STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT DEFERRED
VARIABLE AND FIXED ANNUITY CONTRACTS
ISSUED BY
COVA VARIABLE ANNUITY ACCOUNT FIVE
(FORMERLY, XEROX VARIABLE ANNUITY ACCOUNT FIVE)
AND
COVA FINANCIAL LIFE INSURANCE COMPANY
(FORMERLY, XEROX FINANCIAL LIFE INSURANCE COMPANY)
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 1995, AS AMENDED JUNE
1, 1995, FOR THE INDIVIDUAL FLEXIBLE PURCHASE PAYMENT DEFERRED VARIABLE
AND FIXED 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, 1995, AS
AMENDED JUNE 1, 1995.
<PAGE>
TABLE OF CONTENTS
Page
Company
Experts
Legal Opinions
Distributor
Yield Calculation For Money Market Sub-Account
Performance Information
Annuity Provisions
Variable Annuity
Fixed Annuity
Annuity Unit
Net Investment Factor
Mortality and Expense Guarantee
Financial Statements
<PAGE>
COMPANY
Information regarding Cova Financial Life Insurance Company (the
"Company") and its ownership is contained in the Prospectus. Prior to
June 1, 1995, the Company was known as Xerox Financial Life Insurance
Company.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1993
and for each of the years in the three year period ended December 31, 1994,
included herein, have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
LEGAL OPINIONS
Legal matters in connection with the Contracts described herein are being
passed upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
DISTRIBUTOR
Cova Life Sales Company (Life Sales) acts as the distributor.
Prior to June 1, 1995, Cova Life Sales Company was known as Xerox Life Sales
Company. Life Sales is an affiliate of the Company. The offering is on a
continuous basis.
YIELD CALCULATION FOR MONEY MARKET SUB-ACCOUNT
The Money Market Sub-Account of the Variable Account will calculate its
current yield based upon the seven days ended on the date of calculation. The
Money Market Sub-Account has not yet commenced operations.
The current yield of the Money Market Sub-Account is computed by
determining the net change (exclusive of capital changes) in the value of a
hypothetical pre-existing 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 Sub-Account computes its effective compound yield
according to the method prescribed by the Securities and Exchange Commission.
The effective yield reflects the reinvestment of net income earned daily on
Money Market 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.
<PAGE>
The yields quoted should not be considered a representation of the yield
of the Money Market Sub-Account 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 Sub-Account and changes in the interest
rates on such investments, but also on changes in the Money Market
Sub-Account's expenses during the period.
Yield information may be useful in reviewing the performance of the Money
Market Sub-Account and for providing a basis for comparison with other
investment alternatives.
However, the Money Market Sub-Account's yield fluctuates, 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 1.25% Mortality and Expense
Risk Premium, a .15% 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
<TABLE>
<CAPTION>
<S> <C> <C>
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used (or
fractional portion thereof) of a hypothetical $1,000 payment made
at the beginning of the time periods used.
</TABLE>
<PAGE>
In addition to total return data, the Company may include yield
information in its advertisements. For each Sub-Account (other than the Money
Market Sub-Account) 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)/(cd)) + 1) - 1
Where:
<TABLE>
<CAPTION>
<S> <C> <C>
a = Net investment income earned during the period by the Trust or Fund
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:
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
(1) the dollar amount of the first Annuity Payment is divided by the
value of an Annuity Unit as of the Annuity Date. This
establishes the number of Annuity Units for each monthly
payment. The number of Annuity Units remains fixed during the
Annuity Payment period.
(2) the fixed number of Annuity Units is multiplied by the Annuity
Unit value for the last Valuation Period of the month preceding
the month for which the payment is due. This result is the
dollar amount of the payment.
</TABLE>
The total dollar amount of each Variable Annuity Payment is the sum of all
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. The General Account Value
on the day immediately preceding the Annuity Date will be used to determine
the Fixed Annuity monthly payment. The first monthly Annuity Payment will be
based upon the Annuity Option elected and the appropriate Annuity Option
Table.
ANNUITY UNIT
The value of an Annuity Unit for each 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:
<TABLE>
<CAPTION>
<C> <S>
(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.
<PAGE>
</TABLE>
The Net Investment Factor may be greater or less than one, as the Annuity
Unit value may increase or decrease.
MORTALITY AND EXPENSE GUARANTEE
The Company guarantees that the dollar amount of each Annuity Payment
after the first Annuity Payment will not be affected by variations in
mortality or expense experience.
FINANCIAL STATEMENTS
The 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.
<PAGE>
XEROX FINANCIAL LIFE
INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Financial Statements
December 31, 1994, 1993 and 1992
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Xerox Financial Life Insurance Company:
We have audited the accompanying balance sheets of Xerox Financial Life
Insurance Company (a wholly owned subsidiary of Xerox Corporation) as of
December 31, 1994 and 1993, and the related statements of income,
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards requires 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 financial statements referred to above present fairly, in
all material respects, the financial position of Xerox Financial Life
Insurance Company as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 2 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.
Chicago, Illinois
January 30, 1995
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Balance Sheets
December 31, 1994 and 1993
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
_______________________________________________________________________________
ASSETS 1994 1993
_______________________________________________________________________________
<S> <C> <C>
Investments:
Debt securities available for sale at market in
1994 and at lower of aggregate cost or market in 1993
(cost in 1994 of $148,165, market in 1993 of $197,891) $122,416 $193,996
Short-term investments at cost which approximates market 101 374
Policy loans 829 460
_______________________________________________________________________________
Total investments 123,346 194,830
_______________________________________________________________________________
Cash and cash equivalents - interest bearing 39,267 8,968
Cash - non-interest bearing 580 390
Accrued investment income 1,808 2,444
Due from affiliates 6,500 --
Deferred policy acquisition costs 9,718 7,095
Current Federal income taxes recoverable 1,613 677
Deferred tax benefits 6,987 (1,157)
Reinsurance receivables 9 12
Other assets 21 22
_______________________________________________________________________________
Total Assets 189,849 214,438
_______________________________________________________________________________
LIABILITIES AND SHAREHOLDER'S EQUITY
_______________________________________________________________________________
Policyholder deposits 174,605 192,633
Future policy benefits 4,090 3,182
Accounts payable and accrued liabilities 625 467
_______________________________________________________________________________
Total liabilities 179,320 197,439
_______________________________________________________________________________
Shareholder's equity:
Common stock, $50 par value. (Authorized 30,000
shares; issued and outstanding 12,000 shares in
1994 and 1993) 600 600
Additional paid-in capital 17,200 8,200
Retained earnings 4,045 8,199
Net unrealized depreciation on investments (11,316) --
_______________________________________________________________________________
Total shareholder's equity 10,529 16,999
_______________________________________________________________________________
<PAGE>
Total liabilities and shareholder's equity $189,849 $214,438
_______________________________________________________________________________
</TABLE>
See accompanying notes to financial statements
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Statements of Income
December 31, 1994,1993, and 1992
(In thousands of dollars)
<TABLE>
<CAPTION>
_______________________________________________________________________________
1994 1993 1992
_______________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Premiums (net of $30, $30 and $30 premium
ceded in 1994, 1993 and 1992) $ 1,335 $ 943 $ 415
Net investment income 15,101 21,171 23,528
Net realized gain / (loss) on sale of investments 318 (2,974) 492
Other Income 138 69 80
_______________________________________________________________________________
Total revenues 16,892 19,209 24,515
_______________________________________________________________________________
Benefits and expenses:
Interest on policyholder deposits 13,361 14,829 14,593
Current and future policy benefits 1,452 1,111 659
Operating and other expenses 1,384 1,196 1,189
Amortization of deferred acquisition costs 6,979 2,468 1,351
_______________________________________________________________________________
Total benefits and expenses 23,176 19,604 17,792
_______________________________________________________________________________
Income/(loss) before taxes on income (6,284) (395) 6,723
Taxes on income:
Current (80) 40 1,387
Deferred (2,050) (130) 898
_______________________________________________________________________________
Total taxes on income (2,130) (90) 2,285
_______________________________________________________________________________
Net income/(loss) $(4,154) $ (305) $ 4,438
_______________________________________________________________________________
</TABLE>
See accompanying notes to financial statements
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Statements of Shareholder's Equity
Years ended December 31, 1994, 1993 and 1992
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
________________________________________________________________________________________
1994 1993 1992
________________________________________________________________________________________
<S> <C> <C> <C>
Common stock ($50 par value common stock; Authorized
30,000 shares; issued and outstanding
12,000 in 1994, 1993 and
1992):
Balance at beginning and end of year $ 600 $ 600 $ 600
________________________________________________________________________________________
Additional paid-in capital:
Balance at beginning of year 8,200 8,200 8,200
Capital contribution 9,000 -- --
________________________________________________________________________________________
Balance at end of year 17,200 8,200 8,200
________________________________________________________________________________________
Retained earnings:
Balance at beginning of year 8,199 8,504 4,066
Net income/(loss) (4,154) (305) 4,438
________________________________________________________________________________________
Balance at end of year 4,045 8,199 8,504
________________________________________________________________________________________
Net unrealized appreciation/(depreciation) of securities:
Balance at beginning of year -- -- --
Implementation of change in accounting
for marketable debt and equity securities,
net of effects of deferred taxes of $735 and
deferred acquisition costs of $1,719 1,366 -- --
Change in unrealized depreciation
of debt securities (29,570) -- --
Change in deferred Federal income taxes 6,829 -- --
Change in deferred acquisition costs attributable
to unrealized losses 10,059 -- --
________________________________________________________________________________________
Balance at end of year (11,316) -- --
________________________________________________________________________________________
Total shareholder's equity $ 10,529 $16,999 $17,304
________________________________________________________________________________________
</TABLE>
See accompanying notes to financial statements
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992
(In thousands of dollars)
<TABLE>
<CAPTION>
________________________________________________________________________________________
1994 1993 1992
________________________________________________________________________________________
<S> <C> <C> <C>
Cash flows from operating activities:
Interest and dividend receipts $ 15,690 $ 17,210 $ 18,873
Premiums received 1,357 943 415
Insurance and annuity benefit payments (552) (415) (248)
Operating disbursements (1,482) (1,409) (1,113)
Taxes on income refunded (paid) (856) 576 (2,802)
Commissions and acquisition costs paid (1,097) (1,032) (1,835)
Other 35 (129) 94
________________________________________________________________________________________
Net cash provided by operating activities 13,095 15,744 13,384
________________________________________________________________________________________
Cash flows from investing activities:
Cash used for the purchase of investment securities (69,199) (139,207) (52,775)
Proceeds from investment securities sold and matured 115,994 131,767 51,007
Other (320) -- (334)
________________________________________________________________________________________
Net cash provided by/(used in) investing activities 46,475 (7,440) (2,102)
________________________________________________________________________________________
Cash flows from financing activities:
Policyholder deposits 11,796 10,339 20,899
Return of policyholder deposits (43,377) (27,031) (16,010)
Capital contributions received 2,500 -- --
________________________________________________________________________________________
Net cash provided by/(used in) financing activities (29,081) (16,692) 4,889
Increase/(decrease) in cash and cash equivalents 30,489 (8,388) 16,171
________________________________________________________________________________________
Cash and cash equivalents at beginning of year 9,358 17,746 1,575
________________________________________________________________________________________
Cash and cash equivalents at end of year $ 39,847 $ 9,358 $ 17,746
________________________________________________________________________________________
</TABLE>
See accompanying notes to financial statements
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Statements of Cash Flows, Continued
(In thousands of dollars)
<TABLE>
<CAPTION>
__________________________________________________________________________________________
1994 1993 1992
__________________________________________________________________________________________
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net income/(loss) $(4,154) $ (305) $ 4,438
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefits 911 710 319
Increase/(decrease) in payables and accrued liabilities 126 (625) (4)
Decrease/(increase) in accrued investment income 636 (386) 144
Amortization of intangible assets and costs 6,979 2,468 1,352
Amortization and accretion of securities
premiums and discounts (369) (3,937) (5,133)
Net realized (gain)/loss on sale of investments (318) 2,974 (492)
Interest accumulated on policyholder deposit 13,361 14,829 14,593
Increase/(decrease) in current and deferred
Federal income taxes (2,986) 487 (517)
Investment expenses paid 322 362 333
Deferral of acquisition costs (1,262) (1,017) (1,753)
Other (151) 184 104
__________________________________________________________________________________________
Net cash provided by operating activities $13,095 $15,744 $13,384
__________________________________________________________________________________________
</TABLE>
See accompanying notes to financial statements
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
December 31, 1994, 1993 and 1992
_____________________________________________________________________________
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
Xerox Financial Life Insurance Company (the Company) markets and services
single premium deferred annuities, immediate annuities, single premium
whole-life insurance, and long-term care health coverage. 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.
The Company wrote long-term care health coverage in 1992, and the amounts
involved are immaterial.
Under the deferred annuity contracts, interest 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 4%. The Company may assess
surrender fees against amounts withdrawn prior to scheduled maturity and
adjust account values based on current crediting rates. Policyholders also
may incur certain Federal income tax penalties on withdrawals.
ORGANIZATION
All outstanding shares of the Company are owned by Xerox Financial Services,
Inc. (XFSI), a financial services holding company which is a wholly-owned
subsidiary of Xerox Corporation.
On January 12, 1995, XFSI entered into a stock purchase agreement for the sale
of the Company and its affiliates to a subsidiary of General American Life
Insurance Company (GALIC), a Missouri domiciled life insurance company.
The Company expects closing of the sale to occur during the first half of
1995. Also see note 9: Subsequent Event -- Purchase of Company.
INVESTMENTS
Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS #115) "Accounting for Certain Investments
in Debt and Equity Securities". 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 securities were classified as available-for-sale at
December 31, 1994. Securities available-for-sale are carried at market value,
with unrealized holding gains and losses reported as a separate component of
<PAGE>
stockholders equity, net of deferred effects of tax and related effects on
deferred acquisition costs.
Prior to January 1, 1994 debt securities were valued in aggregate at the lower
of amortized cost or market. Policy loans are carried at their unpaid
principal balances.
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.
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
______________________________________________________________________________
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 originally
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 follows the provisions of the
Financial Accounting Standards Board's Emerging Issues Task Force Consensus
No. 89-4. A new effective yield is 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 is then
used to accrue interest income in the subsequent period. In 1994, the Company
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 should be written down to fair value. The
adoption of this consensus resulted in no adjustments at January 1, 1994.
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in banks, U.S.
Treasury bills, money market accounts, and commercial paper with maturities
under 90 days, which are not otherwise restricted.
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 are
adjusted to the amount that would have existed had the actual experience and
<PAGE>
revised estimates been known and applied from the inception of the policies
and contracts. The amortization and adjustment 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.
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.
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
_____________________________________________________________________________
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 7.8% to 10.0%, 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 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
Revenues and expenses of the Company are included in a consolidated Federal
income tax return with its parent company and other affiliates. Allocations
of Federal income taxes are based upon separate return calculations.
The Company accounts for deferred income taxes according to Statement of
Financial Accounting SFAS 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 carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. 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.
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
_____________________________________________________________________________
RISKS AND UNCERTAINTIES
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of 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 financial statements are most affected by the
use of estimates and assumptions:
- Investment valuation
- Amortization of deferred policy acquisition costs
- 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 flow 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.
Lapse assumptions used by the Company at December 31, 1994 assume continued
operation while being offered for sale with the objective of maintaining a
presence in the marketplace. If the Company's ownership and it's management
strategy are changed, the potential impact on future gross profits could be
material. See note 9 -- Subsequent Events.
The Company is subject to assessments to fund guaranteed benefits to
policyholders of non-affiliated insolvent insurers licensed in California.
Such assessments are limited to 1% of the premiums written by the Company in
the State. The Company records assessments as an expense when received or
reasonably estimatable. See note 8.
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS #107) extends 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.
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
______________________________________________________________________________
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, could
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.
Statement of Financial Accounting Standard No. 115, "Investments in Debt and
Equity Securities" takes SFAS #107 another step and requires balance sheet
adjustment of debt investments available for sale and equity investments to
fair value with a corresponding adjustment to shareholder's equity. The
Company 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 $1.6
million.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND ACCRUED INVESTMENT
INCOME:
The carrying value amounts reported in the balance sheets for these
instruments approximate their fair values.
Investment securities (including mortgage-backed securities):
Fair value 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 2 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
<PAGE>
demand. As of December 31, 1994 and 1993 the cash surrender value of
policyholder funds on deposit were $ 6,207,467 and 3,850,846, 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
feature.
REINSURANCE
Reinsurance is not material to the Company's operations or its financial
statements. The Company however has adopted the provisions of Statements of
Financial Accounting Standards No. 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.
OTHER
Certain 1992 and 1993 amounts have been reclassified to conform to the 1994
presentation.
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
_____________________________________________________________________________
(2) INVESTMENTS
The Company's investments in debt 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
stockholder's equity. The carrying value and amortized cost of investments at
December 31, 1994 and 1993 are as follows:
<TABLE>
1994
_____________________________________________________________
<CAPTION>
GROSS GROSS ESTIMATED COST OR
CARRYING UNREALIZED UNREALIZED FAIR AMORTIZED
VALUE GAINS LOSSES VALUE COST
_____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
(in thousands of dollars)
Debt Securities:
U.S. Government Treasuries $ 601 $ -- $ -- $ 601 $ 601
Mortgage-backed and
derivative securities:
GNMA 186 8 -- 186 178
FNMA & FHLMC 19 20 20
Collateralized mortgage obligations 76,013 11 (18,370) 76,013 94,372
Corporate, state, municipalities, and
political subdivisions 45,597 8 (7,406) 45,597 52,996
_____________________________________________________________________________________________________
Total debt securities 122,416 27 (25,776) 122,416 148,165
_____________________________________________________________________________________________________
Short-term investments 101 -- (1) 101 102
Policy loans 829 -- -- 829 829
_____________________________________________________________________________________________________
Total investments $ 123,346 $ 27 $ (25,777) $123,346 $ 149,096
_____________________________________________________________________________________________________
</TABLE>
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
<TABLE>
1993
_______________________________________________________________
<CAPTION>
GROSS GROSS ESTIMATED COST OR
CARRYING UNREALIZED UNREALIZED MARKET AMORTIZED
VALUE GAINS LOSSES VALUE COST
_______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
(in thousands of dollars)
Debt Securities:
US. Government Treasuries $ 607 $ 91 $ -- $ 698 $ 607
Mortgage-backed and
derivative securities:
GNMA 551 49 -- 600 551
FNMA & FHLMC 437 3 -- 440 437
Collateralized mortgage obligations 139,713 5,059 (2,424) 142,348 139,713
Corporate, state, municipalities, and
political subdivisions 52,688 1,401 (284) 53,805 52,688
_______________________________________________________________________________________________________
Total debt securities 193,996 6,603 (2,708) 197,891 193,996
_______________________________________________________________________________________________________
Short-term investments 374 -- -- 374 374
Policy loans 460 -- -- 460 460
_______________________________________________________________________________________________________
Total investments $ 194,830 $ 6,603 $ (2,708) $ 198,725 $ 194,830
_______________________________________________________________________________________________________
</TABLE>
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
______________________________________________________________________________
The amortized cost and estimated market value of debt securities at December
31, 1994, 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 mortgages may prepay principal.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
_____________________________________________________________________
<S> <C> <C>
(in thousands of dollars)
Due after one year through five years $ 5,729 $ 5,553
Due after five years through ten years 4,993 3,500
Due after ten years 42,874 37,145
Mortgage-backed securities 94,569 76,218
_____________________________________________________________________
Total $ 148,165 $ 122,416
_____________________________________________________________________
</TABLE>
At December 31, 1994, approximately 97.3% of the Company's debt securities are
investment grade or are non-rated but considered to be of investment grade.
Of the non-investment grade debt securities, approximately 2.7% are rated as
BB or its equivalent.
Included in debt securities 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 Accounting Standards Board's
Emerging Issues Task Force Consensus No. 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 $2,293,349 were
recorded in 1993 and none in 1994. At December 31, 1994 the company held no
such securities.
All debt securities were income producing during the year ended December 31,
1994.
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
The components of net investment income were as follows:
<TABLE>
<CAPTION>
____________________________________________________________________________________________
1994 1993 1992
____________________________________________________________________________________________
<S> <C> <C> <C>
(in thousands of dollars)
Income on debt securities $ 15,013 $ 21,111 $ 23,607
Income on short-term investments 349 393 211
Income on policy loans 57 29 27
Miscellaneous interest 4 -- 16
____________________________________________________________________________________________
Total investment income 15,423 21,533 23,861
Investment expenses (322) (362) (333)
____________________________________________________________________________________________
Net investment income $ 15,101 $ 21,171 $ 23,528
____________________________________________________________________________________________
Realized capital gains/(losses) were as follows:
Debt securities $ 320 $ (2,974) $ 492
Short-term investments (2) -- --
____________________________________________________________________________________________
Net realized gains/(losses) on investments $ 318 $ (2,974) $ 492
____________________________________________________________________________________________
Unrealized gains/(losses) were as follows:
Debt securities $(25,749) $ -- $ --
Short-term investments (1) -- --
Effect on deferred acquisition costs amortization 8,340 -- --
____________________________________________________________________________________________
Unrealized gains/(losses) before income taxes (17,410) -- --
Unrealized income (tax)/benefit 6,094 -- --
____________________________________________________________________________________________
Net unrealized gains(losses) on investments $(11,316) $ -- $ --
____________________________________________________________________________________________
</TABLE>
Proceeds from sales of investments in debt securities during 1994 were
$115,993,655. Gross gains of $1,671,736 and losses of $1,351,406 were
realized on those sales.
Proceeds from sales of investments in debt securities during 1993 were
$132,103,177. Gross gains of $5,228,353 and losses of $8,202,256 were
realized on those sales.
Proceeds from sales of investments in debt securities during 1992 were
$51,007,250. Gross gains of $919,757 and no losses were realized on those
sales.
<PAGE>
Unrealized appreciation / (depreciation) of debt securities during the years
ended December 31, 1994, 1993 and 1992 were $(29,644,000), $(2,075,000) and
$(8,154,000) 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 $101,000 at December 31, 1994
were deposited with government authorities as required by law.
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
(3) SECURITIES GREATER THAN 10% OF SHAREHOLDER'S EQUITY
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>
FHLMC MC MTG PRT CRT SER 1543 YI 18,867,811 NEWS AMERICA HOLDINGS 5,219,375
FHLMC MC MTG PRT CRT SER 1665-SA 14,354,455 SALOMON MTG SER 1993-3 A4 5,045,375
INTERAMERICAN DEV BANK 12,172,743 CHASE MTG FIN CORP 1993 SER J2-A8 5,015,800
CMO MTG INVESTORS TRUST SER 7-Z 11,260,851 BANCO RIO PLATA 4,992,774
PRU HOME MTG SEC 1992 SER 6-A3 9,954,430 COUNRTYWIDE MTG 1994 SER L-AB 4,819,590
SHOPKO STORES 7,024,201 FNMA REMIC TR 1994 SER 58-A 4,467,533
TEXAS UTILITIES 7,000,000 FNMA REMIC TR 1993 SER 116-SB 3,103,396
RALSTON PURINA 6,426,572 MAINE HEALTH & HIGHER EDUCATION AUTH 2,420,000
SAXON MTG SEC CORP 1993 2-A6 6,272,516 PRU HOME MTG SEC 1992 SER 29-A8 2,005,536
FHLMC MC MTG PRT CRT SER 1189-K 5,257,411 FHLMC MC MTG PRT CRT SER 1628-G 1,977,346
TELECOMMUNICATIONS INC 5,251,770 FHLMC MC MTG PRT CRT SER 1689-SE 1,828,528
</TABLE>
(4) POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
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
Xerox Life Management Company (XLMC); a wholly owned subsidiary of XFSI, or an
unaffiliated subcontractor. The Company is allocated a portion of certain
health care and life insurance benefits for future retired employees of XLMC
as determined in accordance with Financial Accounting Standards Board
Statement No. 106 (SFAS #106), "Employers' Accounting For Post-Retirement
Benefits Other Than Pensions". In 1994, the Company was allocated a portion
of benefit costs including severance pay, accumulated vacation, and disability
benefits as determined in accordance with Financial Accounting Standards Board
Statement No. 112 (SFAS #112), "Employers' Accounting for Postemployment
Benefits". At December 31, 1994 XLMC had no retired employees nor any
employees fully eligible for retirement and had no disbursements for such
benefit commitments. The amounts allocated from XLMC related to SFAS #106 are
not material.
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
(5) INCOME TAXES
The actual Federal income tax expense differed from the expected tax expense
computed by applying the U.S. Federal statutory rate to income before taxes on
income as follows:
<TABLE>
<CAPTION>
______________________________________________________________________________________________
1994 1993 1992
______________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
(in thousands of dollars)
Computed expected tax expense $ (2,200) 35% $(138) 35% $2,285 34%
Rate change effect on prior deferrals -- -- 48 10 -- --
Other 70 (1) -- -- -- --
______________________________________________________________________________________________
$ (2,130) 34% $ (90) 45% $2,285 34%
______________________________________________________________________________________________
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred taxes at December 31, 1994 and 1993 follows:
<TABLE>
<CAPTION>
_________________________________________________________________________
1994 1993
_________________________________________________________________________
<S> <C> <C>
(in thousands of dollars)
Tax effect of future tax deductions:
Policy reserves $ 972 $ 1,198
Other deferred tax assets 518 305
Unrealized depreciation of debt securities 9,012 --
_________________________________________________________________________
Total Assets $ 10,502 $ 1,503
_________________________________________________________________________
Tax effect on future taxable income:
Deferred acquisition costs $ 3,187 $ 2,237
Market discount on bonds 327 422
Other deferred tax liabilities 1 1
_________________________________________________________________________
Total Liabilities $ 3,515 $ 2,660
_________________________________________________________________________
<PAGE>
Net Deferred Tax Asset/(Liability) $ 6,987 $ (1,157)
_________________________________________________________________________
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
the deferred tax assets will be fully realized in the future based upon
consideration of the reversal of existing temporary differences, anticipated
future earnings, XFSI guarantees, and all other available evidence.
(6) RELATED-PARTY TRANSACTIONS
The Company has entered into a management, operations and services agreement
with both affiliated and unaffiliated companies. Expenses and fees paid to
affiliated companies during the years 1994, 1993 and 1992 were approximately $
674,136, $462,553 and $802,280, respectively.
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
______________________________________________________________________________
(7) 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 basis).
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 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.
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>
____________________________________________________________________________
1994 1993 1992
____________________________________________________________________________
<S> <C> <C> <C>
(in thousands of dollars)
Statutory Capital and Surplus $ 10,875 $ 8,560 $ 8,436
Reconciling items:
Deferred policy acquisition costs 9,718 7,095 8,547
GAAP basis policy reserves 12,002 332 (1,378)
Statutory Asset Valuation Reserve 2,181 2,142 2,037
Interest Maintenance Reserve -- -- 689
Deferred federal income taxes 6,987 (1,157) (1,286)
GAAP investments adjustment to
fair value (SFAS #115) (25,750) -- --
Elimination of notes contributed
to statutory surplus (5,500) -- --
Other 16 27 259
____________________________________________________________________________
GAAP Shareholder's Equity $ 10,529 $ 16,999 $17,304
____________________________________________________________________________
</TABLE>
<PAGE>
The statutory net income/(loss) for the years ended December 31, 1994, 1993
and 1992 were $(13,042,271), $1,681,945 and $4,660,136, respectively.
The maximum amount of dividends which can be paid by State of California
insurance companies to shareholders without prior approval of the insurance
commissioner is the greater of 10% of statutory surplus, or statutory net gain
from operations before capital gains of the preceding year. Accordingly, the
maximum dividend permissible at December 31, 1994 was $1,027,538.
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, 1994 the Company's Total Adjusted
Capital and Authorized Control Level - RBC were $13,056,017 and $2,464,931,
respectively. This level of adjusted capital qualifies under all tests.
<PAGE>
XEROX FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Xerox Corporation)
Notes to Financial Statements
_____________________________________________________________________________
(8) GUARANTY FUND ASSESSMENTS
The Company participates with all life insurance companies licensed in
California, in an association formed to guarantee benefits to policyholders of
insolvent life insurance companies. Under the state law, the Company is
contingently liable for its share of claims covered by the guaranty
association for insolvencies incurred through 1994 but for which assessments
have not yet been determined, to a maximum of 1% of statutory premiums
annually.
In December 31, 1994, 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 roughly $2 million in future
assessments on insolvencies that occurred before December 31, 1994.
(9) SUBSEQUENT EVENT -- PURCHASE OF COMPANY
On January 12, 1995, a subsidiary of General American Life Insurance Company
(GALIC) agreed to purchase the Company, and all of its affiliates except OakRe
Life Insurance Company (OakRe), subject to regulatory approvals.
In conjunction with this Agreement, the Company also agreed to enter into a
financing reinsurance transaction that would cause OakRe to assume the
benefits and risks of existing single premium deferred annuity deposits
(SPDAs) which had an aggregate carrying value at December 31, 1994 of $173.4
million. In exchange, the Company would transfer specifically identified
assets to OakRe which had a carrying value of $173.4 million at December 31,
1994. Ownership of OakRe will be retained by XFSI subsequent to the sale of
the Company and other affiliates. The receivable from OakRe to the Company
that is created by this transaction will be liquidated over the remaining
crediting rate guaranty periods (which all 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 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.
All of the Company's deposit obligations will be fully guaranteed by the
acquirer, GALIC, and the receivable from OakRe equal to the SPDA obligations
will be guaranteed by OakRe's parent, XFSI. 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.
<PAGE>
In substance, this structure to the purchase allows the seller, XFSI, to
retain substantially all of the existing financial benefits and risks of the
existing business, while the purchaser, GALIC, obtains 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 1, of the Company on existing business will
consist of the gross profits on single premium whole life, and single premium
immediate annuities commencing at the date of closing; plus the gross profits
from SPDA deposits commencing upon the expiration of their current guaranteed
crediting rate.
Upon closing of the sale, the Company will restate its financial statements in
accordance with "purchase accounting," which will allocate the net purchase
price of $3.2 million according to the fair values of the acquired assets and
liabilities, including the estimated Present Value of Future Profits. These
allocated values will be dependent upon policies in force and market
conditions at the time of closing.
<PAGE>
