STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACT
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, 1996, FOR THE INDIVIDUAL
FIXED AND VARIABLE DEFERRED ANNUITY CONTRACT WHICH IS DESCRIBED HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE
THE COMPANY AT: One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois
60181-4644, (800) 831-5433.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 1996.
TABLE OF CONTENTS
Page
COMPANY
EXPERTS
LEGAL OPINIONS
DISTRIBUTION
Reduction or Elimination of the Withdrawal Charge
PERFORMANCE INFORMATION
Total Return
Historical Unit Values
Reporting Agencies
Hypothetical Information - Public Fund Performance
Hypothetical Information - Private Accounts
TAX STATUS
General
Diversification
Multiple Contracts
Contracts Owned by Other than Natural Persons
Tax Treatment of Assignments
Income Tax Withholding
Tax Treatment of Withdrawals - Non-Qualified Contracts
Qualified Plans
Tax Treatment of Withdrawals - Qualified Contracts
Tax-Sheltered Annuities - Withdrawal Limitations
ANNUITY PROVISIONS
Variable Annuity
Fixed Annuity
Annuity Unit
Net Investment Factor
Mortality and Expense Guarantee
FINANCIAL STATEMENTS
COMPANY
Cova Financial Life Insurance Company (the "Company") was originally
incorporated on September 6, 1972 as Industrial Indemnity Life Insurance
Company, a California corporation and changed its name on January 1, 1986 to
Xerox Financial Life Insurance Company. The Company presently is licensed to
do business in the state of California. On June 1, 1995 a wholly-owned
subsidiary of General American Life Insurance Company ("General American")
purchased Xerox Financial Services Life Insurance Company ("Xerox Life"), an
affiliate of the Company, from Xerox Financial Services, Inc. ("XFS"). The
acquisition of Xerox Life ("Acquisition") included related companies,
including the Company. On June 1, 1995 the Company changed its name to Cova
Financial Life Insurance Company.
General American is a St. Louis-based mutual company with more than $235
billion of life insurance in force and approximately $9.6 billion in assets.
It provides life and health insurance, retirement plans, and related financial
services to individuals and groups.
In conjunction with the Acquisition, the Company also entered into a financing
reinsurance transaction that caused OakRe Life Insurance Company ("OakRe"), a
Missouri licensed insurer and a wholly-owned XFS subsidiary, to assume the
existing single premium deferred annuity deposits (SPDAs) which had an
aggregate carrying value at June 1, 1995 of $159.0 million. In exchange, the
Company transferred specifically identified assets to OakRe with a market
value at June 1, 1995 of $162.0 million. 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 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.
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 the purchaser, 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.
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, and the financial statements of the Separate Account as of December 31,
1995, included herein, have been included herein in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
LEGAL OPINIONS
Legal matters in connection with the Contracts described herein are being
passed upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
DISTRIBUTION
Cova Life Sales Company ("Life Sales") acts as the distributor. Prior to June
1, 1995, Cova Life Sales Company was known as Xerox Life Sales Company. Life
Sales is an affiliate of the Company. The offering is on a continuous basis.
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE
The amount of the Withdrawal Charge on the Contracts may be reduced or
eliminated when sales of the Contracts are made to individuals or to a group
of individuals in a manner that results in savings of sales expenses. The
entitlement to reduction of the Withdrawal Charge will be determined by the
Company after examination of all the relevant factors such as:
1. The size and type of group to which sales are to be made will be
considered. Generally, the sales expenses for a larger group are less than
for a smaller group because of the ability to implement large numbers of
Contracts with fewer sales contacts.
2. The total amount of purchase payments to be received will be
considered. Per Contract sales expenses are likely to be less on larger
purchase payments than on smaller ones.
3. Any prior or existing relationship with the Company will be
considered. Per Contract sales expenses are likely to be less when there is a
prior existing relationship because of the likelihood of implementing the
Contract with fewer sales contacts.
4. There may be other circumstances, of which the Company is not
presently aware, which could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines that
there will be a reduction in sales expenses, the Company may provide for a
reduction or elimination of the Withdrawal Charge.
The Withdrawal Charge may be eliminated when the Contracts are issued to an
officer, director or employee of the Company or any of its affiliates. In no
event will any reduction or elimination of the Withdrawal Charge be permitted
where the reduction or elimination will be unfairly discriminatory to any
person.
PERFORMANCE INFORMATION
Total Return
From time to time, the Company may advertise performance data. Such data will
show the percentage change in the value of an Accumulation Unit based on the
performance of an investment portfolio over a period of time, usually a
calendar year, determined by dividing the increase (decrease) in value for
that unit by the Accumulation Unit value at the beginning of the period.
Any such advertisement will include total return figures for the time periods
indicated in the advertisement. Such total return figures will reflect the
deduction of a 1.25% Mortality and Expense Risk Premium, a .15% Administrative
Expense Charge, the investment advisory fee for the underlying investment
portfolio being advertised and any applicable Contract Maintenance Charges and
Withdrawal Charges.
The hypothetical value of a Contract purchased for the time periods described
in the advertisement will be determined by using the actual Accumulation Unit
values for an initial $1,000 purchase payment, and deducting any applicable
Contract Maintenance Charges and any applicable Withdrawal 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>
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. The deduction of any Withdrawal Charge would reduce
any percentage increase or make greater any percentage decrease.
Owners should note that the investment results of each investment portfolio
will fluctuate over time, and any presentation of the investment portfolio's
total return for any period should not be considered as a representation of
what an investment may earn or what an Owner's total return may be in any
future period.
Historical Unit Values
The Company may also show historical Accumulation Unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual Accumulation Unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in Accumulation Unit values for any of the investment
portfolios against established market indices such as the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average or other
management investment companies which have investment objectives similar to
the investment portfolio being compared. The Standard & Poor's 500
Composite Stock Price Index is an unmanaged, unweighted average of 500 stocks,
the majority of which are listed on the New York Stock Exchange. The Dow
Jones Industrial Average is an unmanaged, weighted average of thirty blue chip
industrial corporations listed on the New York Stock Exchange. Both the
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones
Industrial Average assume quarterly reinvestment of dividends.
Reporting Agencies
The Company may also distribute sales literature which compares the
performance of the Accumulation Unit values of the Contracts with the unit
values of variable annuities issued by other insurance companies. Such
information will be derived from the Lipper Variable Insurance Products
Performance Analysis Service, the VARDS Report or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is
published by Lipper Analytical Services, Inc., a publisher of statistical
data which currently tracks the performance of almost 4,000 investment
companies. The rankings compiled by Lipper may or may not reflect the
deduction of asset-based insurance charges. The Company's sales literature
utilizing these rankings will indicate whether or not such charges have been
deducted. Where the charges have not been deducted, the sales literature will
indicate that if the charges had been deducted, the ranking might have been
lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Roswell, Georgia and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect
the deduction of asset-based insurance charges. In addition, VARDS prepares
risk adjusted rankings, which consider the effects of market risk on total
return performance. This type of ranking may address the question as to which
funds provide the highest total return with the least amount of risk. Other
ranking services may be used as sources of performance comparison, such as
CDA/Weisenberger.
Morningstar rates a variable annuity against its peers with similar investment
objectives. Morningstar does not rate any variable annuity that has less than
three years of performance data.
Hypothetical Information - Public Fund Performance
Lord, Abbett & Co. is the sub-adviser for the Bond Debenture investment
portfolio (a "high yield" portfolio under California insurance regulations).
This portfolio is newly-organized and does not yet have its own performance
record. However, it has the same investment objective and follows
substantially the same investment strategies as a mutual fund advised by the
same sub-adviser whose shares are sold to the public (Public Fund).
Set forth in the prospectus is the historical performance of this Public Fund.
Investors should not consider this performance data as an indication of the
future performance of this portfolio. The performance figures reflect the
deduction of the historical fees and expenses paid by the Public Fund and not
those to be paid by the investment portfolio. The figures do not reflect the
deduction of the insurance charges and the contract maintenance charge.
Investors should refer to the prospectus for the Contracts for information
pertaining to those charges. The results shown reflect the reinvestment of
dividends and distributions, and were calculated in the same manner that will
be used by the investment portfolio to calculate its own performance.
The performance of the Public Fund is commonly measured as total return. An
average annual compounded rate of return ("T") may be computed by using the
redeemable value at the end of a specified period ("ERV") of a hypothetical
initial investment of $1,000 ("P") over a period of time ("n") according to
the formula:
n
P (1 + T) = ERV
The table contained in the prospectus shows the average annualized total
returns for the fiscal year ended December 31, 1995, of a 1-year, 5-year and
10-year investment in the Public Fund.
In order to demonstrate how the performance of the Public Fund would affect
Accumulation Unit values, the prospectus contains hypothetical performance
information. In determining the hypothetical performance of the Accumulation
Units, the actual performance of the Public Fund was used.
The performance of the Accumulation Units will vary and the hypothetical
results shown are not necessarily representative of future results.
Performance for periods ending after those shown may vary substantially
from the examples shown. The performance of the Accumulation Units is
calculated for the specified period of time by assuming an initial Purchase
Payment of $1,000 allocated to the investment portfolio and a deduction
of all charges and deductions. The hypothetical performance figures for the
Accumulation Units assume the deduction of the fees and expenses anticipated
to actually be paid by the investment portfolio. There are hypothetical
performance figures for the Accumulation Units which reflect the insurance
charges as well as the fees and expenses of the investment portfolio. There
are also hypothetical performance figures for the Accumulation Units which
reflect the insurance charges, the contract maintenance charge, the
withdrawal charge and the fees and expenses of the investment portfolio. The
percentage increases (decreases) are determined by subtracting the initial
Purchase Payment from the ending value and dividing the remainder by the
beginning value.
Hypothetical Information - Private Accounts
J.P. Morgan Investment Management Inc. is the sub-adviser for the Select
Equity, Large Cap Stock, Small Cap Stock, and Quality Bond investment
portfolios. These portfolios are newly formed and have no performance history.
They have investment objectives, policies and strategies substantially
similar to those employed by the sub-adviser with respect to certain private
accounts (Private Accounts) represented in the Active Equity Composite, the
Structured Stock Selection Composite, the Small Cap Directly Invested
Composite and the Public Bond Composite, respectively. Thus, the performance
information derived from these Private Accounts is deemed relevant to the
investor.
Set forth in the prospectus is the hypothetical performance information
derived from the historical composite performance of these Private Accounts
included in the Active Equity Composite, the Structured Stock Selection
Composite, the Small Cap Directly Invested Composite and the Public Bond
Composite. Investors should not consider this performance data as an
indication of the future performance of the comparable investment portfolios.
The actual composite performance figures of the Private Accounts are time-
weighted rates of return which include all income and accrued income and
realized and unrealized gains or losses, but do not reflect the deduction
of investment advisory fees actually charged to the Private Accounts.
The table contained in the prospectus shows the average annualized total
returns for the fiscal year ended December 31, 1995, of a 1-year, 5-year and
10 year (where available) or since inception investment in the composite of
comparable Private Accounts adjusted to reflect the deduction of the
investment advisory fees and expenses which are anticipated to be paid by the
respective investment portfolios.
In order to demonstrate how the actual investment experience of these Private
Accounts would affect Accumulation Unit values, the hypothetical composite
performance information was developed. The composite information is based
upon the performance of the composites of comparable Private Accounts with
substantially similar investment objectives, policies and strategies as the
respective portfolios reduced by the investment advisory fees and expenses
which are anticipated to be paid by the respective investment portfolios. The
hypothetical performance of these Accumulation Units is calculated for a
specified period of time by assuming an initial Purchase Payment of $1,000
allocated to the investment portfolios. There are hypothetical performance
figures for the Accumulation Units which reflect the actual performance
results of the composites of comparable Private Accounts, adjusted to reflect
the deduction of the fees and expenses anticipated to be paid by the
investment portfolio and the insurance charges. There are also hypothetical
performance figures for the Accumulation Units which reflect the insurance
charges, the contract maintenance charge, the withdrawal charge and the actual
performance results of the composites of comparable Private Accounts, adjusted
to reflect the deduction of the fees and expenses anticipated to be paid by
the investment portfolio. The percentage increases (decreases) are determined
by subtracting the initial Purchase Payment from the ending value and dividing
the remainder by the beginning value.
The performance of the comparable investment portfolios may be at variance
from the composite performance of the Private Accounts because such accounts
are not mutual funds and are not subject to the various requirements and
limitations applicable to mutual funds under the Investment Company Act of
1940 and the Internal Revenue Code.
There is no performance information for the International Equity Portfolio,
which is also managed by J.P. Morgan Investment Management Inc., in the
Prospectus.
The future performance of the investment portfolios will vary and the
hypothetical results shown are not necessarily representative of future
results.
TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE
FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT
SPECIAL RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS.
MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER
TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner is
not taxed on increases in the value of a Contract until distribution occurs,
either in the form of a lump sum payment or as annuity payments under the
Annuity Option selected. For a lump sum payment received as a total withdrawal
(total surrender), the recipient is taxed on the portion of the payment that
exceeds the cost basis of the Contract. For Non-Qualified Contracts, this cost
basis is generally the purchase payments, while for Qualified Contracts there
may be no cost basis. The taxable portion of the lump sum payment is taxed at
ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments
based on a fixed annuity option is determined by multiplying the payment by
the ratio that the cost basis of the Contract (adjusted for any period or
refund feature) bears to the expected return under the Contract. The exclusion
amount for payments based on a variable annuity option is determined by
dividing the cost basis of the Contract (adjusted for any period certain or
refund guarantee) by the number of years over which the annuity is expected to
be paid. Payments received after the investment in the Contract has been
recovered (i.e. when the total of the excludable amount equals the
investment in the Contract) are fully taxable. The taxable portion is taxed
at ordinary income tax rates. For certain types of Qualified Plans there
may be no cost basis in the Contract within the meaning of Section 72 of
the Code. Owners, Annuitants and Beneficiaries under the Contracts should seek
competent financial advice about the tax consequences of any distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification
of the Contract as an annuity contract would result in the imposition of
federal income tax to the Owner with respect to earnings allocable to the
Contract prior to the receipt of payments under the Contract. The Code
contains a safe harbor provision which provides that annuity contracts such as
the Contract meet the diversification requirements if, as of the end of each
quarter, the underlying assets meet the diversification standards for a
regulated investment company and no more than fifty-five percent (55%) of the
total assets consist of cash, cash items, U.S. Government securities and
securities of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the Contract. The
Regulations amplify the diversification requirements for variable contracts
set forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (1) no more than 55% of the value of the total
assets of the portfolio is represented by any one investment; (2) no more than
70% of the value of the total assets of the portfolio is represented by any
two investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer."
The Company intends that all investment portfolios underlying the Contracts
will be managed in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be
contained in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available,
would cause the Owner to be considered as the owner of the assets of the
Separate Account resulting in the imposition of federal income tax to the
Owner with respect to earnings allocable to the Contract prior to receipt of
payments under the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a
new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the Owners
being retroactively determined to be the owners of the assets of the Separate
Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from
such combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the Owner is a non-natural
person, e.g., a corporation or certain other entities. Such Contracts
generally will not be treated as annuities for federal income tax purposes.
However, this treatment is not applied to a Contract held by a trust or other
entity as an agent for a natural person nor to Contracts held by Qualified
Plans. Purchasers should consult their own tax counsel or other tax adviser
before purchasing a Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Owner are subject to federal income tax withholding. Generally,
amounts are withheld from periodic payments at the same rate as wages and at
the rate of 10% from non-periodic payments. However, the Owner, in most cases,
may elect not to have taxes withheld or to have withholding done at a
different rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a
mandatory 20% withholding for federal income tax. The 20% withholding
requirement generally does not apply to: a) a series of substantially equal
payments made at least annually for the life or life expectancy of the
participant or joint and last survivor expectancy of the participant and a
designated beneficiary or for a specified period of 10 years or more; or
b) distributions which are required minimum distributions; or c) the portion
of the distributions not includible in gross income (i.e. returns of after-tax
contributions). Participants should consult their own tax counsel or other
tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate
purchase payments made, any amount withdrawn will be treated as coming first
from the earnings and then, only after the income portion is exhausted, as
coming from the principal. Withdrawn earnings are includible in gross income.
It further provides that a ten percent (10%) penalty will apply to the income
portion of any premature distribution. However, the penalty is not imposed on
amounts received: (a) after the taxpayer reaches age 59 1/2; (b) after the
death of the Owner; (c) if the taxpayer is totally disabled (for this purpose
disability is as defined in Section 72(m)(7) of the Code); (d) in a series of
substantially equal periodic payments made not less frequently than annually
for the life (or life expectancy) of the taxpayer or for the joint lives (or
joint life expectancies) of the taxpayer and his or her Beneficiary; (e) under
an immediate annuity; or (f) which are allocable to purchase payments made
prior to August 14, 1982.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS
The Contracts offered herein are designed to be suitable for use under
various types of Qualified Plans. Taxation of participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Owners, Annuitants and Beneficiaries are cautioned that
benefits under a Qualified Plan may be subject to the terms and conditions of
the plan regardless of the terms and conditions of the Contracts issued
pursuant to the plan. Some retirement plans are subject to distribution and
other requirements that are not incorporated into the Company's administrative
procedures. Owners, participants and Beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Contracts comply with applicable law. Following are general
descriptions of the types of Qualified Plans with which the Contracts may be
used. Such descriptions are not exhaustive and are for general informational
purposes only. The tax rules regarding Qualified Plans are very complex and
will have differing applications depending on individual facts and
circumstances. Each purchaser should obtain competent tax advice prior to
purchasing a Contract issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and
excise taxes may apply to contributions or distributions made in violation
of applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee v.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection
with Qualified Plans will utilize annuity tables which do not differentiate on
the basis of sex. Such annuity tables will also be available for use in
connection with certain non-qualified deferred compensation plans.
a. H.R. 10 Plans
Section 401 of the Code permits self-employed individuals to establish
Qualified Plans for themselves and their employees, commonly referred to as
"H.R. 10" or "Keogh" plans. Contributions made to the Plan for the benefit of
the employees will not be included in the gross income of the employees until
distributed from the Plan. The tax consequences to participants may vary
depending upon the particular plan design. However, the Code places
limitations and restrictions on all Plans including on such items as: amount
of allowable contributions; form, manner and timing of distributions;
transferability of benefits; vesting and nonforfeitability of interests;
nondiscrimination in eligibility and participation; and the tax treatment of
distributions, withdrawals and surrenders. (See "Tax Treatment of Withdrawals
- - Qualified Contracts" below.) Purchasers of Contracts for use with an H.R. 10
Plan should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
b. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employees until the employees receive distributions from the Contracts. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. (See "Tax Treatment of Withdrawals -
Qualified Contracts" and "Tax-Sheltered Annuities - Withdrawal Limitations"
below.) Employee loans are not allowable under the Contracts. Any employee
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
c. Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to
an IRA which will be deductible from the individual's gross income. These IRAs
are subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Contracts"
below.) Under certain conditions, distributions from other IRAs and other
Qualified Plans may be rolled over or transferred on a tax-deferred basis into
an IRA. Sales of Contracts for use with IRAs are subject to special
requirements imposed by the Code, including the requirement that certain
informational disclosure be given to persons desiring to establish an IRA.
Purchasers of Contracts to be qualified as Individual Retirement Annuities
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
d. Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit corporate employers to establish
various types of retirement plans for employees. These retirement plans may
permit the purchase of the Contracts to provide benefits under the Plan.
Contributions to the Plan for the benefit of employees will not be includible
in the gross income of the employees until distributed from the Plan. The tax
consequences to participants may vary depending upon the particular plan
design. However, the Code places limitations and restrictions on all
Plans including on such items as: amount of allowable contributions; form,
manner and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Purchasers of Contracts for use with Corporate Pension or Profit Sharing Plans
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract, a ratable portion of
the amount received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued benefit under
the retirement plan. Special tax rules may be available for certain
distributions from a Qualified Contract. Section 72(t) of the Code imposes a
10% penalty tax on the taxable portion of any distribution from qualified
retirement plans, including Contracts issued and qualified under Code
Sections 401 (H.R. 10 and Corporate Pension and Profit-Sharing Plans), 403(b)
(Tax-Sheltered Annuities) and 408(b) (Individual Retirement Annuities). To
the extent amounts are not includible in gross income because they have been
rolled over to an IRA or to another eligible Qualified Plan, no tax
penalty will be imposed. The tax penalty will not apply to the following
distributions: (a) if distribution is made on or after the date on which
the Owner or Annuitant (as applicable) reaches age 59 1/2; (b) distributions
following the death or disability of the Owner or Annuitant (as applicable)
(for this purpose disability is as defined in Section 72(m)(7) of the
Code); (c) after separation from service, distributions that are part
of substantially equal periodic payments made not less frequently than
annually for the life (or life expectancy) of the Owner or Annuitant
(as applicable) or the joint lives (or joint life expectancies) of such
Owner or Annuitant (as applicable) and his or her designated
Beneficiary; (d) distributions to an Owner or Annuitant (as applicable) who
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. The exceptions stated in
(d), (e) and (f) above do not apply in the case of an Individual Retirement
Annuity. The exception stated in (c) above applies to an Individual Retirement
Annuity without the requirement that there be a separation from service.
Generally, distributions from a qualified plan must 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 transfers between Tax-Sheltered Annuity Plans.
Owners should consult their own tax counsel or other tax adviser regarding any
distributions.
ANNUITY PROVISIONS
VARIABLE ANNUITY
A variable annuity is an annuity with payments which: (1) are not
predetermined as to dollar amount; and (2) will vary in amount with the net
investment results of the applicable investment portfolio(s) of the Separate
Account. At the Annuity Date, the Contract Value in each investment portfolio
will be applied to the applicable Annuity Tables. The Annuity Table used will
depend upon the Annuity Option chosen. If, as of the Annuity Date, the then
current Annuity Option rates applicable to this class of Contracts provide a
first Annuity Payment greater than guaranteed under the same Annuity Option
under this Contract, the greater payment will be made. The dollar amount of
Annuity Payments after the first is determined as follows:
<TABLE>
<CAPTION>
<S> <C>
(1) the dollar amount of the first Annuity Payment is divided by the
value of an Annuity Unit as of the Annuity Date. This
establishes the number of Annuity Units for each monthly
payment. The number of Annuity Units remains fixed during the
Annuity Payment period.
(2) the fixed number of Annuity Units is multiplied by the Annuity
Unit value for the last Valuation Period of the month preceding
the month for which the payment is due. This result is the
dollar amount of the payment.
</TABLE>
The total dollar amount of each Variable Annuity Payment is the sum of all
investment portfolios' Variable Annuity Payments reduced by the applicable
Contract Maintenance Charge.
FIXED ANNUITY
A fixed annuity is a series of payments made during the Annuity Period which
are guaranteed as to dollar amount by the Company and do not vary with the
investment experience of the Separate Account. The General Account Value on
the day immediately preceding the Annuity Date will be used to determine the
Fixed Annuity monthly payment. The first monthly Annuity Payment will be
based upon the Annuity Option elected and the appropriate Annuity Option
Table.
ANNUITY UNIT
The value of an Annuity Unit for each investment portfolio was arbitrarily
set initially at $10. This was done when the first investment portfolio shares
were purchased. The investment portfolio Annuity Unit value at the end of any
subsequent Valuation Period is determined by multiplying the investment
portfolio Annuity Unit value for the immediately preceding Valuation Period by
the product of (a) the Net Investment Factor for the day for which the Annuity
Unit value is being calculated, and (b) 0.999919.
NET INVESTMENT FACTOR
The Net Investment Factor for any investment portfolio for any Valuation
Period is determined by dividing:
<TABLE>
<CAPTION>
<S> <C>
(a) the Accumulation Unit value as of the close of the current
Valuation Period, by
(b) the Accumulation Unit value as of the close of the immediately
preceding Valuation Period.
</TABLE>
The Net Investment Factor may be greater or less than one, as the Annuity Unit
value may increase or decrease.
MORTALITY AND EXPENSE GUARANTEE
The Company guarantees that the dollar amount of each Annuity Payment after
the first Annuity Payment will not be affected by variations in mortality or
expense experience.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts.
KPMG Peat Marwick LLP
1010 Market Street
St. Louis, MO 63101-2085
INDEPENDENT AUDITOR'S REPORT
The Contract Owners of Cova Variable
Annuity Account Five
Cova Financial Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of the
Quality Income, Growth and Income, Money Market, and Stock Index sub-accounts
(investment options within the Van Kampen Merritt Series Trust) and the Growth
and Income sub-account (investment option within the Lord Abbett Series Fund,
Inc.) of Cova Variable Annuity Account Five of Cova Financial Life Insurance
Company (the Separate Account) as of December 31, 1995, and the related
statements of operations and changes in contract owners' equity for the
periods then ended, and the financial highlights for the periods presented.
These financial statements and financial highlights are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned at December 31, 1995 by correspondence with the Van Kampen Merritt
Series Trust and the Lord Abbett Series Fund, Inc. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
sub-accounts of Cova Variable Annuity Account Five of Cova Financial Life
Insurance Company as of December 31, 1995, and the results of their operations
and the changes in their contract owners' equity for the periods then ended,
and the financial highlights for the periods presented, in conformity with
generally accepted accounting principles.
By: /s/ KPMG PEAT MARWICK LLP
___________________________
KPMG Peat Marwick LLP
February 9, 1996
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
ASSETS
INVESTMENTS:
<TABLE>
<CAPTION>
<S> <C>
VAN KAMPEN MERRITT SERIES TRUST:
Quality Income Portfolio - 12,273 shares at a net asset value of $10.87 per share (cost $131,622) $ 133,428
Growth and Income Portfolio - 8,404 shares at a net asset value of $12.51 per share (cost $108,946) 105,152
Money Market Portfolio - 325,759 shares at a net asset value of $1.00 per share (cost $325,759) 325,759
Stock Index Portfolio - 15,252 shares at a net asset value of $13.84 per share (cost $209,816) 211,141
LORD ABBETT SERIES FUND, INC:
Growth and Income Portfolio - 175,566 shares at a net asset value of $15.24 per share (cost $2,772,318) 2,675,412
----------
TOTAL ASSETS $3,450,892
==========
LIABILITIES AND CONTRACT OWNERS' EQUITY
FEES PAYABLE TO COVA FINANCIAL LIFE INSURANCE COMPANY $ 394
CONTRACT OWNERS' EQUITY:
Trust Quality Income - 8,702 accumulation units at $15.331980 per unit 133,413
Trust Growth and Income - 7,197 accumulation units at $14.608910 per unit 105,140
Trust Money Market - 28,509 accumulation units at $11.425132 per unit 325,720
Trust Stock Index - 13,384 accumulation units at $15.773909 per unit 211,117
Fund Growth and Income - 125,555 accumulation units at $21.306278 per unit 2,675,108
----------
TOTAL CONTRACT OWNERS' EQUITY 3,450,498
----------
TOTAL LIABILITIES AND CONTRACT OWNERS' EQUITY $3,450,892
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF OPERATIONS
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
VAN KAMPEN MERRITT
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
______________________________________________________ ______________
<TABLE>
<CAPTION>
QUALITY GROWTH & MONEY STOCK GROWTH &
INCOME INCOME MARKET INDEX INCOME TOTAL
-------- ---------- ------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends $ 1,375 $ 7,280 $10,724 $ 7,901 $ 203,892 $231,172
-------- ---------- ------- ------- ---------- ---------
Total Income 1,375 7,280 10,724 7,901 203,892 231,172
EXPENSES:
Mortality and Expense
Risk Fee 216 179 2,299 494 5,791 8,979
Administrative Fee 26 21 276 59 695 1,077
Total Expenses 242 200 2,575 553 6,486 10,056
Net Investment Income 1,133 7,080 8,149 7,348 197,406 221,116
Net Realized Gain
on Investments 6 262 -- 1,432 2,243 3,943
Net Change in Unrealized
Gain/(Loss) on Investments 1,806 (3,794) -- 1,325 (96,906) (97,569)
Net Realized and Unrealized
Gain/(Loss) on Investments 1,812 (3,532) -- 2,757 (94,663) (93,626)
Net Increase in Contract
Owners' Equity Resulting
From Operations $ 2,945 $ 3,548 $ 8,149 $10,105 $ 102,743 $127,490
======== ========== ======= ======= ========== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
VAN KAMPEN MERRITT LORD
ABBETT
SERIES TRUST
SERIES FUND, INC.
________________________________________________________ ______________
<TABLE>
<CAPTION>
QUALITY GROWTH & MONEY STOCK GROWTH &
INCOME INCOME MARKET INDEX INCOME TOTAL
--------- ---------- ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 1,133 $ 7,080 $ 8,149 $ 7,348 $ 197,406 $ 221,116
Net Realized Gain on
Investments 6 262 -- 1,432 2,243 3,943
Net Unrealized Gain/(Loss)
on Investments 1,806 (3,794) -- 1,325 (96,906) (97,569)
NET INCREASE IN CONTRACT
Owners' Equity
Resulting from
Operations 2,945 3,548 8,149 10,105 102,743 127,490
From Account Unit Transactions:
Proceeds from Units of
the Account Sold 20,000 148 2,128,675 15,778 441,266 2,605,867
Payments for Units of the
Account Redeemed (248) -- -- (2,204) (3,894) (6,346)
Account Transfers 110,716 101,444 (1,811,104) 187,438 2,134,993 723,487
Net Increase in Contract
Owners' Equity From
Account Unit
Transactions 130,468 101,592 317,571 201,012 2,572,365 3,323,008
Net Increase in Contract
Owners' Equity 133,413 105,140 325,720 211,117 2,675,108 3,450,498
Contract Owners' Equity:
Beginning of Period -- -- -- -- -- --
End of Period $133,413 $ 105,140 $ 325,720 $211,117 $2,675,108 $3,450,498
========= ========== ============ ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
VAN KAMPEN MERRITT SERIES TRUST - QUALITY INCOME PORTFOLIO
For the Period From 8/16/95
(Commencement of Operations)
Through 12/31/95
-----------------------------
<S> <C>
Accumulation Unit Value,
- ---------------------------------
Beginning of Period $ 14.42
- --------------------------------- -----------------------------
Net Investment Income .32
Net Realized and Unrealized
Gain from Security
Transactions .59
-----------------------------
Total from Investment Operations .91
-----------------------------
Accumulation Unit Value,
End of Period $ 15.33
=============================
Total Return** 17.03%*
Contract Owners Equity ,
End of Period (in thousands) $ 133
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 6.54%*
Number of Units Outstanding
at End of Period 8,702
<FN>
* Annualized
** Investment returns do not reflect any annual contract maintenance fees
or withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
VAN KAMPEN MERRITT SERIES TRUST - GROWTH & INCOME PORTFOLIO
For the Period From 7/19/95
(Commencement of Operations)
Through 12/3195
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 13.05
-----------------------------
Net Investment Income .99
Net Realized and Unrealized
Gain from Security
Transactions .57
Total from Investment Operations 1.56
Accumulation Unit Value,
End of Period $ 14.61
=============================
Total Return** 26.71%*
Contract Owners Equity ,
End of Period (in thousands) $ 105
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 49.49%*
Number of Units Outstanding
at End of Period 7,197
<FN>
* Annualized
** Investment returns do not reflect any annual contract maintenance fees or
withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
VAN KAMPEN MERRITT SERIES TRUST - MONEY MARKET PORTFOLIO
For the Period From 6/19/95
(Commencement of Operations)
Through 12/3195
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 11.13
-----------------------------
Net Investment Income .29
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions --
Total from Investment Operations .29
Accumulation Unit Value,
End of Period $ 11.42
=============================
Total Return** 4.94%*
Contract Owners Equity ,
End of Period (in thousands) $ 326
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 4.38%*
Number of Units Outstanding
at End of Period 28,509
<FN>
* Annualized
** Investment returns do not reflect any annual contract maintenance
fees or withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
VAN KAMPEN MERRITT SERIES TRUST - STOCK INDEX PORTFOLIO
For the Period From 7/20/95
(Commencement of Operations)
Through 12/3195
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 14.13
-----------------------------
Net Investment Income .50
Net Realized and Unrealized
Gain from Security
Transactions 1.14
-----------------------------
Total from Investment Operations 1.64
- --------------------------------- -----------------------------
Accumulation Unit Value,
- ---------------------------------
End of Period $ 15.77
- --------------------------------- =============================
Total Return** 26.25%*
- --------------------------------- -----------------------------
Contract Owners Equity ,
- ---------------------------------
End ofPeriod (in thousands) $ 211
- --------------------------------- -----------------------------
Ratio of Expenses to Average
- ---------------------------------
Contract Owners' Equity 1.40%*
- --------------------------------- -----------------------------
Ratio of Net Investment Income
- ---------------------------------
to Average Contract
- ---------------------------------
Owners' Equity 18.57%*
- --------------------------------- -----------------------------
Number of Units Outstanding
- ---------------------------------
at End of Period 13,384
- --------------------------------- -----------------------------
<FN>
* Annualized
** Investment returns do not reflect any annual contract maintenance
fees or withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
LORD ABBETT SERIES FUND, INC. - GROWTH AND INCOME PORTFOLIO
For the Period From7/20/95
-----------------------------
(Commencement of Operations)
-----------------------------
Through 12/3195
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 19.54
-----------------------------
Net Investment Income 1.50
Net Realized and Unrealized
Gain from Security
Transactions .27
Total from Investment Operations 1.77
-----------------------------
Accumulation Unit Value,
- ---------------------------------
End of Period $ 21.31
- --------------------------------- =============================
Total Return** 20.38%*
- --------------------------------- -----------------------------
Contract Owners Equity , $ 2,675
- --------------------------------- -----------------------------
End ofPeriod (in thousands)
- ---------------------------------
Ratio of Expenses to Average
- ---------------------------------
Contract Owners' Equity 1.40%*
- --------------------------------- -----------------------------
Ratio of Net Investment Income
- ---------------------------------
to Average Contract
- ---------------------------------
Owners' Equity 42.60%*
- --------------------------------- -----------------------------
Number of Units Outstanding
- ---------------------------------
at End of Period 125,555
- --------------------------------- -----------------------------
<FN>
* Annualized
** Investment returns do not reflect any annual contract maintenance
fees or withdrawal charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
1. ORGANIZATION:
Cova Variable Annuity Account Five (the "Separate Account") is a separate
investment account established by a resolution of the Board of Directors of
Cova Financial Life Insurance Company ("Cova Life"). The Separate Account
operates as a Unit Investment Trust under the Investment Company Act of 1940.
The Separate Account is divided into sub-accounts, with the assets of each
sub-account invested in either the Van Kampen Merritt Series Trust ("Trust")
or the Lord Abbett Series Fund, Inc. ("Fund"). The Trust is managed by Van
Kampen American Capital Investment Advisory Corp. During 1995, the Trust
consisted of four portfolios available for investment; the Quality Income,
Growth & Income, Money Market, and Stock Index Portfolios. The Fund had one
portfolio available for investment in 1995; the Growth and Income Portfolio.
Not all portfolios of the Trust and Fund are available for investment
depending upon the nature and specific terms of the different contracts
currently being offered for sale. Both the Trust and Fund are diversified,
open-end, management investment companies which are intended to meet differing
investment objectives.
The Trust Quality Income Portfolio invests in U.S. Government issued debt
obligations and in various investment-grade debt instruments, including
mortgage pass-through obligations and collateralized mortgage obligations.
The Trust Growth and Income Portfolio invests in common stocks and futures and
options contracts. The Trust Money Market Portfolio invests in short-term
money market instruments. The Trust Stock Index Portfolio invests in common
stocks, stock index futures and options, and short-term securities. The Fund
Growth and Income Portfolio invests in common stocks.
2. SIGNIFICANT ACCOUNTING POLICIES:
A. INVESTMENT VALUATION
Investments in shares of the Trust and Fund are carried in the statement of
assets and liabilities at the underlying net asset value of the Trust and
Fund. The net asset value of the Trust and Fund has been determined on the
market value basis, and is valued daily by the Trust and Fund investment
managers. Realized gains and losses are calculated by the average cost
method.
B. REINVESTMENT OF DIVIDENDS
Dividends received from net investment income and net realized capital gains
are reinvested in additional shares of the portfolio of the Trust or Fund
making the distribution or, at the election of the Separate Account, received
in cash. Dividend income and capital gain distributions are recorded as
income on the ex-dividend date.
C. FEDERAL INCOME TAXES
Operations of the Separate Account form a part of Cova Life, which is taxed as
a "Life Insurance Company" under the Internal Revenue Code ("Code"). Under
current provisions of the Code, no Federal income taxes are payable by Cova
Life with respect to earnings of the Separate Account.
Under the principles set forth in Internal Revenue Ruling 81-225 and Section
817(h) of the Code and regulations thereunder, Cova Life believes that it will
be treated as the owner of the assets invested in the Separate Account for
Federal income tax purposes, with the result that earnings and gains, if any,
derived from those assets will not be included in a contract owners' gross
income until amounts are withdrawn or received pursuant to an Optional Payment
Plan.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
3. CONTRACT CHARGES:
There are no deductions made from purchase payments for sales charges at the
time of purchase. However, if all or a portion of the contract value is
withdrawn, a withdrawal charge is calculated and deducted from the contract
value. The withdrawal charge is imposed on withdrawals of contract values
attributable to purchase payments within five years after receipt and is equal
to 5% of the purchase payment withdrawn. After the first contract
anniversary, provided that the contract value prior to withdrawal exceeds
$5,000, an owner may make a withdrawal each contract year of up to 10% of the
aggregate purchase payments free from withdrawal charges. An annual contract
maintenance charge of $30 is imposed on all contracts with contract values
less than $50,000 on their policy anniversary. The charge covers the cost of
contract administration for the previous year and is prorated between the
sub-accounts to which the contract value is allocated.
Mortality and expense risks assumed by Cova Life are compensated by a charge
equivalent to an annual rate of 1.25% of the value of net assets. The
mortality risks assumed by Cova Life arise from its contractual obligation to
make annuity payments after the annuity date for the life of the annuitant,
and to waive the withdrawal charge in the event of the death of the contract
owner.
In addition, the Separate Account bears certain administration expenses, which
are equivalent to an annual rate of .15% of net assets. These charges cover
the cost of establishing and maintaining the contracts and Separate Account.
Cova Life currently advances any premium taxes due at the time purchase
payments are made and then deducts premium taxes from the contract value at
the time annuity payments begin or upon withdrawal if Cova Life is unable to
obtain a refund. Cova Life, however, reserves the right to deduct premium
taxes when incurred.
4. ACCOUNT TRANSFERS:
Subject to certain restrictions, the contract owner may transfer all or a part
of the accumulated value of the contract among other offered and available
account options of the Separate Account and fixed rate annuities of Cova Life.
If more than 12 transfers have been made in the contract year, a transfer fee
of $25 per transfer or, if less, 2% of the amount transferred will be deducted
from the account value. If the owner is participating in the Dollar Cost
Averaging program, such related transfers are not taken into account in
determining any transfer fee.
VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
5. GAIN/(LOSS) ON INVESTMENTS:
The table below summarizes realized and unrealized gains and losses on
investments:
<TABLE>
<CAPTION>
REALIZED GAIN/(LOSS) ON INVESTMENTS:
For The Period From 6/19/95
(Commencement of Operations)
Through 12/31/95
<S> <C>
Trust Quality Income Portfolio:
Aggregate Proceeds From Sales $ 687
Aggregate Cost 681
Net Realized Gain on Investments $ 6
=============================
Trust Growth and Income Portfolio:
Aggregate Proceeds From Sales $ 27,991
Aggregate Cost 27,729
-----------------------------
Net Realized Gain on Investments $ 262
- ------------------------------------------ =============================
Trust Money Market Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 1,544,456
- ------------------------------------------ -----------------------------
Aggregate Cost 1,544,456
- ------------------------------------------ -----------------------------
Net Realized Gain/(Loss) on Investments _ _
- ------------------------------------------ =============================
Trust Stock Index Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 152,510
- ------------------------------------------ -----------------------------
Aggregate Cost 151,078
- ------------------------------------------ -----------------------------
Net Realized Gain on Investments $ 1,432
- ------------------------------------------ =============================
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
5. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
REALIZED GAIN/(LOSS) ON INVESTMENTS
For the Period From 6/19/95
(Commencement of Operations)
Through 12/31/95
-----------------------------
<S> <C>
Fund Growth and Income Portfolio:
Aggregate Proceeds From Sales $ 139,543
Aggregate Cost 137,300
Net Realized Gain on Investments $ 2,243
=============================
UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
- ------------------------------------------------------
Trust Quality Income Portfolio:
End of Period $ 1,806
Beginning of Period _ _
Net Change in Unrealized Gain on Investments $ 1,806
=============================
Trust Growth and Income Portfolio:
End of Period ($3,794)
Beginning of Period _ _
Net Change in Unrealized Loss on Investments ($3,794)
=============================
Trust Money Market Portfolio:
End of Period _ _
Beginning of Period _ _
Net Change in Unrealized Gain/(Loss) on Investments _ _
=============================
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
5. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
UNREALIZED GAIN/(LOSS) ON INVESTMENTS
For the Period From 6/19/95
(Commencement of Operations)
Through 12/31/95
-----------------------------
<S> <C>
Trust Stock Index Portfolio:
End of Period $ 1,325
Beginning of Period _ _
Net Change in Unrealized Gain on Investments $ 1,325
=============================
Fund Growth and Income Portfolio:
End of Period ($96,906)
Beginning of Period _ _
Net Change in Unrealized Loss on Investments ($96,906)
=============================
</TABLE>
6. ACCOUNT UNIT TRANSACTIONS:
The change in the number of accumulation units resulting from account unit
transactions is as follows:
VAN KAMPEN
MERRITT LORD ABBETT
SERIES TRUST SERIES FUND, INC.
____________________________________________ _____________
<TABLE>
__
<CAPTION>
QUALITY GROWTH & MONEY STOCK GROWTH &
INCOME INCOME MARKET INDEX INCOME TOTAL
-------- --------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Units Sold 1,387 -- 188,325 1,057 21,839 212,608
Units Redeemed (16) (1) (28) (114) (527) (686)
Units Transferred 7,331 7,198 (159,788) 12,441 104,243 (28,575)
Balance at December 31, 1995 8,702 7,197 28,509 13,384 125,555 183,347
</TABLE>
7. SUBSEQUENT EVENTS:
On February 9, 1996, the Board of Trustees of Van Kampen Merritt Series Trust
voted to change the name of the Trust to Cova Series Trust, replace Van Kampen
American Capital Investment Advisory Corp. with Cova Investment Advisory Corp.
as Trust manager, and engage Van Kampen American Capital Investment Advisory
Corp. as a sub-advisor to the Trust.
COVA FINANCIAL
LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
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 Life Insurance Company:
We have audited the accompanying balance sheet of Cova Financial Life
Insurance Company (a wholly owned subsidiary of Cova Corporation) as of
December 31, 1995 (Successor or the Company) and the balance sheet of Xerox
Financial Life Insurance Company as of December 31, 1994 (Predecessor), and
the related 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 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 require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from 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 financial statements referred to above present
fairly, in all material respects, the financial position of Cova Financial
Life Insurance Company as of December 31, 1995, and the results of its
operations and its cash flows for the Successor period, in conformity with
generally accepted accounting principles. Also, in our opinion, the
aforementioned Predecessor financial statements present fairly, in all
material respects, the financial position of Xerox Financial Life Insurance
Company as of December 31, 1994, and the results of its operations and its
cash flows for the Predecessor periods, in conformity with generally accepted
accounting principles.
As discussed in note 3 to the 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 LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
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 $37,242 in 1995 and $148,165 in 1994) $38,092 $122,416
Policy loans 1,063 101
Short-term investments at cost which approximates market 984 829
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total investments 40,139 123,346
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Cash and cash equivalents - interest bearing 5,157 39,267
Cash - non-interest bearing 977 580
Accrued investment income 566 1,808
Due from affiliates -- 6,500
Deferred policy acquisition costs 1,007 9,718
Present value of future profits 732 --
Goodwill 2,306 --
Federal and state income taxes recoverable -- 1,613
Deferred tax benefits (net) 1,007 6,987
Receivable from OakRe 127,335 --
Reinsurance receivables 458 9
Other assets 45 21
Separate account assets 3,451 --
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total Assets $183,180 $189,849
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
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 $154,458 $174,605
Future policy benefits 4,369 4,090
Accounts payable and other liabilities 1,116 625
Future purchase price payable to OakRe 1,265 --
Guaranty assessments 1,838 --
Separate account liabilities 3,451 --
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total Liabilities 166,497 179,320
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Shareholders' equity:
Common stock, $233 par value in 1995, $50 par value in 1994.
(Authorized 30,000 shares; issued and outstanding 12,000
shares in 1995 and 1994) 2,800 600
Additional paid-in capital 13,523 17,200
Retained earnings 168 4,045
Net unrealized appreciation/(depreciation) on securities
net of tax 192 (11,316)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total Shareholders' Equity 16,683 10,529
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total Liabilities and Shareholders' Equity $183,180 $189,849
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
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 $18 premium ceded for the
Company in 1995 and $11, $30 and $30 for the
Predecessor in 1995, 1994 and 1993) $ 142 $ 82 $ 1,335 $ 943
Net investment income 1,419 5,271 15,101 21,171
Net realized gain (loss) on sale of investments 118 (272) 318 (2,974)
Other income 3 57 138 69
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total revenues 1,682 5,138 16,892 19,209
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Benefits and expenses:
Interest on policyholder deposits 788 5,034 13,361 14,829
Current and future policy benefits 115 178 1,452 1,111
Operating and other expenses 309 814 1,384 1,196
Amortization of purchase intangible assets 157 -- -- --
Amortization of deferred acquisition costs 5 522 6,979 2,468
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total Benefits and Expenses 1,374 6,548 23,176 19,604
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Income/(loss) before income taxes 308 (1,410) (6,284) (395)
Income tax:
Current -- (362) (80) 40
Deferred 140 (201) (2,050) (130)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total income tax expense/(benefit) 140 (563) (2,130) (90)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net Income/(Loss) $168 ($847) ($4,154) ($305)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
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 ($233 par value at 12/31/95, $50 par value
value for 5 mos. ended 5/31/95, 1994 & 1993
authorized 30,000 shares; issued and out-
standing 12,000 shares in 1995, 1994 & 1993)
Balance at beginning of period $2,800 $ 600 $600 $600
Par value adjustment -- 2,200 __ __
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance at end of period 2,800 2,800 600 600
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Additional paid-in capital:
Balance at beginning of period 18,093 17,200 8,200 8,200
Adjustment to reflect purchase acquisition indicated in note 2
(7,570) -- -- --
Par value adjustment (2,200)
Capital contribution 3,000 3,093 9,000 --
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance at end of period 13,523 18,093 17,200 8,200
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Retained earnings:
Balance at beginning of period 209 4,045 8,199 8,504
Adjustment to reflect purchase acquisition indicated in note 2
(209) -- -- --
Net income/(loss) 168 (847) (4,154) (305)
Adjustment due to financial reinsurance
transaction with OakRe (2,989)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance at end of period $168 $209 $4,045 $8,199
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
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 secur secur securities:iti
Balance at beginning of period $(3,789) ($11,316) -- __
Adjustment to reflect purchase acquisition indicated in note 2
3,789 -- -- --
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 appreciation/(depreciation)
of debt and equity securities 846 15,151 (29,570) __
Change in deferred Federal income taxes (104) (4,053) 6,829 __
Change in deferred acquisition costs attributable
to unrealized losses/(gains) -- (3,571) 10,059 --
Change in present value of future profits
attributable to unrealized (gains) (550) -- -- --
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance at end of period 192 (3,789) (11,316) --
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total Shareholders' Equity $16,683 $17,313 $10,529 $16,999
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
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 $ 934 $ 7,283 $15,690 $17,210
Premiums received 154 90 1,357 943
Insurance and annuity benefit payments (339) (252) (552) (415)
Operating disbursements (490) (1,038) (1,482) (1,409)
Taxes on income refunded (paid) -- 1,975 (856) 576
Commissions and acquisition costs paid (854) (721) (1,097) (1,032)
Other 45 6,478 35 (129)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net cash provided by/(used in) operating activities (550) 13,815 13,095 15,744
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Cash flows from investing activities:
Cash used for the purch. of investment secur. (52,399) (935) (69,199) (139,207)
Proceeds from invest. secur. sold and matured 14,399 151,204 115,994 131,767
Other (57) (97) (320) --
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net cash provided by/(used in) in investing activities
($38,057) $150,172 $46,475 ($7,440)
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
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 $ 12,442 $ 5,614 $ 11,796 $ 10,339
Transfers (to)/from OakRe 33,579 (171,081) -- --
Transfer to Separate Accounts (3,312) -- -- --
Return of policyholder deposits (26,897) (15,531) (43,377) (27,031)
Capital contributions received 3,000 3,093 2,500 --
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net cash provided by/(used in) financing activities 18,812 (177,905) (29,081) (16,692)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Increase in cash and cash equivalents (19,795) (13,918) 30,489 (8,388)
Cash and cash equivalents at beginning of period 25,929 39,847 9,358 17,746
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Cash and cash equivalents at end of period $6,134 $25,929 $39,847 $9,358
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
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>
Reconciliation of net income/(loss) to net cash provided by operating activities:
Net income/(loss) $ 168 ($847)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Increase/(decrease)in future policy
benefits (net of reinsurance) (201) (52)
Increase/(decrease) in payables and accrued liabilities
161 (252)
Decrease/(increase) in accrued investment income
(525) 1,766
Amortization of intangible assets and costs 5 522
Amortization and accretion of securities
premiums and discounts (9) 32
Net realized (gain)/loss on sale of investments
(118) 272
Interest accumulated on policyholder deposits
788 5,034
Investment expenses paid 55 88
Increase/(decrease) in current and deferred
Federal income taxes 140 1,412
Recapture commissions paid to OakRe (223) --
Deferral of costs (1,164) (542)
Due to/from affiliates 27 6,470
Other 346 (88)
<S> <C> <C>
Reconciliation of net income/(loss) to net cash provided by operating activities:
Net income/(loss) ($4,154) ($305)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Increase/(decrease)in future policy
benefits (net of reinsurance) 911 710
Increase/(decrease) in payables and accrued liabilities
126 (625)
Decrease/(increase) in accrued investment income
636 (386)
Amortization of intangible assets and costs 6,979 2,468
Amortization and accretion of securities
premiums and discounts (369) (3,937)
Net realized (gain)/loss on sale of investments
(318) 2,974
Interest accumulated on policyholder deposits
13,361 14,829
Investment expenses paid 322 362
Increase/(decrease) in current and deferred
Federal income taxes (2,986) 487
Recapture commissions paid to OakRe -- --
Deferral of costs (1,262) (1,017)
Due to/from affiliates -- --
Other (151) 184
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net cash provided by operating activities ($550) $13,815 $13,095 $15,744
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
December 31, 1995, 1994 and 1993
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Life Insurance Company (the Company), formerly Xerox Financial
Life Insurance Company (the Predecessor), markets and services single premium
deferred annuities, immediate annuities, variable annuities, and single
premium whole-life insurance policies. The Company is licensed to do business
in the state of California. 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 71%, 47% and 58% of the companies sales have been through two
specific brokerage firms, A.G. Edwards & Sons, Incorporated, and Edward D.
Jones & Company, Incorporated in 1995, 1994 and 1993, respectively.
ORGANIZATION
Prior to June 1, 1995 Xerox Financial Services , Inc. (XFSI) owned 100% of the
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 $13.3 million in cash and $1.4 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), an affiliate of the Predecessor, to assume the existing single
premium deferred annuity deposits (SPDAs) which had an aggregate carrying
value at June 1, 1995 of $159.0 million. In exchange, the Predecessor
transferred specifically identified assets to OakRe with a market value at
June 1, 1995 of $162.0 million. Ownership of OakRe was retained by XFSI
subsequent to the sale of the Predecessor and other affiliates. The
Receivable from OakRe to the Company that was created by this transaction will
be liquidated over the remaining crediting rate guaranty periods (which will
be substantially expired in 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.
Continued
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
In substance, terms of the agreement have allowed the seller, XFSI, to retain
substantially all of the existing financial benefits and risks of the existing
business, while the purchaser, GALIC, obtained the corporate operating and
product licenses, marketing and administrative capabilities of the Company,
and access to the retention of the policyholder deposit base that persists
beyond the next crediting rate reset date. 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 whole life,
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 of $13.3 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:
<TABLE>
<CAPTION>
(In Millions)
<S> <C> June 1, 1995
Assets acquired:
Policy loans $ .9
Cash and cash equivalents 25.9
Short term investment .1
Present value of future profits 1.2
Goodwill 2.4
Deferred tax benefit 1.5
Reinsurance receivable 156.3
Other assets .1
-------------
$ 188.4
Liabilities assumed:
Policyholder deposits $ 168.7
Future policy benefits 4.5
Future purchase price payable 1.4
Deferred income taxes .2
Other liabilities .3
$ 175.1
-------------
Adjusted purchase price $ 13.3
=============
</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 a reduction
(Continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
in shareholders equity of $4.0 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.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
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 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 follows 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.
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.
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.
Policy loans are carried at their unpaid principal balances.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
December 31, 1995, 1994 and 1993
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in banks, US
Treasury bills, money market accounts, and commercial paper with maturities
under 90 days, which are not otherwise restricted.
SEPARATE ACCOUNT ASSETS
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.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
December 31, 1995, 1994 and 1993
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 $ 6,167 $ 9,718 $ 7,095 $ 8,547
Effects of push down purchase
accounting (6,167) -- -- --
Commissions and expenses deferred 1,012 542 1,262 1,016
Amortization (5) (522) (6,979) (2,468)
Deferred policy acquisition costs
attributable to unrealized
gains/(losses) -- (3,571) 8,340 --
Deferred policy acquistion costs,
end of period $ 1,007 $ 6,167 $ 9,718 $ 7,095
======== ======== ======== ========
</TABLE>
PURCHASE RELATED INTANGIBLE ASSETS AND LIABILITIES
In accordance with the purchase method of accounting for business
combinations, two intangible assets and a future payable related to accrued
purchase price consideration were established as of the purchase date:
Present value of future profits
As of June 1, 1995 the Company established an intangible asset which
represents the present value of future profits to be derived from both the
purchased and transferred blocks of business. Certain estimates were utilized
in the computation of this asset including estimates of future policy
retention, investment income, interest credited to policyholders, surrender
fees, mortality costs, and policy maintenance costs discounted at a pre-tax
rate of 18% (12% net after-tax). 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 approximately 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 12.5%, 9.4%, 6.6%, 4.7% and 3.8% 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.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
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 $1,233
Interest added 56
Commissions capitalized 156
Gross amortization, excluding interest (163)
Present value of future profit attributable to
unrealized gains (550)
-------
Present value of future profits - end of period $ 732
=======
</TABLE>
Future payable
Pursuant to the financial reinsurance agreement, 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 with
OakRe 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 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 that can be anticipated.
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 $1,438
Interest added 50
Payments to OakRe (223)
-------
Future payable - end of period $1,265
=======
</TABLE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
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 payable 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 $2.9 million for the value of the business acquired that is
amortizable for tax purposes.
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.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
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
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.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
In a similar manner, the amortization of present value of future profits is
based on estimates of long-term future profits from existing and recaptured
policies. These gross profits are dependent upon policy retention and lapses,
the spread between investment earnings and crediting rates, and the level of
maintenance expenses. Changes in circumstances or estimates may cause
retrospective adjustment to the periodic amortization expense and the carrying
value of the asset.
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets
to be Disposed of (SFAS 121), which was adopted by the Company in the fourth
quarter of 1995, the Company has considered the recoverability of Goodwill and
has concluded that no circumstances have occurred which would give rise to
impairment of Goodwill for the period ending December 31, 1995.
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 premiums written by the Company in the
state. The Company records assessments as an expense when received or
reasonably estimatable.
The Company has been indemnified by OakRe against any guaranty assessments
incurred that relate to insolvencies occurring prior to June 1, 1995. See note
10 - 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 $1.6 million.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
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 . 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 demand. As of December 31,
1995 and 1994 the cash surrender value of policyholder funds on deposit were
$104,571 and $6,207,467 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.
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 then 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.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
(4) 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
shareholders equity. The carrying value and amortized cost of investments at
December 31, 1995 and 1994 are as follows:
<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 $ 104 $ 3 -- $ 104 $ 101
Mortgage-backed and
derivative securities:
Collateralized mortgage obligations 13,377 237 $(14) 13,377 13,154
Corporate, state, municipalities, and
political subdivisions 24,611 624 -- 24,611 23,987
Total debt securities 38,092 864 (14) 38,092 37,242
Policy loans 1,063 -- -- 1,063 1,063
Short term investments 984 0 (4) 984 988
Total investments $40,139 $864 $(18) $40,139 $39,293
</TABLE>
<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 $ 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
Foreign governments
Corporate, state, municipalities, and
political subdivisions 45,597 8 (7,406) 45,597 52,996
Redeemable preferred stocks
Total debt securities 122,416 27 (25,776) 122,416 148,165
Policy loans 829 -- -- 829 829
Short term investments 101 -- (1) 101 102
Total investments $123,346 $27 $(25,777) $123,346 $149,096
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to 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 $12,237 $12,499
Due after five years through ten years 11,318 11,679
Due after ten years 533 537
Mortgage-backed securities 13,154 13,377
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total $37,242 $38,092
<FN>
At December 31, 1995, approximately 97.9% of the Company's debt securities are
investment grade or are non-rated but considered to be of investment grade.
Of the 2.1% non-investment grade debt securities, all are rated as BB+ or its
equivalent.
All debt securities were income producing during the years ended December 31,
1995 and 1994.
</TABLE>
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to 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 $1,166 $ 4,075 $ 15,013 $21,111
Income on short-term investments 257 1,261 349 393
Income on cash on deposit
Income on policy loans 46 29 57 29
Miscellaneous interest -- -- 4 --
Total investment income 1,469 5,365 15,423 21,533
Investment expenses (50) (94) (322) (362)
Net investment income 1,419 5,271 15,101 21,171
Realized capital gains/(losses) were: follows:
Debt securities 118 (272) 320 (2,974)
Short-term investments -- -- (2) --
Net realized gains/(losses) on
investments $ 118 $ (272) $ 318 $(2,974)
Unrealized gains/(losses) were as follows:
Debt securities $ 850 $(10,594) $(25,749) --
Short-term investments (4) 1 (1) --
Effects on deferred acquisition costs amortization -- 4,767 8,340 --
Effects on present value of future
profits (550) -- -- --
Unrealized gains/(losses) before income tax 296 (5,826) (17,410) --
Unrealized income tax benefit/(expense) (104) 2,037 6,094 --
Net unrealized gains (losses) on
investments $ 192 $ (3,789) $(11,316) --
</TABLE>
Proceeds from sales of investments in debt securities for the Company during
1995 were $14,400,247 and for the Predecessor were $148,796,033. Gross gains
of $136,104 and gross losses of $17,789 were realized by the Company on its
sales. The Predecessor realized gross gains of $23,293 and gross losses of
$295,368 on its sales.
Proceeds from sales of investments in debt securities during 1994 were
$115,993,655. Gross gains of $1,671,736 and gross losses of $1,351,406 were
realized on those sales.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
Proceeds from sales of investments in debt securities during 1993 were
$132,103,177. Gross gains of $5,228,353 and gross losses of $8,202,256 were
realized on those sales.
Unrealized appreciation/(depreciation) of debt securities for the Company in
1995 and the Predecessor in 1995, 1994 and 1993 were $850,000, $15,152,000,
$(29,644,000) and $(2,075,000) 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 $101,617 at December 31, 1995
were deposited with government authorities as required by law.
(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:
Long-term Debt Amortized
Securities Cost
North American Mortgage $1,954,398
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-A 39,954,430 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>
FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
(6) 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.
(7) 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
separate Federal Income Tax return. 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.
The actual Federal income tax expense differed from the expected tax expense
computed by applying the US. Federal statutory rate to income before taxes on
income as follows:
<TABLE>
<CAPTION>
THE COMPANY THE 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 $108 35.0% $(494) 35.0% $(2,200) 35.0% $(138) 35.0%
State income taxes, net -- -- -- --
Rate change effect on prior deferrals -- -- -- -- -- -- 48 10.0
Tax-exempt bond interest -- -- (70) 5.0
Amortization of intangible assets 25 8.2 -- --
Other 7 2.3 1 (.1) 70 (1.0) -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total $140 45.5% $(563) 39.9% $(2,130) 34% $ (90) 45.0%
</TABLE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
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
and 1994 follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
1995 1994
<S> <C> <C>
Deferred tax assets:
Tax basis of intangible assets purchased $1,009 --
Liability for commission on recapture 443 --
Policy reserves 143 $ 972
DAC Proxy Tax 277 214
Unrealized depreciation of debt securities -- 9,012
Other Deferred tax assets 81 518
Total assets 1,953 10,716
Deferred tax liabilities:
Unrealized gains in investments 104 --
PVFP 394 --
Deferred acquisition costs 390 3,401
Market discount on bonds -- 327
Other deferred tax liabilities 58 1
Total liabilities 946 3,729
Net deferred tax asset $1,007 $ 6,987
</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, and all other available evidence.
(8) RELATED-PARTY TRANSACTIONS
The Company has entered into management, operations and agreements with both
affiliated and unaffiliated companies. The affiliated companies are Cova Life
Management Company (CLMC), a Delaware corporate, 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, Inc., 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 by the Company in 1995 were $375,764, and by the
Predecessor in 1995, 1994 and 1993 were approximately $334,979, $674,136 and
$462,553 respectively.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
(9) 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, and
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 established fair values, and
shareholders equity to the net purchase price. Statutory accounting does not
recognize the purchase method of accounting.
As of December 31, the differences between statutory capital and surplus and
shareholder's equity determined in conformity with 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 $11,457 $ 10,875 $ 8,560
Reconciling items:
Statutory Asset Valuation Reserves 700 2,181 2,142
Interest Maintenance Reserve 69 -- --
GAAP investment adjustments to fair value 846 (25,750) --
Deferred policy acquisition costs 1,007 9,718 7,095
GAAP basis policy reserves (215) 12,002 332
Deferred federal income taxes (net) 1,007 6,987 (1,157)
Goodwill 2,306 -- --
Present value of future profits 732 -- --
Future purchase price payable (1,265) -- --
Elimination of notes contributed
to statutory surplus -- (5,500) --
Other 39 16 27
GAAP Shareholders' Equity $16,683 $ 10,529 $16,999
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Financial Statements
Statutory net income (loss) for the years ended December 31, 1995, 1994 and
1993 were $(2,404,316), $(13,042,271),and $1,681,945 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 for the preceding year. Accordingly, the maximum dividend
permissible at December 31, 1995 was $865,739.
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, $12,157,242 and $1,071,963
respectively. This level of adjusted capital qualifies under all tests.
(10) 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, 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
association for insolvencies incurred through 1995, but for which assessments
have not yet been determined nor assessed, to a maximum generally of 1% of
statutory premiums per annum.
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 $1.8 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 $1.8 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
