adjustment to the periodic amortization expense and the carrying value of the
asset.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets
to be Disposed of (SFAS 121), which was adopted by the Company in the fourth
quarter of 1995, the Company has considered the recoverability of Goodwill and
has concluded that no circumstances have occurred which would give rise to
impairment of Goodwill for the period ending December 31, 1995.
The Company is subject to assessments in substantially all jurisdictions where
it is licensed to fund guaranteed benefits to policyholders of non-affiliated
insolvent insurers licensed in those jurisdictions. Such assessments
generally are limited to a percentage of the premiums written by the Company
and are fully or partially recoverable as credits against future premium tax
payments in the majority of jurisdictions. The Company is at risk to extent
that the Company may not incur sufficient premium taxes to permit full
recovery of available credits. The Company has been indemnified by OakRe
against any guaranty assessments incurred that relate to insolvencies
occurring prior to June 1, 1995. See note 11 - Guaranty Fund Assessments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS #107) applies fair value disclosure
practices with regard to financial instruments, both assets and liabilities,
for which it is practical to estimate fair value. In cases where quoted
market prices are not readily available, fair values are based on estimates
that use present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Although fair value
estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, might
not be realized in the immediate settlement of the instruments. SFAS #107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Because of this, and further because a value of
a business is also based upon its anticipated earning power, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
SFAS #115 takes SFAS #107 another step and requires balance sheet adjustments
of debt investments available for sale and equity investments to fair value
with a corresponding adjustment to shareholders' equity. The Predecessor
adopted SFAS #115 in 1994 and classified all of its investments as "available
for sale". The effects of implementing SFAS #115 as of January 1, 1994 was a
net increase in Shareholders' Equity of approximately $29.2 million.
The Predecessor adopted Statement of Financial Accounting Standard No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments" (SFAS #119), as of December 31, 1994. SFAS #119 requires
increased disclosures about derivative financial instruments including the
amount, nature, and terms of all derivative financial instruments as well as
(continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
disclosure of the purposes for which derivative financial instruments are
held, end-of-period fair values and any net gains or losses arising from
trading of derivative financial instruments.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS
AND ACCRUED INVESTMENT INCOME:
The carrying values amounts reported in the balance sheets for these
instruments approximate their fair values. Short-term debt securities are
considered "available for sale."
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES):
Fair values for debt securities are based on quoted market prices, where
available. For debt securities not actively traded, fair value estimates are
obtained from independent pricing services. In some cases, such as private
placements and certain mortgage-backed securities, fair values are estimated
by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments. (See
note 4 for fair value disclosures). Fair values for mortgages are based on
management estimates and incorporate independent appraisals of underlying real
property. As of December 31, 1995, fair value of the Companys mortgage loans
are equivalent to the carrying value.
INTEREST RATE SWAPS AND FINANCIAL FUTURES CONTRACTS:
The fair value of interest rate swaps and financial futures contracts are the
amounts the Company would receive or pay to terminate the contracts at the
reporting date, thereby taking into account the current unrealized gains or
losses of open contracts. Amounts are based on quoted market prices, or
pricing models or formulas using current assumptions. (See note 6 for fair
value disclosures).
INVESTMENT CONTRACTS:
The Company's policy contracts require the beneficiaries to commence receipt
of payments by the later of age 85 or 10 years after purchase, and
substantially all permit earlier surrenders, generally subject to fees and
adjustments. Fair values for the Company's liabilities for investment type
contracts (Policyholder Deposits) are estimated as the amount payable on
demand. As of December 31, 1995 and 1994 the cash surrender value of
policyholder funds on deposit were $2,228,009 and $129,404,638 respectively,
less than their stated carrying value. Of the contracts permitting surrender,
90% provide the option to surrender without fee or adjustment during the 30
days following reset of guaranteed crediting rates. The Company has not
determined a practical method to determine the present value of this option.
All of the Company's deposit obligations are fully guaranteed by the acquirer,
GALIC, and the receivable from OakRe equal to the SPDA obligations is
guaranteed by OakRe's parent, XFSI.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
REINSURANCE:
Reinsurance is not material to the Companys operation or its financial
statements. The Company, however, has adopted the provisions of Statement of
Financial Accounting Standard No. 113, Accounting and Reporting for
Reinsurance of Short Duration and Long Duration Contracts (SFAS 113). The
adoption of this accounting standard had no effect on the financial statements
other than gross reporting of balance sheet amounts and disclosure of
reinsurance amounts netted against revenues and expenses.
The financing reinsurance agreement entered into with OakRe does not meet the
conditions for reinsurance accounting under SFAS No. 113. The net assets
initially transferred to OakRe were established as a receivable and are
subsequently increased as interest is accrued on the underlying liabilities
and decreased as funds are transferred back to the Company when policies reach
their crediting rate reset date or benefits are claimed.
OTHER
Certain 1993 and 1994 amounts have been reclassified to conform to the 1995
presentation.
(4) INVESTMENTS
The Company's investments in debt and equity securities are considered
available for sale and carried at estimated fair value, with the aggregate
unrealized appreciation or depreciation being recorded as a separate component
of shareholder equity. The carrying value and amortized cost of investments at
December 31, 1995 and 1994 are as follows:
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
THE COMPANY
1995
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
AMORTIZED
VALUE GAINS LOSSES VALUE
COST
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 4,307 $ 156 -- $ 4,307 $ 4,151
Mortgage-backed and derivative
securities:
Collateralized mortgage obligations 252,148 4,344 $ (237) 252,148 248,041
Corporate, state, municipalities, and
political subdivisions 338,101 7,261 (836) 338,101 331,676
Total debt securities 594,556 11,761 (1,073) 594,556 583,868
Mortgage loans 77,472 -- -- 77,472 77,472
Policy loans 19,125 -- -- 19,125 19,125
Short term investments 7,859 36 -- 7,859 7,823
Total investments $699,012 $11,797 $(1,073) $699,012 $688,288
<FN>
As of December 31, 1995, the Company has no impaired investments and no valuation
allowances established for potential losses on its investments.
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
PREDECESSOR
1994
GROSS GROSS ESTIMATED COST
OR
CARRYING UNREALIZED UNREALIZED FAIR
AMORTIZED
VALUE GAINS LOSSES VALUE
COST
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 10,834 $ 80 $ (1,787) $ 10,834 $ 12,541
Mortgage-backed and
derivative securities:
GNMA 6,447 186 -- 6,447 6,261
FNMA & FHLMC 272 6 -- 272 266
Collateralized mortgage obligations 1,188,257 490 (185,964) 1,188,257 1,373,731
Foreign governments 27,947 -- (4,355) 27,947 32,302
Corporate, state, municipalities, and
political subdivisions 654,848 9,884 (80,583) 654,848 725,547
Redeemable preferred stocks 13,037 194 (97) 13,037 12,940
Total debt securities 1,901,642 10,840 (272,786) 1,901,642 2,163,588
Other invested assets (1) 7,597 466 (1,335) 6,728 7,597
Equity securities 8,754 -- -- 8,754 8,754
Real estate (1) 26,735 2,034 (153) 28,616 26,735
Mortgage loans 6,825 -- (1,245) 5,580 6,825
Policy loans 17,691 -- -- 17,691 17,691
Short term investments 93,118 4,060 (4,654) 93,118 93,712
Total investments(1) $2,062,362 $17,400 $(280,173) $2,062,129 $2,324,902
Company's beneficial interest in separate
account assets $ 167 N/A N/A $ 167 N/A
<FN>
(1) The Company has established valuation allowances of approximately $200,000 and $400,000 as
of December 31, 1994 for estimated potential losses on real estate and other invested assets,
respectively.
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The amortized cost and estimated market value of debt securities at December
31, 1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Maturities of mortgage-backed securities will be substantially shorter than
their contractual maturity because they require monthly principal installments
and mortgagees may prepay principal.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
(in thousands of dollars)
Due after one year through five years $135,221 $137,828
Due after five years through ten years 176,906 180,132
Due after ten years 23,700 24,448
Mortgage-backed securities 248,041 252,148
Total $583,868 $594,556
<FN>
At December 31, 1995, approximately 99.25% of the Company's debt securities
are investment grade or are non-rated but considered to be of investment
grade. Of the 0.75% non-investment grade debt securities, all are rated as
BB+.
</TABLE>
Included in debt securities in 1994 and the first five months of 1995 are
investments in interest-only mortgage-backed stripped securities (IOs) and
similar IOettes. Accounting for investments in "high risk" (interest only)
collateralized mortgage obligations (CMOs), is in accordance with the
provisions of the Financial Standards Board's Emerging Issues Task Force
Consensus Nos. 89-4 and 93-18. An effective yield is calculated for each high
risk CMO based on the current amortized cost of the investment and the current
estimate of future cash flow. The recalculated effective yield is used to
record interest income in subsequent periods (the "prospective method"). If
the anticipated cash flow for any "high risk" CMO discounted at the comparable
risk-free rate is less than the unamortized cost, an impairment loss is
recorded and the unamortized cost adjusted. The write-down is treated as a
realized loss. Write-downs of approximately $3,341,163 and $51,120,276 were
recorded in 1994 and 1993, respectively. At December 31, 1994 the Predecessor
held such securities with a carrying value of $36,441,742. The weighted
average of the effective yield that was used to accrue interest income in 1994
was 11.88%.
FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The Company participates in a securities lending program whereby certain
securities are loaned to third parties, primarily major brokerage firms. The
agreement with a custodian bank facilitating such lending requires a minimum
of 102% of the initial market value of the domestic loaned securities to be
maintained in a collateral pool. To further minimize the credit risk related
to this lending program, the Company monitors the financial condition of the
counter parties to these agreements. Securities loaned at December 31, 1995
had market values totaling $16,034,037. Cash, letters of credit, and
government securities of $16,353,995 was held by the custodian bank as
collateral to secure this agreement. Income on the Companys security lending
program in 1995 was immaterial.
Debt securities with a recorded investment of $0 and $2,827,500, were
non-income producing during the years ended December 31,1995 and 1994.
Information related to troubled debt restructurings during 1994 is as follows:
<TABLE>
<CAPTION>
THE
PREDECESSOR
DEBT MORTGAGE
SECURITIES LOANS
TOTAL
(in thousands of
dollars)
<S> <C> <C> <C>
Aggregate carrying value at December 31, 1994 $3,306 -- $3,306
Gross interest income included in net income
during 1994 205 -- 205
Gross interest income that would have been
earned during 1994 if there had been no
restructuring 538 -- 538
</TABLE>
Information related to troubled debt restructuring during 1993 is as follows:
<TABLE>
<CAPTION>
THE
PREDECESSOR
DEBT
MORTGAGE
SECURITIES LOANS
TOTAL
(in thousands of
dollars)
<S> <C> <C> <C>
Aggregate carrying value at December 31, 1993 $5,275 $6,405 $11,680
Gross interest income included in net income
during 1993 589 568 1,157
Gross interest income that would have been
earned during 1993 if there had been no
restructuring 904 712 1,616
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The components of net investment income were as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994
1993
(in thousands of dollars)
<S> <C> <C> <C> <C>
Income on debt securities $19,629 $ 63,581 $ 267,958 $327,489
Income on equity securities -- 302 645 725
Income on short-term investments 2,778 28,060 11,705 4,624
Income on cash on deposit -- -- 316 1,711
Income on interest rate swaps -- 377 (244) 3,365
Income on policy loans 868 624 1,376 1,147
Interest on mortgage loans 1,444 248 1,162 1,053
Income on foreign exchange -- 184 (433) (281)
Income of real estate -- 1,508 3,278 586
Income on separate account investments -- (1) 2 2,256
Miscellaneous interest 109 (24) (853) (168)
--
Total investment income 24,828 94,859 284,912 342,507
Investment expenses (640) (2,373) (7,296) (6,924)
Net investment income $24,188 $ 92,486 $ 277,616 $335,583
Realized capital gains/(losses) were as follows:
Debt securities $ 1,344 $(16,749) $ (79,300) $ 12,716
Mortgage loans -- 1,431 (3,452) (453)
Equity securities -- (423) (76) 2,489
Real estate -- (124) -- 2,335
Short-term investments (20) (1,933) (282) 612
Other assets -- (76) 147 --
Interest rate swaps -- 5,460 (18,398) --
Net realized gains/(losses) on investments $ 1,324 $(12,414) $(101,361) $ 17,699
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
- -----------------------------------------------------
7 MONTHS 5 MONTHS
ENDED ENDED
12/31/95 5/31/95 1994 1993
<S> <C> <C> <C> <C>
Unrealized gains/(losses) were as follows:
Debt securities $10,688 $(85,410) $(261,947) $ --
Equity securities -- -- -- (494)
Short-term investments 36 879 (594) --
Effects on deferred acquisition costs amortization -- 39,030 162,190 --
Effects on present value of future profits (6,471) -- -- --
Unrealized gains/(losses) before income tax 4,253 (45,501) (100,351) (494)
Unrealized income tax benefit/(expense) (1,489) 16,664 35,123 173
Net unrealized gains (losses) on investments $ 2,764 $(28,837) $ (65,228) $(321)
</TABLE>
Proceeds from sales of investments in debt securities for the Company during
1995 were $214,811,186, and for the Predecessor were $2,786,998,780. Gross
gains of $1,533,501 and gross losses of $190,899 were realized by the Company
on its sales. Included in these amounts for the Company are $373,768 of
gross gains realized on the sale of non-investment grade securities. The
Predecessor realized gross gains of $9,499,191 and gross losses of $26,249,279
on its sales. Included in these amounts are $6,367,297 of gross gains and
$7,607,167 of gross losses realized on the sale of non-investment grade
securities.
Proceeds from sales of investments in debt securities during 1994 were
$3,081,863,341. Gross gains of $59,472,808 and gross losses of $136,394,109
were realized on those sales. Included in these amounts are $6,455,887 of
gross gains and $6,692,683 of gross losses realized on the sale of
non-investment grade securities.
Proceeds from sales of investments in debt securities during 1993 were
$3,635,309,534. Gross gains of $229,942,137 and gross losses of $198,648,778
were realized on those sales. Included in these amounts are $47,042,511 of
gross gains and $9,163,938 of gross losses realized on the sale of
non-investment grade securities.
Unrealized appreciation/(depreciation) of debt securities for the Company in
1995, and the Predecessor in 1995, 1994 and 1993 were $10,688,000,
$176,537,000, $(357,401,000), and $15,171,000, respectively. Unrealized
appreciation/(depreciation)of debt securities is calculated as the change
between the cost and market values of debt securities for the years then
ended.
Securities with a book value of approximately $6,933,755 at December 31, 1995
were deposited with government authorities as required by law.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(5) SECURITIES GREATER THAN 10% OF SHAREHOLDERS' EQUITY
As of December 31, 1995 the Company held the following individual securities
which exceeded 10% of shareholders' equity:
<TABLE>
<CAPTION>
Long-term Debt Amortized
Securities Cost
- -----------------------------------
<S> <C>
Countrywide Mtg. 1933-12 A4 $18,681,636
American Airlines 14,940,484
</TABLE>
As of December 31, 1994 the Company held the following individual securities
which exceeded 10% of shareholders' equity:
<TABLE>
<CAPTION>
Long-term Debt Amortized Long-term Debt Amortized
Securities Cost Securities Cost
<S> <C> <C> <C>
PRU HOME MTG SEC 1994 SER 26-A $43,947,846 VIRGINIA STATE HOUSING DEV AUTH 1994-A $14,300,000
PRU HOME MTG SEC 1993 SER 19-A9 41,024,780 PRU HOME MTG SEC 1994 SER 8-A2 14,228,882
HOUSING SEC INC 1994 SER 1-A8 34,293,893 FHLMC MC MTG PRT CRT SER 1628-G 13,841,422
FNMA REMIC TR 1994-51 PE 34,079,290 FNMA REMIC TR 1993 SER 33-ZA 13,613,754
FHLMC MC MTG PRT CRT SER 1162-Z 34,029,681 FNMA REMIC TR 1994 SER 58-B 13,502,865
RES FUNDING CORP 1994 SER S7-A3 33,929,196 FNMA REMIC TR 1994 SER 58-A 13,402,600
RES FUNDING CORP 1993 SER S18-A6 30,771,180 TELEPHONE & DATA SYSTEMS 13,382,782
FHLMC MC MTG PRT CRT SER 1652-E 29,880,047 ARGENTINA FRB 13,051,979
G E CAPITAL 1994 SER 4-A6 29,587,419 FHA PROJECT LOAN 223-F(MANASSAS VA) 12,985,981
RES FUNDING CORP 1994 SER S10-A3 28,743,601 PARAMOUNT COMMUNICATIONS 12,985,579
FNMA REMIC TR 1993 SER 131-Z 26,821,993 FNMA REMIC TR 1993 SER G22-ZA 12,962,715
CITICORP MTG 1994 SER 11-A1 26,271,938 FNMA REMIC TR 1992 SER 184-X 12,815,453
COUNTRYWIDE MTG 1993 SER 13-A2 24,027,743 TELARG 12,458,038
G E CAPITAL KRONE LINKED (CI) 23,500,000 UNITED AIRLINES 1991 ETC SER A2 12,420,542
G E CAPITAL MTG 1994 SER 12-A4 23,480,685 PRU HOME MTG SEC 1994 SER 6-A5 12,400,623
GRUMA SA DE CV 23,335,945 SIGNET MASTER TR 1994-4A 11,986,616
FHLMC MC MTG PRT CRT SER 1108-K 23,146,222 GENERAL MOTORS CORP DEBENTURE 11,856,797
FHLMC MC MTG PRT CRT SER 1468-ZA 22,546,223 PRU HOME MTG SEC 1993 SER 43-10 11,791,582
G E CAPITAL MTG 1994 SER 10-A12 21,288,675 CENTRAL BANK OF ARGENTINA 11,695,148
RES FUNDING CORP 1993 SER S26-A8 21,225,227 FHLMC MC MTG PRT CRT SER 1697-PG 11,544,588
LOUISIANA POWER & LIGHT(WATERFORD 3) 20,909,267 FNMA REMIC TR 1993 SER 29-SK 11,316,353
SEARS MTG ACC CORP 1993 SER 11-A5 20,861,498 PRU HOME MTG SEC 1993 SER 41-A4 11,272,637
FEDERAL HOME LOAN BANK 20,716,221 FHLMC MC MTG PRT CRT SER 1513-AF 11,266,102
FHLMC MC MTG PRT CRT SER 1244-G 20,697,580 FNMA REMIC TRUST 1993 SER 4-HB 11,181,840
PRU HOME MTG SEC 1993 SER 30-A9 20,570,432 PHILLIPS PETROLEUM 11,120,220
G E CAPITAL MTG 1992 SER 7 20,423,860 INTERAMERICAN DEV BANK 10,751,421
CSR AMERICA INC 19,916,660 COUNRTYWIDE MTG 1994 SER L-AB 10,603,498
FHLMC MC MTG PRT CRT SER 1364-I 19,892,880 CHASE MTG SEC 1994SER F-A7 10,516,592
FHLMC MC MTG PRT CRT SER 1574-F 19,825,320 FNMA REMIC TR 1994 SER 3-SC 10,434,265
SEARS MTG SEC CORP 1993-7 T7 19,709,253 NEWS AMERICAN HOLDINGS 10,310,547
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
FINANCIAL FUTURES CONTRACTS
The Predecessor was a party to financial futures contracts under a program of
hedging with off-balance sheet risk in the normal course of business to meet
the needs of its policyholders and to reduce its own exposure to fluctuations
in interest rates. The contracts involved, to varying degrees, elements of
interest rate risk in excess of the amount recognized in the consolidated
balance sheet.
Futures contracts are contracts for delayed delivery of securities in which
the seller agrees to make delivery at a specified future date for a specific
price. Risks arise from the possible inability of counter parties to meet the
terms of their contracts and from movements in securities values and interest
rates. When futures contracts are designated as hedges additional risks arise
due to the possibility that the futures contract will provide an imperfect
correlation to the hedged security.
As of December 31, 1994, the Predecessor held 65 5Yr T-note futures, 190 10Yr
T-note futures, and 50 T-bond futures contracts with a total notional face
amount of $30,500,000. The contracts matured in March, 1995, and resulted in
a net amount of $468,520 being applied as an increase in book value of the
underlying hedged securities. Collateral requirements were set by the Chicago
Board of Trade and averaged $1,121 per contract as of December 31, 1994.
INTEREST RATE SWAPS
During 1994 and the first five months of 1995, the Predecessor was party to
derivative financial instruments in the normal course of business for the
purposes of earning investment income and modifying the interest rate-related
risks of the portfolio.
The notional amounts of derivatives do not represent amounts exchanged by the
parties and, thus, are not a measure of the Company's exposure through the use
of derivatives. The amounts exchanged are determined by reference to the
notional amounts and the other terms of the instruments.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The following table summarizes various information regarding derivative
financial instruments as of December 31, 1994:
<TABLE>
<CAPTION>
FAIR MARKET LOSSES
NOTIONAL PURPOSE VALUE AT FROM
Amount Nature/Terms For Holding 12/31/94 Investment
- ----------- ----------------------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Open
- -----------
5,000,000 LIBOR/Mexican Par Bond Swap
2/17/1995 receive 10% fixed,
pay 6 Month LIBOR Investment $ (5,460,000) $ 0
35,000,000 Zero Coupon Swap Spread/Yield
Curve 8/19/1996 6 Month LIBOR Investment (12,937,750) 0
Closed
- -----------
25,000,000 Lehman Corporate Index Swap
1/1/1994 Investment 0 (77,305)
25,000,000 Lehman Corporate Index Swap
1/1/1994 Investment 0 (77,305)
</TABLE>
The Libor/Mexican Par Bond swap caused the Predecessor to receive or pay the
net of a fixed-rate of 10%, in exchange for paying 6 month LIBOR, times a
multiplier of six times the notional amount. The substance is as if the
Predecessor owned $30 million par of the bonds using funds borrowed at six
month LIBOR. At maturity, the Predecessor committed to acquire the $30
million par of the bonds if their market price was less than 72, for a payment
of $21.6 million. The Predecessor thereby assumed the market risk below that
price.
The Predecessor received or paid at maturity of the Zero Coupon Swap
Spread/Yield Curve swap an amount derived from both the relationship between
the 6 month LIBOR and the 10 year constant maturity treasury rates, and a
function (swap spread) that usually correlates to corporate bond quality
spreads. The Predecessor could lose money if the yield curve is flat or
inverted and the swap spread is small. The purpose of the instrument was to
offset the effects of holding very large amounts of cash equivalents in
conjunction with XFSIs plan to discontinue its ownership of the Predecessor.
Effective December 31, 1994, XFSI formally assumed the net obligation for this
instrument, resulting in a capital contribution to the Predecessor.
The unrealized depreciation was recorded as a realized loss as of December 31,
1994 based on the current evolving accounting practices for derivative
instruments where as at December 31, 1993 the unrealized loss was treated as
an off-balance-sheet item.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The following table summarizes various information regarding these derivative
financial instruments as of December 31, 1995:
<TABLE>
<CAPTION>
FAIR MARKET LOSSES
NOTIONAL PURPOSE VALUE AT FROM
Amount Nature/Terms For Holding 12/31/95 Investment in 1995
- ---------- ---------------------------- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
Closed
- ----------
5,000,000 LIBOR/Mexican Par Bond Swap
2/17/1995 receive 10% fixed,
pay 6 Month LIBOR Investment $ 0 $ 0
</TABLE>
(7) POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company has no direct employees and no retired employees. All personnel
used to support the operations of the Company are supplied by contract by Cova
Life Management Company (CLMC), a wholly owned subsidiary of Cova Corporation.
The Company is allocated a portion of certain health care and life insurance
benefits for future retired employees of CLMC as determined in accordance with
Financial Accounting Standards Board Statement No. 106, "Employers' Accounting
For Postretirement Benefits Other Than Pensions" (SFAS #106). In 1995, the
Company was allocated a portion of benefit costs including severance pay,
accumulated vacations, and disability benefits as determined in accordance
with Financial Accounting Standards Board Statement No. 112, "Employers'
Accounting for Postemployment Benefits" (SFAS #112). At December 31, 1995
CLMC had no retired employees nor any employees fully eligible for retirement
and had no disbursements for such benefit commitments. The expense arising
from these obligations is not material.
(8) INCOME TAXES
The Company will file a consolidated Federal Income Tax return for the first
five months of 1995 with the Companys former ultimate parent, Xerox
Corporation, a New York corporation, along with Xerox Corporationss other
eligible subsidiaries. For the last seven months, the Company will file a
consolidated Federal Income Tax return with its wholly-owned subsidiary, First
Cova Life Insurance Company, a New York insurance company. Amounts payable or
recoverable related to periods before June 1, 1995 are subject to an
indemnification agreement with XFSI, which has the effect that the Company is
not at risk for any income taxes nor entitled to recoveries related to those
periods, except for approximately $1.4 million of state income taxes.
The actual Federal income tax expense differed from the expected tax expense
computed by applying the US. Federal statutory rate to income before taxes on
income as follows:
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of COVA Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
1995 1995 1994 1993
7 MONTHS 5 MONTHS
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $129 35.0% $(13,862) 35.0% $(76,739) 35.0% $7,503 35.0%
State income taxes, net 11 3.0 (306) 0.8 (1,552) 0.7 1,631 7.6
Rate change effect on prior deferrals -- -- -- -- -- -- 456 2.1
Tax-exempt bond interest (22) (6.0) (332) 0.8 (1,208) 0.6 (123) (0.6)
Amortization of intangible assets 254 69.0 -- -- 111 (0.1) 111 0.5
Permanent difference due to derivative
transfer -- -- 4,399 (11.1) -- -- -- --
Other 59 16.1 37 (.1) 2,388 (1.1) (76) (0.3)
Total $431 117.1% $(10,064) 25.4% $(77,000) 35.1% $9,502 44.3%
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995 &
1994 follows:
<TABLE>
<CAPTION>
The Company Predecessor
1995 1994
<S> <C> <C>
Deferred tax assets:
Policy Reserves $ 7,601 $ 26,602
Liability for commissions on recapture 8,868 --
Tax basis of intangible assets purchased 13,141 --
DAC Proxy Tax 4,749 4,797
Permanent Impairments -- 4,934
Unrealized losses on investments -- 91,889
Book to tax differences on Investments 1,287
Other deferred tax assets 2,860 4,809
Total assets $37,219 $134,318
Deferred tax liabilities:
PVFP $16,774 --
Unrealized gains on investments 1,489 --
Deferred Acquisition Costs 5,316 74,676
Other deferred tax liabilities 84 3,507
Total liabilities $23,663 $ 78,183
Net Deferred Tax Asset/(Liability) $13,556 $ 56,135
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
the deferred tax assets will be fully realized in the future based upon
expectation of the reversal of existing temporary differences, anticipated
future earnings, and consideration of all other available evidence.
Accordingly no valuation allowance is established.
(9) RELATED-PARTY TRANSACTIONS
The Company has entered into management, operations and services agreements
with both affiliated and unaffiliated companies. The affiliated companies are
Cova Life Management Company (CLMC), a Delaware corporation, which provides
management services and the employees necessary to conduct the activities of
the Company, and General American Investment Management Company, which
provides investment advice. Additionally, a portion of overhead and other
corporate expenses are allocated by the Companys ultimate parent, GALIC. The
unaffiliated companies are Johnson & Higgins, a New Jersey corporation, and
Johnson & Higgins/Kirke Van Orsdel, a Delaware corporation, which provide
various services for the Company including underwriting, claims and
administrative functions. The affiliated and unaffiliated service providers
are reimbursed for the cost of their services and are paid a service fee.
Expenses and fees paid to affiliated companies during the 7 months of 1995 for
the Company were $7,139,525, and the five months of 1995 and the years of 1994
and 1993 for the Predecessor were 6,364,609, $8,553,028, and $7,986,999,
respectively.
(10) STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Generally accepted accounting principles (GAAP) differ in certain respects
from the accounting practices prescribed or permitted by insurance regulatory
authorities (statutory accounting principles).
The major differences arise principally from the immediate expense recognition
of policy acquisition costs and intangible assets for statutory reporting,
determination of policy reserves based on different discount rates and
methods, the non-recognition of financial reinsurance for GAAP reporting, the
establishment of an Asset Valuation Reserve as a contingent liability based on
the credit quality of the Company's investment securities, and an Interest
Maintenance Reserve as an unearned liability to defer the realized gains and
losses of fixed income investments presumably resulting from changes to
interest rates and amortize them into income over the remaining life of the
investment sold. In addition, SFAS #115 adjustments to record the carrying
values of debt securities and certain equity securities at market are applied
only under GAAP reporting and capital contributions in the form of notes
receivable from an affiliated company are not recognized under GAAP reporting.
Purchase accounting creates another difference as it requires the restatement
of GAAP assets and liabilities to their estimated fair values and shareholders
equity to the net purchase price. Statutory accounting does not recognize the
purchase method of accounting.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
As of December 31, the differences between statutory capital and surplus and
shareholder's equity determined in conformity with generally accepted
accounting principles (GAAP) were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
(in thousands of dollars)
<S> <C> <C> <C>
Statutory Capital and Surplus $ 59,682 $ 100,071 $108,617
Reconciling items:
GAAP investment valuation reserves -- (600) (14,076)
Statutory Asset Valuation Reserves 13,378 45,470 43,060
Interest Maintenance Reserve 1,892 15,123 50,074
GAAP investment adjustments to fair value 10,724 (274,222) --
Deferred policy acquisition costs 8,708 213,362 146,504
GAAP basis policy reserves (11,233) 7,944 (45,784)
Deferred federal income taxes (net) 13,556 56,135 (8,933)
Modified coinsurance -- (10,534) (13,994)
Goodwill 23,001 -- --
Present value of future profits 43,914 -- --
Future purchase price payable (23,967) -- --
Elimination of notes contributed
to statutory surplus -- (72,000) --
Other (1,569) (2,138) 4,365
GAAP Shareholders' Equity $138,086 $ 78,611 $269,833
</TABLE>
Statutory net losses for the years ended December 31, 1995, 1994 and 1993 were
$(74,012,650), $(92,952,989),and $(13,299,824), respectively.
The maximum amount of dividends which can be paid by State of Missouri
insurance companies to shareholders without prior approval of the insurance
commissioner is the greater of 10% of statutory earned surplus or statutory
net gain from operations for the preceding year. Accordingly, the maximum
dividend permissible at December 31, 1995 was $ 0.
The National Association of Insurance Commissioners has developed certain Risk
Based Capital (RBC) requirements for life insurers. If prescribed levels of
RBC are not maintained, certain actions may be required on the part of the
Company or its regulators. At December 31, 1995 the Company's Total Adjusted
Capital and Authorized Control Level - RBC were, $73,060,575 and $18,224,056
respectively. This level of adjusted capital qualifies under all tests.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARY
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(11) GUARANTY FUND ASSESSMENTS
The Company participates with all life insurance companies licensed throughout
the United States, in associations formed to guarantee benefits to
policyholders of insolvent life insurance companies. Under state laws, as a
condition for maintaining the Companys authority to issue new business, the
Company is contingently liable for its share of claims covered by the guaranty
associations for insolvencies incurred through 1995, but for which assessments
have not yet been determined nor assessed, to a maximum in each state
generally of 2% of statutory premiums per annum in the given state. Most
states then permit recovery of assessments as a credit against premium or
other state taxes over, most commonly, five years.
At December 31, 1995, the National Organization of Life and Health Guaranty
Associations (NOLHGA) distributed a study of the major outstanding industry
insolvencies, with estimates of future assessments by state. Based on this
study, the Company has accrued a liability for approximately $14.3 million in
future assessments on insolvencies that occurred before December 31, 1995.
Under the coinsurance agreement between the Company and OakRe (see note 1),
OakRe is required to reimburse the Company for any future assessments that it
pays which relate to insolvencies occurring prior to June 1, 1995. As such,
the Company has recorded an additional receivable from OakRe for $14.3
million.
At the same time, the Company is liable to OakRe for 80% of any future premium
tax recoveries that are realized from any such assessments, and may retain the
PART C
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included in
Part B hereof:
1 Independent Auditors' Report.
2. Consolidated Balance Sheets of the Company as of December 31, 1995
and 1994.
3. Consolidated Statements of Income for the Company for the years ended
December 31, 1995, 1994 and 1993.
4. Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993.
5. Consolidated Statements of Cash Flows for the years ended December
31, 1995, 1994 and 1993.
6. Notes to Consolidated Financial Statements, December 31, 1995, 1994
and 1993.
b. EXHIBITS
1. Resolution of Board of Directors of the Company authorizing the
establishment of the Variable Account.*
2. Not Applicable.
3. Principal Underwriter's Agreement.###
4. Individual Flexible Purchase Payment Deferred Variable Annuity
Contract.#
5. Application for Variable Annuity.##
6. (i) Copy of Articles of Incorporation of the Company.**
(ii) Copy of the Bylaws of the Company.*
7. Not Applicable.
8. Form of Fund Participation Agreement.#
9. Opinion and Consent of Counsel.
10. Consent of Independent Accountants.
11. Not Applicable.
12. Not Applicable.
13. Not Applicable
14. Company Organizational Chart.
* incorporated by reference to Cova Variable Annuity Account One,
Form N-4 (File No. 811-5200) as filed on June 11, 1987.
** incorporated by reference to Cova Financial Services Life Insurance
Company, Pre-Effective Amendment No. 1 to Form S-1 (File No. 33-43099)
as filed on December 24, 1991.
# incorporated by reference to Registrant's Form N-4 as filed on April
2, 1992.
## incorporated by reference to Registrant's Pre-Effective Amendment
No. 2 to Form N-4 as filed on May 1, 1992.
### incorporated by reference to Registrant's Post-Effective Amendment
No. 1 to Form N-4 as filed on May 1, 1993.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The following are the Officers and Directors of the Company:
<TABLE>
<CAPTION>
<S> <C>
Name and Principal Position and Offices
Business Address with Depositor
- -------------------------------- ----------------------------------
Leonard Rubenstein Chairman of the Board and Director
700 Market Street
St. Louis, MO 63101
Lorry J. Stensrud President and Director
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Donald R. Altieri Director
800 Long Ridge Rd.
Stamford, CT 06904
John W. Barber Director
13045 Tesson Ferry Road
St. Louis, MO 63128
William D. Anthony Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Jerome P. Darga Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Judy M. Drew Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Judith A. Gallup Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Patricia E. Gubbe Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Philip A. Haley Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Christopher Harden Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Eric T. Henry Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Jeffery K. Hoelzel Vice President, General Counsel,
One Tower Lane, Suite 3000 Secretary and Director
Oakbrook Terrace, IL 60181-4644
J. Robert Hopson Vice President,
One Tower Lane, Suite 3000 Chief Actuary and Director
Oakbrook Terrace, IL 60181-4644
Douglas E. Jacobs Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
William C. Mair Vice President, Controller
One Tower Lane, Suite 3000 and Director
Oakbrook Terrace, IL 60181-4644
Patrice L. Peltier Vice President and Director
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Myron H. Sandberg Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
John W. Schaus Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
A company organizational chart is set forth in Exhibit 14.
ITEM 27. NUMBER OF CONTRACT OWNERS
There are no contract owners.
ITEM 28. INDEMNIFICATION
The Bylaws of the Company (Article IV, Section 1) provide that:
Each person who is or was a director, officer or employee of the corporation
or is or was serving at the request of the corporation as a director, officer
or employee of another corporation, partnership, joint venture, trust or other
enterprise (including the heirs, executors, administrators or estate of such
person) shall be indemnified by the corporation as of right to the full extent
permitted or authorized by the laws of the State of Missouri, as now in effect
and as hereafter amended, against any liability, judgment, fine, amount paid
in settlement, cost and expenses (including attorney's fees) asserted or
threatened against and incurred by such person in his capacity as or arising
out of his status as a director, officer or employee of the corporation or if
serving at the request of the corporation, as a director, officer or employee
of another corporation, partnership, joint venture, trust or other enterprise.
The indemnification provided by this bylaw provision shall not be exclusive
of any other rights to which those indemnified may be entitled under any other
bylaw or under any agreement, vote of shareholders or disinterested directors
or otherwise, and shall not limit in any way any right which the corporation
may have to make different or further indemnification with respect to the same
or different persons or classes of persons.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted directors and officers or controlling persons of the
Company pursuant to the foregoing, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Not Applicable.
(b) Cova Life Sales Company is the principal underwriter for the
Contracts. The following persons are the officers and directors of
Cova Life Sales Company. The principal business address for each officer and
director of Cova Life Sales Company is One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644.
<TABLE>
<CAPTION>
<S> <C>
Name and Principal Positions and Offices
Business Address with Underwriter
- ------------------ ---------------------------------------
Judy M. Drew President, Chief Operations Officer and
Director
Lorry J. Stensrud Director
Patricia E. Gubbe Vice President and Chief Compliance
Officer
Patrice L. Peltier Vice President and Director
William C. Mair Director
Jeffery K. Hoelzel Secretary
Philip A. Haley Vice President
Fran Cook Assistant Secretary
Robert A. Miner Treasurer
</TABLE>
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Christopher Harden, whose address is One Tower Lane, Suite 3000, Oakbrook
Terrace, IL 60181-4644 maintains physical possession of the accounts, books or
documents of the Variable Account required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and the rules promulgated thereunder.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
a. Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement are never more than
sixteen (16) months old for so long as payment under the variable annuity
contracts may be accepted.
b. Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
c. Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under
this Form promptly upon written or oral request.
REPRESENTATIONS
The Company hereby represents that it is relying upon a No Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including the
prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in connection with
the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase
the contract specifically to bring the redemption restrictions imposed by
Section 403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b)
annuity contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restrictions on
redemption imposed by Section 403(b)(11), and (2) other investment
alternatives available under the employer's Section 403(b) arrangement to
which the participant may elect to transfer his contract value.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities
Act Rule 485(b) for effectiveness of this Registration Statement and has
caused this Registration Statement to be signed on its behalf, in the City of
Oakbrook Terrace, and State of Illinois on this 25th day of April, 1996.
COVA VARIABLE ANNUITY ACCOUNT FOUR
Registrant
By: COVA FINANCIAL SERVICES LIFE
INSURANCE COMPANY
By: /s/ LORRY J. STENSRUD
___________________________________________
By: COVA FINANCIAL SERVICES LIFE
INSURANCE COMPANY
Depositor
By: /s/ LORRY J. STENSRUD
___________________________________________
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ LORRY J. STENSRUD President and Director 4-25-96
- --------------------- -------
Lorry J. Stensrud Date
Chairman of the Board and
- ---------------------- Director -------
Leonard M. Rubenstein Date
Director
- ---------------------- -------
J. Robert Hopson Date
William C. Mair* Controller and Director 4-25-96
- ---------------------- ------
William C. Mair Date
Jeffery K. Hoelzel* Director 4-25-96
- ---------------------- ------
Jeffery K. Hoelzel Date
E. Thomas Hughes, Jr.* Treasurer and Director 4-25-96
- ---------------------- ------
E. Thomas Hughes, Jr. Date
Matthew P. McCauley* Director 4-25-96
- ---------------------- ------
Matthew P. McCauley Date
Patrice L. Peltier* Director 4-25-96
- ---------------------- ------
Patrice L. Peltier Date
John W. Barber* Director 4-25-96
- ---------------------- -------
John W. Barber Date
</TABLE>
*By: /s/ LORRY J. STENSRUD
____________________________________
Lorry J. Stensrud, Attorney-in-Fact
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, E. Thomas Hughes, Jr., a Director
of Cova Financial Services Life Insurance Company, a corporation duly
organized under the laws of the State of Missouri, do hereby appoint Lorry J.
Stensrud and/or Jeffery K. Hoelzel, or either one of the foregoing
individually, as my attorney and agent, for me, and in my name as a Director
of this Company on behalf of the Company or otherwise, with full power to
execute, deliver and file with the Securities and Exchange Commission all
documents required for registration of variable annuity and variable life
insurance contracts under the Securities Act of 1933, as amended, and the
registration of unit investment trusts under the Investment Company Act of
1940, as amended, and to do and perform each and every act that said attorney
may deem necessary or advisable to comply with the intent of the aforesaid
Acts.
WITNESS my hand this 15th day of April, 1996.
WITNESS:
/S/DEBRA J. FERGUSON /S/E. THOMAS HUGHES, JR.
________________________________ ______________________________________
E. Thomas Hughes, Jr.
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Lorry J. Stensrud, President and
a Director of Cova Financial Services Life Insurance Company, a corporation
duly organized under the laws of the State of Missouri, do hereby appoint
Jeffery K. Hoelzel as my attorney and agent, for me, and in my name as
President and a Director of this Company on behalf of the Company or
otherwise, with full power to execute, deliver and file with the Securities
and Exchange Commission all documents required for registration of variable
annuity and variable life insurance contracts under the Securities Act of
1933, as amended, and the registration of unit investment trusts under the
Investment Company Act of 1940, as amended, and to do and perform each and
every act that said attorney may deem necessary or advisable to comply with
the intent of the aforesaid Acts.
WITNESS my hand this 18th day of April, 1996.
WITNESS:
/S/ROBIN M. POKOP /S/LORRY J. STENSRUD
________________________________ ______________________________________
Lorry J. Stensrud
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Jeffery K. Hoelzel, a Director of
Cova Financial Services Life Insurance Company, a corporation duly organized
under the laws of the State of Missouri, do hereby appoint Lorry J. Stensrud
as my attorney and agent, for me, and in my name as a Director of this Company
on behalf of the Company or otherwise, with full power to execute, deliver and
file with the Securities and Exchange Commission all documents required for
registration of variable annuity and variable life insurance contracts under
the Securities Act of 1933, as amended, and the registration of unit
investment trusts under the Investment Company Act of 1940, as amended, and to
do and perform each and every act that said attorney may deem necessary or
advisable to comply with the intent of the aforesaid Acts.
WITNESS my hand this 11th day of April, 1996.
WITNESS:
/S/DELORES DELGADO /S/JEFFERY K. HOELZEL
________________________________ ______________________________________
Jeffery K. Hoelzel
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, William C. Mair, Sr. Vice
President, Controller and a Director of Cova Financial Services Life Insurance
Company, a corporation duly organized under the laws of the State of Missouri,
do hereby appoint Lorry J. Stensrud and/or Jeffery K. Hoelzel, or either one
of the foregoing individually, as my attorney and agent, for me, and in my
name as Sr. Vice President, Controller and a Director of this Company on
behalf of the Company or otherwise, with full power to execute, deliver and
file with the Securities and Exchange Commission all documents required for
registration of variable annuity and variable life insurance contracts under
the Securities Act of 1933, as amended, and the registration of unit
investment trusts under the Investment Company Act of 1940, as amended, and to
do and perform each and every act that said attorney may deem necessary or
advisable to comply with the intent of the aforesaid Acts.
WITNESS my hand this 11th day of April, 1996.
WITNESS:
/S/DOLORES DELGADO /S/WILLIAM C. MAIR
________________________________ ______________________________________
William C. Mair
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Matthew P. McCauley, a Director
of Cova Financial Services Life Insurance Company, a corporation duly
organized under the laws of the State of Missouri, do hereby appoint Lorry J.
Stensrud and/or Jeffery K. Hoelzel, or either one of the foregoing
individually, as my attorney and agent, for me, and in my name as a Director
of this Company on behalf of the Company or otherwise, with full power to
execute, deliver and file with the Securities and Exchange Commission all
documents required for registration of variable annuity and variable life
insurance contracts under the Securities Act of 1933, as amended, and the
registration of unit investment trusts under the Investment Company Act of
1940, as amended, and to do and perform each and every act that said attorney
may deem necessary or advisable to comply with the intent of the aforesaid
Acts.
WITNESS my hand this 12th day of April, 1996.
WITNESS:
/S/VICTORIA A. QUINT /S/MATTHEW P. McCAULEY
________________________________ ______________________________________
Matthew P. McCauley
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Patrice L. Peltier, a Director of
Cova Financial Services Life Insurance Company, a corporation duly organized
under the laws of the State of Missouri, do hereby appoint Lorry J. Stensrud
and/or Jeffery K. Hoelzel, or either one of the foregoing individually, as my
attorney and agent, for me, and in my name as a Director of this Company on
behalf of the Company or otherwise, with full power to execute, deliver and
file with the Securities and Exchange Commission all documents required for
registration of variable annuity and variable life insurance contracts under
the Securities Act of 1933, as amended, and the registration of unit
investment trusts under the Investment Company Act of 1940, as amended, and to
do and perform each and every act that said attorney may deem necessary or
advisable to comply with the intent of the aforesaid Acts.
WITNESS my hand this 11th day of April, 1996.
WITNESS:
/S/REBECCA R. BEDORE /S/PATRICE L. PELTIER
________________________________ ______________________________________
Patrice L. Peltier
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, John W. Barber, a Director of
Cova Financial Services Life Insurance Company, a corporation duly organized
under the laws of the State of Missouri, do hereby appoint Lorry J. Stensrud
and/or Jeffery K. Hoelzel, or either one of the foregoing individually, as my
attorney and agent, for me, and in my name as a Director of this Company on
behalf of the Company or otherwise, with full power to execute, deliver and
file with the Securities and Exchange Commission all documents required for
registration of variable annuity and variable life insurance contracts under
the Securities Act of 1933, as amended, and the registration of unit
investment trusts under the Investment Company Act of 1940, as amended, and to
do and perform each and every act that said attorney may deem necessary or
advisable to comply with the intent of the aforesaid Acts.
WITNESS my hand this 15th day of April, 1996.
WITNESS:
/S/DELORES DELGADO /S/JOHN W. BARBER
________________________________ ______________________________________
John W. Barber
INDEX TO EXHIBITS
EXHIBIT NO. PAGE NO.
EX-99.B9 Opinion and Consent of Counsel
EX-99.B10 Consent of Independent Accountants
EX-99.B14 Company Organizational Chart
EXHIBITS
TO
POST-EFFECTIVE AMENDMENT NO. 5
TO
FORM N-4
FOR
COVA VARIABLE ANNUITY ACCOUNT FOUR
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
April 30, 1996
Board of Directors
Cova Financial Services Life Insurance Company
One Tower Lane
Suite 3000
Oakbrook Terrace, IL 60181
RE: Opinion of Counsel - Cova Variable Annuity Account Four
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with
the Securities and Exchange Commission of a Post-Effective Amendment to a
Registration Statement on Form N-4 for the Individual Flexible Purchase
Payment Deferred Variable Annuity Contracts (the "Contracts") to be issued by
Cova Financial Services Life Insurance Company and its separate account, Cova
Variable Annuity Account Four.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to
render the opinions expressed below.
We are of the following opinions:
1. Cova Financial Services Life Insurance Company is a valid and
existing stock life insurance company of the state of Missouri.
2. Cova Variable Annuity Account Four is a separate investment account
of Cova Financial Services Life Insurance Company created and validly existing
pursuant to the Missouri Laws and the Regulations thereunder.
3. Upon the acceptance of purchase payments made by an Owner pursuant to
a Contract issued in accordance with the Prospectus contained in the
Registration Statement and upon compliance with applicable law, such an Owner
will have a legally-issued, fully paid, non-assessable contractual interest
under such Contract.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
We consent to the reference to our Firm under the caption "Legal Opinions"
contained in the Statement of Additional Information which forms a part of the
Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /S/ LYNN KORMAN STONE
_____________________________________
Lynn Korman Stone
CONSENT OF INDEPENDENT ACCOUNTANTS
The Contract Owners and Board of Directors of
Cova Variable Annuity Account Four of Cova Financial Services Life
Insurance Company
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the statement of additional
information.
KPMG PEAT MARWICK LLP
St. Louis, Missouri
April 30, 1996
Exhibit 99.B14
COMPANY ORGANIZATIONAL CHART - COVA CORPORATION
Cova Corporation, a Missouri corporation, is owned by General American Life
Insurance Company, a Missouri corporation.
Cova Corporation owns 100% of Cova Financial Services Life Insurance Company,
a Missouri company, Cova Financial Life Insurance Company, a California
company, and Cova Life Management Company, a Delaware company.
Cova Financial Services Life Insurance Company owns 100% of First Cova Life
Insurance Company, a New York company.
Cova Life Management Company owns 100% of Cova Investment Advisory
Corporation, an Illinois company, Cova Investment Allocation Corporation, an
Illinois company, and Cova Life Sales Company, a Delaware company.
