Cova Financial Life Insurance Company May 1, 1997
PROFILE of the Fixed and Variable Annuity Contract
This Profile is a summary of some of the more important points that you should
consider and know before purchasing the Contract. The Contract is more fully
described in the prospectus which accompanies this Profile. Please read the
prospectus carefully.
1. THE ANNUITY CONTRACT. The fixed and variable annuity contract offered by Cova
is a contract between you, the owner, and Cova, an insurance company. The
Contract provides a means for investing on a tax-deferred basis in a fixed
account of Cova and 11 investment portfolios. The Contract is intended for
retirement savings or other long-term investment purposes and provides for a
death benefit and guaranteed income options.
The fixed account offers an interest rate that is guaranteed by the insurance
company, Cova. This interest rate is set once each year. While your money is in
the fixed account, the interest your money will earn as well as your principal
is guaranteed by Cova.
This Contract also offers 11 investment portfolios which are listed in Section
4. These portfolios are designed to offer a better return than the fixed
account. However, this is NOT guaranteed. You can also lose your money.
You can put money into any or all of the investment portfolios and the fixed
account. You can transfer between accounts up to 12 times a year without
charge or tax implications. After 12 transfers, the charge is $25 or 2%
of the amount transferred, whichever is less.
The Contract, like all deferred annuity contracts, has two phases: the
accumulation phase and the income phase. During the accumulation phase, earnings
accumulate on a tax-deferred basis and are taxed as income when you make a
withdrawal. The income phase occurs when you begin receiving regular payments
from your Contract.
The amount of money you are able to accumulate in your account during the
accumulation phase will determine the amount of income payments during the
income phase.
2. ANNUITY PAYMENTS (THE INCOME PHASE). If you want to receive regular income
from your annuity, you can choose one of three options: (1) monthly payments for
your life (assuming you are the annuitant); (2) monthly payments for your life,
but with payments continuing to the beneficiary for 5, 10 or 20 years (as you
select) if you die before the end of the selected period; and (3) monthly
payments for your life and for the life of another person (usually your spouse)
selected by you. Once you begin receiving regular payments, you cannot change
your payment plan.
During the income phase, you have the same investment choices you had during the
accumulation phase. You can choose to have payments come from the fixed account,
the investment portfolios or both. If you choose to have any part of your
payments come from the investment portfolios, the dollar amount of your payments
may go up or down.
3. PURCHASE. You can buy this Contract with $5,000 or more under most
circumstances. You can add $2,000 or more any time you like during the
accumulation phase. Your registered representative can help you fill out the
proper forms.
4. INVESTMENT OPTIONS. You can put your money in any or all of these
investment portfolios which are described in the prospectuses for the funds:
<TABLE>
<CAPTION>
<S> <C> <C>
Managed by J.P. Morgan Managed by Lord, Abbett & Co. Managed by Van Kampen
Investment Management Inc. Bond Debenture (a "high yield" portfolio American Capital
Select Equity under California insurance regulations) Investment Advisory Corp.
Small Cap Stock Growth and Income VKAC Growth and Income
Large Cap Stock Money Market
International Equity Quality Income
Quality Bond Stock Index
</TABLE>
Depending upon market conditions, you can make or lose money in any of these
portfolios.
5. EXPENSES. The Contract has insurance features and investment features,
and there are costs related to each.
Each year Cova deducts a $30 contract maintenance charge from your Contract.
Cova currently waives this charge if the value of your Contract is at least
$50,000. Cova also deducts for its insurance charges which total 1.40% of
the average daily value of your Contract allocated to the investment
portfolios.
There are also investment charges which range from .11% to .95% of the average
daily value of the investment portfolio depending upon the investment portfolio.
If you take your money out, Cova may assess a withdrawal charge which is equal
to 5% of the purchase payment you withdraw. When you begin receiving regular
income payments from your annuity, Cova will assess a state premium tax charge
which ranges from 0-4% depending upon the state.
The following chart is designed to help you understand the expenses in the
Contract. The column "Total Annual Expenses" shows the total of the $30
contract maintenance charge (which is represented as .10% below), the 1.40%
insurance charges and the investment expenses for each investment portfolio.
The next two columns show you two examples of the expenses, in dollars, you
would pay under a Contract. The examples assume that you invested $1,000 in a
Contract which earns 5% annually and that you withdraw your money: (1) at the
end of year 1, and (2) at the end of year 10. For year 1, the Total Annual
Expenses are assessed as well as the withdrawal charges. For year 10, the
example shows the aggregate of all the annual expenses assessed for the 10
years, but there is no withdrawal charge.
The premium tax is assumed to be 0% in both examples.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Examples:
Total Annual
Total Annual Total Annual Total Expenses At End of:
Insurance Portfolio Annual (1) (2)
Portfolio Charges Expenses Expenses 1 Year 10 Years
- --------------------- ------------- ------------- ------------- ------ --------
Managed by J.P. Morgan Investment
Management Inc.
Select Equity 1.50% 0.85% 2.35% $73.80 $266.24
Small Cap Stock 1.50% 0.95% 2.45% $74.80 $276.23
Large Cap Stock 1.50% 0.75% 2.25% $72.80 $256.13
International Equity 1.50% 0.95% 2.45% $74.80 $276.23
Quality Bond 1.50% 0.65% 2.15% $71.79 $245.92
Managed by Lord, Abbett & Co.
Bond Debenture 1.50% 0.85% 2.35% $73.80 $266.24
Growth and Income 1.50% 0.59% 2.09% $71.19 $239.74
Managed by Van Kampen American
Capital Investment Advisory Corp.
VKAC Growth and Income 1.50% 0.70% 2.20% $72.29 $251.04
Money Market 1.50% 0.11% 1.61% $66.36 $188.79
Quality Income 1.50% 0.60% 2.10% $71.29 $240.77
Stock Index 1.50% 0.60% 2.10% $71.29 $240.77
</TABLE>
The expenses reflect any expense reimbursement or fee waiver. For more
detailed information, see the Fee Table in the Prospectus for the Contract.
6. TAXES. Your earnings are not taxed until you take them out. If you take money
out, earnings come out first and are taxed as income. If you are younger than 59
1/2 when you take money out, you may be charged a 10% federal tax penalty on the
earnings. Payments during the income phase are considered partly a return of
your original investment. That part of each payment is not taxable as income.
7. ACCESS TO YOUR MONEY. You can take money out at any time during the
accumulation phase. After the first year, you can take up to 10% of your total
purchase payments each year without charge from Cova. Withdrawals in excess of
that will be charged 5% of each payment you take out. After Cova has had a
payment for 5 years, there is no charge for withdrawals. Of course, you may also
have to pay income tax and a tax penalty on any money you take out. Each
purchase payment you add to your Contract has its own 5 year withdrawal charge
period.
8. PERFORMANCE. The value of the Contract will vary up or down depending
upon the investment performance of the Portfolio(s) you choose. Cova may
provide total return figures for each investment portfolio.
9. DEATH BENEFIT. If you die before moving to the income phase, the person you
have chosen as your beneficiary will receive a death benefit. This death benefit
will be the greater of three amounts: 1) the money you've put in less any money
you've taken out, and the related withdrawal charges, accumulated at 4% until
you reach age 80, or 2) the current value of your Contract, or 3) the value of
your Contract at the most recent 5th-year-anniversary plus any money you've
added since that anniversary minus any money you've taken out since that
anniversary, and the related withdrawal charges. If you die after age 80,
slightly different rules apply.
10. OTHER INFORMATION.
Free Look. If you cancel the Contract within 10 days after receiving it (or
within 30 days if you are 60 years or older when we issue the Contract), we will
send your money back without assessing a withdrawal charge. You will receive
whatever your Contract is worth on the day we receive your request. This may be
more or less than your original payment. If we're required by law to return
your original payment, we will put your money in the Money Market Portfolio
during the free-look period.
No Probate. In most cases, when you die, the person you choose as your
beneficiary will receive the death benefit without going through probate.
Who should purchase the Contract? This Contract is designed for people
seeking long-term tax-deferred accumulation of assets, generally for retirement
or other long-term purposes. The tax-deferred feature is most attractive to
people in high federal and state tax brackets. You should not buy this Contract
if you are looking for a short-term investment or if you cannot take the risk of
getting back less money than you put in.
Additional Features. This Contract has additional features you might be
interested in. These include:
You can arrange to have money automatically sent to you each month while
your Contract is still in the accumulation phase. Of course, you'll have to pay
taxes on money you receive. We call this feature the Systematic Withdrawal
Program.
You can arrange to have a regular amount of money automatically invested in
investment portfolios each month, theoretically giving you a lower average cost
per unit over time than a single one time purchase. We call this feature Dollar
Cost Averaging.
Cova will automatically readjust the money between investment portfolios
periodically to keep the blend you select. We call this feature Automatic
Rebalancing.
Under certain circumstances, Cova will give you your money without a
withdrawal charge if you need it while you're in a nursing home. We call this
feature the Nursing Home Waiver.
These features may not be suitable for your particular situation.
11. INQUIRIES. If you need more information, please contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
THE FIXED
AND VARIABLE ANNUITY
ISSUED BY
COVA VARIABLE ANNUITY ACCOUNT FIVE
AND
COVA FINANCIAL LIFE INSURANCE COMPANY
This prospectus describes the Fixed and Variable Annuity Contract offered by
Cova Financial Life Insurance Company (Cova).
The annuity contract has 12 investment choices - a fixed account which offers
an interest rate which is guaranteed by Cova, and 11 investment portfolios
listed below. The 11 investment portfolios are part of the Cova Series Trust
or the Lord Abbett Series Fund, Inc. You can put your money in the fixed
account and/or any of these investment portfolios.
Cova Series Trust:
Managed by J.P. Morgan
Investment Management Inc.
Select Equity
Large Cap Stock
Small Cap Stock
International Equity
Quality Bond
Managed by Van Kampen American Capital
Investment Advisory Corp.
VKAC Growth and Income
Money Market
Quality Income
Stock Index
Managed by Lord, Abbett & Co.
Bond Debenture (a "high yield" portfolio under California
insurance regulations)
Lord Abbett Series Fund, Inc.:
Managed by Lord, Abbett & Co.
Growth and Income
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Cova Fixed and Variable
Annuity Contract.
To learn more about the Cova Fixed and Variable Annuity Contract, you can
obtain a copy of the Statement of Additional Information (SAI) dated May 1,
1997. The SAI has been filed with the Securities and Exchange Commission (SEC)
and is legally a part of the prospectus. The Table of Contents of the SAI is
on Page 14 of this prospectus. For a free copy of the SAI, call us at (800)
831-5433 or write us at : One Tower Lane, Suite 3000, Oakbrook Terrace,
Illinois 60181-4644.
INVESTMENT IN A VARIABLE ANNUITY CONTRACT IS SUBJECT TO RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
May 1, 1997.
TABLE OF CONTENTS
Page
INDEX OF SPECIAL TERMS
Fee Table
Examples
1. THE ANNUITY CONTRACT
2. ANNUITY PAYMENTS (THE INCOME PHASE)
3. PURCHASE
Purchase Payments
Allocation of Purchase Payments
Accumulation Units
4. INVESTMENT OPTIONS
Cova Series Trust
Lord Abbett Series Fund, Inc.
Transfers
Dollar Cost Averaging Program
Automatic Rebalancing Program
Approved Asset Allocation Programs
Voting Rights
Substitution
5. EXPENSES
Insurance Charges
Contract Maintenance Charge
Withdrawal Charge
Reduction or Elimination of the
Withdrawal Charge
Premium Taxes
Transfer Fee
Income Taxes
Investment Portfolio Expenses
6. TAXES
Annuity Contracts in General
Qualified and Non-Qualified Contracts
Withdrawals - Non-Qualified Contracts
Withdrawals - Qualified Contracts
Withdrawals - Tax-Sheltered Annuities
Diversification
7. ACCESS TO YOUR MONEY
Systematic Withdrawal Program
8. PERFORMANCE
9. DEATH BENEFIT
Upon Your Death
Death of Annuitant
10. OTHER INFORMATION
Cova
The Separate Account
Distributor
Ownership
Beneficiary
Assignment
Suspension of Payments or Transfers
Financial Statements
TABLE OF CONTENTS OF THE STATEMENT OF
ADDITIONAL INFORMATION
APPENDIX A
APPENDIX B
INDEX OF SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you
as possible. By the very nature of the contract, however, certain technical
words or terms are unavoidable. We have identified the following as some of
these words or terms. They are identified in the text in italic and the page
that is indicated here is where we believe you will find the best explanation
for the word or term.
Page
Accumulation Phase
Accumulation Unit
Annuitant
Annuity Date
Annuity Options
Annuity Payments
Annuity Unit
Beneficiary
Fixed Account
Income Phase
Investment Portfolios
Joint Owner
Non-Qualified
Owner
Purchase Payment
Qualified
Tax Deferral
COVA VARIABLE ANNUITY ACCOUNT FIVE FEE TABLE
OWNER TRANSACTION EXPENSES
Withdrawal Charge (see Note 2 below)
5% of purchase payment withdrawn
Transfer Fee (see Note 3 below)
No charge for first 12 transfers in a contract year; thereafter, the fee
is $25 per transfer or, if less, 2% of the amount transferred.
Contract Maintenance Charge (see Note 4 below)
$30 per contract per year
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
<TABLE>
<CAPTION>
<S> <C>
Mortality and Expense Risk Premium 1.25%
Administrative Expense Charge .15%
TOTAL SEPARATE ACCOUNT -----
ANNUAL EXPENSES 1.40%
</TABLE>
INVESTMENT PORTFOLIO EXPENSES
(as a percentage of the average daily net assets of an investment portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other Expenses
(after expense
reimbursement for
Management 12b-1 certain Portfolios) Total Annual
Fees Fees (see Note 5 below) Portfolio Expenses
----------- ------ ------------------- -------------------
COVA SERIES TRUST
Managed by J.P. Morgan
Investment Management Inc.
Select Equity* .75% _ _ .10% .85%
Large Cap Stock* .65% _ _ .10% .75%
Small Cap Stock* .85% _ _ .10% .95%
International Equity* .85% _ _ .10% .95%
Quality Bond* .55% _ _ .10% .65%
Managed by Lord, Abbett & Co.
Bond Debenture* (a "high yield" .75% _ _ .10% .85%
portfolio under California
insurance regulations)
Managed By Van Kampen American
Capital Investment Advisory Corp.
VKAC Growth and Income .60% _ _ .10% .70%
Money Market# .00% _ _ .11% .11%
Quality Income .50% _ _ .10% .60%
Stock Index .50% _ _ .10% .60%
LORD ABBETT SERIES FUND, INC.
Managed by Lord Abbett
Growth and Income## .50% .07% .02% .59%
<FN>
* Annualized. The Portfolio commenced regular investment operations on April 2, 1996.
# Cova Investment Advisory Corporation (Cova Advisory), the investment adviser for Cova Series
Trust, currently waives its fees for the Money Market Portfolio. Although not obligated to, Cova
Advisory expects to continue to waive its fees for the Money Market Portfolio. In the future,
Cova Advisory may charge its fees on a partial or complete basis. Absent the management fee
waiver, the total management fee on an annual basis for the Money Market Portfolio is .50%. The
examples shown below for the Money Market Portfolio are calculated based upon a waiver of the
management fee.
## The Growth and Income Portfolio of Lord Abbett Series Fund, Inc. has a 12b-1 plan which
provides for payments to Lord, Abbett & Co. for remittance to a life insurance company for
certain distribution expenses (see the Fund Prospectus). The 12b-1 plan provides that such
remittances, in the aggregate, will not exceed .15%, on an annual basis, of the daily net asset
value of shares of the Growth and Income Portfolio. As of the date of this Prospectus, no
payments have been made under the 12b-1 plan. For the year ending December 31, 1997, the 12b-1
fees are estimated to be .07%. The examples below for this Portfolio reflect the estimated 12b-1
fees.
</TABLE>
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a
5% annual return on assets:
(a) upon surrender at the end of each time period;
(b) if the contract is not surrendered or is annuitized.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Time Periods
1 year 3 years 5 years 10 years
Cova Series Trust
Managed by J.P. Morgan
Investment Management Inc.
Select Equity (a) $73.80 (a) $118.16
(b) $23.80 (b) $73.16
Large Cap Stock (a) $72.80 (a) $115.15
(b) $22.80 (b) $70.15
Small Cap Stock (a) $74.80 (a) $121.17
(b) $24.80 (b) $76.17
International Equity (a) $74.80 (a) $121.17
(b) $24.80 (b) $76.17
Quality Bond (a) $71.79 (a) $112.12
(b) $21.79 (b) $67.12
Managed by Lord, Abbett & Co.
Bond Debenture (a "high yield"
portfolio under
California insurance (a) $73.80 (a) $118.16
regulations) (b) $23.80 (b) $73.16
Managed By Van Kampen American
Capital Investment Advisory Corp.
VKAC Growth & Income (a) $72.29 (a) $113.63 (a) $162.42 (a) $251.04
(b) $22.29 (b) $68.63 (b) $117.42 (b) $251.04
Money Market (a) $66.36 (a) $95.62 (a) $132.07 (a) $188.79
(b) $16.36 (b) $50.62 (b) $87.07 (b) $188.79
Quality Income (a) $71.29 (a) $110.60 (a) $157.34 (a) $240.77
(b) $21.29 (b) $65.60 (b) $112.34 (b) $240.77
Stock Index (a) $71.29 (a) $110.60 (a) $157.34 (a) $240.77
(b) $21.29 (b) $65.60 (b) $112.34 (b) $240.77
Lord Abbett Series Fund, Inc.
Managed by Lord, Abbett & Co.
Growth and Income (a) $71.19 (a) $110.30 (a) $156.83 (a) $239.74
(b) $21.19 (b) $65.30 (b) $111.83 (b) $239.74
</TABLE>
EXPLANATION OF FEE TABLE AND EXAMPLES
1. The purpose of the Fee Table is to show you the various expenses you
will incur directly or indirectly with the contract. The Fee Table reflects
expenses of the Separate Account as well as of the investment portfolios.
2. The withdrawal charge is 5% of the purchase payments you withdraw.
After Cova has had a purchase payment for 5 years, there is no charge by Cova
for a withdrawal of that purchase payment. You may also have to pay income tax
and a tax penalty on any money you take out. After the first year, you can
take up to 10% of your total purchase payments each year without a charge from
Cova.
3. Cova will not charge you the transfer fee even if there are more than
12 transfers in a year if the transfer is for the Dollar Cost Averaging,
Automatic Rebalancing or approved Asset Allocation Programs.
4. Cova will not charge the contract maintenance charge if the value of
your contract is $50,000 or more, although, if you make a complete withdrawal,
Cova will charge the contract maintenance charge.
5. Since August 20, 1990, an affiliate of Cova has been reimbursing the
investment portfolios of Cova Series Trust for all operating expenses
(exclusive of the management fees) in excess of approximately .10%.
Absent the expense reimbursement and management fee waiver, the
percentages shown for total annual portfolio expenses (on an annualized basis)
for the year or period ended December 31, 1996 would have been .71% for the
Quality Income Portfolio, .74% for the Money Market Portfolio, .67% for the
Stock Index Portfolio, 1.02% for the VKAC Growth and Income Portfolio, 1.70%
for the Select Equity Portfolio, 2.68% for the Small Cap Stock Portfolio,
3.80% for the International Equity Portfolio, 1.52% for the Quality Bond
Portfolio, 1.23% for the Large Cap Stock Portfolio and 2.05% for the Bond
Debenture Portfolio.
6. Premium taxes are not reflected. Premium taxes may apply depending on
the state where you live.
7. The assumed average contract size is $30,000.
8. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
There is an accumulation unit value history contained in Appendix A -
Condensed Financial Information.
1. THE ANNUITY CONTRACT
This Prospectus describes the Fixed and Variable Annuity Contract offered by
Cova.
An annuity is a contract between you, the owner, and an insurance company (in
this case Cova), where the insurance company promises to pay you an income, in
the form of annuity payments, beginning on a designated date that's at least
30 days in the future. Until you decide to begin receiving annuity payments,
your annuity is in the accumulation phase. Once you begin receiving annuity
payments, your contract switches to the income phase. The contract benefits
from tax deferral.
Tax deferral means that you are not taxed on earnings or appreciation on the
assets in your contract until you take money out of your contract.
The contract is called a variable annuity because you can choose among 11
investment portfolios. Depending upon market conditions, you can make or lose
money in any of these portfolios. If you select the variable annuity portion
of the contract, the amount of money you are able to accumulate in your
contract during the accumulation phase depends upon the investment performance
of the investment portfolio(s) you select. The amount of the annuity payments
you receive during the income phase from the variable annuity portion of the
contract also depends upon the investment performance of the investment
portfolios you select for the income phase.
The contract also contains a fixed account. The fixed account offers an
interest rate that is guaranteed by Cova. This interest rate is set once each
year. Cova guarantees that the interest credited to the fixed account will not
be less than 3% per year with respect to contracts issued on or after May 1,
1996. If you select the fixed account, your money will be placed with the
other general assets of Cova. If you select the fixed account, the amount of
money you are able to accumulate in your contract during the accumulation
phase depends upon the total interest credited to your contract. The amount of
the annuity payments you receive during the income phase from the fixed
account portion of the contract will remain level for the entire income phase.
As owner of the contract, you exercise all rights under the contract. You can
change the owner at any time by notifying Cova in writing. You and your spouse
can be named joint owners. We have described more information on this in
Section 10 - Other Information.
2. ANNUITY PAYMENTS (THE INCOME PHASE)
Under the contract you can receive regular income payments. You can choose the
month and year in which those payments begin. We call that date the annuity
date. Your annuity date must be the first day of a calendar month. You can
also choose among income plans. We call those annuity options.
We ask you to choose your annuity date and annuity option when you purchase
the contract. You can change either at any time before the annuity date with
30 days notice to us. Your annuity date cannot be any earlier than one month
after you buy the contract. Annuity payments must begin by the annuitant's
85th birthday or 10 years from the date the contract was issued, whichever is
later. The annuitant is the person whose life we look to when we make annuity
payments.
If you do not choose an annuity option at the time you purchase the contract,
we will assume that you selected Option 2 which provides a life annuity with
10 years of guaranteed payments.
During the income phase, you have the same investment choices you had just
before the start of the income phase. At the annuity date, you can choose
whether payments will come from the fixed account, the investment portfolio(s)
or a combination of both. If you don't tell us otherwise, your annuity
payments will be based on the investment allocations that were in place on the
annuity date.
If you choose to have any portion of your annuity payments come from the
investment portfolio(s), the dollar amount of your payment will depend upon 3
things: 1) the value of your contract in the investment portfolio(s) on the
annuity date, 2) the 3% assumed investment rate used in the annuity table for
the contract, and 3) the performance of the investment portfolios you
selected. If the actual performance exceeds the 3% assumed rate, your annuity
payments will increase. Similarly, if the actual rate is less than 3%, your
annuity payments will decrease.
You can choose one of the following annuity options. After annuity payments
begin, you cannot change the annuity option.
Option 1. Life Annuity. Under this option, we will make an annuity payment
each month so long as the annuitant is alive. After the annuitant dies, we
stop making annuity payments.
Option 2. Life Annuity with 5, 10 or 20 Years Guaranteed. Under this option,
we will make an annuity payment each month so long as the annuitant is alive.
However, if, when the annuitant dies, we have made annuity payments for less
than the selected guaranteed period, we will then continue to make annuity
payments for the rest of the guaranteed period to the beneficiary. If the
beneficiary does not want to receive annuity payments, he or she can ask us
for a single lump sum.
Option 3. Joint and Last Survivor Annuity. Under this option, we will make
annuity payments each month so long as the annuitant and a second person are
both alive. When either of these people dies, we will continue to make annuity
payments, so long as the survivor continues to live. The amount of the annuity
payments we will make to the survivor can be equal to 100%, 66 -2/3% or 50% of
the amount that we would have paid if both were alive.
Annuity payments are made monthly unless you have less than $5,000 to apply
toward a payment. In that case, Cova may provide your annuity payment in a
single lump sum. Likewise, if your annuity payments would be less than $100 a
month, Cova has the right to change the frequency of payments so that your
annuity payments are at least $100.
3. PURCHASE
PURCHASE PAYMENTS
A purchase payment is the money you give us to buy the contract. The minimum
we will accept is $5,000 when the contract is bought as a non-qualified
contract. If you are buying the contract as part of an IRA (Individual
Retirement Annuity), 401(k) or other qualified plan, the minimum we will
accept is $2,000. The maximum we accept is $1 million without our prior
approval. You can make additional purchase payments of $2,000 or more to
either type of contract.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a contract, we will allocate your purchase payment to the
fixed account and/or one or more of the investment portfolios you have
selected. If you make additional purchase payments, we will allocate them in
the same way as your first purchase payment unless you tell us otherwise.
There is a $500 minimum balance requirement for the fixed account and for each
investment portfolio.
If you change your mind about owning this contract, you can cancel it within
10 days after receiving it (or within 30 days if you are 60 years or older
when we issue the contract). When you cancel the contract within this time
period, Cova will not assess a withdrawal charge. You will receive back
whatever your contract is worth on the day we receive your request. If you
have purchased the contract as an IRA, we are required to give you back your
purchase payment if you decide to cancel your contract within 10 days after
receiving it (or whatever period is required). If that is the case, we will
put your purchase payment in the Money Market Portfolio of the Cova Series
Trust for 15 days after we allocate your first purchase payment. At the end of
that period, we will re-allocate those funds as you selected.
Once we receive your purchase payment and the necessary information, we will
issue your contract and allocate your first purchase payment within 2 business
days. If you do not give us all of the information we need, we will contact
you to get it. If for some reason we are unable to complete this process
within 5 business days, we will either send back your money or get your
permission to keep it until we get all of the necessary information. If you
add more money to your contract by making additional purchase payments, we
will credit these amounts to your contract within one business day. Our
business day closes when the New York Stock Exchange closes, usually 4:00 P.M.
Eastern time.
ACCUMULATION UNITS
The value of the variable annuity portion of your contract will go up or down
depending upon the investment performance of the investment portfolio(s) you
choose. In order to keep track of the value of your contract, we use a unit of
measure we call an accumulation unit. (An accumulation unit works like a share
of a mutual fund.) During the income phase of the contract we call the unit an
annuity unit.
Every day we determine the value of an accumulation unit for each of the
investment portfolios. We do this by:
1. determining the total amount of money invested in the particular
investment portfolio;
2. subtracting from that amount any insurance charges and any other
charges such as taxes we have deducted; and
3. dividing this amount by the number of outstanding accumulation units.
The value of an accumulation unit may go up or down from day to day.
When you make a purchase payment, we credit your contract with accumulation
units. The number of accumulation units credited is determined by dividing the
amount of the purchase payment allocated to an investment portfolio divided by
the value of the accumulation unit for that investment portfolio.
We calculate the value of an accumulation unit for each investment portfolio
after the New York Stock Exchange closes each day and then credit your
contract.
EXAMPLE:
On Monday we receive an additional purchase payment of $5,000 from you. You
have told us you want this to go to the Quality Bond Portfolio. When the New
York Stock Exchange closes on that Monday, we determine that the value of an
accumulation unit for the Quality Bond Portfolio is $13.90. We then divide
$5,000 by $13.90 and credit your contract on Monday night with 359.71
accumulation units for the Quality Bond Portfolio.
4. INVESTMENT OPTIONS
The Contract offers 11 investment portfolios which are described below.
Additional investment portfolios may be available in the future.
YOU SHOULD READ THE PROSPECTUSES FOR THESE FUNDS CAREFULLY BEFORE INVESTING.
COPIES OF THESE PROSPECTUSES ARE ATTACHED TO THIS PROSPECTUS.
COVA SERIES TRUST
Cova Series Trust is managed by Cova Advisory, which is an indirect subsidiary
of Cova. Cova Series Trust is a mutual fund with multiple portfolios. Each
investment portfolio has a different investment objective. Cova Advisory has
engaged sub-advisers to provide investment advice for the individual
investment portfolios. The following investment portfolios are available under
the contract:
J.P. MORGAN INVESTMENT MANAGEMENT INC. IS THE SUB-ADVISER TO THE FOLLOWING
PORTFOLIOS:
Select Equity Portfolio
Large Cap Stock Portfolio
Small Cap Stock Portfolio
International Equity Portfolio
Quality Bond Portfolio
LORD, ABBETT & CO. IS THE SUB-ADVISER TO THE FOLLOWING PORTFOLIO:
Bond Debenture Portfolio (a "high yield" portfolio under California insurance
regulations)
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP. IS THE SUB-ADVISER TO
THE FOLLOWING PORTFOLIOS:
Money Market Portfolio
Stock Index Portfolio
Quality Income Portfolio
VKAC Growth and Income Portfolio
LORD ABBETT SERIES FUND, INC.
Lord Abbett Series Fund, Inc. is a mutual fund with multiple portfolios. Each
portfolio is managed by Lord, Abbett & Co. The following portfolio is
available under the contract:
Growth and Income Portfolio
TRANSFERS
You can transfer money among the fixed account and the 11 investment
portfolios.
TRANSFERS DURING THE ACCUMULATION PHASE. You can make 12 transfers every year
during the accumulation phase without charge. We measure a year from the
anniversary of the day we issued your Contract. You can make a transfer to or
from the fixed account and to or from any investment portfolio. If you make
more than 12 transfers in a year, there is a transfer fee deducted. The fee is
$25 per transfer or, if less, 2% of the amount transferred. The following
apply to any transfer during the accumulation phase:
1. The minimum amount which you can transfer is $500 or your entire value
in the investment portfolio or fixed account.
2. Your request for transfer must clearly state which investment
portfolio(s) or the fixed account are involved in the transfer.
3. Your request for transfer must clearly state how much the transfer is
for.
4. You cannot make any transfers within 7 calendar days of the annuity
date.
TRANSFERS DURING THE INCOME PHASE. You can only make transfers between the
investment portfolios once each year. We measure a year from the anniversary
of the day we issued your contract. You cannot transfer from the fixed account
to an investment portfolio, but you can transfer from one or more investment
portfolios to the fixed account at any time. If you make more than 12
transfers in a year, a transfer fee will be charged.
Cova has reserved the right during the year to terminate or modify the
transfer provisions described above.
You can make transfers by telephone. If you own the contract with a joint
owner, unless Cova is instructed otherwise, Cova will accept instructions from
either you or the other owner. Cova will use reasonable procedures to confirm
that instructions given us by telephone are genuine. If Cova fails to use such
procedures, we may be liable for any losses due to unauthorized or fraudulent
instructions. Cova tape records all telephone instructions.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a set
amount each month from the Money Market Portfolio or the fixed account to any
of the other investment portfolio(s). By allocating amounts on a regular
schedule as opposed to allocating the total amount at one particular time, you
may be less susceptible to the impact of market fluctuations.
The minimum amount which can be transferred each month is $500. You must have
at least $6,000 in the Money Market Portfolio or the fixed account, (or the
amount required to complete your program, if less) in order to participate in
the Dollar Cost Averaging Program.
All Dollar Cost Averaging transfers will be made on the 15th day of the month
unless that day is not a business day. If it is not, then the transfer will be
made the next business day.
If you participate in the Dollar Cost Averaging Program, the transfers made
under the program are not taken into account in determining any transfer fee.
AUTOMATIC REBALANCING PROGRAM
Once your money has been allocated among the investment portfolios, the
performance of each portfolio may cause your allocation to shift. You can
direct us to automatically rebalance your contract to return to your original
percentage allocations by selecting our Automatic Rebalancing Program. You can
tell us whether to rebalance quarterly, semi-annually or annually. We will
measure these periods from the anniversary of the date we issued your
contract. The transfer date will be the 1st day after the end of the period
you selected. If you participate in the Automatic Rebalancing Program, the
transfers made under the program are not taken into account in determining any
transfer fee.
EXAMPLE:
Assume that you want your initial purchase payment split between 2 investment
portfolios. You want 40% to be in the Quality Bond Portfolio and 60% to be in
the Select Equity Portfolio. Over the next 2-1 2 months the bond market does
very well while the stock market performs poorly. At the end of the first
quarter, the Quality Bond Portfolio now represents 50% of your holdings
because of its increase in value. If you had chosen to have your holdings
rebalanced quarterly, on the first day of the next quarter, Cova would sell
some of your units in the Quality Bond Portfolio to bring its value back to
40% and use the money to buy more units in the Select Equity Portfolio to
increase those holdings to 60%.
APPROVED ASSET ALLOCATION PROGRAMS
Cova recognizes the value to certain owners of having available, on a
continuous basis, advice for the allocation of your money among the investment
options available under the contracts. Certain providers of these types of
services have agreed to provide such services to owners in accordance with
Cova's administrative rules regarding such programs.
Cova has made no independent investigation of these programs. Cova has only
established that these programs are compatible with our administrative systems
and rules. Approved asset allocation programs are only available during the
accumulation phase.
Even though Cova permits the use of approved asset allocation programs, the
contract was not designed for professional market timing organizations.
Repeated patterns of frequent transfers are disruptive to the operations of
the investment portfolios, and should Cova become aware of such disruptive
practices, we may modify the transfer provisions of the contract.
If you participate in an Approved Asset Allocation Program, the transfers made
under the program are not taken into account in determining any transfer fee.
VOTING RIGHTS
Cova is the legal owner of the investment portfolio shares. However, Cova
believes that when an investment portfolio solicits proxies in conjunction
with a vote of shareholders, it is required to obtain from you and other
owners instructions as to how to vote those shares. When we receive those
instructions, we will vote all of the shares we own in proportion to those
instructions. This will also include any shares that Cova owns on its own
behalf. Should Cova determine that it is no longer required to comply with the
above, we will vote the shares in our own right.
SUBSTITUTION
Cova may be required to substitute one of the investment portfolios you have
selected with another portfolio. We would not do this without the prior
approval of the Securities and Exchange Commission. We will give you notice of
our intent to do this.
5. EXPENSES
There are charges and other expenses associated with the contracts that reduce
the return on your investment in the contract. These charges and expenses are:
INSURANCE CHARGES
Each day, Cova makes a deduction for its insurance charges. Cova does this as
part of its calculation of the value of the accumulation units and the annuity
units. The insurance charge has two parts: 1) the mortality and expense risk
premium and 2) the administrative expense charge.
MORTALITY AND EXPENSE RISK PREMIUM. This charge is equal, on an annual basis,
to 1.25% of the daily value of the contracts invested in an investment
portfolio, after expenses have been deducted. This charge is for all the
insurance benefits e.g., guarantee of annuity rates, the death benefits, for
certain expenses of the contract, and for assuming the risk (expense risk)
that the current charges will be sufficient in the future to cover the cost of
administering the contract. If the charges under the contract are not
sufficient, then Cova will bear the loss. Cova does, however, expect to profit
from this charge. The mortality and expense risk premium cannot be increased.
Cova may use any profits we make from this charge to pay for the costs of
distributing the contract.
ADMINISTRATIVE EXPENSE CHARGE. This charge is equal, on an annual basis, to
.15% of the daily value of the contracts invested in an investment portfolio,
after expenses have been deducted. This charge, together with the contract
maintenance charge (see below), is for all the expenses associated with the
administration of the contract. Some of these expenses are: preparation of the
contract, confirmations, annual reports and statements, maintenance of
contract records, personnel costs, legal and accounting fees, filing fees, and
computer and systems costs. Because this charge is taken out of every unit
value, you may pay more in administrative costs than those that are associated
solely with your contract. Cova does not intend to profit from this charge.
However, if this charge and the contract maintenance charge are not enough to
cover the costs of the contracts in the future, Cova will bear the loss.
CONTRACT MAINTENANCE CHARGE
During the accumulation phase, every year on the anniversary of the date when
your contract was issued, Cova deducts $30 from your contract as a contract
maintenance charge. This charge is for administrative expenses (see above).
This charge can not be increased.
Cova will not deduct this charge, if when the deduction is to be made, the
value of your contract is $50,000 or more. Cova may some time in the future
discontinue this practice and deduct the charge.
If you make a complete withdrawal from your contract, the contract maintenance
charge will also be deducted. A pro rata portion of the charge will be
deducted if the annuity date is other than an anniversary. After the annuity
date, the charge will be collected monthly out of the annuity payment.
WITHDRAWAL CHARGE
During the accumulation phase, you can make withdrawals from your contract.
Cova keeps track of each purchase payment. Once a year after the first year,
you can withdraw up to 10% of your total purchase payments and no withdrawal
charge will be assessed on the 10%, if on the day you make your withdrawal the
value of your contract is $5,000 or more. Otherwise, the charge is 5% of each
purchase payment you take out. However, after Cova has had a purchase payment
for 5 years, there is no charge when you withdraw that purchase payment. For
purposes of the withdrawal charge, Cova treats withdrawals as coming from the
oldest purchase payment first. When the withdrawal is for only part of the
value of your contract, the withdrawal charge is deducted from the remaining
value in your contract.
NOTE: For tax purposes, withdrawals are considered to have come from the last
money into the contract. Thus, for tax purposes, earnings are considered to
come out first.
Cova does not assess the withdrawal charge on any payments paid out as annuity
payments or as death benefits.
After you have owned the contract for one year, if you, or your joint owner,
has been confined to a nursing home or hospital for at least 90 consecutive
days under a doctor's care and you need part or all of the money from your
contract, Cova will not impose a withdrawal charge. You or your joint owner
cannot have been so confined when you purchased your contract if you want to
take advantage of this provision. This is called the Nursing Home Waiver.
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE
Cova will reduce or eliminate the amount of the withdrawal charge when the
contract is sold under circumstances which reduce its sales expense. Some
examples are: if there is a large group of individuals that will be purchasing
the contract or a prospective purchaser already had a relationship with Cova.
Cova will not deduct a withdrawal charge under a contract issued to an
officer, director or employee of Cova or any of its affiliates.
PREMIUM TAXES
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. Cova is responsible for the payment of these
taxes and will make a deduction from the value of the contract for them. Some
of these taxes are due when the contract is issued, others are due when
annuity payments begin. It is Cova's current practice to not charge anyone for
these taxes until annuity payments begin. Cova may some time in the future
discontinue this practice and assess the charge when the tax is due. Premium
taxes generally range from 0% to 4%, depending on the state.
TRANSFER FEE
You can make 12 free transfers every year. We measure a year from the day we
issue your contract. If you make more than 12 transfers a year, we will deduct
a transfer fee of $25 or 2% of the amount that is transferred whichever is
less.
If the transfer is part of the Dollar Cost Averaging Program, the Automatic
Rebalancing Program or an Approved Asset Allocation Program, it will not count
in determining the transfer fee.
INCOME TAXES
Cova will deduct from the contract for any income taxes which it incurs
because of the contract. At the present time, we are not making any such
deductions.
INVESTMENT PORTFOLIO EXPENSES
There are deductions from and expenses paid out of the assets of the various
investment portfolios, which are described in the attached fund prospectuses.
6. TAXES
NOTE: Cova has prepared the following information on taxes as a general
discussion of the subject. It is not intended as tax advice to any individual.
You should consult your own tax adviser about your own circumstances. Cova has
included in the Statement of Additional Information an additional discussion
regarding taxes.
ANNUITY CONTRACTS IN GENERAL
Annuity contracts are a means of setting aside money for future needs -
usually retirement. Congress recognized how important saving for retirement
was and provided special rules in the Internal Revenue Code (Code) for
annuities.
Simply stated these rules provide that you will not be taxed on the earnings
on the money held in your annuity contract until you take the money out. This
is referred to as tax deferral. There are different rules as to how you will
be taxed depending on how you take the money out and the type of contract -
qualified or non-qualified (see following sections).
You, as the owner, will not be taxed on increases in the value of your
contract until a distribution occurs - either as a withdrawal or as annuity
payments. When you make a withdrawal you are taxed on the amount of the
withdrawal that is earnings. For annuity payments, different rules apply. A
portion of each annuity payment is treated as a partial return of your
purchase payments and will not be taxed. The remaining portion of the annuity
payment will be treated as ordinary income. How the annuity payment is divided
between taxable and non-taxable portions depends upon the period over which
the annuity payments are expected to be made. Annuity payments received after
you have received all of your purchase payments are fully includible in
income.
When a non-qualified contract is owned by a non-natural person
(e.g.,corporation or certain other entities other than tax-qualified trusts),
the contract will generally not be treated as an annuity for tax purposes.
QUALIFIED AND NON-QUALIFIED CONTRACTS
If you purchase the contract as an individual and not under any pension plan,
specially sponsored program or an individual retirement annuity, your contract
is referred to as a non-qualified contract.
If you purchase the contract under a pension plan, specially sponsored
program, or an individual retirement annuity, your contract is referred to as
a qualified contract. Examples of qualified plans are: Individual Retirement
Annuities (IRAs), Tax-Sheltered Annuities (sometimes referred to as 403(b)
contracts), H.R. 10 Plans (sometimes referred to as Keogh Plans), and pension
and profit plans, which include 401(k) plans.
WITHDRAWALS - NON-QUALIFIED CONTRACTS
If you make a withdrawal from your contract, the Code treats such a withdrawal
as first coming from earnings and then from your purchase payments. Such
withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract
which is included in income may be subject to a penalty. The amount of the
penalty is equal to 10% of the amount that is includible in income. Some
withdrawals will be exempt from the penalty. They include any amounts: (1)
paid on or after the taxpayer reaches age 59-1/2; (2) paid after you die; (3)
paid if the taxpayer becomes totally disabled (as that term is defined in the
Code); (4) paid in a series of substantially equal payments made annually (or
more frequently) under a lifetime annuity; (5) paid under an immediate
annuity; or (6) which come from purchase payments made prior to August 14,
1982.
WITHDRAWALS - QUALIFIED CONTRACTS
The above information describing the taxation of non-qualified contracts does
not apply to qualified contracts. There are special rules that govern with
respect to qualified contracts. We have provided a more complete discussion in
the Statement of Additional Information.
WITHDRAWALS - TAX-SHELTERED ANNUITIES
The Code limits the withdrawal of purchase payments made by owners from
certain Tax-Sheltered Annuities. Withdrawals can only be made when an owner:
(1) reaches age 59-1/2; (2) leaves his/her job; (3) dies; (4) becomes disabled
(as that term is defined in the Code); or (5) in the case of hardship.
However, in the case of hardship, the owner can only withdraw the purchase
payments and not any earnings.
DIVERSIFICATION
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order to be treated as an
annuity contract. Cova believes that the investment portfolios are being
managed so as to comply with the requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to date
provide guidance as to the circumstances under which you, because of the
degree of control you exercise over the underlying investments, and not Cova
would be considered the owner of the shares of the investment portfolios. If
this occurs, it will result in the loss of the favorable tax treatment for the
contract. It is unknown to what extent owners are permitted to select
investment portfolios, to make transfers among the investment portfolios or
the number and type of investment portfolios owners may select from. If any
guidance is provided which is considered a new position, then the guidance
would generally be applied prospectively. However, if such guidance is
considered not to be a new position, it may be applied retroactively. This
would mean that you, as the owner of the contract, could be treated as the
owner of the investment portfolios.
Due to the uncertainty in this area, Cova reserves the right to modify the
contract in an attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
You can have access to the money in your contract: (1) by making a withdrawal
(either a partial or a complete withdrawal); (2) by electing to receive
annuity payments; or (3) when a death benefit is paid to your beneficiary.
Under most circumstances, withdrawals can only be made during the accumulation
phase.
When you make a complete withdrawal you will receive the value of the contract
on the day you made the withdrawal less any applicable withdrawal charge, less
any premium tax and less any contract maintenance charge. (See Section 5.
Expenses for a discussion of the charges.)
Unless you instruct Cova otherwise, any partial withdrawal will be made pro
rata from all the investment portfolios and the fixed account you selected.
Under most circumstances the amount of any partial withdrawal must be for at
least $500. Cova requires that after a partial withdrawal is made you keep at
least $500 in any selected investment portfolio.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY
WITHDRAWAL YOU MAKE.
There are limits to the amount you can withdraw from a qualified plan referred
to as a 403(b) plan. For a more complete explanation see Section 6. Taxes and
the discussion in the Statement of Additional Information.
SYSTEMATIC WITHDRAWAL PROGRAM
If you are 59-1/2 or older, you may use the Systematic Withdrawal Program.
This program provides an automatic monthly payment to you of up to 10% of your
total purchase payments each year. No withdrawal charge will be made for these
payments. Cova does not have any charge for this program, but reserves the
right to charge in the future. If you use this program, you may not also make
a single 10% free withdrawal. For a discussion of the withdrawal charge and
the 10% free withdrawal, see Section 5. Expenses.
All Systematic Withdrawals will be paid on the 15th day of the month unless
that day is not a business day. If it is not, then the payment will be the
next business day.
INCOME TAXES MAY APPLY TO SYSTEMATIC WITHDRAWALS.
8. PERFORMANCE
Cova periodically advertises performance of the various investment portfolios.
Cova will calculate performance by determining the percentage change in the
value of an accumulation unit by dividing the increase (decrease) for that
unit by the value of the accumulation unit at the beginning of the period.
This performance number reflects the deduction of the insurance charges. It
does not reflect the deduction of any applicable contract maintenance charge
and withdrawal charge. The deduction of any applicable contract maintenance
charge and withdrawal charges would reduce the percentage increase or make
greater any percentage decrease. Any advertisement will also include total
return figures which reflect the deduction of the insurance charges, contract
maintenance charges, and withdrawal charges.
Cova may, from time to time, include in its advertising and sales materials,
tax deferred compounding charts and other hypothetical illustrations, which
may include comparisons of currently taxable and tax deferred investment
programs, based on selected tax brackets.
Appendix B contains performance information that you may find informative.
Future performance will vary and the results shown are not necessarily
representative of future results.
9. DEATH BENEFIT
UPON YOUR DEATH
If you die before annuity payments begin, Cova will pay a death benefit to
your beneficiary (see below). If you have a joint owner, the death benefit
will be paid when the first of you dies. Joint owners must be spouses. The
surviving joint owner will be treated as the beneficiary.
The amount of the death benefit depends on how old you or your joint owner is.
Prior to you, or your joint owner, reaching age 80, the death benefit will be
the greater of:
1. Total purchase payments, less withdrawals (and any withdrawal charges
paid on the withdrawals) accumulated at 4% from the date your contract was
issued until the date of death; or
2. The value of your contract at the time the death benefit is to be paid;
or
3. The value of your contract on the most recent five year anniversary
before the date of death, plus any subsequent purchase payments, less any
withdrawals (and any withdrawal charges paid on the withdrawals).
After you, or your joint owner, reaches age 80, the death benefit will be the
greater of:
1. Total purchase payments, less withdrawals (and any withdrawal charges
paid on the withdrawals) accumulated at 4% from the date your contract was
issued until you or your joint owner reaches age 80, plus any subsequent
purchase payments, less any withdrawals (and any withdrawal charges paid on
the withdrawals); or
2. The value of your contract at the time the death benefit is to be paid;
or
3. The value of your contract on the most recent five year anniversary on
or before you or your joint owner reaches age 80, plus any subsequent purchase
payments, less any withdrawals (and any withdrawal charges paid on the
withdrawals).
The entire death benefit must be paid within 5 years of the date of death
unless the beneficiary elects to have the death benefit payable under an
annuity option. The death benefit payable under an annuity option must be paid
over the beneficiary's lifetime or for a period not extending beyond the
beneficiary's life expectancy. Payment must begin within one year of the date
of death. If the beneficiary is the spouse of the owner, he/she can continue
the contract in his/her own name at the then current value. If a lump sum
payment is elected and all the necessary requirements are met, the payment
will be made within 7 days.
DEATH OF ANNUITANT
If the annuitant, not an owner or joint owner, dies before annuity payments
begin, you can name a new annuitant. If no annuitant is named within 30 days
of the death of the annuitant, you will become the annuitant. However, if the
owner is a non-natural person (for example, a corporation), then the death or
change of annuitant will be treated as the death of the owner, and a new
annuitant may not be named.
Upon the death of the annuitant after annuity payments begin, the death
benefit, if any, will be as provided for in the annuity option selected.
10. OTHER INFORMATION
COVA
Cova Financial Life Insurance Company ("Cova") was originally incorporated on
September 6, 1972 as Industrial Indemnity Life Insurance Company, a California
corporation and changed its name to Xerox Financial Life Insurance Company in
1986. On June 1, 1995, a wholly-owned subsidiary of General American Life
Insurance Company purchased Cova which on that date changed its name to Cova
Financial Life Insurance Company.
Cova is presently licensed to do business in the state of California.
THE SEPARATE ACCOUNT
Cova has established a separate account, Cova Variable Annuity Account Five
(Separate Account), to hold the assets that underlie the contracts. The Board
of Directors of Cova adopted a resolution to establish the Separate Account
under California insurance law on March 24, 1992. We have registered the
Separate Account with the Securities and Exchange Commission as a unit
investment trust under the Investment Company Act of 1940.
The assets of the Separate Account are held in Cova's name on behalf of the
Separate Account and legally belong to Cova. However, those assets that
underlie the contracts, are not chargeable with liabilities arising out of any
other business Cova may conduct. All the income, gains and losses (realized or
unrealized) resulting from these assets are credited to or charged against the
contracts and not against any other contracts Cova may issue.
DISTRIBUTOR
Cova Life Sales Company (Life Sales), One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644, acts as the distributor of the contracts. Life
Sales is an affiliate of Cova.
Commissions will be paid to broker-dealers who sell the contracts.
Broker-dealers will be paid commissions up to 5.5% of purchase payments.
During the initial period in which the Contracts are offered, Cova may pay an
additional .5% commission. Sometimes, Cova enters into an agreement with the
broker-dealer to pay the broker-dealer persistency bonuses, in addition to the
standard commissions. To the extent that the withdrawal charge is insufficient
to cover the actual cost of distribution, Cova may use any of its corporate
assets, including any profit from the mortality and expense risk premium, to
make up any difference.
OWNERSHIP
OWNER. You, as the owner of the contract, have all the rights under the
contract. Prior to the annuity date, the owner is as designated at the time
the contract is issued, unless changed. On and after the annuity date, the
annuitant is the owner. The beneficiary becomes the owner when a death benefit
is payable.
JOINT OWNER. The contract can be owned by joint owners. Any joint owner must
be the spouse of the other owner. Upon the death of either joint owner, the
surviving spouse will be the designated beneficiary. Any other beneficiary
designation at the time the contract was issued or as may have been later
changed will be treated as a contingent beneficiary unless otherwise
indicated.
BENEFICIARY
The beneficiary is the person(s) or entity you name to receive any death
benefit. The beneficiary is named at the time the contract is issued unless
changed at a later date. Unless an irrevocable beneficiary has been named, you
can change the beneficiary at any time before you die.
ASSIGNMENT
You can assign the contract at any time during your lifetime. Cova will not be
bound by the assignment until it receives the written notice of the
assignment. Cova will not be liable for any payment or other action we take in
accordance with the contract before we receive notice of the assignment. AN
ASSIGNMENT MAY BE A TAXABLE EVENT.
If the contract is issued pursuant to a qualified plan, there may be
limitations on your ability to assign the contract.
SUSPENSION OF PAYMENTS OR TRANSFERS
Cova may be required to suspend or postpone payments for withdrawals or
transfers for any period when:
1. the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
investment portfolios is not reasonably practicable or Cova cannot reasonably
value the shares of the investment portfolios;
4. during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
Cova has reserved the right to defer payment for a withdrawal or transfer from
the fixed account for the period permitted by law but not for more than six
months.
FINANCIAL STATEMENTS
The consolidated financial statements of Cova and the Separate Account have
been included in the Statement of Additional Information.
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Company
Experts
Legal Opinions
Distribution
Performance Information
Tax Status
Annuity Provisions
Financial Statements
APPENDIX A
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUE HISTORY
The following schedule includes accumulation unit values for the periods
indicated. This data has been extracted from the Separate Account's Financial
Statements. The Separate Account's Financial Statements have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, whose report
is included in the Statement of Additional Information. This information
should be read in conjunction with the Separate Account's Financial Statements
and related notes which are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
<S> <C> <C>
Period from
Commencement
Year or Period of Operations
Ended 12/31/96 through 12/31/95
COVA SERIES TRUST
MANAGED BY VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CORP.
QUALITY INCOME SUB-ACCOUNT
Beginning of Period $ 15.33 $ 14.42
End of Period 15.54 15.33
Number of Accum. Units Outstanding 19,237 8,702
MONEY MARKET SUB-ACCOUNT
Beginning of Period $ 11.42 $ 11.13
End of Period 11.88 11.42
Number of Accum. Units Outstanding 27,094 28,509
VKAC GROWTH AND INCOME SUB-ACCOUNT
Beginning of Period $ 14.61 $ 13.05
End of Period 17.01 14.61
Number of Accum. Units Outstanding 40,350 7,197
STOCK INDEX SUB-ACCOUNT
Beginning of Period $ 15.77 $ 14.13
End of Period 19.04 15.77
Number of Accum. Units Outstanding 50,426 13,384
MANAGED BY LORD ABBETT & CO.
BOND DEBENTURE SUB-ACCOUNT
Beginning of Period $ 10.15 *
End of Period 11.30
Number of Accum. Units Outstanding 39,545
<FN>
* The Cova Series Trust Money Market Sub-Account started regular investment
operations on June 19, 1995; the VKAC Growth and Income Sub-Account started
regular investment operations on July 19, 1995; the Stock Index Sub-Account
and the Lord Abbett Series Fund, Inc. Growth and Income Sub-Account started
regular investment operations on July 20, 1995; and the Quality Income
Sub-Account started regular investment operations on August 16, 1995. The
accumulation unit values shown for the beginning of the period for the Select
Equity, Small Cap Stock, Large Cap Stock, International Equity, Quality Bond
and Bond Debenture Sub-Accounts reflect the date these Sub-Accounts were first
offered for sale to the public which were as follows: May 15, 1996 for the
Select Equity and Small Cap Stock Sub-Accounts; May 16, 1996 for the Large Cap
Stock Sub-Account; May 14, 1996 for the International Equity Sub-Account; and
May 20, 1996 for the Quality Bond and Bond Debenture Sub-Accounts.
</TABLE>
ACCUMULATION UNIT VALUE HISTORY (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C>
Period from
Commencement
Year or Period of Operations
Ended 12/31/96 through 12/31/95
Managed by J.P. Morgan
Investment Management Inc.
SELECT EQUITY SUB-ACCOUNT
Beginning of Period $ 10.15 *
End of Period 10.84
Number of Accum. Units Outstanding 185,509
SMALL CAP STOCK SUB-ACCOUNT
Beginning of Period $ 10.91 *
End of Period 11.31
Number of Accum. Units Outstanding 113,118
INTERNATIONAL EQUITY SUB-ACCOUNT
Beginning of Period $ 10.10 *
End of Period 10.97
Number of Accum. Units Outstanding 124,032
QUALITY BOND SUB-ACCOUNT
Beginning of Period $ 9.95 *
End of Period 10.37
Number of Accum. Units Outstanding 64,534
LARGE CAP STOCK SUB-ACCOUNT
Beginning of Period $ 10.16 *
End of Period 11.34
Number of Accum. Units Outstanding 126,231
LORD ABBETT SERIES FUND, INC.
GROWTH AND INCOME SUB-ACCOUNT
Beginning of Period $ 21.31 $ 19.54
End of Period 25.09 21.31
Number of Accum. Units Outstanding 375,304 125,555
<FN>
* The Cova Series Trust Money Market Sub-Account started regular investment
operations on June 19, 1995; the VKAC Growth and Income Sub-Account started
regular investment operations on July 19, 1995; the Stock Index Sub-Account
and the Lord Abbett Series Fund, Inc. Growth and Income Sub-Account started
regular investment operations on July 20, 1995; and the Quality Income
Sub-Account started regular investment operations on August 16, 1995. The
accumulation unit values shown for the beginning of the period for the Select
Equity, Small Cap Stock, Large Cap Stock, International Equity, Quality Bond
and Bond Debenture Sub-Accounts reflect the date these Sub-Accounts were first
offered for sale to the public which were as follows: May 15, 1996 for the
Select Equity and Small Cap Stock Sub-Accounts; May 16, 1996 for the Large Cap
Stock Sub-Account; May 14, 1996 for the International Equity Sub-Account; and
May 20, 1996 for the Quality Bond and Bond Debenture Sub-Accounts.
</TABLE>
APPENDIX B
PERFORMANCE INFORMATION
Future performance will vary and the results shown are not necessarily
representative of future results.
COVA SERIES TRUST AND LORD ABBETT SERIES FUND, INC., EXISTING PORTFOLIOS
Van Kampen American Capital Investment Advisory Corp. is the sub-adviser for
the following portfolios of Cova Series Trust which are currently available
under the Contract: Money Market, Stock Index, Quality Income and VKAC Growth
and Income. J.P. Morgan Investment Management Inc. is the sub-adviser for the
following portfolios of Cova Series Trust: Select Equity, Small Cap Stock,
International Equity, Quality Bond and Large Cap Stock. Lord Abbett & Co. is
the sub-adviser for the Bond Debenture Portfolio of Cova Series Trust. Lord,
Abbett & Co. is the investment adviser for Lord Abbett Series Fund, Inc.
Growth and Income Portfolio. All of these portfolios began operations before
May 1, 1997. As a result, performance information is available for these
portfolios as well as for the accumulation unit values.
The performance figures shown for the portfolios in Column A in the chart
below reflect the actual fees and expenses paid by the portfolio. Column B
presents performance figures for the accumulation units which reflect the
insurance charges as well as the fees and expenses of the investment
portfolio. Column C presents performance figures for the accumulation units
which reflect the insurance charges, the contract maintenance charge, the fees
and expenses of the investment portfolio, and assume that you make a
withdrawal at the end of the period and therefore the withdrawal charge is
reflected. For the Cova Series Trust Portfolios, performance is shown from the
dates shares were first offered to the public as follows: December 11, 1989
for the Quality Income Portfolio; July 1, 1991 for the Money Market Portfolio;
November 1, 1991 for the Stock Index Portfolio; May 1, 1992 for the VKAC
Growth and Income Portfolio; and May 1, 1996 for the Select Equity, Small Cap
Stock, International Equity, Quality Bond, Large Cap Stock and Bond Debenture
Portfolios. For the Lord Abbett Series Fund, Inc. Growth and Income Portfolio,
operations commenced on December 11, 1989.
The inception dates for the accumulation units investing in these portfolios
are as follows: June 19, 1995 for the Money Market Portfolio; July 19, 1995
for the VKAC Growth and Income Portfolio of Cova Series Trust; July 20, 1995
for the Stock Index Portfolio; August 16, 1995 for the Quality Income
Portfolio; July 20, 1995 for the Growth and Income Portfolio of Lord Abbett
Series Fund, Inc.; May 15, 1996 for the Select Equity and Small Cap Stock
Portfolios; May 16, 1996 for the Large Cap Stock Portfolio; May 14, 1996 for
the International Equity Portfolio; and May 20, 1996 for the Quality Bond and
Bond Debenture Portfolios. Accumulation unit performance prior to these dates,
as shown in Columns B and C below, is therefore hypothetical.
COVA SERIES TRUST
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/96
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Column A Column B Column C
Portfolio Performance Accumulation Unit Performance
since since since
Portfolio 1 yr 5 yrs inception 1 yr 5 yrs inception 1 yr 5 yrs inception
VKAC Growth and Income 18.18% - - 13.50% 16.42% - - 12.04% 11.02% - - 11.01%
Money Market 5.42% 4.55% 4.64% 3.98% 3.08% 3.18% (1.31%) 1.89% 2.06%
Quality Income 2.82% 6.76% 8.04% 1.36% 5.27% 6.44% (4.01%) 4.08% 5.57%
Stock Index 22.48% 14.13% 16.10% 20.69% 12.52% 13.26% 15.23% 11.54% 12.28%
Select Equity - - - - 8.52% - - - - 7.48% - - - - 2.66%
Small Cap Stock - - - - 8.65% - - - - 7.57% - - - - 2.73%
International Equity - - - - 8.44% - - - - 7.36% - - - - 2.54%
Quality Bond - - - - 5.68% - - - - 4.76% - - - - (0.04)%
Large Cap Stock - - - - 14.35% - - - - 13.32% - - - - 8.48%
Bond Debenture - - - - 12.89% - - - - 11.86% - - - - 7.02%
</TABLE>
LORD ABBETT SERIES FUND, INC.
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/96
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Column A Column B Column C
Portfolio Performance Accumulation Unit Performance
since since since
Portfolio 1 yr 5 yrs inception 1 yr 5 yrs inception 1 yr 5 yrs inception
GROWTH AND INCOME 19.49% 16.16% 15.50% 17.76% 14.54% 13.92% 12.16% 13.50% 13.17%
</TABLE>
- ---------------------------
- --------------------------- STAMP
- ---------------------------
Cova Financial Life Insurance Company
Attn: Variable Products
One Tower Lane
Suite 3000
Oakbrook Terrace, Illinois 60181-4644
Please send me, at no charge, the Statement of Additional Information
dated May 1, 1997 for The Annuity Contract issued by Cova.
(Please print or type and fill in all information)
---------------------------------------------------------------------------
Name
---------------------------------------------------------------------------
Address
---------------------------------------------------------------------------
City State Zip Code
CC-851(5/97) COVA VA
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACT
issued by
COVA VARIABLE ANNUITY ACCOUNT FIVE
AND
COVA 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, 1997, 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, 1997.
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
Performance Information - General American Capital
Company Money Market Fund
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. The
acquisition of Xerox Life 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 $250
billion of life insurance in force and approximately $19 billion in assets.
It provides life and health insurance, retirement plans, and related financial
services to individuals and groups.
EXPERTS
The Balance Sheet of the Company as of December 31, 1996 and 1995
and the related consolidated Statements of Income, Shareholder's Equity and
Cash Flows for the year ended December 31, 1996 and the periods from June
1, 1995 through December 31, 1995 and January 1, 1995 through May 31, 1995 and
for the year ended December 31, 1994 and the Statements of Assets
and Liabilities and Contract Owners' Equity of the Separate Account as of
December 31, 1996 and the related Statement of Operations for the
year then ended and the Statement of Change in Contract Owners'
Equity for the year ended December 31, 1996 and the period from June 19,
1995 through 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 expenses for the underlying investment portfolio being
advertised and any applicable Contract Maintenance Charges and
Withdrawal Charges.
The hypothetical value of a Contract purchased for the time periods described
in the advertisement will be determined by using the actual Accumulation Unit
values for an initial $1,000 purchase payment, and deducting any applicable
Contract Maintenance Charges and any applicable Withdrawal Charges to arrive at
the ending hypothetical value. The average annual total return is then
determined by computing the fixed interest rate that a $1,000 purchase payment
would have to earn annually, compounded annually, to grow to the hypothetical
value at the end of the time periods described. The formula used in these
calculations is:
n
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods
used (or fractional portion thereof) of a hypothetical
$1,000 payment made at the beginning of the time
periods used.
The Company may also advertise performance data which will be calculated in
the same manner as described above but which will not reflect the deduction of
any 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.
Performance Information - General American Capital Company Money Market Fund
Although the Accumulation Units which invest in the Money Market Fund managed
by Conning Asset Management Company have no meaningful investment performance
history yet, the Money Market Fund has been in existence for some time and
consequently has an investment performance history. In order to demonstrate
how investment experience of the General American Capital Company Money
Market Fund affects Accumulation Unit values, performance information was
developed. The information is based upon the historical experience of the
General American Capital Company Money Market Fund and is for the periods
shown. The prospectus contains a chart of performance information.
Future performance of the General American Capital Company Money Market
Fund 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 General American Capital Company Money Market Fund is calculated for
a specified period of time by assuming an initial Purchase Payment of
$1,000 allocated to the Portfolio. There are performance figures for
the Accumulation Units which reflect the insurance charges as well as
the portfolio expenses. There are also performance figures for the
Accumulation Units which reflect the insurance charges, the contract
maintenance charge, the portfolio expenses, and assume that you make a
withdrawal at the end of the period and therefore the withdrawal
charge is reflected. The percentage increases (decreases) are
determined by subtracting the initial Purchase Payment from the ending value
and dividing the remainder by the beginning value. The performance may
also show figures when no withdrawal is assumed.
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 excludible 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; (f) distributions made to an alternate payee pursuant
to a qualified domestic relations order; and (g) distributions from
an Individual Retirement Annuity for the purchase of medical insurance (as
described in Section 213(d)(1)(D) of the Code) for the Owner or Annuitant (as
applicable) and his or her spouse and dependents if the Owner or Annuitant
(as applicable) has received unemployment compensation for at least 12 weeks.
This exception will no longer apply after the Owner or Annuitant (as
applicable) has been re-employed for at least 60 days. The exceptions stated
in (d) and (f) above do not apply in the case of an Individual Retirement
Annuity. The exception stated in (c) above applies to an Individual
Retirement Annuity without the requirement that there be a separation from
service.
Generally, distributions from a qualified plan must commence no later than
April 1st of the calendar year following the later of (a) the year in which
the employee attains age 70 1/2 or (b) the calendar year in which the
employee retires. The date set forth in (b) does not apply to an Individual
Retirement Annuity. Required distributions must be over a period not exceeding
the life expectancy of the individual or the joint lives or life expectancies
of the individual and his or her designated beneficiary. If the required
minimum distributions are not made, a 50% penalty tax is imposed as to the
amount not distributed.
TAX-SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only when the Owner: (1) attains age 59 1/2; (2)
separates from service; (3) dies; (4) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
Value which represents contributions made by the Owner and does not include
any investment results. The limitations on withdrawals became effective on
January 1, 1989 and apply only to salary reduction contributions made after
December 31, 1988, to income attributable to such contributions and to income
attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect rollovers and transfers between certain Qualified
Plans. Owners should consult their own tax counsel or other tax adviser
regarding any distributions.
ANNUITY PROVISIONS
VARIABLE ANNUITY
A variable annuity is an annuity with payments which: (1) are not
predetermined as to dollar amount; and (2) will vary in amount with the net
investment results of the applicable investment portfolio(s) of the Separate
Account. At the Annuity Date, the Contract Value in each investment portfolio
will be applied to the applicable Annuity Tables. The Annuity Table used will
depend upon the Annuity Option chosen. If, as of the Annuity Date, the then
current Annuity Option rates applicable to this class of Contracts provide a
first Annuity Payment greater than guaranteed under the same Annuity Option
under this Contract, the greater payment will be made. The dollar amount of
Annuity Payments after the first is determined as follows:
<TABLE>
<CAPTION>
<S> <C>
(1) the dollar amount of the first Annuity Payment is divided by the
value of an Annuity Unit as of the Annuity Date. This
establishes the number of Annuity Units for each monthly
payment. The number of Annuity Units remains fixed during the
Annuity Payment period.
(2) the fixed number of Annuity Units is multiplied by the Annuity
Unit value for the last Valuation Period of the month preceding
the month for which the payment is due. This result is the
dollar amount of the payment.
</TABLE>
The total dollar amount of each Variable Annuity Payment is the sum of all
investment portfolios' Variable Annuity Payments reduced by the applicable
Contract Maintenance Charge.
FIXED ANNUITY
A fixed annuity is a series of payments made during the Annuity Period which
are guaranteed as to dollar amount by the Company and do not vary with the
investment experience of the Separate Account. The General Account Value on
the day immediately preceding the Annuity Date will be used to determine the
Fixed Annuity monthly payment. The first monthly Annuity Payment will be
based upon the Annuity Option elected and the appropriate Annuity Option
Table.
ANNUITY UNIT
The value of an Annuity Unit for each investment portfolio was arbitrarily
set initially at $10. This was done when the first investment portfolio shares
were purchased. The investment portfolio Annuity Unit value at the end of any
subsequent Valuation Period is determined by multiplying the investment
portfolio Annuity Unit value for the immediately preceding Valuation Period by
the product of (a) the Net Investment Factor for the day for which the Annuity
Unit value is being calculated, and (b) 0.999919.
NET INVESTMENT FACTOR
The Net Investment Factor for any investment portfolio for any Valuation
Period is determined by dividing:
<TABLE>
<CAPTION>
<S> <C>
(a) the Accumulation Unit value as of the close of the current
Valuation Period, by
(b) the Accumulation Unit value as of the close of the immediately
preceding Valuation Period.
</TABLE>
The Net Investment Factor may be greater or less than one, as the Annuity Unit
value may increase or decrease.
MORTALITY AND EXPENSE GUARANTEE
The Company guarantees that the dollar amount of each Annuity Payment after
the first Annuity Payment will not be affected by variations in mortality or
expense experience.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts.
COVA VARIABLE ANNUITY ACCOUNT FIVE
Financial Statements
December 31, 1996
(With Independent Auditors' Report Thereon)
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
ASSETS
INVESTMENTS:
<TABLE>
<CAPTION>
<S> <C>
COVA SERIES TRUST:
Quality Income Portfolio - 27,535 shares at a net asset value of $10.69 per share (cost $293,906) $ 294,353
Growth and Income Portfolio - 46,829 shares at a net asset value of $13.99 per share (cost $617,232) 654,976
Money Market Portfolio - 321,874 shares at a net asset value of $1.00 per share (cost $321,874) 321,874
Stock Index Portfolio - 57,208 shares at a net asset value of $16.13 per share (cost $840,381) 922,565
Bond Debenture Portfolio - 39,495 shares at a net asset value of $10.97 per share (cost $424,882) 433,274
Quality Bond Portfolio - 64,756 shares at a net asset value of $10.08 per share (cost $650,565) 652,878
Small Capital Stock Portfolio - 112,341 shares at a net asset value of $10.92 per share (cost $1,192,979) 1,227,000
Large Capital Stock Portfolio - 125,692 shares at a net asset value of $11.11 per share (cost $1,339,783) 1,396,638
Select Equity Portfolio - 184,560 shares at a net asset value of $10.74 per share (cost $1,881,173) 1,982,566
International Equity Portfolio - 123,533 shares at a net value of $10.96 per share (cost $1,287,163) 1,353,846
LORD ABBETT SERIES FUND, INC:
Growth and Income Portfolio - 553,055 shares at a net asset value of $17.03 per share (cost $9,041,437) 9,416,206
DIVIDENDS RECEIVABLE:
COVA SERIES TRUST:
Quality Income Portfolio 4,591
Growth and Income Portfolio 31,300
Stock Index Portfolio 37,397
Bond Debenture Portfolio 13,385
Quality Bond Portfolio 16,258
Small Cap Portfolio 52,185
Large Cap Portfolio 34,185
Select Equity Portfolio 27,987
International Equity Portfolio 6,413
-----------
TOTAL DIVIDENDS RECEIVABLE 223,701
-----------
TOTAL ASSETS $18,879,877
===========
LIABILITIES AND CONTRACT OWNERS' EQUITY
CONTRACT OWNERS' EQUITY:
Trust Quality Income - 19,237 accumulation units at $15.540286 per unit $ 298,944
Trust Growth and Income - 40,350 accumulation units at $17.008156 per unit 686,276
Trust Money Market - 27,094 accumulation units at $11.879722 per unit 321,874
Trust Stock Index - 50,426 accumulation units at $19.036955 959,962
per unit
Trust Bond Debenture Portfolio - 39,545 accumulation units at $11.294929 per unit 446,659
Trust Quality Bond Portfolio - 64,534 accumulation units at $10.368767 per unit 669,136
Trust Small Cap Stock Portfolio - 113,118 accumulation units at $11.308427 per unit 1,279,185
Trust Large Cap Stock Portfolio - 126,231 accumulation units at $11.334982 per unit 1,430,823
Trust Select Equity Portfolio - 185,509 accumulation units at $10.838053 per unit 2,010,553
Trust International Equity Portfolio - 124,032 accumulation units at $10.967004 per unit 1,360,259
Fund Growth and Income - 375,304 accumulation units at $25.089540 per unit 9,416,206
-----------
TOTAL CONTRACT OWNERS' EQUITY 18,879,877
-----------
TOTAL LIABILITIES AND CONTRACT OWNERS' EQUITY $18,879,877
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
_____________________________________________________________________________
_____________________________________ ____________
<TABLE>
<CAPTION>
QUALITY GROWTH & MONEY STOCK BOND QUALITY SMALL LARGE SELECT
INCOME INCOME MARKET INDEX DEBENTURE BOND CAP STOCK CAP STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends and Capital Gains
Distributions $ 10,397 $ 34,666 $29,444 $ 43,128 $ 13,769 $ 16,671 $ 52,946 $ 34,930 $ 29,027
Total Income 10,397 34,666 29,444 43,128 13,769 16,671 52,946 34,930 29,027
EXPENSES:
Mortality and Expense
Risk Fee 2,833 5,143 6,974 7,487 1,516 2,393 4,749 4,497 6,452
Administrative Fee 340 617 837 898 182 287 570 540 774
Total Expenses 3,173 5,760 7,811 8,385 1,698 2,680 5,319 5,037 7,226
NET INVESTMENT INCOME 7,224 28,906 21,633 34,743 12,071 13,991 47,627 29,893 21,801
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS (682) 518 -- 1,342 1,375 65 334 3,085 465
NET CHANGE IN UNREALIZED
GAIN/(LOSS) ON INVESTMENTS (1,359) 41,537 -- 80,860 8,392 2,313 34,020 56,856 101,392
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS (2,041) 42,055 -- 82,202 9,767 2,378 34,354 59,941 101,857
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS $ 5,183 $ 70,961 $21,633 $116,945 $ 21,838 $ 16,369 $ 81,981 $ 89,834 $123,658
========= ========= ======= ======== ========== ======== ========== ========== ========
INTL GROWTH &
EQUITY INCOME TOTAL
<S> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends and Capital Gains
Distributions $ 8,149 $ 615,866 $ 888,993
Total Income 8,149 615,866 888,993
EXPENSES:
Mortality and Expense
Risk Fee 5,062 72,893 119,999
Administrative Fee 607 8,747 14,399
Total Expenses 5,669 81,640 134,398
NET INVESTMENT INCOME 2,480 534,226 754,595
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS 132 2,820 9,454
NET CHANGE IN UNREALIZED
GAIN/(LOSS) ON INVESTMENTS 66,683 471,675 862,369
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS 66,815 474,495 871,823
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS $69,295 $1,008,721 $1,626,418
======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
For the Year Ended December 31, 1996
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
_____________________________________________________________________________
_________ __________
<TABLE>
<CAPTION>
QUALITY GROWTH & MONEY STOCK BOND QUALITY SMALL
INCOME INCOME MARKET INDEX DEBENTURE BOND CAP. STOCK
--------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 7,224 $ 28,906 $ 21,633 $ 34,743 $ 12,071 $ 13,991 $ 47,627
Net Realized Gain/(Loss) on
Investments (682) 518 -- 1,342 1,375 65 334
Net Unrealized Gain/(Loss)
on Investments (1,359) 41,537 -- 80,860 8,392 2,313 34,020
NET INCREASE IN CONTRACT
Net Increase in Contract
Owners' Equity Resulting
Owners Equity Resulting
FROM OPERATIONS 5,183 70,961 21,633 116,945 21,838 16,369 81,981
FROM ACCOUNT UNIT TRANSACTIONS:
Proceeds from Units of
the Account Sold 57,261 32,625 5,011,759 152,928 115,745 100,194 461,912
Payments for Units of the
Account Redeemed (22,762) (7,535) (170) (13,935) -- (1,570) (3,036)
Account Transfers 125,849 485,085 (5,037,068) 492,907 309,076 554,143 738,328
NET INCREASE/(DECREASE) IN
CONTRACT OWNERS' EQUITY
FROM ACCOUNT UNIT 160,348 510,175 (25,479) 631,900 424,821 652,767 1,197,204
TRANSACTIONS
NET INCREASE/(DECREASE) IN CONTRACT
OWNERS' EQUITY 165,531 581,136 (3,846) 748,845 446,659 669,136 1,279,185
CONTRACT OWNERS' EQUITY:
BEGINNING OF PERIOD 133,413 105,140 325,720 211,117 -- -- --
END OF PERIOD $298,944 $ 686,276 $ 321,874 $959,962 $ 446,659 $669,136 $ 1,279,185
LARGE SELECT INTL GROWTH &
CAP. STOCK EQUITY EQUITY INCOME TOTAL
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 29,893 $ 21,801 $ 2,480 $ 534,226 $ 754,595
Net Realized Gain/(Loss) on
Investments 3,085 465 132 2,820 9,454
Net Unrealized Gain/(Loss)
on Investments 56,856 101,392 66,683 471,675 862,369
NET INCREASE IN CONTRACT
Net Increase in Contract
Owners' Equity Resulting
Owners Equity Resulting
FROM OPERATIONS 89,834 123,658 69,295 1,008,721 1,626,418
FROM ACCOUNT UNIT TRANSACTIONS:
Proceeds from Units of
the Account Sold 542,124 755,570 576,132 1,438,328 9,244,578
Payments for Units of the
Account Redeemed (7,336) (8,859) (4,725) (131,847) (201,775)
Account Transfers 806,201 1,140,184 719,557 4,425,896 4,760,158
NET INCREASE/(DECREASE) IN
CONTRACT OWNERS' EQUITY
FROM ACCOUNT UNIT 1,340,989 1,886,895 1,290,964 5,732,377 13,802,961
TRANSACTIONS
NET INCREASE/(DECREASE) IN CONTRACT
OWNERS' EQUITY 1,430,823 2,010,553 1,360,259 6,741,098 15,429,379
CONTRACT OWNERS' EQUITY:
BEGINNING OF PERIOD -- -- -- 2,675,108 3,450,498
END OF PERIOD $ 1,430,823 $2,010,553 $1,360,259 $9,416,206 $18,879,877
</TABLE>
See accompanying notes to financial statements.
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
<TABLE>
VAN KAMPEN MERRITT LORD ABBETT
SERIES TRUST SERIES FUND, INC.
___________________________________________ ___________________
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Quality Growth & Money Stock Growth &
INCOME INCOME MARKET INDEX INCOME TOTAL
--------- ---------- ------------ --------- ----------- -----------
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.
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>
COVA SERIES TRUST - QUALITY INCOME PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
FOR THE PERIOD FROM 8/16/95
FOR THE YEAR (COMMENCEMENT OF OPERATIONS)
ENDED 12/31/96 THROUGH 12/31/95)
---------------- -----------------------------
<S> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 15.33 $ 14.42
---------------- -----------------------------
Net Investment Income .46 .32
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions (.25) .59
---------------- -----------------------------
Total from Investment Operations .21 .91
---------------- -----------------------------
Accumulation Unit Value,
End of Period $ 15.54 $ 15.33
================ =============================
Total Return** 1.36% 17.03%*
Contract Owners Equity,
End of Period (in thousands) $ 299 $ 133
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 3.21% 6.54%*
Number of Units Outstanding
at End of Period 19,237 8,702
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios (investment
advisory fees and portfolio
operating expenses).
</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>
COVA SERIES TRUST - GROWTH & INCOME PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
FOR THE PERIOD FROM 7/19/95
FOR THE YEAR (COMMENCEMENT OF OPERATIONS)
ENDED 12/31/96 THROUGH 12/31/95
-----------------------------
<S> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 14.61 $ 13.05
Net Investment Income .68 .99
Net Realized and Unrealized
Gain from Security
Transactions 1.72 .57
Total from Investment Operations 2.40 1.56
-----------------------------
Accumulation Unit Value,
End of Period $ 17.01 $ 14.61
================ =============================
Total Return** 16.42% 26.71%*
Contract Owners Equity,
End of Period (in thousands) $ 686 $ 105
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 7.08% 49.49%*
Number of Units Outstanding
at End of Period 40,350 7,197
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees or
account transfer charges), but do reflect mortality and expense charges,
administration expense charges as well
as all expenses of the underlying portfolios (investment advisory fees and
portfolio operating expenses).
</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>
COVA SERIES TRUST - MONEY MARKET PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
For the Period From 6/19/95
FOR THE YEAR (Commencement of Operations)
ENDED 12/31/96 Through 12/31/95
---------------- -----------------------------
<S> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 11.42 $ 11.13
---------------- -----------------------------
Net Investment Income .46 .29
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions -- --
Total from Investment Operations .46 .29
Accumulation Unit Value,
End of Period $ 11.88 $ 11.42
================ =============================
Total Return** 3.98% 4.94%*
Contract Owners Equity,
End of Period (in thousands) $ 322 $ 326
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 3.91% 4.38%*
Number of Units Outstanding
at End of Period 27,094 28,509
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees or
account transfer charges), but do reflect mortality and expense charges,
administration expense charges as well
as all expenses of the underlying portfolios(investment advisory fees and
portfolio operating expenses).
</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>
COVA SERIES TRUST - STOCK INDEX PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
For the Period From 7/20/95
FOR THE YEAR (Commencement of Operations)
ENDED 12/31/96 Through 12/31/95
---------------- -----------------------------
<S> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 15.77 $ 14.13
---------------- -----------------------------
Net Investment Income .67 .50
Net Realized and Unrealized
Gain from Security
Transactions 2.60 1.14
---------------- -----------------------------
Total from Investment Operations 3.27 1.64
---------------- -----------------------------
Accumulation Unit Value,
End of Period $ 19.04 $ 15.77
================ =============================
Total Return** 20.69% 26.25%*
Contract Owners Equity,
End of Period (in thousands) $ 960 $ 211
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 5.84% 18.57%*
Number of Units Outstanding
at End of Period 50,426 13,384
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees
or account transfer charges), but do reflect mortality and expense charges,
administration expense charges as
well as all expenses of the underlying portfolios(investment advisory fees
and portfolio operating expenses).
</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>
COVA SERIES TRUST - BOND DEBENTURE PORTFOLIO (MANAGED BY LORD, ABBETT & CO.)
FOR THE PERIOD FROM 5/20/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.15
-----------------------------
Net Investment Income .33
Net Realized and Unrealized
Gain from Security
Transactions .82
-----------------------------
Total from Investment Operations 1.15
-----------------------------
Accumulation Unit Value,
End of Period $ 11.30
=============================
Total Return** 18.73%*
Contract Owners Equity,
End of Period (in thousands) $ 447
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 9.98%*
Number of Units Outstanding
at End of Period 39,545
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios (investment
advisory fees and portfolio
operating expenses).
</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>
COVA SERIES TRUST - QUALITY BOND PORTFOLIO
(MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT, INC.)
FOR THE PERIOD FROM 5/20/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 9.95
-----------------------------
Net Investment Income .29
Net Realized and Unrealized
Gain from Security
Transactions .13
-----------------------------
Total from Investment Operations .42
-----------------------------
Accumulation Unit Value,
End of Period $ 10.37
=============================
Total Return** 6.80%*
Contract Owners Equity,
End of Period (in thousands) $ 669
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 7.33%*
Number of Units Outstanding
at End of Period 64,534
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio
operating expenses).
</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>
COVA SERIES TRUST - SMALL CAP STOCK PORTFOLIO
(MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT, INC.)
FOR THE PERIOD FROM 5/15/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.91
-----------------------------
Net Investment Income .39
Net Realized and Unrealized
Gain from Security
Transactions .01
-----------------------------
Total from Investment Operations .40
-----------------------------
Accumulation Unit Value,
End of Period $ 11.31
=============================
Total Return** 5.90%*
Contract Owners Equity,
End of Period (in thousands) $ 1,279
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 12.57%*
Number of Units Outstanding
at End of Period 113,118
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio
operating expenses).
</TABLE>
See accompanying notes to financial statements.
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>
COVA SERIES TRUST - LARGE CAP STOCK PORTFOLIO
(MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT, INC.)
FOR THE PERIOD FROM 5/16/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.16
-----------------------------
Net Investment Income .22
Net Realized and Unrealized
Gain from Security
Transactions .96
-----------------------------
Total from Investment Operations 1.18
-----------------------------
Accumulation Unit Value,
End of Period $ 11.34
=============================
Total Return** 19.05%*
Contract Owners Equity,
End of Period (in thousands) $ 1,431
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 8.33%*
Number of Units Outstanding
at End of Period 126,231
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio
operating expenses).
</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>
COVA SERIES TRUST - SELECT EQUITY PORTFOLIO
(MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT, INC.)
FOR THE PERIOD FROM 5/15/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.15
-----------------------------
Net Investment Income .11
Net Realized and Unrealized
Gain from Security
Transactions .58
-----------------------------
Total from Investment Operations .69
-----------------------------
Accumulation Unit Value,
End of Period $ 10.84
=============================
Total Return** 10.89%*
%*
Contract Owners Equity,
End of Period (in thousands) $ 2,011
Ratio of Expenses to Average 1.40%*
Contract Owners' Equity
Ratio of Net Investment Income
to Average Contract
Owners' Equity 4.23%*
Number of Units Outstanding
at End of Period 185,509
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio
operating expenses).
</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>
COVA SERIES TRUST - INTERNATIONAL EQUITY PORTFOLIO
(MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT, INC.)
FOR THE PERIOD FROM 5/14/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.10
-----------------------------
Net Investment Income .02
Net Realized and Unrealized
Gain from Security
Transactions .85
-----------------------------
Total from Investment Operations .87
-----------------------------
Accumulation Unit Value,
End of Period $ 10.97
=============================
Total Return** 13.86%*
Contract Owners Equity,
End of Period (in thousands) $ 1,360
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 0.61%*
Number of Units Outstanding
at End of Period 124,032
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio
operating expenses).
</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
FOR THE YEAR (COMMENCEMENT OF OPERATIONS)
ENDED 12/31/96 THROUGH 12/31/95
---------------- -----------------------------
<S> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 21.31 $ 19.54
---------------- -----------------------------
Net Investment Income 1.32 1.50
Net Realized and Unrealized
Gain from Security
Transactions 2.46 .27
---------------- -----------------------------
Total from Investment Operations 3.78 1.77
---------------- -----------------------------
Accumulation Unit Value,
End of Period $ 25.09 $ 21.31
================ =============================
Total Return** 17.76% 20.38%*
Contract Owners Equity,
End of Period (in thousands) $ 9,416 $ 2,675
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract 9.23%
Owners' Equity 42.60%*
Number of Units Outstanding
at End of Period 375,304 125,555
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios (investment
advisory fees and portfolio
operating expenses).
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
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"). The Separate Account operates
as a Unit Investment Trust under the Investment Company Act of 1940.
The Separate Account is divided into sub-accounts, with the assets of each
sub-account invested in the Cova Series Trust ("Trust") or the Lord Abbett
Series Fund, Inc. ("Fund"). The Trust consists of ten portfolios of which
four managed by Van Kampen American Capital Investment Advisory Corp., five
managed by J.P. Morgan Investment Management, Inc. and one portfolio managed
by Lord, Abbett and Co. The Trust portfolios available for investment are the
Quality Income, Growth and Income, Money Market, Stock Index, Bond Debenture,
Quality Bond, Small Cap Stock, Large Cap Stock, Select Equity, and
International Equity Portfolios. The Fund has one portfolio available for
investment: the Growth and Income Portfolio. Not all portfolios of the Trust
and the Fund are available for investment depending upon the nature and
specific terms of the different contracts currently being offered for sale.
The Trust and the Fund are all 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 certificates and collateralized mortgage obligations.
The Trust Growth and Income Portfolio invests primarily 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 Trust Bond Debenture Portfolio invests primarily in convertible and
discount debt securities. The Trust Quality Bond Portfolio invests primarily
in higher grade debt securities. The Small Cap Stock Portfolio invests
primarily in the common stock of small U.S. companies. The Large Cap Stock
and Select Equity Portfolios invest in stocks of large and medium-sized
companies. The International Equity Portfolio invests primarily in stocks of
established companies based in developed countries. The Fund Growth and
Income Portfolio invests primarily 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.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
C. FEDERAL INCOME TAXES
Operations of the Separate Account form a part of Cova, which is taxed as a
"Life Insurance Company" under the Internal Revenue Code ("Code"). Under
current provisions of the Code, no Federal income taxes are payable by Cova
with respect to earnings of the Separate Account.
Under the principles set forth in Internal Revenue Ruling 81-225 and Section
817(h) of the Code and regulations thereunder, Cova believes that it will be
treated as the owner of the assets invested in the Separate Account for
Federal income tax purposes, with the result that earnings and gains, if any,
derived from those assets will not be included in a contract owners gross
income until amounts are withdrawn or received pursuant to an Optional Payment
Plan.
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.
Subject to certain restrictions, the contract owner may transfer all or a part
of the accumulated value of the contract among other offered and available
account options of the Separate Account and fixed rate annuities of Cova. If
more than 12 transfers have been made in the contract year, a transfer fee of
$25 per transfer or, if less, 2% of the amount transferred will be deducted
from the account value. If the owner is participating in the Dollar Cost
Averaging program, such related transfers are not taken into account in
determining any transfer fee.
For the year ended December 31, 1996, withdrawal and account transfer charges
of $1,050 and contract maintenance charges of $3,324 were deducted from the
contract values in the Separate Account.
Mortality and expense risks assumed by Cova 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 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 currently advances any premium taxes due at the time purchase payments
are made and then deducts premium taxes from the contract value at the time
annuity payments begin or upon withdrawal if Cova is unable to obtain a
refund. Cova, however, reserves the right to deduct premium taxes when
incurred.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
4. GAIN/(LOSS) ON INVESTMENTS:
The table below summarizes realized and unrealized gains and losses on
investments:
<TABLE>
<CAPTION>
REALIZED GAIN/(LOSS) ON INVESTMENTS:
<S> <C> <C>
For The Period From 6/19/95
For the Year (Commencement of Operations)
Ended 12/31/96 Through 12/31/95
----------------
Trust Quality Income Portfolio:
Aggregate Proceeds From Sales $ 50,860 $ 687
Aggregate Cost 51,542 681
Net Realized Gain/(Loss) on Investments ($682) $ 6
Trust Growth and Income Portfolio:
Aggregate Proceeds From Sales $ 24,274 $ 27,991
Aggregate Cost 23,756 27,729
---------------- -----------------------------
Net Realized Gain on Investments $ 518 $ 262
- ------------------------------------------ ---------------- -----------------------------
Trust Money Market Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 4,136,159 $ 1,544,456
- ------------------------------------------ ---------------- -----------------------------
Aggregate Cost 4,136,159 1,544,456
- ------------------------------------------ ---------------- -----------------------------
Net Realized Gain/(Loss) on Investments -- --
- ------------------------------------------ ---------------- -----------------------------
Trust Stock Index Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 23,308 $ 152,510
- ------------------------------------------ ---------------- -----------------------------
Aggregate Cost 21,966 151,078
- ------------------------------------------ ---------------- -----------------------------
Net Realized Gain on Investments $ 1,342 $ 1,432
- ------------------------------------------ ---------------- -----------------------------
Trust Bond Debenture Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales 64,093
- ------------------------------------------ ----------------
Aggregate Cost 62,718 N/A
- ------------------------------------------ ---------------- -----------------------------
Net Realized Gain on Investments $ 1,375
- ------------------------------------------ ================
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
4. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
REALIZED GAIN/(LOSS) ON INVESTMENTS
For the Period From 6/19/95
For the Year (Commencement of Operations)
Ended 12/31/96 Through 12/31/95
--------------- -----------------------------
<S> <C> <C>
Trust Quality Bond Portfolio:
Aggregate Proceeds From Sales $ 9,121
Aggregate Cost 9,056 N/A
---------------
Net Realized Gain on Investments $ 65
===============
Trust Small Capital Stock Portfolio:
Aggregate Proceeds From Sales $ 8,158
Aggregate Cost 7,824 N/A
Net Realized Gain on Investments $ 334
===============
Trust Large Capital Stock Portfolio:
Aggregate Proceeds From Sales $ 39,604
Aggregate Cost 36,519 N/A
Net Realized Gain on Investments $ 3,085
===============
Trust Select Equity Portfolio:
Aggregate Proceeds From Sales $ 10,599
Aggregate Cost 10,134 N/A
Net Realized Gain on Investments $ 465
===============
Trust International Equity Portfolio:
Aggregate Proceeds From Sales $ 4,037
Aggregate Cost 3,905 N/A
Net Realized Gain on Investments $ 132
===============
Fund Growth and Income Portfolio:
Aggregate Proceeds From Sales $ 96,408 $ 139,543
Aggregate Cost 93,588 137,300
Net Realized Gain on Investments $ 2,820 $ 2,243
===============
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
4. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
UNREALIZED GAIN/(LOSS) ON INVESTMENTS
<S> <C> <C>
For the Period From 6/19/95
For the Year (Commencement of Operations)
Ended 12/31/96 Through 12/31/95
---------------- -----------------------------
Trust Quality Income Portfolio:
End of Period $ 447 $ 1,806
Beginning of Period 1,806 --
Net Change in Unrealized Gain/(Loss) on Investments ($1,359) $ 1,806
================ =============================
Trust Growth and Income Portfolio:
End of Period $ 37,743 ($3,794)
Beginning of Period (3,794) --
Net Change in Unrealized Gain/(Loss) on Investments $ 41,537 ($3,794)
================ =============================
Trust Money Market Portfolio:
End of Period -- --
Beginning of Period -- --
Net Change in Unrealized Gain/(Loss) on Investments -- --
Trust Stock Index Portfolio:
End of Period $ 82,185 $ 1,325
Beginning of Period 1,325 --
Net Change in Unrealized Gain on Investments $ 80,860 $ 1,325
================ =============================
Trust Bond Debenture Portfolio:
End of Period $ 8,392
Beginning of Period -- N/A
Net Change in Unrealized Gain on Investments $ 8,392
================
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
4. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
UNREALIZED GAIN/(LOSS) ON INVESTMENTS
<S> <C> <C>
For the Period From 6/19/95
For the Year (Commencement of Operations)
Ended 12/31/96 Through 12/31/95
---------------- ----------------------------
Trust Quality Bond Portfolio:
- ------------------------------------------------------
End of Period $ 2,313
- ------------------------------------------------------ ----------------
Beginning of Period -- N/A
- ------------------------------------------------------ ---------------- ----------------------------
Net Change in Unrealized Gain on Investments $ 2,313
- ------------------------------------------------------ ================
Trust Small Capital Stock Portfolio:
- ------------------------------------------------------
End of Period $ 34,020
- ------------------------------------------------------ ----------------
Beginning of Period -- N/A
- ------------------------------------------------------ ---------------- ----------------------------
Net Change in Unrealized Gain on Investments $ 34,020
- ------------------------------------------------------ ================
Trust Large Capital Stock Portfolio:
- ------------------------------------------------------
End of Period $ 56,856
- ------------------------------------------------------ ----------------
Beginning of Period -- N/A
- ------------------------------------------------------ ---------------- ----------------------------
Net Change in Unrealized Gain on Investments $ 56,856
- ------------------------------------------------------ ================
Trust Select Equity Portfolio:
- ------------------------------------------------------
End of Period $ 101,392 N/A
- ------------------------------------------------------ ---------------- ----------------------------
Beginning of Period --
- ------------------------------------------------------ ----------------
Net Change in Unrealized Gain on Investments $ 101,392
- ------------------------------------------------------ ================
Trust International Equity Portfolio:
- ------------------------------------------------------
End of Period $ 66,683
- ------------------------------------------------------ ----------------
Beginning of Period -- N/A
- ------------------------------------------------------ ---------------- ----------------------------
Net Change in Unrealized Gain on Investments $ 66,683
- ------------------------------------------------------ ================
Fund Growth and Income Portfolio:
- ------------------------------------------------------
End of Period $ 374,769 ($96,906)
- ------------------------------------------------------ ---------------- ----------------------------
Beginning of Period (96,906) --
- ------------------------------------------------------ ---------------- ----------------------------
Net Change in Unrealized Gain/(Loss) on Investments $ 471,675 ($96,906)
- ------------------------------------------------------ ================ ============================
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
5. ACCOUNT UNIT TRANSACTIONS:
The change in the number of accumulation units resulting from account unit
transactions is as follows:
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
______________________________________________________________________________
_______
<TABLE>
__
<CAPTION>
QUALITY GROWTH & MONEY STOCK BOND QUALITY SMALL LARGE SELECT
-------- --------- --------- ------- ---------- -------- ---------- ---------- --------
INCOME INCOME MARKET INDEX DEBENTURE BOND CAP STOCK CAP STOCK EQUITY
-------- --------- --------- ------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at Commencement
- -----------------------------
of Operations 0 0 0 0 0 0 0 0 0
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Sold 1,387 -- 188,325 1,057 -- -- -- -- --
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Redeemed (16) (1) (28) (114) -- -- -- -- --
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Transferred 7,331 7,198 (159,788) 12,441 -- -- -- -- --
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Balance at December 31, 1995 8,702 7,197 28,509 13,384 N/A N/A N/A N/A N/A
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Sold 3,762 2,136 429,882 9,129 10,897 9,984 43,638 50,898 74,928
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Redeemed (1,485) (596) (10) (805) (31) (152) (288) (649) (830)
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Transferred 8,258 31,613 (431,287) 28,718 28,679 54,702 69,768 75,982 111,411
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Balances at December 31, 1996 19,237 40,350 27,094 50,426 39,545 64,534 113,118 126,231 185,509
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
INTL GROWTH &
-------- ---------
EQUITY INCOME TOTAL
-------- --------- ----------
<S> <C> <C> <C>Balances at Commencement
- -----------------------------
of Operations 0 0 0
- ----------------------------- -------- --------- ----------
Units Sold -- 21,839 212,608
- ----------------------------- -------- --------- ----------
Units Redeemed -- (527) (686)
- ----------------------------- -------- --------- ----------
Units Transferred -- 104,243 (28,575)
- ----------------------------- -------- --------- ----------
Balance at December 31, 1995 N/A 125,555 183,347
- ----------------------------- -------- --------- ----------
Units Sold 55,862 61,744 752,860
- ----------------------------- -------- --------- ----------
Units Redeemed (448) (5,839) (11,133)
- ----------------------------- -------- --------- ----------
Units Transferred 68,618 193,844 240,307
- ----------------------------- -------- --------- ----------
Balances at December 31, 1996 124,032 375,304 1,165,381
- ----------------------------- -------- --------- ----------
</TABLE>
COVA FINANCIAL
LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Financial Statements
December 31, 1996, 1995 and 1994
(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 sheets of Cova Financial Life
Insurance Company (a wholly owned subsidiary of Cova Financial Services Life
Insurance Company) as of December 31, 1996 and 1995 and the related statements
of income, shareholders equity and cash flows for the year ended December 31,
1996 and the period from June 1, 1995 to December 31, 1995 (Successor
periods), and from January 1, 1995 to May 31, 1995, and for the year ended
December 31, 1994 (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 financial statements referred to above present fairly, in
all material respects, the financial position of Cova Financial Life Insurance
Company as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the Successor periods, in conformity with generally
accepted accounting principles. Also, in our opinion, the aforementioned
Predecessor financial statements present fairly, in all material respects, the
results of its operations and its cash flows for the Predecessor periods, in
conformity with generally accepted accounting principles.
St. Louis, Missouri
March 7, 1997
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
ASSETS 1996
1995
<S> <C> <C>
Investments:
Debt securities available for sale at market
(cost of $71,257 in 1996 and $37,242 in 1995) $ 71,263 $ 38,092
Policy loans 1,048 1,063
Short-term investments available for sale at market
(cost of $44 in 1996 and $988 in 1995) 44 984
Total investments 72,355 40,139
Cash and cash equivalents - interest bearing 4,150 5,157
Cash - non-interest bearing 2,485 977
Accrued investment income 1,122 566
Deferred policy acquisition costs 3,321 1,164
Present value of future profits 1,178 576
Goodwill 2,034 2,306
Deferred tax asset (net) 1,115 1,007
Receivable from OakRe 92,238 127,335
Reinsurance receivables 51 458
Other assets 44 44
Separate account assets 18,880 3,451
Total Assets $198,973 $183,180
======== ========
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets, Continued
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS EQUITY 1996 1995
<S> <C> <C>
Policyholder deposits $154,566 $154,458
Future policy benefits 4,561 4,369
Accounts payable and other liabilities 1,794 1,116
Future purchase price payable to OakRe 683 1,265
Guaranty assessments 1,585 1,838
Separate account liabilities 18,880 3,451
Total Liabilities 182,069 166,497
Shareholders equity:
Common stock, $233 par value. (Authorized 30,000
shares; issued and outstanding 12,000 shares in
1996 and 1995) 2,800 2,800
Additional paid-in capital 13,523 13,523
Retained earnings 580 168
Net unrealized appreciation on securities, net of tax 1 192
Total Shareholders Equity 16,904 16,683
Total Liabilities and Shareholders Equity $198,973 $183,180
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Income
Years ended December 31, 1996, 1995, and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 488 $ 142 $ 82 $ 1,335
Net investment income 4,176 1,419 5,271 15,101
Net realized gain (loss) on sale of
investments (28) 118 (272) 318
Separate account charges 134 10 -- --
Other income/(expense) 35 (7) 57 138
Total revenues 4,805 1,682 5,138 16,892
Benefits and expenses:
Interest on policyholder deposits 2,563 788 5,034 13,361
Current and future policy benefits 722 115 178 1,452
Operating and other expenses 570 309 814 1,384
Amortization of purchase intangible assets 66 157 -- --
Amortization of deferred acquisition costs 187 5 522 6,979
Total benefits and expenses 4,108 1,374 6,548 23,176
Income/(loss) before income taxes 697 308 (1,410) (6,284)
Income tax:
Current 351 -- (362) (80)
Deferred (66) 140 (201) (2,050)
Total income tax expense/(benefit) 285 140 (563) (2,130)
Net Income/(Loss) $ 412 $ 168 $ (847) $(4,154)
======= ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholders Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Common stock ($233 par value in 1996 and
12/31/95, $50 par value for 5 mos. ended
5/31/95, 1994 & 1993; authorized 30,000
shares;issued and outstanding 12,000
shares in 1996, 1995 & 1994)
Balance at beginning of period $ 2,800 $ 2,800 $ 600 $ 600
Par value adjustment -- -- 2,200 __
Balance at end of period 2,800 2,800 2,800 600
Additional paid-in capital:
Balance at beginning of period 13,523 18,093 17,200 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
Balance at end of period 13,523 13,523 18,093 17,200
Retained earnings:
Balance at beginning of period 168 209 4,045 8,199
Adjustment to reflect purchase acquisition indicated in note 2 --
(209) -- --
Net income/(loss) 412 168 (847) (4,154)
Adjustment due to financial reinsurance
transaction with OakRe - (2,989)
Balance at end of period $ 580 $ 168 $ 209 $ 4,045
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholders Equity, Continued
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Net unrealized appreciation/(depreciation) of
securities:
Balance at beginning of period $ 192 $(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 (840) 846 15,151 (29,570)
Change in deferred Federal income taxes 103 (104) (4,053) 6,829
Change in deferred acquisition costs
attributable to unrealized losses/(gains) (69) -- (3,571) 10,059
Change in present value of future profits
attributable to unrealized losses/(gains) 615 (550) -- --
Balance at end of period 1 192 (3,789) (11,316)
Total Shareholders Equity $16,904 $16,683 $ 17,313 $ 10,529
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Interest and dividend receipts $ 3,676 $ 934 $ 7,283 $ 15,690
Premiums received 509 154 90 1,357
Insurance and annuity benefit payments (580) (339) (252) (552)
Operating disbursements (768) (490) (1,038) (1,482)
Taxes on income refunded (paid) (341) -- 1,975 (856)
Commissions and acquisition costs paid (2,413) (1,169) (542) (1,262)
Other (183) 360 6,299 200
Net cash provided by/(used in) operating (100) (550) 13,815 13,095
activities
Cash flows from investing activities:
Cash used for the purchase of investment (42,655) (52,399) (935) (69,199)
securities
Proceeds from investment securities sold 10,635 14,399 151,204 115,994
and matured
Investment expenses (90) (57) (97) (320)
Net cash provided by/(used in) investing
activities $(32,110) $(38,057) $150,172 $ 46,475
---------
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, Continued
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 38,348 $ 12,442 $ 5,614 $ 11,796
Transfers from/(to) OakRe 36,553 33,579 (171,081) --
Transfer to Separate Accounts (13,669) (3,312) -- --
Return of policyholder deposits (28,521) (26,897) (15,531) (43,377)
Capital contributions received -- 3,000 3,093 2,500
Net cash provided by/(used in) financing
activities 32,711 18,812 (177,905) (29,081)
Increase/(decrease) in cash and cash
equivalents 501 (19,795) (13,918) 30,489
Cash and cash equivalents at beginning of 6,134 25,929 39,847 9,358
period
Cash and cash equivalents at end of period $ 6,635 $ 6,134 $ 25,929 $ 39,847
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, Continued
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Reconciliation of net income/(loss) to net cash provided by operating activities:
Net income/(loss) $ 412 $ 168 $ (847) $(4,154)
Adjustments to reconcile net income/(loss)
to net cash provided by operating
activities:
Increase/(decrease)in future policy
benefits (net of reinsurance) 192 (201) (52) 911
Increase/(decrease) in payables and
accrued liabilities 95 161 (252) 126
Decrease/(increase) in accrued investment
income (556) (525) 1,766 636
Amortization of intangible assets and 254 162 522 6,979
deferred acquisition costs
Amortization and accretion of securities
premiums and discounts 73 (9) 32 (369)
Net realized (gain)/loss on sale of
investments 28 (118) 272 (318)
Interest accumulated on policyholder
deposits 2,563 788 5,034 13,361
Investment expenses paid 90 57 97 320
Increase/(decrease) in current and deferred
Federal income taxes (66) 140 1,412 (2,986)
Recapture commissions paid to OakRe (273) (223) -- --
Deferral of acquisition costs (2,413) (1,169) (542) (1,262)
Due to/from affiliates 44 27 6,470 --
Other (543) 192 (97) (149)
Net cash provided by operating activities $ (100) $ (550) $13,815 $13,095
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(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 81%, 71% and 47% of the Companys sales have been through two
specific brokerage firms, A.G. Edwards & Sons, Incorporated, and Edward Jones
& Company, Incorporated, in 1996, 1995 and 1994, respectively.
ORGANIZATION
The Company is a wholly owned subsidiary of Cova Financial Services Life
Insurance Company (CFSLIC). On December 31, 1996, Cova Corporation, an
insurance holding company wholly owned by General American Life Insurance
Company (GALIC), transferred 100% of the outstanding shares of the Company to
CFSLIC, an affiliated life insurer domiciled in Missouri. The transfer of
direct ownership had no effect on the operations of the Company as both CFSLIC
and the Company had existed under common management and control prior to the
transfer.
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 in exchange for approximately $13.3 million
in cash and $1.1 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 economic benefits and risks of the 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 by the year 2000) by the transfer of cash in the
amount of the then current account value, less a recapture commission fee to
OakRe on policies retained beyond their 30-day no-fee surrender window by the
Company, upon the next crediting rate reset date of each annuity policy. The
Company may then reinvest that cash for those policies that are retained and
thereafter assume the benefits and risks of those deposits.
In the event that both OakRe and XFSI default on the receivable, the Company
may draw funds from a standby bank irrevocable letter of credit established by
XFSI in the amount of $500 million. No funds were drawn on this letter of
credit during the periods ending December 31, 1996 and 1995.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
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.
(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, however, these allocations were not
finalized until 1996. The table below summarizes the final allocation of
purchase price.
<TABLE>
<CAPTION>
(In Millions)
<S> <C>
Assets acquired:
Policy loans $ 0.9
Cash and cash equivalents 25.9
Short term investment 0.1
Present value of future profits 1.1
Goodwill 2.2
Deferred tax benefit 1.5
Reinsurance receivable 156.3
Other assets 0.1
--------
$ 188.1
Liabilities assumed:
Policyholder deposits $ 168.7
Future policy benefits 4.5
Future purchase price payable 1.1
Deferred income taxes 0.2
Other liabilities 0.3
$ 174.8
--------
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 in shareholders equity of
approximately $4.0 million in 1995 reflecting the application of push down
purchase accounting. The Companys financial statements subsequent to June 1,
1995 reflect this new basis of accounting.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
All amounts for periods ended before June 1, 1995 are labeled Predecessor and
are based on Predecessor historical costs. The periods ending on or after
such date are labeled The Company and are based on the new cost basis of the
Company or fair values at June 1, 1995 and the subsequent results of
operations.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Investments in all debt securities and short term investments and those equity
securities with readily determinable market values are classified into one of
three categories: held-to-maturity, trading, or available-for-sale.
Classification of investments is based on management's current intent. All
debt securities and short term investments at December 31, 1996 and 1995 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 shareholders equity, net of deferred effects of income tax and
related effects on deferred acquisition costs and present value of future
profits.
Amortization of the discount or premium from the purchase of mortgage-backed
bonds is recognized using a level-yield method which considers the estimated
timing and amount of prepayments of the underlying mortgage loans. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between the prepayments previously
anticipated and the actual prepayments received and currently anticipated.
When such a difference occurs, the net investment in the mortgage-backed bond
is adjusted to the amount that would have existed had the new effective yield
been applied since the acquisition of the bond, with a corresponding charge or
credit to interest income (the "retrospective method").
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.
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 market value.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business which vary with and are directly related
to the production of new business, principally commissions, premium taxes,
sales costs, and certain policy issuance and underwriting costs, are deferred.
These deferred costs are amortized in proportion to estimated future gross
profits derived from investment income, realized gains and losses on sales of
securities, unrealized securities gains and losses, interest credited to
accounts, surrender fees, mortality costs, and policy maintenance expenses.
The estimated gross profit streams are periodically reevaluated and the
unamortized balance of deferred acquisition costs is adjusted to the amount
that would have existed had the actual experience and revised estimates been
known and applied from the inception of the policies and contracts. The
amortization and adjustments resulting from unrealized gains and losses is not
recognized currently in income but as an offset to the unrealized gains and
losses reflected as a separate component of equity.
The components of deferred policy acquistion costs are shown below:
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
(In thousands) 1996 12/31/95 5/31/95
1994
<S> <C> <C> <C> <C>
Deferred policy acquisition costs,
beginning of period $1,164 $ 6,167 $ 9,718 $ 7,095
Effects of push down purchase
accounting -- (6,167) -- --
Commissions and expenses deferred 2,413 1,169 542 1,262
Amortization (187) (5) (522) (6,979)
Deferred policy acquisition costs
attributable to unrealized
gains/(losses) (69) -- (3,571) 8,340
Deferred policy acquistion costs,
end of period $3,321 $ 1,164 $ 6,167 $ 9,718
======= ========
</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 in proportion to estimated
future gross profits derived from investment income, realized gains and losses
on sales of securities, unrealized securities gains and losses, interest
credited to accounts, surrender fees, mortality costs, and policy maintenance
(continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
expenses. The estimated gross profit streams are periodically reevaluated and
the unamortized balance of present value of future profits will be adjusted to
the amount that would have existed had the actual experience and revised
estimates been known and applied from the inception. The amortization and
adjustments resulting from unrealized gains and losses is not recognized
currently in income but as an offset to the unrealized gains and losses
reflected as a separate component of equity. The amortization period is the
remaining life of the policies, which is 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, is projected
to be 8.4%, 6.2%, 4.8%, 4.0% and 3.4% for the years ended December 31, 1997
through 2001, respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate actual results.
During 1996, the Company adjusted its original purchase accounting to include
a revised estimate of the ultimate renewal (recapture) rate. This adjustment
resulted in a re-allocation of the net purchased intangible asset between
present value of future profits, goodwill, future payable and deferred taxes.
This final allocation and the resulting impact on inception to date
amortization was recorded, in its entirety, in 1996. No restatement of the
June 1, 1995 opening Balance Sheet was made.
The components of present value of future profits are shown below:
<TABLE>
<CAPTION>
The Company
7
Months
Ended
(In Thousands) 1996
12/31/95
<S> <C> <C>
Present value of future profits - beginning of period $ 576 $1,233
Interest added 74 56
Gross amortization 4 (163)
Adjustment due to revised push down purchase accounting (91) --
Present value of future profit attributable to
unrealized losses/(gains) 615 (550)
------- -------
Present value of future profits - end of period $1,178 $ 576
</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 represents a contingent purchase price
payable for the policies transferred to OakRe on the purchase date and has
been pushed down to the Company through the financial reinsurance agreement.
The Company expects that this payable will be substantially extinguished by
the year 2000.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The components of this future payable are shown below:
<TABLE>
<CAPTION>
The Company
7
Months
Ended
(In Thousands) 1996
12/31/95
<S> <C> <C>
Future payable - beginning of period $1,265 $1,438
Interest added 39 50
Payments to OakRe (273) (223)
Adjustment due to revised push down purchase accounting (348) --
Future payable - end of period $ 683 $1,265
======= =======
</TABLE>
GOODWILL
Under the push down method of purchase accounting, the excess of purchase
price over the fair value of tangible and intangible assets and liabilities
acquired is established as an asset and referred to as Goodwill. The Company
has elected to amortize goodwill on the straight line basis over a 20 year
period.
The components of Goodwill are shown below:
<TABLE>
<CAPTION>
<S> <C> <C>
(In Thousands) The Company
--------------------
7 Months Ended
1996 12/31/95
----------------
Goodwill - beginning of period $ 2,306 $ 2,375
Amortization (105) (69)
Adjustment due to revised push down purchase accounting
(167) --
Goodwill - end of period $ 2,034 $ 2,306
</TABLE>
DEFERRED TAX ASSETS AND LIABILITIES
XFSI and GALIC agreed to file an election to treat the acquisition of the
Company as an asset acquisition under the provisions of Internal Revenue Code
Section 338(h)(10). As a result of that election, the tax basis of the
Companys assets as of the date of acquisition were revalued based upon fair
market values as of June 1, 1995. 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 over ten to fifteen years.
POLICYHOLDER DEPOSITS
The Company recognizes its liability for policy amounts that are not subject
to policyholder mortality nor longevity risk at the stated contract value,
which is the sum of the original deposit and accumulated interest, less any
withdrawals. The average weighted interest crediting rate on the Companys
policyholder deposits as of December 31, 1996 was 5.77%.
(Continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
FUTURE POLICY BENEFITS
Reserves are held for future annuity benefits that subject the Company to
risks to make payments contingent upon the continued survival of an individual
or couple (longevity risk). These reserves are valued at the present value of
estimated future benefits discounted for interest, expenses, and mortality.
The assumed mortality is the 1983 Individual Annuity Mortality Tables
discounted at 5.50% to 8.50%, depending upon year of issue.
Current mortality benefits payable are recorded for reported claims and
estimates of amounts incurred but not reported.
PREMIUM REVENUE
The Company recognizes premium revenue at the time of issue on annuity
policies that subject it to longevity risks.
The Company currently assesses no explicit life insurance premium for its
commitment to make payments in excess of its recorded liability that are
contingent upon policyholder mortality. Benefits paid in excess of the
recorded liability are recognized when incurred as the amounts are not
material to the financial statements.
Amounts collected on policies not subject to any mortality or longevity risk
are recorded as increases in the policyholder deposits liability.
FEDERAL INCOME TAXES
Prior to June 1,1995 the revenues and expenses of the Predecessor were
included in a consolidated Federal income tax return with its parent company
and other affiliates. Allocations of Federal income taxes were based upon
separate return calculations.
Subsequent to June 1, 1995 the Company files its own separate income tax
return, independent from its ultimate parent, GALIC.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income to the period that includes
the enactment date.
RISKS AND UNCERTAINTIES
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities 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 financial statements are most affected by the
use of estimates and assumptions:
- Investment market valuation
- Amortization of deferred policy acquisition costs
- Amortization of present value of future profits
- Recoverability of Goodwill
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The market value of the Company's investments is subject to the risk that
interest rates will change and cause a temporary increase or decrease in the
liquidation value of debt securities. To the extent that fluctuations in
interest rates cause the cash flows of assets and liabilities to change, the
Company might have to liquidate assets prior to their maturity and recognize a
gain or loss. Interest rate exposure for the investment portfolio is managed
through asset/liability management techniques which attempt to control the
risks presented by differences in the probable cash flows and reinvestment of
assets with the timing of crediting rate changes in the Company's policies and
contracts. Changes in the estimated prepayments of mortgage-backed securities
also may cause retrospective changes in the amortization period of securities
and the related recognition of income.
The amortization of deferred acquisition costs is based on estimates of
long-term future gross profits from existing policies. These gross profits
are dependent upon policy retention and lapses, the spread between investment
earnings and crediting rates, and the level of maintenance expenses. Changes
in circumstances or estimates may cause retrospective adjustment to the
periodic amortization expense and the carrying value of the deferred expense.
In a similar manner, the amortization of present value of future profits is
based on estimates of long-term future profits from existing and recaptured
policies. These gross profits are dependent upon policy retention and lapses,
the spread between investment earnings and crediting rates, and the level of
maintenance expenses. Changes in circumstances or estimates may cause
retrospective adjustment to the periodic amortization expense and the carrying
value of the asset.
In accordance with 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, 1996.
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.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS
AND ACCRUED INVESTMENT INCOME:
The carrying values amounts reported in the balance sheets for these
instruments approximate their fair values. Short-term debt securities are
considered "available for sale" and are carried at fair value.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES):
Fair values for debt securities are based on quoted market prices, where
available. For debt securities not actively traded, fair value estimates are
obtained from independent pricing services. In some cases, such as private
placements and certain mortgage-backed securities, fair values are estimated
by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments. (See
note 4 for fair value disclosures).
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, 1996 and 1995 the cash surrender value of
policyholder funds on deposit were $537,442 and $104,571, 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
The impact of reinsurance on the December 31, 1996 financial statements is not
considered material.
The financing reinsurance agreement entered into with OakRe does not meet the
conditions for reinsurance accounting under Generally Accepted Accounting
Principles (GAAP). The net assets initially transferred to OakRe were
established as a receivable and 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 1994 and 1995 amounts have been reclassified to conform to the 1996
presentation.
(4) INVESTMENTS
The Company's investments in debt securities and short term investments 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, 1996 and 1995 were as follows:
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
<TABLE>
<CAPTION>
1996
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 $ 101 $ 1 $ -- $ 101 $ 100
Collateralized mortgage obligations 20,143 81 (119) 20,143 20,181
Corporate, state, municipalities,
and political subdivisions 51,019 433 (390) 51,019 50,976
Total debt securities 71,263 515 (509) 71,263 71,257
Policy loans 1,048 -- -- 1,048 1,048
Short term investments 44 -- -- 44 44
Total investments $72,355 $515 $(509) $72,355 $72,349
</TABLE>
<TABLE>
<CAPTION>
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
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>
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The amortized cost and estimated market value of debt securities at December
31, 1996, 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>
1996
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
(in thousands of dollars)
Due after one year through five years $20,531 $20,572
Due after five years through ten years 28,019 28,010
Due after ten years 2,527 2,538
Mortgage-backed securities 20,180 20,143
Total $71,257 $71,263
<FN>
At December 31, 1996, approximately 95.3% of the Company's debt securities are
investment grade or are non-rated but considered to be of investment grade.
Of the 4.7% 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,
1996 and 1995. As of December 31, 1996 and 1995 the Company had no impaired
investments.
</TABLE>
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The components of net investment income, realized capital gains/(losses) and
unrealized gains/(losses)were as follows:
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5
MONTHS
ENDED
ENDED
1996 12/31/95
5/31/95 1994
(in thousands of
dollars)
<S> <C> <C> <C> <C>
Income on debt securities $3,926 $1,166 $ 4,075 $ 15,013
Income on short-term investments 243 257 1,261 349
Income on policy loans 86 46 29 57
Miscellaneous interest 8 -- -- 4
Total investment income 4,263 1,469 5,365 15,423
Investment expenses (87) (50) (94) (322)
Net investment income 4,176 1,419 5,271 15,101
Realized capital gains/(losses) were as
follows:
Debt securities (28) 118 (272) 320
Short-term investments -- -- -- (2)
Net realized gains/(losses) on
investments $ (28) $ 118 $ (272) $ 318
======= ========= =========
Unrealized gains/(losses) were as follows:
Debt securities 6 $ 850 $(10,594) $(25,749)
Short-term investments -- (4) 1 (1)
Effects on deferred acquisition costs
amortization (69) -- 4,767 8,340
Effects on present value of future
profits amortization 65 (550) -- --
Unrealized gains/(losses) before income tax 2 296 (5,826) (17,410)
Unrealized income tax benefit/(expense) (1) (104) 2,037 6,094
Net unrealized gains (losses) on
investments $ 1 $ 192 $ (3,789) $(11,316)
</TABLE>
Proceeds from sales, redemptions and paydowns of investments in debt
securities during 1996 were $10,635,608. Gross gains of $16,757 and gross
losses of $44,311 were realized on those sales. Included in these amounts were
$1,355 of gross gains realized on the sale of non-investment grade securities.
Proceeds from sales, redemptions and paydowns 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, redemptions and paydowns 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.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
Unrealized appreciation/(depreciation) of debt securities for the Company in
1996 and 1995, and the Predecessor in 1995 and 1994 were $(844,000), $850,000,
$15,152,000, and $(29,644,000), 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.
(5) SECURITIES GREATER THAN 10% OF SHAREHOLDERS EQUITY
As of December 31, 1996 the Company held the following individual securities
which exceeded 10% of Shareholders equity:
<TABLE>
<CAPTION>
<S> <C>
Long-term Debt Carrying
Securities Value
- --------------- ----------
Colonial Realty $2,036,540
</TABLE>
As of December 31, 1995 the Company held the following individual securities
which exceeded 10% of Shareholders equity:
<TABLE>
<CAPTION>
<S> <C>
Long-term Debt Carrying
Securities Value
- ----------------------- ----------
North American Mortgage $1,954,398
</TABLE>
(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. In 1996 and 1995, the Company
was allocated a portion of benefit costs including severance pay, accumulated
vacations, and disability benefits. At December 31, 1996 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 files its own 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.
Income taxes are recorded in the statements of earnings and directly in
certain shareholders equity accounts. Income tax expense (benefit) for the
years ended December 31 was allocated as follows:
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
(In thousands of
dollars)
<S> <C> <C> <C> <C>
Statements of income:
Operating income (excluded realized
investment gains and losses) $ 295 $194 $ (561) $(2,241)
Realized investment gains/(losses) (10) (54) (2) 111
Income tax expense/(benefit) included
in the statements of income 285 140 (563) (2,130)
Shareholders equity:
Unrealized gains/(losses) on securities
available for sale and intangible assets (103) 104 4,053 (6,829)
Total income tax expense/(benefit) $ 182 $244 $3,490 $(8,959)
</TABLE>
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
1996 7 MONTHS 5 MONTHS
1994
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $244 35.0% $108 35.0% $(494) 35.0% $(2,200) 35.0%
Tax-exempt bond interest -- -- -- -- (70) 5.0 -- --
Amortization of intangible assets 37 5.3 25 8.2 -- -- -- --
Other 4 .6 7 2.3 1 (.1) 70 (1.0)
Total $285 40.9% $140 45.5% $(563) 39.9% $(2,130) 34.0%
==== ===== ====== ===== ======== =====
</TABLE>
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
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, 1996
and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands of dollars)
<S> <C> <C>
Deferred tax assets:
Tax basis of intangible assets purchased $ 733 $1,009
Liability for commission on recapture 239 443
Policy reserves 972 143
DAC Proxy Tax 556 277
Other Deferred tax assets 6 81
Total assets $2,506 $1,953
Deferred tax liabilities:
Unrealized gains in investments $ 1 $ 104
PVFP 219 377
Deferred acquisition costs 1,162 407
Other deferred tax liabilities 9 58
Total liabilities 1,391 946
Net deferred tax asset $1,115 $1,007
======
</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. Accordingly, no valuation
allowance is established.
(8) RELATED-PARTY TRANSACTIONS
The Company has entered into management, operations and servicing 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 in 1996 and the seven months of
1995 for the Company were $303,694 and $375,764, respectively, and by the
Predecessor in 1995 and 1994 were $334,979 and $674,136 respectively.
(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).
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The major differences arise principally from the immediate expense recognition
of policy acquisition costs and intangible assets for statutory reporting,
determination of policy reserves based on different discount rates and
methods, the recognition of deferred taxes under GAAP reporting, 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>
1996 1995
(in thousands of dollars)
<S> <C> <C>
Statutory Capital and Surplus $11,176 $11,457
Reconciling items:
Statutory Asset Valuation Reserves 825 700
Interest Maintenance Reserve 34 69
GAAP investment adjustments to fair value 6 846
Deferred policy acquisition costs 3,321 1,164
GAAP basis policy reserves (2,101) (215)
Deferred federal income taxes (net) 1,115 1,007
Goodwill 2,034 2,306
Present value of future profits 1,178 576
Future purchase price payable (683) (1,265)
Other (1) 38
GAAP Shareholders Equity $16,904 $16,683
========
</TABLE>
Statutory net income (loss) for the years ended December 31, 1996, 1995 and
1994 were $(113,236), $(2,404,316) and $(13,042,271) 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 during 1997 will be $837,581.
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, 1996 the Company's Total Adjusted
Capital and Authorized Control Level - RBC were, $12,001,030 and $1,360,234
respectively. This level of adjusted capital satisfies regulatory
requirements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
(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 1996, 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, 1996, 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 $1.6 million in
future assessments on insolvencies that occurred before December 31, 1996.
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 $1.6 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
